Reliant Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Reliant Bancorp, Inc.	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Reliant Bancorp, Inc.	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Reliant Bancorp, Inc.	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Reliant Bancorp, Inc.	ex31-1.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

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

For the transition period from ______ to ______

Commission File Number: 001-37391

COMMERCE Union Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Tennessee

37-1641316

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1736 Carothers Parkway, Suite 100 Brentwood, Tennessee	37027
(Address of principal executive offices)	(Zip Code)
(615) 221-2020
(Registrant’s telephone number, including area code)

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

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

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

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

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

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

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of May 8, 2017 was 7,833,030.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Table of Contents

Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited).	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	60
Item 4.	Controls and Procedures.	60

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.	61
Item 1A.	Risk Factors.	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	61
Item 3.	Defaults Upon Senior Securities.	61
Item 4.	Mine Safety Disclosures.	61
Item 5.	Other Information.	61
Item 6.	Exhibits.	61

SIGNATURES		62

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FORWARD-LOOKING STATEMENTS

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

•

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

•

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

•

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

•

Competition from financial institutions and other financial service providers;

•

Economic conditions in the local markets where we operate;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

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PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited).

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

	March 31, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	18,290		$	23,413
Federal funds sold		50			830
Total cash and cash equivalents		18,340			24,243
Securities available for sale		179,266			146,813
Loans, net		688,542			657,701
Mortgage loans held for sale, net		9,798			11,831
Accrued interest receivable		3,921			3,786
Premises and equipment, net		9,688			9,093
Restricted equity securities, at cost		7,140			7,133
Cash surrender value of life insurance contracts		25,013			24,827
Deferred tax assets, net		3,336			3,437
Goodwill		11,404			11,404
Core deposit intangibles		1,493			1,582
Other assets		4,524			10,134

TOTAL ASSETS	$	962,465		$	911,984

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Demand	$	135,939		$	134,792
Interest-bearing demand		84,061			85,478
Savings and money market deposit accounts		210,952			183,788
Time		395,231			359,776
Total deposits		826,183			763,834
Accrued interest payable		158			107
Federal funds purchased		-			3,671
Federal Home Loan Bank advances		24,099			32,287
Dividends payable		-			1,711
Other liabilities		2,430			3,455

TOTAL LIABILITIES		852,870			805,065

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; 7,826,450 and 7,778,309 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively		7,826			7,778
Additional paid-in capital		89,497			89,045
Retained earnings		14,270			12,212
Accumulated other comprehensive loss		(1,998	)		(2,116	)

TOTAL STOCKHOLDERS’ EQUITY		109,595			106,919

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	962,465		$	911,984

See accompanying notes to consolidated financial statements

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COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(Dollar amounts in thousands except per share amounts)

(Unaudited)

	Three Months Ended
	March 31,
	2017		2016
INTEREST INCOME
Interest and fees on loans	$	7,782	$	7,770
Interest and fees on loans held for sale		94		368
Interest on investment securities, taxable		149		236
Interest on investment securities, nontaxable		828		438
Federal funds sold and other		120		102

TOTAL INTEREST INCOME		8,973		8,914

INTEREST EXPENSE
Deposits
Demand		43		44
Savings and money market deposit accounts		150		166
Time		693		423
Federal Home Loan Bank advances and other		116		199

TOTAL INTEREST EXPENSE		1,002		832

NET INTEREST INCOME		7,971		8,082

PROVISION FOR LOAN LOSSES		410		165

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,561		7,917

NONINTEREST INCOME
Service charges on deposit accounts		310		285
Gains on mortgage loans sold, net		542		3,342
Gain on securities transactions, net		36		-
Gain on sale of other real estate		24		-
Other		227		219

TOTAL NONINTEREST INCOME		1,139		3,846

NONINTEREST EXPENSE
Salaries and employee benefits		4,269		5,394
Occupancy		762		829
Information technology		513		627
Advertising and public relations		75		265
Audit, legal and consulting		293		281
Federal deposit insurance		99		114
Provision for losses on other real estate		-		26
Other operating		858		1,101

TOTAL NONINTEREST EXPENSE		6,869		8,637

INCOME BEFORE PROVISION FOR INCOME TAXES		1,831		3,126

INCOME TAX EXPENSE		272		568

CONSOLIDATED NET INCOME		1,559		2,558

NONCONTROLLING INTEREST IN NET (INCOME) LOSS OF SUBSIDIARY		499		(321	)

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	2,058	$	2,237

Basic net income attributable to common shareholders, per share	$	0.27	$	0.30
Diluted net income attributable to common shareholders, per share	$	0.26	$	0.30

See accompanying notes to consolidated financial statements

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COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(Dollar amounts in thousands except per share amounts)

(Unaudited)

	Three Months Ended
	March 31,
	2017			2016

Consolidated net income	$	1,559		$	2,558

Other comprehensive income (loss)

Net unrealized gains on available-for-sale securities, net of tax of $145 and $109 for the three months ended March 31, 2017 and 2016, respectively		140			175

Reclassification adjustment for gains included in net income, net of tax of $(14) for the three months ended March 31, 2017		(22	)		-

TOTAL OTHER COMPREHENSIVE INCOME		118			175

TOTAL COMPREHENSIVE INCOME	$	1,677		$	2,733

See accompanying notes to consolidated financial statements

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COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(Dollar amounts in thousands except per share amounts)

(Unaudited)

												ACCUMULATED
							ADDITIONAL					OTHER
	COMMON STOCK						PAID-IN			RETAINED		COMPREHENSIVE			NONCONTROLLING
	SHARES			AMOUNT			CAPITAL			EARNINGS		INCOME (LOSS)			INTEREST			TOTAL

BALANCE - JANUARY 1, 2016		7,279,620		$	7,280		$	84,520		$	4,987	$	(36	)	$	-		$	96,751

Stock based compensation expense		-			-			50			-		-			-			50

Exercise of stock options		280,974			281			2,528			-		-			-			2,809

Distribution to non-controlling interest		-			-			-			-		-			(321	)		(321	)

Net income		-			-			-			2,237		-			321			2,558

Other comprehensive income		-			-			-			-		175			-			175

BALANCE - MARCH 31, 2016		7,560,594		$	7,561		$	87,098		$	7,224	$	139		$	-		$	102,022


BALANCE - JANUARY 1, 2017		7,778,309		$	7,778		$	89,045		$	12,212	$	(2,116	)	$	-		$	106,919

Stock based compensation expense		-			-			89			-		-			-			89

Exercise of stock options		36,141			36			375			-		-			-			411

Restricted stock awards		15,000			15			(15	)		-		-			-			-

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

Noncontrolling interest contributions		-			-			-			-		-			499			499

Net income (loss)		-			-			-			2,058		-			(499	)		1,559

Other comprehensive income		-			-			-			-		118			-			118

BALANCE - MARCH 31, 2017		7,826,450		$	7,826		$	89,497		$	14,270	$	(1,998	)	$	-		$	109,595

See accompanying notes to consolidated financial statements

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COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(Dollar amounts in thousands except per share amounts)

(Unaudited)

	2017			2016
OPERATING ACTIVITIES
Consolidated net income	$	1,559		$	2,558
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Provision for loan losses		410			165
Deferred income tax benefit		(30	)		-
Depreciation and amortization of premises and equipment		254			241
Net amortization of securities		460			349
Net realized gains on sales of securities		(36	)		-
Gains on mortgage loans sold, net		(542	)		(3,342	)
Stock-based compensation expense		89			50
Realization of deferred gain on other real estate		(24	)		-
Provision for losses on other real estate		-			26
Increase in cash surrender value of life insurance contracts		(186	)		(170	)
Mortgage loans originated for resale		(21,149	)		(72,489	)
Proceeds from sale of mortgage loans		23,724			106,242
Amortization of core deposit intangible		89			89
Change in
Accrued interest receivable		(135	)		61
Other assets		5,549			(1,014	)
Accrued interest payable		51			84
Other liabilities		(1,142	)		727

