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

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

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

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

Indicate by check mark whether the ~~Registrant~~registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated ~~filer”~~filer,” “accelerated ~~filer” and~~filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange ~~Act:~~

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

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

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of ~~November 9, 2016~~May 8, 2017 was ~~7,763,453.~~

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

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

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

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

Competition from financial institutions and other financial service providers;

Economic conditions in the local markets where we operate;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table of Contents

PART~~PART~~ I – FINANCIAL INFORMATION

Item1. Consolidated Financial Statements (Unaudited).

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)


	September 30, 2016		December 31, 2015			March 31, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	34,869	$	20,289		$	18,290		$	23,413
Federal funds sold		100		281			50			830

Total cash and cash equivalents		34,969		20,570			18,340			24,243
Securities available for sale		154,816		133,825			179,266			146,813
Loans, net		652,445		608,747			688,542			657,701
Mortgage loans held for sale		14,649		55,093
Mortgage loans held for sale, net							9,798			11,831
Accrued interest receivable		3,499		3,096			3,921			3,786
Premises and equipment, net		8,964		9,196			9,688			9,093
Restricted equity securities, at cost		7,081		6,244			7,140			7,133
Other real estate, net		—		1,149
Cash surrender value of life insurance contracts		24,633		20,077			25,013			24,827
Deferred tax assets, net		1,964		2,383			3,336			3,437
Goodwill		11,404		11,404			11,404			11,404
Core deposit intangibles		1,671		1,938			1,493			1,582
Other assets		3,925		2,682			4,524			10,134

TOTAL ASSETS	$	920,020	$	876,404		$	962,465		$	911,984

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Demand	$	139,720	$	111,309		$	135,939		$	134,792
Interest-bearing demand		90,205		95,397			84,061			85,478
Savings and money market deposit accounts		183,304		181,316			210,952			183,788
Time		246,627		251,986			395,231			359,776

Total deposits		659,856		640,008			826,183			763,834
Accrued interest payable		134		55			158			107
Federal funds purchased							-			3,671
Federal Home Loan Bank advances		144,680		135,759			24,099			32,287
Dividends payable		—		1,489			-			1,711
Other liabilities		6,118		2,342			2,430			3,455

TOTAL LIABILITIES		810,788		779,653			852,870			805,065

STOCKHOLDERS’ EQUITY
Common stock, $1 par value; 10,000,000 shares authorized; 7,763,351 and 7,279,620 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively		7,763		7,280

Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued to date							-			-
Common stock, $1 par value; 30,000,000 shares authorized; 7,826,450 and 7,778,309 sharesissued and outstanding at March 31, 2017 and December 31, 2016, respectively							7,826			7,778
Additional paid-in capital		88,821		84,520			89,497			89,045
Retained earnings		11,952		4,987			14,270			12,212
Accumulated other comprehensive income (loss)		696		(36	)
Accumulated other comprehensive loss							(1,998	)		(2,116	)

TOTAL STOCKHOLDERS’ EQUITY		109,232		96,751			109,595			106,919

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	920,020	$	876,404		$	962,465		$	911,984

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THETHREE MONTHS ENDEDMARCH 31, 2017 AND ~~NINE MONTHS ENDED SEPTEMBER 30,~~ 2016 ~~AND 2015~~

(Dollar amounts in thousands except per share amounts)

(Unaudited)

											Three Months Ended
	Three Months Ended September 30,					Nine Months Ended September 30,					March 31,
	2016		2015			2016		2015			2017		2016
INTEREST INCOME
Interest and fees on loans	$	7,838	$	7,866		$	24,674	$	19,452		$	7,782	$	7,770
Interest and fees on loans held for sale												94		368
Interest on investment securities, taxable		137		225			589		646			149		236
Interest on investment securities, nontaxable		578		310			1,506		791			828		438
Federal funds sold and other		103		82			298		201			120		102

TOTAL INTEREST INCOME		8,656		8,483			27,067		21,090			8,973		8,914

INTEREST EXPENSE
Deposits
Demand		46		57			137		136			43		44
Savings and money market deposit accounts		151		136			480		325			150		166
Time		430		385			1,260		1,002			693		423
Federal Home Loan Bank advances and other		194		186			581		448			116		199

TOTAL INTEREST EXPENSE		821		764			2,458		1,911			1,002		832

NET INTEREST INCOME		7,835		7,719			24,609		19,179			7,971		8,082

PROVISION FOR LOAN LOSSES		145		—			760		(500	)		410		165

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,690		7,719			23,849		19,679			7,561		7,917

NONINTEREST INCOME
Service charges on deposit accounts		320		350			926		837			310		285
Gains on mortgage loans sold, net		551		3,454			5,675		7,987			542		3,342
Gain (loss) on securities transactions, net (reclassified from other comprehensive income)		296		15			356		(381	)
Gain on securities transactions, net												36		-
Gain on sale of other real estate		145		1			301		1			24		-
Other		263		199			673		494			227		219

TOTAL NONINTEREST INCOME		1,575		4,019			7,931		8,938			1,139		3,846

NONINTEREST EXPENSE
Salaries and employee benefits		4,017		5,324			14,294		13,238			4,269		5,394
Occupancy		767		914			2,406		2,520			762		829
Information technology		586		655			1,849		1,516			513		627
Advertising and public relations		117		363			542		861			75		265
Audit, legal and consulting		328		565			993		1,309			293		281
Federal deposit insurance		109		93			349		276			99		114
Provision for losses on other real estate		17		—			70		110			-		26
Other operating		942		926			3,044		2,692			858		1,101

TOTAL NONINTEREST EXPENSE		6,883		8,840			23,547		22,522			6,869		8,637

INCOME BEFORE PROVISION FOR INCOME TAXES		2,382		2,898			8,233		6,095			1,831		3,126

INCOME TAX EXPENSE		619		558			1,775		1,644			272		568

CONSOLIDATED NET INCOME		1,763		2,340			6,458		4,451			1,559		2,558

NONCONTROLLING INTEREST IN NET (INCOME) LOSS OF SUBSIDIARY		605		(507	)		507		(404	)		499		(321	)

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	2,368	$	1,833		$	6,965	$	4,047		$	2,058	$	2,237

Basic net income attributable to common shareholders, per share	$	0.31	$	0.26		$	0.92	$	0.67		$	0.27	$	0.30

Diluted net income attributable to common shareholders, per share	$	0.30	$	0.25		$	0.91	$	0.65		$	0.26	$	0.30

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THETHREE MONTHS ENDEDMARCH 31, 2017 AND ~~NINE MONTHS ENDED SEPTEMBER 30,~~ 2016 ~~AND 2015~~

(Dollar amounts in thousands except per share amounts)

(Unaudited)

													Three Months Ended
													March 31,
	Three Months Ended September 30,						Nine Months Ended September 30,						2017			2016
	2016			2015			2016			2015
Consolidated net income	$	1,763		$	2,340		$	6,458		$	4,451		$	1,559		$	2,558

Other comprehensive income (loss)
Net unrealized gains (losses) on available-for-sale securities, net of tax of $(122) and $285 for the three months ended September 30, 2016 and 2015, respectively, and $591 and $(509) for the nine months ended September 30, 2016 and 2015, respectively		(197	)		459			952			(820	)
Reclassification adjustment for (gains) losses included in net income, net of tax of $(113) and $(6) for the three months ended September 30, 2016 and 2015, respectively, and $(136) and $146 for the nine months ended September 30, 2016 and 2015, respectively		(183	)		(9	)		(220	)		235

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		(380	)		450			732			(585	)
Net unrealized gains on available-for-sale securities, net of tax of $145 and $109for the three months ended March 31, 2017 and 2016, respectively														140			175

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

TOTAL OTHER COMPREHENSIVE INCOME														118			175

TOTAL COMPREHENSIVE INCOME	$	1,383		$	2,790		$	7,190		$	3,866		$	1,677		$	2,733

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE ~~NINE MONTHS~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2017 AND 2016 ~~AND 2015~~

(Dollar amounts in thousands except per share amounts)

(Unaudited)

																																ACCUMULATED
												ACCUMULATED															ADDITIONAL					OTHER
							ADDITIONAL					OTHER									COMMON STOCK						PAID-IN			RETAINED		COMPREHENSIVE			NONCONTROLLING
	COMMON STOCK						PAID-IN			RETAINED		COMPREHENSIVE			NONCONTROLLING						SHARES			AMOUNT			CAPITAL			EARNINGS		INCOME (LOSS)			INTEREST			TOTAL
	SHARES			AMOUNT			CAPITAL			EARNINGS		INCOME (LOSS)			INTEREST			TOTAL
BALANCE—JANUARY 1, 2015		3,910,191		$	3,910		$	38,955		$	901	$	(250	)	$	—		$	43,516
BALANCE - JANUARY 1, 2016																						7,279,620		$	7,280		$	84,520		$	4,987	$	(36	)	$	-		$	96,751

Stock based compensation expense		—			—			74			—		—			—			74			-			-			50			-		-			-			50
Shares retained by shareholders of
Commerce Union Bancshares, Inc., net of stock issuance costs of $741		3,069,030			3,069			44,091			—		—			—			47,160
Conversion shares issued to shareholders of Reliant Bank		83,015			83			(83	)		—		—			—			—

Exercise of stock options		30,058			30			272			—		—			—			302			280,974			281			2,528			-		-			-			2,809
Stock issuance costs		—			—			(111	)		—		—			—			(111	)
Noncontrolling interest distributions		—			—			—			—		—			(404	)		(404	)

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

Net income		—			—			—			4,047		—			404			4,451			-			-			-			2,237		-			321			2,558
Other comprehensive loss		—			—			—			—		(585	)		—			(585	)

BALANCE—SEPTEMBER 30, 2015		7,092,294		$	7,092		$	83,198		$	4,948	$	(835	)	$	—		$	94,403

BALANCE—JANUARY 1, 2016		7,279,620		$	7,280		$	84,520		$	4,987	$	(36	)	$	—		$	96,751
Stock based compensation expense		—			—			168			—		—			—			168
Exercise of stock options		461,931			462			4,154			—		—			—			4,616
Restricted stock awards		23,800			23			(23	)		—		—			—			—
Restricted stock forfeiture		(2,000	)		(2	)		2			—		—			—			—
Noncontrolling interest contributions		—			—			—			—		—			507			507
Net income (loss)		—			—			—			6,965		—			(507	)		6,458
Other comprehensive income		—			—			—			—		732			—			732			-			-			-			-		175			-			175

BALANCE—SEPTEMBER 30, 2016		7,763,351		$	7,763		$	88,821		$	11,952	$	696		$	—		$	109,232
BALANCE - MARCH 31, 2016																						7,560,594		$	7,561		$	87,098		$	7,224	$	139		$	-		$	102,022


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

Stock based compensation expense																						-			-			89			-		-			-			89

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

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

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

Noncontrolling interest contributions																						-			-			-			-		-			499			499

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

Other comprehensive income																						-			-			-			-		118			-			118

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

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~NINE MONTHS~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2017 AND 2016 ~~AND 2015~~

(Dollar amounts in thousands except per share amounts)

(Unaudited)

   2016 2015
OPERATING ACTIVITIES

Consolidated net income
   $ 6,458    $ 4,451
Adjustments to reconcile consolidated net income to net cash provided (used) in operating activities

Provision for loan losses
   760    (500 )
Deferred income tax expense
   (36 ) 796
Depreciation and amortization of premises and equipment
   728    639
Net amortization of securities
   1,117    794
Net realized (gains) losses on sales of securities
   (356 ) 381
Gains on mortgage loans sold, net
   (5,675 ) (7,987 )
Stock-based compensation expense
   168    74
Gain on sale of other real estate
   (301 ) (1 )
Provision for losses on other real estate
   70    110
Increase in cash surrender value of life insurance contracts
   (556 ) (378 )
Mortgage loans originated for resale
   (137,667 ) (280,739 )
Proceeds from sale of mortgage loans
   183,786    270,621
Amortization of core deposit intangible
   267    210
Change in

Accrued interest receivable
   (403 ) (114 )
Other assets
   (736 ) (3,292 )
Accrued interest payable
   79    6
Other liabilities
   2,610    946


TOTAL ADJUSTMENTS
   43,855    (18,434 )


NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
   50,313    (13,983 )


INVESTING ACTIVITIES

Activities in available for sale securities

Purchases
   (47,391 ) (55,704 )
Sales
   20,036    5,466
Maturities, prepayments and calls
   8,038    4,545
Activities in held to maturity securities

Sales
   —      20,649
Purchases of restricted equity securities
   (837 ) (614 )
Loan originations and payments, net
   (44,458 ) (28,187 )
Purchase of buildings, leasehold improvements, and equipment
   (496 ) (820 )
Proceeds from sale of other real estate
   1,314    567
Improvement of other real estate
   (16 ) —
Purchase of life insurance contracts
   (4,000 ) (4,000 )
Cash received in merger
   —      12,378


NET CASH USED IN INVESTING ACTIVITIES
   (67,810 ) (45,720 )


FINANCING ACTIVITIES

Net change in deposits
   19,848    26,830
Net change in federal funds purchased
   —      (6,651 )
Advances from Federal Home Loan Bank, net
   8,921    61,290
Issuance of common stock
   4,616    302
Stock issuance costs
   —      (111 )
Noncontrolling interest contributions received
   —      305
Cash dividends paid on common stock
   (1,489 ) —


NET CASH PROVIDED BY FINANCING ACTIVITIES
   31,896    81,965


NET INCREASE IN CASH AND CASH EQUIVALENTS
   14,399    22,262
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD
   20,570    11,147


CASH AND CASH EQUIVALENTS—END OF PERIOD
   $ 34,969    $ 33,409

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

TOTAL ADJUSTMENTS		7,382			31,019

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

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

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

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

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

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

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE ~~NINE MONTHS~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2017 AND 2016 ~~AND 2015~~

(Dollar amounts in thousands except per share amounts)

(Unaudited)


	2016		2015			2017			2016
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest	$	2,379	$	1,905		$	951		$	748
Taxes		2,537	$	3,328		$	5		$	94

Non-cash investing and financing activities
Unrealized gain (loss) on securities available-for-sale	$	1,187	$	(879	)	$	249		$	1,024
Change in due to/from noncontrolling interest		507	$	(709	)	$	(61	)	$	(321	)

See accompanying notes to consolidated financial statements

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 1 - BASIS OF PRESENTATION

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

The consolidated financial statements as of ~~September 30, 2016,~~March 31, 2017, and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ included herein have not been audited. ~~See Note 11 related to the business combination occurring during 2015 and the related financial presentation.~~ The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures made are adequate to make the information not misleading. These financial statements should be read in conjunction with the ~~Company’s 2015~~Company's 2016 audited consolidated financial statements. The accompanying consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Such adjustments are of a normal recurring nature. The Company evaluates subsequent events through the date of filing. Certain prior period amounts have been reclassified to conform to the current period presentation. The results for the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2016.~~

2017.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES

The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive ~~income (loss)~~loss at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016 were as follows:

   September 30, 2016
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Estimated
Fair
Value
U. S. Treasury and other U. S. government agencies
   $ 1,914       $ 24       $ —         $ 1,938
State and municipal
   123,445       3,070       (374 )    126,141
Corporate bonds
   2,000       6       (17 )    1,989
Mortgage backed securities
   21,336       239       (77 )    21,498
Time deposits
   3,250       —         —         3,250








Total
   $ 151,945       $ 3,339       $ (468 )    $ 154,816








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








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

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

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

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

Total	$	150,169	$	469	$	(3,825	)	$	146,813

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)

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

Securities pledged at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016 had a carrying amount of ~~$38,615~~$33,788 and ~~$39,815,~~$36,292, respectively, and were pledged to collateralize Federal Home Loan Bank advances, Federal Reserve advances and municipal deposits.

At ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders’ equity.

The fair value of available for sale debt securities at ~~September 30, 2016~~March 31, 2017 by contractual maturity are provided below. Securities not due at a single maturity date, primarily mortgage backed securities, are shown separately.

   Amortized
Cost    Estimated
Fair Value
Due within one year
   $ 935       $ 940
Due in one to five years
   20,339       20,554
Due in five to ten years
   10,081       10,437
Due after ten years
   99,254       101,387
Mortgage backed securities
   21,336       21,498




   $ 151,945       $ 154,816

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

Total	$	182,232	$	179,266

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)

The following table shows available for sale securities with unrealized losses and their estimated fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of ~~September 30, 2016:~~March 31, 2017:

   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
   $ —         $ —         $ —         $ —         $ —         $ —
State and municipal
   29,248       363       1,132       11       30,380       374
Corporate bonds
   —         —         983       17       983       17
Mortgage backed securities
   7,315       61       1,299       16       8,614       77












Total temporarily impaired
   $ 36,563       $ 424       $ 3,414       $ 44       $ 39,977       $ 468

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

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

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

U. S. Treasury and other U. S. government agencies
   $ 2,002       $ 14       $ 2,421       $ 69       $ 4,423       $ 83
State and municipal
   18,619       226       3,760       45       22,379       271
Corporate bonds
   974       26       —         —         974       26
Mortgage backed securities
   28,547       367       4,009       148       32,556       515












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

	Less than 12 months				12 months or more				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
Description of Securities
U. S. Treasury and other U. S.government agencies	$	748	$	5	$	-	$	-	$	748	$	5
State and municipal		83,637		3,597		1,115		28		84,752		3,625
Corporate bonds		496		4		983		17		1,479		21
Mortgage backed securities		17,599		129		1,255		45		18,854		174

Total temporarily impaired	$	102,480	$	3,735	$	3,353	$	90	$	105,833	$	3,825

Management has the intent and ability to hold all securities in an unrealized loss position for the foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. There were 55170 and ~~105~~193 securities in an unrealized loss position as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, respectively.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016 were comprised as follows:

   September 30,
2016    December 31,
2015
Commerical, Industrial and Agricultural
   $ 133,382       $ 143,770
Real Estate

1-4 Family Residential
   111,708       110,736
1-4 Family HELOC
   53,994       49,665
Multifamily and Commercial
   217,166       202,736
Construction, Land Development and Farmland
   113,935       89,763
Consumer
   17,630       15,271
Other
   14,264       5,556




   662,079       617,497
Less

Deferred loan fees
   833       927
Allowance for possible loan losses
   8,801       7,823




Loans, net
   $ 652,445       $ 608,747

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

Loans, net	$	688,542	$	657,701

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

Activity in the allowance for loan losses by portfolio segment was as follows for the ~~nine~~three months ended ~~September 30, 2016:~~March 31, 2017:

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








Ending balance
   $ 2,255       $ 2,678       $ 1,715       $ 1,158








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








Ending balance
   $ 734       $ 221       $ 40       $ 8,801

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

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

Activity in the allowance for loan losses by portfolio segment was as follows for the ~~nine~~three months ended ~~September 30, 2015:~~March 31, 2016:


