UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-37391
COMMERCE UNION BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Tennessee | 37-1641316 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1736 Carothers Parkway, Suite 100 Brentwood, Tennessee | 37027 | |
(Address of principal executive offices) | (Zip Code) |
(615) 221-2020
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x 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 x No¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act:
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | |||
Non-Accelerated Filer | x | Smaller Reporting Company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of May 12, 2016 was 7,576,457.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Item 1. | Consolidated Financial Statements (Unaudited). | 2 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 39 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 58 | ||||
Item 4. | Controls and Procedures. | 58 | ||||
Item 1. | Legal Proceedings. | 59 | ||||
Item 1A. | Risk Factors. | 59 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 59 | ||||
Item 3. | Defaults Upon Senior Securities. | 59 | ||||
Item 4. | Mine Safety Disclosures. | 59 | ||||
Item 5. | Other Information. | 59 | ||||
Item 6. | Exhibits. | 59 | ||||
SIGNATURES | 60 |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q of Commerce Union Bancshares, Inc. (“we,” “our,” or “us” on a consolidated basis) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements include projections, predictions, expectations or statements as to beliefs or future events or results or refer to other matters that are not historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking statements contained in this quarterly report are based on various factors and were derived using numerous assumptions. In some cases, you can identify these forward-looking statements by words like “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of those words and other comparable words. You should be aware that those statements reflect only our predictions. If known or unknown risks or uncertainties should materialize, or if any one or more of our material underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated, or projected. You should bear this in mind when reading this quarterly report and not place undue reliance on these forward-looking statements. Commerce Union’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Factors that might cause such differences include, but are not limited to:
• | The possibility that our asset quality would decline 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 impact of the merger of Commerce Union Bank and legacy Reliant Bank effective on April 1, 2015; |
• | Our ability to recognize planned cost-savings as a result of the merger and to successfully integrate the two institutions; |
• | 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.
1
PART I – FINANCIAL INFORMATION
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED). |
COMMERCE UNION BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
ASSETS | ||||||||
March 31, 2016 | December 31, 2015 | |||||||
Cash and due from banks | $ | 26,107 | $ | 20,289 | ||||
Federal funds sold | 434 | 281 | ||||||
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Total cash and cash equivalents | 26,541 | 20,570 | ||||||
Securities available for sale | 139,899 | 133,825 | ||||||
Loans, net | 614,643 | 608,747 | ||||||
Mortgage loans held for sale | 24,682 | 55,093 | ||||||
Accrued interest receivable | 3,035 | 3,096 | ||||||
Premises and equipment, net | 9,213 | 9,196 | ||||||
Restricted equity securities, at cost | 6,244 | 6,244 | ||||||
Other real estate, net | 1,139 | 1,149 | ||||||
Cash surrender value of life insurance contracts | 24,247 | 20,077 | ||||||
Deferred tax assets, net | 2,274 | 2,383 | ||||||
Goodwill | 11,404 | 11,404 | ||||||
Core deposit intangibles | 1,849 | 1,938 | ||||||
Other assets | 3,375 | 2,682 | ||||||
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TOTAL ASSETS | $ | 868,545 | $ | 876,404 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | ||||||||
Demand | $ | 116,362 | $ | 111,309 | ||||
Interest-bearing demand | 90,622 | 95,397 | ||||||
Savings and money market deposit accounts | 199,988 | 181,316 | ||||||
Time | 250,805 | 251,986 | ||||||
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Total deposits | 657,777 | 640,008 | ||||||
Accrued interest payable | 139 | 55 | ||||||
Federal Home Loan Bank advances | 104,798 | 135,759 | ||||||
Dividends payable | — | 1,489 | ||||||
Other liabilities | 3,809 | 2,342 | ||||||
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TOTAL LIABILITIES | 766,523 | 779,653 | ||||||
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STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $1 par value; 10,000,000 shares authorized; 7,560,594 and 7,279,620 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively | 7,561 | 7,280 | ||||||
Additional paid-in capital | 87,098 | 84,520 | ||||||
Retained earnings | 7,224 | 4,987 | ||||||
Accumulated other comprehensive income (loss) | 139 | (36 | ) | |||||
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TOTAL STOCKHOLDERS’ EQUITY | 102,022 | 96,751 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 868,545 | $ | 876,404 | ||||
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See accompanying notes to consolidated financial statements.
