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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

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

For the fiscal year ended December 31, 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, TN 37027

(Address of principal executive offices) (Zip Code)

(615) 221-2020

(Registrant’s telephone number, including area code)

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

Common Stock

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

None

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐  Yes    ☒  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐  Yes    ☒  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐  (Do not check if a smaller reporting company)		Smaller reporting company		☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ☐  Yes    ☒  No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2016 was $102,626,860 (computed on the basis of $15.27 per share).

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of March 13, 2017 was 7,802,959.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy statement for its Annual Meeting of Shareholders to be held on June 2, 2017, are incorporated by reference in Part III of this Form 10-K.

 

 

 

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TABLE OF CONTENTS

 

Item No.				Page No.
PART I					2
ITEM 1.		BUSINESS			2
ITEM 1A.		RISK FACTORS			13
ITEM 1B.		UNRESOLVED STAFF COMMENTS			23
ITEM 2.		PROPERTIES			23
ITEM 3.		LEGAL PROCEEDINGS			23
ITEM 4.		MINE SAFETY DISCLOSURES			23
PART II					24
ITEM 5.		MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			24
ITEM 6.		SELECTED FINANCIAL DATA			26
ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			27
ITEM 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			54
ITEM 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			54
ITEM 9.		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			55
ITEM 9A.		CONTROLS AND PROCEDURES			55
ITEM 9B.		OTHER INFORMATION			55
PART III					56
ITEM 10.		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			56
ITEM 11.		EXECUTIVE COMPENSATION			56
ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			56
ITEM 13.		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			56
ITEM 14.		PRINCIPAL ACCOUNTANT FEES AND SERVICES			56
PART IV					57
ITEM 15.		EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			57

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FORWARD-LOOKING STATEMENTS

Commerce Union Bancshares, Inc. (“Commerce Union” the “Company” or “CUBN”) may from time to time make written or oral statements, including statements contained in this report (including, without limitation, certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7), that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The words “expect,” “anticipate,” “intend,” “consider,” “plan,” “believe,” “seek,” “should,” “estimate,” and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Commerce Union’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors include, without limitation, those specifically described in Item 1A of Part I of this Annual Report on Form 10-K, as well as the following: (i) the possibility that our asset quality would decline or that we experience greater loan losses than anticipated, (ii) increased levels of other real estate, primarily as a result of foreclosures, (iii) the impact of liquidity needs on our results of operations and financial condition, (iv) competition from financial institutions and other financial service providers, (v) economic conditions in the local markets where we operate, (vi) the impact of negative developments in the financial industry and U.S. and global capital and credit markets, (vii) our ability to retain the services of key personnel, and (viii) our ability to adapt to technological changes. Many of such factors are beyond Commerce Union’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Commerce Union does not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to Commerce Union.

 

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PART I

 

ITEM 1.

BUSINESS

OVERVIEW

Commerce Union, a Tennessee corporation, was incorporated on March 4, 2011, to serve as a holding company for and the sole shareholder of Commerce Union Bank. It became the holding company of Commerce Union Bank upon completion of Commerce Union Bank’s reorganization into a holding company structure on June 6, 2012.

On March 10, 2015, the shareholders of Commerce Union approved the merger of Commerce Union Bank 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 common stock. After the Merger was completed, Commerce Union 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 in this transaction. As a result, the financial statements of the Company prior to the Merger are the historical financial statements of Reliant Bank. 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 Bank. Any excess of purchase price over the net estimate fair values of the acquired assets and assumed liabilities of Commerce Union 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 beginning on April 1, 2015.

Commerce Union is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Tennessee. It conducts its operation through its wholly-owned subsidiary, Reliant Bank (f/k/a Commerce Union Bank) which was organized in April 17, 2006, as a state chartered bank under the laws of the State of Tennessee and opened for business on August 14, 2006. The description of the business contained in this Item 1 should be read in conjunction with the information included elsewhere in this annual report on Form 10-K for the fiscal year ended December 31, 2016, including, but not limited to, the consolidated financial statements and notes thereto beginning on Page F-1.

Target Markets

Commerce Union, through its subsidiary Reliant Bank, provides a full range of traditional banking services throughout the Middle Tennessee Region and the Nashville-Davidson-Murfreesboro-Franklin Metropolitan Statistical Area (the “Nashville MSA”). Based on the deposit market share data published by FDIC as of June 30, 2016, the latest available date, Reliant Bank is the 15th largest bank in the Nashville MSA. Reliant Bank primarily markets its services to small businesses and residents of its market area through its main office and branch in Brentwood, Tennessee, a second branch office in Brentwood, Tennessee, a branch in Franklin, Tennessee, two branches in Gallatin, Tennessee, a branch in Nashville, Tennessee, a branch in Springfield, Tennessee, a mortgage location in Hendersonville, Tennessee, and loan production offices in Murfreesboro, Tennessee and Timonium, Maryland. Reliant Bank opened a full-service retail branch office in the Green Hills area of Nashville, Tennessee in February of 2017. A loan production office opened in Chattanooga, Tennessee in March of 2017. It employs seasoned banking professionals with experience in the market area and who are active in their communities.

Reliant Bank’s eight branches are located in Williamson, Davidson, Robertson, and Sumner County, Tennessee. In 2015, the estimated population of Williamson County was 211,672, the estimated population of Davidson County was 678,889, the estimated population of Robertson County was 68,570, and the estimated population of Sumner County was 175,989. The population of the Nashville MSA was estimated at 1,830,345 as of 2015. The median household income in the Nashville MSA for 2015 was $57,985. Significant growth of population and an increase in the median salary in the Nashville MSA are expected to continue through the next census period.

 

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Employees

As of December 31, 2016, Commerce Union and Reliant Bank had 143 employees on a full-time or part-time basis. The employees are not represented by a collective bargaining unit. Commerce Union believes that its relationship with its employees is good.

Products and Services Overview

Reliant Bank is a full-service community bank. Its principal business is banking, consisting of lending and deposit gathering services (as well as other banking-related products and services) to businesses and individuals of the communities it serves, and the operational support to deliver, fund and manage such banking services. Reliant Bank provides a wide range of commercial banking services for businesses and individuals, including treasury management, credit cards, checking, savings, and money market deposit accounts, certificates of deposit, and loans for consumers, commercial organization, and real estate projects. Reliant Bank’s profitability is dependent on responsible lending with strong focus on lending standards to help ensure long-term growth in assets, loans, deposits and net income in a manner consistent with safe, sound and prudent banking practices. To achieve this goal, Reliant Bank’s strategy is to: (1) expand loans and deposits through organic market share growth and strategic acquisitions; (2) provide customers with a breadth of products and financial services; (3) employ, empower and motivate management to provide personalized customer service, consistent with the best traditions of community banking, while maximizing profits; and (4) maintain asset quality and control overhead expense.

Reliant Bank provides a variety of loans, deposits and related services to its business customers. Such services include but are not limited to business checking, mobile business banking deposit products and services, business loans, and lines of credit. Reliant Bank offers similar service to its consumers, including but not limited to personal loans, checking, residential mortgage loans and mortgage refinancing, safe deposit boxes, debit cards, direct deposit, and official bank checks. A substantial portion of our residential mortgage loans and mortgage refinancings are originated through our residential mortgage banking segment. These loans are originated throughout the United States and are typically sold in the secondary market. For a more detailed description of our residential mortgage loan operations, see Notes 20 and 23 to our Consolidated Financial Statements.

Competition

Reliant Bank has substantial competition in attracting and retaining deposits and making loans to its customers in all of its principal markets. Competition involves efforts to retain current customers, obtain new loans and deposits, increase type of services offered, and offer competitive interest rates on deposits and loans. The primary factors in competing for deposits are the range and quality of financial services offered, the ability to offer attractive rates and the availability of convenient office locations. Reliant Bank competes for deposits with 62 other commercial banking institutions in Davidson, Williamson, Robertson, and Sumner Counties, as well as, numerous savings and loan associations, credit unions, and issuers of commercial paper and other securities. Reliant Bank’s market share in its four counties is 1.55% as of June 30, 2016. According to the FDIC, there are 390 commercial bank branch offices in the four counties as of June 30, 2016. Additional competition for deposits comes from other investment alternatives, such as money market mutual funds and corporate and government securities. The primary factors in competing for loans are the range and quality of the lending services offered, interest rates, and loan origination fees. Competition for the origination of loans normally comes from other financial institutions, commercial banks, credit unions, insurance companies and other financial services companies. Reliant Bank believes that it has successfully competed with larger banks and other smaller community banks in the Williamson, Robertson, Sumner, and Davidson County markets by focusing on personal service and financial products to meets the needs of the community.

Intellectual Property

Reliant Bank utilizes the ownership rights to two registered trademarks with the United States Patent and Trademark Office for the protection of “RELIANT BANK” in the company’s respective colors and fonts. Reliant Bank also utilizes the website domains of reliantbank.com. Commerce Union also holds the rights to three registered trademarks with the United States Patent and Trademark Office for the continued protection of “COMMERCE UNION BANK” in the former entity’s respective colors and fonts.

 

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Supervision and Regulation

Both Commerce Union and Reliant Bank are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight of virtually all aspects of our operations. These laws and regulations are generally intended to protect depositors, not shareholders. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and the policies of various regulatory authorities. We cannot predict the effect that fiscal or monetary policies, economic control, or new federal or state legislation may have on our business and earnings in the future.

Commerce Union Bancshares, Inc.

Commerce Union owns 100% of the stock of Reliant Bank, and therefore, we are considered a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and the regulations promulgated thereunder. Moreover, as a bank holding company of a bank located in Tennessee, we also are subject to the Tennessee Banking Act.

The Bank Holding Company Act, subject to certain exceptions, also prohibits a bank holding company from engaging in or acquiring direct or indirect control of more than 5% of the voting stock of any company engaged in non-banking activities. An exception to this prohibition is for activities expressly found by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

As a bank holding company, Commerce Union is required to file semi-annual reports with the Federal Reserve together with any additional information as the Federal Reserve may require. The Federal Reserve may also examine Commerce Union.

Bank holding companies are required to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a holding company may not be able to provide such support. In the event of a loss suffered or anticipated by the FDIC - as a result of default of a banking or thrift subsidiary of Commerce Union or related to FDIC assistance provided to a subsidiary in danger of default - the other banking subsidiaries of Commerce Union, if any, may be assessed for the FDIC’s loss, subject to certain exceptions.

Regulation Y of the Rules and Regulations of the Federal Reserve Board of Governors requires persons acting directly or indirectly or in concert with one or more persons to give the Federal Reserve 60 days’ prior written notice before acquiring control of a bank holding company. Under the regulation, control is defined as the ownership or control with the power to vote 25% or more of any class of voting securities of the bank holding company. The regulation also provides for a presumption of control if a person owns, controls, or holds with the power to vote 10% or more (but less than 25%) of any class of voting securities, and if no other person owns a greater percentage of that class of voting securities.

Various federal and state statutory provisions limit the amount of dividends subsidiary banks can pay to their holding companies without regulatory approval. The payment of dividends by any bank also may be affected by other factors, such as the maintenance of adequate capital for such subsidiary bank. In addition to the foregoing restrictions, the Federal Reserve has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company experiencing earnings weaknesses should not pay cash dividends that exceed its net income or that could only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Furthermore, the Tennessee Department of Financial Institutions (TDFI) also has authority to prohibit the payment of dividends by a Tennessee chartered bank when it determines such payment to be an unsafe and unsound banking practice. Should an insured member bank controlled by a bank holding company be “significantly undercapitalized” under the applicable federal bank capital ratios, or if the bank subsidiary is “undercapitalized” and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, the Federal Reserve may require prior approval for any capital distribution by the bank holding company. In addition, since our legal entity is separate and distinct from Reliant Bank and does not conduct stand-alone operations, our ability to pay dividends depends on the ability of Reliant Bank to pay dividends to us, which is also subject to regulatory restrictions.

 

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A bank holding company and its subsidiaries are also prohibited from acquiring any voting shares of, or interest in, any banks located outside of the state in which the operations of the bank holding company’s subsidiaries are located, unless the bank holding company and its subsidiaries are well-capitalized and well-managed. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with the extension of credit or provision of any property or service. An affiliate of a bank holding company may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer must obtain or provide some additional credit, property or services from or to its bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended.

In approving acquisitions by bank holding companies of banks and companies engaged in the banking-related activities described above, the Federal Reserve considers a number of factors, including expected benefits to the public such as greater convenience, increased competition, or gains in efficiency, as weighed against the risks of possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve is also empowered to differentiate between new activities and activities commenced through the acquisition of a going concern.

The Attorney General of the United States may, within 30 days after approval by the Federal Reserve of an acquisition involving a bank holding company, bring an action challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. Failure of the Attorney General to challenge an acquisition does not, however, exempt the bank holding company from complying with both state and federal antitrust laws after the acquisition is consummated or immunize the acquisition from future challenge under the anti-monopoly provisions of the Sherman Antitrust Act.

Capital Guidelines

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

In July 2013, the federal banking regulators, in response to the statutory requirements of Dodd-Frank, adopted regulations implementing the Basel Capital Adequacy Accord (“Basel III”), which had been approved by the Basel member central bank governors in 2010 as an agreement among the countries’ central banks and bank regulators on the amount of capital banks must hold as a cushion against losses and insolvency. The new minimum capital to risk-weighted assets (“RWA”) requirements are a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%. The new rule also changes the definition of capital, mainly by adopting stricter eligibility criteria for regulatory capital instruments, and new constraints on the inclusion of minority interests, mortgage-servicing assets (“MSAs”), deferred tax assets (“DTAs”), and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity Tier 1 capital.

Under Basel III, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements began on January 1, 2016, and

 

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the requirements will be fully phased in on January 1, 2019. A banking organization with a buffer greater than 2.5% once the capital conservation buffer is fully phased in would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the current prompt corrective action (“PCA”) well-capitalized thresholds.

Under the new rule, MSAs and DTAs are subject to stricter limitations than those applicable under the current general risk-based capital rule. More specifically, certain DTAs arising from temporary differences, MSAs, and significant investments in the capital of unconsolidated financial institutions in the form of common stock are each subject to an individual limit of 10% of common equity Tier 1 capital elements and are subject to an aggregate limit of 15% of common equity Tier 1 capital elements. The amount of these items in excess of the 10% and 15% thresholds are to be deducted from common equity Tier 1 capital. Amounts of MSAs, DTAs, and significant investments in unconsolidated financial institutions that are not deducted due to the aforementioned 10% and 15% thresholds must be assigned a 250% risk weight. Finally, the new rule increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

The new minimum capital requirements of Basel III took effect on January 1, 2015, whereas the capital conservation buffer and the deductions from common equity Tier 1 capital phase in over time. Similarly, non-qualifying capital instruments phase out over time, except as described above. Most existing non-qualifying capital instruments issued by community banks before May 19, 2010, such as trust preferred securities and cumulative perpetual preferred stock, will continue to count as regulatory capital.

Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject a banking institution to a variety of enforcement remedies available to state and federal regulatory authorities, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits, and other restrictions on its business.

Tennessee Banking Act; Federal Deposit Insurance Act

Reliant Bank is incorporated under the banking laws of the State of Tennessee and is subject to the applicable provisions of those laws. Reliant Bank is subject to the supervision of the TDFI and to regular examination by that department. Reliant Bank is a member of the Federal Reserve and therefore is subject to Federal Reserve regulations and policies and is subject to regular examination by the Federal Reserve. Reliant Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund (“DIF”), and Reliant Bank is, therefore, subject to the provisions of the Federal Deposit Insurance Act (“FDIA”).

The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), the FDIC was required to adopt regulations that would base deposit insurance assessments on total assets less capital rather than deposit liabilities and to include off-balance sheet liabilities of institutions and their affiliates in risk-based assessments. The Emergency Economic Stabilization Act (“ESSA”) provided for a temporary increase in the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. This increased level of basic deposit insurance was made permanent by the Dodd-Frank Act. In addition, on October 14, 2008, the FDIC instituted temporary unlimited FDIC coverage of non-interest-bearing deposit transaction accounts, but this extra coverage expired December 31, 2012. The Dodd-Frank Act also repealed the prohibition on paying interest on demand transaction accounts, but did not extend unlimited insurance protection for these accounts.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

 

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Tennessee statutes and the federal law regulate a variety of the banking activities of Reliant Bank, including required reserves, investments, loans, mergers and consolidations, issuances of securities, payments of dividends, and the establishment of branches. There are certain limitations under federal and Tennessee law on the payment of dividends by banks. A state bank, with the approval of the TDFI, may transfer funds from its surplus account to the undivided profits (retained earnings) account or any part of its paid-in-capital account. The payment of dividends by any bank is dependent upon its earnings and financial condition and, in addition to the limitations referred to above, is subject to the statutory power of certain federal and state regulatory agencies to act to prevent what they deem unsafe or unsound banking practices. The payment of dividends could, depending upon our financial condition, be deemed to constitute such an unsafe or unsound practice. Also, without regulatory approval, a dividend only can be paid to the extent of the net income of the bank for that year plus the net income of the prior two years. The FDIA prohibits a state bank, the deposits of which are insured by the FDIC, from paying dividends if it is in default in the payment of any assessments due the FDIC.

State banks also are subject to regulation respecting the maintenance of certain minimum capital levels (see above), and Reliant Bank is required to file annual reports and such additional information as the Tennessee Banking Act and Federal Reserve regulations require. We are also subject to certain restrictions on loan amounts, interest rates, “insider” loans to officers, directors and principal shareholders, tying arrangements, privacy, transactions with affiliates, and many other matters. Strict compliance at all times with state and federal banking laws is required.

Tennessee law contains limitations on the interest rates that may be charged on various types of loans and restrictions on the nature and amount of loans that may be granted and on the types of investments that may be made. The operations of banks are also affected by various consumer laws and regulations, including those relating to equal credit opportunity and regulation of consumer lending practices. All Tennessee banks must become and remain insured banks under the FDIA.

Under Tennessee law, state banks are prohibited from lending to any one person, firm, or corporation amounts more than 15% of its equity capital accounts, except (i) in the case of certain loans secured by negotiable title documents covering readily marketable nonperishable staples or (ii) we may make a loan to one person, firm or corporation of up to 25% of its equity capital accounts with the prior written approval of the Bank’s board of directors.

Community Reinvestment Act

The Community Reinvestment Act (“CRA”), first enacted by Congress in 1977 and amended from time to time thereafter, requires that each depository institution’s record of helping meet the needs of its entire community be evaluated by depository institution’s primary federal regulator. The CRA helps assure that banks and other financial institutions make credit available to low- and moderate-income borrowers, consistent with safe and sound operations. Before the effective date of the merger, Reliant Bank earned the rating of “Satisfactory” in August of 2012 and Commerce Union Bank had earned a rating of “Outstanding” as of September 2012.

Federal Deposit Insurance Corporation Improvement Act of 1991

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) substantially revised the depository institution regulatory and funding provisions of the FDIA, and revised several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take “prompt corrective action” in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under applicable regulations, a FDIC-insured depository institution is defined to be well capitalized if (i) it maintains a Tier 1 leverage capital ratio of at least 5%, a risk-adjusted Tier 1 capital ratio of at least 6%, and a total risk-based capital ratio of at least 10% and (ii) it is not subject to a directive, order or written agreement to meet and maintain specific capital levels. An insured depository institution is defined to be adequately capitalized if it meets all of its minimum capital requirements as described above. In addition, an insured depository institution is considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it is significantly below such measure, and critically undercapitalized if it fails to maintain a level of tangible equity equal to not less than 2% of total assets. An insured depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.

 

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The capital-based prompt corrective action provision of FDICIA and their implementing regulations apply to FDIC-insured depository institutions and are not directly applicable to the holding companies that control those institutions. However, the Federal Reserve has indicated that, in regulating bank holding companies, it will take appropriate action at the holding company level based on an assessment of the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to these provisions and regulations.

FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its bank holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s bank holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator generally within 90 days of the date on which they became critically undercapitalized.

The FDIC has adopted regulations under FDICIA governing the receipt of brokered deposits and pass-through insurance. Under the regulations, a bank cannot accept, rollover or renew brokered deposits unless it is well-capitalized or it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer “pass-through” insurance on certain employee benefit accounts. Whether or not it has obtained this waiver, an adequately capitalized bank may not pay an interest rate on any deposits in excess of 75 basis points over certain index prevailing market rates specified by regulation. There are no such restrictions on a bank that is well-capitalized.

FDICIA contains numerous other provisions, including accounting, audit and reporting requirements, termination of the “too big to fail” doctrine except in special cases, limitations on the FDIC’s payment of deposits at foreign branches, new regulatory standards in such areas as asset quality, earnings and compensation and revised regulatory standards for, among other things, powers of state banks, real estate lending and capital adequacy. FDICIA also requires that a depository institution provide 90 days prior notice of the closing of any branches.

Gramm-Leach-Bliley Act

In 1999, the Gramm-Leach-Bliley Act (“GLBA”) ratified new powers for banks and bank holding companies, especially in the areas of securities and insurance. This law also includes requirements regarding the privacy and protection of non-public customer information held by financial institutions, as well as many other providers of financial services. There are provisions providing for functional regulation of the various services provided by institutions among different regulators. GLBA codified the “safeguards rule” which requires financial institutions to develop a written information security plan that describes how the company is prepared for and plans to continue to protect customers’ and consumers’ non-public personal information. GLBA did not remove the restrictions in the Bank Holding Company Act that prevent non-financial companies from entering retail and/or commercial banking. Finally, among many other sections of this law, there is some relief for small banks from the regulatory burden of the Community Reinvestment Act.

Bank Secrecy Act and USA PATRIOT Act

The Currency and Foreign Transactions Reporting Act of 1970, better known as the Bank Secrecy Act (“BSA”) requires all United States financial institutions to assist United States government agencies to detect and prevent money laundering. Specifically, BSA requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding a daily aggregate amount of $10,000, and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.