TOTAL ADJUSTMENTS		7,382			31,019

NET CASH PROVIDED BY OPERATING ACTIVITIES		8,941			33,577

INVESTING ACTIVITIES
Activities in available for sale securities
Purchases		(46,001	)		(6,687	)
Sales		12,039			-
Maturities, prepayments and calls		1,475			1,288
Purchases of restricted equity securities		(7	)		-
Loan originations and payments, net		(31,251	)		(6,061	)
Purchase of buildings, leasehold improvements, and equipment		(849	)		(258	)
Improvement of other real estate		-			(16	)
Purchase of life insurance contracts		-			(4,000	)

NET CASH USED IN INVESTING ACTIVITIES		(64,594	)		(15,734	)

FINANCING ACTIVITIES
Net change in deposits		62,349			17,769
Net change in federal funds purchased		(3,671	)		-
Advances from Federal Home Loan Bank, net		(8,188	)		(30,961	)
Issuance of common stock		411			2,809
Noncontrolling interest contributions received		560			-
Cash dividends paid on common stock		(1,711	)		(1,489	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		49,750			(11,872	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(5,903	)		5,971
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		24,243			20,570
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	18,340		$	26,541

See accompanying notes to consolidated financial statements

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COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(Dollar amounts in thousands except per share amounts)

(Unaudited)

	2017			2016
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest	$	951		$	748
Taxes	$	5		$	94

Non-cash investing and financing activities
Unrealized gain (loss) on securities available-for-sale	$	249		$	1,024
Change in due to/from noncontrolling interest	$	(61	)	$	(321	)

See accompanying notes to consolidated financial statements

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Commerce Union Bancshares, Inc, its wholly owned subsidiary, Reliant Bank (the “Bank”), the Bank’s wholly-owned subsidiaries, Commerce Union Mortgage Services, Inc. (inactive and terminated in September 2016) and Reliant Investments, LLC (inactive and terminated in September 2016), and the Bank’s majority controlled subsidiary, Reliant Mortgage Ventures, LLC (collectively, the “Company”). As described in the notes to our annual financial statements, Reliant Mortgage Ventures, LLC is considered a variable interest entity for which the Bank is deemed to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("U.S. GAAP") and to general practices in the banking industry.

The consolidated financial statements as of March 31, 2017, and for the three months ended March 31, 2017 and 2016, included herein have not been audited. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures made are adequate to make the information not misleading. These financial statements should be read in conjunction with the Company's 2016 audited consolidated financial statements. The accompanying consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Such adjustments are of a normal recurring nature. The Company evaluates subsequent events through the date of filing. Certain prior period amounts have been reclassified to conform to the current period presentation. The results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES

The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive loss at March 31, 2017 and December 31, 2016 were as follows:

	March 31, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U. S. Treasury and other U. S. government agencies	$	857	$	1	$	(3	)	$	855
State and municipal		147,822		572		(3,358	)		145,036
Corporate bonds		2,000		8		(22	)		1,986
Mortgage backed securities		28,053		21		(185	)		27,889
Time deposits		3,500		-		-			3,500

Total	$	182,232	$	602	$	(3,568	)	$	179,266

	December 31, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			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

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)

Securities pledged at March 31, 2017 and December 31, 2016 had a carrying amount of $33,788 and $36,292, respectively, and were pledged to collateralize Federal Home Loan Bank advances, Federal Reserve advances and municipal deposits.

At March 31, 2017 and December 31, 2016, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders’ equity.

The fair value of available for sale debt securities at March 31, 2017 by contractual maturity are provided below. Securities not due at a single maturity date, primarily mortgage backed securities, are shown separately.

	Amortized		Estimated
	Cost		Fair Value
Due within one year	$	1,364	$	1,366
Due in one to five years		15,336		15,419
Due in five to ten years		10,349		10,432
Due after ten years		127,130		124,160
Mortgage backed securities		28,053		27,889

Total	$	182,232	$	179,266

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)

The following table shows available for sale securities with unrealized losses and their estimated fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2017:

	Less than 12 months				12 months or more				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
Description of Securities
U. S. Treasury and other U. S. government agencies	$	499	$	3	$	-	$	-	$	499	$	3
State and municipal		91,307		3,324		1,574		34		92,881		3,358
Corporate bonds		497		3		481		19		978		22
Mortgage backed securities		15,478		142		1,261		43		16,739		185

Total temporarily impaired	$	107,781	$	3,472	$	3,316	$	96	$	111,097	$	3,568

	Less than 12 months				12 months or more				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Loss		Fair Value		Loss		Fair Value		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

Management has the intent and ability to hold all securities in an unrealized loss position for the foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. There were 170 and 193 securities in an unrealized loss position as of March 31, 2017 and December 31, 2016, respectively.

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COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at March 31, 2017 and December 31, 2016 were comprised as follows:

	March 31, 2017		December 31, 2016
Commerical, Industrial and Agricultural	$	133,080	$	134,404
Real Estate
1-4 Family Residential		113,554		113,031
1-4 Family HELOC		60,571		57,460
Multifamily and Commercial		233,399		215,639
Construction, Land Development and Farmland		127,710		115,889
Consumer		16,086		17,240
Other		13,723		13,745
		698,123		667,408
Less
Deferred loan fees		491		625
Allowance for possible loan losses		9,090		9,082

Loans, net	$	688,542	$	657,701

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

Activity in the allowance for loan losses by portfolio segment was as follows for the three months ended March 31, 2017:

	Commercial Industrial and Agricultural			Multi Family and Commercial Real Estate			Construction Land Development and Farmland			1-4 Family Residential Real Estate
Beginning balance	$	2,438		$	2,731		$	1,786		$	1,178
Charge-offs		(472	)		-			-			(15	)
Recoveries		78			-			2			-
Provision		936			(117	)		(120	)		(58	)
Ending balance	$	2,980		$	2,614		$	1,668		$	1,105

	1-4 Family HELOC			Consumer			Other			Total
Beginning balance	$	704		$	208		$	37		$	9,082
Charge-offs		-			(11	)		-			(498	)
Recoveries		16			-			-			96
Provision		(204	)		(26	)		(1	)		410
Ending balance	$	516		$	171		$	36		$	9,090

Activity in the allowance for loan losses by portfolio segment was as follows for the three months ended March 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		(8	)		-			-		-
Recoveries		91			1			1		4
Provision		63			(210	)		269		58
Ending balance	$	2,344		$	2,382		$	1,164	$	1,276

	1-4 Family HELOC			Consumer			Other		Total
Beginning balance	$	699		$	192		$	35	$	7,823
Charge-offs		-			(4	)		-		(12	)
Recoveries		4			13			-		114
Provision		(9	)		(6	)		-		165
Ending balance	$	694		$	195		$	35	$	8,090

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2017 was as follows:

	Commercial Industrial and Agricultural		Multi Family and Commercial Real Estate		Construction Land Development and Farmland		1-4 Family Residential Real Estate
Allowance for loan losses
Individually evaluated for impairment	$	1,297	$	-	$	17	$	26
Acquired with credit impairment		6		-		-		-
Collectively evaluated for impairment		1,677		2,614		1,651		1,079
Total	$	2,980	$	2,614	$	1,668	$	1,105
Loans
Individually evaluated for impairment	$	5,607	$	2,009	$	2,513	$	2,069
Acquired with credit impairment		319		2,822		1,481		49
Collectively evaluated for impairment		127,154		228,568		123,716		111,436
Total	$	133,080	$	233,399	$	127,710	$	113,554

	1-4 Family HELOC		Consumer		Other		Total
Allowance for loan losses
Individually evaluated for impairment	$	-	$	-	$	-	$	1,340
Acquired with credit impairment		-		-		-		6
Collectively evaluated for impairment		516		171		36		7,744
Total	$	516	$	171	$	36	$	9,090
Loans
Individually evaluated for impairment	$	1,005	$	-	$	-	$	13,203
Acquired with credit impairment		17		-		-		4,688
Collectively evaluated for impairment		59,549		16,086		13,723		680,232
Total	$	60,571	$	16,086	$	13,723	$	698,123

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 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	$	2,438	$	2,731	$	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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

Risk characteristics relevant to each portfolio segment are as follows:

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

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

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

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

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

Non-accrual loans by class of loan were as follows at March 31, 2017 and December 31, 2016:

	March 31, 2017		December 31, 2016
Commercial, Industrial and Agricultural	$	3,931	$	3,062
Multi Family and Commercial Real Estate		-		636
Construction, Land Development and Farmland		730		730
1-4 Family Residential Real Estate		836		344
1-4 Family HELOC		-		862

Total	$	5,497	$	5,634

Performing non-accrual loans totaled $970 and $2,799 at March 31, 2017 and December 31, 2016, respectively.

