Reliant Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Reliant Bancorp, Inc.	ex_98893.htm
EX-32.1 - EXHIBIT 32.1 - Reliant Bancorp, Inc.	ex_98892.htm
EX-31.2 - EXHIBIT 31.2 - Reliant Bancorp, Inc.	ex_98891.htm
EX-31.1 - EXHIBIT 31.1 - Reliant Bancorp, Inc.	ex_98890.htm

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 September 30, 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, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

	Large Accelerated Filer ☐	Accelerated Filer ☒
	Non-Accelerated Filer ☐	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 November 8, 2017 was 9,022,226.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Table of Contents

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION		4
Item 1.	Consolidated Financial Statements (Unaudited).	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	62
Item 4.	Controls and Procedures.	62

PART II – OTHER INFORMATION		62
Item 1.	Legal Proceedings.	62
Item 1A.	Risk Factors.	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	64
Item 3.	Defaults Upon Senior Securities.	64
Item 4.	Mine Safety Disclosures.	64
Item 5.	Other Information.	64
Item 6.	Exhibits.	64

SIGNATURES		65

Table of Contents

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;

•

A merger or acquisition, like our merger with Community First, Inc.

•

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;

•

Difficulties encountered in our merger with Community First, Inc. with customers, employees or other business relationships;

•

Risk that integrating Community First, Inc. with and into Commerce Union could be delayed, or substantially more expensive than anticipated;

•

The dilution caused by our issuance of shares to investors in the private placement discussed herein;

•

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

•

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

•

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

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

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

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited).

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

	September 30, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	18,277		$	23,413
Federal funds sold		669			830
Total cash and cash equivalents		18,946			24,243
Securities available for sale		192,277			146,813
Loans, net		739,738			657,701
Mortgage loans held for sale, net		19,475			11,831
Accrued interest receivable		4,999			3,786
Premises and equipment, net		9,558			9,093
Restricted equity securities, at cost		7,163			7,133
Cash surrender value of life insurance contracts		29,422			24,827
Deferred tax assets, net		2,776			3,437
Goodwill		11,404			11,404
Core deposit intangibles		1,336			1,582
Other assets		4,086			10,134

TOTAL ASSETS	$	1,041,180		$	911,984

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Demand	$	132,058		$	134,792
Interest-bearing demand		79,439			85,478
Savings and money market deposit accounts		197,521			183,788
Time		431,430			359,776
Total deposits		840,448			763,834
Accrued interest payable		220			107
Federal funds purchased		-			3,671
Federal Home Loan Bank advances		56,720			32,287
Dividends payable		541			1,711
Other liabilities		5,307			3,455

TOTAL LIABILITIES		903,236			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; 9,022,098 and 7,778,309 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		9,022			7,778
Additional paid-in capital		112,202			89,045
Retained earnings		16,821			12,212
Accumulated other comprehensive loss		(101	)		(2,116	)

TOTAL STOCKHOLDERS’ EQUITY		137,944			106,919

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,041,180		$	911,984

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Dollar amounts in thousands except per share amounts)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2017			2016		2017			2016
INTEREST INCOME
Interest and fees on loans	$	9,078		$	7,729	$	25,193		$	24,011
Interest and fees on loans held for sale		211			109		420			663
Interest on investment securities, taxable		179			137		514			589
Interest on investment securities, nontaxable		1,022			578		2,796			1,506
Federal funds sold and other		137			103		381			298

TOTAL INTEREST INCOME		10,627			8,656		29,304			27,067

INTEREST EXPENSE
Deposits
Demand		42			46		131			137
Savings and money market deposit accounts		207			151		557			480
Time		1,117			430		2,663			1,260
Federal Home Loan Bank advances and other		165			194		383			581

TOTAL INTEREST EXPENSE		1,531			821		3,734			2,458

NET INTEREST INCOME		9,096			7,835		25,570			24,609

PROVISION FOR LOAN LOSSES		540			145		1,195			760

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		8,556			7,690		24,375			23,849

NONINTEREST INCOME
Service charges on deposit accounts		309			320		936			926
Gains on mortgage loans sold, net		1,571			551		2,751			5,675
Gain on securities transactions, net		-			296		59			356
Gain on sale of other real estate		1			145		26			301
Loss on disposal of premises and equipment		(50	)		-		(50	)		-
Other		256			263		735			673

TOTAL NONINTEREST INCOME		2,087			1,575		4,457			7,931

NONINTEREST EXPENSE
Salaries and employee benefits		4,880			4,017		13,634			14,294
Occupancy		850			767		2,482			2,406
Information technology		732			586		1,924			1,849
Advertising and public relations		81			117		204			542
Audit, legal and consulting		1,046			328		1,647			993
Federal deposit insurance		100			109		320			349
Provision for losses on other real estate		-			17		-			70
Other operating		808			942		2,423			3,044

TOTAL NONINTEREST EXPENSE		8,497			6,883		22,634			23,547

INCOME BEFORE PROVISION FOR INCOME TAXES		2,146			2,382		6,198			8,233

INCOME TAX EXPENSE		306			619		1,005			1,775

CONSOLIDATED NET INCOME		1,840			1,763		5,193			6,458

NONCONTROLLING INTEREST IN NET LOSS OF SUBSIDIARY		6			605		898			507

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	1,846		$	2,368	$	6,091		$	6,965

Basic net income attributable to common shareholders, per share	$	0.23		$	0.31	$	0.77		$	0.92
Diluted net income attributable to common shareholders, per share	$	0.22		$	0.30	$	0.76		$	0.91

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Dollar amounts in thousands except per share amounts)

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2017		2016			2017			2016

Consolidated net income	$	1,840	$	1,763		$	5,193		$	6,458

Other comprehensive income

Net unrealized gains (losses) on available-for-sale securities, net of tax of $257 and $(122) for the three months ended September 30, 2017 and 2016, respectively, and $1,273 and $591 for the nine months ended September 30, 2017 and 2016, respectively		412		(197	)		2,051			952

Reclassification adjustment for gains included in net income, net of tax of $(113) for the three months ended September 30, 2016, respectively, and $(23) and $(136) for the nine months ended September 30, 2017 and 2016, respectively		-		(183	)		(36	)		(220	)

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		412		(380	)		2,015			732

TOTAL COMPREHENSIVE INCOME	$	2,252	$	1,383		$	7,208		$	7,190

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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		-			-			168			-			-			-			168

Exercise of stock options		461,931			462			4,154			-			-			-			4,616

Restricted stock awards		23,800			23			(23	)		-			-			-			-

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

Noncontrolling interest contributions		-			-			-			-			-			507			507

Net income (loss)		-			-			-			6,965			-			(507	)		6,458

Other comprehensive income		-			-			-			-			732			-			732

BALANCE - SEPTEMBER 30, 2016		7,763,351		$	7,763		$	88,821		$	11,952		$	696		$	-		$	109,232


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

Stock based compensation expense		-			-			412			-			-			-			412

Exercise of stock options		59,739			60			633			-			-			-			693

Restricted stock awards		50,050			50			(50	)		-			-			-			-

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

Common stock issuance		1,137,000			1,137			23,877			-			-			-			25,014

Stock issuance costs		-			-			(1,718	)		-			-			-			(1,718	)

Noncontrolling interest contributions		-			-			-			-			-			898			898

Cash dividend declared to common shareholders ($0.18 per share)		-			-			-			(1,482	)		-			-			(1,482	)

Net income (loss)		-			-			-			6,091			-			(898	)		5,193

Other comprehensive income		-			-			-			-			2,015			-			2,015

BALANCE - SEPTEMBER 30, 2017		9,022,098		$	9,022		$	112,202		$	16,821		$	(101	)	$	-		$	137,944

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Dollar amounts in thousands except per share amounts)

(Unaudited)

	2017			2016
OPERATING ACTIVITIES
Consolidated net income	$	5,193		$	6,458
Adjustments to reconcile consolidated net income to net cash provided by operating activities
Provision for loan losses		1,195			760
Deferred income tax benefit		(589	)		(36	)
Loss on disposal of premises and equipment		50			-
Depreciation and amortization of premises and equipment		762			728
Net amortization of securities		1,478			1,117
Net realized gains on sales of securities		(59	)		(356	)
Gains on mortgage loans sold, net		(2,751	)		(5,675	)
Stock-based compensation expense		412			168
Realization of deferred gain on other real estate		(26	)		(301	)
Provision for losses on other real estate		-			70
Increase in cash surrender value of life insurance contracts		(595	)		(556	)
Mortgage loans originated for resale		(99,485	)		(137,667	)
Proceeds from sale of mortgage loans		94,592			183,786
Amortization of core deposit intangible		246			267
Change in
Accrued interest receivable		(1,213	)		(403	)
Other assets		5,701			(736	)
Accrued interest payable		113			79
Other liabilities		1,525			2,610