	1-4 Family HELOC			Consumer			Other		Unallocated			Total			Commercial Industrial and Agricultural			Multi Family and Commercial Real Estate			Construction Land Development and Farmland		1-4 Family Residential Real Estate
Beginning balance	$	854		$	181		$	2	$	678		$	7,353		$	2,198		$	2,591		$	894	$	1,214
Charge-offs		(6	)		(15	)		—		—			(21	)		(8	)		-			-		-
Recoveries		25			—			—		—			679			91			1			1		4
Provision		(237	)		(2	)		6		(88	)		(500	)		63			(210	)		269		58

Ending balance	$	636		$	164		$	8	$	590		$	7,511		$	2,344		$	2,382		$	1,164	$	1,276

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of ~~September 30, 2016~~March 31, 2017 was as follows:

   Commercial
Industrial and
Agricultural    Multi Family
and
Commercial
Real Estate    Construction
Land
Development
and Farmland    1-4 Family
Residential
Real Estate
Allowance for loan losses

Individually evaluated for impairment
   $ 681       $ —         $ 17       $ 27
Acquired with credit impairment
   6       —         —         —
Collectively evaluated for impairment
   1,568       2,678       1,698       1,131








Total
   $ 2,255       $ 2,678       $ 1,715       $ 1,158








Loans

Individually evaluated for impairment
   $ 7,215       $ 2,081       $ 2,547       $ 2,060
Acquired with credit impairment
   334       3,892       1,480       90
Collectively evaluated for impairment
   125,833       211,193       109,908       109,558








Total
   $ 133,382       $ 217,166       $ 113,935       $ 111,708








   1-4 Family
HELOC    Consumer    Other    Total
Allowance for loan losses

Individually evaluated for impairment
   $ 122       $ —         $ —         $ 847
Acquired with credit impairment
   —         —         —         6
Collectively evaluated for impairment
   612       221       40       7,948








Total
   $ 734       $ 221       $ 40       $ 8,801








Loans

Individually evaluated for impairment
   $ 1,637       $ —         $ —         $ 15,540
Acquired with credit impairment
   17       —         —         5,813
Collectively evaluated for impairment
   52,340       17,630       14,264       640,726








Total
   $ 53,994       $ 17,630       $ 14,264       $ 662,079

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, ~~2015~~2016 was as follows:


	Commercial Industrial and Agricultural		Multi Family and Commercial Real Estate		Construction Land Development and Farmland		1-4 Family Residential Real Estate		Commercial Industrial and Agricultural		Multi Family and Commercial Real Estate		Construction Land Development and Farmland		1-4 Family Residential Real Estate
Allowance for loan losses
Individually evaluated for impairment	$	479	$	11	$	22	$	—	$	747	$	-	$	17	$	27
Acquired with credit impairment		6		—		—		241		6		-		-		-
Collectively evaluated for impairment		1,713		2,580		872		973		1,685		2,731		1,769		1,151

Total	$	2,198	$	2,591	$	894	$	1,214	$	2,438	$	2,731	$	1,786	$	1,178

Loans
Individually evaluated for impairment	$	2,438	$	2,196	$	224	$	2,646	$	5,375	$	2,036	$	2,544	$	1,972
Acquired with credit impairment		888		3,968		1,496		735		329		2,852		1,481		89
Collectively evaluated for impairment		140,444		196,572		88,043		107,355		128,700		210,751		111,864		110,970

Total	$	143,770	$	202,736	$	89,763	$	110,736	$	134,404	$	215,639	$	115,889	$	113,031


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

Total	$	699	$	192	$	35	$	7,823

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

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

	1-4 Family HELOC		Consumer		Other		Total
Allowance for loan losses
Individually evaluated for impairment	$	62	$	-	$	-	$	853
Acquired with credit impairment		-		-		-		6
Collectively evaluated for impairment		642		208		37		8,223
Total	$	704	$	208	$	37	$	9,082
Loans
Individually evaluated for impairment	$	1,479	$	-	$	-	$	13,406
Acquired with credit impairment		16		-		-		4,767
Collectively evaluated for impairment		55,965		17,240		13,745		649,235
Total	$	57,460	$	17,240	$	13,745	$	667,408

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

Risk characteristics relevant to each portfolio segment are as follows:

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

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

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

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

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

Non-accrual loans by class of loan were as follows at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015:~~2016:


	September 30, 2016		December 31, 2015		March 31, 2017		December 31, 2016
Commercial, Industrial and Agricultural	$	3,402	$	947	$	3,931	$	3,062
Multi Family and Commercial Real Estate		651		713		-		636
Construction, Land Development and Farmland		730		158		730		730
1-4 Family Residential Real Estate		327		2,109		836		344
1-4 Family HELOC		1,012		1,077		-		862

Total	$	6,122	$	5,004	$	5,497	$	5,634

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

Individually impaired loans by class of loans were as follows at ~~September 30, 2016:~~March 31, 2017:

   Unpaid
Principal
Balance    Recorded
Investment
with no
Allowance
Recorded    Recorded
Investment
with
Allowance
Recorded    Total
Recorded
Investment    Related
Allowance
Commercial, Industrial and Agricultural
   $ 8,275       $ 5,536       $ 2,013       $ 7,549       $ 687
Multi Family and Commercial Real Estate
   6,815       5,973       —         5,973       —
Construction, Land Development and Farmland
   4,128       3,856       171       4,027       17
1-4 Family Residential Real Estate
   2,511       2,123       27       2,150       27
1-4 Family HELOC
   2,228       1,258       396       1,654       122










Total
   $ 23,957       $ 18,746       $ 2,607       $ 21,353       $ 853

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

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

Individually impaired loans by class of loans were as follows at December 31, ~~2015:~~2016:

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










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

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

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

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

The average balances of impaired loans for the ~~nine~~three months ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ were as follows:

   2016    2015
Commercial, Industrial and Agricultural
   $ 6,143       $ 3,141
Multi Family and Commercial Real Estate
   6,074       3,386
Construction, Land Development and Farmland
   3,047       882
1-4 Family Residential Real Estate
   2,879       3,892
1-4 Family HELOC
   1,944       2,146




Total
   $ 20,087       $ 13,447

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

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

Grade 1 - Minimal Risk (Pass)

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

Grade 2 - High Quality (Pass)

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

Grade 3 - Above Average (Pass)

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

Grade 4 - Average (Pass)

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

Grade 5 - Acceptable (Management Attention) (Pass)

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

Grade 6 - Special Mention

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

Grade 7 - Substandard

A ‘‘substandard’’ extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified should have a well-defined weakness ~~or weaknesses~~orweaknesses 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~~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~~uncollectible.With loss assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified loss, there is little prospect of collecting either its principal or interest.

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

Credit quality indicators by class of loan were as follows at ~~September 30, 2016:~~March 31, 2017:

   Commercial    Multi Family and    Construction
   Industrial and    Commercial    Land Development
   Agricultural    Real Estate    and Farmland
Pass (grades 1-5)
   $ 126,539       $ 213,399       $ 109,679
Special Mention
   1,207       —         1,650
Substandard
   5,636       3,767       2,606






Total
   $ 133,382       $ 217,166       $ 113,935

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

      1-4 Family
      Residential Real
   Consumer and Other    Estate    1-4 Family HELOC    Total
Pass (grades 1-5)
   $ 31,894       $ 108,176       $ 52,357       $ 642,044
Special Mention
   —         1,433       —         4,290
Substandard
   —         2,099       1,637       15,745








Total
   $ 31,894       $ 111,708       $ 53,994       $ 662,079

Credit quality indicators by class of loan were as follows at December 31, ~~2015:~~2016:

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






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

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








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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

Past due ~~and accrual~~ status by class of loan was as follows at ~~September 30, 2016:~~March 31, 2017:

   Accruing
30-59 Days
Past Due    Accruing
60-89 Days
Past Due    Accruing
Greater
than
90 Days    Accruing
Total
Past Due
Commercial, Industrial and Agricultural
   $ 26       $ —         $ —         $ 26
Multi family and Commercial Real Estate
   1,430       —         —         1,430
Construction, Land Development and Farmland
   191       —         —         191
1-4 Family Residential Real Estate
   —         —         —         —
1-4 Family HELOC
   —         —         —         —
Consumer
   8       —         —         8
Other
   —         —         —         —








Total
   $ 1,655       $ —         $ —         $ 1,655

   Current    Accruing
Total
Past Due    Non Accrual
Current
Loans    Non Accrual
Past Due
Loans    Total Loans
Commercial, Industrial and Agricultural
   $ 129,954       $ 26       $ 3,027       $ 375       $ 133,382
Multi family and Commercial Real Estate
   215,085       1,430       651       —         217,166
Construction, Land Development and Farmland
   113,014       191       101       629       113,935
1-4 Family Residential Real Estate
   111,381       —         57       270       111,708
1-4 Family HELOC
   52,982       —         866       146       53,994
Consumer
   17,622       8       —         —         17,630
Other
   14,264       —         —         —         14,264










Total
   $ 654,302       $ 1,655       $ 4,702       $ 1,420       $ 662,079

~~COMMERCE UNION BANCSHARES, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~SEPTEMBER 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015~~

~~(Dollar amounts in thousands except per share amounts)~~

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

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

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

Past due ~~and accrual~~ status by class of loan was as follows at December 31, ~~2015:~~2016:

									30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans
	Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing Greater than 90 Days		Accruing Total Past Due
Commercial, Industrial and Agricultural	$	1	$	148	$	—	$	149	$	207	$	1,586	$	375	$	2,168	$	132,236	$	134,404
1-4 Family Residential Real Estate										7		-		286		293		112,738		113,031
1-4 Family HELOC										-		-		-		-		57,460		57,460
Multi family and Commercial Real Estate		—		—		—		—		-		-		-		-		215,639		215,639
Construction, Land Development and Farmland		—		—		—		—		58		-		730		788		115,101		115,889
1-4 Family Residential Real Estate		579		—		—		579
1-4 Family HELOC		—		—		—		—
Consumer		11		—		—		11		193		-		-		193		17,047		17,240
Other		—		—		—		—		-		-		-		-		13,745		13,745

Total	$	591	$	148	$	—	$	739	$	465	$	1,586	$	1,391	$	3,442	$	663,966	$	667,408

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










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

There were no loans past due 90 days or more and still accruing interest at ~~September 30, 2016~~March 31, 2017 or December 31, ~~2015.~~2016.

During the ~~nine~~three months ended ~~September 30, 2016, loans~~March 31, 2017, one loan totaling ~~approximately $1,700 were~~$108 was modified in a troubled debt ~~restructurings.~~restructuring. The ~~modifications~~modification consisted of ~~changes~~a temporary reduction in ~~payment terms and extension of maturity dates.~~required monthly payments. The modifications had no effect on the allowance for loan losses or interest income.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

The Company has acquired loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance and carrying amount of the purchased credit impaired loans was as follows at ~~September 30,~~March 31, 2017 and December 31, 2016:

			March 31, 2017		December 31, 2016
Commercial, Industrial and Agricultural	$	392	$	372	$	385
Multi Family and Commercial Real Estate		4,428		3,278		3,321
Construction, Land Development and Farmland		1,571		1,566		1,569
1-4 Family Residential Real Estate		93		50		92
1-4 Family HELOC		37		36		36

Total outstanding balance		6,521		5,302		5,403
Less remaining purchase discount		708		614		635
				4,688		4,768
		5,813
Allowance for loan losses		6		6		6

Carrying amount, net of allowance	$	5,807	$	4,682	$	4,762

During the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2017, there was no change in the allowance for loan losses related to purchased credit impaired ~~loans decreased by $241.~~loans.

Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the ~~nine~~three months ended ~~September 30, 2016:~~March 31, 2017:

Balance at January 1, 2016
   $ 233
Accretion income
   (85 )


Balance at September 30, 2016
   $ 148

~~During the nine months ended September 30, 2016, loans with non-accretable purchase discounts totaling $708 were paid in full resulting in the recognition~~

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

Table of ~~the discounts in interest income.~~

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

Contents

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

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 4 - FAIR VALUES OF ASSETS AND LIABILITIES

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

Level 1

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

Level 2

Inputs to the valuation methodology include:

~~Level 2~~

●

~~Inputs to the valuation methodology include:~~

Quoted prices for similar assets or liabilities in active markets;

~~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.~~
●
Quoted prices for identical or similar assets or liabilities in inactive markets;
●
Inputs other than quoted prices that are observable for the asset or liability;
●
Inputs that are derived principally from or corroborated by the observable market data by correlation or other means.

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

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

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

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

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

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

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

~~Other real estate owned:~~Mortgage Loans Held ForSale:The fair value of ~~other real estate owned~~mortgage loans held for sale are valued at the lower of cost or market on an aggregate basis. When the aggregate fair value of mortgage loans held for sale is ~~generally based on recent real estate appraisals. These appraisals may utilize~~less than cost, an allowance is recorded. The Company utilizes a ~~single valuation approach or a combination of approaches including~~third party to value the mortgage loans held for sale portfolio using comparable sales ~~and~~data available with consideration of specific attributes of 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.~~loans. Such adjustments are typically not significant, and result in a Level 32 classification of the inputs for determining fair value.

There were no changes in valuation methodologies used during the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2017.

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

The following table sets forth the Company’s major categories of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015:~~2016:

   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, 2016

Assets

U. S. Treasury and other U. S. government agencies
   $ 1,938       $ —         $ 1,938       $ —
State and municipal
   126,141       —         126,141       —
Corporate bonds
   1,989       —         1,989       —
Mortgage backed securities
   21,498       —         21,498       —
Time deposits
   3,250       3,250       —         —
Liabilities

Interest rate swap
   $ 1,743       $ —         $ 1,743       $ —
December 31, 2015

Assets

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

Interest rate swap
   $ 572       $ —         $ 572       $ —

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

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

December 31, 2016
Assets
U. S. Treasury and other U. S.government agencies	$	1,908	$	-	$	1,908	$	-
State and municipal		119,634		-		119,634		-
Corporate bonds		1,987		-		1,987		-
Mortgage backed securities		20,034		-		20,034		-
Time deposits		3,250		3,250		-		-
Interest rate swap		195		-		195		-

Liabilities
Interest rate swap	$	267	$	-	$	267	$	-

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

The following table sets forth the Company’s major categories of assets and liabilities measured at fair value on a nonrecurring basis, by level within the fair value hierarchy, as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015:~~2016:

											Quoted Prices in		Significant
			Quoted Prices in		Significant						Active Markets		Other		Significant
			Active Markets		Other		Significant				for Identical		Observable		Unobservable
			for Identical		Observable		Unobservable				Assets		Inputs		Inputs
			Assets		Inputs		Inputs		Fair Value		(Level 1)		(Level 2)		(Level 3)
	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2016
March 31, 2017
Assets
Impaired loans	$	1,754	$	—	$	—	$	1,754	$	855	$	-	$	-	$	855
December 31, 2015
Mortgage loans held for sale										9,798		-		9,798		-

December 31, 2016
Assets
Impaired loans	$	2,486	$	—	$	—	$	2,486	$	3,410	$	-	$	-	$	3,410
Other real estate owned		1,149		—		—		1,149
Mortgage loans held for sale										11,831		-		11,831		-

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015:~~2016:

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

(1)

~~(1)~~

The ~~fair value is generally determined through independent appraisals of~~Company markets other real estate owned both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the ~~underlying collateral, which may include Level 3 inputs that~~Company markets independently are not ~~identifiable, or~~discounted by ~~using the discounted cash flow method if the loan is not collateral dependent.~~selling costs.

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

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

Carrying amounts and estimated fair values of financial instruments not reported at ~~September 30, 2016~~fair value at March 31, 2017 were as follows:


					Quoted Prices in		Significant								Quoted Prices in		Significant
					Active Markets		Other		Significant						Active Markets		Other		Significant
			Estimated		for Identical		Observable		Unobservable				Estimated		for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs		Carrying		Fair		Assets		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)		Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	34,869	$	34,869	$	34,869	$	—	$	—	$	18,290	$	18,290	$	18,290	$	-	$	-
Federal funds sold		100		100		100		—		—		50		50		50		-		-
Loans, net		652,445		655,257		—		—		655,257		688,542		689,063		-		-		689,063
Mortgage loans held for sale		14,649		14,649		—		—		14,649
Accrued interest receivable		3,499		3,499		—		3,499		—		3,921		3,921		-		3,921		-
Restricted equity securities		7,081		7,081		—		7,081		—		7,140		7,140		-		7,140		-
Financial liabilities
Deposits		659,856		659,809		—		—		659,809		826,183		825,376		-		-		825,376
Accrued interest payable		134		134		—		134		—		158		158		-		158		-
Federal Home Loan Bank advances		144,680		145,032		—		145,032		—		24,099		24,210		-		24,210		-

Carrying amounts and estimated fair values of financial instruments not reported at fair value at December 31, ~~2015~~2016 were as follows:


					Quoted Prices in		Significant								Quoted Prices in		Significant
					Active Markets		Other		Significant						Active Markets		Other		Significant
			Estimated		for Identical		Observable		Unobservable				Estimated		for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs		Carrying		Fair		Assets		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)		Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	20,289	$	20,289	$	20,289	$	—	$	—	$	23,413	$	23,413	$	23,413	$	-	$	-
Federal funds sold		281		281		281		—		—		830		830		830		-		-
Loans, net		608,747		611,628		—		—		611,628		657,701		658,130		-		-		658,130
Mortgage loans held for sale		55,093		55,093		—		—		55,093
Accrued interest receivable		3,096		3,096		—		3,096		—		3,786		3,786		-		3,786		-
Restricted equity securities		6,244		6,244		—		6,244		—		7,133		7,133		-		7,133		-
Financial liabilities
Deposits		640,008		639,746		—		—		639,746		763,834		763,174		-		-		763,174
Accrued interest payable		55		55		—		55		—		107		107		-		107		-
Federal Home Loan Bank advances		135,759		136,138		—		136,138		—		32,287		32,444		-		32,444		-

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 5 - STOCK-BASED COMPENSATION

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

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

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

A summary of the activity in the stock option plans for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2017 is as follows:

															Weighted
						Weighted							Weighted		Average
				Weighted		Average							Average		Remaining		Aggregate
				Average		Remaining		Aggregate					Exercise		Contractual		Intrinsic
				Exercise		Contractual		Intrinsic		Shares			Price		Term		Value
	Shares			Price		Term		Value
Outstanding at January 1, 2016		708,921		$	10.73
Outstanding at January 1, 2017											241,541		$	12.96
Granted		39,500			15.27						-			-
Exercised		(461,931	)		10.03						(36,141	)		11.38
Forfeited or expired		(31,991	)		10.37						(5,800	)		13.86

Outstanding at September 30, 2016		254,499			12.75		5.39	$	1,796

Exercisable at September 30, 2016		157,899			11.93		3.27	$	1,242

Outstanding at March 31, 2017											199,600			13.22		5.73	$	1,703
Exercisable at March 31, 2017											114,011			12.35		3.60	$	1,072

      Weighted Average
   Shares    Grant-Date Fair Value
Non-vested options at January 1, 2016
   84,160       $ 2.90
Granted
   39,500       3.82
Vested
   (22,260 )    2.75
Forfeited
   (4,800 )    2.92



Non-vested options at September 30, 2016
   96,600       3.31

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

~~NOTE 5 - STOCK-BASED COMPENSATION (CONTINUED)~~

~~The fair values of stock options granted during the nine months ended September 30, 2016 were determined using the following assumptions as of the grant date:~~


~~Risk-free interest rate~~		~~1.33% - 1.94%~~
~~Expected term~~		~~6.5 - 10~~ ~~years~~
~~Expected stock price volatility~~		~~21% - 24%~~
~~Dividend yield~~		~~1.40% - 1.57%~~

NOTE 6 - REGULATORY CAPITAL REQUIREMENTS

The Company and the Bank isare 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, 2016,~~March 31, 2017, the Company and the Bank ~~meets~~meet all capital adequacy requirements to which ~~it is~~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, 2016~~March 31, 2017 and December 31, ~~2015,~~2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 6 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

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

Actual and required capital amounts and ratios are presented below as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015.~~2016.