Individually impaired loans by class of loans were as follows at March 31, 2017:

	Unpaid Principal Balance		Recorded Investment with no Allowance Recorded		Recorded Investment with Allowance Recorded		Total Recorded Investment		Related Allowance

Commercial, Industrial and Agricultural	$	6,559	$	3,922	$	2,004	$	5,926	$	1,303
Multi Family and Commercial Real Estate		5,592		4,831		-		4,831		-
Construction, Land Development and Farmland		4,089		3,823		171		3,994		17
1-4 Family Residential Real Estate		2,492		2,092		26		2,118		26
1-4 Family HELOC		1,580		1,022		-		1,022		-

Total	$	20,312	$	15,690	$	2,201	$	17,891	$	1,346

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

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

	Unpaid Principal Balance		Recorded Investment with no Allowance Recorded		Recorded Investment with Allowance Recorded		Total Recorded Investment		Related Allowance

Commercial, Industrial and Agricultural	$	6,383	$	3,924	$	1,780	$	5,704	$	753
Multi Family and Commercial Real Estate		5,666		2,914		1,974		4,888		-
Construction, Land Development and Farmland		4,124		3,854		171		4,025		17
1-4 Family Residential Real Estate		2,422		2,034		27		2,061		27
1-4 Family HELOC		2,075		1,178		317		1,495		62

Total	$	20,670	$	13,904	$	4,269	$	18,173	$	859

The average balances of impaired loans for the three months ended March 31, 2017 and 2016 were as follows:

	2017		2016
Commercial, Industrial and Agricultural	$	5,815	$	4,714
Multi Family and Commercial Real Estate		4,860		6,139
Construction, Land Development and Farmland		4,010		2,033
1-4 Family Residential Real Estate		2,090		3,433
1-4 Family HELOC		1,259		2,146
Total	$	18,034	$	18,465

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

Grade 1 - Minimal Risk (Pass)

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

Grade 2 - High Quality (Pass)

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

Grade 3 - Above Average (Pass)

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

Grade 4 - Average (Pass)

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

Grade 5 - Acceptable (Management Attention) (Pass)

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

Grade 6 - Special Mention

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

Grade 7 - Substandard

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

Grade 8 - Doubtful

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

Grade 9 - Loss

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

Credit quality indicators by class of loan were as follows at March 31, 2017:

	Pass		Special Mention		Substandard		Total
Commercial, Industrial and Agricultural	$	128,302	$	5	$	4,773	$	133,080
1-4 Family Residential Real Estate		109,534		1,418		2,602		113,554
1-4 Family HELOC		60,099		-		472		60,571
Multi Family and Commercial Real Estate		229,747		-		3,652		233,399
Construction, Land Development and Farmland		123,639		1,643		2,428		127,710
Consumer		16,086		-		-		16,086
Other		13,723		-		-		13,723
Total	$	681,130	$	3,066	$	13,927	$	698,123

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

	Pass		Special Mention		Substandard		Total
Commercial, Industrial and Agricultural	$	129,880	$	-	$	4,524	$	134,404
1-4 Family Residential Real Estate		109,592		1,427		2,012		113,031
1-4 Family HELOC		55,981		-		1,479		57,460
Multi Family and Commercial Real Estate		211,938		-		3,701		215,639
Construction, Land Development and Farmland		111,663		1,767		2,459		115,889
Consumer		17,240		-		-		17,240
Other		13,745		-		-		13,745
Total	$	650,039	$	3,194	$	14,175	$	667,408

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

Past due status by class of loan was as follows at March 31, 2017:

	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans

Commercial, Industrial and Agricultural	$	858	$	877	$	1,927	$	3,662	$	129,418	$	133,080
1-4 Family Residential Real Estate		89		280		245		614		112,940		113,554
1-4 Family HELOC		-		-		-		-		60,571		60,571
Multi family and Commercial Real Estate		-		-		-		-		233,399		233,399
Construction, Land Development and Farmland		1,449		-		730		2,179		125,531		127,710
Consumer		1		-		-		1		16,085		16,086
Other		-		-		-		-		13,723		13,723
Total	$	2,397	$	1,157	$	2,902	$	6,456	$	691,667	$	698,123

Past due status by class of loan was as follows at December 31, 2016:

	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans

Commercial, Industrial and Agricultural	$	207	$	1,586	$	375	$	2,168	$	132,236	$	134,404
1-4 Family Residential Real Estate		7		-		286		293		112,738		113,031
1-4 Family HELOC		-		-		-		-		57,460		57,460
Multi family and Commercial Real Estate		-		-		-		-		215,639		215,639
Construction, Land Development and Farmland		58		-		730		788		115,101		115,889
Consumer		193		-		-		193		17,047		17,240
Other		-		-		-		-		13,745		13,745
Total	$	465	$	1,586	$	1,391	$	3,442	$	663,966	$	667,408

There were no loans past due 90 days or more and still accruing interest at March 31, 2017 or December 31, 2016.

During the three months ended March 31, 2017, one loan totaling $108 was modified in a troubled debt restructuring. The modification consisted of a temporary reduction in required monthly payments. The modifications had no effect on the allowance for loan losses or interest income.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

The Company has acquired loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance and carrying amount of the purchased credit impaired loans was as follows at March 31, 2017 and December 31, 2016:

	March 31, 2017		December 31, 2016
Commercial, Industrial and Agricultural	$	372	$	385
Multi Family and Commercial Real Estate		3,278		3,321
Construction, Land Development and Farmland		1,566		1,569
1-4 Family Residential Real Estate		50		92
1-4 Family HELOC		36		36
Total outstanding balance		5,302		5,403
Less remaining purchase discount		614		635
		4,688		4,768
Allowance for loan losses		6		6
Carrying amount, net of allowance	$	4,682	$	4,762

During the three months ended March 31, 2017, there was no change in the allowance for loan losses related to purchased credit impaired loans.

Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the three months ended March 31, 2017:

Balance at January 1, 2017	$	87
Accretion income		(18	)
Balance at March 31, 2017	$	69

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 4 - FAIR VALUES OF ASSETS AND LIABILITIES

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

Level 1

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

Level 2

Inputs to the valuation methodology include:

●

Quoted prices for similar assets or liabilities in active markets;

●

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

●

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

●

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

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

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

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

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

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

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

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

Mortgage Loans Held For Sale: The fair value of mortgage loans held for sale are valued at the lower of cost or market on an aggregate basis. When the aggregate fair value of mortgage loans held for sale is less than cost, an allowance is recorded. The Company utilizes a third party to value the mortgage loans held for sale portfolio using comparable sales data available with consideration of specific attributes of the loans. Such adjustments are typically not significant, and result in a Level 2 classification of the inputs for determining fair value.

There were no changes in valuation methodologies used during the three months ended March 31, 2017.