 

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The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposed new compliance and due diligence obligations, defined new crimes and penalties, compelled the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarified the safe harbor from civil liability to customers. The U.S. Treasury Department has issued a number of regulations implementing the USA PATRIOT Act that apply certain of its requirements to financial institutions such as our Bank. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The Treasury Department may issue additional regulations that will further clarify the USA PATRIOT Act’s requirements.

Under the USA PATRIOT Act all “financial institutions,” as defined, must establish anti-money laundering compliance and due diligence programs. Such programs must include, among other things, adequate policies, the designation of a compliance officer, employee and director training programs, and an independent audit function to review and test the program.

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

In July 2010, the Dodd-Frank Act was signed into law, incorporating numerous financial institution regulatory reforms. Many of these reforms were implemented between 2011 and 2014 through regulations promulgated by banking and securities regulators. The following discussion describes the material elements of the regulatory framework. Many of the Dodd-Frank Act provisions are stated to only apply to larger financial institutions and do not directly impact community-based institutions like Reliant Bank. For instance, provisions that regulate derivative transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, impose new regulatory authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital are among the provisions that do not directly impact our Bank either because of exemptions for institutions below a certain asset size or because of the nature of our Bank’s operations. Other provisions that impact Reliant Bank are:

 

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Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling and increase the size of the floor of the DIF, and offset the impact of the increase in the minimum floor on institutions with less than $10 billion in assets.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Many aspects of the Dodd-Frank Act are subject to continued rulemaking and will take effect over several years, and their impact on Reliant Bank or the financial industry is difficult to predict before such regulations are adopted. However, there is a significant possibility that the Dodd-Frank Act will, in the long run, increase regulatory burden, compliance costs, and interest expense for community banks. Of particular concern to many community banks is the depth and breadth of the powers of the CFPB, which may have significant impact on consumer compliance regulation and increased costs, particularly for smaller depository institutions.

Volcker Rule

The Volcker Rule generally prohibits a “banking entity” (which includes any insured depository institution, such as Reliant Bank, or any affiliate or subsidiary of such depository institution, such as Commerce Union Bancshares, Inc.) from engaging in proprietary trading and acquiring or retaining any ownership interest in, sponsoring, or engaging in certain transactions with, a “covered fund”. Both the proprietary trading and covered fund-related prohibitions are subject to a number of exemptions and exclusions. The Volcker Rule became effective by statute in July 2012, and on December 10, 2013, five federal regulators including the FDIC and the Federal Reserve jointly adopted the final regulations to implement the Volcker Rule. The final regulations contain exemptions for, among others, market making, risk-mitigating hedging, underwriting, and trading in U.S. government and agency obligations and also permit certain ownership interests in certain types of funds to be retained. They also permit the offering and sponsoring of funds under certain conditions. In addition, the final regulations impose significant compliance and reporting obligations on banking entities.

The final regulations became effective on April 1, 2014, and banking entities were required to conform their proprietary trading activities and investments in and relationships with covered funds that were in place after December 31, 2013 by July 21, 2015. For those banking entities whose investments in and relationships with covered funds were in place prior to December 31, 2013 (“legacy covered funds”), the Volcker Rule conformance period was recently extended by the Federal Reserve to July 21, 2017 for such legacy covered funds. In addition, the Federal Reserve has also indicated its intention to grant two additional one-year extensions of the conformance period to July 21, 2017, for banking entities to conform ownership interests in and sponsorship of activities of collateralized loan obligations, or CLOs, that are backed in part by non-loan assets and that were in place as of December 31, 2013.

FIRREA and FDICIA

Far-reaching legislation, including the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA, and the Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, have impacted the business of banking for years. FIRREA primarily affected the regulation of savings institutions rather than the regulation of commercial banks and bank holding companies like Reliant Bank and Commerce Union Bancshares, Inc., but did include provisions affecting deposit insurance premiums, acquisitions of thrifts by banks and bank holding companies, liability of commonly controlled depository institutions, receivership and conservatorship rights and procedures and substantially increased penalties for violations of banking statutes, regulations and orders.

FDICIA resulted in extensive changes to the federal banking laws. The primary purpose of FDICIA was to authorize additional borrowings by the FDIC in order to assist in the resolution of failed and failing financial institutions. However, the law also instituted certain changes to the supervisory process and contained various provisions affecting the operations of banks and bank holding companies.

The additional supervisory powers and regulations mandated by FDICIA include a “prompt corrective action” program based upon five regulatory zones for banks, in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank’s financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s ratio of tangible equity to total assets reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. The Federal Reserve has adopted regulations implementing the prompt corrective action provisions of the FDICIA, which place financial institutions into one of the following five categories based upon capitalization ratios as these ratios have been amended following regulations implementing the requirements of Basel III: (1) a “well capitalized” institution has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a leverage ratio of at least 5% and a CET1 capital ratio of at least 6.5%; (2) an “adequately capitalized” institution has a total risk-based ratio of at least 8%, a Tier 1 risk-based ratio of at least 6%, a leverage ratio of at least 4% and a CET1 capital ratio of at least 4.5%; (3) an “undercapitalized” institution has a total risk-based capital ratio of under 8%, a Tier 1 risk-based capital ratio of under 6%, a leverage ratio of under 4% or a CET1 capital ratio of less than 4.5%; (4) a

 

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“significantly undercapitalized” institution has a total risk-based capital ratio of under 6%, a Tier 1 risk-based ratio of under 4%, a leverage ratio of under 3% or a CET1 capital ratio of less than 3%; and (5) a “critically undercapitalized” institution has a ratio of tangible equity to total assets of 2% or less. Institutions in any of the three undercapitalized categories would generally be prohibited from declaring dividends or making capital distributions. The regulations also establish procedures for “downgrading” an institution to a lower capital category based on supervisory factors other than capital.

Various other sections of the FDICIA impose substantial audit and reporting requirements and increase the role of independent accountants and outside directors. Set forth below is a list containing certain other significant provisions of the FDICIA:

 

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annual on-site examinations by regulators (except for smaller, well-capitalized banks with high management ratings, which must be examined every 18 months);

 

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mandated annual independent audits by independent public accountants and an independent audit committee of outside directors for institutions with more than $500,000,000 in assets;

 

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uniform disclosure requirements for interest rates and terms of deposit accounts;

 

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a requirement that the FDIC establish a risk-based deposit insurance assessment system;

 

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authorization for the FDIC to impose one or more special assessments on its insured banks to recapitalize the bank insurance fund (now called the Deposit Insurance Fund);

 

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a requirement that each institution submit to its primary regulators an annual report on its financial condition and management, which report will be available to the public;

 

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a ban on the acceptance of brokered deposits except by well capitalized institutions and by adequately capitalized institutions with the permission of the FDIC, and the regulation of the brokered deposit market by the FDIC;

 

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restrictions on the activities engaged in by state banks and their subsidiaries as principal, including insurance underwriting, to the same activities permissible for national banks and their subsidiaries unless the state bank is well capitalized and a determination is made by the FDIC that the activities do not pose a significant risk to the insurance fund;

 

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a review by each regulatory agency of accounting principles applicable to reports or statements required to be filed with federal banking agencies and a mandate to devise uniform requirements for all such filings;

 

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the institution by each regulatory agency of noncapital safety and soundness standards for each institution it regulates which cover (1) internal controls, (2) loan documentation, (3) credit underwriting, (4) interest rate exposure, (5) asset growth, (6) compensation, fees and benefits paid to employees, officers and directors, (7) operational and managerial standards, and (8) asset quality, earnings and stock valuation standards for preserving a minimum ratio of market value to book value for publicly traded shares (if feasible);

 

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uniform regulations regarding real estate lending; and

 

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a review by each regulatory agency of the risk-based capital rules to ensure they take into account adequate interest rate risk, concentration of credit risk, and the risks of non-traditional activities.

Jumpstart Our Business Startups Act of 2012

The Jumpstart Our Business Startups Act (the “JOBS Act”) increased the threshold under which a bank or bank holding company may terminate registration of a security under the Securities Exchange Act of 1934, as amended, to 1,200 shareholders of record from 300. The JOBS Act also raised the threshold requiring companies to register to 2,000 shareholders from 500. Since the JOBS Act was signed, numerous banks or bank holding companies have filed to deregister their common stock.

 

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Other Regulations

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

 

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

 

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

 

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

 

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

 

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

 

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

In addition, our bank subsidiary’s deposit operations are subject to the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement this act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

FDIC Insurance Premiums

Reliant Bank is required to pay quarterly FDIC deposit insurance assessments to the DIF. The FDIC merged the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) to form the DIF on March 31, 2006, in accordance with the Federal Deposit Insurance Reform Act of 2005. The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the insurance fund. The FDIC uses a risk-based premium system that assesses higher rates on those institutions that pose greater risks to the DIF.

Effective April 1, 2009, the FDIC revised its risk-based assessment system to adjust the risk-based calculation of an institution’s unsecured debt, secured liabilities and brokered deposits. On November 12, 2009, the FDIC announced a final rule to increase of 3 basis points the deposit assessment base rate, beginning January 1, 2011. Additional increases in premiums will impact Reliant Bank’s earnings adversely. Depending on any future losses that the FDIC insurance fund may suffer due to failed institutions, there can be no assurance that there will not be additional significant premium increases in order to replenish the fund.

Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a federal bank regulatory agency.

Effects of Governmental Policies

Reliant Bank’s earnings are affected by the difference between the interest earned by Reliant Bank on its loans and investments and the interest paid by Reliant Bank on its deposits or other borrowings. The yields on its assets and the rates paid on its liabilities are sensitive to changes in prevailing market rates of interest. Thus, the earnings and growth of Reliant Bank are influenced by general economic conditions, fiscal policies of the federal government, and the policies of regulatory agencies, particularly the Federal Reserve, which establishes national monetary policy. The nature and impact of any future changes in fiscal or monetary policies cannot be predicted.

 

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Commercial banks are affected by the credit policy of various regulatory authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. Government securities, changes in reserve requirements on bank deposits, changes in the discount rate on bank borrowings and limitations on interest rates that banks may pay on time and savings deposits. The Federal Reserve uses these means in varying combinations to influence overall growth of bank loans, investments and deposits, and also to affect interest rates charged on loans, received on investments or paid for deposits.

The monetary and fiscal policies of regulatory authorities, including the Federal Reserve, also affect the banking industry. Through changes in the reserve requirements against bank deposits, open market operations in U.S. Government securities and changes in the discount rate on bank borrowings, the Federal Reserve influences the cost and availability of funds obtained for lending and investing. No prediction can be made with respect to possible future changes in interest rates, deposit levels or loan demand or with respect to the impact of such changes on the business and earnings of Reliant Bank.

From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial institutions. With the enactments of EESA, the American Recovery and Reinvestment Act, and the Dodd-Frank Act and the significant number of regulations that have or will be promulgated under these and other laws affecting financial institutions, the nature and extent of the future legislative and regulatory changes affecting financial institutions, and the resulting impact on those institutions is and will be unpredictable. Bills are currently pending which may have the effect of changing the way our Bank conducts its business.

Statistical Information Required by Guide 3

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

 

ITEM 1A.

RISK FACTORS

Reliant’s decisions regarding credit risk and reserves for loan losses may materially and adversely affect its business.

Making loans and other extensions of credit is an essential element of Reliant Bank’s business. Although Reliant Bank seeks to mitigate risks inherent in lending by adhering to specific underwriting practices, its loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

 

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the duration of the credit;

 

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credit risks of a particular customer;

 

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changes in economic and industry conditions; and

 

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in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

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

 

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

 

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Reliant Bank’s historical loan loss experience;

 

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evaluation of economic conditions;

 

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regular reviews of loan delinquencies and loan portfolio quality; and

 

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

 

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There is no precise method of predicting credit losses; therefore, Reliant Bank faces the risk that charge-offs in future periods will exceed its allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease in Commerce Union’s net income, and possibly its capital.

Federal and state regulators periodically review Reliant Bank’s allowance for loan losses and may require Reliant Bank to increase its provision for loan losses or recognize further loan charge-offs, based on judgments different than those of its management. Any increase in the amount of Reliant Bank’s provision or loans charged-off as required by these regulatory agencies could have a negative effect on its operating results.

Reliant Bank may have higher loan losses than it has allowed for in its allowance for loan losses. Our loan portfolio includes a meaningful amount of real estate construction and development loans, which have a greater credit risk than residential mortgage loans.

Reliant Bank’s actual loan losses could exceed its allowance for loan losses. Reliant Bank’s average loan size continues to increase and reliance on its historic allowance for loan losses may not be adequate. A large portion of Reliant Bank’s loan portfolio is composed of construction, commercial mortgage, and commercial loans. Repayment of such loans is generally considered more subject to market risk than residential mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of loans will require partial or entire charge-off. Regardless of the underwriting criteria used, losses may be experienced as a result of various factors beyond Reliant Bank’s control, including among other things, changes in market conditions affecting the value of loan collateral and problems affecting the credit of Reliant Bank’s borrowers.

Both Commerce Union and Reliant Bank are subject to extensive regulation.

Commerce Union and Reliant Bank are subject to extensive governmental regulation and control. Compliance with state and federal banking laws has a material effect on the business and operations of Commerce Union and Reliant Bank. Our operations are subject to state and federal banking laws, regulations, and procedures. The laws and regulations applicable to the banking industry could change at any time and are subject to interpretation, and management cannot predict the effects of these changes on Commerce Union’s business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, the cost of compliance could adversely affect the ability of Commerce Union to operate profitably. Non-banking financial institutions, such as securities brokerage firms, insurance companies, and money market funds are now permitted to offer services that compete directly with services offered by banks. See “Supervision and Regulation.”

Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.

We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by them. For example, in the United States, certain of our businesses are subject to the Gramm-Leach-Bliley Act (“GLBA”) and implementing regulations and guidance. Among other things, the GLBA: (i) imposes certain limitations on the ability of financial institutions to share consumers’ nonpublic personal information with nonaffiliated third parties, (ii) requires that financial institutions provide certain disclosures to consumers about their information collection, sharing and security practices and affords customers the right to “opt out” of the institution’s disclosure of their personal financial information to nonaffiliated third parties (with certain exceptions) and (iii) requires financial institutions to develop, implement and maintain a written comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities, and the sensitivity of customer information processed by the financial institution as well as plans for responding to data security breaches.

Moreover, various United States federal banking regulatory agencies, states and foreign jurisdictions have enacted data security breach notification requirements with varying levels of individual, consumer, regulatory and/or law enforcement notification in certain circumstances in the event of a security breach. Many of these requirements also apply broadly to our partners that accept our payment. In many countries that have yet to impose data security breach notification requirements, regulators have increasingly used the threat of significant sanctions and penalties by data protection authorities to encourage voluntary notification and discourage data security breaches.

 

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Furthermore, legislators and/or regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer and/or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level, by the Federal Trade Commission, as well as at the state level, such as with regard to mobile applications.

Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer and/or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could materially and adversely affect our profitability. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions and damage to our reputation and our brand.

Material changes to national or state legislation or regulation may increase our expenses and reduce earnings.

Bank regulators continue to impose and emphasize additional restrictions (including those originating from the Dodd-Frank Act) on financial institutions. Changes in federal legislation, regulation or policies, such as bankruptcy laws, deposit insurance, consumer protection laws, and capital requirements, among others, can result in significant increases in our expenses and/or charge-offs, which may adversely affect our earnings. Changes in state or federal tax laws or regulations can have a similar impact. The current administration has said that changes to federal tax laws, as well as the manner in which financial institutions are regulated, are high priority legislative issues. The federal government, as well as state and municipal governments, including the State of Tennessee, could seek to increase their tax revenues through increased tax levies which could have a meaningful impact on our results of operations. Furthermore, financial institution regulatory agencies are expected to continue to be aggressive in responding to concerns and trends identified in examinations, including the continued issuance of additional formal or informal enforcement or supervisory actions. Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans.

Anti-money laundering and anti-terrorism financing laws could have significant adverse consequences for us.

We maintain an enterprise-wide program designed to enable us to comply with applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the USA PATRIOT Act. This program includes policies, procedures, processes and other internal controls designed to identify, monitor, manage and mitigate the risk of money laundering or terrorist financing posed by our products, services, customers and geographic locale. These controls include procedures and processes to detect and report suspicious transactions, perform customer due diligence, respond to requests from law enforcement, and meet all recordkeeping and reporting requirements related to particular transactions involving currency or monetary instruments. We cannot be sure our programs and controls will be effective to ensure our compliance with all applicable anti-money laundering and anti-terrorism financing laws and regulations, and our failure to comply could subject us to significant sanctions, fines, penalties and reputational harm, all of which could have a material adverse effect on our business, results of operations and financial condition.

Reliant Bank’s focus on lending to small to mid-sized community based businesses may increase Commerce Union’s credit risk.

Most of Reliant Bank’s commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the markets in which Reliant Bank operates negatively impact this important customer sector, Commerce Union’s results of operations and financial condition and the value of its common stock may be adversely affected. Furthermore, the deterioration of Reliant Bank’s borrowers’ businesses may hinder their ability to repay their loans with Reliant, which could have a material adverse effect on Reliant’s financial condition and results of operations.

 

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Reliant is geographically concentrated in middle Tennessee and changes in local economic conditions impact our profitability.

We currently operate primarily in the Nashville, Tennessee MSA, and most of our loan, deposit and other customers live or have operations in this area. Accordingly, our success significantly depends upon the growth in population, income levels, deposits, and housing starts in this market, along with the continued attraction of business ventures to the areas, and our profitability is impacted by the changes in general economic conditions in this market. We cannot assure you that economic conditions, including loan demand, in our market will improve during 2016, or thereafter, and in that case, we may not be able to grow our loan portfolio in line with our expectations. In addition, the ability of our customers to repay their loans to us may be negatively impacted and our financial condition and results of operations could be negatively impacted.

Compared to regional or national financial institutions, we are less able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or return of more favorable economic conditions in our primary market areas if they do occur.

Reliant Bank faces strong competition for customers, which could prevent it from obtaining customers and may cause it to pay higher interest rates to attract customers.

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

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

The FDIC insures deposits at FDIC-insured depository institutions, such as Reliant Bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. Recent market developments and bank failures significantly depleted the FDIC’s Deposit Insurance Fund and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, banks are now assessed deposit insurance premiums based on the bank’s average consolidated total assets, and the FDIC has modified certain risk-based adjustments, which increase or decrease a bank’s overall assessment rate. This has resulted in increases to the deposit insurance assessment rates and thus raised deposit premiums for many insured depository institutions. If these increases are insufficient for the Deposit Insurance Fund to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. Reliant is generally unable to control the amount of premiums that Reliant Bank is required to pay for FDIC insurance. If there are additional bank or financial institution failures, Reliant Bank may be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could reduce Reliant Bank’s profitability, may limit its ability to pursue certain business opportunities or otherwise negatively impact its operations.

Changes in prevailing interest rates may reduce Reliant’s profitability.

Reliant’s results of operations depend in large part upon the level of its net interest income, which is the difference between interest income from interest earning assets, such as loans and investment securities, and interest expense on interest bearing liabilities, such as deposits and other borrowings. Depending on the terms and maturities

 

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of Reliant’s assets and liabilities, Reliant believes it is more likely than not a significant change in interest rates could have a material adverse effect on its profitability. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While Reliant intends to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of its assets and liabilities, its efforts may not be effective and its financial condition and results of operations could suffer.

Commerce Union and Reliant are dependent on key individuals and the loss of one or more of these key individuals could curtail its growth and adversely affect its prospects.

Commerce Union and Reliant Bank are materially dependent on the performance of the executive management team, loan officers, and other support personnel. On January 30, 2017, the Company announced the retirement of William R. (Ron) DeBerry, its chairman and CEO, effective June 30, 2017, and its intention to appoint the company’s current President, DeVan D. Ard, Jr., to succeed Mr. DeBerry. While the Company believes it has reasonable succession plans in place, the Company is dependent on its executive team including the President, Chief Executive Officer, Chief Financial Officer and other high-level officers. The loss of the services of any of these individuals could have a material adverse effect on the business of Commerce Union and Reliant, results of operations, and financial condition. Many of these key officers have important customer relationships, which are instrumental to the Bank’s operations. Changes in key personnel and their responsibilities may be disruptive to Reliant Bank’s business and could have a material adverse effect on Reliant Bank’s business, financial condition, and results of operations, either before or after the merger. Management believes that future results also will depend in part upon attracting and retaining highly skilled and qualified management, especially in the new market areas into which Reliant may enter, as well as sales and marketing personnel. Competition for such personnel is intense, and management cannot be sure that Reliant will be successful in attracting or retaining such personnel.

Commerce Union is an emerging growth company, and it cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make Commerce Union’s common stock less attractive to investors.

Commerce Union is subject to periodic reporting requirements under the Securities Exchange Act of 1934. Commerce Union is an “emerging growth company,” as defined in the JOBS Act, however, and it may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, even if Commerce Union complies with the greater obligations of public companies that are not emerging growth companies immediately after this offering, Commerce Union may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as it is an emerging growth company. Commerce Union 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 Commerce Union’s total annual gross revenues equal or exceed $1 billion in a fiscal year. Commerce Union cannot predict if investors will find its common stock less attractive because it will rely on these exemptions. If some investors find Commerce Union’s common stock less attractive as a result, there may be a less active trading market for Commerce Union’s common stock and its stock price may be more volatile.

Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. Commerce Union has elected not to opt out of such an extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, Commerce Union, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make Commerce Union’s financial statements not comparable with those of another public company that is neither an emerging growth company nor an emerging growth company, which has opted out of using the extended transition period because of the potential differences in accounting standards used.

 

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The short-term and long-term impact of the changing regulatory capital requirements and recently adopted capital rules is uncertain.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement to a strengthened set of capital requirements for internationally active banking organizations in the U.S. and around the world, known as Basel III. Basel III called for increases in the requirements for minimum common equity, minimum Tier 1 capital and minimum total capital for certain systemically important financial institutions, to be phased in over time until fully phased in by January 1, 2019. The final rules were adopted by the federal banking agencies in July 2013.

