Reliant Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-33 - EXHIBIT 33 - Reliant Bancorp, Inc.	ex33q32018.htm
EX-32.2 - EXHIBIT 32.2 - Reliant Bancorp, Inc.	ex322q32018.htm
EX-32.1 - EXHIBIT 32.1 - Reliant Bancorp, Inc.	ex321q32018.htm
EX-31.2 - EXHIBIT 31.2 - Reliant Bancorp, Inc.	ex312q32018.htm
EX-31.1 - EXHIBIT 31.1 - Reliant Bancorp, Inc.	ex311q32018.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

FORM 10-Q

_______________________________

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

For the quarterly period ended September 30, 2018

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

For the transition period from ______ to ______

Commission File Number: 001-37391

_______________________________

Reliant Bancorp, Inc.

(Exact name of registrant as specified in its charter)

_______________________________



Tennessee	37-1641316
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1736 Carothers Parkway, Suite 100 Brentwood, Tennessee	37027
(Address of principal executive offices)	(Zip Code)

(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 ý 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 ý 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 ý
Non-Accelerated Filer ¨	Smaller Reporting Company ý
Emerging growth company ý

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 ý

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of November 5, 2018 was 11,531,594.

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	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	59

PART II – OTHER INFORMATION		60
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61

SIGNATURES		62

FORWARD-LOOKING STATEMENTS

Reliant Bancorp, Inc. (“Reliant Bancorp”) may from time to time make written or oral statements, including statements contained in this report (including, without limitation, certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2), that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “anticipate,” “expect,” “may,” “will,” “assume,” “should,” “predict,” “could,” “would,” “intend,” “targets,” “estimates,” “projects,” “plans,” “potential” and other similar words and expressions of the future are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Reliant Bancorp to differ materially from any results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others:


(i)	the effect of interest rate increases on the cost of deposits;


(ii)	unanticipated weakness in loan demand or loan pricing;


(iii)	greater than anticipated adverse conditions in the national or local economies in which we operate, including Middle Tennessee;


(iv)	lack of strategic growth opportunities or our failure to execute on those opportunities;


(v)	deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;


(vi)	the ability to grow and retain low-cost core deposits and retain large, uninsured deposits;


(vii)	the impact of competition with other financial institutions, including pricing pressures and the resulting impact on Reliant Bancorp’s results, including as a result of compression to net interest margin;


(viii)	our ability to effectively manage problem credits;


(ix)	our ability to successfully implement efficiency initiatives on time and in amounts projected;


(x)	our ability to successfully develop and market new products and technology;


(xi)	the vulnerability of Reliant Bank’s network and online banking portals, and the systems of parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches; and


(xii)	changes in laws or regulations.

You should also consider carefully the risk factors discussed in 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)

RELIANT BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)



	September 30, 2018			December 31, 2017
	Unaudited			Audited
ASSETS
Cash and due from banks	$	34,026		$	20,497
Federal funds sold	417			171
Total cash and cash equivalents	34,443			20,668
Securities available for sale	293,028			220,201
Loans, net	1,183,431			762,488
Mortgage loans held for sale, net	12,712			45,322
Accrued interest receivable	8,032			5,744
Premises and equipment, net	22,156			9,790
Restricted equity securities, at cost	11,681			7,774
Other real estate, net	1,000			—
Cash surrender value of life insurance contracts	45,220			33,663
Deferred tax assets, net	9,214			1,099
Goodwill	43,642			11,404
Core deposit intangibles	8,456			1,280
Other assets	11,186			5,601

TOTAL ASSETS	$	1,684,201		$	1,125,034
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Demand	$	221,252		$	131,996
Interest-bearing demand	162,159			88,230
Savings and money market deposit accounts	358,934			205,230
Time	653,201			458,063
Total deposits	1,395,546			883,519
Accrued interest payable	1,150			305
Subordinated debentures	11,583			—
Federal Home Loan Bank advances	62,686			96,747
Dividends payable	922			542
Other liabilities	8,563			3,784

TOTAL LIABILITIES	1,480,450			984,897
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; 11,531,094 and 9,034,439 shares issued and outstanding at September 30, 2018, and December 31, 2017, respectively	11,531			9,034
Additional paid-in capital	172,930			112,437
Retained earnings	24,246			17,189
Accumulated other comprehensive gain (loss)	(4,956		)	1,477

TOTAL STOCKHOLDERS’ EQUITY	203,751			140,137

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,684,201		$	1,125,034

See accompanying notes to consolidated financial statements

RELIANT BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(Dollar amounts in thousands except per share amounts)

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018		2017
INTEREST INCOME
Interest and fees on loans	$	14,873	$	9,078		$	42,497	$	25,193
Interest and fees on loans held for sale	294		211			1,101		420
Interest on investment securities, taxable	414		179			1,374		514
Interest on investment securities, nontaxable	1,709		1,022			4,921		2,796
Federal funds sold and other	280		137			869		381

TOTAL INTEREST INCOME	17,570		10,627			50,762		29,304

INTEREST EXPENSE
Deposits
Demand	102		42			263		131
Savings and money market deposit accounts	657		207			1,709		557
Time	2,542		1,117			6,737		2,663
Federal Home Loan Bank advances and other	606		165			1,275		383
Subordinated debentures	197		—			526		—

TOTAL INTEREST EXPENSE	4,104		1,531			10,510		3,734

NET INTEREST INCOME	13,466		9,096			40,252		25,570

PROVISION FOR LOAN LOSSES	322		540			759		1,195

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	13,144		8,556			39,493		24,375

NONINTEREST INCOME
Service charges on deposit accounts	833		309			2,504		936
Gains on mortgage loans sold, net	1,399		1,571			4,061		2,751
Gain on securities transactions, net	18		—			43		59
Gain on sale of other real estate	150		1			259		26
Gain (loss) on disposal of premises and equipment	16		(50		)	16		(50		)
Other	361		256			1,139		735

TOTAL NONINTEREST INCOME	2,777		2,087			8,022		4,457

NONINTEREST EXPENSE
Salaries and employee benefits	6,913		4,880			20,480		13,634
Occupancy	1,234		850			3,673		2,482
Information technology	1,315		732			3,913		1,924
Advertising and public relations	183		81			413		204
Audit, legal and consulting	588		501			2,027		1,102
Federal deposit insurance	210		100			630		320
Merger expenses	82		562			2,742		562
Other operating	1,637		791			4,487		2,406

TOTAL NONINTEREST EXPENSE	12,162		8,497			38,365		22,634

INCOME BEFORE PROVISION FOR INCOME TAXES	3,759		2,146			9,150		6,198

INCOME TAX EXPENSE	519		306			1,431		1,005

CONSOLIDATED NET INCOME	3,240		1,840			7,719		5,193

NONCONTROLLING INTEREST IN NET LOSS OF SUBSIDIARY	842		6			2,243		898

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	4,082	$	1,846		$	9,962	$	6,091

Basic net income attributable to common shareholders, per share	$	0.36	$	0.23		$	0.88	$	0.77
Diluted net income attributable to common shareholders, per share	$	0.36	$	0.22		$	0.87	$	0.76

See accompanying notes to consolidated financial statements

RELIANT BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(Dollar amounts in thousands except per share amounts)

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Consolidated net income	$	3,240		$	1,840	$	7,719		$	5,193
Other comprehensive income (loss)
Net unrealized gains (losses) on available for sale securities, net of tax of ($712) and $257 for the three months ended September 30, 2018 and 2017, respectively, and ($2,260) and $1,273 for the nine months ended September 30, 2018 and 2017, respectively	(2,023		)	412		(6,401		)	2,051
Reclassification adjustment for gains included in net income, net of tax of ($4) for the three months ended September 30, 2018, and ($11) and ($23) for the nine months ended September 30, 2018 and 2017, respectively	(14		)	—		(32		)	(36		)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	(2,037		)	412		(6,433		)	2,015
TOTAL COMPREHENSIVE INCOME	$	1,203		$	2,252	$	1,286		$	7,208

See accompanying notes to consolidated financial statements

RELIANT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(Dollar amounts in thousands except per share amounts)

(Unaudited)



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



BALANCE - JANUARY 1, 2018	9,034,439		$	9,034		$	112,437		$	17,189		$	1,477		$	—		$	140,137

Stock based compensation expense	—		—			609			—			—			—			609

Exercise of stock options	30,001		30			368			—			—			—			398

Restricted stock awards	51,210		51			(51		)	—			—			—			—

Restricted stock forfeiture	(1,000	)	(1		)	1			—			—			—			—

Conversion shares issued to shareholders of Community First, Inc.	2,416,444		2,417			59,566			—			—			—			61,983

Noncontrolling interest contributions	—		—			—			—			—			2,243			2,243

Cash dividends declared to common shareholders	—		—			—			(2,905		)	—			—			(2,905		)

Net income (loss)	—		—			—			9,962			—			(2,243		)	7,719

Other comprehensive loss	—		—			—			—			(6,433		)	—			(6,433		)

BALANCE - SEPTEMBER 30, 2018	11,531,094		$	11,531		$	172,930		$	24,246		$	(4,956	)	$	—		$	203,751

See accompanying notes to consolidated financial statements

RELIANT BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(Dollar amounts in thousands except per share amounts)

(Unaudited)



	2018			2017
OPERATING ACTIVITIES
Consolidated net income	$	7,719		$	5,193
Adjustments to reconcile consolidated net income to net cash provided by (used in) operating activities
Provision for loan losses	759			1,195
Provision to reflect market value of mortgage loans held for sale	196			(160		)
Deferred income taxes (benefit)	(959		)	(589		)
Loss (gain) on disposal of premises and equipment	(16		)	50
Depreciation and amortization of premises and equipment	1,235			762
Net amortization of securities	2,374			1,478
Net realized losses on sales of securities	(43		)	(59		)
Gains on mortgage loans sold, net	(4,061		)	(2,751		)
Stock-based compensation expense	609			412
Realization of gain on other real estate	(259		)	(26		)
Increase in cash surrender value of life insurance contracts	(893		)	(595		)
Mortgage loans originated for resale	(113,481		)	(99,325		)
Proceeds from sale of mortgage loans	150,866			94,592
Other amortization (accretion)	(615		)	(260		)
Change in
Accrued interest receivable	(1,123		)	(1,213		)
Other assets	(2,852		)	5,701
Accrued interest payable	845			113
Other liabilities	778			1,525