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

Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

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

The following table sets forth the Company’s major categories of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of March 31, 2017 and December 31, 2016:

			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2017
Assets
U. S. Treasury and other U. S. government agencies	$	855	$	-	$	855	$	-
State and municipal		145,036		-		145,036		-
Corporate bonds		1,986		-		1,986		-
Mortgage backed securities		27,889		-		27,889		-
Time deposits		3,500		3,500		-		-
Interest rate swap		116		-		116		-

Liabilities
Interest rate swap	$	329	$	-	$	329	$	-

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	$	-

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(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 March 31, 2017 and December 31, 2016:

			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2017
Assets
Impaired loans	$	855	$	-	$	-	$	855
Mortgage loans held for sale		9,798		-		9,798		-

December 31, 2016
Assets
Impaired loans	$	3,410	$	-	$	-	$	3,410
Mortgage loans held for sale		11,831		-		11,831		-

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 March 31, 2017 and December 31, 2016:

	Valuation	Significant	Range
	Techniques	Unobservable Inputs	(Weighted Average)
Impaired loans	Appraisal(1)	Estimated costs to sell		10	%
Mortgage loans held for sale	Pricing models	Not applicable		Not applicable

(1)	The Company markets other real estate owned both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by selling costs.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(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 not reported at fair value at March 31, 2017 were as follows:

					Quoted Prices in		Significant
					Active Markets		Other		Significant
			Estimated		for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	18,290	$	18,290	$	18,290	$	-	$	-
Federal funds sold		50		50		50		-		-
Loans, net		688,542		689,063		-		-		689,063
Accrued interest receivable		3,921		3,921		-		3,921		-
Restricted equity securities		7,140		7,140		-		7,140		-
Financial liabilities
Deposits		826,183		825,376		-		-		825,376
Accrued interest payable		158		158		-		158		-
Federal Home Loan Bank advances		24,099		24,210		-		24,210		-

Carrying amounts and estimated fair values of financial instruments not reported at fair value at December 31, 2016 were as follows:

					Quoted Prices in		Significant
					Active Markets		Other		Significant
			Estimated		for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(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
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		-

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 5 - STOCK-BASED COMPENSATION

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

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

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

A summary of the activity in the stock option plans for the three months ended March 31, 2017 is as follows:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at January 1, 2017		241,541		$	12.96
Granted		-			-
Exercised		(36,141	)		11.38
Forfeited or expired		(5,800	)		13.86
Outstanding at March 31, 2017		199,600			13.22		5.73	$	1,703
Exercisable at March 31, 2017		114,011			12.35		3.60	$	1,072

				Weighted Average
	Shares			Grant-Date Fair Value
Non-vested options at January 1, 2017		96,600		$	3.36
Granted		-			-
Vested		(5,211	)		2.80
Forfeited		(5,800	)		3.27
Non-vested options at March 31, 2017		85,589			3.40

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 6 - 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 as of March 31, 2017, the Company and the Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2017 and 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.

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 6 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

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

Actual and required capital amounts and ratios are presented below as of March 31, 2017 and December 31, 2016.

						Minimum Required					To Be Well
	Actual					Capital Including					Capitalized Under
	Regulatory					Capital Conservation					Prompt Corrective
	Capital					Buffer					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017
Company
Tier I leverage	$	98,995		10.81	%	$	36,631		4.000	%		N/A		N/A
Common equity tier 1		98,995		12.65	%		44,998		5.750	%		N/A		N/A
Tier I risk-based capital		98,995		12.65	%		56,736		7.250	%		N/A		N/A
Total risk-based capital		108,085		13.81	%		72,396		9.250	%		N/A		N/A

Bank
Tier I leverage	$	97,755		10.69	%	$	36,578		4.000	%	$	45,723		5.00	%
Common equity tier 1		97,755		12.50	%		44,967		5.750	%		50,833		6.50	%
Tier I risk-based capital		97,755		12.50	%		56,698		7.250	%		62,563		8.00	%
Total risk-based capital		106,845		13.67	%		72,298		9.250	%		78,160		10.00	%

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	%

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 7 - EARNINGS PER SHARE

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

	Three Months Ended
	March 31,
	2017		2016
Basic EPS Computation
Net income attributable to common shareholders	$	2,058	$	2,237
Weighted average common shares outstanding		7,741,305		7,450,400
Basic earnings per common share	$	0.27	$	0.30
Diluted EPS Computation
Net income attributable to common shareholders	$	2,058	$	2,237
Weighted average common shares outstanding		7,741,305		7,450,400
Dilutive effect of stock options and restricted shares		109,347		113,266
Adjusted weighted average common shares outstanding		7,850,652		7,563,666
Diluted earnings per common share	$	0.26	$	0.30

NOTE 8 - SEGMENT REPORTING

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

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

Residential Mortgage Banking originates first lien residential mortgage loans throughout the United States. The loans are amortizing first mortgage loans and home equity line of credit loans (HELOC). The amortizing first mortgage loans are typically underwritten to government agency standards and sold to third party secondary market mortgage investors. Some of the HELOC loans are retained in the retail banking operation’s loan portfolio while others are sold to third party investors.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 8 - SEGMENT REPORTING (CONTINUED)

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

	Three Months Ended
	March 31, 2017
	Retail Banking		Residential Mortgage Banking			Elimination Entries			Consolidated
Net interest income	$	7,896	$	75		$	-		$	7,971
Provision for loan losses		410		-			-			410
Noninterest income		594		591			(46	)		1,139
Noninterest expense		5,719		1,150			-			6,869
Income tax expense (benefit)		303		(31	)		-			272
Net income (loss)		2,058		(453	)		(46	)		1,559
Noncontrolling interest in net loss of subsidiary		-		453			46			499
Net income attributable to common shareholders	$	2,058	$	-		$	-		$	2,058

	Three Months Ended
	March 31, 2016
	Retail Banking		Residential Mortgage Banking			Elimination Entries		Consolidated
Net interest income	$	7,788	$	294		$	-	$	8,082
Provision for loan losses		165		-			-		165
Noninterest income		502		3,344			-		3,846
Noninterest expense		5,342		3,295			-		8,637
Income tax expense		546		22			-		568
Net income		2,237		321			-		2,558
Noncontrolling interest in net income of subsidiary		-		(321	)		-		(321	)
Net income attributable to common shareholders	$	2,237	$	-		$	-	$	2,237

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 9 - DERIVATIVES

The total notional amount of swap agreements was $21,505 at March 31, 2017 and December 31, 2016. At March 31, 2017, the contracts had fair values totaling $116 recorded in other assets and $329 recorded in other liabilities. At December 31, 2016, the contracts had fair values totaling $195 recorded in other assets and $267 recorded in other liabilities.

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 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 March 31, 2017, the Company’s fair value hedges are effective and are not expected to have a significant impact on net income over the next twelve months.

NOTE 10 – INCOME TAXES

Income tax expense totaled $272 in the first quarter of 2017 as compared to $568 in the first quarter of 2016. The tax rate was favorably impacted by an increase in income from tax-exempt securities, excess tax benefits recognized relating to the exercise of stock options and the addition of certain state tax credits on interest-free loans.

NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-1 will be effective for the Company beginning on January 1, 2018 and is not expected to have a significant impact on our consolidated financial statements.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

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

ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” requires that all excess tax benefits and tax deficiencies related to share-based payment awards be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such excess tax benefits were recorded as additional paid-in capital, and tax deficiencies were charged to additional paid in capital to the extent of prior excess tax benefits. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. ASU 2016-09 became effective on January 1, 2017 with early adoption permitted. The Company elected early adoption of this update and as a result recognized in income tax expense an excess tax benefit of $62 and $324 related to the exercise of stock options during the three months ended March 31, 2017 and March 31, 2016, respectively.

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

ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. ASU 2017-05 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on our consolidated financial statements.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

ASU 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities” shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 will be effective for the Company on January 1, 2019, with early adoption permitted. We are currently evaluating the potential impact of ASU 2017-08 on our consolidated financial statements.