TOTAL ADJUSTMENTS		1,356			43,855

NET CASH PROVIDED BY OPERATING ACTIVITIES		6,549			50,313

INVESTING ACTIVITIES
Activities in available for sale securities
Purchases		(68,010	)		(47,391	)
Sales		18,688			20,036
Maturities, prepayments and calls		6,057			8,038
Purchases of restricted equity securities		(30	)		(837	)
Loan originations and payments, net		(83,232	)		(44,458	)
Purchase of buildings, leasehold improvements, and equipment		(1,277	)		(496	)
Proceeds from sale of other real estate		-			1,314
Improvement of other real estate		-			(16	)
Purchase of life insurance contracts		(4,000	)		(4,000	)

NET CASH USED IN INVESTING ACTIVITIES		(131,804	)		(67,810	)

FINANCING ACTIVITIES
Net change in deposits		76,614			19,848
Net change in federal funds purchased		(3,671	)		-
Net change in Advances from Federal Home Loan Bank		24,433			8,921
Issuance of common stock		23,989			4,616
Noncontrolling interest contributions received		1,245			-
Cash dividends paid on common stock		(2,652	)		(1,489	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		119,958			31,896

NET CHANGE IN CASH AND CASH EQUIVALENTS		(5,297	)		14,399
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		24,243			20,570
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	18,946		$	34,969

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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	$	3,621		$	2,379
Taxes	$	1,277		$	2,537

Non-cash investing and financing activities
Unrealized gain on securities available-for-sale	$	3,618		$	2,435
Unrealized loss on derivatives	$	(353	)	$	(1,248	)
Change in due to/from noncontrolling interest	$	898		$	507

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of Consolidation

The consolidated financial statements include the accounts of Commerce Union Bancshares, Inc., its wholly owned subsidiary, Reliant Bank (the “Bank”), the Bank’s wholly-owned subsidiaries, Commerce Union Mortgage Services, Inc. (inactive and terminated in September 2016) 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.

Nature of Operations

The Company began its organizational activities in 2005. The Company provides financial services through its offices in Williamson, Robertson, Davidson, and Sumner Counties. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial and residential construction loans, commercial loans, installment loans and lines secured by home equity. Substantially all loans are secured by specific items of collateral including commercial and residential real estate, business assets, and consumer assets. These consolidated financial statements should be read in conjunction with the Company's 2016 audited consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for loan losses, the valuation of other real estate, the valuation of debt and equity securities, the valuation of deferred tax assets and fair values of financial instruments.

The consolidated financial statements as of September 30, 2017, and for the three months and nine months ended September 30, 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.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates (Continued)

These consolidated 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 nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

Proposed Merger with Community First, Inc.

On August 22, 2017, Commerce Union Bancshares, Inc. and Reliant Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Community First, Inc. and Community First Bank & Trust, Columbia, Tennessee, that provides for the combination of the companies. Under the Merger Agreement, a wholly owned subsidiary of Commerce Union Bancshares, Inc. will merge with and into Community First, Inc. with Community First, Inc. to be the surviving corporation and becoming a wholly owned subsidiary of Commerce Union Bancshares, Inc. (the “Merger”). As soon as reasonably practicable following the Merger and as part of a single integrated transaction, Community First, Inc. will merge with and into Commerce Union Bancshares, Inc. (the “Second Step Merger” and, together with the Merger, collectively, the “Mergers”). The Merger Agreement also contemplates that, immediately following the completion of the Second Step Merger, Community First Bank & Trust, the wholly owned bank subsidiary of Community First, Inc., will merge with and into Reliant Bank, with Reliant Bank as the surviving bank (the “Bank Merger”).

Pursuant to the terms of the Merger Agreement, upon consummation of the Merger, each share of Community First, Inc. common stock (except for specified shares of Community First, Inc. common stock held by Community First, Inc. or Commerce Union Bancshares, Inc. and any dissenting shares) will be converted into the right to receive 0.481 (the “Exchange Ratio”) shares of Commerce Union Bancshares, Inc. common stock. Although the Exchange Ratio is fixed, the market value of the merger consideration will fluctuate with the market price of Commerce Union Bancshares, Inc. common stock and will not be known until the Merger is consummated. As of the date of the Merger Agreement, Community First, Inc. had 5,025,883.87134 shares of common stock issued and outstanding (including shares of restricted stock) and 20,700 outstanding stock options, all of which are, or will be at or prior to the effective time of the Merger, fully vested and exercisable.

Commerce Union Bancshares, Inc. has filed a registration statement on Form S-4 with the Securities and Exchange Commission with respect to the registration of the shares of Commerce Union Bancshares, Inc. common stock to be issued to Community First, Inc. shareholders in connection with the Merger.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Proposed Merger with Community First, Inc. (Continued)

The Mergers are subject to the satisfaction of customary closing conditions, including obtaining approvals from applicable federal and state banking regulators and the shareholders of Commerce Union Bancshares, Inc. and Community First, Inc. Additionally, the Merger Agreement contains certain termination provisions that may require Community First, Inc. to pay Commerce Union Bancshares, Inc. a termination fee of $2,100,000 under certain specified circumstances, including if Community First, Inc. terminates the Merger Agreement to enter into a definitive agreement for a transaction that its board of directors has determined is superior to the Merger. Commerce Union Bancshares Inc. may also have to pay a termination fee of $2,100,000 in certain circumstances, as set forth in the registration statement filed on Form S-4, and in the Merger Agreement thereto.

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 September 30, 2017 and December 31, 2016 were as follows:

	September 30, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U. S. Treasury and other U. S. government agencies	$	591	$	-	$	(5	)	$	586
State and municipal		164,968		1,989		(1,710	)		165,247
Corporate bonds		1,500		8		(13	)		1,495
Mortgage backed securities		21,456		70		(77	)		21,449
Time deposits		3,500		-		-			3,500

Total	$	192,015	$	2,067	$	(1,805	)	$	192,277

	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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)

Securities pledged at September 30, 2017 and December 31, 2016 had a carrying amount of $78,520 and $36,292, respectively, and were pledged to collateralize Federal Home Loan Bank advances, Federal Reserve advances and municipal deposits.

At September 30, 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 September 30, 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	$	3,655	$	3,657
Due in one to five years		13,488		13,584
Due in five to ten years		10,234		10,391
Due after ten years		143,182		143,196
Mortgage backed securities		21,456		21,449

Total	$	192,015	$	192,277

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 September 30, 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	$	493	$	5	$	-	$	-	$	493	$	5
State and municipal		43,122		609		23,994		1,101		67,116		1,710
Corporate bonds		-		-		487		13		487		13
Mortgage backed securities		2,131		18		3,183		59		5,314		77

Total temporarily impaired	$	45,746	$	632	$	27,664	$	1,173	$	73,410	$	1,805

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)

	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 117 and 193 securities in an unrealized loss position as of September 30, 2017 and December 31, 2016, respectively.

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at September 30, 2017 and December 31, 2016 were comprised as follows:

	September 30, 2017		December 31, 2016
Commerical, Industrial and Agricultural	$	138,648	$	134,404
Real Estate
1-4 Family Residential		100,655		113,031
1-4 Family HELOC		79,195		57,460
Multi-family and Commercial		258,168		215,639
Construction, Land Development and Farmland		141,581		115,889
Consumer		16,386		17,240
Other		15,048		13,745
		749,681		667,408
Less
Deferred loan fees		320		625
Allowance for possible loan losses		9,623		9,082

Loans, net	$	739,738	$	657,701

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 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 nine months ended September 30, 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		(941	)		-		-		(15	)
Recoveries		306			-		5		-
Provision		872			363		356		(296	)
Ending balance	$	2,675		$	3,094	$	2,147	$	867

	1-4 Family HELOC			Consumer			Other		Total
Beginning balance	$	704		$	208		$	37	$	9,082
Charge-offs		-			(30	)		-		(986	)
Recoveries		19			2			-		332
Provision		(110	)		9			1		1,195
Ending balance	$	613		$	189		$	38	$	9,623

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

	Commercial Industrial and Agricultural			Multi-family and Commercial Real Estate		Construction Land Development and Farmland		1-4 Family Residential Real Estate
Beginning balance	$	2,198		$	2,591	$	894	$	1,214
Charge-offs		(84	)		-		-		(25	)
Recoveries		250			3		5		66
Provision		(109	)		84		816		(97	)
Ending balance	$	2,255		$	2,678	$	1,715	$	1,158

	1-4 Family HELOC		Consumer		Other			Total
Beginning balance	$	699	$	192	$	35		$	7,823
Charge-offs		-		-		(19	)		(128	)
Recoveries		9		13		-			346
Provision		26		16		24			760
Ending balance	$	734	$	221	$	40		$	8,801

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 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 September 30, 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	$	526	$	-	$	17	$	26
Acquired with credit impairment		4		-		-		-
Collectively evaluated for impairment		2,145		3,094		2,130		841
Total	$	2,675	$	3,094	$	2,147	$	867
Loans
Individually evaluated for impairment	$	4,643	$	1,953	$	3,268	$	2,574
Acquired with credit impairment		281		1,161		1,432		47
Collectively evaluated for impairment		133,724		255,054		136,881		98,034
Total	$	138,648	$	258,168	$	141,581	$	100,655