TOTAL ADJUSTMENTS	33,360			850

NET CASH PROVIDED BY OPERATING ACTIVITIES	41,079			6,043

INVESTING ACTIVITIES
Cash received from merger	33,128			—
Activities in available for sale securities
Purchases	(103,375		)	(68,010		)
Sales	100,737			18,688
Maturities, prepayments and calls	10,125			6,057
Purchases of restricted equity securities	(2,181		)	(30		)
Loan originations and payments, net	(108,431		)	(82,766		)
Purchase of buildings, leasehold improvements, and equipment	(4,000		)	(1,277		)
Proceeds from sale of other real estate	1,947			—
Purchase of life insurance contracts	—			(4,000		)

NET CASH USED IN INVESTING ACTIVITIES	(72,050		)	(131,338		)

FINANCING ACTIVITIES
Net change in deposits	79,588			76,614
Net change in federal funds purchased	—			(3,671		)
Net change in advances from Federal Home Loan Bank	(34,020		)	24,473
Issuance of common stock	398			23,989
Noncontrolling interest contributions received	1,305			1,245
Cash dividends paid on common stock	(2,525		)	(2,652		)

NET CASH PROVIDED BY FINANCING ACTIVITIES	44,746			119,998

NET CHANGE IN CASH AND CASH EQUIVALENTS	13,775			(5,297		)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	20,668			24,243
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	34,443		$	18,946


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest	$	9,665		$	3,621
Taxes	$	2,170		$	1,277

Non-cash investing and financing activities
Unrealized gain (loss) on securities available-for-sale	$	(9,742	)	$	3,618
Unrealized gain (loss) on derivatives	$	1,038		$	(353	)
Change in due to/from noncontrolling interest	$	2,243		$	898
Loans foreclosed and transferred to other real estate owned and foreclosed assets	$	1,060		$	—

See accompanying notes to consolidated financial statements

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Reliant Bancorp, Inc. 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.

Nature of Operations

Reliant Bancorp, Inc. ("Reliant Bancorp"), through its wholly owned subsidiary bank, Reliant Bank (the "Bank"), provides financial services through its offices in Williamson, Robertson, Davidson, Sumner, Rutherford, Maury, Hickman and Hamilton Counties in Tennessee. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial and residential construction loans, commercial loans, installment loans and lines secured by home equity. Substantially all loans are secured by specific items of collateral including commercial and residential real estate, business assets, and consumer assets. Commercial loans are expected to be repaid from cash flow from operations of businesses.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP). All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with Reliant Bancorp, Inc.’s consolidated financial statements and related notes appearing in Reliant Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017.

The consolidated financial statements as of and for the periods presented include the accounts of Reliant Bancorp, the Bank, Community First TRUPS Holding Company, which is wholly owned by Reliant Bancorp (“TRUPS”), and Reliant Mortgage Ventures, LLC ("RMV"), of which the Bank controls 51% of the governance rights. Reliant Bancorp, the Bank, TRUPS, and RMV, are collectively referred to herein as the “Company”. As described in the notes to our annual consolidated financial statements, RMV 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. As described in Note 12, Reliant Bancorp, Inc. and Community First, Inc. merged effective January 1, 2018. 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.

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.

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates (Continued)

The consolidated financial statements as of September 30, 2018, and for the three and nine months ended September 30, 2018 and 2017, included herein have not been audited. The accounting and reporting policies of the Company conform to U.S. GAAP and Article 8 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.

The accompanying consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Such adjustments are of a normal recurring nature. The Company evaluates subsequent events through the date of filing. Certain prior period amounts have been reclassified to conform to the current period presentation. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

Reclassifications

Certain reclassifications were made to the September 30, 2017 financial statement presentation in order to conform to the September 30, 2018 financial statement presentation. Total shareholder's equity and net income are unchanged due to these reclassifications.

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, 2018 and accumulated other comprehensive income at December 31, 2017 were as follows:



	September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Treasury and other U. S. government agencies	$	573	$	—	$	(20	)	$	553
State and municipal	233,929		320		(6,741		)	227,508
Corporate bonds	3,130		2		(103		)	3,029
Mortgage backed securities	29,335		10		(478		)	28,867
Asset backed securities	30,279		—		(708		)	29,571
Time deposits	3,500		—		—			3,500
Total	$	300,746	$	332	$	(8,050	)	$	293,028



	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Treasury and other U. S. government agencies	$	586	$	—	$	(8	)	$	578
State and municipal	189,576		3,081		(905		)	191,752
Corporate bonds	1,500		5		(13		)	1,492
Mortgage backed securities	6,262		3		(96		)	6,169
Asset backed securities	16,753		45		(88		)	16,710
Time deposits	3,500		—		—			3,500
Total	$	218,177	$	3,134	$	(1,110	)	$	220,201

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)

Securities pledged at September 30, 2018 and December 31, 2017 had a carrying amount of $70,833 and $78,220, respectively, and were pledged to collateralize Federal Home Loan Bank advances, Federal Reserve advances and municipal deposits.

At September 30, 2018 and December 31, 2017, 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, 2018 by contractual maturity are provided below. Actual maturities may differ from contractual maturities for mortgage and asset backed securities since the underlying asset may be called or prepaid with or without penalty. Securities not due at a single maturity date are shown separately.



	Amortized Cost		Estimated Fair Value
Due within one year	$	1,756	$	1,753
Due in one to five years	7,066		7,019
Due in five to ten years	13,090		12,797
Due after ten years	219,220		213,021
Mortgage backed securities	29,335		28,867
Asset backed securities	30,279		29,571
Total	$	300,746	$	293,028

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, 2018:



	Less than 12 months				12 months or more				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Description of Securities
U. S. Treasury and other U. S. government agencies	$	72	$	2	$	481	$	18	$	553	$	20
State and municipal	157,984		4,455		38,571		2,286		196,555		6,741
Corporate bonds	2,035		95		492		8		2,527		103
Mortgage backed securities	20,440		367		2,136		111		22,576		478
Asset backed securities	27,965		685		1,116		23		29,081		708

Total temporarily impaired	$	208,496	$	5,604	$	42,796	$	2,446	$	251,292	$	8,050

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)



	Less than 12 months				12 months or more				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Description of Securities
U. S. Treasury and other U. S. government agencies	$	86	$	1	$	491	$	7	$	577	$	8
State and municipal	19,899		128		34,946		777		54,845		905
Corporate bonds	—		—		487		13		487		13
Mortgage backed securities	2,412		14		3,349		82		5,761		96
Asset backed securities	8,971		73		854		15		9,825		88

Total temporarily impaired	$	31,368	$	216	$	40,127	$	894	$	71,495	$	1,110

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 and the change in the federal tax rate. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. There were 275 and 120 securities in an unrealized loss position as of September 30, 2018 and December 31, 2017, respectively.

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at September 30, 2018 and December 31, 2017 were comprised as follows:



	September 30, 2018			December 31, 2017
Commercial, Industrial and Agricultural	$	209,608		$	138,706
Real Estate
1-4 Family Residential	228,014			111,932
1-4 Family HELOC	86,778			72,017
Multi-family and Commercial	433,882			261,044
Construction, Land Development and Farmland	199,849			156,452
Consumer	21,533			17,605
Other	14,444			14,694
	1,194,108			772,450
Less
Deferred loan (fees) costs	(21		)	231
Allowance for possible loan losses	10,698			9,731

Loans, net	$	1,183,431		$	762,488

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(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, 2018:



	Commercial Industrial and Agricultural			Multi-family and Commercial Real Estate			Construction Land Development and Farmland			1-4 Family Residential Real Estate
Beginning balance	$	2,538		$	3,166		$	2,434		$	773
Charge-offs	(308		)	(76		)	(144		)	(36		)
Recoveries	530			215			44			11
Provision	(734		)	813			56			573
Ending balance	$	2,026		$	4,118		$	2,390		$	1,321



	1-4 Family HELOC			Consumer			Other			Total
Beginning balance	$	595		$	183		$	42		$	9,731
Charge-offs	(6		)	(24		)	(37		)	(631		)
Recoveries	7			29			3			839
Provision	24			(2		)	29			759
Ending balance	$	620		$	186		$	37		$	10,698

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

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(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, 2018 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	$	334	$	—	$	67	$	23
Acquired with credit impairment	—		—		—		—
Collectively evaluated for impairment	1,692		4,118		2,323		1,298
Total	$	2,026	$	4,118	$	2,390	$	1,321
Loans
Individually evaluated for impairment	$	1,485	$	1,173	$	2,314	$	2,241
Acquired with credit impairment	40		236		1,762		268
Collectively evaluated for impairment	208,083		432,473		195,773		225,505
Total	$	209,608	$	433,882	$	199,849	$	228,014



	1-4 Family HELOC		Consumer		Other		Total
Allowance for loan losses
Individually evaluated for impairment	$	—	$	—	$	—	$	424
Acquired with credit impairment	—		—		—		—
Collectively evaluated for impairment	620		186		37		10,274
Total	$	620	$	186	$	37	$	10,698
Loans
Individually evaluated for impairment	$	90	$	12	$	—	$	7,315
Acquired with credit impairment	—		11		—		2,317
Collectively evaluated for impairment	86,688		21,510		14,444		1,184,476
Total	$	86,778	$	21,533	$	14,444	$	1,194,108

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(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, 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	$	606	$	—	$	57	$	—
Acquired with credit impairment	2		—		2		—
Collectively evaluated for impairment	1,930		3,166		2,375		773
Total	$	2,538	$	3,166	$	2,434	$	773
Loans
Individually evaluated for impairment	$	3,649	$	1,921	$	3,800	$	2,114
Acquired with credit impairment	276		1,157		1,436		45
Collectively evaluated for impairment	134,781		257,966		151,216		109,773
Total	$	138,706	$	261,044	$	156,452	$	111,932



	1-4 Family HELOC		Consumer		Other		Total
Allowance for loan losses
Individually evaluated for impairment	$	—	$	—	$	—	$	663
Acquired with credit impairment	—		—		—		4
Collectively evaluated for impairment	595		183		42		9,064
Total	$	595	$	183	$	42	$	9,731
Loans
Individually evaluated for impairment	$	90	$	—	$	—	$	11,574
Acquired with credit impairment	—		—		—		2,914
Collectively evaluated for impairment	71,927		17,605		14,694		757,962
Total	$	72,017	$	17,605	$	14,694	$	772,450

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.

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

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

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.

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.

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

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

1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values 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.