																					Minimum Required					To Be Well
	Actual Regulatory Capital					Minimum Required Capital Including Capital Conservation Buffer					To Be Well Capitalized Under Prompt Corrective Action Provisions					Actual					Capital Including					Capitalized Under
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Regulatory					Capital Conservation					Prompt Corrective
September 30, 2016
																Capital					Buffer					Action Provisions
																Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017
Company
Tier I leverage	$	96,129		11.03	%	$	34,861		4.000	%		N/A		N/A		$	98,995		10.81	%	$	36,631		4.000	%		N/A		N/A
Common equity tier 1		96,129		13.07	%		37,694		5.125	%		N/A		N/A			98,995		12.65	%		44,998		5.750	%		N/A		N/A
Tier I risk-based capital		96,129		13.07	%		48,726		6.625	%		N/A		N/A			98,995		12.65	%		56,736		7.250	%		N/A		N/A
Total risk-based capital		104,930		14.26	%		63,466		8.625	%		N/A		N/A			108,085		13.81	%		72,396		9.250	%		N/A		N/A

Bank
Tier I leverage	$	95,264		10.94	%	$	34,831		4.000	%	$	43,539		5.00	%	$	97,755		10.69	%	$	36,578		4.000	%	$	45,723		5.00	%
Common equity tier 1		95,264		12.96	%		37,672		5.125	%		47,779		6.50	%		97,755		12.50	%		44,967		5.750	%		50,833		6.50	%
Tier I risk-based capital		95,264		12.96	%		48,698		6.625	%		58,805		8.00	%		97,755		12.50	%		56,698		7.250	%		62,563		8.00	%
Total risk-based capital		104,065		14.16	%		63,387		8.625	%		73,492		10.00	%		106,845		13.67	%		72,298		9.250	%		78,160		10.00	%
December 31, 2015

December 31, 2016
Company
Tier I leverage	$	84,608		9.92	%	$	34,116		4.000	%		N/A		N/A		$	96,682		10.86	%	$	35,610		4.000	%		N/A		N/A
Common equity tier 1		84,608		12.02	%		31,675		4.500	%		N/A		N/A			96,682		13.00	%		38,115		5.125	%		N/A		N/A
Tier I risk-based capital		84,608		12.02	%		42,234		6.000	%		N/A		N/A			96,682		13.00	%		49,271		6.625	%		N/A		N/A
Total risk-based capital		92,431		13.13	%		56,317		8.000	%		N/A		N/A			105,764		14.22	%		64,150		8.625	%		N/A		N/A

Bank
Tier I leverage	$	84,196		9.88	%	$	34,087		4.000	%	$	42,609		5.00	%	$	95,637		10.75	%	$	35,586		4.000	%	$	44,482		5.00	%
Common equity tier 1		84,196		11.97	%		31,653		4.500	%		45,720		6.50	%		95,637		12.88	%		38,054		5.125	%		48,264		6.50	%
Tier I risk-based capital		84,196		11.97	%		42,204		6.000	%		56,271		8.00	%		95,637		12.88	%		49,192		6.625	%		59,402		8.00	%
Total risk-based capital		92,019		13.08	%		56,281		8.000	%		70,351		10.00	%		104,719		14.10	%		64,057		8.625	%		74,269		10.00	%

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 7 - EARNINGS PER SHARE

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2016		2015		2016		2015		2017		2016
Basic EPS Computation
Net income attributable to common shareholders	$	2,368	$	1,833	$	6,965	$	4,047	$	2,058	$	2,237
Weighted average common shares outstanding		7,651,549		7,086,798		7,542,573		6,059,257		7,741,305		7,450,400

Basic earnings per common share	$	0.31	$	0.26	$	0.92	$	0.67	$	0.27	$	0.30

Diluted EPS Computation
Net income attributable to common shareholders	$	2,368	$	1,833	$	6,965	$	4,047	$	2,058	$	2,237
Weighted average common shares outstanding		7,651,549		7,086,798		7,542,573		6,059,257		7,741,305		7,450,400
Dilutive effect of stock options and restricted shares		117,243		199,271		97,674		185,990		109,347		113,266

Adjusted weighted average common shares outstanding		7,768,792		7,286,069		7,640,247		6,245,247		7,850,652		7,563,666

Diluted earnings per common share	$	0.30	$	0.25	$	0.91	$	0.65	$	0.26	$	0.30

NOTE 8 - SEGMENT REPORTING

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

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

Table of Contents

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016

(Dollar amounts in thousands except per share amounts)

NOTE 8 - SEGMENT REPORTING (CONTINUED)

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


	Three Months Ended
	September 30, 2016
			Residential						Three Months Ended
			Mortgage						March 31, 2017
	Retail Banking		Banking			Consolidated			Retail Banking		Residential Mortgage Banking			Elimination Entries			Consolidated
Net interest income	$	7,750	$	85		$	7,835		$	7,896	$	75		$	-		$	7,971
Provision for loan losses		145		—			145			410		-			-			410
Noninterest income		1,024		551			1,575			594		591			(46	)		1,139
Noninterest expense		5,600		1,283			6,883			5,719		1,150			-			6,869
Income tax expense (benefit)		661		(42	)		619			303		(31	)		-			272

Net income (loss)		2,368		(605	)		1,763			2,058		(453	)		(46	)		1,559
Noncontrolling interest in net loss of subsidiary		—		605			605			-		453			46			499

Net income attributable to common shareholders	$	2,368	$	—		$	2,368		$	2,058	$	-		$	-		$	2,058


	Three Months Ended
	September 30, 2015
			Residential
			Mortgage
	Retail Banking		Banking			Consolidated
Net interest income	$	7,336	$	383		$	7,719
Provision for loan losses		—		—			—
Noninterest income		564		3,455			4,019
Noninterest expense		5,361		3,479			8,840
Income tax expense (benefit)		706		(148	)		558

Net income		1,833		507			2,340
Noncontrolling interest in net income of subsidiary		—		(507	)		(507	)

Net income attributable to common shareholders	$	1,833	$	—		$	1,833

Three Months Ended

March 31, 2016

Retail Banking

Residential
Mortgage
Banking

Elimination
Entries

Consolidated

Net interest income
$ 7,788 $ 294 $ - $ 8,082
Provision for loan losses
165 - - 165
Noninterest income
502 3,344 - 3,846
Noninterest expense
5,342 3,295 - 8,637
Income tax expense
546 22 - 568
Net income
2,237 321 - 2,558
Noncontrolling interest in net income of subsidiary
- (321 ) - (321 )
Net income attributable to common shareholders
$ 2,237 $ - $ - $ 2,237
36
Table of Contents
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)
~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016
(Dollar amounts in thousands except per share amounts)
~~NOTE 8 - SEGMENT REPORTING (CONTINUED)~~

   Nine Months Ended
   September 30, 2016
      Residential
      Mortgage
   Retail Banking    Banking    Consolidated
Net interest income
   $ 24,082       $ 527       $ 24,609
Provision for loan losses
   760       —         760
Noninterest income
   2,253       5,678       7,931
Noninterest expense
   16,800       6,747       23,547
Income tax expense
   1,810       (35 )    1,775






Net income (loss)
   6,965       (507 )    6,458
Noncontrolling interest in net income of subsidiary
   —         507       507






Net income attributable to common shareholders
   $ 6,965       $ —         $ 6,965






   Nine Months Ended
   September 30, 2015
      Residential
      Mortgage
   Retail Banking    Banking    Consolidated
Net interest income
   $ 18,304       $ 875       $ 19,179
Provision for loan losses
   (500 )    —         (500 )
Noninterest income
   950       7,988       8,938
Noninterest expense
   13,915       8,607       22,522
Income tax expense
   1,792       (148 )    1,644






Net income
   4,047       404       4,451
Noncontrolling interest in net loss of subsidiary
   —         (404 )    (404 )






Net income attributable to common shareholders
   $ 4,047       $ —         $ 4,047






~~COMMERCE UNION BANCSHARES, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~SEPTEMBER 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015~~
~~(Dollar amounts in thousands except per share amounts)~~

NOTE 9 - DERIVATIVES
~~During the nine months ended September 30, 2015, the Company entered into~~
The total notional amount of swap agreements was $21,505 at March 31, 2017 and December 31, 2016. At March 31, 2017, the contracts had fair values totaling ~~$6,300 to effectively convert fixed municipal security yields to floating rates.~~ $116 recorded in other assets and $329 recorded in other liabilities. At December 31, 2016, the contracts had fair values totaling $195 recorded in other assets and $267 recorded in other liabilities.
This hedge is intended to reduce the interest rate risk associated with the underlying hedged item by mitigating the risk of changes in fair value based on fluctuations in interest rates.
The total notional amount of swap agreements was $21,505 million at September 30, 2016 and December 31, 2015. At September 30, 2016, the contracts had fair values totaling $1,743 recorded in other liabilities. At December 31, 2015, the contracts had fair values totaling $77 recorded in other assets and $572 recorded in other liabilities.
The derivative instruments held by the Company are designated and qualify as fair value hedges. Accordingly, the gain or loss on the derivatives as well as the offsetting gain or loss on the available-for-sale securities attributable to the hedged risk are recognized in current earnings. At ~~September 30, 2016,~~March 31, 2017, the Company’s fair value hedges are effective and are not expected to have a significant impact on net income over the next twelve months.
NOTE 10 – INCOME TAXES
Income tax expense totaled $272 in the first quarter of 2017 as compared to $568 in the first quarter of 2016. The tax rate was favorably impacted by an increase in income from tax-exempt securities, excess tax benefits recognized relating to the exercise of stock options and the addition of certain state tax credits on interest-free loans.
NOTE 1011 - RECENT ACCOUNTING PRONOUNCEMENTS
ASU ~~2015-02, “Consolidation (Topic 810) – Amendments to the Consolidation Analysis”~~ implements changes to both the variable interest consolidation model and the voting interest consolidation model. ASU 2015-02 (1) eliminates certain criteria that must be met when determining when fees paid to a decision maker or service provider do not represent a variable interest, (2) amends the criteria for determining whether a limited partnership is a variable interest entity and (3) eliminates the presumption that a general partner controls a limited partnership in the voting model. ASU 2015-02 became effective for the Company on January 1, 2016 and did not have a significant impact on the consolidated financial statements.
2016-01~~ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs”~~ requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 became effective for the Company on January 1, 2016 and did not have a significant impact on the consolidated financial statements.
~~ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”~~ adds SEC paragraphs pursuant to an SEC Staff Announcement that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This did not have a significant impact on the consolidated financial statements.
~~COMMERCE UNION BANCSHARES, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~SEPTEMBER 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015~~
~~(Dollar amounts in thousands except per share amounts)~~
~~NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)~~
~~ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments”~~ requires that adjustments to provisional amounts that are identified during the measurement period of a business combination be recognized in the reporting period in which the adjustment amounts are determined. Furthermore, the income statement effects of such adjustments, if any, must be calculated as if the accounting had been completed at the acquisition date. The portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Under previous guidance, adjustments to provisional amounts identified during the measurement period are to be recognized retrospectively. ASU 2015-16 became effective for the Company on January 1, 2016 and did not have a significant impact on the consolidated financial statements.
~~ASU 2016-1,~~, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”(i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-1 will be effective for the Company beginning on January 1, 2018 and is not expected to have a significant impact on our consolidated financial statements.
37
Table of Contents
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 2016
(Dollar amounts in thousands except per share amounts)
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
ASU 2016-02”,“Leases (Topic 842)”requires lessees to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors. ASU 2016-1 will be effective for the Company on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is evaluating the potential impact of ASU 2016-02 on ~~the~~our consolidated financial statements.
~~COMMERCE UNION BANCSHARES, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~SEPTEMBER 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015~~
~~(Dollar amounts in thousands except per share amounts)~~

~~NOTE 10~~ASU 2016-09,“Compensation - ~~RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)~~
~~ASU 2016-09, “Compensation—~~Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment ~~Accounting”~~Accounting”requires that all excess tax benefits and tax deficiencies related to share-based payment awards be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such excess tax benefits were recorded as additional paid-in capital, and tax deficiencies were charged to additional paid in capital to the extent of prior excess tax benefits. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. ASU 2016-09 isbecame effective on January 1, 2017 with early adoption permitted. The Company ~~has~~ elected early adoption of this update and as a result recognized in income tax expense an excess tax benefit of ~~approximately $531~~$62 and $324 related to the exercise of stock options during the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2017 and March 31, 2016, respectively.
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective beginning on January 1, 2020. We are currently evaluating the potential impact of ASU 2016-13 on our consolidated financial statements.
~~NOTE 11~~
ASU 2017-05, “Other Income - ~~BUSINESS COMBINATION~~
~~On March 10, 2015,~~Gains and Losses from the ~~shareholders~~Derecognition of ~~Commerce Union Bancshares, Inc. (“Commerce Union”) approved a merger between Commerce Union Bank~~Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and ~~Reliant Bank (“Reliant”)~~Accounting for Partial Sales of Nonfinancial Assets”clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might apply and clarifies which ~~became~~model does apply in various circumstances. ASU 2017-05 will be effective on April 1, 2015 (“the Merger”). At the effective time of the Merger, each outstanding share and option to purchase a share of Reliant common stock converted into the right to receive 1.0213 shares of Commerce Union common stock. After the Merger was completed, Commerce Union’s shareholders owned approximately 44.5% of the common stock of the Company and Reliant Bank’s shareholders owned approximately 55.5% of the common stock offor the Company on ~~a fully diluted basis.~~
The Merger was accounted for as a reverse merger using the acquisition method of accounting, in accordance with the provisions of FASB ASC Topic 805-10 Business Combinations. As such, for accounting purposes, Reliant was consideredJanuary 1, 2018 and is not expected to have ~~acquired Commerce Union in this transaction.~~a significant impact on our consolidated financial statements.
~~As a result, the historical financial statements~~
38
Table of the Company prior to April 1, 2015 are the historical financial statements of Reliant. The assets and liabilities of Commerce Union as of the effective date of the Merger were recorded at their respective estimated fair values and added to those of Reliant. Any excess of purchase price over the net estimate fair values of the acquired assets and assumed liabilities of Commerce Union was allocated to all identifiable intangibles assets. Any remaining excess was then allocated to goodwill. Goodwill arising from the acquisition consists primarily of synergies of the combined operations. The goodwill resulting from this business combination is not deductible for tax purposes.Contents
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)
~~SEPTEMBER 30, 2016~~MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, ~~2015~~2016
(Dollar amounts in thousands except per share amounts)

NOTE 11 - ~~BUSINESS COMBINATION~~RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
~~The following table details~~ASU 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities” shortens the ~~financial impact~~amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the ~~merger, including~~security. ASU 2017-08 does not change the ~~calculation of the purchase price, the allocation of the purchase price to the fair values of net assets assumed and goodwill recognized:~~

Calculation of Purchase Price

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


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


Total consideration
   $ 47,901


Allocation of Purchase Price

Total consideration above
   $ 47,901


Fair value of assets acquired and liabilities assumed

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


Total fair value of net assets acquired
   37,270


Goodwill
   $ 10,631


~~COMMERCE UNION BANCSHARES, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~
~~SEPTEMBER 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015~~
~~(Dollar amounts in thousands except per share amounts)~~
~~NOTE 11 - BUSINESS COMBINATION (CONTINUED)~~
~~Actual data~~accounting for callable debt securities held at a discount. ASU 2017-08 will be effective for the ~~nine months ended September 30, 2016 and comparative proforma data for the nine months ended September 30, 2015 in the table below presents information as if the merger occurred~~Company on January 1, ~~2015:~~2019, with early adoption permitted. We are currently evaluating the potential impact of ASU 2017-08 on our consolidated financial statements.