2
COMMERCE UNION BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(Dollar amounts in thousands except per share amounts)
(Unaudited)
March 31, 2016 | March 31, 2015 | |||||||
INTEREST INCOME | ||||||||
Interest and fees on loans | $ | 8,138 | $ | 4,036 | ||||
Interest on investment securities, taxable | 236 | 203 | ||||||
Interest on investment securities, nontaxable | 438 | 182 | ||||||
Federal funds sold and other | 102 | 52 | ||||||
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TOTAL INTEREST INCOME | 8,914 | 4,473 | ||||||
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INTEREST EXPENSE | ||||||||
Deposits | ||||||||
Demand | 44 | 22 | ||||||
Savings and money market deposit accounts | 166 | 65 | ||||||
Time | 423 | 224 | ||||||
Federal Home Loan Bank advances and other | 199 | 93 | ||||||
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TOTAL INTEREST EXPENSE | 832 | 404 | ||||||
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NET INTEREST INCOME | 8,082 | 4,069 | ||||||
PROVISION FOR LOAN LOSSES | 165 | — | ||||||
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 7,917 | 4,069 | ||||||
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NONINTEREST INCOME | ||||||||
Service charges on deposit accounts | 285 | 147 | ||||||
Gains on mortgage loans sold, net | 3,342 | 1,777 | ||||||
Loss on securities transactions, net (reclassified from other comprehensive income) | — | (396 | ) | |||||
Other | 219 | 106 | ||||||
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TOTAL NONINTEREST INCOME | 3,846 | 1,634 | ||||||
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NONINTEREST EXPENSE | ||||||||
Salaries and employee benefits | 5,394 | 2,839 | ||||||
Occupancy | 829 | 700 | ||||||
Data processing | 627 | 408 | ||||||
Advertising and public relations | 265 | 209 | ||||||
Audit, legal and consulting | 281 | 224 | ||||||
Federal deposit insurance | 114 | 70 | ||||||
Provision for losses on other real estate | 26 | 20 | ||||||
Other operating | 1,101 | 508 | ||||||
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TOTAL NONINTEREST EXPENSE | 8,637 | 4,978 | ||||||
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INCOME BEFORE PROVISION FOR INCOME TAXES | 3,126 | 725 | ||||||
INCOME TAX EXPENSE | 568 | 184 | ||||||
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CONSOLIDATED NET INCOME | 2,558 | 541 | ||||||
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NONCONTROLLING INTEREST IN NET (INCOME) LOSS OF SUBSIDIARY | (321 | ) | 71 | |||||
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NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 2,237 | $ | 612 | ||||
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Basic net income attributable to common shareholders, per share | $ | 0.30 | $ | 0.15 | ||||
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Diluted net income attributable to common shareholders, per share | $ | 0.30 | $ | 0.15 | ||||
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See accompanying notes to consolidated financial statements.
3
COMMERCE UNION BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(Dollar amounts in thousands except per share amounts)
(Unaudited)
March 31, 2016 | March 31, 2015 | |||||||
Consolidated net income | $ | 2,558 | $ | 541 | ||||
Other comprehensive income (loss) | ||||||||
Net unrealized gains (losses) on available-for-sale securities, net of tax of $109 and $(196) for the three months ended March 31, 2016 and 2015, respectively. | 175 | (313 | ) | |||||
Reclassification adjustment for losses included in net income, net of tax of $152 for the three months ended March 31, 2015. | ||||||||
— | 244 | |||||||
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TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | 175 | (69 | ) | |||||
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TOTAL COMPREHENSIVE INCOME | $ | 2,733 | $ | 472 | ||||
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See accompanying notes to consolidated financial statements.