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, 2018 and December 31, 2017:



	September 30, 2018		December 31, 2017
Commercial, Industrial and Agricultural	$	750	$	2,110
Multi-family and Commercial Real Estate	—		—
Construction, Land Development and Farmland	2,112		2,518
1-4 Family Residential Real Estate	1,317		533
1-4 Family HELOC	—		—
Consumer	56		—
Total	$	4,235	$	5,161

Performing non-accrual loans totaled $2,492 and $1,096 at September 30, 2018 and December 31, 2017, respectively.

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(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 September 30, 2018:



	Unpaid Principal Balance		Recorded Investment with no Allowance Recorded		Recorded Investment with Allowance Recorded		Total Recorded Investment		Related Allowance
Commercial, Industrial and Agricultural	$	1,897	$	976	$	549	$	1,525	$	334
Multi-family and Commercial Real Estate	1,691		1,409		—		1,409		—
Construction, Land Development and Farmland	5,678		3,459		617		4,076		67
1-4 Family Residential Real Estate	3,501		2,377		132		2,509		23
1-4 Family HELOC	90		90		—		90		—
Consumer	29		23		—		23		—
Total	$	12,886	$	8,334	$	1,298	$	9,632	$	424

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



	Unpaid Principal Balance		Recorded Investment with no Allowance Recorded		Recorded Investment with Allowance Recorded		Total Recorded Investment		Related Allowance
Commercial, Industrial and Agricultural	$	4,398	$	2,959	$	966	$	3,925	$	608
Multi-family and Commercial Real Estate	3,427		3,078		—		3,078		—
Construction, Land Development and Farmland	5,317		3,249		1,987		5,236		59
1-4 Family Residential Real Estate	2,857		2,159		—		2,159		—
1-4 Family HELOC	90		90		—		90		—
Total	$	16,089	$	11,535	$	2,953	$	14,488	$	667

The average balances of impaired loans for the nine months ended September 30, 2018 and 2017 were as follows:



	2018		2017
Commercial, Industrial and Agricultural	$	2,661	$	5,550
Multi-family and Commercial Real Estate	2,610		4,403
Construction, Land Development and Farmland	4,831		4,319
1-4 Family Residential Real Estate	2,708		2,225
1-4 Family HELOC	90		957
Consumer	72		—
Total	$	12,972	$	17,454

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

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

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 1to 9. Grades 1 -5 are pass credits, grade 6 is special mention, grade 7 is substandard, grade 8 is doubtful and grade 9 is loss. A description of the risk grades are as follows:

Grade 1 - Minimal Risk (Pass)

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

Grade 2 - High Quality (Pass)

This grade includes loans to borrowers with a strong financial condition reflecting dependable net profits and cash flows. The borrower has verifiable liquid net worth providing above average asset protection. An identifiable market 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

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(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.

Credit quality indicators by class of loan were as follows at September 30, 2018:



	Pass		Special Mention		Substandard		Total
Commercial, Industrial and Agricultural	$	206,847	$	—	$	2,761	$	209,608
1-4 Family Residential Real Estate	222,315		1,130		4,569		228,014
1-4 Family HELOC	85,848		—		930		86,778
Multi-family and Commercial Real Estate	430,379		1,566		1,937		433,882
Construction, Land Development and Farmland	195,623		642		3,584		199,849
Consumer	21,272		—		261		21,533
Other	14,444		—		—		14,444
Total	$	1,176,728	$	3,338	$	14,042	$	1,194,108

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(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 December 31, 2017:



	Pass		Special Mention		Substandard		Total
Commercial, Industrial and Agricultural	$	135,833	$	5	$	2,868	$	138,706
1-4 Family Residential Real Estate	108,426		1,392		2,114		111,932
1-4 Family HELOC	71,927		—		90		72,017
Multi-family and Commercial Real Estate	259,123		—		1,921		261,044
Construction, Land Development and Farmland	149,886		2,998		3,568		156,452
Consumer	17,605		—		—		17,605
Other	14,694		—		—		14,694
Total	$	757,494	$	4,395	$	10,561	$	772,450

Past due status by class of loan was as follows at September 30, 2018:



	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans
Commercial, Industrial and Agricultural	$	95	$	—	$	573	$	668	$	208,940	$	209,608
1-4 Family Residential Real Estate	572		1,160		129		1,861		226,153		228,014
1-4 Family HELOC	50		—		—		50		86,728		86,778
Multi-family and Commercial Real Estate	—		245		—		245		433,637		433,882
Construction, Land Development and Farmland	—		—		989		989		198,860		199,849
Consumer	30		1		40		71		21,462		21,533
Other	—		—		—		—		14,444		14,444
Total	$	747	$	1,406	$	1,731	$	3,884	$	1,190,224	$	1,194,108

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



	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans
Commercial, Industrial and Agricultural	$	7	$	—	$	1,548	$	1,555	$	137,151	$	138,706
1-4 Family Residential Real Estate	617		—		—		617		111,315		111,932
1-4 Family HELOC	—		7		—		7		72,010		72,017
Multi-family and Commercial Real Estate	1,254		—		—		1,254		259,790		261,044
Construction, Land Development and Farmland	265		444		2,073		2,782		153,670		156,452
Consumer	14		—		—		14		17,591		17,605
Other	—		—		—		—		14,694		14,694
Total	$	2,157	$	451	$	3,621	$	6,229	$	766,221	$	772,450

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

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

There was a loan totaling $40 past due 90 days or more and still accruing interest at September 30, 2018. There were no loans past due 90 days or more still accruing interest at December 31, 2017.

The following table presents loans by class modified as troubled debt restructurings that occurred during the first nine months of 2018 and 2017:



	Number of Contracts	Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
September 30, 2018
1-4 Family Residential	1	$	1,254	$	1,254
Multi-family and Commercial Real Estate	1	661		585
Total	2	$	1,915	$	1,839

September 30, 2017
1-4 Family Residential	1	108		108
Commercial, Industrial and Agricultural	1	790		320
Total	2	$	898	$	428

One modification that occurred during the nine months ended September 30, 2018, consisted of an interest only monthly payment restructure and had no effect on the allowance for loan losses or interest income. The other modification was a restructure of five loans, including purchased credit impaired loans, in which a charge off occurred of $76, resulting in one remaining loan of $585. During the nine months ended September 30, 2017, two loans totaling $428 were modified in trouble debt restructurings. 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. During the three months ended September 30, 2018, the 1-4 Family Residential loan with a related balance of $1,254 was paid.

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, 2018 and December 31, 2017:



	September 30, 2018		December 31, 2017
Commercial, Industrial and Agricultural	$	63	$	298
Multi-family and Commercial Real Estate	238		1,217
Construction, Land Development and Farmland	1,969		1,508
1-4 Family Residential Real Estate	330		47
1-4 Family HELOC	—		—
Consumer	17		—
Total outstanding balance	2,617		3,070
Less remaining purchase discount	300		156
Allowance for loan losses	—		4
Carrying amount, net of allowance	$	2,317	$	2,910

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

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

Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the quarters and nine months ended September 30, 2018 and 2017:



	2018			2017
Balance at January 1,	$	—		$	87
New accretable loan discount	424			—
Loan payoffs	(46		)	—
Accretion income	(38		)	(18		)
Balance at March 31,	340			69
Accretion income	(95		)	(17		)
Balance at June 30,	245			52
Loan charge offs	(74		)	—
Accretion income	—			(33		)
Balance at September 30,	$	171		$	19

NOTE 4 - OTHER REAL ESTATE

In connection with the merger with Community First, the Company acquired three real estate parcels. The Company valued the properties at their estimated fair values less costs to sale which totaled $1,650. During the nine months ended September 30, 2018 and 2017, the Company sold parcels for a gain of $259 and $26, respectively. During the nine months ended September 30, 2018, the Company transferred from loans to other real estate two properties totaling $1,060.

At September 30, 2018, there were three loans in the process of foreclosure with related balances totaling $1,526.

NOTE 5 - 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.

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 5 - FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)

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.

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: Bid quotes are presently used for the fair value estimate of mortgage loans held for sale, while previously, a pricing model of an independent entity was used to estimate the fair value of mortgage loans held for sale.

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

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 5 - 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, 2018 and December 31, 2017:



	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2018
Assets
U. S. Treasury and other U. S. government agencies	$	553	$	—	$	553	$	—
State and municipal	227,508		—		227,508		—
Corporate bonds	3,029		—		3,029		—
Mortgage backed securities	28,867		—		28,867		—
Time deposits	3,500		3,500		—		—
Interest rate swaps	1,013		—		1,013		—

December 31, 2017
Assets
U. S. Treasury and other U. S. government agencies	$	578	$	—	$	578	$	—
State and municipal	191,752		—		191,752		—
Corporate bonds	1,492		—		1,492		—
Mortgage backed securities	6,169		—		6,169		—
Time deposits	3,500		3,500		—		—
Interest rate swaps	155		—		155		—

Liabilities
Interest rate swaps	$	180	$	—	$	180	$	—

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 5 - 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, 2018 and December 31, 2017:



	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2018
Assets
Impaired loans	$	874	$	—	$	—	$	874
Mortgage loans held for sale	12,712		—		12,712		—
Other real estate owned	1,000		—		—		1,000

December 31, 2017
Assets
Impaired loans	$	2,286	$	—	$	—	$	2,286

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, 2018 and December 31, 2017:



	Valuation Techniques (1)	Significant Unobservable Inputs	Range (Weighted Average)
Impaired loans	Appraisal	Estimated costs to sell	10%
Mortgage loans held for sale	Market bids	Not Applicable	Not Applicable
Other real estate owned	Appraisal	Estimated costs to sell	10%


(1)	The fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent. Estimated cash flows change and appraised values of the assets or collateral underlying the loans will be sensitive to changes.