	1-4 Family HELOC		Consumer		Other		Total
Allowance for loan losses
Individually evaluated for impairment	$	-	$	-	$	-	$	569
Acquired with credit impairment		-		-		-		4
Collectively evaluated for impairment		613		189		38		9,050
Total	$	613	$	189	$	38	$	9,623
Loans
Individually evaluated for impairment	$	273	$	-	$	-	$	12,711
Acquired with credit impairment		17		-		-		2,938
Collectively evaluated for impairment		78,905		16,386		15,048		734,032
Total	$	79,195	$	16,386	$	15,048	$	749,681

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 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)

SEPTEMBER 30, 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)

SEPTEMBER 30, 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)

SEPTEMBER 30, 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 September 30, 2017 and December 31, 2016:

	September 30, 2017		December 31, 2016
Commercial, Industrial and Agricultural	$	2,460	$	3,062
Multi-family and Commercial Real Estate		-		636
Construction, Land Development and Farmland		1,898		730
1-4 Family Residential Real Estate		592		344
1-4 Family HELOC		-		862
Total	$	4,950	$	5,634

Performing non-accrual loans totaled $1,133 and $2,799 at September 30, 2017 and December 31, 2016, respectively.

Individually impaired loans by class of loans were as follows at September 30, 2017:

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

Commercial, Industrial and Agricultural	$	5,438	$	3,396	$	1,529	$	4,925	$	530
Multi-family and Commercial Real Estate		3,479		3,114		-		3,114		-
Construction, Land Development and Farmland		4,788		4,463		236		4,699		17
1-4 Family Residential Real Estate		3,325		2,595		26		2,621		26
1-4 Family HELOC		309		290		-		290		-

Total	$	17,339	$	13,858	$	1,791	$	15,649	$	573

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 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 nine months ended September 30, 2017 and 2016 were as follows:

	2017		2016
Commercial, Industrial and Agricultural	$	5,550	$	6,143
Multi-family and Commercial Real Estate		4,403		6,074
Construction, Land Development and Farmland		4,319		3,047
1-4 Family Residential Real Estate		2,225		2,879
1-4 Family HELOC		957		1,944
Total	$	17,454	$	20,087

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)

SEPTEMBER 30, 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)

SEPTEMBER 30, 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)

SEPTEMBER 30, 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 September 30, 2017:

	Pass		Special Mention		Substandard		Total
Commercial, Industrial and Agricultural	$	134,802	$	5	$	3,841	$	138,648
1-4 Family Residential Real Estate		96,681		1,400		2,574		100,655
1-4 Family HELOC		78,922		-		273		79,195
Multi-family and Commercial Real Estate		256,215		-		1,953		258,168
Construction, Land Development and Farmland		137,180		1,368		3,033		141,581
Consumer		16,386		-		-		16,386
Other		15,048		-		-		15,048
Total	$	735,234	$	2,773	$	11,674	$	749,681

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)

SEPTEMBER 30, 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 September 30, 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	$	71	$	-	$	1,859	$	1,930	$	136,718	$	138,648
1-4 Family Residential Real Estate		688		-		257		945		99,710		100,655
1-4 Family HELOC		17		-		-		17		79,178		79,195
Multi-family and Commercial Real Estate		70		-		-		70		258,098		258,168
Construction, Land Development and Farmland		213		338		1,899		2,450		139,131		141,581
Consumer		21		-		-		21		16,365		16,386
Other		-		-		-		-		15,048		15,048
Total	$	1,080	$	338	$	4,015	$	5,433	$	744,248	$	749,681

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 was a loan totaling $200 past due 90 days or more and still accruing interest at September 30, 2017. There were no loans past due 90 days or more still accruing interest at December 31, 2016.

During the nine months ended September 30, 2017, two loans totaling $428 were modified in a troubled debt restructuring. One modification consisted of a partial charge off, totaling $470, and a payment restructure with the modification having no effect on interest income. The other modification consisted of a temporary reduction in required monthly payments and 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)

SEPTEMBER 30, 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 September 30, 2017 and December 31, 2016:

	September 30, 2017		December 31, 2016
Commercial, Industrial and Agricultural	$	305	$	385
Multi-family and Commercial Real Estate		1,232		3,321
Construction, Land Development and Farmland		1,510		1,569
1-4 Family Residential Real Estate		48		92
1-4 Family HELOC		36		36
Total outstanding balance		3,131		5,403
Less remaining purchase discount		193		635
Allowance for loan losses		4		6
Carrying amount, net of allowance	$	2,934	$	4,762

During the three months ended September 30, 2017, there was a $2 reduction in the allowance for loan losses related to purchased credit impaired loans. During the nine months ended September 30, 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 each quarter ended September 30, 2017:

Balance at January 1, 2017	$	87
Accretion income		(18	)
Balance at March 31, 2017		69
Accretion income		(17	)
Balance at June 30, 2017		52
Accretion income		(33	)
Balance at September 30, 2017	$	19

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 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)

SEPTEMBER 30, 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 nine months ended September 30, 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)

SEPTEMBER 30, 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 September 30, 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)
September 30, 2017
Assets
U. S. Treasury and other U. S. government agencies	$	586	$	-	$	586	$	-
State and municipal		165,247		-		165,247		-
Corporate bonds		1,495		-		1,495		-
Mortgage backed securities		21,449		-		21,449		-
Time deposits		3,500		3,500		-		-
Interest rate swap		23		-		23		-

Liabilities
Interest rate swap	$	448	$	-	$	448	$	-

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)

SEPTEMBER 30, 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 September 30, 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)
September 30, 2017
Assets
Impaired loans	$	1,218	$	-	$	-	$	1,218

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 September 30, 2017 and December 31, 2016:

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

(1)

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 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 September 30, 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	$	18,277	$	18,277	$	18,277	$	-	$	-
Federal funds sold		669		669		-		669		-
Loans, net		739,738		739,783		-		-		739,783
Mortgage loans held for sale		19,475		19,479		-		19,479		-
Accrued interest receivable		4,999		4,999		-		4,999		-
Restricted equity securities		7,163		7,163		-		7,163		-
Financial liabilities
Deposits		840,448		840,055		-		-		840,055
Accrued interest payable		220		220		-		220		-
Federal Home Loan Bank advances		56,720		56,792		-		56,792		-

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 funds purchased		3,671		3,671		-		3,671		-
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, federal funds sold or purchased, 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)

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 5 - STOCK-BASED COMPENSATION (CONTINUED)

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

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

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

A summary of the activity in the stock option plans for the nine months ended September 30, 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		15,500			24.24
Exercised		(59,739	)		11.60
Forfeited or expired		(11,800	)		13.75
Outstanding at September 30, 2017		185,502			14.29		5.85	$	1,673
Exercisable at September 30, 2017		107,802			12.68		3.92	$	1,132

				Weighted Average
	Shares			Grant-Date Fair Value
Non-vested options at January 1, 2017		96,600		$	3.36
Granted		15,500			6.66
Vested		(22,600	)		3.12
Forfeited		(11,800	)		3.02
Non-vested options at September 30, 2017		77,700			4.14

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 5 - STOCK-BASED COMPENSATION

At September 30, 2017, the unrecognized future compensation expense to be recognized for stock compensation totals $1,569.

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 September 30, 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 September 30, 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)

SEPTEMBER 30, 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 September 30, 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
September 30, 2017
Company
Tier I leverage	$	125,572		12.58	%	$	39,928		4.000	%	$	49,909		5.00	%
Common equity tier 1		125,572		14.72	%		49,052		5.750	%		55,450		6.50	%
Tier I risk-based capital		125,572		14.72	%		61,848		7.250	%		68,246		8.00	%
Total risk-based capital		135,195		15.85	%		78,899		9.250	%		85,297		10.00	%

Bank
Tier I leverage	$	121,715		12.20	%	$	39,907		4.000	%	$	49,883		5.00	%
Common equity tier 1		121,715		14.29	%		48,976		5.750	%		55,364		6.50	%
Tier I risk-based capital		121,715		14.29	%		61,752		7.250	%		68,140		8.00	%
Total risk-based capital		131,338		15.42	%		78,786		9.250	%		85,174		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)

SEPTEMBER 30, 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				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Basic EPS Computation
Net income attributable to common shareholders	$	1,846	$	2,368	$	6,091	$	6,965
Weighted average common shares outstanding		8,174,973		7,651,549		7,878,760		7,542,573
Basic earnings per common share	$	0.23	$	0.31	$	0.77	$	0.92
Diluted EPS Computation
Net income attributable to common shareholders	$	1,846	$	2,368	$	6,091	$	6,965
Weighted average common shares outstanding		8,174,973		7,651,549		7,878,760		7,542,573
Dilutive effect of stock options and restricted shares		105,885		117,243		95,587		97,674
Adjusted weighted average common shares outstanding		8,280,858		7,768,792		7,974,347		7,640,247
Diluted earnings per common share	$	0.22	$	0.30	$	0.76	$	0.91