The rules add a new common equity Tier 1 capital to risk-weighted assets ratio minimum of 4.5%, increase the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, and decrease the Tier 2 capital that may be included in calculating total risk-based capital from 4.0% to 2.0%. The final rules also introduce a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and total risk-based capital requirements. The required minimum ratio of total capital to risk-weighted assets will remain 8.0% and the minimum leverage ratio will remain 4.0%. The new risk-based capital requirements (except for the capital conservation buffer) became effective for Commerce Union on January 1, 2015. The capital conservation buffer is being phased in over four years which began on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.

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

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

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

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

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

Our financial results also are affected by the risks generally incident to our mortgage banking business, including interest rate levels, the impact of government regulation on mortgage loan originations and servicing and the need to issue forward commitments to fund and sell mortgage loans. Our mortgage banking business also is affected by interest rate fluctuations. We also may experience market losses resulting from daily increases in interest rates to the extent we are unable to match interest rates and amounts on loans we have committed to originate with forward commitments from third parties to purchase such loans. Increases in interest rates may have a material adverse effect on our mortgage banking revenue, profitability, stock performance, ability to service our debt obligations and future cash flows. Our mortgage loan operations may also be adversely affected by other economic factors within our markets such as negative changes in employment levels, job growth, and consumer confidence and availability of mortgage financing, one or all of which could result in reduced demand or price depression from current levels. Our mortgage banking operations are also dependent upon the securitization market for mortgage-backed securities, and could be materially adversely affected by any fluctuation or downturn in such market. In the event that disruptions to the secondary markets tighten or eliminate the available liquidity within the secondary markets for mortgage loans, we could experience a material adverse effect on our sales, profitability, and stock performance.

 

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

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

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

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

Commerce Union’s historical operating results may not be indicative of its future operating results.

Commerce Union may not be able to sustain its historical rate of growth, and, consequently, Commerce Union’s historical results of operations will not necessarily be indicative of its future operations due to the merger with Reliant Bank. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede Commerce Union’s ability to expand its market presence. If Commerce Union experiences a significant decrease in its historical rate of growth, Commerce Union’s results of operations and financial condition may be adversely affected because a high percentage of its operating costs are fixed expenses.

Commerce Union may be adversely affected by the soundness of other financial institutions.

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

 

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Commerce Union’s ability to pay cash dividends is limited, and Commerce Union may be unable to pay future dividends even if it desires to do so.

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

Commerce Union’s ability to pay cash dividends may be limited by regulatory restrictions, by Reliant Bank’s ability to pay cash dividends to Commerce Union and by Commerce Union’s need to maintain sufficient capital to support Commerce Union’s operations. A Tennessee chartered bank may, with the approval of the TDFI, transfer funds from its surplus account to the undivided profits (retained earnings) account or any part of its paid-in-capital account. The payment of dividends by any bank is dependent upon its earnings and financial condition and, in addition to the limitations referred to above, is subject to the statutory power of certain federal and state regulatory agencies to act to prevent what they deem unsafe or unsound banking practices. The payment of dividends could, depending upon the financial condition of Reliant Bank, be deemed to constitute such an unsafe or unsound practice. Without regulatory approval, a dividend only can be paid to the extent of the net income of the bank for that year plus the net income of the prior two years. The FDIA prohibits a state bank, the deposits of which are insured by the FDIC, from paying dividends if it is in default in the payment of any assessments due the FDIC.

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

Commerce Union’s stock price may fluctuate, which could result in losses to its investors and litigation against Commerce Union.

Commerce Union’s common stock was approved to be listed on The Nasdaq Stock Market, LLC, effective July 7, 2015. We cannot assure you that this listing will result in significant trading in Commerce Union’s common stock. Further, we cannot assure that an active market for Commerce Union common stock will benefit the stock price. The stock will be subject to greater fluctuations and more easily impacted by general market factors. A number of factors could cause Commerce Union’s stock price to fluctuate substantially in the future. These factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, Commerce Union’s announcement of developments related to its businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, irrational exuberance on the part of investors, new federal banking regulations, and other issues related to the financial services industry. Commerce Union’s stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to its performance. General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect the price of Commerce Union’s common stock, and the current market price may not be indicative of future market prices. Stock price volatility may make it more difficult for Commerce Union’s shareholders to resell their common stock when desired and at prices they find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of its securities. Commerce Union could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from Commerce Union’s normal business.

 

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Economic and other circumstances may require Commerce Union to raise capital at times or in amounts that are unfavorable to it. If Commerce Union has to issue shares of common stock, the issuance will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of Commerce Union’s common stock and adversely affect the terms on which Commerce Union may obtain additional capital.

Commerce Union may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments or to strengthen its capital position. Commerce Union’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and Commerce Union’s financial performance. Commerce Union cannot provide assurance that such financing will be available to Commerce Union on acceptable terms or at all, or if Commerce Union does raise additional capital that it will not be dilutive to existing shareholders.

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

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

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

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

 

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

Negative public opinion surrounding Commerce Union and the financial institutions industry generally could damage Commerce Union’s reputation and adversely impact its earnings.

Reputation risk, or the risk to Commerce Union’s business, earnings and capital from negative public opinion surrounding Commerce Union and the financial institutions industry generally, is inherent in Commerce Union’s business. Negative public opinion can result from Commerce Union’s actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect Commerce Union’s ability to keep and attract clients and employees and can expose it to litigation and regulatory action. Although Commerce Union takes steps to minimize reputation risk in dealing with its clients and communities, this risk will always be present given the nature of Commerce Union’s business.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

As a smaller company, it may be difficult for us to attract or retain the interest of equity research analysts. A lack of research coverage may adversely affect the liquidity of and market price of our common stock. We will not have any control over the equity research analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company, or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

Shares of Commerce Union common stock are not FDIC insured.

Shares of Commerce Union common stock are not deposits with a bank and are not insured by the FDIC.

 

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ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.

PROPERTIES

As of December 31, 2016, the main office of both Commerce Union and Reliant Bank was located at 1736 Carothers Parkway, Suite 100, Brentwood, Tennessee. Commerce Union owns and operates three branch offices with the following addresses: the Gallatin Branch at 1204 Nashville Pike, Gallatin, Tennessee 37066, the East Main Branch at 425 East Main, Gallatin, Tennessee 37066, and the Springfield Branch at 701 South Main Street, Springfield, TN 37172.

Reliant Bank leases its main office, as well as, the following: the Murfreesboro Loan Production Office at 745 South Church Street, Suite 401, Murfreesboro, TN 37130; the Franklin Branch at 101 Creekstone Boulevard, Suite 100, Franklin, TN 37064; the Lenox Branch at 6005 Nolensville Pike, Suite 101, Nashville, TN 37211; the Hendersonville, TN Mortgage Location (Loan Production Office) at 711 East Main Street, Suite 105, Hendersonville, TN 37075; the Maryland Farms Branch at 5109 Peter Taylor Drive, Suite 300, Brentwood, TN 37027; the Timonium, Maryland (Loan Production Office) at 15 West Aylesbury Road, Suite 600, Timonium, MD 21093 and the Green Hills Branch which recently opened on February 27, 2017, located at 4108 Hillsboro Pike, Nashville, TN 37215. Reliant Bank also leases the Chattanooga Loan Production Office at 633 Chestnut Street, Suite 630, Chattanooga, TN 37450. Other leases routinely exist on a month-to-month basis.

 

ITEM 3.

LEGAL PROCEEDINGS

As of the end of 2016, neither Commerce Union nor Reliant Bank was involved in any litigation that is expected to have a material impact on our financial position or results of operations. The Bank is periodically involved as a plaintiff or defendant in various legal actions in the ordinary course of its business. Management believes that any claims pending against 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 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5.

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

Commerce Union’s common stock is traded on the Nasdaq Capital Market under the symbol “CUBN.” As of March 1, 2017, there were 536 holders of record of Commerce Union common stock. This number does not include shareholders with shares in nominee name held by the Depository Trust Company or its nominee.

Dividends

Commerce Union declared a dividend of $0.22 per share on December 15, 2016, which was payable January 20, 2017. The following table sets forth dividends declared and/or paid to shareholders of Commerce Union during the previous two fiscal years.

 

Date Paid		Total Value Issued				Per Share Value
01/16/2015		$	613,766.00			$	0.20
01/22/2016		$	1,488,715.60			$	0.20
01/20/2017		$	1,711,227.98			$	0.22

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

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

Market Price for Commerce Union’s Stock

Prior to the merger, the shares of Reliant Bank were not publicly traded. The following table shows for the indicated periods the high and low sales prices for Commerce Union’s common stock. Prior to July 7, 2015, the common stock was traded on the OTCQB market place. Effective as of July 7, 2015, Commerce Union’s common stock has been traded on the Nasdaq Capital Market under the symbol “CUBN.” These prices may include retail markups, markdowns, or commissions.

 

CUBN (1)		High				Low
2016
First Quarter		$	16.74			$	13.50
Second Quarter			16.50				14.93
Third Quarter			22.99				15.20
Fourth Quarter			21.51				19.00
2015
First Quarter		$	15.50			$	13.00
Second Quarter			15.25				14.00
Third Quarter			14.50				12.50
Fourth Quarter			14.10				13.30

 

(1)

Companies that have common shares quoted on the over-the-counter market typically do not have an active trading market. Consequently, the prices quoted above falling prior to the Nasdaq listing effective July 7, 2015, may not represent an accurate indication of the value of shares of Commerce Union’s common stock.

 

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Stock Performance Graph

The following chart, which is furnished not filed, compares the monthly percentage changes in the cumulative shareholder return on our common stock during the five fiscal years ended December 31, 2016, with (i) the Russell 2000 index, and (ii) the SNL Southeast Bank Index. This comparison assumes $100 was invested on the January 1, 2011, in our common stock and the comparison indices, and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. Price information from July 31, 2015 to December 31, 2016, was obtained by using the Nasdaq closing prices as of the last trading day of each month. From August 29, 2012 to July 7, 2015, our stock was traded on the over-the-counter market, and closing prices for the months of 2012, 2013, and 2014 have been obtained by using the closing prices reported on the last trading day of the month through the over-the-counter system. Prior to August of 2012, our stock was traded exclusively in private transactions and the prices reported for 2011 reflect the last trade made in each month of 2011 that is known to us. Note that all stock prices below are representative of Commerce Union common stock, both before and after the Merger.

 

Recent Sales of Unregistered Securities

There were no sales of unregistered securities for the period ended December 31, 2016.

Issuer Purchases of Securities

There were no repurchases of the Company’s common stock for the period ended December 31, 2016.

 

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ITEM 6.

SELECTED FINANCIAL DATA

The following selected historical consolidated financial data as of and for the twelve months ended December 31, 2016, 2015 and 2014, is derived from the audited consolidated financial statements of Commerce Union Bancshares, Inc. The financial data presented for the Company prior to the Merger is derived from the historical financial statements of Reliant Bank.

 

		2016				2015				2014
SUMMARY OF OPERATIONS:
Total interest income		$	36,015			$	29,888			$	17,215
Total interest expense			3,363				2,718				1,629
Net interest income			32,652				27,170				15,586
Provision for loan losses			968				(270	)			(1,500	)
Net interest income after provision for loan losses			31,684				27,440				17,086
Noninterest income			8,800				12,382				4,608
Noninterest expense			30,374				31,569				17,166
Income before income taxes			10,110				8,253				4,528
Income tax expense			2,213				2,271				1,816
Consolidated net income			7,897				5,982				2,712
Noncontrolling interest in net (income) loss of subsidiary			1,039				(407	)			1,184
Net income attributable to common shareholders			8,936				5,575				3,896
PER COMMON SHARE DATA:
Net income attributable to common shareholders, per share
Basic		$	1.18			$	0.88			$	0.98
Diluted		$	1.16			$	0.86			$	0.96
Book value per common share		$	13.75			$	13.29			$	11.13
Tangible book value per common share		$	12.08			$	11.46			$	10.84
Dividends per common share		$	0.22			$	0.20			$	0.20
Preferred shares outstanding			—				—				—
Basic weighted average common shares			7,586,993				6,329,316				3,993,206
Diluted weighted average common shares			7,691,493				6,478,952				4,053,804
Common shares outstanding at period end			7,778,309				7,279,620				3,910,191
BALANCE SHEET DATA:
Total assets		$	911,984			$	876,404			$	449,731
Mortgage loans held for sale, net			11,831				55,093				26,640
Total loans, net			657,701				608,747				309,497
Allowance for loan losses			9,082				7,823				7,353
Total securities			146,813				133,825				77,245
Other real estate, net			—				1,149				1,204
Goodwill and core deposit intagible			12,986				13,342				1,110
Total deposits			763,834				640,008				334,365
Federal Home Loan Bank advances			32,287				135,759				63,500
Dividends payable			1,711				1,489				—
Stockholders’ equity			106,919				96,751				43,516
Average total assets			885,074				733,651				417,050
Average gross loans, excluding loans held for sale			640,592				517,148				293,195
Average interest earning assets			835,337				694,135				401,487
Average deposits			664,844				543,341				323,466
Average interest bearing deposits			537,225				459,610				278,363
Average interest bearing liabilities			648,515				565,234				329,565
Average total shareholders’ equity			104,216				80,122				41,525

 

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		2016				2015				2014
SELECTED FINANCIAL RATIOS:
Return on average assets			1.01	%			0.76	%			0.93	%
Return on average equity			8.57	%			6.96	%			9.38	%
Average equity to average total assets			11.77	%			10.92	%			9.96	%
Dividend payouts			18.64	%			22.73	%			20.41	%
Efficiency ratio(1)			73.28	%			79.82	%			85.01	%
Net interest margin(2)			4.15	%			4.00	%			3.96	%
Net interest spread(3)			4.04	%			3.91	%			3.88	%
Capital Ratios(5)
Tier 1 leverage			10.86	%			9.92	%			9.71	%
Common equity tier 1			13.00	%			12.02	%			12.19	%
Tier 1 risk-based capital			13.00	%			12.02	%			12.19	%
Total risk-based capital			14.22	%			13.13	%			13.45	%
ASSET QUALITY RATIOS:
Net charge-offs to average loans			-0.05	%			-0.14	%			-0.11	%
Allowance to period end loans(4)			1.36	%			1.27	%			2.32	%
Allowance for loan losses to non-performing loans			105.76	%			116.59	%			83.40	%
Non-performing assets to total assets			0.94	%			0.90	%			2.23	%
OTHER DATA:
Banking locations			7				9				4
Loan production offices			3				8				7
Full-time equivalent employees			143				226				138

 

(1)	Efficiency ratio is non-interest expense divided by the sum of net interest income before the provision for loan losses plus non-interest income.

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

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

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

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

 

ITEM 7.

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

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

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and fair value of financial instruments are particularly subject to change.

 

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Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to the consolidated financial statements included elsewhere in this report. The critical accounting policies require our judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief summary of the more significant policies.

Principles of Consolidation

The consolidated financial statements as of and for the year ended December 31, 2016 include the accounts of Commerce Union Bancshares, Inc., its wholly-owned subsidiary, Reliant Bank (the “Bank”), the Bank’s majority controlled subsidiary, Reliant Mortgage Ventures, LLC, collectively (the “Company”). The consolidated financial statements for the year ended December 31, 2015 included the accounts of the Company after the reverse merger described below for the nine months ended December 31, 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. Comparative periods are comprised of the accounts of Reliant Bank, its wholly-owned subsidiary, Reliant Investments, LLC, and its 51% controlled subsidiary, Reliant Mortgage Ventures, LLC. 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 December 31, 2016, the cumulative losses to date totaled $3,397. 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

 

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individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The entire allowance is available for any loan that, in management’s judgment, should be charged off.

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

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED

DECEMBER 31, 2016, 2015 AND 2014

Merger Between Commerce Union Bancshares, Inc. and Reliant Bank

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

The Merger was accounted for as a reverse merger using the acquisition method of accounting, in accordance with the provisions of FASB ASC Topic 805-10 Business Combinations.

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

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

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

 

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

As a result of the Merger, the Company:

 

•

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

 

•

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

 

•

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

 

•

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

Earnings

Net income attributable to shareholders amounted to $8,936, or $1.18 per basic share for the year ended December 31, 2016, compared to $5,575, or $0.88 per basic share for the same period in 2015 and $3,896 or $0.98 per basic share for the same period in 2014. Diluted net income attributable to shareholders per share was $1.16, $0.86 and $0.96 per diluted share for the years ended December 31, 2016, 2015 and 2014, respectively. The largest components of the improvement from the year ended December 31, 2015 to the year ended December 31, 2016 include a 20.2% increase in net interest income of $5,482, and a decrease in non-interest expenses of $1,195 for the year ended December 31, 2016 compared to the same period in 2015. The largest factors offsetting the improvement was a decrease in non-interest income of $3,582 for the year ended December 31, 2016 compared to the same period in 2015. The largest components of the improvement from the year ended December 31, 2014 to the year ended December 31, 2015 include a 74.3% increase in net interest income of $11,584, and an increase in non-interest income of $7,774 for the year ended December 31, 2015 compared to the same period in 2014. The largest factors offsetting the improvement was an increase in non-interest expenses of $14,403 for the year ended December 31, 2015 compared to the same period in 2014.

 

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Net Interest Income

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of our revenues. The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):

Average Balances – Yields and Rates

 

		Year Ended December 31, 2016												Year Ended December 31, 2015												Year Ended December 31, 2014
		Average Balances				Rates / Yields (%)				Interest Income / Expense				Average Balances				Rates / Yields (%)				Interest Income / Expense				Average Balances				Rates / Yields (%)				Interest Income / Expense
Interest earning assets
Loans		$	640,592				4.78			$	29,950			$	517,148				4.78			$	24,719			$	293,195				4.63			$	13,578
Loan fees			—				0.31				1,955				—				0.25				1,298				—				0.37				1,081
Loans with fees			640,592				5.09				31,905				517,148				5.03				26,017				293,195				5.00				14,659
Mortgage loans held for sale			21,064				3.67				773				38,284				3.98				1,523				17,110				4.20				718
Deposits with banks			20,240				0.35				70				21,715				0.18				39				14,285				0.19				27
Investment securities - taxable			40,463				1.79				724				46,393				1.90				881				42,061				2.43				1,024
Investment securities - tax-exempt			105,536				3.39				2,211				65,165				2.76				1,185				31,443				3.09				641
Fed funds sold and other			7,442				4.46				332				5,430				4.48				243				3,393				4.30				146
Total earning assets			835,337				4.56				36,015				694,135				4.39				29,888				401,487				4.37				17,215
Nonearning assets			49,737												39,516												15,563
		$	885,074											$	733,651											$	417,050
Interest bearing liabilities
Interest bearing demand		$	88,775				0.21				182			$	88,857				0.21				190			$	51,662				0.29				148
Savings and money market			186,473				0.34				632				158,670				0.29				466				116,434				0.28				330
Time deposits - retail			159,351				0.70				1,116				116,364				0.76				883				33,640				1.13				380
Time deposits - wholesale			102,626				0.70				719				95,719				0.56				533				76,627				0.54				417
Total interest bearing deposits			537,225				0.49				2,649				459,610				0.45				2,072				278,363				0.46				1,275
Federal Home Loan Bank advances			111,290				0.64				714				105,624				0.61				646				51,202				0.69				354
Total borrowed funds			111,290				0.64				714				105,624				0.61				646				51,202				0.69				354
Total interest-bearing liabilities			648,515				0.52				3,363				565,234				0.48				2,718				329,565				0.49				1,629
Net interest rate spread (%) / Net interest income ($)							4.04			$	32,652								3.91			$	27,170								3.88			$	15,586
Non-interest bearing deposits			127,619				(0.09	)							83,731				(0.07	)							45,103				(0.06	)
Other non-interest bearing liabilities			4,724												4,564												857
Stockholder’s equity			104,216												80,122												41,525
		$	885,074											$	733,651											$	417,050
Cost of funds							0.43												0.41												0.43
Net interest margin							4.15												4.00												3.96

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

 

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Analysis of Changes in Interest Income and Expense

 

		Change for Year Ended December 31, 2016 to 2015												Change for Year Ended December 31, 2015 to 2014
		Due to Volume				Due to Rate				Total				Due to Volume				Due to Rate				Total
Interest earning assets
Loans		$	5,231			$	—			$	5,231			$	10,687			$	454			$	11,141
Loan fees			657				—				657				217				—				217
Loans with fees			5,888				—				5,888				10,904				454				11,358
Mortgage loans held for sale			(639	)			(111	)			(750	)			845				(40	)			805
Deposits with banks			(3	)			34				31				13				(1	)			12
Investment securities - taxable			(108	)			(49	)			(157	)			97				(240	)			(143	)
Investment securities - tax-exempt			749				277				1,026				684				(140	)			544
Fed funds sold and other			92				(3	)			89				91				6				97
Total earning assets			5,979				148				6,127				12,634				39				12,673
Interest bearing liabilities
Interest bearing demand			(8	)			—				(8	)			90				(48	)			42
Savings and money market			84				82				166				123				13				136
Time deposits - retail			307				(74	)			233				663				(160	)			503
Time deposits - wholesale			42				144				186				101				15				116
Total interest bearing deposits			425				152				577				977				(180	)			797
Federal Home Loan Bank advances			36				32				68				337				(45	)			292
Total borrowed funds			36				32				68				337				(45	)			292
Total interest-bearing liabilities			461				184				645				1,314				(225	)			1,089
Change in Net interest income		$	5,518			$	(36	)		$	5,482			$	11,320			$	264			$	11,584

Analysis—For the year ended December 31, 2016, we recorded net interest income of approximately $32.7 million, which resulted in a net interest margin (net interest income divided by the average balance of interest earning assets) of 4.15%. For the year ended December 31, 2015, we recorded net interest income of approximately $27.2 million, which resulted in a net interest margin of 4.00%. For the year ended December 31, 2014, we recorded net interest income of approximately $15.6 million, which resulted in a net interest margin of 3.96%. For the year ended December 31, 2016, 2015 and 2014, our net interest spread was 4.04%, 3.91% and 3.88%, respectively. During the year ended December 31, 2016, a contributing factor to the increase in our net interest income was the payoff of loans previously carried as purchase credit impaired. These payoffs resulted in a $827 increase in our net interest income for the period. This was partially offset by reversals of interest due to nonaccrual loans.