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

In the following section the terms “Company” means “Commerce Union Bancshares, Inc.” and “Bank” means “Reliant Bank.” The following discussion and analysis is intended to assist in the understanding and assessment of significant changes and trends related to our financial position and operating results. This discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere herein along with our 10-K filed March 14, 2017. 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 principles we follow and our methods of applying these principles conform with U.S. GAAP and with general practices within the banking industry. There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2016. The following is a brief summary of the more significant policies.

Principles of Consolidation

The consolidated financial statements as of and for the three months ended March 31, 2017 and 2016 include the accounts of Commerce Union Bancshares, Inc., its wholly-owned subsidiary, Reliant Bank (the “Bank”), the Bank’s 51% controlled subsidiary, Reliant Mortgage Ventures, LLC, collectively (the “Company”). 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 March 31, 2017, the cumulative losses to date totaled $3,850 prior to intercompany eliminations. Reliant Mortgage Ventures, LLC will have to generate net income of this amount before the Company will participate in future earnings.

Purchased Loans

The Company maintains an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, because we recorded all acquired loans at fair value as of the date of the reverse merger (discussed below), we did not establish an allowance for loan losses on any of the loans we purchased as of the acquisition date as any credit deterioration evident in the loans was included in the determination of the acquisition date fair values. For purchased credit-impaired loans accounted for under ASC 310-30, management establishes an allowance for loan losses subsequent to the date of acquisition by re-estimating expected cash flows on these loans on a quarterly basis, with any decline in expected cash flows due to a credit triggering impairment recorded as provision for loan losses. The allowance established is the excess of the loan’s carrying value over the present value of projected future cash flows, discounted at the current accounting yield of the loan or the fair value of collateral (less estimated costs to sell) for collateral dependent loans. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. While the determination of specific cash flows involves estimates, each estimate is unique to the individual loan, and none is individually significant. For non-purchased credit-impaired loans acquired in the reverse merger and that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by Reliant Bank for loans with similar characteristics as those acquired other than purchased credit-impaired loans. We record an allowance for loan losses only when the calculated amount exceeds the remaining credit mark established at acquisition.

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Allowance for Loan Losses

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

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

Fair Value of Financial Instruments

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

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

Earnings

Net income attributable to common shareholders amounted to $2,058, or $0.27 per basic share for the three months ended March 31, 2017, respectively, compared to $2,237, or $0.30 per basic share for the same period in 2016. Diluted net income attributable to shareholders per share was $0.26 and $0.30 per diluted share for the three months ended March 31, 2017, and 2016, respectively. The major components contributing to the decline in income per share from the prior-year discussed further below are the slight decline in net interest income primarily attributable to the impact of purchase accounting and an increase in our provision for loan losses driven by slightly higher charge offs and growth in our loan portfolio, offset by a decline in income taxes. Our earnings per share declined with the change in earnings and the greater number of average shares outstanding due to the exercise of Company stock options.

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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 table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three months ended March 31, 2017, and 2016 (dollars in thousands):

	Three Months Ended March 31, 2017							Three Months Ended March 31, 2016							Change
	Average Balances		Rates / Yields (%)			Interest Income / Expense		Average Balances		Rates / Yields (%)			Interest Income / Expense		Due to Volume			Due to Rate			Total
Interest Earning Assets
Loans	$	673,036		4.48		$	7,263	$	617,600		4.76		$	7,307	$	2,063		$	(2,107	)	$	(44	)
Loan fees		-		0.31			519		-		0.30			463		56			-			56
Loans with fees		673,036		4.79			7,782		617,600		5.06			7,770		2,119			(2,107	)		12
Mortgage loans held for sale		10,478		3.64			94		39,514		3.75			368		(264	)		(10	)		(274	)
Deposits with banks		15,092		0.64			24		21,143		0.36			19		(31	)		36			5
Investment securities - taxable		31,093		1.94			149		49,255		1.93			236		(96	)		9			(87	)
Investment securities - tax-exempt		133,550		3.95			828		87,116		3.06			438		252			138			390
Fed funds sold and other		7,770		5.01			96		6,553		5.09			83		21			(8	)		13
Total earning assets		871,019		4.18			8,973		821,181		4.48			8,914		2,001			(1,942	)		59
Nonearning Assets		55,263							50,780
Total assets	$	926,282						$	871,961
Interest Bearing Liabilities
Interest bearing demand	$	82,780		0.21			43	$	89,856		0.20			44		(12	)		11			(1	)
Savings and money market		184,872		0.33			150		193,715		0.34			166		(10	)		(6	)		(16	)
Time deposits - retail		291,594		0.70			506		140,508		0.70			245		261			-			261
Time deposits - wholesale		81,975		0.93			187		115,766		0.62			178		(262	)		271			9
Total interest bearing deposits		641,221		0.56			886		539,845		0.47			633		(23	)		276			253
Federal Home Loan Bank advances		45,974		1.02			116		117,224		0.68			199		(483	)		400			(83	)
Total interest-bearing liabilities		687,195		0.59			1,002		657,069		0.51			832		(506	)		676			170
Net interest rate spread (%) / Net interest income ($)				3.59		$	7,971				3.97		$	8,082	$	2,507		$	(2,618	)	$	(111	)
Non-interest bearing deposits		129,385		(0.09	)				110,060		(0.08	)
Other non-interest bearing liabilities		2,976							5,595
Stockholders' equity		106,726							99,237
Total liabilities and stockholders' equity	$	926,282						$	871,961
Cost of funds				0.50							0.43
Net Interest Margin				4.01							4.08

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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.

Analysis—For the three months ended March 31, 2017, we recorded net interest income of approximately $8.0 million, which resulted in a net interest margin (net interest income expressed on a tax-equivalent basis divided by the average balance of interest earning assets) of 4.01%. For the three months ended March 31, 2016, we recorded net interest income of approximately $8.1 million, which resulted in a net interest margin of 4.08%. For the three months ended March 31, 2017 and 2016, our net interest spread was 3.59% and 3.97%, respectively.

Our year-over-year average loan volume increased by approximately 9.0% from the first three months of 2016 to the first three months of 2017. Our combined loan and loan fee yield decreased from 5.06% to 4.79% for the three months ended March 31, 2016 to 2017, respectively.

Our yield on tax-exempt investments increased to 3.95% for the three months ended March 31, 2017 from 3.06% for the same period in 2016. Our year-over-year average tax-exempt investment volume increased by approximately 53.3% from the first three months of 2016 to the same period in 2017. We have continued to add volume to our investment portfolio. A portion of the earnings growth in the tax-exempt investment portfolio related to the completion of a municipal bond replacement strategy that was implemented late in the fourth quarter of 2016 and completed in the first quarter. Additional strategies were implemented in the first quarter of 2017 that are expected to provide better yielding securities that are relatively less sensitive to rising interest rates and potential declines in corporate tax rates.

Our cost of funds increased to 0.50% for the three months ended March 31, 2017 compared to 0.43% for the same period in 2016. The increase in our cost of funds was driven mainly by higher rates being paid on time deposits and FHLB advances. We experienced a 17.6% increase in our average non-interest bearing deposits from March 31, 2016 as a result of our continuing initiative to grow low cost deposits.

We continue to deploy various asset and liability management strategies to manage our risk relating to interest rate fluctuations. We believe margin expansion over both the short and the long term will be challenging primarily due to continued pressure on loan yields in our competitive markets. Any increases in short-term market interest rates would be expected to increase our interest income on variable-rate loans, certain investments and interest rate swaps but may be offset by an increase in our cost of funds that is somewhat dependent on short-term interest rates.

Provision for Loan Losses

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

Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at March 31, 2017. While policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management, they are necessarily approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, local real estate market, or particular industry or borrower-specific conditions, which may materially negatively impact our asset quality and the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.

