Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


 

 

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

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016March 31, 2017

OR

TRANSITION 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

For the transition period from ______ to ______

Commission File Number:001-37391


 

COMMERCE UNION BANCSHARES, INC.Union Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 


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)

(615) 384-3357

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the Registrantregistrant 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” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act:

Act.

 

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 ☒

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, 2016May 8, 2017 was 7,763,453.

DOCUMENTS INCORPORATED BY REFERENCE

None.7,833,030.

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

None.




Table of ContentsTABLE OF CONTENTS

Tableof Contents

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Consolidated Financial Statements (Unaudited).

  4

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.

  4440

Item 3.

Quantitative and Qualitative Disclosures About Market RiskRisk.

  6860

Item 4.

Controls and ProceduresProcedures.

  60
  68

PART II – OTHER INFORMATION

 

Item 1.

Legal ProceedingsProceedings.

  6961

Item 1A.

Risk FactorsFactors.

  6961

Item 2.

Unregistered Sales of Equity Securities and Use of ProceedsProceeds.

  6961

Item 3.

Defaults Upon Senior SecuritiesSecurities.

  6961

Item 4.

Mine Safety DisclosuresDisclosures.

  6961

Item 5.

Other InformationInformation.

  6961

Item 6.

Exhibits.

Exhibits  61
  69

SIGNATURES

7062

2

Table of Contents

FORWARD-LOOKING STATEMENTS

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 declinedeclines 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.

PARTPART I – FINANCIAL INFORMATION

Item1.           Consolidated Financial Statements (Unaudited).

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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

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

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

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHSTHREE 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

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHSTHREE 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

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE NINE MONTHSTHREE 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

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 2015Company'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, 2016March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

2017.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 2016March 31, 2017 and December 31, 20152016 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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 2016March 31, 2017 and December 31, 20152016 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, 2016March 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, 2016March 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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 

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 December 31, 2015:2016:

 

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

Description of Securities

            

U. S. Treasury and other U. S. government agencies

  $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 105193 securities in an unrealized loss position as of September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(Dollar amounts in thousands except per share amounts)

 

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at September 30, 2016March 31, 2017 and December 31, 20152016 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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 ninethree 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 ninethree months ended September 30, 2015:March 31, 2016:

 

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

Beginning balance

  $2,184    $2,070    $742    $642  

Charge-offs

   —       —       —       —    

Recoveries

   252     386     5     11  

Provision

   (476   (179   57     419  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $1,960    $2,277    $804    $1,072  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 2016March 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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 20152016 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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 2016March 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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 ninethree 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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 weaknessesorweaknesses 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. Substandardsubstandard.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. Withuncollectible.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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 2016March 31, 2017 or December 31, 2015.2016.

During the ninethree months ended September 30, 2016, loansMarch 31, 2017, one loan totaling approximately $1,700 were$108 was modified in a troubled debt restructurings.restructuring. The modificationsmodification consisted of changesa 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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 ninethree 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 ninethree 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 

 

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, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 ownedmortgage 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 utilizeless than cost, an allowance is recorded. The Company utilizes a single valuation approach or a combination of approaches includingthird party to value the mortgage loans held for sale portfolio using comparable sales anddata 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 ninethree 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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 2016March 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  $- 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 2016March 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, 2016March 31, 2017 and December 31, 2015:2016:

 

Valuation

Significant

 ValuationSignificant

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 modelsAppraisalEstimated costs to sellNot applicable  10Not applicable% 

  

 (1)

(1)

The fair value is generally determined through independent appraisals ofCompany 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 thatCompany markets independently are not identifiable, ordiscounted by using the discounted cash flow method if the loan is not collateral dependent.selling costs.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 2016fair 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, 20152016 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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 ninethree months ended September 30, 2016March 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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 meetsmeet all capital adequacy requirements to which it isthey 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, 2016March 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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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, 2016March 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%

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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. TheseThe 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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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 

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(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.

2016-01ASU 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.