4
COMMERCE UNION BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(Dollar amounts in thousands except per share amounts)
(Unaudited)
ACCUMULATED | ||||||||||||||||||||||||||||
ADDITIONAL | OTHER | |||||||||||||||||||||||||||
COMMON STOCK | PAID-IN | RETAINED | COMPREHENSIVE | NONCONTROLLING | ||||||||||||||||||||||||
SHARES | AMOUNT | CAPITAL | EARNINGS | INCOME (LOSS) | INTEREST | TOTAL | ||||||||||||||||||||||
BALANCE - JANUARY 1, 2015 | 3,910,191 | $ | 3,910 | $ | 38,955 | $ | 901 | $ | (250 | ) | $ | — | $ | 43,516 | ||||||||||||||
Stock based compensation expense | — | — | 5 | — | — | — | 5 | |||||||||||||||||||||
Noncontrolling interest contributions | — | — | — | — | — | 71 | 71 | |||||||||||||||||||||
Net income (loss) | — | — | — | 612 | — | (71 | ) | 541 | ||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (69 | ) | — | (69 | ) | |||||||||||||||||||
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BALANCE - MARCH 31, 2015 | 3,910,191 | $ | 3,910 | $ | 38,960 | $ | 1,513 | $ | (319 | ) | $ | — | $ | 44,064 | ||||||||||||||
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BALANCE - JANUARY 1, 2016 | 7,279,620 | $ | 7,280 | $ | 84,520 | $ | 4,987 | $ | (36 | ) | $ | — | 96,751 | |||||||||||||||
Stock based compensation expense | — | — | 50 | — | — | — | 50 | |||||||||||||||||||||
Exercise of stock options | 280,974 | 281 | 2,528 | — | — | — | 2,809 | |||||||||||||||||||||
Distribution to non-controlling interest | — | — | — | — | — | (321 | ) | (321 | ) | |||||||||||||||||||
Net income | — | — | — | 2,237 | — | 321 | 2,558 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | 175 | — | 175 | |||||||||||||||||||||
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BALANCE - MARCH 31, 2016 | 7,560,594 | $ | 7,561 | $ | 87,098 | $ | 7,224 | $ | 139 | $ | — | $ | 102,022 | |||||||||||||||
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See accompanying notes to consolidated financial statements.
5
COMMERCE UNION BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(Dollar amounts in thousands except per share amounts)
(Unaudited)
March 31, 2016 | March 31, 2015 | |||||||
OPERATING ACTIVITIES | ||||||||
Consolidated net income | $ | 2,558 | $ | 541 | ||||
Adjustments to reconcile consolidated net income to net cash used in operating activities | ||||||||
Provision for loan losses | 165 | — | ||||||
Deferred income tax expense | — | 186 | ||||||
Depreciation and amortization of premises and equipment | 241 | 127 | ||||||
Net amortization of securities | 349 | 144 | ||||||
Net realized losses on sales of securities | — | 396 | ||||||
Gains on mortgage loans sold, net | (3,342 | ) | (1,777 | ) | ||||
Stock-based compensation expense | 50 | 5 | ||||||
Provision for losses on other real estate | 26 | 20 | ||||||
Increase in cash surrender value of life insurance contracts | (170 | ) | (93 | ) | ||||
Mortgage loans originated for resale | (72,489 | ) | (40,871 | ) | ||||
Proceeds from sale of mortgage loans | 106,242 | 41,899 | ||||||
Amortization of core deposit intangible | 89 | 32 | ||||||
Change in | ||||||||
Accrued interest receivable | 61 | (28 | ) | |||||
Other assets | (1,014 | ) | (75 | ) | ||||
Accrued interest payable | 84 | (30 | ) | |||||
Other liabilities | 727 | (677 | ) | |||||
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TOTAL ADJUSTMENTS | 31,019 | (742 | ) | |||||
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 33,577 | (201 | ) | |||||
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INVESTING ACTIVITIES | ||||||||
Activities in available for sale securities | ||||||||
Purchases | (6,687 | ) | (32,293 | ) | ||||
Sales | — | 459 | ||||||
Maturities, prepayments and calls | 1,288 | 614 | ||||||
Activities in held to maturity securities | ||||||||
Sales | — | 20,649 | ||||||
Purchases of restricted equity securities | — | (86 | ) | |||||
Loan originations and payments, net | (6,061 | ) | 3,659 | |||||
Purchase of buildings, leasehold improvements, and equipment | (258 | ) | (33 | ) | ||||
Improvement of other real estate | (16 | ) | — | |||||
Purchase of life insurance contracts | (4,000 | ) | — | |||||
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NET CASH USED IN INVESTING ACTIVITIES | (15,734 | ) | (7,031 | ) | ||||
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FINANCING ACTIVITIES | ||||||||
Net change in deposits | 17,769 | 42,197 | ||||||
Net change in federal funds purchased | — | (6,651 | ) | |||||
Payments on Federal Home Loan Bank advances, net | (30,961 | ) | (11,000 | ) | ||||
Issuance of common stock | 2,809 | — | ||||||
Cash dividends paid on common stock | (1,489 | ) | — | |||||
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (11,872 | ) | 24,546 | |||||
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NET INCREASE IN CASH AND CASH EQUIVALENTS | 5,971 | 17,314 | ||||||
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR | 20,570 | 11,147 | ||||||
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CASH AND CASH EQUIVALENTS - END OF YEAR | $ | 26,541 | $ | 28,461 | ||||
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See accompanying notes to consolidated financial statements.