We recorded a provision for loan losses of $410 for the three months ended March 31, 2017, compared to $165 for loans losses being recorded for the three months ended March 31, 2016. Our provision for loan losses was impacted by the level of loan growth, the credit quality of the loan portfolio and the amount of net charge-offs and recoveries.

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Non-Interest Income

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

	Three months Ended				Dollar			Percent
	March 31,				Increase			Increase
	2017		2016		(Decrease)			(Decrease)
Non-Interest Income
Service charges and fees	$	310	$	285	$	25			8.8	%
Securities gains (losses), net		36		-		36			100.0	%
Gains on mortgage loans sold, net		542		3,342		(2,800	)		-83.8	%
Gain on sale of other real estate		24		-		24			100.0	%
Other noninterest income:
Bank-owned life insurance		186		170		16			9.4	%
Trust and brokerage revenue		14		14		-			0.0	%
Rental income		-		2		(2	)		-100.0	%
Miscellaneous noninterest income		27		33		(6	)		-18.2	%
Total other non-interest income		227		219		8			3.7	%
Total Non-Interest Income	$	1,139	$	3,846	$	(2,707	)		-70.4	%

The decrease in total non-interest income during the three months ended March 31, 2017 compared to the same period in 2016 substantially relates to the decline in gains on mortgage loans sold, net. This and other factors impacting non-interest income are discussed further below.

Service charges on deposit accounts generally reflect customer growth trends but are also impacted by changes in our fee structures.

Securities gains and losses often fluctuate from period to period and can sometimes be attributable to various balance sheet risk strategies. During the three months ended March 31, 2017, the Company sold securities classified as available for sale for a gain of $36. During the first quarter of 2016, the Bank did not sell any securities classified as available for sale.

Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans. These mortgage fees are for loans originated and subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage related revenue increases in lower interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging housing markets. Mortgage-related revenue will fluctuate from quarter to quarter as the rate environment changes and as changes occur with our mortgage operations. Gains on mortgage loans sold, net, amounted to $542 for the three months ended March 31, 2017, compared to $3,342 for the same period in 2016. 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 timing of this revenue recognition varies from the time a loan is originated with a customer. We completed the transition of a majority of our out-of-market mortgage loan production offices during the quarter ended June 30, 2016 to better focus our marketing and other resources in our core Middle Tennessee markets. The decline in gains on mortgage loans sold during the three months ended March 31, 2017 was directly attributable to the transition.

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Non-interest income also includes appreciation in the cash surrender value of bank-owned life insurance which was $186 for the three months ended March 31, 2017, compared to $170 for the three months ended March 31, 2016. Primarily, the increase in earnings on these bank-owned life insurance policies resulted from an additional $4.0 million of bank-owned life insurance that was purchased with terms similar to our existing policies in March 2016. 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 trust and brokerage revenue is solely based on commissions received from established referral relationships and fluctuate based on related activity.

Rental income relates to rent received on foreclosed properties and is minimal for the three months ended March 31, 2016. There were no foreclosed properties on our balance sheet or rent received during the three months ended March 31, 2017.

Non-Interest Expense

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

	Three months Ended				Dollar			Percent
	March 31,				Increase			Increase
	2017		2016		(Decrease)			(Decrease)
Non-Interest Expense
Salaries and employee benefits	$	4,269	$	5,394	$	(1,125	)		-20.9	%
Occupancy		762		829		(67	)		-8.1	%
Information technology		513		627		(114	)		-18.2	%
Advertising and public relations		75		265		(190	)		-71.7	%
Audit, legal and consulting		293		281		12			4.3	%
Federal deposit insurance		99		114		(15	)		-13.2	%
Provision for losses on other real estate		-		26		(26	)		-100.0	%
Other operating		858		1,101		(243	)		-22.1	%
Total Non-Interest Expense	$	6,869	$	8,637	$	(1,768	)		-20.5	%

The most significant reason for the decline in total non-interest expense of $1,768 or 20.5% is due to the decrease in salary and employee benefits for the three months ended March 31, 2017 when compared to the same period in 2016. This was primarily attributable to a reduction in the number of mortgage employees. These and other factors impacting non-interest expense are discussed further below.

Salaries and employee benefits decreased for the three months ended March 31, 2017 compared to the same period in 2016. The decline is mainly attributable to the decrease in employee related expenses of the mortgage operations resulting from the transition of a majority of our out-of-market mortgage loan production offices during the 2^nd quarter of 2016. This decrease was offset by an increase in expenses relating the staffing of the Green Hills branch and the Chattanooga loan production office.

Certain of our facilities are leased while there are others that we own. Primarily, occupancy costs decreased due to the transition of a majority of our out-of-market mortgage loan production offices during the 2^nd quarter of 2016. This decrease was offset by an increase in our Maryland Farms lease which renewed in mid-2016.

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Information technology costs decreased when comparing the three months ended March 31, 2017 to the comparable period in 2016. The decline from the prior year mainly relates to a reduction of our core processing and communication line expenses.

Advertising and public relations costs decreased when comparing the three months ended March 31, 2017 to the same period of 2016, by $190. The decrease was substantially attributable to a decline in our direct-mail advertising and related consultation expenditures. New customer aquisition strategies are being evaluated by our new Chief Strategy Officer hired in the first quarter of 2017.

Audit, legal and consulting costs increased slightly by $12 or 4.3% when comparing the three months ended March 31, 2017 and the same period in 2016.

Our FDIC expense is based on our outstanding liabilities for the period multiplied by a factor determined by the FDIC, mainly driven by our most recent regulatory rating and certain financial performance factors. Our FDIC expense decreased for three months ended March 31, 2017, compared to the same period in 2016. This decrease is the result of a decrease in this factor by the FDIC which was partially offset by the increase in average liabilities.

We recorded a provision for losses on other real estate of $26 during the three months ended March 31, 2016 compared to no provision during the three months ended March 31, 2017. As of March 31, 2017, the Company has no properties held in the other real estate portfolio.

Other operating expenses decreased for the three months ended March 31, 2017, compared to the same period in 2016 mainly due 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. This decrease was offset by increased blanket bond costs, consulting fees, and regulatory fees.

Income Taxes

During the three months ended March 31, 2017, we recorded consolidated income tax expense of $272, compared to $568, for the three months ended March 31, 2016. 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. 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 attributable to Bank shareholders for the three months ended March 31, 2017, reflects an effective income tax rate of 12.8% (exclusive of a tax benefit from our mortgage banking operations of $31 on pre-tax losses of $484 prior to intercompany eliminations), compared to 19.6% (exclusive of tax expense of $22 on pre-tax income of $343 from our mortgage banking operations for the comparable period of 2016). Our tax rate for the three months ended March 31, 2017, was favorably influenced by tax credits related to interest-free loans originated in April of 2016, an increase in income earned on tax-exempt investment securities, certain federal and state tax credits, and benefits relating to the exercise of Company stock options.

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 any profits. The noncontrolling member is responsible for 100% of the mortgage venture’s net losses. The venture had a net loss of $453 prior to intercompany eliminations, for the three months ended March 31, 2017 compared to net income of $321, for the same period in 2016. The decrease in income for the three months ended March 31, 2017 when compared to the same period in 2016 results from the transition of most of its out-of-market mortgage offices to another bank. These amounts are included in our consolidated results. Also, see Note 8 for segment reporting in the consolidated financial statements included elsewhere herein.