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 5 - FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)

Carrying amounts and estimated fair values of financial instruments not reported at fair value at September 30, 2018 were as follows:



	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Cash and due from banks	$	34,026	$	34,026	$	34,026	$	—	$	—
Federal funds sold	417		417		—		417		—
Loans, net	1,183,431		1,172,723		—		—		1,172,723
Accrued interest receivable	8,032		8,032		—		8,032		—
Restricted equity securities	11,681		11,681		—		11,681		—
Financial liabilities
Deposits	$	1,395,546	1,388,931		—		—		1,388,931
Accrued interest payable	1,150		1,150		—		1,150		—
Subordinate debentures	11,583		11,692		—		—		11,692
Federal Home Loan Bank advances	62,686		62,572		—		—		62,572

Carrying amounts and estimated fair values of financial instruments not reported at fair value at December 31, 2017 were as follows:



	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Cash and due from banks	$	20,497	$	20,497	$	20,497	$	—	$	—
Federal funds sold	171		171		—		171		—
Loans, net	762,488		762,574		—		—		762,574
Mortgage loans held for sale	45,322		46,467		—		46,467		—
Accrued interest receivable	5,744		5,744		—		5,744		—
Restricted equity securities	7,774		7,774		—		7,774		—
Financial liabilities
Deposits	$	883,519	$	882,533	$	—	$	—	$	882,533
Accrued interest payable	305		305		—		305		—
Federal Home Loan Bank advances	96,747		96,754		—		—		96,754

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 5 - FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)

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

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, restricted equity securities, 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.

NOTE 6 - STOCK-BASED COMPENSATION

In 2011, the Board of Directors and shareholders of the Company approved the Commerce Union Bancshares, Inc. Stock Option Plan, which was amended and restated in 2015 (as amended, the "2011 Plan"). The 2011 Plan initially provided for the issuance of up to 625,000 options to purchase shares of common stock, and in 2015, the Company's shareholders amended the 2011 Plan to authorize the issuance of up to 1,250,000 stock options. Under the 2011 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.

On June 18, 2015, the shareholders of the Company 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, 2018 as follows:



	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2018	170,761	$	14.48	5.73	$	1,905
Granted	25,500	$	28.00	9.83	—
Exercised	(30,001)	$	13.27	2.56	—
Forfeited or expired	(6,000)	$	18.62	8.44	—
Outstanding at September 30, 2018	160,260	$	16.71	6.30	$	1,482
Exercisable at September 30, 2018	89,660	$	13.46	4.63	$	1,085



	Shares		Weighted Average Grant-Date Fair Value
Non-vested options at January 1, 2018	74,900		$4.14
Granted	25,500		$7.10
Vested	(23,800	)	$6.16
Forfeited	(6,000	)	$4.94
Non-vested options at September 30, 2018	70,600		$5.30

At September 30, 2018, the unrecognized future compensation expense to be recognized for stock compensation totals $2,314.

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 7 - 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, 2018, 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, 2018 and December 31, 2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that 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.

Basel III establishes a “capital conservation buffer” of 2.5% which began phasing in on January 1, 2016, at a rate of 0.625% 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.

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 7 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

Actual and required capital amounts and ratios are presented below as of September 30, 2018 and December 31, 2017.



	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, 2018
Company
Tier I leverage	$	165,163	10.38	%	$	63,647	4.000	%	$	79,558	5.000	%
Common equity tier 1	153,580		11.50	%	85,137		6.375	%	86,806		6.500	%
Tier I risk-based capital	165,163		12.37	%	105,146		7.875	%	106,815		8.000	%
Total risk-based capital	176,286		13.20	%	131,881		9.875	%	133,550		10.000	%

Bank
Tier I leverage	$	161,381	10.17	%	$	63,473	4.000	%	$	79,342	5.000	%
Common equity tier 1	161,381		12.13	%	84,815		6.375	%	86,478		6.500	%
Tier I risk-based capital	161,381		12.13	%	104,771		7.875	%	106,434		8.000	%
Total risk-based capital	172,504		12.97	%	131,340		9.875	%	133,002		10.000	%

December 31, 2017
Company
Tier I leverage	$	126,234	11.89	%	$	42,467	4.000	%	$	53,084	5.000	%
Common equity tier 1	126,234		13.90	%	52,219		5.750	%	59,030		6.500	%
Tier I risk-based capital	126,234		13.90	%	65,841		7.250	%	72,653		8.000	%
Total risk-based capital	135,965		14.97	%	84,013		9.250	%	90,825		10.000	%

Bank
Tier I leverage	$	123,862	11.68	%	$	42,418	4.000	%	$	53,023	5.000	%
Common equity tier 1	123,862		13.67	%	52,100		5.750	%	58,896		6.500	%
Tier I risk-based capital	123,862		13.67	%	65,691		7.250	%	72,487		8.000	%
Total risk-based capital	133,593		14.74	%	83,835		9.250	%	90,633		10.000	%

NOTE 8 - 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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Basic EPS Computation
Net income attributable to common shareholders	$	4,082	$	1,846	$	9,962	$	6,091
Weighted average common shares outstanding	11,406,753		8,174,973		11,378,755		7,878,760
Basic earnings per common share	$	0.36	$	0.23	$	0.88	$	0.77
Diluted EPS Computation
Net income attributable to common shareholders	$	4,082	$	1,846	$	9,962	$	6,091
Weighted average common shares outstanding	11,406,753		8,174,973		11,378,755		7,878,760
Dilutive effect of stock options and restricted shares	91,426		105,885		83,944		95,587
Adjusted weighted average common shares outstanding	11,498,179		8,280,858		11,462,699		7,974,347
Diluted earnings per common share	$	0.36	$	0.22	$	0.87	$	0.76

NOTE 9 - 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 traditional first lien residential mortgage loans and first lien home equity lines of credit throughout the United States. The traditional first lien residential mortgage loans are typically underwritten to government agency standards and sold to third party secondary market mortgage investors. The home equity lines of credit are typically underwritten to participating banks or other investor group standards.

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



	Three Months Ended September 30, 2018
	Retail Banking		Residential Mortgage Banking			Elimination Entries			Consolidated
Net interest income	$	13,295	$	171		$	—		$	13,466
Provision for loan losses	322		—			—			322
Noninterest income	1,379		1,449			(51		)	2,777
Noninterest expense (excluding merger expense)	9,614		2,466			—			12,080
Merger expense	82		—			—			82
Income tax expense (benefit)	574		(55		)	—			519
Net income (loss)	4,082		(791		)	(51		)	3,240
Noncontrolling interest in net loss of subsidiary	—		791			51			842
Net income attributable to common shareholders	$	4,082	$	—		$	—		$	4,082

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 9 - 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 (excluding merger expense)	6,186		1,749			—			7,935
Merger expense	562		—			—			562
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



	Nine Months Ended September 30, 2018
	Retail Banking		Residential Mortgage Banking			Elimination Entries			Consolidated
Net interest income	$	39,529	$	723		$	—		$	40,252
Provision for loan losses	759		—			—			759
Noninterest income	3,966		4,190			(134		)	8,022
Noninterest expense (excluding merger expense)	28,454		7,169			—			35,623
Merger expense	2,742		—			—			2,742
Income tax expense (benefit)	1,578		(147		)	—			1,431
Net income (loss)	9,962		(2,109		)	(134		)	7,719
Noncontrolling interest in net loss of subsidiary	—		2,109			134			2,243
Net income attributable to common shareholders	$	9,962	$	—		$	—		$	9,962

Table of Contents

RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 9 - SEGMENT REPORTING (CONTINUED)

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



	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 (excluding merger expense)	18,019		4,053			—			22,072
Merger expense	562		—			—			562
Income tax expense (benefit)	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

NOTE 10 - DERIVATIVES

The Company has swap agreements that relate to the purchase of investment grade municipal securities effectively converting the fixed municipal yields to floating rates. These are fair value hedges that are intended to reduce the interest rate risk associated with the underlying hedged items by mitigating the changes in fair value based on fluctuations in interest rates. Additionally, during the nine months ended September 30, 2018, the Company has entered into swap agreements which hedge Federal Home Loan Bank advances and subordinated debentures that convert the floating rate elements into fixed rates. These cash flow 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. At September 30, 2018, the Company’s hedges are deemed effective and are not expected to have a significant impact on net income over the next twelve months.

The total notional amount of swap agreements was $81,505 at September 30, 2018 and $21,505 at December 31, 2017, respectively. At September 30, 2018, the contracts had fair values totaling $1,013 recorded in other assets. At December 31, 2017, the contracts had fair values totaling $155 recorded in other assets and $180 recorded in other liabilities.

NOTE 11 – INCOME TAXES

On December 22, 2017, comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act amends the Internal Revenue Code to reduce U.S. tax rates and modify policies, credits and deductions for individuals and businesses. The Tax Reform Act permanently reduces the U.S. federal corporate income tax rate from a high of 35% to 21%, effective for tax years beginning after 2017.

Income tax expense totaled $519 in the third quarter of 2018 as compared to $306 in the third quarter of 2017 and $1,431 and $1,005 for the nine months ended September 30, 2018 and 2017. The effective tax rate of 14% for the third quarters of 2018 and 2017, respectively, were favorably impacted by an increase in income from tax-exempt securities, excess tax benefits recognized relating to the stock compensatory plans and the addition of certain state tax credits on interest-free loans. The effective tax rates for the nine months ended September 30, 2018 and 2017 of 16% for each period were similarly impacted. The state tax credits and excess tax benefits recognized relating to stock compensatory plans for 2018 are at lesser level than 2017.

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RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 12 - BUSINESS COMBINATION

On January 1, 2018, pursuant to the Agreement and Plan of Merger, dated August 22, 2017, by and among Reliant Bancorp, Community First, Pioneer Merger Sub, Inc., the Bank, and Community First Bank & Trust, Community First merged with and into the Reliant Bancorp. Immediately following the merger, Community First Bank & Trust merged with and into the Bank, with the Bank surviving.

Pursuant to the merger agreement, each outstanding share of Community First common stock (except for excluded shares and dissenting shares) was converted into and cancelled in exchange for the right to receive 0.481 shares of Reliant Bancorp common stock, together with cash in lieu of any fractional shares.

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



Calculation of Purchase Price

Shares of Community First common stock outstanding as of December 31, 2017	5,025,884
Exchange ratio for Reliant Bancorp, Inc. common stock	0.481
Share conversion	2,417,450
Reliant Bancorp, Inc. common stock shares issued	2,416,444
Reliant Bancorp, Inc. share price at December 29, 2017	$	25.64
Value of Reliant Bancorp, Inc. common stock shares issued	61,958
Value of fractional shares	25
Estimated fair value of Community First	$	61,983

Allocation of Purchase Price
Total consideration above	$	61,983
Fair value of assets acquired and liabilities assumed
Cash and cash equivalents	(33,128		)
Time deposits in other financial institutions	(23,309		)
Investment securities available for sale	(69,078		)
Loans, net of unearned income	(313,040		)
Mortgage loans held for sale, net	(910		)
Accrued interest receivable	(1,165		)
Premises and equipment	(9,585		)
Restricted equity securities	(1,726		)
Cash surrender value of life insurance contracts	(10,664		)
Other real estate owned	(1,650		)
Deferred tax asset, net	(4,885		)
Core deposit intangible	(7,888		)
Other assets	(1,795		)
Deposits—noninterest-bearing	80,395
Deposits—interest-bearing	352,100
Other borrowings	11,522
Payables and other liabilities	5,061
Net liabilities assumed (net assets acquired)	(29,745		)
Goodwill	$	32,238

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RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 12 - BUSINESS COMBINATION (CONTINUED)

During 2018, as part of the system integration of Community First, the Company determined minor adjustments were appropriate to reduce other assets by $93 and increase payables and other liabilities by $85 effective as of the acquisition date.