Our year-over-year average loan volume increased by approximately 23.9% from 2015 to 2016 and 76.4% from 2014 to 2015. Our combined loan and loan fee yield increased from 5.03% to 5.09% for 2015 compared to 2016, respectively, and from 5.00% to 5.03% for 2014 compared to 2015, respectively.

Our cost of funds increased from 0.41% to 0.43% for 2015 compared to the same period in 2016 and declined from 0.43% to 0.41% for 2014 compared to the same period in 2015. Our cost of interest-bearing liabilities increased from 0.48% at December 31, 2015 to 0.52% at December 31, 2016. Our cost of interest-bearing liabilities decreased from 0.49% at December 31, 2014 to 0.48% at December 31, 2015. We also experienced 52.4% and 85.6% increases in our average non-interest bearing deposits from the year ended December 31, 2015 and 2016 and

 

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for the year ended December 31, 2014 and 2015, respectively. The increase from 2015 to 2016 was primarily the result of the Merger that occurred on April 1, 2015, but also a result of our continuing initiative to grow low cost core deposits. The increase from 2014 to 2015 was primarily the result of the Merger effective April 1, 2015, and a result of a year-long strategic growth initiative.

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

Provision for Loan Losses

The provision for loan losses represents a charge (or in the case of the years ended December 31, 2015 and 2014, a recovery) to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. Based upon management’s assessment of the loan portfolio, we adjust our allowance for loan losses on a quarterly basis to an amount deemed appropriate to adequately cover probable losses inherent in the loan portfolio.

Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at December 31, 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 $968 for the year ended December 31, 2016, a negative provision for loan losses of $270 for the year ended December 31, 2015 and a negative provision for loan losses of $1,500 for the year ended December 31, 2014. Our provision increase was primarily the result of loan growth that we have experienced. The lower provision for loan losses (including the negative provision) experienced in the prior year was due to the continued improvement of credit-quality factors in our loan portfolio, continued recoveries and low charge-offs.

Non-Interest Income

Our non-interest income is composed of several components, some of which vary significantly between periods. The following is a summary of our non-interest income for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):

 

		Years Ended December 31,								Dollar Increase				Percent Increase				Year Ended December 31,				Dollar Increase				Percent Increase
		2016				2015				(Decrease)				(Decrease)				2014				(Decrease)				(Decrease)
Non-interest income
Service charges on deposit accounts		$	1,239			$	958			$	281				29.3	%		$	617			$	341				55.3	%
Gains (loss) on securities transactions, net			36				(388	)			424				109.3	%			143				(531	)			-371.3	%
Gains on mortgage loans sold, net			6,317				10,999				(4,682	)			-42.6	%			3,447				7,552				219.1	%
Gain (loss) on sale of other real estate			301				6				295				4916.7	%			(8	)			14				175.0	%
Other noninterest income:
Bank-owned life insurance			750				541				209				38.6	%			360				181				50.3	%
Brokerage revenue			89				93				(4	)			-4.3	%			18				75				416.7	%
Rental income			2				6				(4	)			-66.7	%			—				6				100.0	%
Miscellaneous noninterest income, net			66				167				(101	)			-60.5	%			31				136				438.7	%
Total other non-interest income			907				807				100				12.4	%			409				398				97.3	%
Total non-interest income		$	8,800			$	12,382			$	(3,582	)			-28.9	%		$	4,608			$	7,774				168.7	%

 

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The most significant reason for the decrease during the year ended December 31, 2016 compared to the same period in 2015, related to the decline in gains on mortgage loans sold, net, while the increase for the year ended December 31, 2015 compared to 2014, related to an increase in gains on mortgage loans sold, net, and 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 other reasons for fluctuations during the year ended December 31, 2016 compared to the same period in 2015 and the year ended December 31, 2015 compared to the same period in 2014.

Service charges on deposit accounts generally reflect trends in the growth of our customer base. Changes in pricing for deposit account services, the addition or discontinuation of deposit products and the volume and type of deposit account transactions will also impact our level of service charges.

Securities gains and losses will fluctuate from period to period and are often attributable to various balance sheet risk strategies. During the year ended December 31, 2016, the Company sold securities classified as available for sale totaling $31,782 and recognized a net gain of $36. Proceeds from sales during 2016 were primarily reinvested in higher yielding securities with comparable interest rate and credit risk. During the year ended December 31, 2015, the Company sold securities classified as available for sale and held to maturity totaling $27,258 and recognized a net loss of $388. During the first quarter of 2015, the Bank sold securities that were previously classified as held to maturity and recognized a loss on sale of $396, which is included in the net loss above. All other securities classified as held to maturity were transferred to available-for-sale during the first quarter of 2015. During the year ended December 31, 2014, the Company sold securities classified as available for sale and held to maturity totaling $14,732 and recognized a net gain of $143.

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 decreases in rising interest rate environments and more challenging housing markets. Mortgage-related revenue will fluctuate as the rate environment changes and as changes occur to our mortgage operations. Gains on mortgage loans sold, net, amounted to $6,317, $10,999 and $3,447, for the years ended December 31, 2016, 2015 and 2014, respectively. As discussed further in the notes to our consolidated financial statements, gains on mortgage loans sold are generally recognized at the time of a loan sale corresponding to the transfer of risk. The decline in sells of loans during 2016 primarily related to the transition of a majority of our out-of-market mortgage loan production offices during the quarter ended June 30, 2016 to better focus our marketing and other resources in our core Middle Tennessee markets. The increase during 2015 compared to same period in 2014 was due to expanding our mortgage operation during the second quarter of 2014 by increasing the number of out-of-market offices and personnel.

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

Noninterest income also includes appreciation in the cash surrender value of bank-owned life insurance which was $750, $541 and $360 for the years ended December 31, 2016, 2015 and 2014, respectively. Primarily, the increases in earnings on these bank-owned life insurance policies resulted from the Merger effective April 1, 2015. Also, 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, and during 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 generated through an arrangement with a third party and is based on the volume and type of product sales made to customers referred by our employees.

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

 

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Non-Interest Expense

The following is a summary of our non-interest expense for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):

 

		Years Ended December 31,								Dollar Increase				Percent Increase				Year Ended December 31,				Dollar Increase				Percent Increase
		2016				2015				(Decrease)				(Decrease)				2014				(Decrease)				(Decrease)
Non-interest expense
Salaries and employee benefits		$	18,256			$	18,657			$	(401	)			-2.1	%		$	10,170			$	8,487				83.5	%
Occupancy			3,174				3,387				(213	)			-6.3	%			2,599				788				30.3	%
Information technology			2,486				2,479				7				0.3	%			1,399				1,080				77.2	%
Advertising and public relations			702				1,213				(511	)			-42.1	%			559				654				117.0	%
Audit, legal and consulting			1,287				1,892				(605	)			-32.0	%			714				1,178				165.0	%
Federal deposit insurance			438				383				55				14.4	%			264				119				45.1	%
Provision for losses on other real estate			70				110				(40	)			-36.4	%			72				38				52.8	%
Other operating			3,961				3,448				513				14.9	%			1,389				2,059				148.2	%
Total non-interest expense		$	30,374			$	31,569			$	(1,195	)			-3.8	%		$	17,166			$	14,403				83.9	%

The most significant reason for the changes during the years ended December 31, 2016, 2015 and 2014 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 years ended December 31, 2016, 2015 and 2014.

Salaries and employee benefits decreased for the year ended December 31, 2016 compared to the same period in 2015 and increased for the year ended December 31, 2015 compared to the same period in 2014. The primary reason for the changes during the year ended December 31, 2016 compared to the same period in 2015 and the same period in 2014 was a result of the Merger effective April 1, 2015. The decrease from 2015 to 2016 was primarily a result of a decrease in compensation from transitioning several of our out-of-market mortgage offices to another bank and was partially offset from general increases in compensation of our staff. The increase from 2014 to 2015, aside from the Merger effective April 1, 2015, was related to payments made under a management incentive program, the expansion of our mortgage operations and payments made under a retail incentive program to help grow business and consumer deposit activity.

Certain of our facilities are leased while there are others that we own. Occupancy costs decreased during the year ended December 31, 2016 compared to the same period in 2015. This decrease is due to transitioning several of our out-of-market mortgage offices to another bank. When comparing the period of 2015 with 2014, occupancy costs increased, primarily due to the Merger effective April 1, 2015, and increases in rent for other mortgage loan production offices.

Information technology costs were relatively flat when comparing the year ended December 31, 2016 to the comparable period in 2015. When comparing the year ended December 31, 2015 to the comparable period in 2014, the increase was 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, core service costs have declined as a result of this conversion.

Advertising and public relations costs decreased when comparing the year ended December 31, 2016 to the similar period in 2015, by $511. The decrease is primarily due to transitioning several of our out-of-market mortgage offices to another bank. These decreases have been partially offset by cost increases attributable to our current customer acquisition strategy. Advertising and public relations costs increased when comparing the year ended December 31, 2015 to the similar period in 2014, by $654. These costs were substantially attributable to a retail customer acquisition strategy, expanded use of a mortgage lead-generating platform and the Merger effective April 1, 2015. We engaged a third party to assist with the implementation of a program to grow business and consumer deposit accounts during the period from 2014 to 2016.

 

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Audit, legal and consulting costs decreased $605 when comparing the year ended December 31, 2016 compared to the similar period in 2015 due to a reduction in merger-related expenses offset partially by increased costs associated with being a public company. The increase from 2014 to 2015 of $1,178 was due to merger-related expenses and the costs associated with being a public company.

Our FDIC expense is based on our outstanding liabilities for the period multiplied by a factor determined by the FDIC, mainly driven by our most recent regulatory rating and certain financial performance factors. Our FDIC expense increased $55 for year ended December 31, 2016, compared to the same period in 2015 and increased $119 for the year ended December 31, 2015 compared to the same period in 2014. The increase from the year ended December 31, 2014 to the same period in 2015 was primarily due to the Merger effective April 1, 2015. Increase in both periods relate 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 $70, $110 and $72 during the years ended December 31, 2016, 2015 and 2014, respectively. The provision recorded for 2016 related to a property held in our other real estate portfolio while the provision recorded for 2015 related to a different property held in our other real estate portfolio. The provision recorded for 2014 related to two properties that were held in our other real estate portfolio.

Other operating expenses increased $513 for the year ended December 31, 2016, compared to the same period in 2015 and increased $2,059 for the year ended December 31, 2015 compared to the same period in 2014 mainly due to the Merger effective April 1, 2015. These increases from 2015 compared to 2016 were partially offset by decreases in loan-related expenses such as processing costs relating to our mortgage operations as volume decreased and our transitioning of several of our out-of-market mortgage offices to another bank. Other increases from 2014 compared to 2015 related to loan-related expenses from volume increases in mortgage originations and sales during the year ended December 31, 2015. We also recorded a provision for unfunded commitments of $85 and $323 during the years ended December 31, 2016 and 2015, respectively. This provision was recorded to provide for estimated losses in our unfunded loan commitments.

Income Taxes

During the years ended December 31, 2016, 2015 and 2014 we recorded income tax expense of $2,213, $2,271 and $1,816, respectively. The Company files separate Federal tax returns for the operations of the mortgage banking and banking operations. The taxable income or losses of the mortgage banking operations are included in the respective returns of the Bank and non-controlling members for Federal purposes. During the third quarter of 2015, the Company began consolidating the results of the Bank and the mortgage banking operations in its tax filings with the State of Tennessee. At that time, we recognized a cumulative benefit of $159 relating to 2014 and prior tax losses of the mortgage banking operations that were available to offset a portion of the income of the Bank. Results of the mortgage banking operations were previously reported on the individual state returns of the Bank and mortgage banking operation’s non-controlling members.

Our income tax expense for the year ended December 31, 2016, reflects an effective income tax rate of 20.4% (exclusive of a tax benefit from our mortgage banking operations of $72 on pre-tax loss of $1,111) compared to 30.3% (exclusive of a tax benefit from our mortgage banking operations of $148 on pre-tax income of $259) for the comparable period of 2015. During the year ended December 31, 2016, the Company recognized excess tax benefits of $478 related to the exercise of stock options, thereby reducing our effective tax rate as compared to the year ended December 31, 2015. Also, during the year ended December 31, 2016, the Bank entered into an interest-free loan agreement and recognizes a state tax credit in the amount of $217 each quarter beginning in the second quarter of 2016. Our income tax expense for the year ended December 31, 2014, reflects an effective income tax rate of 31.8% (exclusive of a pre-tax loss of 1,184 from our mortgage banking operations with no tax expense or benefit). 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.

 

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Noncontrolling Interest in Net Income (Loss) of Subsidiary

Our noncontrolling interest in net income (loss) of subsidiary is solely attributable to Reliant Mortgage Ventures, LLC. Reliant Bank has a 51% voting interest in this venture. Under the terms of the related operating agreement, the noncontrolling member receives 70% of the profits of the mortgage venture, and the Bank receives 30% of the profits. The noncontrolling member is responsible for 100% of the mortgage venture’s net losses. During the year ended December 31, 2016, the Company transitioned most of its out-of-market mortgage offices to another bank. The venture incurred a net loss of $1,039 for the year ended December 31, 2016, net income of $407 for the year ended December 31, 2015 and a net loss of $1,184 for the year ended December 31, 2014. The net loss for the year ended December 31, 2016, results in a cumulative net loss from the venture of $3,397. Revenue and expenses from the operation are included in our consolidated statements of operations as noninterest income and noninterest expense and the net income (loss) is subtracted (added) as the noncontrolling interest. See Note 20 for segment reporting in the consolidated financial statements included elsewhere herein.

Return on Equity and Assets

The following schedule details selected key ratios for the years ended December 31, 2016, 2015 and 2014:

 

		2016				2015				2014
Return on assets			1.01	%			0.76	%			0.93	%
(Net income divided by average total assets)
Return on equity			8.57	%			6.96	%			9.38	%
(Net income divided by average equity)
Dividend payout ratio			18.64	%			22.73	%			20.41	%
(Dividends declared per share divided by net income per share)
Equity to assets ratio			11.77	%			10.92	%			9.96	%
(Average equity divided by average total assets)
Leverage capital ratio - Bank			10.75	%			9.88	%			9.71	%
(Equity divided by fourth quarter average total assets, excluding accumulated other comprehensive income)

 

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Under guidelines developed by regulatory agencies a “risk weight” is assigned to various categories of assets and commitments ranging from 0% to 100% based on the risk associated with the asset. The following schedule details the Bank’s risk-based capital at December 31, 2016 excluding the net unrealized loss on available-for-sale securities which is shown as a reduction in shareholders’ equity in the consolidated financial statements:

 

		In Thousands, Except Percentages
Tier 1 capital
Shareholders’ equity, excluding accumulated other comprehensive income, disallowed goodwill, other disallowed intangible assets and disallowed servicing assets		$	95,637
Tier 2 capital
Allowable allowance for loan losses (limited to 1.25% of gross risk- weighted assets)			9,082
Total risk-based capital		$	104,719
Risk-weighted assets, gross		$	742,640
Less: Excess allowance for loan and lease losses			—
Risk-weighted assets, net		$	742,640
Risk-based capital ratios:
Tier 1 risk-based capital ratio			12.88	%
Total risk-based capital ratio			14.10	%

The minimum Tier 1 risk-based capital ratio required by the regulatory agencies is 4.00%, and the minimum total risk-based capital ratio required is 8.00%. At December 31, 2016, the Company was in compliance with these requirements.

COMPARISON OF BALANCE SHEETS AT DECEMBER 31, 2016 AND DECEMBER 31, 2015

Overview

The Company’s total assets were $911,984 at December 31, 2016 and $876,404 at December 31, 2015. Our assets increased by 4.1% from December 31, 2015 to December 31, 2016. The increase in assets from December 31, 2015 to December 31, 2016, was substantially attributable to an increase in cash and cash equivalents of $3.7 million; an increase in net loans of approximately $49.0 million, discussed further below; a net increase in our securities portfolio of $13.0 million, discussed further below; and a $4.8 million increase in bank-owned life insurance. These increases were offset by a decrease in our mortgage loans held for sale of $43.3 million. The Company’s total liabilities were $805,065 at December 31, 2016 and $779,653 at December 31, 2015, an increase of 3.3%. The increase in total liabilities from December 31, 2015 to December 31, 2016, was substantially attributable to an increase in total deposits of $123.8 million, offset by a decrease in Federal Home Loan Bank advances of $103.5 million. 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 December 31, 2016, and December 31, 2015, were $657,701 and $608,747, respectively. This represented an increase of 8.0% from December 31, 2015 to December 31, 2016.

 

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

 

		As of December 31,
		2016								2015								2014
		Amount				Percent				Amount				Percent				Amount				Percent
Commerical, industrial and agricultural		$	134,404				20.1	%		$	143,770				23.3	%		$	80,817				25.5	%
Real estate:
1-4 family residential			113,031				16.9	%			110,736				17.9	%			41,297				13.0	%
1-4 family HELOC			57,460				8.6	%			49,665				8.0	%			33,108				10.4	%
Multifamily and commercial real estate			215,639				32.3	%			202,736				32.8	%			112,805				35.6	%
Construction, land development and farmland			115,889				17.4	%			89,763				14.6	%			37,127				11.7	%
Consumer			17,240				2.6	%			15,271				2.5	%			11,771				3.7	%
Other			13,745				2.1	%			5,556				0.9	%			300				0.1	%
			667,408				100.0	%			617,497				100.0	%			317,225				100.0	%
Less:
Deferred loan fees			625								927								375
Allowance for possible loan losses			9,082								7,823								7,353
Loans, net		$	657,701							$	608,747							$	309,497

 

		As of December 31,
		2013								2012
		Amount				Percent				Amount				Percent
Commerical, industrial and agricultural		$	84,715				29.6	%		$	75,627				26.6	%
Real estate:
1-4 family residential			38,604				13.5	%			37,790				13.3	%
1-4 family HELOC			35,353				12.3	%			42,503				14.9	%
Multifamily and commercial real estate			91,400				31.9	%			99,138				34.8	%
Construction, land development and farmland			27,916				9.7	%			19,350				6.8	%
Consumer			8,330				2.9	%			9,820				3.5	%
Other			302				0.1	%			302				0.1	%
			286,620				100.0	%			284,530				100.0	%
Less:
Deferred loan fees			320								552
Allowance for possible loan losses			8,530								7,760
Loans, net		$	277,770							$	276,218

 

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

 

		December 31, 2016				December 31, 2015
Commerical, industrial and agricultural		$	385			$	1,558
Real estate:
1-4 family residential			92				1,016
1-4 family HELOC			36				40
Multifamily and commercial real estate			3,321				4,565
Construction, land development and farmland			1,569				1,598
Consumer			—				—
Other			—				—
Total gross PCI loans			5,403				8,777
Less:
Remaining purchase discount			635				1,671
Allowance for possible loan losses			6				247
Loans, net		$	4,762			$	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 $134,404 at December 31, 2016, decreased 6.5% compared to $143,770 as of December 31, 2015. Agricultural loans represent 10.9% of the total commercial, industrial and agricultural portfolio, and 2.2% of gross loans at December 31, 2016.

Real estate loans comprised 75.2% of the loan portfolio at December 31, 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 December 31, 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 $215,639 at December 31, 2016, increased 6.4% compared to the $202,736 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 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. We have a relatively small number of automobile loans. Our consumer loans experienced an increase from December 31, 2015, to December 31, 2016, of 12.9%.

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

 

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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 December 31, 2016, excluding unearned net fees and costs.

 

		One Year or Less				One to Five Years				Over Five Years				Total
Commercial, industrial and agricultural		$	43,134			$	73,624			$	17,646			$	134,404
Real estate:
1-4 family residential			17,071				68,215				27,745				113,031
1-4 family HELOC			8,002				23,055				26,403				57,460
Multifamily and commercial real estate			20,377				103,958				91,304				215,639
Construction, land development and farmland			63,369				46,141				6,379				115,889
Consumer			10,059				6,886				295				17,240
Other			464				5,781				7,500				13,745
Total		$	162,476			$	327,660			$	177,272			$	667,408
Fixed interest rate		$	61,607			$	259,604			$	137,150			$	458,361
Variable interest rate			100,869				68,056				40,122				209,047
Total		$	162,476			$	327,660			$	177,272			$	667,408

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

Allowance for Loan Losses

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

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

At December 31, 2016, the allowance for loan losses was $9,082 compared to $7,823 at December 31, 2015. The allowance for loan losses as a percentage of total loans was 1.4% at December 31, 2016 and 1.3% at December 31, 2015. The allowance was adjusted upward from December 31, 2015 to December 31, 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.

 

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The following table sets forth the activity in the allowance for loan losses for the years presented.