   Nine Months Ended
   September 30,
   2016    2015
Net interest income
   $ 24,609       $ 22,160
Net income attributable to common shareholders
   6,965       4,693
Earnings per share—basic
   0.92       0.66
Earnings per share—diluted
   0.91       0.64
~~Proforma information for the nine months ended September 30, 2015 includes $840~~
39
Table of ~~nonrecurring merger related costs.~~Contents
~~NOTE 12 - MORTGAGE OPERATIONS~~
During the second quarter of 2016, the Company began transitioning most of its out-of-market branches to another bank and closed its Florida office. On April 5, 2016, the Bank entered into an agreement with BBMC Mortgage, LLC (“BBMC”), a wholly owned subsidiary of Bridgeview Bank Group. Under this agreement, the Bank ceased operations of its mortgage lending offices in Illinois, Ohio and Kentucky, and a support office in Brentwood, Tennessee. Employees of the Bank in these locations became employees of BBMC, and BBMC assumed certain lease obligations of the Bank in connection with these locations. The employees who transitioned from the Bank to BBMC did not have non-compete agreements with the Bank and were released from any existing non-solicitation agreements, provided that no customers for whom the Bank has funded residential mortgage loans will be refinanced by BBMC for a minimum period of 180 days from funding. Furthermore, BBMC will not solicit any Bank employees other than the employees at these locations. The transition of these offices and related personnel was completed on April 30, 2016. The Company received no consideration in connection with the agreement.
~~NOTE 13 - GAIN CONTINGENCY~~
In September 2016, as part of a plea agreement, a federal court ordered restitution of $935 to the Company related to loans made in reliance on fraudulent or inaccurate loan application data provided by a borrower who is now a defendant in a federal criminal proceeding. The amount of restitution will represent loan recoveries of $794 and interest income of $141. The funds are currently being held in escrow pending final sentencing that is scheduled for December. Should the Judge not approve the plea agreement, the amount of restitution could be affected. Therefore, the Company will not recognize any amount in the consolidated financial statements until it is received.
~~ITEM~~ Item2.           Management’s Discussion and Analysis of Financial ~~Condition~~Conditions and Results of ~~Operations~~Operations.
In the following section the terms “Company” means “Commerce Union Bancshares, Inc.” and “Bank” means “Reliant Bank.” The following discussion and analysis is intended to assist in the understanding and assessment of significant changes and trends related to our financial position and operating results. This discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere herein along with our ~~Annual Report on Form~~ 10-K filed March ~~28, 2016.~~14, 2017. Amounts in the narrative are shown in thousands, except for economic and demographic information, numbers of shares, per share amounts and as otherwise noted.
Critical Accounting Policies
The accounting principles we follow and ~~reporting policies~~our methods of ~~the Company are in accordance~~applying these principles conform with ~~accounting principles generally accepted in the United States of America~~U.S. GAAP and ~~conform to~~with general practices within the banking industry. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and fair value of financial instruments are particularly subjectThere have been no significant changes to ~~change.~~
~~Our accounting policies are integral to understanding the results reported. Accounting policies are described throughout this document which includes the consolidated financial statements. The~~our critical accounting policies ~~require~~as described in our ~~judgment to ascertain~~Annual Report on Form 10-K for the valuation of assets, liabilities, commitments and contingencies. We have established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner.year ended December 31, 2016. The following is a brief summary of the more significant policies.
Principles of Consolidation
The consolidated financial statements as of and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016 ~~and the three months ended September 30, 2015,~~ include the accounts of Commerce Union Bancshares, Inc., its wholly-owned subsidiary, Reliant Bank (the “Bank”), the Bank’s wholly-owned subsidiaries, Commerce Union Mortgage Services, Inc. (inactive and terminated in September 2016) and Reliant Investments, LLC (inactive and terminated in September 2016), and the Bank’s majority51% controlled subsidiary, Reliant Mortgage Ventures, LLC, collectively (the “Company”). ~~The consolidated financial statements for the nine months ended September 30, 2015 include the accounts~~Comparative periods are comprised of ~~the Company after the reverse merger described below for the six months ended September 30, 2015 and~~ the accounts of Reliant Bank, ~~only, with~~ its wholly-owned subsidiary, Reliant Investments, LLC, and ~~it’s~~its 51% controlled subsidiary, Reliant Mortgage Ventures, LLC, for the three months ended March 31, 2015. As described in the notes to our consolidated financial statements, Reliant Mortgage Ventures, LLC is considered a variable interest entity for which the Bank is deemed to be the primary beneficiary.LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
During 2011, the Bank and another entity organized Reliant Mortgage Ventures, LLC referred to above for the purpose of improving the Bank’s mortgage operations. Under the related operating agreement, the non-controlling member receives 70% of the profits of the mortgage venture, and the Bank receives 30% of the profits once the non-controlling member recovers its aggregate losses. The non-controlling member is responsible for 100% of the mortgage venture’s net losses. As of ~~September 30, 2016,~~March 31, 2017, the cumulative losses to date totaled ~~$2,865.~~$3,850 prior to intercompany eliminations. Reliant Mortgage Ventures, LLC will have to generate net income of this amount before the Company will participate in future earnings.
Purchased Loans
The Company maintains an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, because we recorded all acquired loans at fair value as of the date of the reverse merger (discussed below), we did not establish an allowance
for loan losses on any of the loans we purchased as of the acquisition date as any credit deterioration evident in the loans was included in the determination of the acquisition date fair values. For purchased credit-impaired loans accounted for under ASC 310-30, management establishes an allowance for loan losses subsequent to the date of acquisition by re-estimating expected cash flows on these loans on a quarterly basis, with any decline in expected cash flows due to a credit triggering impairment recorded as provision for loan losses. The allowance established is the excess of the loan’s carrying value over the present value of projected future cash flows, discounted at the current accounting yield of the loan or the fair value of collateral (less estimated costs to sell) for collateral dependent loans. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. While the determination of specific cash flows involves estimates, each estimate is unique to the individual loan, and none is individually significant. For non-purchased credit-impaired loans acquired in the reverse merger and that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by Reliant Bank for loans with similar characteristics as those acquired other than purchased credit-impaired loans. We record an allowance for loan losses only when the calculated amount exceeds the remaining credit mark established at acquisition.
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Table of Contents
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using historical loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions (national and local), and other factors such as changes in interest rates, portfolio concentrations, changes in the experience, ability, and depth of the lending function, levels of and trends in charged-off loans, recoveries, past-due loans and volume and severity of classified loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The entire allowance is available for any loan that, in management’s judgment, should be charged off.
A loan is impaired when full payment under the loan terms is not expected. All classified loans and loans on non-accrual status are individually evaluated for impairment. Factors considered in determining if a loan is impaired include the borrower’s ability to repay amounts owed, collateral deficiencies, the risk rating of the loan and economic conditions affecting the borrower’s industry, among other things. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value (less estimated costs to sell) of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless the principal amount is deemed fully collectible, in which case interest is recognized on a cash basis. When recognition of interest income on a cash basis is appropriate, the amount of income recognized is limited to what would have been accrued on the remaining principal balance at the contractual rate. Cash payments received over this limit, and not applied to reduce the loans remaining principal balance, are recorded as recoveries of prior charge-offs until these charge-offs have been fully recovered.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30,~~ MARCH 31,2017 AND2016 ~~AND 2015~~
~~Merger Between Commerce Union Bancshares, Inc. and Reliant Bank~~
~~On March 10, 2015, Commerce Union Bancshares, Inc. approved a merger with Reliant Bank which became effective on April 1, 2015 (“the Merger”). Each outstanding~~Earnings
Net income attributable to common shareholders amounted to $2,058, or $0.27 per basic share and option to purchase a share of Reliant Bank common stock converted into the right to receive 1.0213 shares of Commerce Union Bancshares, Inc. common stock. After the Merger was completed, Commerce Union Bancshares, Inc.’s shareholders owned approximately 44.5% of the common stock of the Company and Reliant Bank’s shareholders owned approximately 55.5% of the common stock of the Company on a fully diluted basis.
~~The Merger was accounted for as a reverse merger using the acquisition method of accounting, in accordance with the provisions of FASB ASC Topic 805-10 Business Combinations.~~
As such, for accounting purposes, Reliant Bank was considered to be acquiring Commerce Union Bancshares, Inc. in this transaction. As a result of the Merger, the historical financial statements for the nine months ended September 30, 2015, of the Company include the historical financial statements of Reliant Bank for the three months ended March 31, 2015 and Commerce Union Bancshares, Inc. for the six months ended September 30, 2015. The assets and liabilities of Commerce Union Bancshares, Inc. as of the effective date of the Merger were recorded at their respective estimated fair values and added to those of Reliant Bank. Any excess of purchase price over the net estimated fair values of the acquired assets and assumed liabilities of Commerce Union Bancshares, Inc. were allocated to all identifiable intangibles assets. Any remaining excess was then allocated to goodwill.
In periods following the Merger, the comparative historical financial statements of the Company are those of Reliant Bank prior to the Merger. These consolidated financial statements include the results attributable to the operations of Commerce Union Bancshares, Inc. beginning on April 1, 2015.
~~Merger expenses totaled $14 and $74 for the three and nine months ended September 30, 2016,~~2017, respectively, compared to $214 and $840 for the three and nine months ended September 30, 2015, respectively. These expenses were related to various professional fees for legal, accounting and other consultants. These and other factors that contributed to the Company’s earnings results for the periods indicated are discussed in more detail below.
~~Earnings~~
~~Net income attributable to shareholders amounted to $2,368 and $6,965,~~$2,237, or ~~$0.31 and $0.92 per basic share for the three and nine months ended September 30, 2016, respectively, compared to $1,833 and $4,047, or $0.26 and $0.67~~$0.30 per basic share for the same ~~periods~~period in ~~2015.~~2016. Diluted net income attributable to shareholders per share was ~~$0.30~~$0.26 and ~~$0.91 per diluted share and $0.25 and $0.65~~$0.30 per diluted share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017, and 2016, ~~and 2015,~~ respectively. The ~~largest~~major components ofcontributing to the ~~improvement~~decline in income per share from the ~~previous three and nine months include a 1.50% and 28.31%, respectively, increase~~prior-year discussed further below are the slight decline in net interest income ~~of $116 and $5,430, respectively, and a decrease in non-interest expenses of $1,957 for the three months ended September 30, 2016 compared~~primarily attributable to the ~~same period in 2015. The largest factors offsetting the improvement was a decrease in non-interest income~~impact of ~~$2,444 and $1,007 for the three and nine months ended September 30, 2016,~~purchase accounting and an increase in ~~non-interest expense~~our provision for loan losses driven by slightly higher charge offs and growth in our loan portfolio, offset by a decline in income taxes. Our earnings per share declined with the change in earnings and the greater number of ~~$1,025 for the nine months ended September 30, 2016 compared~~average shares outstanding due to the ~~same periods in 2015.~~
exercise of Company stock options.
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Table of Contents
Net Interest Income
Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of our revenues. The following table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017, and 2016 ~~and 2015~~ (dollars in thousands):

Three Months Ended March 31, 2017

Three Months Ended March 31, 2016

Change

Three Months Ended
September 30, 2016 Three Months Ended
September 30, 2015 Change
Average
Balances

Rates /
Yields
(%)

Interest
Income /
Expense

Average
Balances

Rates /
Yields
(%)

Interest
Income /
Expense

Due to
Volume

Due to
Rate

Total

Average
Balances Rates /
Yields
(%) Interest
Income /
Expense Average
Balances Rates /
Yields
(%) Interest
Income /
Expense Due to
Volume Due to
Rate Total
Interest earning assets

Interest Earning Assets

Loans
$ 649,778    4.57    $ 7,277    $ 582,145    4.75    $ 6,969    $ 1,813    $ (1,505 ) $ 308    $ 673,036 4.48 $ 7,263 $ 617,600 4.76 $ 7,307 $ 2,063 $ (2,107 ) $ (44 )
Loan fees
—      0.28    452    —      0.29    424    28    —      28    - 0.31 519 - 0.30 463 56 - 56

Loans with fees
649,778    4.85    7,729    582,145    5.04    7,393    1,841    (1,505 ) 336    673,036 4.79 7,782 617,600 5.06 7,770 2,119 (2,107 ) 12
Mortgage loans held for sale
12,804    3.39    109    47,521    3.95    473    (305 ) (59 ) (364 ) 10,478 3.64 94 39,514 3.75 368 (264 ) (10 ) (274 )
Federal funds sold
1,434    0.55    2    127    18.74    6    38    (42 ) (4 )
Deposits with banks
20,439    0.37    19    22,715    0.17    10    (7 ) 16    9    15,092 0.64 24 21,143 0.36 19 (31 ) 36 5
Investment securities—taxable
33,512    1.63    137    49,103    1.82    225    (66 ) (22 ) (88 )
Investment securities—tax-exempt
111,448    3.33    578    68,284    2.73    310    199    69    268
Other
7,072    4.61    82    5,418    4.83    66    35    (19 ) 16

Investment securities - taxable
31,093 1.94 149 49,255 1.93 236 (96 ) 9 (87 )
Investment securities - tax-exempt
133,550 3.95 828 87,116 3.06 438 252 138 390
Fed funds sold and other
7,770 5.01 96 6,553 5.09 83 21 (8 ) 13
Total earning assets
836,487    4.37    8,656    775,313    4.42    8,483    1,735    (1,562 ) 173    871,019 4.18 8,973 821,181 4.48 8,914 2,001 (1,942 ) 59

Nonearning assets
48,640    47,915

$ 885,127    $ 823,228

Interest bearing liabilities

Nonearning Assets
55,263 50,780
Total assets
$ 926,282 $ 871,961
Interest Bearing Liabilities

Interest bearing demand
$ 89,572    0.20    46    102,110    0.22    57    (6 ) (5 ) (11 ) $ 82,780 0.21 43 $ 89,856 0.20 44 (12 ) 11 (1 )
Savings and money market
179,816    0.33    151    173,651    0.31    136    5    10    15    184,872 0.33 150 193,715 0.34 166 (10 ) (6 ) (16 )
Time deposits—retail
143,344    0.73    262    140,894    0.74    262    16    (16 ) —
Time deposits—wholesale
94,239    0.71    168    88,075    0.55    123    9    36    45

Time deposits - retail
291,594 0.70 506 140,508 0.70 245 261 - 261
Time deposits - wholesale
81,975 0.93 187 115,766 0.62 178 (262 ) 271 9
Total interest bearing deposits
506,971    0.49    627    504,730    0.45    578    24    25    49    641,221 0.56 886 539,845 0.47 633 (23 ) 276 253
Federal Home Loan Bank advances and other
132,876    0.58    194    129,024    0.57    186    5    3    8

Federal Home Loan Bank advances
45,974 1.02 116 117,224 0.68 199 (483 ) 400 (83 )
Total interest-bearing liabilities
639,847    0.51    821    633,754    0.48    764    29    28    57    687,195 0.59 1,002 657,069 0.51 832 (506 ) 676 170

Net interest rate spread (%) / Net Interest Income ($)
3.86    $ 7,835    3.94    $ 7,719    $ 1,706    $ (1,590 ) $ 116

Net interest rate spread (%) / Net interest income ($)
3.59 $ 7,971 3.97 $ 8,082 $ 2,507 $ (2,618 ) $ (111 )
Non-interest bearing deposits
134,343    (0.09 ) 93,267    (0.06 ) 129,385 (0.09 ) 110,060 (0.08 )
Other non-interest bearing liabilities
4,159    3,177    2,976 5,595
Stockholder’s equity
106,778    93,030

$ 885,127    $ 823,228

Stockholders' equity
106,726 99,237
Total liabilities and stockholders' equity
$ 926,282 $ 871,961
Cost of funds
0.42    0.42    0.50 0.43

Net interest margin
3.98    4.03
Net Interest Margin
4.01 4.08
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Table of Contents

   Nine Months Ended
September 30, 2016    Nine Months Ended
September 30, 2015    Change
   Average
Balances    Rates /
Yields
(%) Interest
Income /
Expense    Average
Balances    Rates /
Yields
(%) Interest
Income /
Expense    Due to
Volume Due to
Rate Total
Interest earning assets

Loans
   $ 635,055       4.87    $ 22,603       $ 488,421       4.75    $ 17,345       $ 4,850    $ 408    $ 5,258
Loan fees
   —         0.30    1,408       —         0.28    1,032       376    —      376










Loans with fees
   635,055       5.17    24,011       488,421       5.03    18,377       5,226    408    5,634
Mortgage loans held for sale
   24,351       3.64    663       35,554       4.04    1,075       (314 ) (98 ) (412 )
Federal funds sold
   700       0.57    3       440       3.04    10       6    (13 ) (7 )
Deposits with banks
   20,646       0.35    54       21,327       0.17    27       (1 ) 28    27
Investment securities—taxable
   43,840       1.79    589       45,302       1.91    646       (19 ) (38 ) (57 )
Investment securities—tax-exempt
   98,560       3.33    1,506       58,779       2.73    791       540    175    715
Other
   6,747       4.77    241       4,688       4.68    164       74    3    77










Total earning assets
   829,899       4.60    27,067       654,511       4.39    21,090       5,512    465    5,977










Nonearning assets
   49,350          35,441





   $ 879,249          $ 689,952





Interest bearing liabilities

Interest bearing demand
   $ 89,604       0.20    137       85,554       0.21    136       10    (9 ) 1
Savings and money market
   188,387       0.34    480       152,764       0.28    325       81    74    155
Time deposits—retail
   142,602       0.70    747       107,692       0.78    625       223    (101 ) 122
Time deposits—wholesale
   105,188       0.65    513       94,593       0.53    377       45    91    136










Total interest bearing deposits
   525,781       0.48    1,877       440,603       0.44    1,463       359    55    414
Federal Home Loan Bank advances and other
   121,999       0.64    581       93,470       0.64    448       133    —      133










Total interest-bearing liabilities
   647,780       0.51    2,458       534,073       0.48    1,911       492    55    547










Net interest rate spread (%) / Net Interest Income ($)
      4.09    $ 24,609          3.91    $ 19,179       $ 5,020    $ 410    $ 5,430






Non-interest bearing deposits
   123,526       (0.08 )    77,592       (0.06 )
Other non-interest bearing liabilities
   4,846          2,317
Stockholder’s equity
   103,097          75,970





   $ 879,249          $ 689,952










Cost of funds
      0.43          0.42





Net interest margin
      4.20          4.00

Table Assumptions—Average loan balances are inclusive of nonperforming loans. Yields computed on tax-exempt instruments are on a tax equivalent basis. Net interest spread is calculated as the yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. Net interest margin is the result of net interest income calculated on a tax-equivalent basis divided by average interest earning assets for the period. Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is change in rate times the previous volume. Changes not due solely to volume or rate changes have been allocated to volume change and rate change in proportion to the relationship of the absolute dollar amounts of the change in each category.
Analysis—For the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, we recorded net interest income of approximately ~~$7.8~~$8.0 million, ~~and $24.6 million, respectively,~~ which resulted in a net interest margin (net interest income expressed on a tax-equivalent basis divided by the average balance of interest earning assets) of ~~3.98% and 4.20%, respectively.~~4.01%. For the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, we recorded net interest income of approximately ~~$7.7~~$8.1 million, ~~and $19.2 million, respectively,~~ which resulted in a net interest margin of ~~4.03% and 4.00%, respectively.~~4.08%. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016, ~~and 2015,~~ our net interest spread was ~~3.86%~~3.59% and ~~4.09%, respectively and 3.94% and 3.91%~~3.97%, respectively. During the nine months ended September 30, 2016, a contributing factor to the increase in our net interest income was the payoff of a loan previously carried as purchase credit impaired. The payoff resulted in a $619 increase in our net interest income for the period. This was partially offset by a $165 reversal of interest due to nonaccrual loans.
Our year-over-year average loan volume increased by approximately ~~30.0%~~9.0% from the first ~~nine~~three months of ~~2015~~2016 to the first ~~nine~~three months of ~~2016.~~2017. Our ~~combined loan and loan fee yield increased from 5.03% to 5.17% for the first nine months of 2015 compared to 2016, respectively, while our~~ combined loan and loan fee yield decreased from ~~5.04%~~5.06% to ~~4.85%~~4.79% for the three months ended ~~September 30, 2015~~March 31, 2016 to 2017, respectively.
Our yield on tax-exempt investments increased to 3.95% for the three months ended March 31, 2017 from 3.06% for the same period in 2016. Our year-over-year average tax-exempt investment volume increased by approximately 53.3% from the first three months of 2016 ~~respectively.~~to the same period in 2017. We have continued to add volume to our investment portfolio. A portion of the earnings growth in the tax-exempt investment portfolio related to the completion of a municipal bond replacement strategy that was implemented late in the fourth quarter of 2016 and completed in the first quarter. Additional strategies were implemented in the first quarter of 2017 that are expected to provide better yielding securities that are relatively less sensitive to rising interest rates and potential declines in corporate tax rates.
Our cost of funds increased ~~from 0.42%~~ to ~~0.43% for the nine months ended September 30, 2015 compared to the same period in 2016, respectively. Our cost of funds remained constant at 0.42%~~0.50% for the three months ended ~~September 30, 2015 and~~March 31, 2017 compared to 0.43% for the same period in 2016. ~~Our~~The increase in our cost of ~~interest-bearing liabilities has held fairly constant over the periods presented.~~funds was driven mainly by higher rates being paid on time deposits and FHLB advances. We ~~also~~ experienced a ~~44.0%~~17.6% increase in our average non-interest bearing deposits from ~~the three months ended September 30, 2015 to~~March 31, 2016 ~~and~~as a ~~59.2% increase in our average non-interest bearing deposits from the nine months ended September 30, 2015 to 2016. These increases were the~~ result of ~~the Merger that occurred on April 1, 2015 and~~ our continuing initiative to grow low cost ~~core~~ deposits.
We continue to deploy various asset and liability management strategies to manage our risk relating to interest rate fluctuations. We believe margin expansion over both the short and the long term will be challenging primarily due to continued pressure on ~~earning asset~~loan yields ~~during this extended period of low interest rates. Loan pricing for creditworthy borrowers is very competitive~~ in our ~~markets and has limited our ability~~competitive markets. Any increases in short-term market interest rates would be expected to increase ~~pricing~~our interest income on ~~new~~variable-rate loans, certain investments and ~~renewed loans over the last several quarters.~~interest rate swaps but may be offset by an increase in our cost of funds that is somewhat dependent on short-term interest rates.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. Based upon management’s assessment of the loan portfolio, we adjust our allowance for loan losses on a quarterly basis to an amount deemed appropriate to adequately cover probable losses inherent in the loan portfolio.
Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at ~~September 30, 2016.~~March 31, 2017. While policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management, they are necessarily approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, local real estate market, or particular industry or borrower-specific conditions, which may materially negatively impact our asset quality and the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.
We recorded a provision for loan losses of ~~$145 and $760, respectively, for the three and nine months ended September 30, 2016, compared to no provision for loan losses~~$410 for the three months ended ~~September 30, 2015 and a negative~~March 31, 2017, compared to $165 for loans losses being recorded for the three months ended March 31, 2016. Our provision for loan losses ~~of $500 for~~was impacted by the ~~nine months ended September 30, 2015. Our provision increase was primarily the result~~level of loan growth, ~~that we have experienced. The lower provision for loan losses (including~~ the ~~negative provision) experienced in~~credit quality of the ~~prior year was due to the continued improvement of credit-quality factors in our~~ loan portfolio ~~continued recoveries~~ and ~~low charge-offs.~~
the amount of net charge-offs and recoveries.
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Table of Contents
Non-Interest Income
Our non-interest income is composed of several components, some of which vary significantly between periods. The following is a summary of our non-interest income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017, and 2016 ~~and 2015~~ (dollars in thousands):