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 theour 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 10ASU 2016-09,“Compensation - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”Accountingrequires 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 ninethree 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 shareholdersDerecognition of Commerce Union Bancshares, Inc. (“Commerce Union”) approved a merger between Commerce Union BankNonfinancial 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 becamemodel 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

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2016MARCH 31, 2017 (UNAUDITED) ANDDECEMBER 31, 20152016

(Dollar amounts in thousands except per share amounts)

 

NOTE 11 - BUSINESS COMBINATIONRECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

The following table detailsASU 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities shortens the financial impactamortization 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, includingsecurity. 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 dataaccounting 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 occurredCompany 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

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 ConditionConditions and Results of OperationsOperations.

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 policiesour methods of the Company are in accordanceapplying these principles conform with accounting principles generally accepted in the United States of AmericaU.S. GAAP and conform towith 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. Theour critical accounting policies requireas described in our judgment to ascertainAnnual 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 accountsComparative 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’sits 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.

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 outstandingEarnings

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 periodsperiod 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 largestmajor components ofcontributing to the improvementdecline in income per share from the previous three and nine months include a 1.50% and 28.31%, respectively, increaseprior-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 comparedprimarily attributable to the same period in 2015. The largest factors offsetting the improvement was a decrease in non-interest incomeimpact of $2,444 and $1,007 for the three and nine months ended September 30, 2016,purchase accounting and an increase in non-interest expenseour 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 comparedaverage shares outstanding due to the same periods in 2015.

exercise of Company stock options.

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                 

   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 AssumptionsAverage 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.

AnalysisFor 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 ninethree months of 20152016 to the first ninethree 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, 2015March 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 andMarch 31, 2017 compared to 0.43% for the same period in 2016. OurThe 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 toMarch 31, 2016 andas 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 assetloan yields during this extended period of low interest rates. Loan pricing for creditworthy borrowers is very competitive in our markets and has limited our abilitycompetitive markets. Any increases in short-term market interest rates would be expected to increase pricingour interest income on newvariable-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 negativeMarch 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 forwas impacted by the nine months ended September 30, 2015. Our provision increase was primarily the resultlevel of loan growth, that we have experienced. The lower provision for loan losses (including the negative provision) experienced incredit 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.

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, 2016March 31, 2017 compared to the same periodsperiod 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 willoften fluctuate from period to period and are oftencan sometimes be attributable to various balance sheet risk strategies. During the ninethree months ended September 30, 2016,March 31, 2017, the Company sold securities classified as available for sale totaling $20,036, including $18,978 sold duringfor a gain of $36. During the thirdfirst quarter of 2016. The Company recognized a gain on sales of2016, 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 periodsperiod 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 monthsquarter 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 periodthree months ended September 30, 2016March 31, 2017 was directly attributable to the transition.

During the three and nine months ended September 30, 2016, we recognized a gain on sale

NoninterestNon-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 duringdecline in total non-interest expense of $1,768 or 20.5% is due to the ninedecrease 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 periodsperiod 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, 2016March 31, 2017 compared to the same period in 2015 and increased for the nine months ended September 30, 2016 compared2016. The decline is mainly attributable to the same perioddecrease 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 resultemployee related expenses of the Merger effective April 1, 2015. The decrease duringmortgage operations resulting from the three months ended September 30, 2016 compared to the same period in 2015 was a resulttransition of a decrease in compensation due to transitioning severalmajority of our out-of-market mortgage loan production offices to another bank. Theduring the 2nd quarter of 2016. This decrease was partially offset by general increasesan 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 compareddue 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 severaltransition of a majority of our out-of-market mortgage loan production offices to another bank. These decreases were partiallyduring the 2nd quarter of 2016. This decrease was offset by inflationary increasesan increase in theour Maryland Farms lease which renewed in mid-2016.

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, 2016March 31, 2017 to the similarcomparable 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 forfrom the third quarterprior year mainly relates to a reduction of 2016 compared to the same period of 2015 was partially offset by purchases of other information technology productsour 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 increaseswas substantially attributable to a decline in our currentdirect-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 inincreased 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 reductionMarch 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 increaseddecreased for the ninethree 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 withresult 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 relatedMarch 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 provisionMarch 31, 2017. As of $110 forMarch 31, 2017, the nine months ended September 30, 2015 relating to one property that wasCompany has no properties held in ourthe other real estate portfolio.