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)

SEPTEMBER 30, 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
	September 30, 2017
	Retail Banking		Residential Mortgage Banking			Elimination Entries			Consolidated
Net interest income	$	8,924	$	172		$	-		$	9,096
Provision for loan losses		540		-			-			540
Noninterest income		516		1,584			(13	)		2,087
Noninterest expense		6,748		1,749			-			8,497
Income tax expense (benefit)		306		-			-			306
Net income (loss)		1,846		7			(13	)		1,840
Noncontrolling interest in net loss of subsidiary		-		(7	)		13			6
Net income attributable to common shareholders	$	1,846	$	-		$	-		$	1,846

	Three Months Ended
	September 30, 2016
	Retail Banking		Residential Mortgage Banking			Elimination Entries		Consolidated
Net interest income	$	7,750	$	85		$	-	$	7,835
Provision for loan losses		145		-			-		145
Noninterest income		1,024		551			-		1,575
Noninterest expense		5,600		1,283			-		6,883
Income tax expense (benefit)		661		(42	)		-		619
Net income (loss)		2,368		(605	)		-		1,763
Noncontrolling interest in net loss of subsidiary		-		605			-		605
Net income attributable to common shareholders	$	2,368	$	-		$	-	$	2,368

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 8 - SEGMENT REPORTING (CONTINUED)

	Nine Months Ended
	September 30, 2017
	Retail Banking		Residential Mortgage Banking			Elimination Entries			Consolidated
Net interest income	$	25,224	$	346		$	-		$	25,570
Provision for loan losses		1,195		-			-			1,195
Noninterest income		1,704		2,851			(98	)		4,457
Noninterest expense		18,581		4,053			-			22,634
Income tax expense		1,061		(56	)		-			1,005
Net income (loss)		6,091		(800	)		(98	)		5,193
Noncontrolling interest in net loss of subsidiary		-		800			98			898
Net income attributable to common shareholders	$	6,091	$	-		$	-		$	6,091

	Nine Months Ended
	September 30, 2016
	Retail Banking		Residential Mortgage Banking			Elimination Entries		Consolidated
Net interest income	$	24,082	$	527		$	-	$	24,609
Provision for loan losses		760		-			-		760
Noninterest income		2,253		5,678			-		7,931
Noninterest expense		16,800		6,747			-		23,547
Income tax expense		1,810		(35	)		-		1,775
Net income		6,965		(507	)		-		6,458
Noncontrolling interest in net income of subsidiary		-		507			-		507
Net income attributable to common shareholders	$	6,965	$	-		$	-	$	6,965

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 9 - DERIVATIVES

The Company has swap agreements that were executed upon the purchase of investment grade municipal securities effectively converting the fixed municipal yields to floating rates. These fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item by mitigating the changes in fair value based on fluctuations in interest rates.

The total notional amount of swap agreements was $21,505 at September 30, 2017 and December 31, 2016. At September 30, 2017, the contracts had fair values totaling $23 recorded in other assets and $448 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.

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 September 30, 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 $306 and $1,005 for the three and nine months ended September 30, 2017 as compared to $619 and $1,775 in the comparative periods in 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)

SEPTEMBER 30, 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, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. Management is evaluating the impact of the update on the Company’s 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 $82 and $181 related to the exercise of stock options during the three months and nine months ended September 30, 2017, respectively and $106 and $531 for the corresponding periods in 2016.

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

ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective beginning on January 1, 2020, with early adoption permitted for interim or annual impairment tests beginning in 2017. ASU 2017-04 is not expected to have a significant impact on the consolidated financial statements.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016

(Dollar amounts in thousands except per share amounts)

NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

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.

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 and is not expected to have a significant impact on our consolidated financial statements.

ASU 2017-09, “Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. ASU 2017-09 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 will be effective for the Company on January 1, 2019 and is not expected to have a significant impact on the consolidated financial statements.

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

During 2011, the Bank and another entity organized Reliant Mortgage Ventures. Under the related operating agreement, the non-controlling member receives 70% of the profits of the mortgage venture, and the Bank receives 30% of the profits once the non-controlling member recovers its aggregate losses. The non-controlling member is responsible for 100% of the mortgage venture’s net losses. As of September 30, 2017, the cumulative losses to date totaled $4,197 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.

Table of Contents

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 or 90+ days past due still accruing are individually evaluated for impairment. Factors considered in determining if a loan is impaired include the borrower’s ability to repay amounts owed, collateral deficiencies, the risk rating of the loan and economic conditions affecting the borrower’s industry, among other things. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value (less estimated costs to sell) of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless the principal amount is deemed fully collectible, in which case interest is recognized on a cash basis. When recognition of interest income on a cash basis is appropriate, the amount of income recognized is limited to what would have been accrued on the remaining principal balance at the contractual rate. Cash payments received over this limit, and not applied to reduce the loans remaining principal balance, are recorded as recoveries of prior charge-offs until these charge-offs have been fully recovered.

Fair Value of Financial Instruments

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

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

Earnings

Net income attributable to common shareholders amounted to $1,846 and $6,091, or $0.23 and $0.77 per basic share for the three and nine months ended September 30, 2017, respectively, compared to $2,368 and $6,965, or $0.31 and $0.92 per basic share for the same periods in 2016. Diluted net income attributable to shareholders per share was $0.22 and $0.30 per share and $0.76 and $0.91 per diluted share for the three and nine months ended September 30, 2017, compared to 2016, respectively. The major components contributing to the decline in income per share from the prior-year discussed further below include the private offering of 1,137,000 shares, the increase in audit, legal and consulting expenses relating to the merger with Community First Inc., the increase in provision for loan loss and somewhat offset by an increase in net interest income and 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 and the private offering.

Table of Contents

Net Interest Income

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of our revenues. The following table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three and nine months ended September 30, 2017, and 2016 (dollars in thousands):

	Three Months Ended September 30, 2017							Three Months Ended September 30, 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	$	727,453		4.78		$	8,588	$	649,778		4.57		$	7,277	$	947		$	364		$	1,311
Loan fees		-		0.27			490		-		0.28			452		38			-			38
Loans with fees		727,453		5.05			9,078		649,778		4.85			7,729		985			364			1,349
Mortgage loans held for sale		18,333		4.57			211		12,804		3.39			109		56			46			102
Deposits with banks		14,451		0.88			32		20,439		0.37			19		(34	)		47			13
Investment securities - taxable		30,212		2.35			179		33,512		1.63			137		(81	)		123			42
Investment securities - tax-exempt		157,718		3.99			1,022		111,448		3.33			578		300			144			444
Fed funds sold and other		7,557		5.51			105		8,506		3.93			84		(53	)		74			21
Total earning assets		955,724		4.72			10,627		836,487		4.37			8,656		1,173			798			1,971
Nonearning assets		54,812							48,640
Total Assets	$	1,010,536						$	885,127
Interest bearing liabilities
Interest bearing demand		81,629		0.20			42		89,572		0.20			46		(4	)		-			(4	)
Savings and money market		205,463		0.40			207		179,816		0.33			151		23			33			56
Time deposits - retail		329,203		1.02			845		143,344		0.73			262		446			137			583
Time deposits - wholesale		90,222		1.20			272		94,239		0.71			168		(48	)		152			104
Total interest bearing deposits		706,517		0.77			1,366		506,971		0.49			627		417			322			739
Federal Home Loan Bank advances		46,910		1.40			165		132,876		0.58			194		(694	)		665			(29	)
Total interest-bearing liabilities		753,427		0.81			1,531		639,847		0.51			821		(277	)		987			710
Net interest rate spread (%) / Net Interest Income ($)				3.91		$	9,096				3.86		$	7,835	$	1,450		$	(189	)	$	1,261
Non-interest bearing deposits		133,108		(0.13	)				134,343		(0.09	)
Other non-interest bearing liabilities		4,574							4,159
Stockholder's equity		119,427							106,778
Total liabilities and stockholders' equity	$	1,010,536						$	885,127
Cost of funds				0.68							0.42
Net interest margin				4.08							3.98