   Three Months Ended    Dollar    Percent
Three months Ended

Dollar

Percent

   September 30,    Increase    Increase March 31, Increase Increase
   2016    2015    (Decrease)    (Decrease)
2017

2016
(Decrease) (Decrease)
Non-Interest Income

Service charges and fees
   $ 320       $ 350       $ (30 )    -8.6 % $ 310 $ 285 $ 25 8.8 %
Securities gains (losses), net
   296       15       281       1873.3 % 36 - 36 100.0 %
Gains on mortgage loans sold, net
   551       3,454       (2,903 )    �� -84.0 % 542 3,342 (2,800 ) -83.8 %
Gain on sale of other real estate
   145       1       144       14400.0 % 24 - 24 100.0 %
Other noninterest income:

Bank-owned life insurance
   194       162       32       19.8 % 186 170 16 9.4 %
Brokerage revenue
   40       3       37       1233.3 %
Trust and brokerage revenue
14 14 - 0.0 %
Rental income
   —         —         —         0.0 % - 2 (2 ) -100.0 %
Miscellaneous noninterest income, net
   29       34       (5 )    -14.7 %








Miscellaneous noninterest income
27 33 (6 ) -18.2 %
Total other non-interest income
   263       199       64       32.2 % 227 219 8 3.7 %








Total non-interest income
   $ 1,575       $ 4,019       $ (2,444 )    -60.8 %








   Nine Months Ended    Dollar    Percent
   September 30,    Increase    Increase
   2016    2015    (Decrease)    (Decrease)
Non-Interest Income

Service charges and fees
   $ 926       $ 837       $ 89       10.6 %
Securities gains (losses), net
   356       (381 )    737       -193.4 %
Gains on mortgage loans sold, net
   5,675       7,987       (2,312 )    -28.9 %
Gain on sale of other real estate
   301       1       300       30000.0 %
Other noninterest income:

Bank-owned life insurance
   557       378       179       47.4 %
Brokerage revenue
   67       10       57       570.0 %
Rental income
   2       6       (4 )    -66.7 %
Miscellaneous noninterest income, net
   47       100       (53 )    -53.0 %








Total other non-interest income
   673       494       179       36.2 %








Total non-interest income
   $ 7,931       $ 8,938       $ (1,007 )    -11.3 %








Total Non-Interest Income
$ 1,139 $ 3,846 $ (2,707 ) -70.4 %
The most significant reason for the increases during the nine months ended September 30, 2016 compared to 2015 relate to the Merger between Commerce Union Bancshares, Inc. and Reliant Bank that was effective April 1, 2015. Following is a description of certain components ofdecrease in total non-interest income ~~and additional reasons for fluctuations~~ during the three ~~and nine~~ months ended ~~September 30, 2016~~March 31, 2017 compared to the same ~~periods~~period in ~~2015.~~2016 substantially relates to the decline in gains on mortgage loans sold, net. This and other factors impacting non-interest income are discussed further below.
Service charges on deposit accounts generally reflect customer growth trends but are also ~~are~~ impacted by changes in our fee ~~pricing to help attract and retain customers.~~
structures.
Securities gains and losses ~~will~~often fluctuate from period to period and ~~are often~~can sometimes be attributable to various balance sheet risk strategies. During the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2017, the Company sold securities classified as available for sale ~~totaling $20,036, including $18,978 sold during~~for a gain of $36. During the ~~third~~first quarter of ~~2016. The Company recognized a gain on sales of~~2016, the Bank did not sell any securities classified as available for sale of $296 and $356 for the three and nine months ended September 30, 2016, respectively. Proceeds from sales during the third quarter of 2016 were reinvested in higher yielding securities with comparable interest rate and credit risk. During the nine months ended September 30, 2015, the Bank sold securities that were previously classified as held to maturity and recognized a loss on sale of $381. All other securities classified as held to maturity were transferred to available-for-sale during the first quarter of 2015.sale.
Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans. These mortgage fees are for loans originated and subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage related revenue increases in lower interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging housing markets. Mortgage-related revenue will fluctuate from quarter to quarter as the rate environment changes and as changes occur towith our mortgage operations. Gains on mortgage loans sold, net, amounted to ~~$551 and $5,675~~$542 for the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, compared to ~~$3,454 and $7,987~~$3,342 for the same ~~periods~~period in ~~the prior year.~~2016. As discussed further in the notes to our consolidated financial statements, gains on mortgage loans sold are generally recognized at the time of a loan sale corresponding to the transfer of risk. The timing of this revenue recognition varies from the time a loan is originated with a customer. We completed the transition of a majority of our out-of-market mortgage loan production offices during the ~~three months~~quarter ended June 30, 2016 to better focus our marketing and other resources in our core Middle Tennessee markets. The decline in gains on mortgage loans sold during the ~~nine month period~~three months ended ~~September 30, 2016~~March 31, 2017 was directly attributable to the transition.
~~During the three and nine months ended September 30, 2016, we recognized a gain on sale~~
44
Table of other real estate of $145 and $301, respectively. During the nine months ended September 30, 2016, we sold the remaining two properties in our other real estate portfolio, of which one was sold during the third quarter of 2016. Also, we recognized a gain previously deferred related to the payoff of a loan financing a previous other real estate sale.Contents
~~Noninterest~~Non-interest income also includes appreciation in the cash surrender value of bank-owned life insurance which was ~~$194 and $557~~$186 for the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, compared to ~~$162 and $378~~$170 for the three ~~and nine~~ months ended ~~September 30, 2015. For the nine months ended September 30, 2016 compared to the same period in 2015,~~March 31, 2016. Primarily, the increase in earnings on these bank-owned life insurance policies ~~primarily~~ resulted from ~~the Merger effective April 1, 2015. At the end of June 2015,~~ an additional $4.0 million of bank-owned life insurance that was purchased with terms similar to our existing ~~policies. Also, during the nine months ended September 30, 2016, an additional $4.0 million of bank-owned life insurance was purchased with terms similar to our existing policies.~~policies in March 2016. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in the cash surrender value of the policies) is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support the policies. Earnings on these policies generally are not taxable.
Our trust and brokerage revenue is solely based on commissions received from established referral relationships and fluctuate based on related activity.
Rental income relates to rent received on foreclosed properties and is minimal for the ~~periods presented.~~
three months ended March 31, 2016. There were no foreclosed properties on our balance sheet or rent received during the three months ended March 31, 2017.
Non-Interest Expense
The following is a summary of our non-interest expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 and 2016 ~~and 2015~~ (dollars in thousands):

   Three Months Ended    Dollar    Percent
Three months Ended

Dollar

Percent

   September 30,    Increase    Increase March 31, Increase Increase
   2016    2015    (Decrease)    (Decrease)
2017

2016
(Decrease) (Decrease)
Non-Interest Expense

Salaries and employee benefits
   $ 4,017       $ 5,324       $ (1,307 )    -24.5 % $ 4,269 $ 5,394 $ (1,125 ) -20.9 %
Occupancy
   767       914       (147 )    -16.1 % 762 829 (67 ) -8.1 %
Information technology
   586       655       (69 )    -10.5 % 513 627 (114 ) -18.2 %
Advertising and public relations
   117       363       (246 )    -67.8 % 75 265 (190 ) -71.7 %
Audit, legal and consulting
   328       565       (237 )    -41.9 % 293 281 12 4.3 %
Federal deposit insurance
   109       93       16       17.2 % 99 114 (15 ) -13.2 %
Provision for losses on other real estate
   17       —         17       100.0 % - 26 (26 ) -100.0 %
Other operating
   942       926       16       1.7 % 858 1,101 (243 ) -22.1 %








Total non-interest expense
   $ 6,883       $ 8,840       $ (1,957 )    -22.1 %








   Nine Months Ended    Dollar    Percent
   September 30,    Increase    Increase
   2016    2015    (Decrease)    (Decrease)
Non-Interest Expense

Salaries and employee benefits
   $ 14,294       $ 13,238       $ 1,056       8.0 %
Occupancy
   2,406       2,520       (114 )    -4.5 %
Information technology
   1,849       1,516       333       22.0 %
Advertising and public relations
   542       861       (319 )    -37.0 %
Audit, legal and consulting
   993       1,309       (316 )    -24.1 %
Federal deposit insurance
   349       276       73       26.4 %
Provision for losses on other real estate
   70       110       (40 )    -36.4 %
Other operating
   3,044       2,692       352       13.1 %








Total non-interest expense
   $ 23,547       $ 22,522       $ 1,025       4.6 %








Total Non-Interest Expense
$ 6,869 $ 8,637 $ (1,768 ) -20.5 %
The most significant reason for the ~~changes during~~decline in total non-interest expense of $1,768 or 20.5% is due to the ~~nine~~decrease in salary and employee benefits for the three months ended September 30, 2016 and 2015 relate to the Merger between Commerce Union Bancshares, Inc. and Reliant Bank that was effective April 1, 2015. Following is a description of certain components of non-interest expense and additional reasons for fluctuations during the three and nine months ended September 30, 2016March 31, 2017 when compared to the same ~~periods~~period in ~~2015.~~2016. This was primarily attributable to a reduction in the number of mortgage employees. These and other factors impacting non-interest expense are discussed further below.
Salaries and employee benefits decreased for the three months ended ~~September 30, 2016~~March 31, 2017 compared to the same period in ~~2015 and increased for the nine months ended September 30, 2016 compared~~2016. The decline is mainly attributable to the ~~same period~~decrease in ~~2015. The primary reason for the change during the nine month period ended September 30, 2016 compared to the same period in 2015 was a result~~employee related expenses of the ~~Merger effective April 1, 2015. The decrease during~~mortgage operations resulting from the ~~three months ended September 30, 2016 compared to the same period in 2015 was a result~~transition of a ~~decrease in compensation due to transitioning several~~majority of our out-of-market mortgage loan production offices ~~to another bank. The~~during the 2^nd quarter of 2016. This decrease was ~~partially~~ offset by ~~general increases~~an increase in ~~compensation for our other staff.~~
expenses relating the staffing of the Green Hills branch and the Chattanooga loan production office.
Certain of our facilities are leased while there are others that we own. Primarily, occupancy costs decreased ~~during the nine months ended September 30, 2016 compared~~due to the ~~same period in 2015. During the three months ended September 30, 2016 compared to the same period in 2015, occupancy costs decreased. These decreases are due to transitioning several~~transition of a majority of our out-of-market mortgage loan production offices ~~to another bank. These decreases were partially~~during the 2^nd quarter of 2016. This decrease was offset by ~~inflationary increases~~an increase in ~~the~~our Maryland Farms lease which renewed in mid-2016.
45
Table of ~~our Franklin operations center as well as increases in rent for other mortgage loan production offices.~~Contents
~~Information technology costs increased when comparing the nine months ended September 30, 2016 to the similar period of 2015, substantially due to the Merger effective April 1, 2015.~~ Information technology costs decreased when comparing the three months ended ~~September 30, 2016~~March 31, 2017 to the ~~similar~~comparable period of 2015. The Company operated on two core data processing systems until mid-November 2015 when the conversion to one core system occurred. Since November 2015, core service costs have declined as a result of this conversion.in 2016. The decline ~~for~~from the ~~third quarter~~prior year mainly relates to a reduction of ~~2016 compared to the same period of 2015 was partially offset by purchases of other information technology products~~our core processing and ~~services during the three and nine months ended September 30, 2016.~~communication line expenses.
Advertising and public relations costs decreased when comparing the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 to the same period of 2016, ~~to similar periods of 2015,~~ by ~~$246 and $319, respectively.~~$190. The decrease ~~is primarily due to transitioning several of our out-of-market mortgage offices to another bank. These decreases have been partially offset by cost increases~~was substantially attributable to a decline in our ~~current~~direct-mail advertising and related consultation expenditures. New customer ~~acquisition strategy.~~aquisition strategies are being evaluated by our new Chief Strategy Officer hired in the first quarter of 2017.
Audit, legal and consulting costs ~~decreased in~~increased slightly by $12 or 4.3% when comparing the three ~~and nine~~ months ended ~~September 30, 2016 compared to similar periods of 2015 due to a reduction~~March 31, 2017 and the same period in ~~merger-related expenses offset partially by increased costs associated with being a public company.~~2016.
Our FDIC expense is based on our outstanding liabilities for the period multiplied by a factor determined by the FDIC, mainly driven by our most recent regulatory rating and certain financial performance factors. Our FDIC expense ~~increased~~decreased for ~~the nine~~three months ended ~~September 30, 2016,~~March 31, 2017, compared to the same period in 2015 primarily due to the Merger effective April 1, 2015. The remainder of the increase for the nine months and the increase for the three month ended September 30, 2016 compared to the same periods in 2015 relates to our increase in average liabilities which2016. This decrease is the ~~base for determining our premiums. The costs associated with~~result of a decrease in this factor by the FDIC which was partially offset by the increase in average ~~liabilities was slightly offset by an improved combined rate post-merger.~~liabilities.
We recorded a provision for losses on other real estate of ~~$17 and $70 for~~$26 during the three ~~and nine~~ months ended ~~September 30, 2016. These provisions related~~March 31, 2016 compared to ~~one property held in our other real estate portfolio. As mentioned previously, this remaining property was sold during the third quarter of 2016. We recorded~~ no provision during the three months ended ~~September 30, 2015 and a provision~~March 31, 2017. As of ~~$110 for~~March 31, 2017, the ~~nine months ended September 30, 2015 relating to one property that was~~Company has no properties held in ~~our~~the other real estate portfolio.
Other operating expenses ~~increased~~decreased for the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, compared to the same ~~periods~~period in ~~2015~~2016 mainly due ~~to the Merger effective April 1, 2015. These increases were partially offset by~~ decreases in loan-related expenses such as processing costs relating to our mortgage operations as volume decreased and our transitioning of several of our out-of-market mortgage offices to another bank. This decrease was offset by increased blanket bond costs, consulting fees, and regulatory fees.
Income Taxes
During the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, we recorded consolidated income tax expense of ~~$619 and $1,775, respectively,~~$272, compared to ~~$558 and $1,644, respectively,~~$568, for the three ~~and nine~~ months ended ~~September 30, 2015.~~March 31, 2016. The Company files separate ~~Federal~~federal tax returns for the operations of the mortgage banking and ~~mortgage~~ banking operations. The taxable income or losses of the mortgage banking operations are included in the respective returns of the Bank and non-controlling members for ~~Federal~~federal purposes. During the third quarter of 2015, the Company began consolidating the results of the Bank and the mortgage banking operations in its tax filings with the State of Tennessee. Results of the mortgage banking operations were previously reported on the individual state returns of the Bank and mortgage banking operation’s non-controlling members.
Our income tax expense attributable to Bank shareholders for the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2017, reflects an effective income tax rate of ~~21.8%~~12.8% (exclusive of a tax benefit from our mortgage banking operations of ~~$42~~$31 on pre-tax ~~loss~~losses of ~~$647) and 20.6%~~$484 prior to intercompany eliminations), compared to 19.6% (exclusive of a tax ~~benefit~~expense of $22 on pre-tax income of $343 from our mortgage banking operations ~~of $35 on pre-tax loss of $542),~~
respectively, compared to 27.8% (exclusive of a tax benefit from our mortgage banking operations of $148 on pre-tax income of $359) and 30.7% (exclusive of a tax benefit from our mortgage banking operations of $148 on pre-tax income of $256) for the comparable ~~periods~~period of ~~2015. During~~2016). Our tax rate for the three ~~and nine~~ months ended ~~September 30, 2016, the Company recognized excess~~March 31, 2017, was favorably influenced by tax ~~benefits of $107 and $531, respectively,~~credits related to ~~the exercise~~interest-free loans originated in April of ~~stock options, thereby reducing our effective tax rate as compared to the three and nine months ended September 30, 2015. Also, during the nine months ended September 30,~~ 2016, ~~the Bank entered into~~ an ~~interest-free loan agreement and recognizes a state tax credit~~increase in the amount of $217 each quarter beginning in the second quarter of 2016. Our effective tax rate represents our blended federal and state rate of 38.29% reduced by the impact of anticipated favorable permanent differences between our book and taxable income such as bank-owned life insurance, income earned on tax-exempt investment securities, ~~and~~ certain federal and state tax ~~credits. The non-deductibility~~credits, and benefits relating to the exercise of ~~certain merger related expenses also drives fluctuations in our effective tax rate.~~Company stock options.
Noncontrolling Interest in Net Income (Loss) of Subsidiary
Our noncontrolling interest in net income (loss) of subsidiary is solely attributable to Reliant Mortgage Ventures, LLC. Reliant Bank has a 51% voting interest in this venture. Under the terms of the related operating agreement, the noncontrolling member receives 70% of the profits of the mortgage venture, and the Bank receives 30% of ~~the~~any profits. The noncontrolling member is responsible for 100% of the mortgage venture’s net losses. ~~During~~The venture had a net loss of $453 prior to intercompany eliminations, for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 compared to net income of $321, for the same period in 2016. The decrease in income for the three months ended March 31, 2017 when compared to the same period in 2016 results from the ~~Company was transitioning~~transition of most of its out-of-market mortgage offices to another bank (see Note 12 to the consolidated financial statements included elsewhere herein). The venture incurred net losses of $605 and $507, respectively, during the three and nine months ended September 30, 2016, compared to net income of $507 and $404, respectively, for the three and nine months ended September 30, 2015.bank. These amounts are included in our consolidated results. ~~See~~Also, see Note 8 for segment reporting in the consolidated financial statements included elsewhere herein.
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Table of Contents
COMPARISON OF BALANCE SHEETS ~~AS OF SEPTEMBER 30, 2016~~ATMARCH 31, 2017 ANDDECEMBER 31, ~~2015~~2016
Overview
The Company’s total assets were ~~$920,020~~$962,465 at ~~September 30, 2016~~March 31, 2017 and ~~$876,404~~$911,984 at December 31, ~~2015.~~2016. Our assets increased by ~~5.0%~~5.5% from December 31, ~~2015~~2016 to ~~September 30, 2016.~~March 31, 2017. The increase was substantially attributable to the growth in loans and investments during the period of $30,849, or 4.6% and $32,453 or 22.1%, respectively discussed further below. These increases were partially offset by a decrease in cash and cash equivalents of $5.9 million; a decrease in mortgage loans held for sale, net of $2.0 million; and a decrease in other assets of $5.6 million. The Company’s total liabilities were $852,870 at March 31, 2017 and $805,065 at December 31, 2016, an increase of 5.9%. The increase in ~~assets~~liabilities from December 31, ~~2015~~2016 to ~~September 30, 2016,~~March 31, 2017, was substantially attributable to an increase in ~~cash and cash equivalents~~deposits of ~~$14.4 million; an~~$62.3 million or 8.2% during the period. This increase in net loans of approximately $43.7 million, discussed further below; a net increase in our securities portfolio of $21.0 million discussed further below; and a $4.6 million increase in bank-owned life insurance. These increases werewas partially offset by a decrease in our mortgage loans held for sale of $40.4 million. The Company’s total liabilities were $810,788 at September 30, 2016 and $779,653 at December 31, 2015, an increase of 4.0%. The increase in total liabilities from December 31, 2015 to September 30, 2016, was substantially attributable to an increase in total deposits of $19.8 million and an increase in Federal Home Loan ~~Bank~~ advances of ~~$8.9~~$8.2 million. These and other components of our balance sheets are discussed further below.
Loans
Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. As previously discussed the competition for quality loans in our markets has remained ~~intense.~~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~~growth. In the first quarter of 2017 we expanded outside Middle Tennessee into Chattanooga, one of the state’s fastest growing metropolitan markets. Our Chattanooga team as well as the ~~local market has continued~~lending staff in our new full-service branch in Green Hills opened in the first quarter of 2017 are expected to ~~improve.~~help us towards our goal of obtaining quality loan growth. Total loans, net, at ~~September 30, 2016,~~March 31, 2017, and December 31, ~~2015,~~2016, were ~~$652,445~~$688,542 and ~~$608,747,~~$657,701, respectively. This represented an increase of ~~7.2%~~4.7% from December 31, ~~2015~~2016 to ~~September 30, 2016.~~March 31, 2017.
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Table of Contents
The table below provides a summary of the loan portfolio composition for the dates noted (including purchased credit-impaired (PCI) loans).