6
COMMERCE UNION BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(Dollar amounts in thousands except per share amounts)
(Unaudited)
March 31, 2016 | March 31, 2015 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for | ||||||||
Interest | $ | 748 | $ | 434 | ||||
Taxes | 94 | 380 | ||||||
Non-cash investing and financing activities | ||||||||
Unrealized gain (loss) on securities available-for-sale | $ | 1,024 | $ | (80 | ) | |||
Unrealized loss on derivatives | (740 | ) | (330 | ) | ||||
Change in due to/from noncontrolling interest | (321 | ) | 71 |
See accompanying notes to consolidated financial statements.
7
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(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. (or “Commerce Union”), its wholly owned subsidiary, Reliant Bank (the “Bank”), the Bank’s wholly-owned subsidiaries, Commerce Union Mortgage Services, Inc. (inactive) and Reliant Investments, LLC, and the Bank’s majority controlled subsidiary, Reliant Mortgage Ventures, LLC, collectively (the “Company”). As described in the notes to our annual financial statements, Reliant Mortgage Ventures, LLC is considered a variable interest entity for which the Bank is deemed to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices in the banking industry.
The consolidated financial statements as of March 31, 2016, and for the three months ended March 31, 2016 and 2015, included herein have not been audited. See Note 11 related to the business combination occurring during 2015 and the related financial presentation. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures made are adequate to make the information not misleading. These financial statements should be read in conjunction with the Company’s 2015 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 results for the three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
8
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 2 - SECURITIES
The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive loss at March 31, 2016 and December 31, 2015 were as follows:
March 31, 2016 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U. S. Treasury and other U. S. government agencies | $ | 4,915 | $ | 18 | $ | (36 | ) | $ | 4,897 | |||||||
State and municipal | 90,508 | 1,612 | (182 | ) | 91,938 | |||||||||||
Corporate bonds | 2,683 | 60 | (16 | ) | 2,727 | |||||||||||
Mortgage backed securities | 37,083 | 153 | (149 | ) | 37,087 | |||||||||||
Time deposits | 3,250 | — | — | 3,250 | ||||||||||||
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Total | $ | 138,439 | $ | 1,843 | $ | (383 | ) | $ | 139,899 | |||||||
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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 | ||||||||||||
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Total | $ | 133,389 | $ | 1,331 | $ | (895 | ) | $ | 133,825 | |||||||
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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 March 31, 2016 and December 31, 2015 had a carrying amount of $49,489 and $39,815, respectively, and were pledged to collateralize Federal Home Loan Bank advances, Federal Reserve advances and municipal deposits.
At March 31, 2016 and December 31, 2015, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies or U.S. Government sponsored entities, in an amount greater than 10% of stockholders’ equity.