Table of Contents

	Nine Months Ended September 30, 2017							Nine Months Ended September 30, 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	$	701,362		4.61		$	23,652	$	635,055		4.87		$	22,603	$	2,879		$	(1,830	)	$	1,049
Loan fees		-		0.29			1,541		-		0.30			1,408		133			-			133
Loans with fees		701,362		4.90			25,193		635,055		5.17			24,011		3,012			(1,830	)		1,182
Mortgage loans held for sale		13,310		4.22			420		24,351		3.64			663		(389	)		146			(243	)
Deposits with banks		15,177		0.71			81		20,646		0.35			54		(25	)		52			27
Investment securities - taxable		32,355		2.12			514		43,840		1.79			589		(214	)		139			(75	)
Investment securities - tax-exempt		145,412		4.01			2,796		98,560		3.33			1,506		902			388			1,290
Fed funds sold and other		7,787		5.15			300		7,447		4.38			244		12			44			56
Total earning assets		915,403		4.58			29,304		829,899		4.60			27,067		3,298			(1,061	)		2,237
Nonearning assets		54,240							49,350
Total Assets	$	969,643						$	879,249
Interest bearing liabilities
Interest bearing demand		84,307		0.21			131		89,604		0.20			137		(13	)		7			(6	)
Savings and money market		200,304		0.37			557		188,387		0.34			480		32			45			77
Time deposits - retail		308,911		0.86			1,994		142,602		0.70			747		1,043			204			1,247
Time deposits - wholesale		87,105		1.03			669		105,188		0.65			513		(147	)		303			156
Total interest bearing deposits		680,627		0.66			3,351		525,781		0.48			1,877		915			559			1,474
Federal Home Loan Bank advances and other		41,132		1.24			383		121,999		0.64			581		(689	)		491			(198	)
Total interest-bearing liabilities		721,759		0.69			3,734		647,780		0.51			2,458		226			1,050			1,276
Net interest rate spread (%) / Net Interest Income ($)				3.89		$	25,570				4.09		$	24,609	$	3,072		$	(2,111	)	$	961
Non-interest bearing deposits		132,406		(0.11	)				123,526		(0.08	)
Other non-interest bearing liabilities		3,548							4,846
Stockholder's equity		111,930							103,097
Total liabilities and stockholders' equity	$	969,643						$	879,249
Cost of funds				0.58							0.43
Net interest margin				4.04							4.20

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 and nine months ended September 30, 2017, we recorded net interest income of approximately $9.1 million and $25.6 million, respectively, which resulted in a net interest margin (net interest income divided by the average balance of interest earning assets) of 4.08% and 4.04% respectively. For the three and nine months ended September 30, 2016, we recorded net interest income of approximately $7.8 million and $24.6 million, respectively, which resulted in a net interest margin of 3.98% and 4.20%, respectively. For the three months ended September 30, 2017 and 2016, our net interest spread was 3.91% and 3.86%, respectively. For the nine months ended September 30, 2017 and 2016, our net interest spread was 3.89% and 4.09%, respectively. The main factor contributing to the increase in our net interest income was our earning asset growth outpacing our interest-bearing liability growth for the periods presented. Additionally, net interest income for the three and nine months ended September 30, 2017 was impacted by the recognition of income from the remaining purchase discount of $354 on a purchase-credit impaired loan that paid in full during the third quarter of 2017 compared to a similar $619 recognition of income for the nine months ended September 30, 2016.

Table of Contents

Our year-over-year average loan volume increased by approximately 10.4% from the first nine months of 2016 to the first nine months of 2017. Our combined loan and loan fee yield decreased from 5.17% to 4.90% for the first nine months of 2016 compared to 2017, respectively, while our combined loan and loan fee yield increased from 4.85% to 5.05% for the three months ended September 30, 2016 to 2017, respectively. The increased yield for the three months ended September 30, 2017 is attributable to the recognition of income from the remaining purchase discount of $354 on a purchase-credit impaired loan that paid in full during the third quarter of 2017.

Our yield on tax-exempt investments increased to 3.99% and 4.01%, respectively, for the three and nine months ended September 30, 2017, from 3.33% for the same periods in 2016. Our year-over-year average tax-exempt investment volume increased by approximately 41.5% and 47.5% from the first three and nine months of 2016 compared to the same periods in 2017. Our year-over-year average taxable securities volume decreased by 9.9% and 26.2% from the first three and nine months of 2016 compared to the same periods 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 2017 and additional strategies that were implemented in 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 from 0.43% to 0.58% for the nine months ended September 30, 2016 compared to the same period in 2017. Our cost of funds increased from 0.42% to 0.68% for the three months ended September 30, 2016 compared to the same period in 2017. The increase in our cost of funds was driven mainly by higher rates being paid on time deposits and FHLB advances. We experienced a 7.2% increase and a 0.9% decrease in our average non-interest bearing deposits from the nine and three months ended September 30, 2016, respectively.

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 as well as recent and anticipated increases in short term interest rates. 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 September 30, 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 $540 and $1,195, for the three and nine months ended September 30, 2017, respectively, compared to $145 and $760, for loan losses recorded for the three and nine months ended September 30, 2016, respectively. 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.

Table of Contents

Non-Interest Income

Our non-interest income is composed of several components, some of which vary significantly between periods. The following is a summary of our non-interest income for the three and nine months ended September 30, 2017, and 2016 (dollars in thousands):

	Three Months Ended					Dollar			Percent
	September 30,					Increase			Increase
	2017			2016		(Decrease)			(Decrease)
Non-Interest Income
Service charges and fees	$	309		$	320	$	(11	)		-3.4	%
Securities gains (losses), net		-			296		(296	)		-100.0	%
Gains on mortgage loans sold, net		1,571			551		1,020			185.1	%
Gain (loss) on sale of other real estate		1			145		(144	)		-99.3	%
Loss on disposal of premises and equipment		(50	)		-		(50	)		-100.0	%
Other noninterest income:
Bank-owned life insurance		219			194		25			12.9	%
Brokerage revenue		16			40		(24	)		-60.0	%
Miscellaneous noninterest income (expense), net		21			29		(8	)		-27.6	%
Total other non-interest income		256			263		(7	)		-2.7	%
Total non-interest income	$	2,087		$	1,575	$	512			32.5	%

	Nine Months Ended					Dollar			Percent
	September 30,					Increase			Increase
	2017			2016		(Decrease)			(Decrease)
Non-Interest Income
Service charges and fees	$	936		$	926	$	10			1.1	%
Securities gains (losses), net		59			356		(297	)		-83.4	%
Gains on mortgage loans sold, net		2,751			5,675		(2,924	)		-51.5	%
Gain (loss) on sale of other real estate		26			301		(275	)		-91.4	%
Loss on disposal of premises and equipment		(50	)		-		(50	)		-100.0	%
Other noninterest income:
Bank-owned life insurance		595			557		38			6.8	%
Brokerage revenue		70			67		3			4.5	%
Rental income		-			2		(2	)		-100.0	%
Miscellaneous noninterest income (expense), net		70			47		23			48.9	%
Total other non-interest income		735			673		62			9.2	%
Total non-interest income	$	4,457		$	7,931	$	(3,474	)		-43.8	%

The most significant reason for the changes in total non-interest income during the three and nine months ended September 30, 2017 compared to the same periods in 2016 is the fluctuation in gains on mortgage loans sold, net. This and other factors impacting non-interest income are discussed further below.

Service charges on deposit accounts have remained generally flat and mainly reflect customer growth trends but have also been 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 nine months ended September 30, 2017, the Company sold securities classified as available for sale totaling $18,688 for gains of $59. During the nine months ended September 30, 2016, the Company sold securities classified as available for sale totaling $20,036, including $18,978 sold during the third quarter of 2016. The Company recognized a gain on sales of securities classified as available for sale of $296 and $356 for the three and nine months ended September 30, 2016, respectively.

Table of Contents

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 including but not limited to the number of loan originators employed and the channels available for loan sales of the venture’s products in the secondary markets. Gains on mortgage loans sold, net, amounted to $1,571 and $2,751 for the three and nine months ended September 30, 2017, compared to $551 and $5,675 for the same periods in the prior year. As discussed further in the notes to our consolidated financial statements, gains on mortgage loans sold are generally recognized at the time of a loan sale corresponding to the transfer of risk. The timing of this revenue recognition varies from the time a loan is originated with a customer. We completed the transition to dispose 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 nine months ended September 30, 2017 was impacted by the transition. The increase in gains on mortgage loans sold during the three months ended September 30, 2017 was influenced by our new first-lien HELOC program.

During the three and nine months ended September 30, 2017, we recognized a gain of $1 and $26, respectively, due to the recognition of a previously deferred gain from a payoff of a loan compared to a gain of $145 and $301 in the same periods in 2016 for similar transactions.

Non-interest income also includes appreciation in the cash surrender value of bank-owned life insurance which was $219 and $595 for the three and nine months ended September 30, 2017, compared to $194 and $557 for the same periods in, 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. An additional $4.0 million of bank-owned life insurance was purchased with terms similar to our existing policies in June 2017.

Our brokerage revenue is solely based on commissions received from established referral relationships and fluctuate based on related activity.

Rental income relates to rent received on foreclosed properties and is minimal for the periods presented. There were no foreclosed properties on our balance sheet or rent received during the three or nine months ended September 30, 2017.