March 31,

December 31,

2017

2016

Amount

Percent

Amount

Percent

Commercial, Industrial and Agricultural
$ 133,080 19.0 % $ 134,404 20.1 %
Real estate:

1-4 Family Residential
113,554 16.3 % 113,031 16.9 %
1-4 Family HELOC
60,571 8.7 % 57,460 8.6 %
Multifamily and Commercial
233,399 33.4 % 215,639 32.3 %
Construction, Land Development and Farmland
127,710 18.3 % 115,889 17.4 %
Consumer
16,086 2.3 % 17,240 2.6 %
Other
13,723 2.0 % 13,745 2.1 %
698,123 100.0 % 667,408 100.0 %
Less:

Deferred loan fees
491 625
Allowance for possible loan losses
9,090 9,082

Loans, net
$ 688,542 $ 657,701

   September 30, December 31,
   2016 2015
   Amount    Percent Amount    Percent
Commerical, Industrial and Agricultural
   $ 133,382       20.1 % $ 143,770       23.3 %
Real estate:

1-4 Family Residential
   111,708       16.9 % 110,736       17.9 %
1-4 Family HELOC
   53,994       8.2 % 49,665       8.0 %
Multifamily and Commercial
   217,166       32.8 % 202,736       32.8 %
Construction, Land Development and Farmland
   113,935       17.2 % 89,763       14.6 %
Consumer
   17,630       2.7 % 15,271       2.5 %
Other
   14,264       2.1 % 5,556       0.9 %






   662,079       100.0 % 617,497       100.0 %
Less:

Deferred loan fees
   833       927
Allowance for possible loan losses
   8,801       7,823





Loans, net
   $ 652,445       $ 608,747





The table below provides a summary of PCI loans as of ~~September 30, 2016 and December~~March 31, ~~2015:~~2017:

March 31,

   September 30,    December 31,
2017

   2016    2015
Commerical, Industrial and Agricultural
   $ 392       $ 1,558
Commercial, Industrial and Agricultural
$ 372
Real estate:

1-4 Family Residential
   93       1,016    50
1-4 Family HELOC
   37       40    36
Multifamily and Commercial
   4,428       4,565    3,278
Construction, Land Development and Farmland
   1,571       1,598    1,566
Consumer
   —         —      -
Other
   —         —      -




Total gross PCI loans
   6,521       8,777    5,302
Less:

Remaining purchase discount
   708       1,671    614
Allowance for loan losses
   6       247
Allowance for possible loan losses
6




Loans, net
   $ 5,807       $ 6,859    $ 4,682




Commercial, industrial and agricultural loans above consist solely of ~~commercial and industrial~~ loans made to U.S. domiciled customers. These include loans for use in normal business operations to finance working capital needs, equipment purchases or other expansionary projects. Commercial, ~~loans of $133,382 at September 30, 2016, decreased 7.2% compared to $143,770 as of December 31, 2015. Agricultural loans represent 13.3% of the total commercial,~~ industrial and agricultural ~~portfolio, and 2.7%~~loans of ~~gross loans~~$133,080 at ~~September 30,~~March 31, 2017, decreased 1.0% compared to $134,404 at December 31, 2016.
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Table of Contents
Real estate loans comprised ~~75.1%~~76.7% of the loan portfolio at ~~September 30, 2016.~~March 31, 2017. Residential loans included in this category consist mainly of ~~closed-end loans secured by first and second liens that are not held for sale and~~ revolving, open-end loans secured by 1-4 family residential properties extended under home equity lines of ~~credit.~~credit and closed-end loans secured by first and second liens that are not held for sale. The Company increased the residential portfolio from December 31, ~~2015~~2016 to ~~September 30, 2016. Commercial~~March 31, 2017. Multi-family and commercial loans included in the real estate category above include (in typical order of prominence) loans secured by non- owner-occupied nonfarm nonresidential properties, loans secured by owner-occupied nonfarm nonresidential properties, and loans secured by multi-family residential properties. Multi-family and commercial real estate loans of ~~$217,166~~$233,399 at ~~September 30, 2016,~~March 31, 2017, increased ~~7.1%~~8.2% compared to the ~~$202,736~~$215,639 held as of December 31, ~~2015.~~2016. Real estate construction loans consist of 1-4 family residential construction loans, other construction loans, land loans, and loans secured by farmland. Construction lending ~~also~~ increased during ~~2015~~2016 and into the first ~~nine~~three months of ~~2016,~~2017, based on a strengthening local economy.
Consumer loans mainly consist of loans to individuals for household, family, and other personal expenditures under revolving credit plans and other consumer loans. WeCurrently we have no credit card loans on our balance sheet although we do offer credit cards to customers through a third party. We are in the process of implementing a new credit card program for which such loans will be carried on our balance sheet. This program is expected to be implemented during the second quarter of 2017. We have a relatively small number of automobile loans. Our consumer loans experienced a decrease from December 31, 2016, to March 31, 2017, of 6.7%.
Our other loans consist mainly of loans to other depository institutions and were minimal for the periods presented.
The repayment of loans is a source of additional liquidity for us. The following table sets forth the loans repricing or maturing within specific intervals at ~~September 30, 2016,~~March 31, 2017, excluding unearned net fees and costs.

   One Year or    One to Five    Over Five
One Year or
Less

One to Five
Years

Over Five
Years

Total

   Less    Years    Years    Total
Gross loans
   $ 208,908       $ 298,061       $ 155,110       $ 662,079    $ 245,658 $ 286,741 $ 165,724 $ 698,123








Fixed interest rate
            $ 462,176    $ 477,463
Variable interest rate
            199,903    220,660


Total
            $ 662,079    $ 698,123


The information presented in the above table is based upon the contractual maturities or next repricing date of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, we believe this treatment presents fairly the maturity and repricing structure of the loan portfolio.
Allowance for Loan Losses
We maintain an allowance for loan losses that we believe is adequate to absorb the probable incurred losses inherent in our loan portfolio. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using historical loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions (national and local), and other factors such as changes in interest rates, portfolio concentrations, changes in the experience, ability, and depth of the lending function, levels of and trends in charged-off loans, recoveries, past-due loans and volume and severity of classified loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The entire allowance is available for any loan that, in management’s judgment, should be charged off.
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Table of Contents
A loan is impaired when full payment under the loan terms is not expected. All classified loans and loans on non-accrual status are individually evaluated for impairment. Factors considered in determining if a loan is impaired include the borrower’s ability to repay amounts owed, collateral deficiencies, the risk rating of the loan and economic conditions affecting the borrower’s industry, among other things. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value (less estimated costs to sell) of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless the principal amount is deemed fully collectible, in which case interest is recognized on a cash basis. When recognition of interest income on a cash basis is appropriate, the amount of income recognized is limited to what would have been accrued on the remaining principal balance at the contractual rate. Cash payments received over this limit, and not applied to reduce the loans remaining principal balance, are recorded as recoveries of prior charge-offs until these charge-offs have been fully recovered.
At ~~September 30, 2016,~~March 31, 2017, the allowance for loan losses was ~~$8,801~~$9,090 compared to ~~$7,823~~$9,082 at December 31, ~~2015.~~2016. The allowance for loan losses as a percentage of total loans was ~~1.3%~~1.30% at ~~September 30, 2016 and~~March 31, 2017 compared to 1.36% at December 31, ~~2015.~~2016. The allowance was adjusted ~~upward~~downward as a percent of total loans from December 31, ~~2015~~2016 to ~~September 30, 2016.~~March 31, 2017. This ~~increase in our~~ allowance for loan losses ~~is directly attributable~~increased slightly due to our loan ~~growth. Charge-off~~growth and ~~general economic~~offset by charge offs.
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Table of Contents
The following table sets forth the activity ~~has continued to improve~~in the allowance for ~~our area and our customers.~~
loan losses for the periods presented.
Analysis of Changes in Allowance for Loan Losses

March, 31

March, 31

2017

2016

   September 30,
2016 September 30,
2015
Beginning Balance, January 1
   $ 7,823    $ 7,353    $ 9,082 $ 7,823
Loans charged off:

Commerical, Industrial and Agricultural
   (84 ) —
Real estate:

Loans charged off

Commercial, Industrial and Agricultural
(472 ) (8 )
Real estate

1-4 Family Residential
   (25 ) —      (15 ) -
1-4 Family HELOC
   —      (6 ) - -
Multifamily and Commercial
   —      —      - -
Construction, Land Development and Farmland
   —      —      - -
Consumer
   —      (15 ) (11 ) (4 )
Other
   (19 ) —      - -


Total loans charged off
   (128 ) (21 ) (498 ) (12 )


Recoveries on loans previously charged off:

Recoveries on loans previously charged off

Commerical, Industrial and Agricultural
   250    252    78 91
Real estate:

Real estate

1-4 Family Residential
   66    11    - 4
1-4 Family HELOC
   9    25    16 4
Multifamily and Commercial
   3    386    - 1
Construction, Land Development and Farmland
   5    5    2 1
Consumer
   13    —      - 13
Other
   —      —      - -


Total loan recoveries
   346    679    96 114


Net recoveries (charge-offs)
   218    658    (402 ) 102
Provision for loan losses
   760    (500 ) 410 165


Total allowance, September 30
   $ 8,801    $ 7,511


Total allowance, March 31
$ 9,090 $ 8,090
Gross loans at end of period⁽¹⁾
   $ 662,079    $ 594,744    $ 698,123 $ 623,553


Average gross loans⁽¹⁾
   $ 635,055    $ 488,421    $ 673,036 $ 617,600


Allowance to total loans
   1.33 % 1.26 % 1.30 % 1.30 %


Net charge offs (recoveries) to average loans
0.24 % -0.07 %

(1)
Loan balances exclude loans held for sale.
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Table of Contents
While no portion of the allowance is in any way restricted to any individual loan or group of loans, and the entire allowance is available to absorb losses from any and all loans, the following table summarizes our allocation of allowance for loan losses by loan category and loans in each category as a percentage of total loans, for the periods presented.

March 31,

December 31,

September 30,
2016 December 31,
2015
2017

2016

Amount % of
Allowance
To Total % of Loan
Type to
Total Loans Amount % of
Allowance
To Total % of Loan
Type to
Total Loans
% of

% of Loan

% of

% of Loan

Commerical, Industrial and Agricultural
$ 2,255    25.6 % 20.1 % $ 2,198    28.1 % 23.3 %

Allowance

Type to

Allowance

Type to

Amount

To Total

Total Loans

Amount

To Total

Total Loans

Commercial, Industrial and Agricultural
$ 2,980 32.8 % 19.0 % $ 2,438 26.8 % 20.1 %
Real estate:

1-4 Family Residential
1,158    13.2 % 16.9 % 1,214    15.5 % 17.9 % 1,105 12.1 % 16.3 % 1,178 13.0 % 16.9 %
1-4 Family HELOC
734    8.3 % 8.2 % 699    8.9 % 8.0 % 516 5.7 % 8.7 % 704 7.8 % 8.6 %
Multifamily and Commercial
2,678    30.4 % 32.8 % 2,591    33.1 % 32.8 % 2,614 28.8 % 33.4 % 2,731 30.1 % 32.3 %
Construction, Land Development and Farmland
1,715    19.5 % 17.2 % 894    11.4 % 14.6 % 1,668 18.3 % 18.3 % 1,786 19.7 % 17.4 %
Consumer
221    2.5 % 2.7 % 192    2.5 % 2.5 % 171 1.9 % 2.3 % 208 2.3 % 2.6 %
Other
40    0.5 % 2.1 % 35    0.5 % 0.9 % 36 0.4 % 2.0 % 37 0.3 % 2.1 %

$ 9,090 100.0 % 100.0 % $ 9,082 100.0 % 100.0 %
$ 8,801    100.0 % 100.0 % $ 7,823    100.0 % 100.0 %

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

March 31,

December 31,

2017

2016

   September 30,
2016 December 31,
2015
Non-accrual loans
   $ 6,122    $ 5,004    $ 5,497 $ 5,634
Past due loans 90 days or more and still accruing interest
   —      —      - -
Restructured loans
   3,652    1,706    3,676 2,953


Total non-performing loans
   9,774    6,710    9,173 8,587
Foreclosed real estate (“OREO”)
   —      1,149


Other real estate
- -
Total non-performing assets
   $ 9,774    $ 7,859    $ 9,173 $ 8,587


Total non-performing loans as a percentage of total loans
   1.48 % 1.09 % 1.31 % 1.29 %
Total non-performing assets as a percentage of total assets
   1.06 % 0.90 % 0.95 % 0.94 %
Allowance for loan losses as a percentage of non-performing loans
   90.05 % 116.59 % 99.10 % 105.76 %
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The increase in non-performing assets as of September 30, 2016, is primarily due to one agricultural lending relationship becoming impaired due to low commodity prices and being moved to non-accrual status. We expect significant paydowns on this relationship during the fourth quarter of 2016 due to its seasonal nature.
Investment Securities and Other Earning Assets
The investment securities portfolio is intended to provide the Company with adequate liquidity, ~~meet customer collateral needs and, provide~~ flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of securities classified as available-for-sale. All available-for-sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in our best interest. Unrealized gains and losses on this portfolio are excluded from earnings, but are reported as other comprehensive income in a separate component of stockholders’ equity, net of income tax. Premium amortization and discount accretion are recognized as adjustments to interest income using the interest method. Realized gains or losses on sales are based on the net proceeds and the adjusted carrying value amount of the securities sold using the specific identification method.
Securities are a significant component of the Company’s earning assets. Securities totaled ~~$154,816~~$179,266 at ~~September 30, 2016.~~March 31, 2017. This represents a ~~15.7%~~22.1% increase from the December 31, ~~2015~~2016 total of ~~$133,825.~~$146,813. The increase is attributable to purchasing ~~$47,391~~$46,001 securities available for sale during the ~~nine~~three months ended ~~September 30 2016,~~March 31 2017, offset by sales of $12,039, and principal paydowns and maturities of ~~$28,074~~$1,475 during the same period. A portion of our quarterly growth in the investment portfolio related to the completion of a municipal bond replacement strategy that was implemented late in the fourth quarter of 2016 and completed in the first quarter. Additional strategies were implemented in the first quarter of 2017 that are expected to provide better yielding securities that are relatively less sensitive to rising interest rates and potential declines in corporate tax rates.
Restricted equity securities totaled ~~$7,081~~$7,140 and 7,133 at ~~September 30, 2016. This represents a 13.4% increase from the~~March 31, 2017, and December 31, ~~2015 total of $6,244. Restricted securities~~2016, respectively, and consist of Federal Reserve Bank and Federal Home Loan Bank stock.
The following table shows the Company’s investments’ amortized cost and fair value, aggregated by investment category for the periods presented:

   September 30, 2016 December 31, 2015
March 31, 2017

December 31, 2016

Available-For-Sale    Amortized
Cost    Fair Value    % of Total Amortized
Cost    Fair Value    % of Total
Amortized
Cost

Fair Value

% of Total

Amortized
Cost

Fair Value

% of Total

U.S. Treasury and other U.S. government agencies
   $ 1,914       1,938       1.25 % $ 4,918       4,836       3.61 %
U.S.Treasury and other U.S. government agencies
$ 857 855 0.48 % $ 1,909 1,908 1.30 %
State and municipal
   123,445       126,141       81.48 % 86,604       87,595       65.46 % 147,822 145,036 80.90 % 122,813 119,634 81.49 %
Corporate bonds
   2,000       1,989       1.28 % 2,000       1,979       1.48 % 2,000 1,986 1.11 % 2,000 1,987 1.35 %
Mortgage backed securities
   21,336       21,498       13.89 % 36,617       36,165       27.02 % 28,053 27,889 15.56 % 20,197 20,034 13.65 %
Time deposits
   3,250       3,250       2.10 % 3,250       3,250       2.43 % 3,500 3,500 1.95 % 3,250 3,250 2.21 %