The fair value of available for sale debt securities at March 31, 2016 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 in one to five years | $ | 17,351 | $ | 17,493 | ||||
Due in five to ten years | 12,719 | 12,912 | ||||||
Due after ten years | 71,286 | 72,407 | ||||||
Mortgage backed securities | 37,083 | 37,087 | ||||||
|
|
|
| |||||
$ | 138,439 | $ | 139,899 | |||||
|
|
|
|
9
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 2 - SECURITIES (CONTINUED)
The following table shows available for sale securities with unrealized losses and their estimated fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2016:
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 | $ | 2,476 | $ | 11 | $ | 975 | $ | 25 | $ | 3,451 | $ | 36 | ||||||||||||
State and municipal | 8,836 | 63 | 5,884 | 119 | 14,720 | 182 | ||||||||||||||||||
Corporate bonds | — | — | 984 | 16 | 984 | 16 | ||||||||||||||||||
Mortgage backed securities | 4,135 | 16 | 16,027 | 133 | 20,162 | 149 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired | $ | 15,447 | $ | 90 | $ | 23,870 | $ | 293 | $ | 39,317 | $ | 383 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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:
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 | $ | 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 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 69 and 105 securities in an unrealized loss position as of March 31, 2016 and December 31, 2015, respectively.
10
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at March 31, 2016 and December 31, 2015 were comprised as follows:
March 31, 2016 | December 31, 2015 | |||||||
Commercial, Industrial and Agricultural | $ | 140,893 | $ | 143,770 | ||||
Real Estate | ||||||||
1-4 Family Residential | 114,302 | 110,736 | ||||||
1-4 Family HELOC | 48,952 | 49,665 | ||||||
Multifamily and Commercial | 202,976 | 202,736 | ||||||
Construction, Land Development and Farmland | 94,888 | 89,763 | ||||||
Consumer | 15,268 | 15,271 | ||||||
Other | 6,274 | 5,556 | ||||||
|
|
|
| |||||
623,553 | 617,497 | |||||||
Less | ||||||||
Deferred loan fees | 820 | 927 | ||||||
Allowance for possible loan losses | 8,090 | 7,823 | ||||||
|
|
|
| |||||
Loans, net | $ | 614,643 | $ | 608,747 | ||||
|
|
|
|
11
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Activity in the allowance for loan losses by portfolio segment was as follows for the three months ended March 31, 2016:
Commercial Industrial and Agricultural | Multi Family and Commercial Real Estate | Construction Land Development and Farmland | 1-4 Family Residential Real Estate | |||||||||||||
Beginning balance | $ | 2,198 | $ | 2,591 | $ | 894 | $ | 1,214 | ||||||||
Charge-offs | (8 | ) | — | — | — | |||||||||||
Recoveries | 91 | 1 | 1 | 4 | ||||||||||||
Provision | 63 | (210 | ) | 269 | 58 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Ending balance | $ | 2,344 | $ | 2,382 | $ | 1,164 | $ | 1,276 | ||||||||
|
|
|
|
|
|
|
| |||||||||
1-4 Family HELOC | Consumer | Other | Total | |||||||||||||
Beginning balance | $ | 699 | $ | 192 | $ | 35 | $ | 7,823 | ||||||||
Charge-offs | — | (4 | ) | — | (12 | ) | ||||||||||
Recoveries | 4 | 13 | — | 114 | ||||||||||||
Provision | (9 | ) | (6 | ) | — | 165 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Ending balance | $ | 694 | $ | 195 | $ | 35 | $ | 8,090 | ||||||||
|
|
|
|
|
|
|
|
Activity in the allowance for loan losses by portfolio segment was as follows for the three months ended March 31, 2015:
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 | 48 | 1 | 2 | — | ||||||||||||||
Provision | 120 | (100 | ) | (73 | ) | (115 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||||
Ending balance | $ | 2,352 | $ | 1,971 | $ | 671 | $ | 527 | ||||||||||
|
|
|
|
|
|
|
|
1-4 Family HELOC | Consumer | Other | Unallocated | Total | ||||||||||||||||
Beginning balance | $ | 854 | $ | 181 | $ | 2 | $ | 678 | $ | 7,353 | ||||||||||
Charge-offs | — | — | (4 | ) | — | (4 | ) | |||||||||||||
Recoveries | 8 | — | — | — | 59 | |||||||||||||||