Pro forma data for the nine months ended September 30, 2018 and 2017 in the table below presents information as if the merger occurred at the beginning of each period.



	Nine Months Ended September 30,
	2018		2017
Net interest income	$	40,252	$	38,022
Net income attributable to common shareholders	$	9,962	$	8,486
Earnings per share - basic	$	0.88	$	0.83
Earnings per share - diluted	$	0.87	$	0.82

Supplemental pro forma earnings in the above table for the nine months ended 2018 and 2017 include $2,742 and $562 of nonrecurring costs, respectively.

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RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS

Information about certain issued accounting standards updates is presented below. Also refer to Note 1 - Summary of Significant Accounting Policies “Recent Authoritative Accounting Guidance” in our 2017 Form 10-K for additional information related to previously issued accounting standards updates.

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

ASU 2016-02,“Leases (Topic 842)” requires lessees to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors. ASU 2016-02 will be effective for the Company on January 1, 2020 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 2016-13, “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, 2021. Management is evaluating the impact of the pronouncement on the consolidated financial statements. The adoption of the ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

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, 2021, 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.

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RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

(Dollar amounts in thousands except per share amounts)

NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

ASU 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. In March 2017, the FASB issued this pronouncement which shortens the amortization period to the earliest call date for certain purchased callable debt securities held at a premium. There is no change for accounting for securities held at a discount. Under the existing guidance, the premium is generally amortized as an adjustment to interest income over the contractual life of the debt security. We adopted this standard on January 1, 2018. The adoption of this guidance did not have a material 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 became effective for the Company on January 1, 2018 and did not have a significant impact on the consolidated financial statements.

ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” In February 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance which permits entities to reclassify stranded tax effects in accumulated other comprehensive income to retained earnings as a result of the Tax Cuts and Jobs Act enacted by the U.S. federal government on December 22, 2017. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company elected to adopt this change in accounting principle in the fourth quarter of 2017, which resulted in a decrease to retained earnings and an increase to accumulated other comprehensive income of $245 in 2017 on the Company’s consolidated statement of changes in stockholders’ equity.

ASU 2018-05, "Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118." ASU 2018-05 amends the Accounting Standards Codification to incorporate various SEC paragraphs pursuant to the issuance of SAB 118. SAB 118 addresses the application of generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. See Note 11 - Income Taxes.

ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 will be effective for the Company on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our financial statements.

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

Executive Summary

The following is a summary of the Company’s financial highlights and significant events for the nine months ended September 30, 2018:


•	Acquired Community First, Inc., on January 1, 2018.


•	Net income available to common shareholders totaled $10.0 million, or $0.87 per diluted common share for the nine months ended September 30, 2018 compared to $6.1 million, or $0.76 per diluted common share, during same period in 2017.


•	Gross loans increased $421.7 million for the nine months ended September 30, 2018.


•	Deposits increased $512.0 million for the nine months ended September 30, 2018.


•	Asset quality remains strong with nonperforming assets to total assets of just 0.31 percent.

In the following section the term “Company” means “Reliant Bancorp, 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 16, 2018. 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 to accounting principles generally accepted in the United States of America ("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, 2017. The following is a brief summary of the more significant policies.

Principles of Consolidation

The consolidated financial statements as of and for the periods presented include the accounts of Reliant Bancorp, the Bank, Community First TRUPS Holding Company, which is wholly owned by Reliant Bancorp (“TRUPS”), and Reliant Mortgage Ventures, LLC ("RMV"), of which the Bank controls 51% of the governance rights (Reliant Bancorp, the Bank, TRUPS, and RMV, are collectively referred to herein as the “Company”). As described in the notes to our annual consolidated financial statements, RMV 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. As described in Note 12, Reliant Bancorp and Community First, Inc. merged effective January 1, 2018. The accounting and reporting policies of the Company conform U.S. GAAP and to general practices in the banking industry.

During 2011, the Bank and another entity organized RMV. Under the related operating agreement, the non-controlling member receives 70% of the profits of RMV, 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, 2018, the cumulative losses to date totaled $6,461 prior to intercompany eliminations. RMV will have to generate net income of this amount before the Company will participate in future earnings.

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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 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 merger and that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by Reliant Bank for loans with similar characteristics as those acquired other than purchased credit-impaired loans. We record an allowance for loan losses only when the calculated amount exceeds the remaining credit mark established at acquisition.

Allowance for Loan Losses

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

A loan is impaired when full payment under the loan terms is not expected. All classified loans and loans on non-accrual status 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.

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COMPARISON RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

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

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

The assets and liabilities of Community First as of the effective date of the Merger were recorded at their respective estimated fair values and added to those of the Company. Any excess of purchase price over the net estimated fair values of the acquired assets and assumed liabilities of Community First were allocated to all identifiable intangibles assets. Any remaining excess was then allocated to goodwill.

As of December 31, 2017, Community First, including its wholly owned subsidiaries, had total assets of $480 million, total loans of $316 million and total deposits of $433 million. Community First held a loan portfolio that was primarily comprised of real estate loans.

As a result of the Merger on January 1, 2018, the Company:


•	grew consolidated total assets from $1,125.0 million to $1,636.0 million as of January 1, 2018 after giving effect to purchase accounting;


•	increased total loans from $762.5 million to $1,075.5 million as of January 1, 2018;


•	increased total deposits from $883.5 million to $1,316.9 million as of January 1, 2018; and


•	expanded its employee base from 167 full time equivalent employees to 272 full time equivalent employees as of January 1, 2018.

Earnings

Net income attributable to common shareholders amounted to $4,082 and $9,962, or $0.36 and $0.88 per basic share for the three and nine months ended September 30, 2018, compared to $1,846 and $6,091, or $0.23 and $0.77 per basic share for the same periods in 2017. Diluted net income attributable to common shareholders was $0.36 and $0.22 per share and $0.87 and $0.76 per share for the three and nine months ended September 30, 2018, compared to the same periods in 2017, respectively. The major component of the increase from the prior-year is mainly attributable to the increase of 48.0% and 57.4% in net interest income for the three and nine months ended September 30, 2018, respectively compared to the same periods in 2017. The largest factor offsetting the increase was an increase in non-interest expense for the three and nine months ended September 30, 2018 by 43.1% and 69.5%, respectively when compared to the same periods in 2017, which included merger expenses of $82 and $2,742 for the three and nine months ended September 30, 2018 compared to $562 for the same periods in 2017. These and other components of the variances are discussed further below.

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Net Interest Income

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of our revenues. The following table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three and nine months ended September 30, 2018, and 2017 (dollars in thousands):



	Three Months Ended September 30, 2018						Three Months Ended September 30, 2017						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	$	1,144,307	5.01		$	14,092	$	727,453	4.78		$	8,588	$	5,078		$	426		$	5,504
Loan fees	—		0.27		781		—		0.27		490		291			—			291
Loans with fees	1,144,307		5.28		14,873		727,453		5.05		9,078		5,369			426			5,795
Mortgage loans held for sale	22,464		5.19		294		18,333		4.57		211		52			31			83
Deposits with banks	24,570		1.53		95		14,451		0.88		32		31			32			63
Investment securities - taxable	70,389		2.33		414		30,212		2.35		179		246			(11		)	235
Investment securities - tax-exempt	229,934		3.74		1,709		157,718		3.99		1,022		1,298			(611		)	687
Federal funds sold and other	12,760		5.75		185		7,557		5.51		105		75			5			80
Total earning assets	1,504,424		4.85		17,570		955,724		4.72		10,627		7,070			(127		)	6,943
Nonearning assets	139,972						54,812
Total assets	$	1,644,396					$	1,010,536
Interest bearing liabilities
Interest bearing demand	143,057		0.28		102		81,629		0.20		42		39			21			60
Savings and money market	339,487		0.77		657		205,463		0.40		207		186			264			450
Time deposits - retail	527,930		1.60		2,128		329,203		1.02		845		661			622			1,283
Time deposits - wholesale	87,262		1.88		414		90,222		1.20		272		(59		)	201			142
Total interest bearing deposits	1,097,736		1.19		3,301		706,517		0.77		1,366		827			1,108			1,935
Federal Home Loan Bank advances	102,731		2.34		606		46,910		1.40		165		282			159			441
Subordinated debt	11,577		6.75		197		—		—		—		—			197			197
Total borrowed funds	114,308		2.79		803		46,910		1.40		165		282			356			638
Total interest-bearing liabilities	1,212,044		1.34		4,104		753,427		0.81		1,531		1,108			1,465			2,573
Net interest rate spread (%) / Net interest income ($)			3.51		$	13,466			3.91		$	9,096	$	5,961		$	(1,591	)	$	4,370
Non-interest bearing deposits	221,107		(0.20	)			133,108		(0.12	)
Other non-interest bearing liabilities	7,344						4,574
Stockholder's equity	203,901						119,427
Total liabilities and stockholders' equity	$	1,644,396					$	1,010,536
Cost of funds			1.14						0.69
Net interest margin			3.77						4.08