Total
   $ 151,945       154,816       100.00 % $ 133,389       133,825       100.00 % $ 182,232 179,266 100.00 % $ 150,169 146,813 100.00 %










The table below summarizes the contractual maturities of securities available for sale at ~~September 30, 2016:~~March 31, 2017:

Amortized
Cost

Estimated
Fair Value

   Amortized
Cost    Estimated
Fair Value
Due within one year
   $ 935       $ 940    $ 1,364 $ 1,366
Due in one to five years
   20,339       20,554    15,336 15,419
Due in five to ten years
   10,081       10,437    10,349 10,432
Due after ten years
   99,254       101,387    127,130 124,160
Mortgage backed securities
   21,336       21,498    28,053 27,889




Total
   $ 151,945       $ 154,816    $ 182,232 $ 179,266




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Table of Contents
Premises and Equipment
Premises and equipment, net, totaled ~~$8,964~~$9,688 at ~~September 30, 2016~~March 31, 2017 compared to ~~$9,196~~$9,093 at December 31, ~~2015,~~2016, a net ~~decrease~~increase of ~~$232~~$595 or ~~2.5%~~6.5%. Asset purchases amounted to approximately ~~$496~~$849 during the first ~~nine~~three months of ~~2016~~2017 and were mainly incurred for leasehold improvements related to our new Green Hills branch while ~~related~~ depreciation expense amounted to ~~$728.~~$254. At ~~September 30, 2016,~~March 31, 2017, we operated from ~~seven~~eight retail ~~branch~~banking locations as well as two stand-alone mortgage loan production offices and ~~one~~two commercial loan production ~~office.~~offices. Two of our bank branch locations, including our main office, are in Brentwood, Tennessee. Our other ~~five~~six bank branch locations are in Franklin, Springfield, Gallatin, Murfreesboro and Nashville, Tennessee. Our commercial loan production ~~office is~~offices are in Murfreesboro and Chattanooga, Tennessee. As of ~~September 30, 2016,~~March 31, 2017 our mortgage loan production offices were located Hendersonville, Tennessee, as well as Timonium, Maryland. During the ~~nine~~three months ended ~~September 30,~~March 31, 2016, the Company ~~transitioned~~began transitioning most of it out-of-market branches to another ~~bank as more fully described in Note 12 in the consolidated financial statements included elsewhere herein.~~bank. Until the Merger, all of our facilities were leased. After the Merger, we own three branch and office facilities located in Robertson and Sumner counties of Tennessee.
Deposits
Deposits represent the Company’s largest source of funds. The Company competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors such as money market funds and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the interest rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives.
At ~~September 30, 2016,~~March 31, 2017, total deposits were ~~$659,856,~~$826,183, an increase of ~~$19,848,~~$62,349, or ~~3.1%~~8.2%, compared to ~~$640,008~~$763,834 at December 31, ~~2015.~~2016. During the first ~~nine~~three months of ~~2016,~~2017, we increased non-interest bearing demand deposits by ~~$28.4~~$1.1 million, ~~or 25.5% and~~ increased savings and money market deposits by ~~$2.0~~$27.2 million, ~~or 1.1%,~~and increased time deposits by $35.5 million, while ~~time~~interest-bearing deposits decreased by $5.4 million, or 2.1%, and interest bearing demand deposits decreased $5.2 million, 5.4%. We are continuing to focus on growth of our non-interest bearing deposits and using alternative sources of funds to better manage our cost of funds. As of September 30, 2016, non-interest bearing deposits represent 21.2% of total deposits.$1.4 million.
The following table shows maturity of time deposits of $100 or more by category based on time remaining until maturity at ~~September 30, 2016.~~March 31, 2017.

March 31,

   September 30,
2016
2017

Twelve months or less
   $ 90,100    $ 245,079
Over twelve months through three years
   44,626    39,745
Over three years
   12,276    12,398


Total
   $ 147,002    $ 297,222


Market and Liquidity Risk Management
Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. Our Asset Liability Management Committee (ALCO) is charged with the responsibility of monitoring these policies, which are designed to ensure acceptable composition of asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.
Interest Rate Sensitivity—Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. Measurements we use to help us manage interest rate sensitivity include a gap analysis, an earnings simulation model and an economic value of equity model. These measurements are used in conjunction with competitive pricing analysis and are further described below.
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Table of Contents
Interest Rate Sensitivity Gap Analysis—The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments which are approaching maturity. The measurement of our interest rate sensitivity, or gap, is one of the three principal techniques we use in our asset/liability management effort.
Our policy is to have 12 and 24-month cumulative repricing gaps that do not exceed ~~15%~~25% of assets. We were in compliance with our policy as of ~~September 30, 2016.~~March 31, 2017. Although we do monitor our gap on a periodic basis, we recognize the potential shortcomings of such a model. The static nature of the gap schedule makes it difficult to incorporate changes in behavior that are caused by changes in interest rates. Also, although the periods of estimated and contractual repricing are identified in the analysis, the extent of repricing is not modeled in the gap schedule (i.e. whether repricing is expected to move on a one-to-one or other basis in relationship to the market changes simulated). For these and other shortcomings, we rely more heavily on the earnings simulation model and the economic value of equity model discussed further below.
Earnings Simulation Model—We believe interest rate risk is effectively measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with simulated forecasts of interest rates for the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from ~~management’s~~a flat interest rate forecast over the next 12 and 24 months, ~~limits in the decline~~our estimated change in net interest income as well as our policy limits are as follows:

Maximum Percentage Decline in Net Interest Income
from the Budgeted or Base Case Projection of Net
Interest Income
Next 12
Months Next 24
Months
An instantaneous, parallel rate increase or decrease of the following at the beginning of the first quarter:

± 100 bp
10 % 10 %
± 200 bp
15 % 15 %
± 300 bp
20 % 20 %
± 400 bp
25 % 25 %
Non-parallel shifts
15 % 15 %

Instantaneous, Parallel Change
in Prevailing Interest Rates
Equal to

Estimated Change in Net Interest Income and Policy of Maximum Percentage
Decline in Net Interest Income

Next 12

Next 24

Months

Months

Estimate
Policy

Estimate
Policy
-200 bp

-6.4%
-15%

-13.5%
-15%
-100 bp

-3.4%
-10%

-6.4%
-10%
+100 bp

-0.1%
-10%

-0.5%
-10%
+200 bp

0.0%
-15%

-0.8%
-15%
+300 bp

-0.1%
-20%

-1.4%
-20%
+400 bp

-0.3%
-25%

-2.2%
-25%
We were in compliance with ~~the~~our earnings simulation model policies ~~monitored by the Bank~~ as of ~~September 30, 2016,~~March 31, 2017, indicating what we believe to be a fairly neutral profile.
Economic value of equity—Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.
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Table of Contents
To help monitor our related risk, we’ve established the following policy limits regarding simulated changes in our economic value of equity:

Instantaneous, Parallel Change in Prevailing
Interest Rates Equal to

Maximum Percentage Decline in Economic Value of
Equity from the Economic Value of Equity at
Currently Prevailing Interest Rates
±+100 bp
15 %
15%
±+200 bp
25 %
25%
±+300 bp
30 %
30%
±+400 bp
35 %
35%
Non-parallel shifts
35 %
35%
At ~~September 30, 2016,~~March 31, 2017, our model results indicated that we were within these policy limits.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of
changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. Our ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies.
Liquidity Risk Management —The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other ~~institutions.~~institutions and sources.
Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.
Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, ~~debt security~~debtsecurity 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, 2016,~~securities.At March 31, 2017, advances totaled ~~$144,680~~$24,099 compared to ~~$135,759~~$32,287 as of December 31, ~~2015.~~2016. The ~~increase~~decline in FHLB advances generally is attributable to ~~obtaining lower cost funding for~~ our ~~loan portfolio growth.~~increase in deposits offset by our increase in loans and securities.
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Table of Contents
At ~~September 30, 2016,~~March 31, 2017, the scheduled maturities of our FHLB advances and interest rates were as follows (scheduled maturities will differ from scheduled repayments):

Scheduled Maturities

Amount

Weighted
Average
Rates

Scheduled Maturities
   Amount    Weighted
Average
Rates
2016
   $ 130,900       0.42 %
2017
   1,000       1.03 % $ 12,000 0.92%
2018
   6,000       2.74 % 6,000 2.74%
2019
   —         0.00 % - 0.00%
2020
   —         0.00 % - 0.00%
2021
507 2.73%
Thereafter
   6,780       1.94 % 5,592 1.86%



   $ 144,680       0.59 % $ 24,099 1.63%



Capital
Stockholders’ equity was ~~$109,232~~$109,595 at ~~September 30, 2016,~~March 31, 2017, an increase of ~~$12,481,~~$2,676, or ~~12.9%~~2.5%, from ~~$96,751~~$106,919 at December 31, ~~2015.~~2016. The Company raised ~~$4.6 million~~$411 of capital through the exercise of Company stock ~~options during the nine months ended September 30, 2016.~~options. The additional capital was pushed-down to the Bank and when combined with the accretion of earnings to capital partially offset the increase in liabilities led to an ~~increase~~decrease in the Bank’s ~~September 30, 2016~~March 31, 2017 Tier 1 leverage ratio to ~~10.94%~~10.69% compared with ~~9.88%~~10.75% at December 31, ~~2015~~2016 (see other ratios discussed further below). Common dividends of ~~$1,489~~$1,711 (declared during the fourth quarter of ~~2015)~~2016) were paid during the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2017.
Banks as regulated institutions are required to meet certain levels of capital. The Federal Reserve Board of Governors, the primary federal regulator for the Bank, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. We regularly review our capital adequacy to ensure compliance with these guidelines and to help ensure that sufficient capital is available for current and future needs. It is management’s intent to maintain an optimal capital and leverage mix for growth and for shareholder return.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At ~~September 30, 2016,~~March 31, 2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that ~~notification~~notifications that management believes have changed the institution’s category.
In July 2013, the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bank. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in “Basel III: A Global Framework for More Resilient Banks and Banking Systems” (Basel III) and changes required by the Dodd-Frank Act.
Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing Basel III became effective on January 1, 2015, and include new minimum risk-based capital and leverage ratios and a new common equity tier 1 ratio. In addition, these rules refine the definition of what constitutes capital for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital.
Basel III establishes a “capital conservation buffer” of 2.5% which began phasing in on January 1, 2016, at a rate of .625% per year. The buffer becomes fully phased in on January 1, 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer.
Actual and required capital amounts and ratios are presented below as of ~~September 30, 2016~~March 31, 2017 and December 31, ~~2015~~2016 for the Company and Bank.
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Table of Contents

Actual Regulatory Capital

For Capital Adequacy
Including Capital
Conservation Buffer

To Be Well Capitalized
Under Prompt Corrective
Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

March 31, 2017

Company

Common equity Tier 1
$ 98,995 12.65 % $ 44,998 5.750 % N/A N/A
Tier I leverage
98,995 10.81 % 36,631 4.000 % N/A N/A
Tier I risk-based capital
98,995 12.65 % 56,736 7.250 % N/A N/A
Total risk-based capital
108,085 13.81 % 72,396 9.250 % N/A N/A

Bank

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

December 31, 2016

Company

Common equity Tier 1
$ 96,682 13.00 % $ 38,115 5.125 % N/A N/A
Tier I leverage
96,682 10.86 % 35,610 4.000 % N/A N/A
Tier I risk-based capital
96,682 13.00 % 49,271 6.625 % N/A N/A
Total risk-based capital
105,764 14.22 % 64,150 8.625 % N/A N/A

Bank

Common equity Tier 1
$ 95,637 12.88 % $ 38,054 5.125 % $ 48,264 6.50 %
Tier I leverage
95,637 10.75 % 35,586 4.000 % 44,482 5.00 %
Tier I risk-based capital
95,637 12.88 % 49,192 6.625 % 59,402 8.00 %
Total risk-based capital
104,719 14.10 % 64,057 8.625 % 74,269 10.00 %

   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, 2016

Company

Common equity Tier 1
   $ 96,129       13.07 % $ 37,694       5.125 % N/A       N/A
Tier I leverage
   96,129       11.03 % 34,861       4.00 % N/A       N/A
Tier I risk-based capital
   96,129       13.07 % 48,726       6.625 % N/A       N/A
Total risk-based capital
   104,930       14.26 % 63,466       8.625 % N/A       N/A
Bank

Common equity Tier 1
   $ 95,264       12.96 % $ 37,672       5.125 % $ 47,779       6.50 %
Tier I leverage
   95,264       10.94 % 34,831       4.00 % 43,539       5.00 %
Tier I risk-based capital
   95,264       12.96 % 48,698       6.625 % 58,805       8.00 %
Total risk-based capital
   104,065       14.16 % 63,387       8.625 % 73,492       10.00 %
December 31, 2015

Company

Common equity Tier 1
   $ 84,608       12.02 % $ 31,675       4.50 % N/A       N/A
Tier I leverage
   84,608       9.92 % 34,116       4.00 % N/A       N/A
Tier I risk-based capital
   84,608       12.02 % 42,234       6.00 % N/A       N/A
Total risk-based capital
   92,431       13.13 % 56,317       8.00 % N/A       N/A
Bank

Common equity Tier 1
   $ 84,196       11.97 % $ 31,653       4.50 % $ 45,720       6.50 %
Tier I leverage
   84,196       9.88 % 34,087       4.00 % 42,609       5.00 %
Tier I risk-based capital
   84,196       11.97 % 42,204       6.00 % 56,271       8.00 %
Total risk-based capital
   92,019       13.08 % 56,281       8.00 % 70,351       10.00 %
Effects of Inflation and Changing Prices
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions’ increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and ~~stockholders’~~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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Table of Contents
Off Balance Sheet Arrangements
Off-balance sheet arrangements generally consist of unused lines of credit and standby letters of credit. Such commitments were as follows:

March 31,

2017

   September 30,
2016
Unused lines of credit
   $ 155,994    $ 161,499
Standby letters of credit
   12,005    12,642


Total commitments
   $ 167,999    $ 174,141


Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will remain an emerging growth company for up to five years, though it may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, it is deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if total annual gross revenues equal or exceed $1 billion in a fiscal year. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.
Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected to take advantage of the extended transition period that allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies, which means that the financial statements included in this filing, as well as the financial statements we will file in the future, will be subject to all new or revised accounting standards generally applicable to private companies. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-public companies.
59
Table of Contents
Item~~Item 3.Quantitative~~3.          Quantitative and Qualitative Disclosures About Market Risk.
The information required by this Item 3 is discussed in Part 1 – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~under the~~underthe heading “Market and Liquidity Risk” ~~on pages 62-64.~~
Item~~Item 4.Controls~~4.          Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended ~~September 30, 2016,~~March 31, 2017, that has materially affected, or is reasonably likely ~~to materially~~tomaterially affect, our internal control over financial reporting.
60
Table of Contents
PART~~PART~~ II – OTHER INFORMATION
Item~~Item~~ 1.    Legal Proceedings.
Commerce Union and its wholly-owned subsidiary, Reliant Bank, are periodically involved as a plaintiff or defendant in various legal actions in the ordinary course of its business. Neither Commerce Union nor Reliant Bank is involved in any litigation that is expected to have a material impact on our financial position or results of operations. Management believes that any claims pending against Commerce Union or its subsidiaries are without merit or that the ultimate liability, if any, resulting from them will not materially affect Reliant Bank’s financial condition or Commerce Union’s consolidated financial position.
Item~~Item~~ 1A.  Risk Factors.
Investing in Commerce Union involves various risks which are particular to our company, our industry, and our market area. We believe all significant risks to investors in Commerce Union have been outlined in Part I, Item 1A of our Annual Report onForm 10-K for the fiscal year ended December ~~31, 2015.~~31,2016. However, other risks may prove to be important in the future, and new risks may emerge at any time. We cannot predict with certainty all potential developments which could materially affect our financial performance or condition. There has been no material change to our risk factors as previously disclosed in the above described Annual Report on Form 10-K.
Item~~Item~~ 2.     Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item~~Item~~ 3.     Defaults Upon Senior Securities.
Not applicable.
Item~~Item~~ 4.     Mine Safety Disclosures.
Not applicable.
Item~~Item~~ 5.      Other Information.
None.
Item~~Item~~ 6.      Exhibits.