Provision | (132 | ) | (29 | ) | 3 | 326 | — | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Ending balance | $ | 730 | $ | 152 | $ | 1 | $ | 1,004 | $ | 7,408 | ||||||||||
|
|
|
|
|
|
|
|
|
|
12
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2016 was as follows:
Commercial Industrial and Agricultural | Multi Family and Commercial Real Estate | Construction Land Development and Farmland | 1-4 Family Residential Real Estate | |||||||||||||
Allowance for loan losses | ||||||||||||||||
Individually evaluated for impairment | $ | 687 | $ | — | $ | 22 | $ | — | ||||||||
Acquired with credit impairment | 6 | — | — | 221 | ||||||||||||
Collectively evaluated for impairment | 1,651 | 2,382 | 1,142 | 1,055 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,344 | $ | 2,382 | $ | 1,164 | $ | 1,276 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Loans | ||||||||||||||||
Individually evaluated for impairment | $ | 5,324 | $ | 2,158 | $ | 857 | $ | 2,862 | ||||||||
Acquired with credit impairment | 778 | 3,955 | 1,489 | 623 | ||||||||||||
Collectively evaluated for impairment | 134,791 | 196,863 | 92,542 | 110,817 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 140,893 | $ | 202,976 | $ | 94,888 | $ | 114,302 | ||||||||
|
|
|
|
|
|
|
| |||||||||
1-4 Family HELOC | Consumer | Other | Total | |||||||||||||
Allowance for loan losses | ||||||||||||||||
Individually evaluated for impairment | $ | 250 | $ | — | $ | — | $ | 959 | ||||||||
Acquired with credit impairment | — | — | — | 227 | ||||||||||||
Collectively evaluated for impairment | 444 | 195 | 35 | 6,904 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 694 | $ | 195 | $ | 35 | $ | 8,090 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Loans | ||||||||||||||||
Individually evaluated for impairment | $ | 2,018 | $ | — | $ | — | $ | 13,219 | ||||||||
Acquired with credit impairment | 18 | — | — | 6,863 | ||||||||||||
Collectively evaluated for impairment | 46,916 | 15,268 | 6,274 | 603,471 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 48,952 | $ | 15,268 | $ | 6,274 | $ | 623,553 | ||||||||
|
|
|
|
|
|
|
|
13
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2015 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 | $ | 479 | $ | 11 | $ | 22 | $ | — | ||||||||
Acquired with credit impairment | 6 | — | — | 241 | ||||||||||||
Collectively evaluated for impairment | 1,713 | 2,580 | 872 | 973 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,198 | $ | 2,591 | $ | 894 | $ | 1,214 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Loans | ||||||||||||||||
Individually evaluated for impairment | $ | 2,438 | $ | 2,196 | $ | 224 | $ | 2,646 | ||||||||
Acquired with credit impairment | 888 | 3,968 | 1,496 | 735 | ||||||||||||
Collectively evaluated for impairment | 140,444 | 196,572 | 88,043 | 107,355 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 143,770 | $ | 202,736 | $ | 89,763 | $ | 110,736 | ||||||||
|
|
|
|
|
|
|
| |||||||||
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 | ||||||||
|
|
|
|
|
|
|
|
Risk characteristics relevant to each portfolio segment are as follows:
Commercial, industrial and agricultural: The commercial, industrial and agricultural loan portfolio segment includes loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial, industrial and agricultural loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial, industrial and agricultural 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.
14
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property.
Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
1-4 family residential real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value (LTV), minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment.
15
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans.
Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV on secured consumer loans, minimum credit scores, and maximum debt to income. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle, or other large personal items, or for consolidating debt. These loans may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.