Non-Interest Expense

The following is a summary of our non-interest expense for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

	Three Months Ended				Dollar			Percent
	September 30,				Increase			Increase
	2017		2016		(Decrease)			(Decrease)
Non-Interest Expense
Salaries and employee benefits	$	4,880	$	4,017	$	863			21.5	%
Occupancy		850		767		83			10.8	%
Information technology		732		586		146			24.9	%
Advertising and public relations		81		117		(36	)		-30.8	%
Audit, legal and consulting		1,046		328		718			218.9	%
Federal deposit insurance		100		109		(9	)		-8.3	%
Provision for losses on other real estate		-		17		(17	)		-100.0	%
Other operating		808		942		(134	)		-14.2	%
Total non-interest expense	$	8,497	$	6,883	$	1,614			23.4	%

Table of Contents

	Nine Months Ended				Dollar			Percent
	September 30,				Increase			Increase
	2017		2016		(Decrease)			(Decrease)
Non-Interest Expense
Salaries and employee benefits	$	13,634	$	14,294	$	(660	)		-4.6	%
Occupancy		2,482		2,406		76			3.2	%
Information technology		1,924		1,849		75			4.1	%
Advertising and public relations		204		542		(338	)		-62.4	%
Audit, legal and consulting		1,647		993		654			65.9	%
Federal deposit insurance		320		349		(29	)		-8.3	%
Provision for losses on other real estate		-		70		(70	)		-100.0	%
Other operating		2,423		3,044		(621	)		-20.4	%
Total non-interest expense	$	22,634	$	23,547	$	(913	)		-3.9	%

The most significant reasons for the increase in total non-interest expense of $1,614 or 23.4% for the three months ended September 30, 2017 is due to the increase in audit, legal and consulting expenses and the increase in salaries and employee benefits. The most significant reason for the decline in total non-interest expense of $913 or 3.9% for the nine months ended September 30, 2017 is due to the decrease in salary and employee benefits when compared to the same period in 2016. These and other factors impacting non-interest expense are discussed further below.

Salaries and employee benefits increased by $863 or 21.5% for the three months ended September 30, 2017 compared to the same period in 2016. This increase is attributable to the staffing of the Green Hills branch, the Chattanooga loan and deposit production office, and other strategic hires. For the nine months ended September 30, 2017 compared to the same period in 2016, salaries and employee benefits decreased by $660 or 4.6%. 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 second quarter of 2016 and was partially offset by staffing previously mentioned.

Certain of our facilities are leased while there are others that we own. Primarily, occupancy costs increased $83 and $76 during the three and nine months ended September 30, 2017 when compared to the same period in 2016 due to the full quarter of depreciation for our new Green Hills location and a full quarter of depreciation and lease expense for our new Chattanooga location that opened in the first quarter of 2017 and the related depreciation for our new Mortgage office in Brentwood which opened in the second quarter of 2017.

Information technology costs increased by $146 and $75 or 24.9% and 4.1% when comparing the three and nine months ended September 30, 2017 to the comparable periods in 2016. These fluctuations are mainly attributable to the timing of project related activities.

Advertising and public relations costs decreased when comparing the three and nine months ended September 30, 2017 to the same periods in 2016, by $36 and $338, respectively. The decrease was substantially attributable to a decline in our direct-mail advertising and related consultation expenditures and partially offset by the recently completed marketing campaign to increase core deposits. Additional customer acquisition strategies are being evaluated by the Company.

Audit, legal and consulting costs increased by $718 and $654, respectively, or 218.9% and 65.9% when comparing the three and nine months ended September 30, 2017 to the same periods in 2016. This increase is mainly attributable to the $562 of merger related expenses in the third quarter of 2017.

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 by $9 and $29, respectively for three and nine months ended September 30, 2017, compared to the same periods in 2016. This decrease is primarily the result of a reduction in the applicable rate which was partially offset by the increase in average liabilities.

Table of Contents

We recorded a provision for losses on other real estate of $17 and $70 during the three and nine months ended September 30, 2016, respectively compared to no provision during the three and nine months ended September 30, 2017. As of September 30, 2017, the Company has no properties held in the other real estate portfolio.

Other operating expenses decreased for the three and nine months ended September 30, 2017, compared to the same periods in 2016 mainly due to decreases in loan-related expenses such as processing costs relating to our mortgage operations as volume decreased and our transitioning of several of our out-of-market mortgage offices to another bank, and the reversal of the lower of cost or market adjustment for loans held for sale during the nine months ended September 30, 2017.

Income Taxes

During the three and nine months ended September 30, 2017, we recorded consolidated income tax expense of $306 and $1,005, respectively, compared to $619 and $1,775, respectively, for the three and nine months ended September 30, 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.

Our income tax expense attributable to Bank shareholders for the three and nine months ended September 30, 2017, reflects an effective income tax rate of 14.2% and 14.8%, respectively, (exclusive of a tax benefit from our mortgage banking operations of $0 and $56 on pre-tax gains (losses) of $7 and $(856) prior to intercompany eliminations), compared to 21.8% and 20.6% (exclusive of tax benefit of $42 and $35 on pre-tax losses of $647 and $542 from our mortgage banking operations for the comparable periods of 2016). Our tax rate for the three and nine months ended September 30, 2017, was favorably influenced by tax credits related to interest-free loans originated in the second quarter 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 income of $7 and a net loss of $800, respectively prior to intercompany eliminations, for the three and nine months ended September 30, 2017 compared to net loss of $605 and $507, for the same periods in 2016. The increase in income for the three months ended September 30, 2017 when compared to the same period in 2016 results from their increased production volume from our first-lien HELOC program. The decrease in income for the nine months ended September 30, 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.

Table of Contents

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

Overview

The Company’s total assets were $1,041,180 at September 30, 2017 and $911,984 at December 31, 2016. Our assets increased by 14.2% from December 31, 2016 to September 30, 2017. The increase was substantially attributable to the growth in loans and investments during the period of $82.0 million, or 12.5% and $45.5 million or 31.0%, respectively discussed further below. Other increases include mortgage loans held for sale of $7.6 million or 64.6% and cash surrender value of life insurance contracts of $4.6 million or 18.5%. These increases were partially offset by the decline of cash and cash equivalents by $5.3 million or 21.8%. The Company’s total liabilities were $903,236 at September 30, 2017 and $805,065 at December 31, 2016, an increase of 12.2%. The increase in liabilities from December 31, 2016 to September 30, 2017, was substantially attributable to an increase in deposits and Federal Home Loan Bank advances of $76.6 million or 10.0% and $24.4 million or 75.7%, respectively, during the period. This increase was partially offset by a decrease in federal funds purchased of $3.7 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 September 30, 2017, and December 31, 2016, were $739,738 and $657,701, respectively. This represented an increase of 12.5% from December 31, 2016 to September 30, 2017.

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

	September 30,					December 31,
	2017					2016
	Amount		Percent			Amount		Percent

Commerical, Industrial and Agricultural	$	138,648		18.5	%	$	134,404		20.1	%
Real estate:
1-4 Family Residential		100,655		13.4	%		113,031		16.9	%
1-4 Family HELOC		79,195		10.6	%		57,460		8.6	%
Multifamily and Commercial		258,168		34.4	%		215,639		32.3	%
Construction, Land Development and Farmland		141,581		18.9	%		115,889		17.4	%
Consumer		16,386		2.2	%		17,240		2.6	%
Other		15,048		2.0	%		13,745		2.1	%
		749,681		100.0	%		667,408		100.0	%
Less:
Deferred loan fees		320					625
Allowance for possible loan losses		9,623					9,082

Loans, net	$	739,738				$	657,701

Table of Contents

The table below provides a summary of PCI loans as of September 30, 2017:

	September 30,
	2017

Commerical, Industrial and Agricultural	$	305
Real estate:
1-4 Family Residential		48
1-4 Family HELOC		36
Multifamily and Commercial		1,232
Construction, Land Development and Farmland		1,510
Consumer		-
Other		-
Total gross PCI loans		3,131
Less:
Remaining purchase discount		193
Allowance for possible loan losses		4

Loans, net	$	2,934

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 $138,648 at September 30, 2017, increased 3.2% compared to $134,404 at December 31, 2016.

Real estate loans comprised 77.3% of the loan portfolio at September 30, 2017. Residential loans included in this category consist mainly of closed-end loans secured by first and second liens that are not held for sale and revolving, open-end loans secured by 1-4 family residential properties extended under home equity lines of credit. The Company decreased the residential portfolio from December 31, 2016 to September 30, 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 $258,168 at September 30, 2017, increased 19.7% 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 nine months of 2017, based on a strong local economy.

Consumer loans mainly consist of loans to individuals for household, family, and other personal expenditures under revolving credit plans and other consumer loans. We have a small amount of credit card loans on our balance sheet due to the implementation of a new credit card program during the third quarter of 2017. We have a relatively small number of automobile loans. Our consumer loans experienced a decrease from December 31, 2016, to September 30, 2017, of 5.0%.

Other loans consist mainly of loans to states and political subdivisions and loans to other depository institutions and were minimal for the periods presented. Our other loans experienced an increase of 9.5% from December 31, 2016 to September 30, 2017.