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COMPARISON OF BALANCE SHEETS AT MARCH 31, 2017 AND DECEMBER 31, 2016

Overview

The Company’s total assets were $962,465 at March 31, 2017 and $911,984 at December 31, 2016. Our assets increased by 5.5% from December 31, 2016 to March 31, 2017. The increase was substantially attributable to the growth in loans and investments during the period of $30,849, or 4.6% and $32,453 or 22.1%, respectively discussed further below. These increases were partially offset by a decrease in cash and cash equivalents of $5.9 million; a decrease in mortgage loans held for sale, net of $2.0 million; and a decrease in other assets of $5.6 million. The Company’s total liabilities were $852,870 at March 31, 2017 and $805,065 at December 31, 2016, an increase of 5.9%. The increase in liabilities from December 31, 2016 to March 31, 2017, was substantially attributable to an increase in deposits of $62.3 million or 8.2% during the period. This increase was partially offset by a decrease in Federal Home Loan advances of $8.2 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 strong. 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. In the first quarter of 2017 we expanded outside Middle Tennessee into Chattanooga, one of the state’s fastest growing metropolitan markets. Our Chattanooga team as well as the lending staff in our new full-service branch in Green Hills opened in the first quarter of 2017 are expected to help us towards our goal of obtaining quality loan growth. Total loans, net, at March 31, 2017, and December 31, 2016, were $688,542 and $657,701, respectively. This represented an increase of 4.7% from December 31, 2016 to March 31, 2017.

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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).

	March 31,					December 31,
	2017					2016
	Amount		Percent			Amount		Percent

Commercial, Industrial and Agricultural	$	133,080		19.0	%	$	134,404		20.1	%
Real estate:
1-4 Family Residential		113,554		16.3	%		113,031		16.9	%
1-4 Family HELOC		60,571		8.7	%		57,460		8.6	%
Multifamily and Commercial		233,399		33.4	%		215,639		32.3	%
Construction, Land Development and Farmland		127,710		18.3	%		115,889		17.4	%
Consumer		16,086		2.3	%		17,240		2.6	%
Other		13,723		2.0	%		13,745		2.1	%
		698,123		100.0	%		667,408		100.0	%
Less:
Deferred loan fees		491					625
Allowance for possible loan losses		9,090					9,082

Loans, net	$	688,542				$	657,701

The table below provides a summary of PCI loans as of March 31, 2017:

	March 31,
	2017

Commercial, Industrial and Agricultural	$	372
Real estate:
1-4 Family Residential		50
1-4 Family HELOC		36
Multifamily and Commercial		3,278
Construction, Land Development and Farmland		1,566
Consumer		-
Other		-
Total gross PCI loans		5,302
Less:
Remaining purchase discount		614
Allowance for possible loan losses		6

Loans, net	$	4,682

Commercial, industrial and agricultural loans above consist solely of 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, industrial and agricultural loans of $133,080 at March 31, 2017, decreased 1.0% compared to $134,404 at December 31, 2016.

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Real estate loans comprised 76.7% of the loan portfolio at March 31, 2017. Residential loans included in this category consist mainly of revolving, open-end loans secured by 1-4 family residential properties extended under home equity lines of credit and closed-end loans secured by first and second liens that are not held for sale. The Company increased the residential portfolio from December 31, 2016 to March 31, 2017. Multi-family and 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 $233,399 at March 31, 2017, increased 8.2% compared to the $215,639 held as of December 31, 2016. Real estate construction loans consist of 1-4 family residential construction loans, other construction loans, land loans, and loans secured by farmland. Construction lending increased during 2016 and into the first three months of 2017, 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. Currently we have no credit card loans on our balance sheet although we do offer credit cards to customers through a third party. We are in the process of implementing a new credit card program for which such loans will be carried on our balance sheet. This program is expected to be implemented during the second quarter of 2017. We have a relatively small number of automobile loans. Our consumer loans experienced a decrease from December 31, 2016, to March 31, 2017, of 6.7%.

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

The repayment of loans is a source of additional liquidity for us. The following table sets forth the loans repricing or maturing within specific intervals at March 31, 2017, excluding unearned net fees and costs.

	One Year or Less		One to Five Years		Over Five Years		Total

Gross loans	$	245,658	$	286,741	$	165,724	$	698,123

Fixed interest rate							$	477,463
Variable interest rate								220,660
Total							$	698,123

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

Allowance for Loan Losses

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

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At March 31, 2017, the allowance for loan losses was $9,090 compared to $9,082 at December 31, 2016. The allowance for loan losses as a percentage of total loans was 1.30% at March 31, 2017 compared to 1.36% at December 31, 2016. The allowance was adjusted downward as a percent of total loans from December 31, 2016 to March 31, 2017. This allowance for loan losses increased slightly due to our loan growth and offset by charge offs.

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

Analysis of Changes in Allowance for Loan Losses

	March, 31			March, 31
	2017			2016

Beginning Balance, January 1	$	9,082		$	7,823
Loans charged off
Commercial, Industrial and Agricultural		(472	)		(8	)
Real estate
1-4 Family Residential		(15	)		-
1-4 Family HELOC		-			-
Multifamily and Commercial		-			-
Construction, Land Development and Farmland		-			-
Consumer		(11	)		(4	)
Other		-			-
Total loans charged off		(498	)		(12	)
Recoveries on loans previously charged off
Commerical, Industrial and Agricultural		78			91
Real estate
1-4 Family Residential		-			4
1-4 Family HELOC		16			4
Multifamily and Commercial		-			1
Construction, Land Development and Farmland		2			1
Consumer		-			13
Other		-			-
Total loan recoveries		96			114
Net recoveries (charge-offs)		(402	)		102
Provision for loan losses		410			165
Total allowance, March 31	$	9,090		$	8,090
Gross loans at end of period ⁽¹⁾	$	698,123		$	623,553
Average gross loans ⁽¹⁾	$	673,036		$	617,600
Allowance to total loans		1.30	%		1.30	%
Net charge offs (recoveries) to average loans		0.24	%		-0.07	%

(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 periods presented.

	March 31,								December 31,
	2017								2016
			% of			% of Loan					% of			% of Loan
			Allowance			Type to					Allowance			Type to
	Amount		To Total			Total Loans			Amount		To Total			Total Loans

Commercial, Industrial and Agricultural	$	2,980		32.8	%		19.0	%	$	2,438		26.8	%		20.1	%
Real estate:
1-4 Family Residential		1,105		12.1	%		16.3	%		1,178		13.0	%		16.9	%
1-4 Family HELOC		516		5.7	%		8.7	%		704		7.8	%		8.6	%
Multifamily and Commercial		2,614		28.8	%		33.4	%		2,731		30.1	%		32.3	%
Construction, Land Development and Farmland		1,668		18.3	%		18.3	%		1,786		19.7	%		17.4	%
Consumer		171		1.9	%		2.3	%		208		2.3	%		2.6	%
Other		36		0.4	%		2.0	%		37		0.3	%		2.1	%
	$	9,090		100.0	%		100.0	%	$	9,082		100.0	%		100.0	%

Nonperforming Assets

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

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

	March 31,			December 31,
	2017			2016

Non-accrual loans	$	5,497		$	5,634
Past due loans 90 days or more and still accruing interest		-			-
Restructured loans		3,676			2,953
Total non-performing loans		9,173			8,587
Other real estate		-			-
Total non-performing assets	$	9,173		$	8,587
Total non-performing loans as a percentage of total loans		1.31	%		1.29	%
Total non-performing assets as a percentage of total assets		0.95	%		0.94	%
Allowance for loan losses as a percentage of non-performing loans		99.10	%		105.76	%

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Investment Securities and Other Earning Assets

The investment securities portfolio is intended to provide the Company with adequate liquidity, 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 significant component of the Company’s earning assets. Securities totaled $179,266 at March 31, 2017. This represents a 22.1% increase from the December 31, 2016 total of $146,813. The increase is attributable to purchasing $46,001 securities available for sale during the three months ended March 31 2017, offset by sales of $12,039, and principal paydowns and maturities of $1,475 during the same period. A portion of our quarterly growth in the investment portfolio related to the completion of a municipal bond replacement strategy that was implemented late in the fourth quarter of 2016 and completed in the first quarter. Additional strategies were implemented in the first quarter of 2017 that are expected to provide better yielding securities that are relatively less sensitive to rising interest rates and potential declines in corporate tax rates.