Analysis of Changes in Allowance for Loan Losses

 

		2016				2015				2014				2013				2012
Beginning Balance, January 1		$	7,823			$	7,353			$	8,530			$	7,760			$	9,738
Loans charged off
Commerical, industrial and agricultural			(84	)			—				(9	)			(41	)			(1,706	)
Real estate:
1-4 family residential			(25	)			—				—				(53	)			(930	)
1-4 family HELOC			—				(6	)			—				(143	)			(1,029	)
Multifamily and commercial real estate			—				—				—				—				—
Construction, land development and farmland			—				—				—				—				(464	)
Consumer			—				(35	)			(120	)			(16	)			—
Other			(36	)			—				(11	)			—				(9	)
Total loans charged off			(145	)			(41	)			(140	)			(253	)			(4,138	)
Recoveries on loans previously charged off:
Commerical, industrial and agricultural			323				346				178				381				212
Real estate
1-4 family residential			66				15				100				281				177
1-4 family HELOC			11				25				25				354				46
Multifamily and commercial real estate			18				388				49				105				157
Construction, land development and farmland			6				7				111				250				215
Consumer			12				—				—				1				3
Other			—				—				—				1				—
Total loan recoveries			436				781				463				1,373				810
Net recoveries (charge-offs)			291				740				323				1,120				(3,328	)
Provision for loan losses			968				(270	)			(1,500	)			(350	)			1,350
Total allowance, December 31		$	9,082			$	7,823			$	7,353			$	8,530			$	7,760
Gross loans at end of period (1)		$	667,408			$	617,497			$	317,225			$	286,620			$	284,530
Average gross loans (1)		$	640,592			$	517,148			$	293,195			$	283,276			$	281,221
Allowance to total loans			1.36	%			1.27	%			2.32	%			2.98	%			2.73	%
Net charge offs (recoveries) to average loans			-0.05	%			-0.14	%			-0.11	%			-0.40	%			1.18	%

 

(1)	Loan balances exclude loans held for sale.

 

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

 

		2016												2015												2014
		Amount				% of Allowance To Total				% of Loan Type to Total Loans				Amount				% of Allowance To Total				% of Loan Type to Total Loans				Amount				% of Allowance To Total				% of Loan Type to Total Loans
Commerical, industrial and agricultural		$	2,432				26.8	%			20.1	%		$	2,198				28.1	%			23.3	%		$	2,184				29.7	%			25.5	%
Real estate:
1-4 family residential			1,178				13.0	%			16.9	%			1,214				15.5	%			17.9	%			642				8.7	%			13.0	%
1-4 family HELOC			704				7.8	%			8.6	%			699				8.9	%			8.0	%			854				11.6	%			10.4	%
Multifamily and commercial real estate			2,737				30.1	%			32.3	%			2,591				33.1	%			32.8	%			2,070				28.2	%			35.6	%
Construction, land development and farmland			1,786				19.7	%			17.4	%			894				11.4	%			14.6	%			742				10.1	%			11.7	%
Consumer			208				2.3	%			2.6	%			192				2.5	%			2.5	%			181				2.5	%			3.7	%
Other			37				0.3	%			2.1	%			35				0.5	%			0.9	%			2				0.0	%			0.1	%
Unallocated			—				0.0	%			0.0	%			—				0.0	%			0.0	%			678				9.2	%			0.0	%
		$	9,082				100.0	%			100.0	%		$	7,823				100.0	%			100.0	%		$	7,353				100.0	%			100.0	%

 

		2013												2012
		Amount				% of Allowance To Total				% of Loan Type to Total Loans				Amount				% of Allowance To Total				% of Loan Type to Total Loans
Commerical, industrial and agricultural		$	2,138				25.1	%			29.6	%		$	1,318				17.0	%			26.6	%
Real estate:
1-4 family residential			1,071				12.6	%			13.5	%			2,319				29.9	%			13.3	%
1-4 family HELOC			865				10.1	%			12.3	%			1,366				17.6	%			14.9	%
Multifamily and commercial real estate			1,581				18.5	%			31.9	%			1,467				18.9	%			34.8	%
Construction, land development and farmland			553				6.5	%			9.7	%			339				4.4	%			6.8	%
Consumer			257				3.0	%			2.9	%			48				0.6	%			3.5	%
Other			13				0.2	%			0.1	%			2				0.0	%			0.1	%
Unallocated			2,052				24.0	%			0.0	%			901				11.6	%			0.0	%
		$	8,530				100.0	%			100.0	%		$	7,760				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.

 

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

 

		December 31,
		2016				2015				2014				2013				2012
Non-accrual loans		$	5,634			$	5,004			$	2,625			$	3,570			$	9,106
Past due loans 90 days or more and still accruing interest			—				—				—				—				—
Restructured loans			2,953				1,706				6,192				5,455				2,277
Total non-performing loans			8,587				6,710				8,817				9,025				11,383
Other real estate			—				1,149				1,204				1,375				1,455
Total non-performing assets		$	8,587			$	7,859			$	10,021			$	10,400			$	12,838
Total non-performing loans as a percentage of total loans			1.29	%			1.09	%			2.78	%			3.15	%			4.00	%
Total non-performing assets as a percentage of total assets			0.94	%			0.90	%			2.23	%			2.70	%			3.34	%
Allowance for loan losses as a percentage of non-performing loans			105.76	%			116.59	%			83.40	%			94.52	%			68.17	%

Investment Securities and Other Earning Assets

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

Securities are a component of the Company’s earning assets. Securities totaled $146,813 at December 31, 2016. This represents a 9.7% increase from the December 31, 2015 total of $133,825. The increase is attributable to purchasing $59,332 securities available for sale during the year ended December 31, 2016, offset by sales, principal paydowns and maturities of $41,037 during the same period.

Restricted equity securities totaled $7,133 at December 31, 2016. This represents a 14.2% increase from the December 31, 2015 total of $6,244. Restricted securities consist of Federal Reserve Bank and Federal Home Loan Bank stock.

 

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

 

		December 31, 2016												December 31, 2015												December 31, 2014
Available-For-Sale		Amortized Cost				Fair Value				% of Total				Amortized Cost				Fair Value				% of Total				Amortized Cost				Fair Value				% of Total
U.S.Treasury and other U.S. government agencies		$	1,909				1,908				1.30	%		$	4,918				4,836				3.61	%		$	4,758				4,628				8.53	%
State and municipal			122,813				119,634				81.49	%			86,604				87,595				65.46	%			35,952				36,209				66.70	%
Corporate bonds			2,000				1,987				1.35	%			2,000				1,979				1.48	%			1,000				1,007				1.85	%
Mortgage backed securities			20,197				20,034				13.65	%			36,617				36,165				27.02	%			9,933				9,942				18.31	%
Time deposits			3,250				3,250				2.21	%			3,250				3,250				2.43	%			2,500				2,500				4.61	%
Total		$	150,169				146,813				100.00	%		$	133,389				133,825				100.00	%		$	54,143				54,286				100.00	%
Held-To-Maturity
U.S.Treasury and other U.S. government agencies		$	—				—				—			$	—				—				—			$	21,016				20,675				91.26	%
Corporate bonds			—				—				—				—				—				—				1,943				1,980				8.74	%
Total		$	—				—				—			$	—				—				—			$	22,959				22,655				100.00	%

The table below summarizes the maturities and yield characteristics of the Company’s available-for-sale securities as of December 31, 2016. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		One year or less								Over one year through five years								Over five year through ten years								Over ten years								Total
		Fair Value				Yield				Fair Value				Yield				Fair Value				Yield				Fair Value				Yield				Fair Value				Yield
Available-For-Sale
U.S.Treasury and other U.S. government agencies		$	—				—			$	1,043				2.02	%		$	611				2.19	%		$	254				1.37	%		$	1,908				1.99	%
State and municipal			1,133				2.72	%			15,944				2.62	%			9,958				3.56	%			92,599				4.25	%			119,634				3.96	%
Corporate bonds			—				—				1,490				1.64	%			—				—				497				3.48	%			1,987				2.10	%
Mortgage backed securities			—				—				222				0.80	%			4,737				1.99	%			15,075				2.17	%			20,034				2.11	%
Time deposits			—				—				3,250				2.18	%			—				—				—				—				3,250				2.18	%
Total		$	1,133				2.72	%		$	21,949				2.44	%		$	15,306				3.02	%		$	108,425				3.95	%		$	146,813				3.63	%

Securities pledged at December 31, 2016 and 2015 had a carrying amount of $36,292 and $39,815 and were pledged to secure public deposits and repurchase agreements.

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

Premises and Equipment

Premises and equipment, net, totaled $9,093 at December 31, 2016 compared to $9,196 at December 31, 2015, a net decrease of $103 or 1.1%. Asset purchases amounted to approximately $873 during the year ended 2016 while related depreciation expense amounted to $976. At December 31, 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

 

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office is in Murfreesboro, Tennessee. As of December 31, 2016, our mortgage loan production offices were located Hendersonville, Tennessee, as well as Timonium, Maryland. During the year ended December 31, 2016, the Company transitioned most of it out-of-market branches to another bank. 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 December 31, 2016, total deposits were $763,834, an increase of $123,826, or 19.3%, compared to $640,008 at December 31, 2015. During the year ended December 31, 2016, we increased non-interest bearing demand deposits by $23.5 million, or 21.1%, increased savings and money market deposits by $2.5 million, or 1.4% and increased time deposits by $107.8 million, or 42.8%, while interest bearing demand deposits decreased $9.9 million, or 10.4%. A large portion of the increase in time deposits related to obtaining certificates of deposit from the state of Tennessee of which the proceeds were used to repay Federal Home Loan Bank advances. We are continuing to focus on growth of our non-interest bearing deposits and using alternative sources of funds to better manage our cost of funds. As of December 31, 2016, non-interest bearing deposits represent 17.6% of total deposits.

The average amounts for deposits for 2016, 2015 and 2014 are detailed in the following schedule (in thousands, except for percentages).

 

		2016								2015								2014
		Average Balance				Average Rate				Average Balance				Average Rate				Average Balance				Average Rate
Non-interest-bearing deposits		$	127,619				0.00	%		$	83,731				0.00	%		$	45,103				0.00	%
Interest bearing demand			88,775				0.21	%			88,857				0.21	%			51,662				0.29	%
Savings and money market			186,473				0.34	%			158,670				0.29	%			116,434				0.28	%
Time deposits-retail			159,351				0.70	%			116,364				0.76	%			33,640				1.13	%
Time deposits-wholesale			102,626				0.70	%			95,719				0.56	%			76,627				0.54	%
		$	664,844				0.40	%		$	543,341				0.38	%		$	323,466				0.39	%

The following table shows maturity of time deposits of $100,000 or more by category based on time remaining until maturity.

 

		December 31, 2016
Three months or less		$	187,933
Over three months through six months			8,141
Over six months through 12 months			25,247
Over one year through three years			44,530
Over three years through five years			13,744
Over five years			—
Total		$	279,595

 

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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 25% of assets. We were in compliance with our policy as of December 31, 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
		Estimate				Policy				Estimate				Policy
-200 bp			-5.1	%			-15	%			-12.2	%			-15	%
-100 bp			-2.2	%			-10	%			-5.4	%			-10	%
+100 bp			-0.1	%			-10	%			0.1	%			-10	%
+200 bp			0.0	%			-15	%			0.2	%			-15	%
+300 bp			0.1	%			-20	%			0.1	%			-20	%
+400 bp			0.0	%			-25	%			0.1	%			-25	%

We were in compliance with the earnings simulation model policies monitored by the Bank as of December 31, 2016, indicating what we believe to be a fairly neutral profile.

 

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

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

 

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

At December 31, 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 Bank of Cincinnati which is secured by a blanket pledge of cash deposits, 1-4 family residential mortgages, multi-family residential, home equity loans, and available-for-sale securities.

 

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At December 31, 2016, Federal Home Loan Bank advances totaled $32,287 compared to $135,759 as of December 31, 2015. The decrease in FHLB advances is substantially attributable to obtaining lower cost funding from certificates of deposit issued by the state of Tennessee.

At December 31, 2016, the scheduled maturities of these advances and interest rates were as follows (scheduled maturities will differ from scheduled repayments):

 

Scheduled Maturities		Amount				Weighted Average Rates
2017		$	20,000				0.66	%
2018			6,000				2.74	%
2019			—				0.00	%
2020			—				0.00	%
2021			519				2.73	%
Thereafter			5,768				1.86	%
		$	32,287				1.29	%

Capital

Stockholders’ equity was $106,919 at December 31, 2016, an increase of $10,168, or 10.5%, from $96,751 at December 31, 2015. The Company raised $4.8 million of capital through the exercise of Company stock options during the year ended December 31, 2016. 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 December 31, 2016 Tier 1 leverage ratio to 10.75% 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 first quarter of 2016. As of December 31, 2016, common dividends of $1,711 were declared to be paid during the first quarter of 2017.

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 December 31, 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 notification that management believes have changed the institution’s category.

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.

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.

 

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

 

		Actual Regulatory Capital								For Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
December 31, 2016
Company
Common equity Tier 1		$	96,682				13.00	%		$	38,115				5.125	%			N/A				N/A
Tier I leverage			96,682				10.86	%			35,610				4.000	%			N/A				N/A
Tier I risk-based capital			96,682				13.00	%			49,271				6.625	%			N/A				N/A
Total risk-based capital			105,764				14.22	%			64,150				8.625	%			N/A				N/A
Bank
Common equity Tier 1		$	95,637				12.88	%		$	38,054				5.125	%		$	48,264				6.50	%
Tier I leverage			95,637				10.75	%			35,586				4.000	%			44,482				5.00	%
Tier I risk-based capital			95,637				12.88	%			49,192				6.625	%			59,402				8.00	%
Total risk-based capital			104,719				14.10	%			64,057				8.625	%			74,269				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	%

 

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Contractual Obligations

The following table summarizes our contractual obligations and other commitments to make future payments as of December 31, 2016:

 

		December 31, 2016
		Total				Due in one year or less				Due over one year and less than three years				Due over three years and less than five years				Due over five years
Deposits with maturities		$	359,776			$	288,850			$	54,188			$	16,738			$	—
Federal Home Loan Bank advances			32,287				20,960				7,447				1,763				2,117
Federal funds purchased			3,671				3,671				—				—				—
Lease commitments			11,237				1,540				2,906				2,681				4,110
Total		$	406,971			$	315,021			$	64,541			$	21,182			$	6,227

Off Balance Sheet Arrangements

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

 

		December 31, 2016
Unused lines of credit		$	159,019
Standby letters of credit			12,217
Total commitments		$	171,236

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

 

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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.

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.

Impact of Recent Accounting Guidance

ASU 2014-04, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure” clarifies when substance repossession or foreclosure occurs. A creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-11 became effective for the Company on January 1, 2015 and did not have a significant impact on the consolidated financial statements.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” implements a common revenue standard that clarifies the principles for recognizing revenue. The principle element of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, the FASB recently issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date” which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. We do not expect these changes to have a significant impact on our consolidated financial statements. We continue to evaluate the impact of ASU 2014-09 on other components of non-interest income.

ASU 2014-11, “Transfers and Servicing (Topic 860)” requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 became effective for the Company on January 1, 2015 and did not have a significant impact on the consolidated financial statements.

 

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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 2015-05, “Intangibles – Goodwill and Other - Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” addresses accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service, (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 became effective for the Company on January 1, 2016 and did not have a significant impact on the consolidated financial statements.

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 2016-02, “Leases (Topic 842).” ASU 2016-02 will require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 will be effective for us on January 1, 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 consolidated financial statements. We are evaluating the potential impact of ASU 2016-02 on our consolidated financial statements.

ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 simplifies the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. ASU 2016-07 will be effective for the Company on January 1, 2017 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share excludes the amount of excess tax benefits that would have previously been recognized in additional paid-in capital.

 

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Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. The Company elected to adopt the provisions of ASU 2016-09 in 2016 in advance of the required application date of January 1, 2017. The adoption of this standard reduced reported income tax expense by $478, or approximately $0.06 per diluted common share, for 2016.

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

ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016-15 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2016-16, “Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory.” ASU 2016-16 provides guidance stating that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash.” ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Please see headings: “Market and Liquidity Risk Management,” “Interest Rate Sensitivity” and “Effect of Inflation and Changing Prices.”

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this Item are included as a separate section of this report commencing on page F-1.

 

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ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Commerce Union maintains disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, which are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to Commerce Union’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Commerce Union carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of December 31, 2016. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2016, Commerce Union’s disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting

The report of Commerce Union Bancshares, Inc.’s management on internal control over financial reporting is set forth on page F-1 of this Annual Report on Form 10-K. This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.

Changes in Internal Controls

There were no changes in Commerce Union’s internal control over financial reporting during Commerce Union’s fiscal quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, Commerce Union’s internal control over financial reporting.

 

ITEM 9B.

OTHER INFORMATION

None.

 

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PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The response to this item is incorporated by reference to the Company’s proxy statement for the 2017 annual meeting of shareholders under the captions “Proposal One - Election of Directors,” “Information About the Directors,” “Information About the Executive Officers,” “Corporate Governance and the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The Company’s proxy statement will be filed no later than 120 days after the close of our last fiscal year.

 

ITEM 11.

EXECUTIVE COMPENSATION

The response to this item is incorporated by reference to the Company’s Proxy Statement, under the captions “Compensation of Directors and Executive Officers” and “Director Compensation.”

 

ITEM 12.

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

The response to this item is incorporated by reference to the Company’s Proxy Statement, under the caption “Security Ownership of Certain Beneficial Owners and Management.”

The following table summarizes the Company’s equity compensation plan information as of December 31, 2016:

Equity Compensation Plan Information as of December 31, 2016

 

Plan category		Number of securities to be issued upon exercise of outstanding options				Weighted average exercise price of outstanding options				Number of securities remaining available for future issuance
Equity compensation plans approved by security holders			241,541			$	12.96				1,188,586	(1)
Equity compensation plans not approved by security holders			—				—				—
Total			241,541			$	12.96				1,188,586

 

(1)

This number includes 434,186 securities available to be issued under the Commerce Union Bancshares, Inc. Amended and Restated Stock Option Plan. Although this plan will remain in effect until March 23, 2021, the Company has no intentions to issue new awards under the plan. Future awards are intended to be issued under the Commerce Union Bancshares, Inc. 2015 Equity Incentive Plan for which the number of securities remaining available for future issuance is 754,400.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The response to this item is incorporated by reference to the Company’s Proxy Statement, under the captions “Proposal One - Election of Directors” and “Related Party Transactions.”

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The response to this item is incorporated by reference to the Company’s Proxy Statement, Item 2-Ratification of Auditor Appointment under the caption “Proposal Two - Ratification of Independent Registered Public Accountants.”

 

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PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(1)	Financial Statements:

The consolidated financial statements are included as Item 8 of this Form 10-K beginning on Page F-1.

 

(2)	Financial Statement Schedules:

All schedules have been omitted because the information is not required, not applicable, not present in amounts sufficient to require submission of the schedule, or is included in the financial statements or notes thereto.

 

(3)

Exhibits:

The exhibits filed as part of this report and incorporated herein by reference to other documents are listed on the Exhibit Index to this annual report on Form 10-K, immediately following the financial statements.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS THAT HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.

No annual report to security holders or proxy materials covering the Company’s last fiscal year have been sent as of the date of this report. If sent, copies of these materials will be furnished to the SEC when they are mailed to security holders. The annual report and proxy materials shall not be deemed to be “filed” with the SEC or otherwise subject to the liabilities of Section 18 of the act.

 

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

						COMMERCE UNION BANCSHARES, INC.
Date: March 14, 2017				By:		/s/ William Ronald DeBerry
						William Ronald DeBerry
						Chairman and Chief Executive Officer
						(Principal Executive Officer)

 

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KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William R. DeBerry, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on March 14, 2017.

 

		SIGNATURE AND CAPACITY
		/s/    Homayoun Aminmadani
		Homayoun Aminmadani, Director   /s/    DeVan D. Ard
		DeVan D. Ard, Director and President   /s/    Charles Trimble Beasley
		Charles Trimble (Trim) Beasley, Director   /s/    John Lewis Bourne
		John Lewis (Buddy) Bourne, Director   /s/    William R. DeBerry
		William R. DeBerry, Chairman and Chief Executive Officer (Principal Executive Officer)   /s/    Sharon H. Edwards
		Sharon H. Edwards, Director   /s/    Farzin Ferdowsi
		Farzin Ferdowsi, Director   /s/    Darrell S. Freeman
		Darrell S. Freeman, Sr., Director
		/s/    James Gilbert Hodges         James Gilbert Hodges, Director
		/s/    James R. Kelley         James R. Kelley, Director
		/s/    Don R. Sloan
		Don Richard Sloan Director

 

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COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

TABLE OF CONTENTS

 

		PAGE
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING			F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – 2016 AND 2015			F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - 2014			F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets			F-4
Consolidated Statements of Operations			F-5
Consolidated Statements of Comprehensive Income			F-6
Consolidated Statements of Changes in Stockholders’ Equity			F-7
Consolidated Statements of Cash Flows			F-8
Notes to Consolidated Financial Statements			F-10

 

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Management Report On Internal Control Over Financial Reporting

The management of Commerce Union Bancshares, Inc. and its subsidiaries (collectively referred to as the Company) is responsible for the preparation, integrity and fair presentation of published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, as such, include amounts based on informed judgments and estimates made by management.

Management is responsible for establishing and maintaining adequate internal control over financial reporting for financial presentations in conformity with GAAP. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and included those policies and procedures that:

 

•

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company.

 

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and

 

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, or that the degree of compliance with the policies and procedures include in such controls may deteriorate.

Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2016 based on the control criteria established in a report entitled Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that Commerce Union Bancshares, Inc.’s internal control over financial reporting is effective as of December 31, 2016.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

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				Stephen M. Maggart, CPA, ABV, CFF J. Mark Allen, CPA M. Todd Maggart, CPA, ABV, CFF Michael Holland, CPA, ABV, CFF Michael F. Murphy, CPA P. Jason Ricciardi, CPA, CGMA David B. von Dohlen, CPA T. Keith Wilson, CPA, CITP

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Commerce Union Bancshares, Inc.:

We have audited the accompanying consolidated balance sheets of Commerce Union Bancshares, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2016. Commerce Union Bancshares, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commerce Union Bancshares, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ Maggart & Associates, P.C.