Table of Contents

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 September 30, 2017, excluding unearned net fees and costs.

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

Gross loans	$	284,604	$	267,591	$	197,486	$	749,681

Fixed interest rate							$	509,603
Variable interest rate								240,078
Total							$	749,681

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.

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

At September 30, 2017, the allowance for loan losses was $9,623 compared to $9,082 at December 31, 2016. The allowance for loan losses as a percentage of total loans was 1.28% at September 30, 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 September 30, 2017. The increase in our allowance for loan losses is directly attributable to our loan growth and offset by our net charge offs and recoveries.

Table of Contents

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

	September 30,			September 30,
	2017			2016

Beginning Balance, January 1	$	9,082		$	7,823
Loans charged off:
Commerical, Industrial and Agricultural		(941	)		(84	)
Real estate:
1-4 Family Residential		(15	)		(25	)
1-4 Family HELOC		-			-
Multifamily and Commercial		-			-
Construction, Land Development and Farmland		-			-
Consumer		(30	)		-
Other		-			(19	)
Total loans charged off		(986	)		(128	)
Recoveries on loans previously charged off:
Commerical, Industrial and Agricultural		306			250
Real estate:
1-4 Family Residential		-			66
1-4 Family HELOC		19			9
Multifamily and Commercial		-			3
Construction, Land Development and Farmland		5			5
Consumer		2			13
Other		-			-
Total loan recoveries		332			346
Net recoveries (charge-offs)		(654	)		218
Provision for loan losses		1,195			760
Total allowance at end of period	$	9,623		$	8,801
Gross loans at end of period ⁽¹⁾	$	749,681		$	662,079
Average gross loans ⁽¹⁾	$	701,362		$	635,055
Allowance to total loans		1.28	%		1.33	%
Net charge offs to average loans (annualized)		0.12	%		-0.05	%

(1)	Loan balances exclude loans held for sale.

Table of Contents

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.

	September 30,								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

Commerical, Industrial and Agricultural	$	2,675		27.8	%		18.5	%	$	2,438		26.8	%		20.1	%
Real estate:
1-4 Family Residential		867		9.0	%		13.4	%		1,178		13.0	%		16.9	%
1-4 Family HELOC		613		6.4	%		10.6	%		704		7.8	%		8.6	%
Multifamily and Commercial		3,094		32.2	%		34.4	%		2,731		30.1	%		32.3	%
Construction, Land Development and Farmland		2,147		22.3	%		18.9	%		1,786		19.7	%		17.4	%
Consumer		189		2.0	%		2.2	%		208		2.3	%		2.6	%
Other		38		0.3	%		2.0	%		37		0.5	%		2.1	%
	$	9,623		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.

	September 30,			December 31,
	2017			2016

Non-accrual loans	$	4,950		$	5,634
Past due loans 90 days or more and still accruing interest		200			-
Restructured loans		2,204			2,953
Total non-performing loans		7,354			8,587
Foreclosed real estate ("OREO")		-			-
Total non-performing assets	$	7,354		$	8,587
Total non-performing loans as a percentage of total loans		0.98	%		1.29	%
Total non-performing assets as a percentage of total assets		0.71	%		0.94	%
Allowance for loan losses as a percentage of non-performing loans		130.85	%		105.76	%

Table of Contents

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 taxes. 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 $192,277 at September 30, 2017. This represents a 31.0% increase from the December 31, 2016 total of $146,813. The increase is attributable to purchasing $68,010 securities available for sale during the nine months ended September 30 2017, offset by sales of $18,688, and principal paydowns and maturities of $6,057 during the same period. A portion of our year-to-date growth in the investment portfolio is 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 2017 and additional strategies that were implemented in 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 $7,163 and 7,133 at September 30, 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:

	September 30, 2017							December 31, 2016
	Amortized Cost		Fair Value		% of Total			Amortized Cost		Fair Value		% of Total
U.S.Treasury and other U.S. government agencies	$	591		586		0.30	%	$	1,909		1,908		1.30	%
State and municipal		164,968		165,247		85.94	%		122,813		119,634		81.49	%
Corporate bonds		1,500		1,495		0.78	%		2,000		1,987		1.35	%
Mortgage backed securities		21,456		21,449		11.16	%		20,197		20,034		13.65	%
Time deposits		3,500		3,500		1.82	%		3,250		3,250		2.21	%
Total	$	192,015		192,277		100.00	%	$	150,169		146,813		100.00	%

The table below summarizes the contractual maturities of securities available for sale at September 30, 2017:

	Amortized Cost		Estimated Fair Value

Due within one year	$	3,655	$	3,657
Due in one to five years		13,488		13,584
Due in five to ten years		10,234		10,391
Due after ten years		143,182		143,196
Mortgage backed securities		21,456		21,449
Total	$	192,015	$	192,277

Table of Contents

Premises and Equipment

Premises and equipment, net, totaled $9,558 at September 30, 2017 compared to $9,093 at December 31, 2016, a net increase of $465 or 5.1%. Premises and equipment purchases amounted to approximately $1,277 during the first nine months of 2017 and were mainly incurred for leasehold improvements related to our new Green Hills branch and improvements to our IT infrastructure for disaster recovery planning while depreciation expense amounted to $762. At September 30, 2017, we operated from eight retail banking locations as well as two stand-alone mortgage loan production offices and two commercial loan and deposit 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, and Nashville, Tennessee. Our commercial loan and deposit production offices are in Murfreesboro and Chattanooga, Tennessee. As of September 30, 2017 our mortgage loan production offices were located Hendersonville and Brentwood, Tennessee, as well as Timonium, Maryland. During the three months ended March 31, 2016, the Company began transitioning most of its out-of-market branches to another bank. We own three branch and office facilities located in Robertson and Sumner counties of Tennessee while the remainder of our locations are leased.

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 September 30, 2017, total deposits were $840,448, an increase of $76,614, or 10.0%, compared to $763,834 at December 31, 2016. During the first nine months of 2017, savings and money market deposits increased by $13.7 million, and time deposits increased by $71.7 million, while non-interest bearing demand and interest-bearing demand deposits decreased by $2.7 and $6.0 million, respectively. A substantial portion of the increase in the time deposits is attributable to our marketing campaign in August.

The following table shows maturity of time deposits of $250 or more by category based on time remaining until maturity at September 30, 2017.

	September 30,
	2017
Twelve months or less	$	232,064
Over twelve months through three years		13,669
Over three years		4,589
Total	$	250,322

Market and Liquidity Risk Management

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

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

Table of Contents

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 September 30, 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		-2.3%		-15%		-6.6%		-15%
-100 bp		0.8%		-10%		-0.3%		-10%
+100 bp		0.0%		-10%		-0.5%		-10%
+200 bp		0.2%		-15%		-0.7%		-15%
+300 bp		0.8%		-20%		-0.8%		-20%
+400 bp		1.0%		-25%		-1.2%		-25%

We were in compliance with our earnings simulation model policies as of September 30, 2017, indicating what we believe to be a fairly neutral interest-rate risk 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.

Table of Contents

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 September 30, 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, competition, and the actions of our customers. 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 September 30, 2017, advances totaled $56,720 compared to $32,287 as of December 31, 2016. The increase in FHLB advances generally is attributable to our increase in loans and securities and offset by our increase in deposits.

Table of Contents

At September 30, 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	$	45,000		1.18%
2018		6,000		2.74%
2019		-		0.00%
2020		-		0.00%
2021		483		2.73%
Thereafter		5,237		1.87%

	$	56,720		1.42%

Capital

Stockholders’ equity was $137,944 at September 30, 2017, an increase of $31,025, or 29.0%, from $106,919 at December 31, 2016. During the third quarter of 2017, the company issued 1,137,000 shares of common stock in a private offering raising $23.3 million net of expenses of which $20.0 million was pushed-down to the Bank. Additionally, during the nine months ended September 30, 2017, the Company raised $693 of capital through the exercise of Company stock options. The additional capital for the stock option exercises and a portion of the proceeds from the private placement was pushed-down to the Bank and when combined with the accretion of earnings to capital partially offset by the declared dividends and the increase in assets led to a increase in the Bank’s September 30, 2017 Tier 1 leverage ratio to 12.20% 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) and $941 (declared in the second quarter of 2017) were paid during the nine months ended September 30, 2017, and dividends of $541 were declared in the second quarter of 2017 and were paid subsequent to quarter end.

On July 14, 2017, the Company filed a Form S-3 registration statement to offer, issue and sell from time to time in one or more offerings any combination of (i) common stock, (ii) preferred stock, (iii) debt securities, (iv) depositary shares, (v) warrants, and (vi) units, up to a maximum aggregate offering price of $75,000,000. The net proceeds from any offering will be used for general corporate purposes including acquisitions, capital expenditures, investments, and the repayment, redemption, or refinancing of any indebtedness or other securities. Until allocated to such purposes it is expected that we will invest any proceeds in short-term, interest-bearing instruments or other investment-grade securities.