31.1 Certification pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
101
~~101~~
Interactive Data Files*
* The documents formatted in eXtensible Business Reporting Language (XBRL) and attached as Exhibit 101 to this report are deemed not filed as part of a registration statement or prospectus for purposes of Section 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise not subject to liability under these sections.
61
Table of Contents
SIGNATURES
~~SIGNATURES~~
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

COMMERCE UNION BANCSHARES, INC.
~~November~~
May 10, ~~2016~~
2017
/s/ William Ronald DeBerry
William Ronald DeBerry
~~William Ronald DeBerry~~
Chief Executive Officer
(Principal Executive Officer)
~~November 10, 2016~~

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

7062


~~Tennessee~~		~~37-1641316~~
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

~~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)

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

~~Non-Accelerated Filer~~		☒ Smaller reporting company ☐
		~~Smaller Reporting Company~~	☐ Emerging growth company ☒


PART I – FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements (Unaudited).		4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.		44	40
Item 3.		Quantitative and Qualitative Disclosures About Market ~~Risk~~Risk.		68	60
Item 4.		Controls and ~~Procedures~~Procedures.	60
		68

PART II – OTHER INFORMATION
Item 1.		Legal ~~Proceedings~~Proceedings.		69	61
Item 1A.		Risk ~~Factors~~Factors.		69	61
Item 2.		Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceeds.		69	61
Item 3.		Defaults Upon Senior ~~Securities~~Securities.		69	61
Item 4.		Mine Safety ~~Disclosures~~Disclosures.		69	61
Item 5.		Other ~~Information~~Information.		69	61
Item 6.	Exhibits.	~~Exhibits~~ 61
			69

SIGNATURES				70	62


	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Treasury and other U. S. government agencies	$	1,914	$	24	$	—		$	1,938
State and municipal		123,445		3,070		(374	)		126,141
Corporate bonds		2,000		6		(17	)		1,989
Mortgage backed securities		21,336		239		(77	)		21,498
Time deposits		3,250		—		—			3,250

Total	$	151,945	$	3,339	$	(468	)	$	154,816


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

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


	Amortized Cost		Estimated Fair Value
Due within one year	$	935	$	940
Due in one to five years		20,339		20,554
Due in five to ten years		10,081		10,437
Due after ten years		99,254		101,387
Mortgage backed securities		21,336		21,498

	$	151,945	$	154,816


	Commercial		Multi Family and		Construction
	Industrial and		Commercial		Land Development
	Agricultural		Real Estate		and Farmland
Pass (grades 1-5)	$	126,539	$	213,399	$	109,679
Special Mention		1,207		—		1,650
Substandard		5,636		3,767		2,606

Total	$	133,382	$	217,166	$	113,935


			1-4 Family
			Residential Real
	Consumer and Other		Estate		1-4 Family HELOC		Total
Pass (grades 1-5)	$	31,894	$	108,176	$	52,357	$	642,044
Special Mention		—		1,433		—		4,290
Substandard		—		2,099		1,637		15,745

Total	$	31,894	$	111,708	$	53,994	$	662,079


	Current		Accruing Total Past Due		Non Accrual Current Loans		Non Accrual Past Due Loans		Total Loans
Commercial, Industrial and Agricultural	$	129,954	$	26	$	3,027	$	375	$	133,382
Multi family and Commercial Real Estate		215,085		1,430		651		—		217,166
Construction, Land Development and Farmland		113,014		191		101		629		113,935
1-4 Family Residential Real Estate		111,381		—		57		270		111,708
1-4 Family HELOC		52,982		—		866		146		53,994
Consumer		17,622		8		—		—		17,630
Other		14,264		—		—		—		14,264

Total	$	654,302	$	1,655	$	4,702	$	1,420	$	662,079


Balance at January 1, 2016	$	233
Accretion income		(85	)

Balance at September 30, 2016	$	148


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


	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, 2016
Assets
U. S. Treasury and other U. S. government agencies	$	1,938	$	—	$	1,938	$	—
State and municipal		126,141		—		126,141		—
Corporate bonds		1,989		—		1,989		—
Mortgage backed securities		21,498		—		21,498		—
Time deposits		3,250		3,250		—		—
Liabilities
Interest rate swap	$	1,743	$	—	$	1,743	$	—
December 31, 2015
Assets
U. S. Treasury and other U. S. government agencies	$	4,836	$	—	$	4,836	$	—
State and municipal		87,595		—		87,595		—
Corporate bonds		1,979		—		1,979		—
Mortgage backed securities		36,165		—		36,165		—
Time deposits		3,250		3,250		—		—
Interest rate swap		77		—		77		—
Liabilities
Interest rate swap	$	572	$	—	$	572	$	—

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


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

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

Total consideration	$	47,901

Allocation of Purchase Price
Total consideration above	$	47,901

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

Total fair value of net assets acquired		37,270

Goodwill	$	10,631

																								Three Months Ended March 31, 2017							Three Months Ended March 31, 2016							Change
	Three Months Ended September 30, 2016							Three Months Ended September 30, 2015							Change									Average Balances		Rates / Yields (%)			Interest Income / Expense		Average Balances		Rates / Yields (%)			Interest Income / Expense		Due to Volume			Due to Rate			Total
	Average Balances		Rates / Yields (%)			Interest Income / Expense		Average Balances		Rates / Yields (%)			Interest Income / Expense		Due to Volume			Due to Rate			Total
Interest earning assets
Interest Earning Assets
Loans	$	649,778		4.57		$	7,277	$	582,145		4.75		$	6,969	$	1,813		$	(1,505	)	$	308		$	673,036		4.48		$	7,263	$	617,600		4.76		$	7,307	$	2,063		$	(2,107	)	$	(44	)
Loan fees		—		0.28			452		—		0.29			424		28			—			28			-		0.31			519		-		0.30			463		56			-			56

Loans with fees		649,778		4.85			7,729		582,145		5.04			7,393		1,841			(1,505	)		336			673,036		4.79			7,782		617,600		5.06			7,770		2,119			(2,107	)		12
Mortgage loans held for sale		12,804		3.39			109		47,521		3.95			473		(305	)		(59	)		(364	)		10,478		3.64			94		39,514		3.75			368		(264	)		(10	)		(274	)
Federal funds sold		1,434		0.55			2		127		18.74			6		38			(42	)		(4	)
Deposits with banks		20,439		0.37			19		22,715		0.17			10		(7	)		16			9			15,092		0.64			24		21,143		0.36			19		(31	)		36			5
Investment securities—taxable		33,512		1.63			137		49,103		1.82			225		(66	)		(22	)		(88	)
Investment securities—tax-exempt		111,448		3.33			578		68,284		2.73			310		199			69			268
Other		7,072		4.61			82		5,418		4.83			66		35			(19	)		16

Investment securities - taxable																									31,093		1.94			149		49,255		1.93			236		(96	)		9			(87	)
Investment securities - tax-exempt																									133,550		3.95			828		87,116		3.06			438		252			138			390
Fed funds sold and other																									7,770		5.01			96		6,553		5.09			83		21			(8	)		13
Total earning assets		836,487		4.37			8,656		775,313		4.42			8,483		1,735			(1,562	)		173			871,019		4.18			8,973		821,181		4.48			8,914		2,001			(1,942	)		59

Nonearning assets		48,640							47,915

	$	885,127						$	823,228

Interest bearing liabilities
Nonearning Assets																									55,263							50,780
Total assets																								$	926,282						$	871,961
Interest Bearing Liabilities
Interest bearing demand	$	89,572		0.20			46		102,110		0.22			57		(6	)		(5	)		(11	)	$	82,780		0.21			43	$	89,856		0.20			44		(12	)		11			(1	)
Savings and money market		179,816		0.33			151		173,651		0.31			136		5			10			15			184,872		0.33			150		193,715		0.34			166		(10	)		(6	)		(16	)
Time deposits—retail		143,344		0.73			262		140,894		0.74			262		16			(16	)		—
Time deposits—wholesale		94,239		0.71			168		88,075		0.55			123		9			36			45

Time deposits - retail																									291,594		0.70			506		140,508		0.70			245		261			-			261
Time deposits - wholesale																									81,975		0.93			187		115,766		0.62			178		(262	)		271			9
Total interest bearing deposits		506,971		0.49			627		504,730		0.45			578		24			25			49			641,221		0.56			886		539,845		0.47			633		(23	)		276			253
Federal Home Loan Bank advances and other		132,876		0.58			194		129,024		0.57			186		5			3			8

Federal Home Loan Bank advances																									45,974		1.02			116		117,224		0.68			199		(483	)		400			(83	)
Total interest-bearing liabilities		639,847		0.51			821		633,754		0.48			764		29			28			57			687,195		0.59			1,002		657,069		0.51			832		(506	)		676			170

Net interest rate spread (%) / Net Interest Income ($)				3.86		$	7,835				3.94		$	7,719	$	1,706		$	(1,590	)	$	116

Net interest rate spread (%) / Net interest income ($)																											3.59		$	7,971				3.97		$	8,082	$	2,507		$	(2,618	)	$	(111	)
Non-interest bearing deposits		134,343		(0.09	)				93,267		(0.06	)													129,385		(0.09	)				110,060		(0.08	)
Other non-interest bearing liabilities		4,159							3,177																2,976							5,595
Stockholder’s equity		106,778							93,030

	$	885,127						$	823,228


Stockholders' equity																									106,726							99,237
Total liabilities and stockholders' equity																								$	926,282						$	871,961
Cost of funds				0.42							0.42																0.50							0.43

Net interest margin				3.98							4.03
Net Interest Margin																											4.01							4.08


	Nine Months Ended September 30, 2016							Nine Months Ended September 30, 2015							Change
	Average Balances		Rates / Yields (%)			Interest Income / Expense		Average Balances		Rates / Yields (%)			Interest Income / Expense		Due to Volume			Due to Rate			Total
Interest earning assets
Loans	$	635,055		4.87		$	22,603	$	488,421		4.75		$	17,345	$	4,850		$	408		$	5,258
Loan fees		—		0.30			1,408		—		0.28			1,032		376			—			376

Loans with fees		635,055		5.17			24,011		488,421		5.03			18,377		5,226			408			5,634
Mortgage loans held for sale		24,351		3.64			663		35,554		4.04			1,075		(314	)		(98	)		(412	)
Federal funds sold		700		0.57			3		440		3.04			10		6			(13	)		(7	)
Deposits with banks		20,646		0.35			54		21,327		0.17			27		(1	)		28			27
Investment securities—taxable		43,840		1.79			589		45,302		1.91			646		(19	)		(38	)		(57	)
Investment securities—tax-exempt		98,560		3.33			1,506		58,779		2.73			791		540			175			715
Other		6,747		4.77			241		4,688		4.68			164		74			3			77

Total earning assets		829,899		4.60			27,067		654,511		4.39			21,090		5,512			465			5,977

Nonearning assets		49,350							35,441

	$	879,249						$	689,952

Interest bearing liabilities
Interest bearing demand	$	89,604		0.20			137		85,554		0.21			136		10			(9	)		1
Savings and money market		188,387		0.34			480		152,764		0.28			325		81			74			155
Time deposits—retail		142,602		0.70			747		107,692		0.78			625		223			(101	)		122
Time deposits—wholesale		105,188		0.65			513		94,593		0.53			377		45			91			136

Total interest bearing deposits		525,781		0.48			1,877		440,603		0.44			1,463		359			55			414
Federal Home Loan Bank advances and other		121,999		0.64			581		93,470		0.64			448		133			—			133

Total interest-bearing liabilities		647,780		0.51			2,458		534,073		0.48			1,911		492			55			547

Net interest rate spread (%) / Net Interest Income ($)				4.09		$	24,609				3.91		$	19,179	$	5,020		$	410		$	5,430

Non-interest bearing deposits		123,526		(0.08	)				77,592		(0.06	)
Other non-interest bearing liabilities		4,846							2,317
Stockholder’s equity		103,097							75,970

	$	879,249						$	689,952


Cost of funds				0.43							0.42

Net interest margin				4.20							4.00


	Three Months Ended					Dollar			Percent			Three months Ended				Dollar			Percent
	September 30,					Increase			Increase			March 31,				Increase			Increase
	2016		2015			(Decrease)			(Decrease)			2017		2016		(Decrease)			(Decrease)
Non-Interest Income
Service charges and fees	$	320	$	350		$	(30	)		-8.6	%	$	310	$	285	$	25			8.8	%
Securities gains (losses), net		296		15			281			1873.3	%		36		-		36			100.0	%
Gains on mortgage loans sold, net		551		3,454			(2,903	)	��	-84.0	%		542		3,342		(2,800	)		-83.8	%
Gain on sale of other real estate		145		1			144			14400.0	%		24		-		24			100.0	%
Other noninterest income:
Bank-owned life insurance		194		162			32			19.8	%		186		170		16			9.4	%
Brokerage revenue		40		3			37			1233.3	%
Trust and brokerage revenue													14		14		-			0.0	%
Rental income		—		—			—			0.0	%		-		2		(2	)		-100.0	%
Miscellaneous noninterest income, net		29		34			(5	)		-14.7	%

Miscellaneous noninterest income													27		33		(6	)		-18.2	%
Total other non-interest income		263		199			64			32.2	%		227		219		8			3.7	%

Total non-interest income	$	1,575	$	4,019		$	(2,444	)		-60.8	%


	Nine Months Ended					Dollar			Percent
	September 30,					Increase			Increase
	2016		2015			(Decrease)			(Decrease)
Non-Interest Income
Service charges and fees	$	926	$	837		$	89			10.6	%
Securities gains (losses), net		356		(381	)		737			-193.4	%
Gains on mortgage loans sold, net		5,675		7,987			(2,312	)		-28.9	%
Gain on sale of other real estate		301		1			300			30000.0	%
Other noninterest income:
Bank-owned life insurance		557		378			179			47.4	%
Brokerage revenue		67		10			57			570.0	%
Rental income		2		6			(4	)		-66.7	%
Miscellaneous noninterest income, net		47		100			(53	)		-53.0	%

Total other non-interest income		673		494			179			36.2	%

Total non-interest income	$	7,931	$	8,938		$	(1,007	)		-11.3	%

Total Non-Interest Income												$	1,139	$	3,846	$	(2,707	)		-70.4	%

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

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

Loans, net	$	688,542				$	657,701


	One Year or		One to Five		Over Five				One Year or Less		One to Five Years		Over Five Years		Total
	Less		Years		Years		Total
Gross loans	$	208,908	$	298,061	$	155,110	$	662,079	$	245,658	$	286,741	$	165,724	$	698,123

Fixed interest rate							$	462,176							$	477,463
Variable interest rate								199,903								220,660

Total							$	662,079							$	698,123

							March, 31			March, 31
							2017			2016
	September 30, 2016			September 30, 2015
Beginning Balance, January 1	$	7,823		$	7,353		$	9,082		$	7,823
Loans charged off:
Commerical, Industrial and Agricultural		(84	)		—
Real estate:
Loans charged off
Commercial, Industrial and Agricultural								(472	)		(8	)
Real estate
1-4 Family Residential		(25	)		—			(15	)		-
1-4 Family HELOC		—			(6	)		-			-
Multifamily and Commercial		—			—			-			-
Construction, Land Development and Farmland		—			—			-			-
Consumer		—			(15	)		(11	)		(4	)
Other		(19	)		—			-			-

Total loans charged off		(128	)		(21	)		(498	)		(12	)

Recoveries on loans previously charged off:
Recoveries on loans previously charged off
Commerical, Industrial and Agricultural		250			252			78			91
Real estate:
Real estate
1-4 Family Residential		66			11			-			4
1-4 Family HELOC		9			25			16			4
Multifamily and Commercial		3			386			-			1
Construction, Land Development and Farmland		5			5			2			1
Consumer		13			—			-			13
Other		—			—			-			-

Total loan recoveries		346			679			96			114

Net recoveries (charge-offs)		218			658			(402	)		102
Provision for loan losses		760			(500	)		410			165

Total allowance, September 30	$	8,801		$	7,511

Total allowance, March 31							$	9,090		$	8,090
Gross loans at end of period⁽¹⁾	$	662,079		$	594,744		$	698,123		$	623,553

Average gross loans⁽¹⁾	$	635,055		$	488,421		$	673,036		$	617,600

Allowance to total loans		1.33	%		1.26	%		1.30	%		1.30	%

Net charge offs (recoveries) to average loans								0.24	%		-0.07	%

																	March 31,								December 31,
	September 30, 2016								December 31, 2015								2017								2016
	Amount		% of Allowance To Total			% of Loan Type to Total Loans			Amount		% of Allowance To Total			% of Loan Type to Total Loans					% of			% of Loan					% of			% of Loan
Commerical, Industrial and Agricultural	$	2,255		25.6	%		20.1	%	$	2,198		28.1	%		23.3	%
																			Allowance			Type to					Allowance			Type to
																	Amount		To Total			Total Loans			Amount		To Total			Total Loans

Commercial, Industrial and Agricultural																	$	2,980		32.8	%		19.0	%	$	2,438		26.8	%		20.1	%
Real estate:
1-4 Family Residential		1,158		13.2	%		16.9	%		1,214		15.5	%		17.9	%		1,105		12.1	%		16.3	%		1,178		13.0	%		16.9	%
1-4 Family HELOC		734		8.3	%		8.2	%		699		8.9	%		8.0	%		516		5.7	%		8.7	%		704		7.8	%		8.6	%
Multifamily and Commercial		2,678		30.4	%		32.8	%		2,591		33.1	%		32.8	%		2,614		28.8	%		33.4	%		2,731		30.1	%		32.3	%
Construction, Land Development and Farmland		1,715		19.5	%		17.2	%		894		11.4	%		14.6	%		1,668		18.3	%		18.3	%		1,786		19.7	%		17.4	%
Consumer		221		2.5	%		2.7	%		192		2.5	%		2.5	%		171		1.9	%		2.3	%		208		2.3	%		2.6	%
Other		40		0.5	%		2.1	%		35		0.5	%		0.9	%		36		0.4	%		2.0	%		37		0.3	%		2.1	%
																	$	9,090		100.0	%		100.0	%	$	9,082		100.0	%		100.0	%
	$	8,801		100.0	%		100.0	%	$	7,823		100.0	%		100.0	%


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


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


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	% 15%
±+200 bp		25	% 25%
±+300 bp		30	% 30%
±+400 bp		35	% 35%
Non-parallel shifts		35	% 35%

Scheduled Maturities						Amount		Weighted Average Rates

Scheduled Maturities	Amount		Weighted Average Rates
2016	$	130,900		0.42	%
2017		1,000		1.03	%	$	12,000		0.92%
2018		6,000		2.74	%		6,000		2.74%
2019		—		0.00	%		-		0.00%
2020		—		0.00	%		-		0.00%
2021							507		2.73%
Thereafter		6,780		1.94	%		5,592		1.86%

	$	144,680		0.59	%	$	24,099		1.63%

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

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

December 31, 2016
Company
Common equity Tier 1	$	96,682		13.00	%	$	38,115		5.125	%		N/A		N/A
Tier I leverage		96,682		10.86	%		35,610		4.000	%		N/A		N/A
Tier I risk-based capital		96,682		13.00	%		49,271		6.625	%		N/A		N/A
Total risk-based capital		105,764		14.22	%		64,150		8.625	%		N/A		N/A

Bank
Common equity Tier 1	$	95,637		12.88	%	$	38,054		5.125	%	$	48,264		6.50	%
Tier I leverage		95,637		10.75	%		35,586		4.000	%		44,482		5.00	%
Tier I risk-based capital		95,637		12.88	%		49,192		6.625	%		59,402		8.00	%
Total risk-based capital		104,719		14.10	%		64,057		8.625	%		74,269		10.00	%


	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, 2016
Company
Common equity Tier 1	$	96,129		13.07	%	$	37,694		5.125	%		N/A		N/A
Tier I leverage		96,129		11.03	%		34,861		4.00	%		N/A		N/A
Tier I risk-based capital		96,129		13.07	%		48,726		6.625	%		N/A		N/A
Total risk-based capital		104,930		14.26	%		63,466		8.625	%		N/A		N/A
Bank
Common equity Tier 1	$	95,264		12.96	%	$	37,672		5.125	%	$	47,779		6.50	%
Tier I leverage		95,264		10.94	%		34,831		4.00	%		43,539		5.00	%
Tier I risk-based capital		95,264		12.96	%		48,698		6.625	%		58,805		8.00	%
Total risk-based capital		104,065		14.16	%		63,387		8.625	%		73,492		10.00	%
December 31, 2015
Company
Common equity Tier 1	$	84,608		12.02	%	$	31,675		4.50	%		N/A		N/A
Tier I leverage		84,608		9.92	%		34,116		4.00	%		N/A		N/A
Tier I risk-based capital		84,608		12.02	%		42,234		6.00	%		N/A		N/A
Total risk-based capital		92,431		13.13	%		56,317		8.00	%		N/A		N/A
Bank
Common equity Tier 1	$	84,196		11.97	%	$	31,653		4.50	%	$	45,720		6.50	%
Tier I leverage		84,196		9.88	%		34,087		4.00	%		42,609		5.00	%
Tier I risk-based capital		84,196		11.97	%		42,204		6.00	%		56,271		8.00	%
Total risk-based capital		92,019		13.08	%		56,281		8.00	%		70,351		10.00	%


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

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

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

32.2		Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002
101
~~101~~		Interactive Data Files*


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


		COMMERCE UNION BANCSHARES, INC.

~~November~~ May 10, ~~2016~~	2017	/s/ William Ronald DeBerry
	William Ronald DeBerry
		~~William Ronald DeBerry~~
		Chief Executive Officer
		(Principal Executive Officer)


~~November 10, 2016~~

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