Nashville, Tennessee

March 14, 2017

 

 

150 FOURTH AVENUE, NORTH ◾ SUITE 2150 ◾ NASHVILLE, TENNESSEE 37219-2431 ◾ (615) 252-6100 ◾ Fax ◾ (615) 252-6105

www.maggartpc.com

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Reliant Bank

Brentwood, Tennessee

We have audited the accompanying consolidated statement of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2014. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the fmancial position of Reliant Bank, the results of their operations and their cash flows for the year ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ KraftCPAs PLLC

Nashville, Tennessee

March 31, 2015, except for Note 20 as to which the date is March 28, 2016

KraftCPAs PLLC ◾ Certified Public Accountants and Consultants

555 Great Circle Road ◾ Nashville, TN 37228 ◾ phone: 615-242-7351 ◾ fax: 615-782-4271 ◾ kraftcpas.com

 

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COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2016 AND 2015

(Dollar amounts in thousands except per share amounts)

 

		2016				2015
ASSETS
Cash and due from banks		$	23,413			$	20,289
Federal funds sold			830				281
Total cash and cash equivalents			24,243				20,570
Securities available for sale			146,813				133,825
Loans, net			657,701				608,747
Mortgage loans held for sale, less allowance for fair market adjustment of $160 at December 31, 2016			11,831				55,093
Accrued interest receivable			3,786				3,096
Premises and equipment, net			9,093				9,196
Restricted equity securities, at cost			7,133				6,244
Other real estate, net			—				1,149
Cash surrender value of life insurance contracts			24,827				20,077
Deferred tax assets, net			3,437				2,383
Goodwill			11,404				11,404
Core deposit intangibles			1,582				1,938
Other assets			10,134				2,682
TOTAL ASSETS		$	911,984			$	876,404
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Demand		$	134,792			$	111,309
Interest-bearing demand			85,478				95,397
Savings and money market deposit accounts			183,788				181,316
Time			359,776				251,986
Total deposits			763,834				640,008
Accrued interest payable			107				55
Federal funds purchased			3,671				—
Federal Home Loan Bank advances			32,287				135,759
Dividends payable			1,711				1,489
Other liabilities			3,455				2,342
TOTAL LIABILITIES			805,065				779,653
STOCKHOLDERS’ EQUITY
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued to date			—				—
Common stock, $1 par value; 30,000,000 shares authorized; 7,778,309 and 7,279,620 shares issued and outstanding at December 31, 2016 and 2015, respectively			7,778				7,280
Additional paid-in capital			89,045				84,520
Retained earnings			12,212				4,987
Accumulated other comprehensive loss			(2,116	)			(36	)
TOTAL STOCKHOLDERS’ EQUITY			106,919				96,751
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	911,984			$	876,404

See accompanying notes to consolidated financial statements.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

		2016				2015				2014
INTEREST INCOME
Interest and fees on loans		$	31,905			$	26,017			$	14,659
Interest and fees on loans held for sale			773				1,523				718
Interest on investment securities, taxable			724				881				1,024
Interest on investment securities, nontaxable			2,211				1,185				641
Federal funds sold and other			402				282				173
TOTAL INTEREST INCOME			36,015				29,888				17,215
INTEREST EXPENSE
Deposits
Demand			182				190				148
Savings and money market deposit accounts			632				466				330
Time			1,835				1,416				797
Federal Home Loan Bank advances and other			714				646				354
TOTAL INTEREST EXPENSE			3,363				2,718				1,629
NET INTEREST INCOME			32,652				27,170				15,586
PROVISION FOR LOAN LOSSES			968				(270	)			(1,500	)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			31,684				27,440				17,086
NONINTEREST INCOME
Service charges on deposit accounts			1,239				958				617
Gains on mortgage loans sold, net			6,317				10,999				3,447
Gain (loss) on securities transactions, net (reclassified from other comprehensive income)			36				(388	)			143
Gain (loss) on sale of other real estate			301				6				(8	)
Other			907				807				409
TOTAL NONINTEREST INCOME			8,800				12,382				4,608
NONINTEREST EXPENSE
Salaries and employee benefits			18,256				18,657				10,170
Occupancy			3,174				3,387				2,599
Information technology			2,486				2,479				1,399
Advertising and public relations			702				1,213				559
Audit, legal and consulting			1,287				1,892				714
Federal deposit insurance			438				383				264
Provision for losses on other real estate			70				110				72
Other operating			3,961				3,448				1,389
TOTAL NONINTEREST EXPENSE			30,374				31,569				17,166
INCOME BEFORE PROVISION FOR INCOME TAXES			10,110				8,253				4,528
INCOME TAX EXPENSE			2,213				2,271				1,816
CONSOLIDATED NET INCOME			7,897				5,982				2,712
NONCONTROLLING INTEREST IN NET (INCOME) LOSS OF SUBSIDIARY			1,039				(407	)			1,184
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	8,936			$	5,575			$	3,896
Basic net income attributable to common shareholders, per share		$	1.18			$	0.88			$	0.98
Diluted net income attributable to common shareholders, per share		$	1.16			$	0.86			$	0.96

See accompanying notes to consolidated financial statements.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

		2016				2015				2014
Consolidated net income		$	7,897			$	5,982			$	2,712
Other comprehensive income (loss)
Net unrealized gains (losses) on available-for-sale securities, net of tax of $(1,275), $(17) and $892 for the years ended December 31, 2016, 2015 and 2014, respectively			(2,058	)			(25	)			1,440
Reclassification adjustment for (gains) losses included in net income, net of tax of $(14), $149 and $(55) for the years ended December 31, 2016, 2015 and 2014, respectively			(22	)			239				(88	)
Amortization of unrealized holding loss related to transfer of securities from available for sale to held to maturity, net of tax of $26 for the year ended December 31, 2014			—				—				39
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)			(2,080	)			214				1,391
TOTAL COMPREHENSIVE INCOME		$	5,817			$	6,196			$	4,103

See accompanying notes to consolidated financial statements.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

																		ACCUMULATED
										ADDITIONAL								OTHER
		COMMON STOCK								PAID-IN				RETAINED				COMPREHENSIVE				NONCONTROLLING
		SHARES				AMOUNT				CAPITAL				EARNINGS				INCOME (LOSS)				INTEREST				TOTAL
BALANCE - JANUARY 1, 2014			3,910,191			$	3,910			$	38,925			$	(2,212	)		$	(1,641	)		$	—			$	38,982
Stock based compensation expense			—				—				32				—				—				—				32
Stock issuance costs			—				—				(2	)			—				—				—				(2	)
Noncontrolling interest contributions			—				—				—				—				—				1,184				1,184
Cash dividend declared to common shareholders ($0.20 per share)			—				—				—				(783	)			—				—				(783	)
Net income (loss)			—				—				—				3,896				—				(1,184	)			2,712
Other comprehensive income			—				—				—				—				1,391				—				1,391
BALANCE - DECEMBER 31, 2014			3,910,191				3,910				38,955				901				(250	)			—				43,516
Stock based compensation expense			—				—				104				—				—				—				104
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			186,884				187				1,633				—				—				—				1,820
Restricted stock awards			30,500				31				(31	)			—				—				—				—
Stock issuance costs			—				—				(149	)			—				—				—				(149	)
Noncontrolling interest distributions			—				—				—				—				—				(407	)			(407	)
Cash dividend declared to common shareholders ($0.20 per share)			—				—				—				(1,489	)			—				—				(1,489	)
Net income			—				—				—				5,575				—				407				5,982
Other comprehensive income			—				—				—				—				214				—				214
BALANCE - DECEMBER 31, 2015			7,279,620				7,280				84,520				4,987				(36	)			—				96,751
Stock based compensation expense			—				—				251				—				—				—				251
Exercise of stock options			476,889				477				4,295				—				—				—				4,772
Restricted stock awards			23,800				23				(23	)			—				—				—				—
Restricted stock forfeiture			(2,000	)			(2	)			2				—				—				—				—
Noncontrolling interest contributions			—				—				—				—				—				1,039				1,039
Cash dividend declared to common shareholders ($0.22 per share)			—				—				—				(1,711	)			—				—				(1,711	)
Net income (loss)			—				—				—				8,936				—				(1,039	)			7,897
Other comprehensive loss			—				—				—				—				(2,080	)			—				(2,080	)
BALANCE - DECEMBER 31, 2016			7,778,309			$	7,778			$	89,045			$	12,212			$	(2,116	)		$	—			$	106,919

See accompanying notes to consolidated financial statements.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

		2016				2015				2014
OPERATING ACTIVITIES
Consolidated net income		$	7,897			$	5,982			$	2,712
Adjustments to reconcile consolidated net income to net cash provided (used) in operating activities
Provision for loan losses			968				(270	)			(1,500	)
Deferred income taxes			235				(203	)			830
Depreciation and amortization of premises and equipment			976				890				567
Net amortization of securities			1,551				1,110				391
Net realized (gains) losses on sales of securities			(36	)			388				(143	)
Gains on mortgage loans sold, net			(6,317	)			(10,999	)			(3,447	)
Stock-based compensation expense			251				104				32
Loss (gain) on sale of other real estate			(301	)			(6	)			8
Provision for losses on other real estate			70				110				72
Increase in cash surrender value of life insurance contracts			(750	)			(541	)			(360	)
Mortgage loans originated for resale			(158,457	)			(409,338	)			(108,498	)
Proceeds from sale of mortgage loans			208,036				391,884				87,985
Amortization of core deposit intangible			356				300				131
Change in
Accrued interest receivable			(690	)			(465	)			(105	)
Other assets			(6,580	)			(1,357	)			(120	)
Accrued interest payable			52				(107	)			26
Other liabilities			1,501				(167	)			631
TOTAL ADJUSTMENTS			40,865				(28,667	)			(23,500	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			48,762				(22,685	)			(20,788	)
INVESTING ACTIVITIES
Activities in available for sale securities
Purchases			(59,332	)			(62,556	)			(22,364	)
Sales			31,782				6,609				14,732
Maturities, prepayments and calls			9,255				7,297				2,000
Activities in held to maturity securities
Sales			—				20,649				—
Maturities, prepayments and calls			—				—				105
Purchases of restricted equity securities			(889	)			(1,007	)			(436	)
Loan originations and payments, net			(49,922	)			(51,480	)			(30,227	)
Purchase of buildings, leasehold improvements, and equipment			(873	)			(926	)			(340	)
Proceeds from sale of other real estate			1,313				568				91
Improvement of other real estate			(16	)			—				—
Purchase of life insurance contracts			(4,000	)			(4,000	)			(2,000	)
Cash received in merger			—				12,378				—
NET CASH USED IN INVESTING ACTIVITIES			(72,682	)			(72,468	)			(38,439	)
FINANCING ACTIVITIES
Net change in deposits			123,826				57,848				44,564
Net change in federal funds purchased			3,671				(6,651	)			6,651
Advances from (repayments to) Federal Home Loan Bank, net			(103,472	)			51,403				8,500
Issuance of common stock			4,772				1,820				—
Stock issuance costs			—				(149	)			(2	)
Noncontrolling interest contributions received			285				305				775
Cash dividends paid on common stock			(1,489	)			—				(783	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			27,593				104,576				59,705
NET INCREASE IN CASH AND CASH EQUIVALENTS			3,673				9,423				478
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD			20,570				11,147				10,669
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	24,243			$	20,570			$	11,147

See accompanying notes to consolidated financial statements.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

		2016				2015				2014
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest		$	3,311			$	2,742			$	1,603
Taxes			3,091				4,232				142
Non-cash investing and financing activities
Unrealized gain (loss) on securities available-for-sale		$	(3,369	)		$	293			$	2,439
Change in due to/from noncontrolling interest			754				(712	)			409
Foreclosures transferred from loans to other real estate			—				622				—
Dividends declared, not paid			1,711				1,489				—

See accompanying notes to consolidated financial statements.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Commerce Union Bancshares, Inc. and Subsidiaries (“the Company”) conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The following is a brief summary of the significant policies.

Principles of Consolidation

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 terminated in September 2016), Reliant Investments, LLC (inactive and terminated in September 2016), and the Bank’s majority controlled subsidiary, Reliant Mortgage Ventures, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. As described in Note 21, Commerce Union Bancshares, Inc. and Reliant Bank merged effective April 1, 2015. The merger was accounted for as a reverse acquisition, and as a result, the historical financial statements presented for the Company are the historical financial statements of Reliant Bank for 2015 and 2014. 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.

Nature of Operations

The Company began its organizational activities in 2005. The Company provides financial services through its offices in Williamson, Robertson, Davidson, and Sumner Counties. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial and residential construction loans, commercial loans, installment loans and lines secured by home equity. Substantially all loans are secured by specific items of collateral including commercial and residential real estate, business assets, and consumer assets. Commercial loans are expected to be repaid from cash flow from operations of businesses.

At December 31, 2016, the Company had significant credit exposures to borrowers in real estate. If this industry experiences another economic slowdown and, as a result, the borrowers in this industry are unable to meet the obligations of their existing loan agreements, earnings could be negatively impacted.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Use of Estimates (Continued)

 

Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for loan losses, the valuation of other real estate, the valuation of debt and equity securities, the valuation of deferred tax assets and fair values of financial instruments.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, deposits with other financial institutions with maturities less than 90 days, and federal funds sold. Generally, federal funds sold are purchased and sold for one-day periods. Net cash flows are reported for customer loan and deposit transactions, securities sold under repurchase agreements, federal funds sold, and short-term Federal Home Loan Bank borrowings.

The Company maintains deposits in excess of the federal insurance amounts with other financial institutions. Management makes deposits only with financial institutions it considers financially sound.

Federal funds sold of $830 and $281 at December 31, 2016 and 2015, respectively, were invested in two financial institutions. Such funds were unsecured and matured the next business day.

Securities

The Company classifies its securities in one of two categories: held to maturity and available for sale. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. Securities are classified as available for sale when they might be sold before maturity. As the Company sold securities in the held to maturity classification during 2015, it currently classifies all securities as available for sale.

Interest income includes purchase premiums and discounts amortized or accreted over the life of the related security as an adjustment to the yield without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

When the fair value of a debt security has declined below the amortized cost at the measurement date, if an entity intends to sell a security or is more likely than not to sell the security before the recovery of the security’s cost basis, the entity must recognize the other-than-temporary impairment (OTTI) in earnings. For a debt security with a fair value below the amortized cost at the measurement date where it is more likely than not that an entity will not sell the security before the recovery of its cost basis, but an entity does not expect to recover the entire cost basis of the security, the security is classified as OTTI.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Securities (Continued)

 

The related OTTI loss on the debt security will be recognized in earnings to the extent of the credit losses, with the remaining impairment loss recognized in accumulated other comprehensive income. In estimating OTTI losses, management considers: the length of time and extent that fair value of the security has been less than the cost of the security, the financial condition and near term prospects of the issuer, cash flow, stress testing analysis on securities, when applicable, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Loans

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

The accrual of interest is discontinued when a loan becomes 90 days past due according to the contractual terms of the note unless it is well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. When a loan is placed on non-accrual status, previously accrued and uncollected interest is charged against interest income on loans. When full collection of the remaining book balance is uncertain, interest payments received are applied to the principal balance outstanding. In some cases, when the remaining book balance of the loan is deemed fully collectible, payments are treated as interest income on a cash basis. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The restructuring of a loan is considered a “troubled debt restructuring” if the borrower is experiencing financial difficulties and the Company has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

 

F-12

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

During 2011, the Company added an unallocated general reserve. This unallocated portion of the reserve was above the allocated amount calculated for each loan pool segment based on each loan pool’s historical loss experience adjusted for current economic and environmental factors. This unallocated reserve was added due to the volatility in credit losses and the uncertainty risk that is not specifically identified with any particular loan pool segment. It also recognized that the current recessionary period manifested in higher and more unpredictable loss rates over an extended period of time. Management believed the decline in real estate values over the past several years as well as the continued slowness in general economic recovery supported maintaining an unallocated portion of the general reserve. During 2015, management determined that the decline in real estate values had subsided and, accordingly, management has removed the unallocated portion of the general reserve.

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.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Mortgage Loans Held for Sale

Mortgage loans originated with the intent to sell to third party investors are classified as held for sale. Such loans are carried at the lower of aggregate cost or market value, as determined by outstanding commitments from investors. These loans are typically marketed to potential investors prior to closing the loan with the borrower. Net unrealized losses, if any, are recorded through a valuation allowance and charged to operations. At December 31, 2016, a valuation allowance of $160 was attributable to mortgage loans held for sale. The related servicing rights are generally sold with the loans.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets or the terms of the related lease for leasehold improvements. The range of estimated useful lives for buildings is 30 to 40 years, for leasehold improvements is 3 to 25 years, which correlates with the applicable lease term, and for furniture, fixtures and equipment is 3 to 7 years. Gain or loss on items retired and otherwise disposed of is credited or charged to operations and the cost and related accumulated depreciation are removed from the asset and accumulated depreciation accounts.

Expenditures and improvements of premises and equipment are capitalized and those for maintenance and repairs are charged to earnings as incurred.

Restricted Equity Securities

Each member of the Federal Reserve is required to subscribe to Federal Reserve Bank (“FRB”) stock.

The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.

These stocks are carried at cost, classified as restricted equity securities, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Other Real Estate

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

Cash Surrender Value of Life Insurance Contracts

The Company is the owner and beneficiary of various life insurance policies on certain key employees. These policies are recorded at their cash surrender values.

Impairment of Long-Term Assets

Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are written down to fair value, with a corresponding charge to earnings.

Goodwill

Goodwill represents that excess of the purchase price of over the fair value of assets and liabilities acquired in a 2015 business acquisition (see Note 21) and in a 2009 business acquisition. Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired.

Securities Sold Under Agreements to Repurchase

All repurchase agreement liabilities represent amounts advanced by a customer of the Company. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Stock Based Compensation

Compensation cost recognized for stock options and restricted stock awards issued to employees is based on the fair value of these awards at the date of grant. A binomial model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period.

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

ASU 2016-09 also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award’s vesting period.

Income Taxes

Income tax expense or benefit is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Management performs an evaluation of all income tax positions taken or expected to be taken in the course of preparing the Company’s income tax returns to determine whether the income tax positions meet a “more likely than not” standard of being sustained under examination by the applicable taxing authorities. Management has performed its evaluation of all income tax positions taken on all open income tax returns and has determined that there were no positions taken that do not meet the “more likely than not” standard. Penalties and interest relating to income taxes are recognized in income tax expense.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Income Taxes (Continued)

 

The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company’s federal and state income tax returns for years prior to fiscal year 2013 are no longer open to examination. Certain returns from years in which net operating losses have occurred are still open for examination by the tax authorities.

Earnings Per Share

Earnings per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding plus shares representing the dilutive effect of stock options outstanding.

Retirement Plan

The Company has a 401(k) retirement plan covering all employees who elect to participate, subject to certain eligibility requirements. The Plan allows employees to defer up to 100% of their salary, subject to regulatory limitations with the Company matching 100% of the first 3% and 50% of the next 2% which is contributed by the employee. The Company recognizes as expense the amount of matching contributions related to the 401(k) plan. Vesting within the plan is immediate for 100% of deferral and employer contributions.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and derivatives. These gains and losses are recognized as a separate component of stockholders’ equity.

Loss Contingencies

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

Restrictions on Cash

Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. At December 31, 2016, the Company did not have a reserve balance to maintain and at December 31, 2015, the Company’s reserve requirement was $10,310.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Preferred Shares

Preferred shares rights that can be set when issued as determined by the Board of Directors.

Dividend Restriction

Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Company to shareholders.

Advertising Costs

Advertising costs are expensed as incurred and totaled $684, $1,117 and $403 for the years ended December 31, 2016, 2015 and 2014.

Fair Value Measurements

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

 

Level 1		Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2		Inputs to the valuation methodology include:
		•		Quoted prices for similar assets or liabilities in active markets;
		•		Quoted prices for identical or similar assets or liabilities in inactive markets;
		•		Inputs other than quoted prices that are observable for the asset or liability;
		•		Inputs that are derived principally from or corroborated by the observable market data by correlation or other means.
		If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3		Inputs to the valuation methodology are unobservable and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value Measurements (Continued)

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

Securities available for sale: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The Company obtains fair value measurements for securities available for sale from an independent pricing service. The fair value measurements consider observable data that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, cash flows and reference data, including market research publications, among other things.

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

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

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

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.

No changes in the valuation methodologies have been made since the prior year.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Fair Value Measurements (Continued)

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

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 4. 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.

Reclassifications

Certain reclassifications have been made in the 2015 and 2014 consolidated financial statements to conform to the 2016 presentation. These reclassifications had no effect on the results of operations previously reported.

Recent Authoritative Accounting Guidance

The following discusses new authoritative accounting guidance and the related impact on the Company.

ASU 2014-04, “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40)”: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure clarifies when substance repossession or foreclosure occurs. A creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU 2014-11 became effective for the Company on January 1, 2015 and did not have a significant impact on the consolidated financial statements

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Authoritative Accounting Guidance, (Continued)

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” implements a common revenue standard that clarifies the principles for recognizing revenue. The principle element of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, the FASB recently issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date” which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. We do not expect these changes to have a significant impact on our consolidated financial statements. We continue to evaluate the impact of ASU 2014-09 on other components of non-interest income.

ASU 2014-11, “Transfers and Servicing (Topic 860)” requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 became effective for the Company on January 1, 2015 and did not have a significant impact on the consolidated financial statements.

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.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Authoritative Accounting Guidance, (Continued)

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 2015-05, “Intangibles – Goodwill and Other - Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” addresses accounting for fees paid by a customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service, (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 became effective for the Company on January 1, 2016 and did not have a significant impact on the consolidated financial statements.