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	Nine Months Ended September 30, 2018						Nine Months Ended September 30, 2017						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	$	1,117,743	4.88		$	40,360	$	701,362	4.61		$	23,652	$	15,207	$	1,501		$	16,708
Loan fees	—		0.26		2,137		—		0.29		1,541		596		—			596
Loans with fees	1,117,743		5.14		42,497		701,362		4.90		25,193		15,803		1,501			17,304
Mortgage loans held for sale	28,636		5.14		1,101		13,310		4.22		420		573		108			681
Deposits with banks	36,837		1.35		371		15,177		0.71		81		178		112			290
Investment securities - taxable	70,276		2.61		1,374		32,355		2.12		514		718		142			860
Investment securities - tax-exempt	226,601		3.69		4,921		145,412		4.01		2,796		2,673		(548		)	2,125
Fed funds sold and other	11,389		5.85		498		7,787		5.15		300		153		45			198
Total earning assets	1,491,482		4.71		50,762		915,403		4.58		29,304		20,098		1,360			21,458
Nonearning assets	137,606						54,240
Total assets	$	1,629,088					$	969,643
Interest bearing liabilities
Interest bearing demand	147,022		0.24		263		84,307		0.21		131		111		21			132
Savings and money market	347,184		0.66		1,709		200,304		0.37		557		557		595			1,152
Time deposits - retail	520,717		1.45		5,640		308,911		0.86		1,994		1,822		1,824			3,646
Time deposits - wholesale	91,466		1.60		1,097		87,105		1.03		669		36		392			428
Total interest bearing deposits	1,106,389		1.05		8,709		680,627		0.66		3,351		2,526		2,832			5,358
Federal Home Loan Bank advances and other	84,176		2.03		1,275		41,132		1.24		383		555		337			892
Subordinated debt	11,556		6.09		526		—		—		—		—		526			526
Total borrowed funds	95,732		2.52		1,801		41,132		1.24		383		555		863			1,418
Total interest-bearing liabilities	1,202,121		1.17		10,510		721,759		0.69		3,734		3,081		3,695			6,776
Net interest rate spread (%) / Net interest income ($)			3.54		$	40,252			3.89		$	25,570	$	17,017	$	(2,335	)	$	14,682
Non-interest bearing deposits	217,957		(0.18	)			132,406		(0.11	)
Other non-interest bearing liabilities	6,464						3,548
Stockholder's equity	202,546						111,930
Total liabilities and stockholders' equity	$	1,629,088					$	969,643
Cost of funds			0.99						0.58
Net interest margin			3.76						4.04

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

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Analysis—For the three and nine months ended September 30, 2018, we recorded net interest income of approximately $13.5 million and $40.3 million, respectively, which resulted in a net interest margin (net interest income divided by the average balance of interest earning assets) of 3.77% and 3.76%, respectively. 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 of 4.08% and 4.04%, respectively. For the three months ended September 30, 2018 and 2017, our net interest spread was 3.51% and 3.91%, respectively. For the nine months ended September 30, 2018 and 2017, our net interest spread was 3.54% and 3.89%, 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 which was accelerated by the Merger.

Our year-over-year average loan volume increased by approximately 59.4% for the first nine months of 2018 compared to the first nine months of 2017. Our combined loan and loan fee yield increased from 4.9% to 5.14% for the first nine months of 2018 compared to 2017, while our combined loan and loan fee yield increased from 5.05% to 5.28% for the three months ended September 30, 2018 compared to the same period in 2017. The increased yield for the three and nine months ended September 30, 2018 is partly attributable to the accretion of $369 and $1,291, respectively, in income due to the Merger.

Our tax equivalent yield on tax-exempt investments decreased to 3.74% and 3.69%, respectively for the three and nine months ended September 30, 2018, from 3.99% and 4.01% for the same periods in 2017. This decrease was driven by the change in the federal tax rate. Our year-over-year average tax-exempt investment volume increased by approximately 55.8% for the first nine months of 2018 compared to the same period in 2017. Our year-over-year average taxable securities volume increased by 117.2% for the first nine months of 2018 compared to the same period in 2017. During the first quarter of 2018, we completed a planned investment securities restructuring that began in the fourth quarter of 2017. As part of the restructuring, we sold $60.0 million of legacy Community First mortgage backed securities and purchased $79.0 million of investment grade securities including a combination of municipals, SBA floating securities, and collateralized mortgage obligations. No material changes to our investment portfolio were made during the third quarter of 2018.

Our cost of funds increased to 1.14% from 0.69% for the three months ended September 30, 2018 compared to the same period in 2017. Our cost of funds increased to 0.99% from 0.58% for the nine months ended September 30, 2018 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 but was also affected by the subordinated debt that we assumed in the Merger. The subordinated debt had an average balance of $11.6 million for the three and nine months ended September 30, 2018 with a cost of 6.75% and 6.09%, respectively. We experienced a 66.1% and 64.6%, increase in our average non-interest bearing deposits from the three and nine months ended September 30, 2017, respectively.

Our balance sheet has some components that will benefit from rising interest rates, including variable rate loans, some variable rate investment securities and interest rate swaps. Conversely our interest bearing liabilities are negatively impacted with rising interest rates. Our wholesale fundings are particularly sensitive to changes in interest rates mainly due to their short term nature. We added $30 million of pay-fixed receive-variable interest rate swaps in each of the second and third quarters of 2018. We are always looking for opportunities to increase our non-interest bearing and lower cost deposits and have seen some success with a stronger focus on low cost deposits in all of our sales incentive plans. These efforts will continue as well as continuing to evaluate the benefits of fixing a greater portion of our funding costs through interest rate swaps.

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, 2018. 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 $322 and $759 for the three and nine months ended September 30, 2018, respectively, compared to $540 and $1,195 for loan losses recorded for the three and nine months ended September 30, 2017, 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.

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Non-Interest Income

Our non-interest income is composed of several components, some of which vary significantly between periods. The following is a summary of our non-interest income for the three and nine months ended September 30, 2018, and 2017 (dollars in thousands):



	Three Months Ended September 30,					Dollar Increase			Percent Increase
	2018		2017			(Decrease)			(Decrease)
Non-Interest Income
Service charges and fees	$	833	$	309		$	524		169.6	%
Securities gains, net	18		—			18			100.0	%
Gains on mortgage loans sold, net	1,399		1,571			(172		)	(10.9	)%
Gain on sale of other real estate	150		1			149			14,900.0	%
Gain (loss) on disposal of premises and equipment	16		(50		)	66			(132.0	)%
Other noninterest income:
Bank-owned life insurance	293		219			74			33.8	%
Brokerage revenue	7		16			(9		)	(56.3	)%
Rental income	61		21			40			190.5	%
Miscellaneous noninterest income	361		256			105			41.0	%
Total non-interest income	$	2,777	$	2,087		$	690		33.1	%



	Nine Months Ended September 30,					Dollar Increase			Percent Increase
	2018		2017			(Decrease)			(Decrease)
Non-Interest Income
Service charges and fees	$	2,504	$	936		$	1,568		167.5	%
Securities gains, net	43		59			(16		)	(27.1	)%
Gains on mortgage loans sold, net	4,061		2,751			1,310			47.6	%
Gain on sale of other real estate	259		26			233			896.2	%
Gain (loss) on disposal of premises and equipment	16		(50		)	66			132.0	%
Other noninterest income:
Bank-owned life insurance	893		595			298			50.1	%
Brokerage revenue	91		70			21			30.0	%
Miscellaneous noninterest income	155		70			85			121.4	%
Total other non-interest income	1,139		735			404			55.0	%
Total non-interest income	$	8,022	$	4,457		$	3,565		80.0	%

The most significant reasons for the changes in total non-interest income during the three and nine months ended September 30, 2018 compared to the same periods in 2017 are the fluctuation in gains on mortgage loans sold, net, the increase in service charges, and the Merger which affects most of the categories. These and other factors impacting non-interest income are discussed further below.

Service charges on deposit accounts have increased and mainly reflect customer growth trends but have also been impacted by changes in our fee structures. The majority of the 169.6% and 167.5% increase for the three and nine months ended September 30, 2018, respectively, was driven by the Merger which assisted in growing our deposits by 66.0% since the same period in 2017.

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, 2018, the Company sold securities classified as available for sale totaling $100,737 with a gain of $43. During the nine months ended September 30, 2017, the Company sold securities classified as available for sale totaling $18,688 and realized a gain of $59.

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Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans and first-lien HELOCs. 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 $1,399 and $4,061 for the three and nine months ended September 30, 2018, respectively, compared to $1,571 and $2,751 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.

During the three and nine months ended September 30, 2018, we recognized a gain of $150 and $259, respectively, due to the sale of other real estate and the recognition of a previously deferred gain from a paydown of a loan made to finance a piece of other real estate compared to a gain of $1 and $26 in the same periods in 2017.

Non-interest income also includes appreciation in the cash surrender value of bank-owned life insurance which was $293 and $893 for the three and nine months ended September 30, 2018, compared to $219 and $595 for the same period in 2017. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in the cash surrender value of the policies) is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support the policies. Earnings on these policies generally are not expected to be taxable. An additional $10.7 million was acquired in the Merger.

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

Non-Interest Expense

The following is a summary of our non-interest expense for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):



	Three Months Ended September 30,				Dollar Increase			Percent Increase
	2018		2017		(Decrease)			(Decrease)
Non-Interest Expense
Salaries and employee benefits	$	6,913	$	4,880	$	2,033		41.7	%
Occupancy	1,234		850		384			45.2	%
Information technology	1,315		732		583			79.6	%
Advertising and public relations	183		81		102			125.9	%
Audit, legal and consulting	588		501		87			17.4	%
Federal deposit insurance	210		100		110			110.0	%
Merger expenses	82		562		(480		)	(85.4	)%
Other operating	1,637		791		846			107.0	%
Total non-interest expense	$	12,162	$	8,497	$	3,665		43.1	%

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	Nine Months Ended September 30,				Dollar Increase		Percent Increase
	2018		2017		(Decrease)		(Decrease)
Non-Interest Expense
Salaries and employee benefits	$	20,480	$	13,634	$	6,846	50.2	%
Occupancy	3,673		2,482		1,191		48.0	%
Information technology	3,913		1,924		1,989		103.4	%
Advertising and public relations	413		204		209		102.5	%
Audit, legal and consulting	2,027		1,102		925		83.9	%
Federal deposit insurance	630		320		310		96.9	%
Merger expenses	2,742		562		2,180		387.9	%
Other operating	4,487		2,406		2,081		86.5	%
Total non-interest expense	$	38,365	$	22,634	$	15,731	69.5	%

The most significant reason for the increase in total non-interest expense of $3,665 and $15,731 or 43.1% and 69.5% for the three and nine months ended September 30, 2018 is due to the Merger. This and other factors impacting non-interest expense are discussed further below.

Salaries and employee benefits increased by $2,033 and $6,846 or for the three and nine months ended September 30, 2018 compared to the same periods in 2017. This increase is attributable mainly to the increased staff due to the Merger as well as the addtional staff for our mortgage venture, additional staff for our new Murfreesboro branch, and additional staff for our Chattanooga branch which will open in the fourth quarter.