Restricted equity securities totaled $7,140 and 7,133 at March 31, 2017, and December 31, 2016, respectively, and consist of Federal Reserve Bank and Federal Home Loan Bank stock.

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

	March 31, 2017							December 31, 2016
Available-For-Sale	Amortized Cost		Fair Value		% of Total			Amortized Cost		Fair Value		% of Total
U.S.Treasury and other U.S. government agencies	$	857		855		0.48	%	$	1,909		1,908		1.30	%
State and municipal		147,822		145,036		80.90	%		122,813		119,634		81.49	%
Corporate bonds		2,000		1,986		1.11	%		2,000		1,987		1.35	%
Mortgage backed securities		28,053		27,889		15.56	%		20,197		20,034		13.65	%
Time deposits		3,500		3,500		1.95	%		3,250		3,250		2.21	%
Total	$	182,232		179,266		100.00	%	$	150,169		146,813		100.00	%

The table below summarizes the contractual maturities of securities available for sale at March 31, 2017:

	Amortized Cost		Estimated Fair Value

Due within one year	$	1,364	$	1,366
Due in one to five years		15,336		15,419
Due in five to ten years		10,349		10,432
Due after ten years		127,130		124,160
Mortgage backed securities		28,053		27,889
Total	$	182,232	$	179,266

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Premises and Equipment

Premises and equipment, net, totaled $9,688 at March 31, 2017 compared to $9,093 at December 31, 2016, a net increase of $595 or 6.5%. Asset purchases amounted to approximately $849 during the first three months of 2017 and were mainly incurred for leasehold improvements related to our new Green Hills branch while depreciation expense amounted to $254. At March 31, 2017, we operated from eight retail banking locations as well as two stand-alone mortgage loan production offices and two commercial loan production offices. Two of our bank branch locations, including our main office, are in Brentwood, Tennessee. Our other six bank branch locations are in Franklin, Springfield, Gallatin, Murfreesboro and Nashville, Tennessee. Our commercial loan production offices are in Murfreesboro and Chattanooga, Tennessee. As of March 31, 2017 our mortgage loan production offices were located Hendersonville, Tennessee, as well as Timonium, Maryland. During the three months ended March 31, 2016, the Company began transitioning 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 March 31, 2017, total deposits were $826,183, an increase of $62,349, or 8.2%, compared to $763,834 at December 31, 2016. During the first three months of 2017, we increased non-interest bearing demand deposits by $1.1 million, increased savings and money market deposits by $27.2 million, and increased time deposits by $35.5 million, while interest-bearing deposits decreased by $1.4 million.

The following table shows maturity of time deposits of $100 or more by category based on time remaining until maturity at March 31, 2017.

	March 31,
	2017
Twelve months or less	$	245,079
Over twelve months through three years		39,745
Over three years		12,398
Total	$	297,222

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.

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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 March 31, 2017. Although we do monitor our gap on a periodic basis, we recognize the potential shortcomings of such a model. The static nature of the gap schedule makes it difficult to incorporate changes in behavior that are caused by changes in interest rates. Also, although the periods of estimated and contractual repricing are identified in the analysis, the extent of repricing is not modeled in the gap schedule (i.e. whether repricing is expected to move on a one-to-one or other basis in relationship to the market changes simulated). For these and other shortcomings, we rely more heavily on the earnings simulation model and the economic value of equity model discussed further below.

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


Instantaneous, Parallel Change in Prevailing Interest Rates Equal to	Estimated Change in Net Interest Income and Policy of Maximum Percentage Decline in Net Interest Income
	Next 12		Next 24
	Months		Months
	Estimate	Policy	Estimate	Policy
-200 bp	-6.4%	-15%	-13.5%	-15%
-100 bp	-3.4%	-10%	-6.4%	-10%
+100 bp	-0.1%	-10%	-0.5%	-10%
+200 bp	0.0%	-15%	-0.8%	-15%
+300 bp	-0.1%	-20%	-1.4%	-20%
+400 bp	-0.3%	-25%	-2.2%	-25%

We were in compliance with our earnings simulation model policies as of March 31, 2017, indicating what we believe to be a fairly neutral profile.

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

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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 March 31, 2017, 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 and sources.

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

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

The Company has established a line of credit with the Federal Home Loan Bank of Cincinnati which is secured by a blanket pledge of 1-4 family residential mortgages, multi-family residential, and home equity loans, and available-for-sale securities. At March 31, 2017, advances totaled $24,099 compared to $32,287 as of December 31, 2016. The decline in FHLB advances generally is attributable to our increase in deposits offset by our increase in loans and securities.

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At March 31, 2017, the scheduled maturities of our FHLB advances and interest rates were as follows (scheduled maturities will differ from scheduled repayments):

Scheduled Maturities	Amount		Weighted Average Rates

2017	$	12,000		0.92%
2018		6,000		2.74%
2019		-		0.00%
2020		-		0.00%
2021		507		2.73%
Thereafter		5,592		1.86%

	$	24,099		1.63%

Capital

Stockholders’ equity was $109,595 at March 31, 2017, an increase of $2,676, or 2.5%, from $106,919 at December 31, 2016. The Company raised $411 of capital through the exercise of Company stock options. The additional capital was pushed-down to the Bank and when combined with the accretion of earnings to capital partially offset the increase in liabilities led to an decrease in the Bank’s March 31, 2017 Tier 1 leverage ratio to 10.69% compared with 10.75% at December 31, 2016 (see other ratios discussed further below). Common dividends of $1,711 (declared during the fourth quarter of 2016) were paid during the three months ended March 31, 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 March 31, 2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notifications that management believes have changed the institution’s category. Actual and required capital amounts and ratios are presented below as of March 31, 2017 and December 31, 2016 for the Company and Bank.

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	Actual Regulatory Capital					For Capital Adequacy Including Capital Conservation Buffer					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017
Company
Common equity Tier 1	$	98,995		12.65	%	$	44,998		5.750	%		N/A		N/A
Tier I leverage		98,995		10.81	%		36,631		4.000	%		N/A		N/A
Tier I risk-based capital		98,995		12.65	%		56,736		7.250	%		N/A		N/A
Total risk-based capital		108,085		13.81	%		72,396		9.250	%		N/A		N/A

Bank
Common equity Tier 1	$	97,755		12.50	%	$	44,967		5.750	%	$	50,833		6.50	%
Tier I leverage		97,755		10.69	%		36,578		4.000	%		45,723		5.00	%
Tier I risk-based capital		97,755		12.50	%		56,698		7.250	%		62,563		8.00	%
Total risk-based capital		106,845		13.67	%		72,298		9.250	%		78,160		10.00	%

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	%

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.

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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:

	March 31,
	2017

Unused lines of credit	$	161,499
Standby letters of credit		12,642
Total commitments	$	174,141

Emerging Growth Company Status

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will remain an emerging growth company for up to five years, though it may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, it is deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if total annual gross revenues equal or exceed $1 billion in a fiscal year. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

Investing in Commerce Union involves various risks which are particular to our company, our industry, and our market area. We believe all significant risks to investors in Commerce Union have been outlined in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. However, other risks may prove to be important in the future, and new risks may emerge at any time. We cannot predict with certainty all potential developments which could materially affect our financial performance or condition. There has been no material change to our risk factors as previously disclosed in the above described Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a)
32.1	Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
32.2	Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
101	Interactive Data Files*

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

Table of Contents

SIGNATURES

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

	COMMERCE UNION BANCSHARES, INC.

May 10, 2017	/s/ William Ronald DeBerry
	William Ronald DeBerry
	Chief Executive Officer
	(Principal Executive Officer)


May 10, 2017	/s/ J. Daniel Dellinger
	J. Daniel Dellinger
	Chief Financial Officer
	(Principal Financial Officer)

Reliant Bancorp, Inc. - FORM 10-Q - May 10, 2017

Attached files

Reliant Bancorp, Inc. Reports