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 2016-02, “Leases (Topic 842).” ASU 2016-02 will require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 will be effective for us on January 1, 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 consolidated financial statements. We are evaluating the potential impact of ASU 2016-02 on our consolidated financial statements.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Authoritative Accounting Guidance, (Continued)

ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 simplifies the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. ASU 2016-07 will be effective for the Company on January 1, 2017 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09, all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share excludes the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. The Company elected to adopt the provisions of ASU 2016-09 in 2016 in advance of the required application date of January 1, 2017. The adoption of this standard reduced reported income tax expense by $478, or approximately $0.06 per diluted common share, for 2016. The Company did not apply the provisions of this pronouncement retrospectively.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recent Authoritative Accounting Guidance, (Continued)

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

ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016-15 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2016-16, “Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory.” ASU 2016-16 provides guidance stating that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash.” ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 2 - SECURITIES

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

 

		December 31, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
U. S. Treasury and other U. S. government agencies		$	1,909			$	4			$	(5	)		$	1,908
State and municipal			122,813				446				(3,625	)			119,634
Corporate bonds			2,000				8				(21	)			1,987
Mortgage backed securities			20,197				11				(174	)			20,034
Time deposits			3,250				—				—				3,250
Total		$	150,169			$	469			$	(3,825	)		$	146,813
		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

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 2 - SECURITIES (CONTINUED)

 

There were no held to maturity securities as of December 31, 2016 and 2015. On January 16, 2015, as part of a strategy to reposition the Company’s investment portfolio, $20,806 of securities classified as held to maturity were sold resulting in a loss on sale of $396. Subsequent to the sale, all other securities classified as held to maturity were transferred to available for sale.

The fair value of available for sale debt securities at December 31, 2016 by contractual maturity is provided below. Mortgage backed securities, which are not due at a single maturity date, are shown separately.

 

		Amortized Cost				Estimated Fair Value
Due within one year		$	1,130			$	1,133
Due in one to five years			21,723				21,727
Due in five to ten years			10,565				10,569
Due after ten years			96,554				93,350
Mortgage backed securities			20,197				20,034
		$	150,169			$	146,813

The following table shows available for sale securities with unrealized losses and their estimated fair value aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position as of December 31, 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		$	748			$	5			$	—			$	—			$	748			$	5
State and municipal			83,637				3,597				1,115				28				84,752				3,625
Corporate bonds			496				4				983				17				1,479				21
Mortgage backed securities			17,599				129				1,255				45				18,854				174
Total temporarily impaired		$	102,480			$	3,735			$	3,353			$	90			$	105,833			$	3,825

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 2 - SECURITIES (CONTINUED)

 

The following table shows available for sale securities with unrealized losses and their estimated fair value aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position as of December 31, 2015:

 

		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

At December 31, 2016, management had the intent and ability to hold all securities in a loss position for the foreseeable future, and the decline in fair value was largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. There were 193 securities in an unrealized loss position as of December 31, 2016.

During the years ended December 31, 2016, 2015 and 2014, gross realized gains on sales of securities were $359, $75 and $158, respectively, and gross realized losses were $323, $463 and $15, respectively.

Securities pledged at December 31, 2016 and 2015 had a market value of $36,292 and $39,815, respectively, and were pledged to collateralize Federal Home Loan Bank advances, Federal Reserve advances and municipal deposits.

At December 31, 2016 and 2015, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders’ equity.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

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

 

		December 31, 2016				December 31, 2015
Commerical, industrial and agricultural		$	134,404			$	143,770
Real estate
1-4 family residential			113,031				110,736
1-4 family HELOC			57,460				49,665
Multi family and commercial real estate			215,639				202,736
Construction, land development and farmland			115,889				89,763
Consumer			17,240				15,271
Other			13,745				5,556
			667,408				617,497
Less
Deferred loan fees			625				927
Allowance for possible loan losses			9,082				7,823
Loans, net		$	657,701			$	608,747

At December 31, 2016 and 2015, loans are recorded net of purchase discounts of $1,210 and $3,533, respectively.

 

F-28

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

 

Activity in the allowance for loan losses by portfolio segment was as follows for the year ended December 31, 2016:

 

		Commercial Industrial and Agricultural				Multi Family and Commercial Real Estate				Construction Land Development and Farmland				1-4 Family Residential Real Estate
Beginning balance		$	2,198			$	2,591			$	894			$	1,214
Charge-offs			(84	)			—				—				(25	)
Recoveries			323				18				6				66
Provision			(5	)			128				886				(77	)
Ending balance		$	2,432			$	2,737			$	1,786			$	1,178
		1-4 Family HELOC				Consumer				Other				Total
Beginning balance		$	699			$	192			$	35			$	7,823
Charge-offs			—				—				(36	)			(145	)
Recoveries			11				12				—				436
Provision			(6	)			4				38				968
Ending balance		$	704			$	208			$	37			$	9,082

Activity in the allowance for loan losses by portfolio segment was as follows for the year ended December 31, 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			346				388				7				15
Provision			(332	)			133				145				557
Ending balance		$	2,198			$	2,591			$	894			$	1,214

 

		1-4 Family HELOC				Consumer				Other				Unallocated				Total
Beginning balance		$	854			$	181			$	2			$	678			$	7,353
Charge-offs			(6	)			(35	)			—				—				(41	)
Recoveries			25				—				—				—				781
Provision			(174	)			46				33				(678	)			(270	)
Ending balance		$	699			$	192			$	35			$	—			$	7,823

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

 

Activity in the allowance for loan losses by portfolio segment was as follows for the year ended December 31, 2014:

 

		Commercial Industrial and Agricultural				Multi Family and Commercial Real Estate				Construction Land Development and Farmland				1-4 Family Residential Real Estate
Beginning balance		$	2,138			$	1,581			$	553			$	1,071
Charge-offs			(9	)			—				—				—
Recoveries			178				49				111				100
Provision			(123	)			440				78				(529	)
Ending balance		$	2,184			$	2,070			$	742			$	642

 

		1-4 Family HELOC				Consumer				Other				Unallocated				Total
Beginning balance		$	865			$	257			$	13			$	2,052			$	8,530
Charge-offs			—				(120	)			(11	)			—				(140	)
Recoveries			25				—				—				—				463
Provision			(36	)			44				—				(1,374	)			(1,500	)
Ending balance		$	854			$	181			$	2			$	678			$	7,353

 

F-30

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(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, 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		$	747			$	—			$	17			$	27
Acquired with credit impairment			—				6				—				—
Collectively evaluated for impairment			1,685				2,731				1,769				1,151
Total		$	2,432			$	2,737			$	1,786			$	1,178
Loans
Individually evaluated for impairment		$	5,375			$	2,036			$	2,544			$	1,972
Acquired with credit impairment			329				2,852				1,481				89
Collectively evaluated for impairment			128,700				210,751				111,864				110,970
Total		$	134,404			$	215,639			$	115,889			$	113,031
		1-4 Family HELOC				Consumer				Other				Total
Allowance for loan losses
Individually evaluated for impairment		$	62			$	—			$	—			$	853
Acquired with credit impairment			—				—				—				6
Collectively evaluated for impairment			642				208				37				8,223
Total		$	704			$	208			$	37			$	9,082
Loans
Individually evaluated for impairment		$	1,479			$	—			$	—			$	13,406
Acquired with credit impairment			16				—				—				4,767
Collectively evaluated for impairment			55,965				17,240				13,745				649,235
Total		$	57,460			$	17,240			$	13,745			$	667,408

 

F-31

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(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

 

F-32

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

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

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

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

 

F-33

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

At December 31, 2016, approximately 33% of the outstanding principal balance of the Company’s commercial real estate loan portfolio was secured by owner-occupied properties.

Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners.

Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of 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 influence the depth of potential losses in this portfolio segment.

 

F-34

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

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

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

Non-accrual loans by class of loan were as follows at December 31:

 

		December 31, 2016				December 31, 2015
Commercial, industrial and agricultural		$	3,062			$	947
Multi family and commercial real estate			636				713
Construction, land development and farmland			730				158
1-4 family residential real estate			344				2,109
1-4 family HELOC			862				1,077
Total		$	5,634			$	5,004

 

F-35

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

Individually impaired loans by class of loans were as follows at December 31, 2016:

 

		Unpaid Principal Balance				Recorded Investment with no Allowance Recorded				Recorded Investment with Allowance Recorded				Total Recorded Investment				Related Allowance
Commercial, industrial and agricultural		$	6,383			$	3,924			$	1,780			$	5,704			$	747
Multi family and commercial real estate			5,666				2,914				1,974				4,888				6
Construction, land development and farmland			4,124				3,854				171				4,025				17
1-4 family residential real estate			2,422				2,035				27				2,062				27
1-4 family HELOC			2,075				1,178				317				1,495				62
Total		$	20,670			$	13,905			$	4,269			$	18,174			$	859

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

 

F-36

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

Interest income recognized on impaired loans totaled $848, $853 and $656 for the years ended December 31, 2016, 2015 and 2014, respectively.

The average recorded investment in impaired loans for the years ended December 31, 2016 and 2015 was as follows:

 

		2016				2015
Commercial, industrial and agricultural		$	6,055			$	3,177
Multi family and commercial real estate			5,837				3,941
Construction, land development and farmland			3,243				1,049
1-4 family residential real estate			2,715				3,789
1-4 family HELOC			1,854				2,168
Total		$	19,704			$	14,124

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

Grade 1 - Minimal Risk (Pass)

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

Grade 2 - High Quality (Pass)

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

 

F-37

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

Grade 3 - Above Average (Pass)

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

Grade 4 - Average (Pass)

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

Grade 5 - Acceptable (Management Attention) (Pass)

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

Grade 6 - Special Mention

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

 

F-38

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(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 supervision that is more intensive by Company management. Substandard assets are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigation.

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.

 

F-39

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

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

Credit quality indicators by class of loan were as follows at December 31, 2016:

 

		Commercial Industrial and Agricultural				Multi Family and Commercial Real Estate				Construction Land Development and Farmland
Pass (grades 1-5)		$	129,880			$	211,938			$	111,663
Special Mention			—				—				1,767
Substandard			4,524				3,701				2,459
Total		$	134,404			$	215,639			$	115,889

 

		Consumer and Other				1-4 Family Residential Real Estate				1-4 Family HELOC				Total
Pass (grades 1-5)		$	30,985			$	109,592			$	55,981			$	650,039
Special Mention			—				1,427				—				3,194
Substandard			—				2,012				1,479				14,175
Total		$	30,985			$	113,031			$	57,460			$	667,408

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

 

F-40

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

Past due loan balances by class of loan were as follows at December 31, 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		$	207			$	142			$	—			$	349
Multi family and commercial real estate			—				—				—				—
Construction, land development and farmland			58				—				—				58
1-4 family residential real estate			7				—				—				7
1-4 family HELOC			—				—				—				—
Consumer			193				—				—				193
Other			—				—				—				—
Total		$	465			$	142			$	—			$	607

 

		Current				Accruing Total Past Due				Non Accrual Current Loans				Non Accrual Past Due Loans				Total Loans
Commercial, industrial and agricultural		$	130,993			$	349			$	1,243			$	1,819			$	134,404
Multi family and commercial real estate			215,003				—				636				—				215,639
Construction, land development and farmland			115,101				58				—				730				115,889
1-4 family residential real estate			112,680				7				58				286				113,031
1-4 family HELOC			56,598				—				862				—				57,460
Consumer			17,047				193				—				—				17,240
Other			13,745				—				—				—				13,745
Total		$	661,167			$	607			$	2,799			$	2,835			$	667,408

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

Past due loan balances by class of loan were as follows at December 31, 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 December 31, 2016 or 2015.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

Troubled debt restructurings occurring during the year ended December 31, 2016 by class of loan were as follows:

 

		Number of Contracts				Pre-Modification Oustanding Recorded Investments				Post-Modification Oustanding Recorded Investments
Construction, land development and farmland			2			$	1,712			$	1,712

Troubled debt restructurings occurring during the year ended December 31, 2015 by class of loan were as follows:

 

		Number of Contracts				Pre-Modification Oustanding Recorded Investments				Post-Modification Oustanding Recorded Investments
1-4 family residential real estate			1			$	196			$	196

Troubled debt restructurings occurring during the year ended December 31, 2014 by class of loan were as follows:

 

		Number of Contracts				Pre-Modification Oustanding Recorded Investments				Post-Modification Oustanding Recorded Investments
Commercial and industrial			2			$	948			$	1,044

There were no charge offs resulting from modifications during the years ended December 31, 2016, 2015 or 2014. The modifications consisted of changes in the amortization terms of the loans and payment modifications. The modifications had no affect on the allowance for loan losses and interest income was not significantly affected.

There were no subsequent defaults on loans modified in troubled debt restructurings during the years ended December 31, 2016, 2015 and 2014.

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

As part of an acquisition completed during 2015, the Company has acquired loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that not all contractually required payments would be collected. The carrying amount of those loans was as follows at December 31, 2016 and 2015, respectively:

 

		2016				2015
Commercial, industrial and agricultural		$	385			$	1,558
Multi family and commercial real estate			3,321				4,565
Construction, land development and farmland			1,569				1,598
1-4 family residential real estate			92				1,016
1-4 family HELOC			36				40
Total outstanding balance			5,403				8,777
Less remaining purchase discount			635				1,671
			4,768				7,106
Allowance for loan losses			6				247
Carrying amount, net of allowance		$	4,762			$	6,859

During the year ended December 31, 2016, a loan with non-accretable purchase discount totaling $708 was paid in full resulting in the recognition of the discounts in interest income.

Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the years ended December 31, 2015 and 2016:

 

Balance at January 1, 2015		$	—
New loans acquired			478
Accretion income			(97	)
Reclassification to nonaccretable			(148	)
Balance at December 31, 2015		$	233
Accretion income			(146	)
Balance at December 31, 2016		$	87

The Company decreased the allowance for loan losses on purchased credit impaired loans by $241 during the year ended December 31, 2016 and increased the allowance for loan losses on purchased credit impaired loans by $247 during the year ended December 31, 2015.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

Purchased credit impaired loans acquired during the year ended December 31, 2015 for which it was probable at acquisition that all contractually required payments would not be collected are 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

In the normal course of business, the Company will enter into various credit arrangements with its executive officers, directors and their affiliates. These arrangements generally take the form of commercial lines of credit, personal lines of credit, mortgage loans, term loans or revolving arrangements secured by personal residences. An analysis of the activity with respect to loans to related parties for the years ended December 31, 2016, 2015 and 2014, is as follows:

 

		2016				2015
Balance - January 1		$	10,484			$	9,995
New loans during the year			4,442				5,413
Repayments during the year			(2,991	)			(4,924	)
Balance - December 31		$	11,935			$	10,484

As of December 31, 2016 and 2015, none of these loans were restructured, nor were any related party loans charged off in 2016, 2015 or 2014.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 4 - FAIR VALUES OF ASSETS AND LIABILITIES

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

 

		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
December 31, 2016
Assets
U. S. Treasury and other U. S. government agencies		$	1,908			$	—			$	1,908			$	—
State and municipal			119,634				—				119,634				—
Corporate bonds			1,987				—				1,987				—
Mortgage backed securities			20,034				—				20,034				—
Time deposits			3,250				3,250				—				—
Interest rate swap			195				—				195				—
Liabilities
Interest rate swap		$	267			$	—			$	267			$	—
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			$	—

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(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 December 31, 2016 and 2015:

 

		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
December 31, 2016
Assets
Impaired loans		$	3,410			$	—			$	—			$	3,410
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 December 31, 2016 and 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.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(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, by level within the fair value hierarchy, at December 31, 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		$	23,413			$	23,413			$	23,413			$	—			$	—
Federal funds sold			830				830				830				—				—
Loans, net			657,701				658,130				—				—				658,130
Mortgage loans held for sale			11,831				11,831				—				—				11,831
Accrued interest receivable			3,786				3,786				—				3,786				—
Restricted equity securities			7,133				7,133				—				7,133				—
Financial liabilities
Deposits			763,834				763,174				—				—				763,174
Accrued interest payable			107				107				—				107				—
Federal Home Loan Bank advances			32,287				32,444				—				32,444				—

Carrying amounts and estimated fair values of financial instruments, by level within the fair value hierarchy, 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				—

 

F-48

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

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

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

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, restricted equity securities, demand deposits, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is not considered material.

NOTE 5 - PREMISES AND EQUIPMENT

The detail of premises and equipment at December 31, 2016 and 2015 is as follows:

 

		2016				2015
Land		$	1,211			$	1,211
Buildings			4,717				4,717
Construction in progress			368				406
Leasehold improvements			3,828				3,739
Furniture, fixtures and equipment			7,316				6,699
			17,440				16,772
Less: accumulated depreciation			(8,347	)			(7,576	)
		$	9,093			$	9,196

Depreciation expense was $976, $890 and $567 for the years ended December 31, 2016, 2015 and 2014, respectively.

NOTE 6 - RESTRICTED EQUITY SECURITIES

The Company owned the following restricted equity securities as of December 31, 2016 and 2015:

 

		2016				2015
Federal Reserve Bank		$	2,906			$	2,717
Federal Home Loan Bank			4,227				3,527
		$	7,133			$	6,244

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 7 - GOODWILL AND CORE DEPOSIT INTANGIBLE

The following presents the balances as of December 31, 2016, and 2015, of intangible assets acquired in business acquisitions:

 

		2016				2015
Goodwill		$	11,404			$	11,404
Amortized intangible assets:
Core deposit intangibles		$	2,946			$	2,946
Less accumulated amortization			(1,364	)			(1,008	)
		$	1,582			$	1,938

Amortization expense was $356, $300 and $131 for the years ended December 31, 2016, 2015 and 2014, respectively.

Estimated future amortization expense as of December 31, 2016 is as follows:

 

2017		$	301
2018			226
2019			226
2020			226
2021			226
Thereafter			377
Total		$	1,582

 

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Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 8 - DEPOSITS

Contractual maturities of time deposit accounts for the next five years at December 31, 2016 are as follows:

 

Maturity
2017		$	288,850
2018			45,676
2019			8,512
2020			11,423
2021			5,315
		$	359,776

The aggregate amount of overdrafts reclassified to loans receivable was $154 and $202 at December 31, 2016 and 2015, respectively.

At December 31, 2016 and 2015, deposits in excess of $250 totaled $221,136 and $167,720, respectively.

Deposits from principal officers, directors, and their affiliates at December 31, 2016, 2015 and 2014 were $14,151, $9,920 and $5,498, respectively.

NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES

At December 31, advances from the Federal Home Loan Bank were as follows:

 

		2016				2015
Maturities January 2017 through March 2024, fixed rates ranging from .64% to 2.99%		$	32,287			$	135,759

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The weighted average rate at December 31, 2016 and 2015 was 1.29% and .66%, respectively. The advances were collateralized by $332,419 and $288,397 of real estate loans at December 31, 2016 and 2015, respectively. The Company’s additional borrowing capacity was $30,484 and $23,214 at December 31, 2016 and 2015, respectively.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)

Required future principal payments on Federal Home Loan Bank borrowings are as follows:

 

2017		$	20,960
2018			6,717
2019			730
2020			743
2021			1,020
Thereafter			2,117
Total		$	32,287

NOTE 10 - BENEFIT PLANS

The Company has a 401(k) benefit plan that allows employee contributions up to 100% of their compensation, subject to regulatory limitations. The Company matches 100% of the first 3% contributed by the employee and 50% of the next 2% of the compensation contributed. Expense was $467 for 2016, $416 for 2015 and $173 for 2014.

NOTE 11 - INCOME TAXES

The income tax expense consists of the following for the years ended December 31:

 

		2016				2015				2014
Income tax expense
Current		$	1,978			$	2,474			$	986
Deferred			235				(203	)			830
Total provision for income tax expense		$	2,213			$	2,271			$	1,816

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 11 - INCOME TAXES (CONTINUED)

A reconciliation of the income tax expense for the years ended December 31, 2016, 2015 and 2014 from the “expected” tax expense computed by applying the statutory federal income tax rate of 34 percent to income before income taxes is as follows:

 

		2016								2015								2014
Computed “expected” tax expense		$	3,437				34	%		$	2,806				34	%		$	1,540				34	%
Increase (decrease) in tax expense resulting from:
State tax expense, net of federal tax effect			404				4	%			348				4	%			234				5	%
Tax exempt interest			(923	)			-9	%			(569	)			-7	%			(260	)			-6	%
Disallowed interest expense			56				1	%			53				1	%			13				0	%
Incentive stock options			22				0	%			23				0	%			11				0	%
Cash surrender value of life insurance contracts			(255	)			-3	%			(184	)			-2	%			(123	)			-3	%
Meals and entertainment			18				0	%			22				0	%			15				0	%
Officers life insurance expense			7				0	%			2				0	%			—				0	%
Excess tax benefit from stock compensation			(478	)			-5	%			—				0	%			—				0	%
Expiration of capital loss carryover			—				0	%			—				0	%			43				1	%
Nondeductible merger expenses			—				0	%			143				2	%			—				0	%
Federal and state tax credits			(499	)			-5	%			(123	)			-1	%			—				0	%
Benefit of subsidiary net loss			—				0	%			(159	)			-2	%			—				0	%
Subsidiary disregarded for federal taxes			378				4	%			(88	)			-1	%			403				9	%
Other			46				0	%			(3	)			0	%			(60	)			-1	%
Total income tax expense		$	2,213				21	%		$	2,271				28	%		$	1,816				39	%

The Company files a separate Federal tax return for the operations of the mortgage banking and banking operations. The taxable income or losses of the mortgage banking operations are included in the respective returns of the Company and non-controlling members for Federal purposes. During 2015, the Company began consolidating the results of the mortgage banking operations in its income tax filings with the State of Tennessee. A cumulative income tax benefit of $159 relating to 2014 and prior tax losses of the mortgage banking operations has been included in the consolidated income tax expense of the Company for the year ended December 31, 2015. The benefit of these losses is attributable to the non-controlling interest of the subsidiary.