Non-accrual loans by class of loan were as follows at March 31, 2016 and December 31, 2015:
March 31, 2016 | December 31, 2015 | |||||||
Commercial, Industrial and Agricultural | $ | 435 | $ | 947 | ||||
Multi Family and Commercial Real Estate | 697 | 713 | ||||||
Construction, Land Development and Farmland | — | 158 | ||||||
1-4 Family Residential Real Estate | 2,243 | 2,109 | ||||||
1-4 Family HELOC | 967 | 1,077 | ||||||
|
|
|
| |||||
Total | $ | 4,342 | $ | 5,004 | ||||
|
|
|
|
16
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(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 March 31, 2016:
Unpaid Principal Balance | Recorded Investment with no Allowance Recorded | Recorded Investment with Allowance Recorded | Total Recorded Investment | Related Allowance | ||||||||||||||||
Commercial, Industrial and Agricultural | $ | 7,544 | $ | 4,703 | $ | 1,399 | $ | 6,102 | $ | 693 | ||||||||||
Multi Family and Commercial Real Estate | 6,965 | 6,113 | — | 6,113 | — | |||||||||||||||
Construction, Land Development and Farmland | 2,453 | 2,122 | 224 | 2,346 | 22 | |||||||||||||||
1-4 Family Residential Real Estate | 3,990 | 3,226 | 259 | 3,485 | 221 | |||||||||||||||
1-4 Family HELOC | 2,604 | 1,110 | 926 | 2,036 | 250 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 23,556 | $ | 17,274 | $ | 2,808 | $ | 20,082 | $ | 1,186 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Individually impaired loans by class of loans were as follows at December 31, 2015:
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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
17
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The average balances of impaired loans for the three months ended March 31, 2016 and 2015 were as follows:
2016 | 2015 | |||||||
Commercial, Industrial and Agricultural | $ | 4,714 | $ | 2,235 | ||||
Multi Family and Commercial Real Estate | 6,139 | 1,232 | ||||||
Construction, Land Development and Farmland | 2,033 | — | ||||||
1-4 Family Residential Real Estate | 3,433 | 3,983 | ||||||
1-4 Family HELOC | 2,146 | 2,055 | ||||||
|
|
|
| |||||
Total | $ | 18,465 | $ | 9,505 | ||||
|
|
|
|
Interest income recognized on these loans was not material for the three months ended March 31, 2016 or 2015.
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.
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.
18
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
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.
Grade 7 - Substandard
A ‘‘substandard’’ extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified should have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard. Substandard assets have a high probability of payment default, or they have other well-defined weaknesses. They require more intensive supervision by Company management. Substandard assets are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigation.
Grade 8 - Doubtful
An extension of credit classified ‘‘doubtful’’ has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral, or refinancing plans. Generally, the doubtful classification should not extend for a long period of time because in most cases the pending factors or events that warranted the doubtful classification should be resolved either positively or negatively in a reasonable period of time.
Grade 9 - Loss
Extensions of credit classified ‘‘loss’’ are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. Amounts classified loss should be promptly charged off. The Company will not attempt long term recoveries while the credit remains on the Company’s books. Losses should be taken in the period in which they surface as uncollectible. With loss assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified loss, there is little prospect of collecting either its principal or interest.
Non-commercial purpose loans are initially assigned a default loan grade of 99 (Pass) and are risk graded (Grade 6, 7, or 8) according to delinquency status when applicable.
19
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Credit quality indicators by class of loan were as follows at March 31, 2016:
Commercial Industrial and Agricultural | Multi Family and Commercial Real Estate | Construction Land Development and Farmland | ||||||||||
Pass (grades 1-5) | $ | 135,517 | $ | 199,092 | $ | 94,169 | ||||||
Special Mention | 1,278 | 1,726 | — | |||||||||
Substandard | 4,098 | 2,158 | 719 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 140,893 | $ | 202,976 | $ | 94,888 | ||||||
|
|
|
|
|
|
Consumer and Other | 1-4 Family Residential Real Estate | 1-4 Family HELOC | Total | |||||||||||||
Pass (grades 1-5) | $ | 21,542 | $ | 110,868 | $ | 46,934 | $ | 608,122 | ||||||||
Special Mention | — | — | — | 3,004 | ||||||||||||
Substandard | — | 3,434 | 2,018 | 12,427 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 21,542 | $ | 114,302 | $ | 48,952 | $ | 623,553 | ||||||||
|
|
|
|
|
|
|
|