Certain of our facilities are leased while there are others that we own. Primarily, occupancy costs increased $384 and $1,191 during the three and nine months ended September 30, 2018 when compared to the same periods in 2017 due to the additional branches from the Merger as well as the lease for a new executive office which opened in the second quarter, and the the lease for the Murfreesboro branch which opened in the third quarter of 2018.

Information technology costs increased by $583 or 79.6% when comparing the three months ended September 30, 2018 to the comparable period in 2017. For the nine months ended September 30, 2018, information technology costs increased by $1,989 or 103.4% when compared to the same period in 2017. These increases are mainly attributable to increased costs due to the Merger associated with running additional branches and increasing the volume of accounts and transactions as well as our continued investment in information security and other technology.

Advertising and public relations costs increased when comparing the three and nine months ended September 30, 2018 to the same period in 2017, by $102 and $209, respectively. The increase was substantially attributable to the Merger and the opening of our new Murfreesboro branch.

Audit, legal and consulting costs increased by $87 and $925, respectively, or 17.4% and 83.9% when comparing the three and nine months ended September 30, 2018 to the same periods in 2017. This increase is mainly attributable to the increase in legal fees and consulting fees incurred in connection with our mortgage venture.

Our FDIC expense is based on our outstanding liabilities for the period multiplied by a factor determined by the FDIC, mainly driven by our most recent regulatory rating and certain financial performance factors. Our FDIC expense increased by $110 and $310, respectively, for three and nine months ended September 30, 2018, compared to the same periods in 2017. This increase is primarily the result of an increase in deposits due to the Merger.

Merger related expenses decreased by 85.4% to $82 and increased by 387.9% to $2,742 for the three and nine months ended September 30, 2018, respectively when compared to the same periods in 2017. These costs are considered one time expenses associated with the Merger, and most of these expected expenses have been incurred at this point.

Other operating expenses increased by $846 and $2,081 for the three and nine months ended September 30, 2018, compared to the same periods in 2017 mainly due to the Merger with the largest increases in loan-related expenses such as processing costs based on volume, franchise tax expense due to the Merger, and an increase in core deposit intangible amortization of $170 and $466 three and nine months ended September 30, 2018. We also recorded a lower of cost or market adjustment for loans held for sale during the nine months ended September 30, 2018 of $196 compared to a reversal of $160 for the same period in 2017.

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Income Taxes

During the three and nine months ended September 30, 2018, we recorded consolidated income tax expense of $519 and $1,431, respectively, and compared to $306 and $1,005 for the three and nine months ended September 30, 2017. 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, 2018, reflects an effective income tax rate of 12.3% and 13.7% (exclusive of a tax benefit from our mortgage banking operations of $55 and $147 on pre-tax losses of $897 and $2,390), compared to 14.2% and 14.8% (exclusive of tax benefit of $0 and $56 on pre-tax losses of $6 and $954 from our mortgage banking operations for the comparable periods of 2017). Our tax rate for the three and nine months ended September 30, 2018, was favorably influenced by the change in the corporate federal tax rate and state tax credits. Also, merger expenses had the impact of reducing our taxable income and increasing the proportion of our non-taxable versus taxable income for the 2018 periods.

Noncontrolling Interest in Net Loss of Subsidiary

Our noncontrolling interest in net loss of subsidiary is solely attributable to Reliant Mortgage Ventures, LLC. Reliant Bank has a 51% voting interest in this venture. Under the terms of the related operating agreement, the noncontrolling member receives 70% of the profits of the mortgage venture, and the Bank receives 30% of any profits. The noncontrolling member is responsible for 100% of the mortgage venture’s net losses. The venture had a net loss of $842 and $2,243 for the three and nine months ended September 30, 2018 compared to net loss of $6 and $898 for the same periods in 2017. The increase in loss for the three and nine months ended September 30, 2018 when compared to the same periods in 2017 results are mainly attributable to the increase in salaries and benefits due to the increased staff as well as legal fees and consulting fees previously mentioned. These amounts are included in our consolidated results. Also, see Note 9 for segment reporting in the consolidated financial statements included elsewhere herein.

COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2018 AND DECEMBER 31, 2017

Overview

The Company’s total assets were $1,684,201 at September 30, 2018 and $1,125,034 at December 31, 2017. Our assets increased by 49.7% from December 31, 2017 to September 30, 2018. The increase was substantially attributable to the Merger which enhanced the growth in net loans and investments during the period of $420.9 million, or 55.2% and $72.8 million or 33.1%, respectively discussed further below. Other increases include goodwill of $32.2 million or 282.7%, cash of $13.8 million or 66.6%, premise and equipment of $12.4 million or 126.3%, core deposit intangibles of $7.2 million or 560.6%, deferred taxes of $8.1 million or 738.4%, cash surrender value of life insurance contracts of $11.6 million or 34.3%, and other real estate owned of $1.0 or 100.0%. These increases were partially offset by the decline of mortgage loans held for sale by $32.6 million or 72.0%. The Company’s total liabilities were $1,480,450 at September 30, 2018 and $984,897 at December 31, 2017, an increase of 50.3%. The increase in liabilities from December 31, 2017 to September 30, 2018, was substantially attributable to the Merger with most categories increasing across the board including an increase in deposits of $512.0 million or 58.0% and the addition of subordinated debt in the amount of $11.6 million during the period. The increases were partially offset by the decrease in Federal Home Loan Bank advances of $34 million or 35.2% during the period. 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, and with the Merger we have expanded our Middle Tennessee footprint into Maury and Hickman Counties. Total loans, net, at September 30, 2018, and

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December 31, 2017, were $1,183,431 and $762,488, respectively. This represented an increase of 55.2% from December 31, 2017 to September 30, 2018 and was greatly impacted by the Merger.

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,
	2018					2017
	Amount			Percent		Amount		Percent
Commerical, Industrial and Agricultural	$	209,608		17.6	%	$	138,706	18.0	%
Real estate:
1-4 Family Residential	228,014			19.1	%	111,932		14.4	%
1-4 Family HELOC	86,778			7.3	%	72,017		9.3	%
Multifamily and Commercial	433,882			36.3	%	261,044		33.8	%
Construction, Land Development and Farmland	199,849			16.7	%	156,452		20.3	%
Consumer	21,533			1.8	%	17,605		2.3	%
Other	14,444			1.2	%	14,694		1.9	%
	1,194,108			100.0	%	772,450		100.0	%
Less:
Deferred loan fees (costs)	(21		)			231
Allowance for possible loan losses	10,698					9,731

Loans, net	$	1,183,431				$	762,488

The table below provides a summary of PCI loans as of September 30, 2018:



	September 30, 2018

Commerical, Industrial and Agricultural	$	63
Real estate:
1-4 Family Residential	330
1-4 Family HELOC	—
Multifamily and Commercial	238
Construction, Land Development and Farmland	1,969
Consumer	17
Other	—
Total gross PCI loans	2,617
Less:
Remaining purchase discount	300
Allowance for possible loan losses	—

Loans, net	$	2,317

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 $209,608 at September 30, 2018, increased 51.1% compared to $138,706 at December 31, 2017.

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Real estate loans comprised 79.4% of the loan portfolio at September 30, 2018. Residential loans included in this category consist mainly of closed-end loans secured by first and second liens that are not held for sale and revolving, open-end loans secured by 1-4 family residential properties extended under home equity lines of credit. The Company increased the residential portfolio 71.1% from December 31, 2017 to September 30, 2018. 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 $433,882 at September 30, 2018, increased 66.2% compared to the $261,044 held as of December 31, 2017. Real estate construction loans consist of 1-4 family residential construction loans, other construction loans, land loans, and loans secured by farmland. Construction lending has increased since 2016 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 an increase from December 31, 2017, to September 30, 2018, of 22.3%.

Other loans consist mainly of loans to states and political subdivisions and loans to other depository institutions experienced a decrease of 1.7% from December 31, 2017 to September 30, 2018.

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, 2018, excluding unearned net fees and costs.



	One Year or Less		One to Five Years		Over Five Years		Total
Gross loans	$	394,061	$	486,422	$	313,625	$	1,194,108

Fixed interest rate							$	770,273
Variable interest rate							423,835
Total							$	1,194,108

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.

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At September 30, 2018, the allowance for loan losses was $10,698 compared to $9,731 at December 31, 2017. The allowance for loan losses as a percentage of total loans was 0.90% at September 30, 2018 compared to 1.26% at December 31, 2017. The allowance was adjusted downward as a percent of total loans from December 31, 2017 to September 30, 2018 because the loans from the Merger were booked at their discounted value.

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, 2018			September 30, 2017
Beginning Balance, January 1	$	9,731		$	9,082
Loans charged off:
Commerical, Industrial and Agricultural	(308		)	(941		)
Real estate:
1-4 Family Residential	(36		)	(15		)
1-4 Family HELOC	(6		)	—
Multifamily and Commercial	(76		)	—
Construction, Land Development and Farmland	(144		)	—
Consumer	(24		)	(30		)
Other	(37		)	—
Total loans charged off	(631		)	(986		)
Recoveries on loans previously charged off:
Commerical, Industrial and Agricultural	530			306
Real estate:
1-4 Family Residential	11			—
1-4 Family HELOC	7			19
Multifamily and Commercial	215			—
Construction, Land Development and Farmland	44			5
Consumer	29			2
Other	3			—
Total loan recoveries	839			332
Net recoveries (charge-offs)	208			(654		)
Provision for loan losses	759			1,195
Total allowance at end of period	$	10,698		$	9,623
Gross loans at end of period ⁽¹⁾	$	1,194,108		$	720,187
Average gross loans ⁽¹⁾	$	1,117,743		$	701,362
Allowance to total loans	0.90		%	1.34		%
Net charge offs to average loans (annualized)	(0.04		)%	0.19		%


(1)	Loan balances exclude loans held for sale.