Banks as regulated institutions are required to meet certain levels of capital. The Federal Reserve Board of Governors, the primary federal regulator for the Bank, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. We regularly review our capital adequacy to ensure 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.

Table of Contents

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 September 30, 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 September 30, 2017 and December 31, 2016 for the Company and Bank.

	Actual Regulatory Capital					Minimum Required Capital Including Capital Conservation Buffer					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2017
Company
Tier I leverage	$	125,572		12.58	%	$	39,928		4.000	%	$	49,909		5.00	%
Common equity Tier 1		125,572		14.72	%		49,052		5.750	%		55,450		6.50	%
Tier I risk-based capital		125,572		14.72	%		61,848		7.250	%		68,246		8.00	%
Total risk-based capital		135,195		15.85	%		78,899		9.250	%		85,297		10.00	%

Bank
Tier I leverage	$	121,715		12.20	%	$	39,907		4.000	%	$	49,883		5.00	%
Common equity Tier 1		121,715		14.29	%		48,976		5.750	%		55,364		6.50	%
Tier I risk-based capital		121,715		14.29	%		61,752		7.250	%		68,140		8.00	%
Total risk-based capital		131,338		15.42	%		78,786		9.250	%		85,174		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	%

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.

Table of Contents

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:

	September 30,
	2017

Unused lines of credit	$	179,462
Standby letters of credit		12,358
Total commitments	$	191,820

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 an initial five year period, though it may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, it is deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if total annual gross revenues equal or exceed $1.07 billion in a fiscal year. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.

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

Table of Contents

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 President and 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 President and 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 President and 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 September 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

Except as set forth below there have been no material changes to the risk factors included in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

The merger of Commerce Union and Community First may not be completed, which could have a material adverse effect on our business, future operations, and stock price.

Completion of the merger is subject to certain closing conditions, including the receipt of all required regulatory approvals, in each case without the imposition of a materially burdensome condition. If we are not successful in obtaining the required regulatory approvals, the merger will not be completed. Even if the regulatory approvals are received, the timing of the regulatory approvals and any conditions imposed by the regulatory approvals could result in certain closing conditions of the merger not being satisfied.

Consummation of the merger is also conditioned upon other customary closing conditions, including (1) the approval of the merger agreement by Community First’s shareholders and the approval by our shareholders of the issuance of stock by Commerce Union in connection with the merger, (2) the absence of any order, decree, injunction, or law enjoining or prohibiting the merger, (3) the effectiveness of a registration statement on Form S-4 for the shares of common stock to be issued by Commerce Union in connection with the merger, and (4) the authorization for listing on the Nasdaq Capital Market of the shares to be issued by Commerce Union in connection with the merger. Each party’s obligation to complete the merger is also subject to certain additional customary conditions. Additionally, Commerce Union’s obligation to complete the merger is subject to holders of not more than 7.5% of the outstanding shares of Community First’s common stock perfecting their rights to dissent from the merger. If a condition to either party’s obligation to consummate the merger is not satisfied, that party may be able to terminate the merger agreement and, in such case, the transaction would not be consummated.

If the merger is not completed, our ongoing business and financial results may be adversely affected and we will be subject to several risks, including the following:

●

the price of our common stock may decline to the extent that its current market prices reflect a market assumption that the merger will be completed;

●

having to pay significant costs relating to the merger without receiving any benefits arising from the merger;

●

negative reactions from customers, shareholders and market analysts; and

●

the diversion of the focus of our management to the merger instead of on pursuing other opportunities that could have been beneficial to our business.

If the merger is not completed, our business may be adversely affected by the failure to pursue other beneficial opportunities due to the focus of our management team on the merger, without realizing any of the anticipated benefits of completing the merger. If the merger agreement is terminated under certain circumstances, we may be required to pay a termination fee of $2.1 million to Community First.

Table of Contents

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

Reliant Bank and Community First Bank have operated and, until the bank merger is completed, will continue to operate, independently. Accordingly, the process of integrating Community First Bank’s operations into Reliant Bank’s operations could result in the disruption of operations or the loss of Community First Bank customers and employees, and could make it more difficult to achieve the intended benefits of the merger. Inconsistencies between the standards, controls, procedures, and policies of Reliant Bank and those of Community First Bank could adversely affect Reliant Bank’s ability to maintain relationships with current customers and employees of Community First Bank if and when the bank merger is completed.

As with any merger of banking institutions, business disruptions may occur that may cause Reliant Bank to lose customers or may cause Community First Bank’s customers to withdraw their deposits from Community First Bank prior to the merger’s consummation and from Reliant Bank thereafter. The realization of the anticipated benefits of the merger may depend in large part on our ability to integrate Community First Bank’s operations into Reliant Bank’s operations, and to address differences in business models and cultures. If we are unable to integrate the operations of Community First and Community First Bank into our and Reliant Bank’s operations successfully and on a timely basis, some or all of the expected benefits of the acquisition may not be realized. Difficulties encountered with respect to such matters could result in an adverse effect on the financial condition, results of operations, capital, liquidity, or cash flows of Reliant Bank and our company.

We may fail to realize the cost savings anticipated from the merger.

Although we anticipate that we would realize certain cost savings as to the operations of Community First and Community First Bank and otherwise from the merger if and when the operations of Community First and Community First Bank are fully integrated into our and Reliant Bank’s operations, it is possible that we may not realize all of the cost savings that we have estimated we can realize from the merger. For example, we may be required to continue to operate or maintain functions that are currently expected to be combined or reduced as a result of the merger. Our realization of the estimated cost savings also will depend on our ability to combine the operations of our company and Reliant Bank with the operations of Community First and Community First Bank in a manner that permits those costs savings to be realized. If we are not able to integrate the operations of Community First and Community First Bank into our and Reliant Bank’s operations successfully and to reduce the combined costs of conducting the integrated operations of the two banks, the anticipated cost savings may not be fully realized, if at all, or may take longer to realize than expected. Our failure to realize those cost savings could materially adversely affect our financial condition, results of operations, capital, liquidity, or cash flows.

The issuance of the stock consideration to Community First’s shareholders and the issuance of the shares in the private placement may decrease the market price of our common stock.

We issued 1,137,000 shares of our common stock in connection with the private placement of our shares, and as consideration for the merger, we will issue approximately 2,417,450 additional shares of our common stock to Community First’s shareholders. These two transactions together will result in our shareholders’ existing share ownership being diluted by an aggregate of approximately 3,554,450 new shares, which represents 45.3% of our outstanding common stock immediately prior to the closing of the private placement. The dilution associated with the issuance of new shares of common stock in the private placement and/or the merger may result in fluctuations in the market price of our common stock, including a stock price decrease, and could materially impair our earnings per share and other per share financial metrics.

The combined company will incur significant transaction and merger-related costs in connection with the merger.

We expect to incur significant costs associated with combining the operations of Community First with our operations. We recently began collecting information in order to formulate detailed integration plans to deliver anticipated cost savings. Additional unanticipated costs may be incurred in the integration of our business with the business of Community First. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

Table of Contents

Whether or not the merger is consummated, each of Commerce Union and Community First will incur substantial expenses, such as legal, accounting, and financial advisory fees, in pursuing the merger which will adversely impact its earnings.

We will be subject to business uncertainties and contractual restrictions while the merger is pending, which could adversely affect our business and operations.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Reliant Bank. Uncertainties surrounding the merger may impair the ability of one or more of Commerce Union, Reliant Bank, Community First, and/or Community First Bank to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with either of the banks to seek to change their existing business relationships with such bank.

Under the terms of the merger agreement, Commerce Union is subject to certain restrictions on its business prior to completing the merger, which may adversely affect our ability to execute certain of our business strategies. In addition, the merger agreement restricts Community First and Community First Bank from taking other specified actions until the merger occurs without our consent, such as acquiring or disposing of assets, incurring indebtedness, or incurring capital expenditures. These restrictions may prevent Community First and Community First Bank from pursuing attractive business opportunities that may arise prior to the completion of the merger. Such limitations could negatively impact Community First’s or Commerce Union’s businesses and operations prior to the completion of the merger.

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

Commerce Union completed a private placement of common stock in the quarter ended September 30, 2017, as reported on our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 23, 2017.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

2.1	Agreement and Plan of Merger, dated as of , by and among Commerce Union Bancshares, Inc., Community First, Inc., Reliant Bank, and Community First Bank (incorporated herein by reference to Exhibit 2.1 to our Form 8-K filed on 08/23/17).

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.

November 9, 2017		/s/ DeVan D. Ard, Jr.
	DeVan D. Ard, Jr.
	President and Chief Executive Officer
	(Principal Executive Officer)


November 9, 2017		/s/ J. Daniel Dellinger
	J. Daniel Dellinger
	Chief Financial Officer
	(Principal Financial Officer)

Reliant Bancorp, Inc. - FORM 10-Q - November 9, 2017

Attached files

Reliant Bancorp, Inc. Reports