Other operating expenses increaseddecreased for the three and nine months ended September 30, 2016,March 31, 2017, compared to the same periodsperiod in 20152016 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 Federalfederal 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 Federalfederal 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 losslosses of $647) and 20.6%$484 prior to intercompany eliminations), compared to 19.6% (exclusive of a tax benefitexpense 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 periodsperiod of 2015. During2016). Our tax rate for the three and nine months ended September 30, 2016, the Company recognized excessMarch 31, 2017, was favorably influenced by tax benefits of $107 and $531, respectively,credits related to the exerciseinterest-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 creditincrease 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-deductibilitycredits, 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 theany profits. The noncontrolling member is responsible for 100% of the mortgage venture’s net losses. DuringThe 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 transitioningtransition 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. SeeAlso, see Note 8 for segment reporting in the consolidated financial statements included elsewhere herein.

COMPARISON OF BALANCE SHEETS AS OF SEPTEMBER 30, 2016ATMARCH 31, 2017 ANDDECEMBER 31, 20152016

Overview

The Company’s total assets were $920,020$962,465 at September 30, 2016March 31, 2017 and $876,404$911,984 at December 31, 2015.2016. Our assets increased by 5.0%5.5% from December 31, 20152016 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 assetsliabilities from December 31, 20152016 to September 30, 2016,March 31, 2017, was substantially attributable to an increase in cash and cash equivalentsdeposits 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 growthgrowth. 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 continuedlending 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, 20152016 to September 30, 2016.March 31, 2017.

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 DecemberMarch 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.

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, 20152016 to September 30, 2016. CommercialMarch 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 20152016 and into the first ninethree 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.

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 andMarch 31, 2017 compared to 1.36% at December 31, 2015.2016. The allowance was adjusted upwarddownward as a percent of total loans from December 31, 20152016 to September 30, 2016.March 31, 2017. This increase in our allowance for loan losses is directly attributableincreased slightly due to our loan growth. Charge-offgrowth and general economicoffset by charge offs.

The following table sets forth the activity has continued to improvein 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.

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%

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, 20152016 total of $133,825.$146,813. The increase is attributable to purchasing $47,391$46,001 securities available for sale during the ninethree 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 theMarch 31, 2017, and December 31, 2015 total of $6,244. Restricted securities2016, 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 
  

 

   

 

 

Premises and Equipment

Premises and equipment, net, totaled $8,964$9,688 at September 30, 2016March 31, 2017 compared to $9,196$9,093 at December 31, 2015,2016, a net decreaseincrease of $232$595 or 2.5%6.5%. Asset purchases amounted to approximately $496$849 during the first ninethree months of 20162017 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 seveneight retail branchbanking locations as well as two stand-alone mortgage loan production offices and onetwo commercial loan production office.offices. Two of our bank branch locations, including our main office, are in Brentwood, Tennessee. Our other fivesix bank branch locations are in Franklin, Springfield, Gallatin, Murfreesboro and Nashville, Tennessee. Our commercial loan production office isoffices 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 ninethree months ended September 30,March 31, 2016, the Company transitionedbegan 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 ninethree 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 timeinterest-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.

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’sa flat interest rate forecast over the next 12 and 24 months, limits in the declineour 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 theour 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 equityOur economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.

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

 

Instantaneous, Parallel Change in Prevailing

Interest Rates Equal to

 

Maximum Percentage Decline in Economic Value of

Equity from the Economic Value of Equity at

Currently Prevailing Interest Rates

±+100 bp

 15

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 ManagementThe 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 securitydebtsecurity 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 increasedecline 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.

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 increasedecrease in the Bank’s September 30, 2016March 31, 2017 Tier 1 leverage ratio to 10.94%10.69% compared with 9.88%10.75% at December 31, 20152016 (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 ninethree 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 notificationnotifications 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, 2016March 31, 2017 and December 31, 20152016 for the Company and Bank.

  

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.

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.

ItemItem 3.Quantitative3.          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 theunderthe heading “Market and Liquidity Risk” on pages 62-64.

ItemItem  4.Controls4.          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 materiallytomaterially affect, our internal control over financial reporting.

PARTPART II – OTHER INFORMATION

ItemItem 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.

ItemItem 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.

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

None.

ItemItem 3.     Defaults Upon Senior Securities.

Not applicable.

ItemItem 4.     Mine Safety Disclosures.

Not applicable.

ItemItem 5.      Other Information.

None.

ItemItem 6.      Exhibits.

 

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

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)

 

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