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

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	September 30, 2018						December 31, 2017
	Amount		% of Allowance To Total		% of Loan Type to Total Loans		Amount		% of Allowance To Total		% of Loan Type to Total Loans
Commercial, Industrial and Agricultural	$	2,026	18.9	%	17.6	%	$	2,538	26.1	%	18.0	%
Real estate:
1-4 Family Residential	1,321		12.3	%	19.1	%	773		7.9	%	14.4	%
1-4 Family HELOC	620		5.8	%	7.3	%	595		6.1	%	9.3	%
Multifamily and Commercial	4,118		38.7	%	36.3	%	3,166		32.6	%	33.8	%
Construction, Land Development and Farmland	2,390		22.3	%	16.7	%	2,434		25.0	%	20.3	%
Consumer	186		1.7	%	1.8	%	183		1.9	%	2.3	%
Other	37		0.3	%	1.2	%	42		0.4	%	1.9	%
	$	10,698	100.0	%	100.0	%	$	9,731	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, 2018			December 31, 2017
Non-accrual loans	$	4,235		$	5,161
Past due loans 90 days or more and still accruing interest	40			—
Total non-performing loans	4,275			5,161
Foreclosed real estate ("OREO")	1,000			—
Total non-performing assets	$	5,275		$	5,161
Total non-performing loans as a percentage of total loans	0.36		%	0.67		%
Total non-performing assets as a percentage of total assets	0.31		%	0.46		%
Allowance for loan losses as a percentage of non-performing loans	250.25		%	188.55		%

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.

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Securities are a significant component of the Company’s earning assets. Securities totaled $293,028 at September 30, 2018. This represents a 33.1% increase from the December 31, 2017 total of $220,201. Our growth is attributable to the Merger and the planned investment securities restructuring, mentioned previously, that began in the fourth quarter of 2017. The increase is attributable to purchasing $103,375 securities available for sale during the nine months ended September 30, 2018, offset by sales of $100,737, and principal paydowns and maturities of $10,125 during the same period.

Restricted equity securities totaled $11,681 and $7,774 at September 30, 2018, and December 31, 2017, 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, 2018					December 31, 2017
	Amortized Cost		Fair Value	% of Total		Amortized Cost		Fair Value	% of Total
U.S.Treasury and other U.S. government agencies	$	573	553	0.19	%	$	586	578	0.26	%
State and municipal	233,929		227,508	77.64	%	189,576		191,752	87.08	%
Corporate bonds	3,130		3,029	1.03	%	1,500		1,492	0.68	%
Mortgage backed securities	29,335		28,867	9.85	%	6,262		6,169	2.80	%
Asset backed securities	30,279		29,571	10.09	%	16,753		16,710	7.59	%
Time deposits	3,500		3,500	1.20	%	3,500		3,500	1.59	%
Total	$	300,746	293,028	100.00	%	$	218,177	220,201	100.00	%

The table below summarizes the contractual maturities of securities available for sale at September 30, 2018:



	Amortized Cost		Estimated Fair Value
Due within one year	$	1,756	$	1,753
Due in one to five years	7,066		7,019
Due in five to ten years	13,090		12,797
Due after ten years	219,220		213,021
Mortgage backed securities	29,335		28,867
Asset backed securities	30,279		29,571
Total	$	300,746	$	293,028

Premises and Equipment

Premises and equipment, net, totaled $22,156 at September 30, 2018 compared to $9,790 at December 31, 2017, a net increase of $12,366 or 126.3% due to the Merger, a new executive office, and additional branches. Premises and equipment purchases amounted to approximately $4,000 during the first nine months of 2018 and were mainly incurred for leasehold improvements related to our new executive office, our Murfreesboro branch, and our planned Chatanooga branch and for IT infrastructure related to the Merger while depreciation expense amounted to $1,235. At September 30, 2018, we operated from sixteen retail banking locations as well as two stand-alone mortgage loan production offices and one commercial loan and deposit production office. Two of our bank branch locations, including our main office, are in Brentwood, Tennessee. Of our other fourteen bank branch locations three are in Columbia, the remaining nine are in Franklin, Springfield, Gallatin, Nashville, Murfreesboro, Mt. Pleasant, Thompson Station, Centerville and Lyles Tennessee. Our commercial loan and deposit production office is in Chattanooga, Tennessee. As of September 30, 2018, our mortgage loan production offices were located Hendersonville and Brentwood, Tennessee, as well as Timonium, Maryland.

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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, 2018, total deposits were $1,395,546, an increase of $512,027, or 58.0%, compared to $883,519 at December 31, 2017. During the first nine months of 2018, non-interest bearing demand deposits increased by $89.3 million, interest-bearing demand deposits by $73.9 million, savings and money market deposits by $153.7 million, and time deposits increased by $195.1 million. A substantial portion of the increase in the deposits is attributable to the Merger.

The following table shows maturity or repricing of time deposits of $250 or more by category based on time remaining until maturity at September 30, 2018.



	September 30, 2018
Twelve months or less	$	317,931
Over twelve months through three years	16,822
Over three years	3,326
Total	$	338,079

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.

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, 2018. 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.

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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	0.6%	(15)%	(2.1)%	(15)%
-100 bp	1.8%	(10)%	1.6%	(10)%
+100 bp	(0.7)%	(10)%	(1.0)%	(10)%
+200 bp	(1.0)%	(15)%	(1.6)%	(15)%
+300 bp	(1.8)%	(20)%	(2.7)%	(20)%
+400 bp	(2.8)%	(25)%	(4.1)%	(25)%

We were in compliance with our earnings simulation model policies as of September 30, 2018, 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.

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, 2018, 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.

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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, 2018, advances totaled $62,686 compared to $96,747 as of December 31, 2017. The decrease in FHLB advances generally is attributable to our increase in deposits, the addition of subordinated debentures to our balance sheet assumed in the Merger, and the decrease in our mortgage loans held for sale and somewhat offset by our increase in loans and securities.

At September 30, 2018, 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
2018	$	58,000	2.16%
2019	—		—%
2020	—		—%
2021	378		2.73%
2022	813		1.22%
Thereafter	3,495		2.03%
	$	62,686	2.15%

The Company has issued $23.0 million in principal amount of subordinated debentures in connection with trust preferred securities issued by trusts that are affiliates of the Company, $10.0 million of which is owned by a wholly owned subsidiary of the Company. The Company timely made its scheduled interest payments on these subordinated debentures since assumed in the first quarter of 2018. As of September 30, 2018, the Company was current on all interest payments due related to its subordinated debentures. The Company has the right to defer the payment of interest on the subordinated debentures at any time, for a period not to exceed 20 consecutive quarters. During the period in which it is deferring the payment of interest on its subordinated debentures, the indentures governing the subordinated debentures provide that the Company cannot pay any dividends on its Common Stock or preferred stock.

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Capital

Stockholders’ equity was $203,751 at September 30, 2018, an increase of $63,614, or 45.4%, from $140,137 at December 31, 2017. During the nine months ended September 30, 2018, the Company raised $398 of capital through the exercise of Company stock options and issued $61,983 as consideration in the Merger. The subordinated debentures assumed in the Merger and the additional capital for the stock option exercises was pushed-down to the Bank and when combined with the accretion of earnings to capital but offset by the declared dividends and the increase in assets led to a decrease in the Bank’s September 30, 2018 Tier 1 leverage ratio to 10.17% compared with 11.68% at December 31, 2017 (see other ratios discussed further below). Additionally, the subordinated debentures qualify as Tier 1 and Total risk-based capital for the Company. Common dividends of $2,525 (of which $542 were declared in the prior year) were paid during the nine months ended September 30, 2018, and common dividends of $922 were declared in the third quarter of 2018 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.

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, 2018, 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, 2018 and December 31, 2017 for the Company and Bank.

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	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, 2018
Company
Tier I leverage	$	165,163	10.38	%	$	63,647	4.000	%	$	79,558	5.00	%
Common equity Tier 1	153,580		11.50	%	85,137		6.375	%	86,806		6.50	%
Tier I risk-based capital	165,163		12.37	%	105,146		7.875	%	106,815		8.00	%
Total risk-based capital	176,286		13.20	%	131,881		9.875	%	133,550		10.00	%

Bank
Tier I leverage	$	161,381	10.17	%	$	63,473	4.000	%	$	79,342	5.00	%
Common equity Tier 1	161,381		12.13	%	84,815		6.375	%	86,478		6.50	%
Tier I risk-based capital	161,381		12.13	%	104,771		7.875	%	106,434		8.00	%
Total risk-based capital	172,504		12.97	%	131,340		9.875	%	133,002		10.00	%

December 31, 2017
Company
Tier I leverage	$	126,234	11.89	%	$	42,467	4.000	%	$	53,084	5.00	%
Common equity Tier 1	126,234		13.90	%	52,219		5.750	%	59,030		6.50	%
Tier I risk-based capital	126,234		13.90	%	65,841		7.250	%	72,653		8.00	%
Total risk-based capital	135,965		14.97	%	84,013		9.250	%	90,825		10.00	%

Bank
Tier I leverage	$	123,862	11.68	%	$	42,418	4.000	%	$	53,023	5.00	%
Common equity Tier 1	123,862		13.67	%	52,100		5.750	%	58,896		6.50	%
Tier I risk-based capital	123,862		13.67	%	65,691		7.250	%	72,487		8.00	%
Total risk-based capital	133,593		14.74	%	83,835		9.250	%	90,633		10.00	%

Effects of Inflation and Changing Prices

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

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Off Balance Sheet Lending Arrangements

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



	September 30, 2018
Unused lines of credit	$	267,433
Standby letters of credit	17,322
Total commitments	$	284,755

Other Off Balance Sheet Arrangements

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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

This Item is not applicable to smaller reporting companies.

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 nine months ended September 30, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Reliant Bancorp 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 Reliant Bancorp 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 Reliant Bancorp or its subsidiaries are without merit or that the ultimate liability, if any, resulting from them will not materially affect Reliant Bank’s financial condition or Reliant Bancorp’s consolidated financial position.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I--Item 1A--Risk Factors” in our Form 10-K for the year ended December 31, 2017. These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. There have been no material changes from the risk factors described in our Form 10-K.

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

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

EXHIBIT INDEX



Exhibit No.	Description	Location
3.1	Amended and Restated Charter of Reliant Bancorp, Inc. (Restated for SEC filing purposes)	Filed herewith

3.4	Third Amended and Restated Bylaws of Reliant Bancorp, Inc., effective June 15, 2018	Incorporated by reference to Exhibit 3.1 to Form 8-K filed June 21, 2018

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

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

32.1	Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002	Filed herewith.

32.2	Certification pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002	Filed herewith.

101	Interactive Data Files	Filed herewith.

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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.



	RELIANT BANCORP, INC.

November 6, 2018		/s/ DeVan D. Ard, Jr.
		DeVan D. Ard, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)


November 6, 2018		/s/ J. Daniel Dellinger
		J. Daniel Dellinger
		Chief Financial Officer
		(Principal Financial Officer)

Reliant Bancorp, Inc. - FORM 10-Q - November 6, 2018

Attached files

Reliant Bancorp, Inc. Reports