During the years ended December 31, 2016, 2015 and 2014, deferred tax assets increased by $1,289, $132 and $863 related to unrealized gains and losses on available for sale securities, and income tax expense (benefit) of $14, $(149) and $55 was recognized related to gains and losses reclassified from other comprehensive income.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 11 - INCOME TAXES (CONTINUED)

 

Significant components of deferred tax assets as of December 31, 2016 and 2015 are as follows:

 

		2016				2015
Organizational and start-up costs		$	188			$	231
Core deposit intangible			(403	)			(513	)
Goodwill			(109	)			(94	)
Acquisition fair value adjustments			344				1,206
Allowance for loan losses			2,083				1,286
Loan fees			240				355
Other real estate			19				70
Premises and equipment			(691	)			(645	)
Unrealized loss on available-for-sale securities			1,312				23
Non-accrual loans			264				228
Other			190				236
Total		$	3,437			$	2,383
State		$	418			$	326
Federal			3,019				2,057
Net deferred tax asset		$	3,437			$	2,383

In assessing the future realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management determined that as of December 31, 2016, it was more likely than not that all deferred tax assets would be realized.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 12 - 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 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 plan for 2016 is as follows.

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at January 1, 2016			708,921			$	10.73
Granted			41,500				15.57
Exercised			(476,889	)			10.03
Forfeited or expired			(31,991	)			10.61
Outstanding at December 31, 2016			241,541				12.96				5.41			$	2,065
Exercisable at December 31, 2016			144,941				12.11				3.25			$	1,363
Vested and expected to vest at December 31, 2016			238,643				12.89				5.41			$	2,003

 

		Shares				Weighted Average Grant-Date Fair Value
Non-vested options at January 1, 2016			84,160			$	2.90
Granted			41,500				3.89
Vested			(24,260	)			2.76
Forfeited			(4,800	)			2.92
Non-vested options at December 31, 2016			96,600				3.36

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 12 - STOCK-BASED COMPENSATION (CONTINUED)

 

Information related to the stock option plan during each year follows and assumes a 3% forfeiture rate:

 

		2016				2015
Intrinsic value of options exercised		$	2,272			$	766
Cash received form option exercises			4,772				1,820
Tax benefit realized from option exercises			478				—

The fair value of options granted during 2016 and 2015 was determined using the following assumptions as of the grant date, resulting in an estimated fair value per option of $3.82.

 

		2016		2015
Risk-free interest rate		1.33% - 2.45%			1.65	%
Expected term		6.5 - 10 years			10 years
Expected stock price volatility		21% - 24%			21.00	%
Dividend yield		1.02% - 1.57%			1.50	%

The following table shows the activity related to restricted stock for 2016 and 2015:

 

		2016				2015
Non-vested options at January 1,			30,500				—
Granted			23,800				30,500
Vested			(3,835	)			—
Forfeited			(2,000	)			—
Non-vested options at December 31,			48,465				30,500

The shares issued had a market value of $15.24 per share in 2016 and $13.65 per share in 2015. The shares vest over periods ranging from one to three years. As of December 31, 2016, there was $496 of unrecognized compensation cost related to non-vested restricted share awards. The cost is expected to be recovered over a weighted-average period of 2.15 years. In 2016, the fair value of share awards vested totaled $60.

NOTE 13 - REGULATORY CAPITAL REQUIREMENTS

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

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 13 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

 

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2016 and 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 category.

Actual and required capital amounts and ratios are presented below as of December 31, 2016 and 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
December 31, 2016
Company
Tier I leverage		$	96,682				10.86	%		$	35,610				4.000	%			N/A				N/A
Common equity tier 1			96,682				13.00	%			38,115				5.125	%			N/A				N/A
Tier I risk-based capital			96,682				13.00	%			49,271				6.625	%			N/A				N/A
Total risk-based capital			105,764				14.22	%			64,150				8.625	%			N/A				N/A
Bank
Tier I leverage		$	95,637				10.75	%		$	35,586				4.000	%		$	44,482				5.00	%
Common equity tier 1			95,637				12.88	%			38,054				5.125	%			48,264				6.50	%
Tier I risk-based capital			95,637				12.88	%			49,192				6.625	%			59,402				8.00	%
Total risk-based capital			104,719				14.10	%			64,057				8.625	%			74,269				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	%

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 13 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

 

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

NOTE 14 - COMMITMENTS AND CONTINGENCIES

The Company has federal funds lines at other financial institutions with availability totaling $39,500 and $39,300 at December 31, 2016 and 2015, respectively. At December 31, 2016, the Company had an outstanding balance of $3,671 under these federal funds lines. The Company had no outstanding balance under these lines as of December 31, 2015. The Company also has an unsecured line of credit at IDC Deposits with availability of $20,000. The Company did not have an outstanding balance under this line of credit at December 31, 2016 or 2015. The Company also may access borrowings utilizing the Federal Reserve bank discount window of $3,923 at December 31, 2016. There no funds advanced from the discount window at December 31, 2016.

At December 31, 2016 and 2015, the Company has $170,000 and $25,000 in standby letters of credit with the Federal Home Loan Bank, with $162,190 and $19,000 pledged to secure municipal deposits. The Company had $3,047 of pledged cash secured with the Federal Home Loan Bank at December 31, 2016.

At December 31, 2016, the Company has employment agreements with certain executive officers. Upon the occurrence of an “Event of Termination” as defined by the agreements, the Company has an obligation to pay each of the executive officers as defined in the agreements.

NOTE 15 - LEASES

The Company’s principal office is located at 1736 Carothers Parkway in Brentwood, Tennessee. The Company leases this office from a related third party but owns the leasehold improvements.

The Company leases additional offices for its operation center and branch at 101 Creekstone Boulevard in Franklin, Tennessee from a related third party but owns the leasehold improvements.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 15 – LEASES (CONTINUED)

 

A summary of the Company’s leased facilities (other than month-to-month agreements) follows:

 

Property Description (In Tennesee unless noted)		Base Lease Expiration Date		Base Lease Term With Renewal Periods		Escalation Clause
1736 Carothers Parkway, Brentwood		February 28, 2025		25 years		3% annually
6005 Nolensville Road, Nashville		September 30, 2018		20 years		none
5109 Peter Taylor Park Drive, Brentwood		July 31, 2016		17 years		3% annually
4108 Hillsboro Pike, Nashville		November 30, 2021		27 years		10% after 5th year of initial term
101 Creekstone Boulevard, Franklin		March 31, 2026		20 years		1% annually
711 East Main Street, Suite 105, Hendersonville		October 31, 2017		5 years		2.5% annually
15 W. Aylesbury Road, Timonium Maryland		Month to Month		Monthly		none
745 South Church Street, Murfreesboro		April 15, 2015		3 years		$100 annually
633 Chestnut Street, Chattanooga		February 28, 2018		1 year		none

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

 

Year Ending December 31,
2017		$	1,564
2018			1,447
2019			1,463
2020			1,438
2021			1,243
Thereafter			4,110
Total		$	11,265

Total rent expense under the leases amounted to $1,954, $2,094 and $1,876, respectively, during the years ended December 31, 2016, 2015 and 2014.

NOTE 16 - RELATED PARTY TRANSACTIONS

The main office, operations center, and Franklin branch were previously leased from Corporations in which owners in the Corporations serve as members of the Company’s Board of Directors. The amounts paid under these leases totaled $44, $599 and $972 during the years ended December 31, 2016, 2015 and 2014, respectively.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection lines, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amounts of financial instruments with off-balance-sheet risk at December 31, 2016 and 2015 were as follows:

 

		2016				2015
Unused lines of credit
Fixed		$	44,371			$	26,957
Variable			114,648				93,923
Standby letters of credit			12,217				8,776
Total		$	171,236			$	129,656

NOTE 18 - DERIVATIVES

During the year ended December 31, 2015, the Company entered into swap agreements totaling $11,200 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 at December 31, 2016 and December 31, 2015. At December 31, 2016, the contracts had fair values totaling $195 recorded in other assets and $267 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 December 31, 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.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 19 - EARNINGS PER SHARE

The following is a summary of the components comprising basic and diluted earnings per common share of stock (EPS) for the years ended December 31:

 

		2016				2015				2014
Basic EPS Computation
Net income attributable to common shareholders		$	8,936			$	5,575			$	3,896
Weighted average common shares outstanding			7,586,993				6,329,316				3,993,206
Basic earnings per common share		$	1.18			$	0.88			$	0.98
Diluted EPS Computation
Net income attributable to common shareholders		$	8,936			$	5,575			$	3,896
Weighted average common shares outstanding			7,586,993				6,329,316				3,993,206
Dilutive effect of stock options and restricted shares			104,500				149,636				60,598
Adjusted weighted average common shares outstanding			7,691,493				6,478,952				4,053,804
Diluted earnings per common share		$	1.16			$	0.86			$	0.96

NOTE 20 - 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.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 20 - SEGMENT REPORTING (CONTINUED)

 

The following tables present summarized results of operations for the Company’s business segments:

 

		Year Ended December 31, 2016
		Retail Banking				Residential Mortgage Banking				Consolidated
Net interest income		$	32,035			$	617			$	32,652
Provision for loan losses			968				—				968
Noninterest income			2,481				6,319				8,800
Noninterest expense			22,327				8,047				30,374
Income tax expense			2,285				(72	)			2,213
Net income (loss)			8,936				(1,039	)			7,897
Noncontrolling interest in net loss of subsidiary			—				1,039				1,039
Net income attributable to common shareholders		$	8,936			$	—			$	8,936

 

		Year Ended December 31, 2015
		Retail Banking				Residential Mortgage Banking				Consolidated
Net interest income		$	25,931			$	1,239			$	27,170
Provision for loan losses			(270	)			—				(270	)
Noninterest income			1,383				10,999				12,382
Noninterest expense			19,590				11,979				31,569
Income tax expense			2,419				(148	)			2,271
Net income			5,575				407				5,982
Noncontrolling interest in net income of subsidiary			—				(407	)			(407	)
Net income attributable to common shareholders		$	5,575			$	—			$	5,575

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 20 - SEGMENT REPORTING (CONTINUED)

 

 

		Year Ended December 31, 2014
		Retail Banking				Residential Mortgage Banking				Consolidated
Net interest income		$	14,996			$	590			$	15,586
Provision for loan losses			(1,500	)			—				(1,500	)
Noninterest income			1,161				3,447				4,608
Noninterest expense			11,945				5,221				17,166
Income tax expense			1,816				—				1,816
Net income			3,896				(1,184	)			2,712
Noncontrolling interest in net loss of subsidiary			—				1,184				1,184
Net income attributable to common shareholders		$	3,896			$	—			$	3,896

NOTE 21 - BUSINESS COMBINATION

On March 10, 2015, Commerce Union Bancshares, Inc. (“Commerce Union”) approved a merger with Reliant Bank (“Reliant”) which became effective on April 1, 2015 (“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 will be 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 were 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.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 21 - BUSINESS COMBINATION (CONTINUED)

 

As mentioned above, in periods following the Merger, the comparative historical financial statements of the Company are those of Reliant prior to the Merger. These financial statements include the results attributable to the operations of Commerce Union beginning on April 1, 2015.

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

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 21 - BUSINESS COMBINATION (CONTINUED)

 

Pro forma data for the year ended December 31, 2015 and 2014 in the table below presents information as if the merger occurred at the beginning of each year.

 

		Year Ended December 31,
		2015				2014
Net interest income		$	30,355			$	27,962
Net income attributable to common shareholders			6,221				6,980
Earnings per share—basic			0.88				0.99
Earnings per share—diluted			0.85				0.97

Supplemental pro forma earnings in the above table for the years ended December 31, 2015 and 2014 include $849 and $1,462 of nonrecurring costs, respectively.

NOTE 22 - QUARTERLY FINANCIAL RESULTS (UNAUDITED)

The following is a summary of consolidated quarterly financial results for the year ended December 31, 2016:

 

		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
Interest income		$	8,914			$	9,497			$	8,656			$	8,948
Net interest income			8,082				8,692				7,835				8,043
Consolidated net income			2,558				2,137				1,763				1,439
Noncontrolling interest in net (income) loss of subsidiary			(321	)			223				605				532
Net income attributable to common shareholders			2,237				2,360				2,368				1,971
Basic earnings per share			0.30				0.31				0.31				0.26
Diluted earnings per share			0.30				0.31				0.30				0.25

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

The following is a summary of consolidated quarterly financial results for the year ended December 31, 2015:

 

		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
Interest income		$	4,473			$	8,224			$	8,483			$	8,708
Net interest income			4,069				7,481				7,719				7,901
Consolidated net income			541				1,570				2,340				1,531
Noncontrolling interest in net (income) loss of subsidiary			71				32				(507	)			(3	)
Net income attributable to common shareholders			612				1,602				1,833				1,528
Basic earnings per share			0.16				0.23				0.26				0.21
Diluted earnings per share			0.15				0.22				0.25				0.21

NOTE 23 - MORTGAGE OPERATIONS

During 2011, the Company and VHC Fund 1, LLC organized Reliant Mortgage Ventures, LLC (the “Venture”) for the purpose of improving the Company’s mortgage operations. The Company holds 51% of the governance rights of the Venture (and therefore consolidates the results of its operations) and 30% of the Venture’s financial rights. VHC Fund 1, LLC holds 49% of the governance rights of the Venture and 70% of the related financial rights. VHC Fund 1, LLC is controlled by an immediate family member of a member of the Company’s board of directors. Under the related operating agreement, the non-controlling member receives 70% of the profits of the Venture, and the Company receives 30% of the profits once the non-controlling member recovers its cumulative losses. The non-controlling member is responsible for 100% of the mortgage venture’s operational and credit losses. The income and loss is included in the consolidated results of operations. The portion of the income and loss attributable to the non-controlling member (100% for 2016, 2015 and 2014) are included in non-controlling interest in net (income) loss of subsidiary on the accompanying consolidated statements of operations. At December 31, 2016, the Venture has a payable balance to the Company of $632, and a receivable balance of $122 at December 31, 2015.

Direct costs incurred by the Company attributable to the mortgage operations are allocated to the Venture as well as rent, personnel and core processing. As of December 31, 2016, the cumulative losses to date of the Venture totaled $3,397. The Venture will have to generate net income of this amount before the Company will participate in future earnings.

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 24 - PARENT COMPANY CONDENSED FINANCIAL INFORMATION

The following tables present parent company condensed financial statements as of and for the year ended December 31, 2016 and December 31, 2015. Prior to 2015, the parent company was under different ownership.

CONDENSED BALANCE SHEET

DECEMBER 31

 

		2016				2015
ASSETS
Cash and cash equivalents		$	166			$	113
Due from bank			1,711				—
Investment in subsidiary			105,874				96,338
Other assets			920				2,412
Total assets		$	108,671			$	98,863
LIABILITIES AND EQUITY
Dividend payable			1,711				1,489
Accrued expenses and other liabilities			41				623
Shareholders’ equity			106,919				96,751
Total liabilities and shareholders’ equity		$	108,671			$	98,863

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 24 - PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)

 

CONDENSED STATEMENT OF INCOME

YEARS ENDED DECEMBER 31

 

		2016				2015
Dividends from subsidiary		$	3,161			$	3,139
Other expense			1,326				1,413
Income before income tax and undistributed income from subsidiary			1,835				1,726
Income tax expense (benefit)			(508	)			(446	)
Equity in undistributed income from subsidiary			6,593				3,403
Net income attributable to common shareholders		$	8,936			$	5,575

CONDENSED STATEMENT OF CASH FLOWS

YEARS ENDED DECEMBER 31

 

		2016				2015
Cash flows from operating activities
Net income attributable to common shareholders		$	8,936			$	5,575
Adjustments:
Equity in undistributed income from subsidiary			(6,593	)			(3,403	)
Change in other assets			(219	)			(2,337	)
Change in other liabilities			(582	)			336
Net cash from operating activities			1,542				171
Cash flows from investing activities
Investment in subsidiary			(4,772	)			(1,895	)
Cash from merger			—				17
Net cash from investing activities			(4,772	)			(1,878	)
Cash flows from financing activities
Dividends paid			(1,489	)			—
Proceeds from equity issuances, net			4,772				1,820
Net cash from financing activities			3,283				1,820
Net change in cash and cash equivalents			53				113
Beginning cash and cash equivalents			113				—
Ending cash and cash equivalents		$	166			$	113

 

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands except per share amounts)

 

NOTE 25 – SUBSEQUENT EVENTS

In February of 2017 the Company opened a full service retail branch office in the Green Hills area of Nashville, Tennessee. In March of 2017 the Company opened a loan production office in Chattanooga, Tennessee.

 

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EXHIBIT INDEX

 

Exhibit No.		Description		Location
3.1		Amended and Restated Charter of Commerce Union Bancshares, Inc.		Incorporated by reference to Exhibit 3.1 to Form S-4 filed July 3, 2014
3.2		Amended and Restated Bylaws of Commerce Union Bancshares, Inc.		Incorporated by reference to Exhibit 3.2 to Form S-4 filed July 3, 2014
4.1		Specimen certificate representing the common stock, par value $1.00 per share, of Commerce Union Bancshares, Inc.		Incorporated by reference to Exhibit 4.1 to Form S-4 filed July 3, 2014
10.1**		Employment Agreement, dated as of April 1, 2015, by and between William Ronald DeBerry and Commerce Union Bancshares, Inc.		Incorporated by reference to Exhibit 10.1 to Form 8-K filed April 6, 2015
10.2**		Employment Agreement, dated as of April 1, 2015, by and between Devan D. Ard, Jr. and Commerce Union Bancshares, Inc. and Commerce Union Bank		Incorporated by reference to Exhibit 10.2 to Form 8-K filed April 6, 2015
10.3**		Employment Agreement, dated as of April 1, 2015, by and between J. Daniel Dellinger and Commerce Union Bank		Incorporated by reference to Exhibit 10.3 to Form 8-K filed April 6, 2015
10.4**		Employment Agreement, dated as of April 1, 2015, by and between Michael Scott McKeown and Commerce Union Bancshares, Inc. and Commerce Union Bank		Incorporated by reference to Exhibit 10.4 to Form 8-K filed April 6, 2015
10.5		Lease Agreement, dated as of January 31, 2013, by and between MarCor Properties, a partnership, and Commerce Union Bank		Incorporated by reference to Exhibit 10.6 to Form S-4 filed July 3, 2014
10.6		Rental Agreement, dated as of March 28, 2013, by and between Springfield Executive Suites LLC and Commerce Union Bank		Incorporated by reference to Exhibit 10.7 to Form S-4 filed July 3, 2014
10.7**		Form of First Amendment to Organizer Stock Option Agreement		Incorporated by reference to Exhibit 10.9 to Form S-4 filed July 3, 2014
10.8**		Form of Second Amendment to Organizer Stock Option Agreement		Incorporated by reference to Exhibit 10.10 to Form S-4 filed July 3, 2014
10.9**		Form of Employee Incentive Stock Option Agreement		Incorporated by reference to Exhibit 10.11 to Form S-4 filed July 3, 2014
10.10**		Form of First Amendment to Employee Incentive Stock Option Agreement		Incorporated by reference to Exhibit 10.12 to Form S-4 filed July 3, 2014
10.11**		Form of Second Amendment to Employee Incentive Stock Option Agreement		Incorporated by reference to Exhibit 10.13 to Form S-4 filed July 3, 2014
10.12**		Form of Management Incentive Stock Option Agreement		Incorporated by reference to Exhibit 10.14 to Form S-4 filed July 3, 2014
10.13**		Form of First Amendment to Management Incentive Stock Option Agreement		Incorporated by reference to Exhibit 10.15 to Form S-4 filed July 3, 2014
10.14**		Form of Second Amendment to Management Incentive Stock Option Agreement		Incorporated by reference to Exhibit 10.16 to Form S-4 filed July 3, 2014

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Table of Contents

Exhibit No.		Description		Location
10.15**		Commerce Union Bancshares, Inc. Amended and Restated Stock Option Plan		Incorporated by reference to Exhibit 10.17 to Form S-4 filed July 3, 2014
10.16		Operations Lease Agreement by and between RBC Center II, LLC and Reliant Bank, dated as of April 1, 2010		Incorporated by reference to Exhibit 10.1 to Form 8-K filed January 22, 2016
10.17		Branch Lease Agreement by and between RBC Center II, LLC and Reliant Bank, dated as of April 1, 2010		Incorporated by reference to Exhibit 10.2 to Form 8-K filed January 22, 2016
10.18		First Amendment to the Operations Lease Agreement by and between RBC Center II, LLC and Reliant Bank, dated June 1, 2011		Incorporated by reference to Exhibit 10.3 to Form 8-K filed January 22, 2016
10.19		First Amendment to the Branch Lease Agreement by and between RBC Center II, LLC and Reliant Bank, dated June 1, 2011		Incorporated by reference to Exhibit 10.4 to Form 8-K filed January 22, 2016
10.20		Second Amendment to the Operations Lease Agreement by and between RBC Center II, GP (successor-in-interest to RBC Center II, LLC) and Reliant Bank, dated January 15, 2016		Incorporated by reference to Exhibit 10.5 to Form 8-K filed January 22, 2016
10.21		Second Amendment to the Branch Lease Agreement by and between RBC Center II, GP (successor-in-interest to RBC Center II, LLC) and Reliant Bank, dated January 15, 2016		Incorporated by reference to Exhibit 10.6 to Form 8-K filed January 22, 2016
10.22**		Form of Management Incentive Stock Option Agreement for grants under 2015 Equity Compensation Plan		Incorporated by reference to Exhibit 10.24 to Form 10-K filed March 28, 2016
10.23**		Employment Agreement, dated as of March 22, 2016, by and between Wallace E. Gammon, Jr. and Reliant Bank		Incorporated by reference to Exhibit 10.1 to Form 8-K filed March 22, 2016
10.24		Mutual Cooperation Agreement, dated as of March 31, 2016, by and between BBMC Mortgage, LLC and Commerce Union Bancshares, Inc.		Incorporated by reference to Exhibit 10.1 to Form 10-Q filed August 12, 2016
21.1		Subsidiaries of Commerce Union Bancshares, Inc. and Reliant Bank		Filed herewith
23.1		Consent of Maggart & Associates, P.C.		Filed herewith
23.2		Consent of Kraft CPAs PLLC		Filed herewith
24.1		Power of Attorney		Included in Signature Page hereto
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)		Filed herewith
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)		Filed herewith
32.1		Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act		Filed herewith

 

**	Indicates compensatory plan or arrangement