Credit quality indicators by class of loan were as follows at December 31, 2015:
Commercial Industrial and Agricultural | Multi Family and Commercial Real Estate | Construction Land Development 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 | ||||||
|
|
|
|
|
|
Consumer and Other | 1-4 Family Residential Real 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 | ||||||||
|
|
|
|
|
|
|
|
20
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(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 March 31, 2016:
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 | $ | 263 | $ | — | $ | — | $ | 263 | ||||||||
Multi family and Commercial Real Estate | — | — | — | — | ||||||||||||
Construction, Land Development and Farmland | 235 | 67 | — | 302 | ||||||||||||
1-4 Family Residential Real Estate | 435 | — | — | 435 | ||||||||||||
1-4 Family HELOC | 146 | — | — | 146 | ||||||||||||
Consumer | 1 | — | — | 1 | ||||||||||||
Other | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 1,080 | $ | 67 | $ | — | $ | 1,147 | ||||||||
|
|
|
|
|
|
|
|
Current | Accruing Total Past Due | Non Accrual Current Loans | Non Accrual Past Due Loans | Total Loans | ||||||||||||||||
Commercial, Industrial and Agricultural | $ | 140,195 | $ | 263 | $ | 435 | $ | — | $ | 140,893 | ||||||||||
Multi family and Commercial Real Estate | 202,279 | — | 697 | — | 202,976 | |||||||||||||||
Construction, Land Development and Farmland | 94,586 | 302 | — | — | 94,888 | |||||||||||||||
1-4 Family Residential Real Estate | 111,624 | 435 | 1,789 | 454 | 114,302 | |||||||||||||||
1-4 Family HELOC | 47,839 | 146 | 967 | — | 48,952 | |||||||||||||||
Consumer | 15,267 | 1 | — | — | 15,268 | |||||||||||||||
Other | 6,274 | — | — | — | 6,274 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 618,064 | $ | 1,147 | $ | 3,888 | $ | 454 | $ | 623,553 | ||||||||||
|
|
|
|
|
|
|
|
|
|
21
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(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 December 31, 2015:
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 | ||||||||
Multi family and Commercial Real Estate | — | — | — | — | ||||||||||||
Construction, Land Development and Farmland | — | — | — | — | ||||||||||||
1-4 Family Residential Real Estate | 579 | — | — | 579 | ||||||||||||
1-4 Family HELOC | — | — | — | — | ||||||||||||
Consumer | 11 | — | — | 11 | ||||||||||||
Other | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 591 | $ | 148 | $ | — | $ | 739 | ||||||||
|
|
|
|
|
|
|
|
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 March 31, 2016 or December 31, 2015.
During the three months ended March 31, 2016, one loan totaling $1,223 was modified in a troubled debt restructuring. The modification consisted of an extension of the scheduled due date of an annual principal and interest payment. The modifications had no effect on the allowance for loan losses or interest income.
22
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(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 loans was as follows at March 31, 2016:
Commercial, Industrial and Agricultural | $ | 1,418 | ||
Multi Family and Commercial Real Estate | 4,532 | |||
Construction, Land Development and Farmland | 1,586 | |||
1-4 Family Residential Real Estate | 886 | |||
1-4 Family HELOC | 39 | |||
|
| |||
Total outstanding balance | 8,461 | |||
Less remaining purchase discount | 1,598 | |||
|
| |||
6,863 | ||||
Allowance for loan losses | 227 | |||
|
| |||
Carrying amount, net of allowance | $ | 6,636 | ||
|
|
During the three months ended March 31, 2016, the allowance for loan losses related to purchased credit impaired loans decreased by $20.
Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the three months ended March 31, 2016:
Balance at January 1, 2016 | $ | 233 | ||
Accretion income | (73 | ) | ||
Reclassification from nonaccretable | 46 | |||
|
| |||
Balance at March 31, 2016 | $ | 206 | ||
|
|
23
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 4 - FAIR VALUES OF ASSETS AND LIABILITIES
Financial accounting standards relating to fair value measurements establish a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. | |||
Level 2 | Inputs to the valuation methodology include: | |||
• | Quoted prices for similar assets or liabilities in active markets; | |||
• | Quoted prices for identical or similar assets or liabilities in inactive markets; | |||
• | Inputs other than quoted prices that are observable for the asset or liability; | |||
• | Inputs that are derived principally from or corroborated by the observable market data by correlation or other means. | |||
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. | ||||
Level 3 | Inputs to the valuation methodology are unobservable and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. |
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis:
Securities available for sale:The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The Company obtains fair value measurements for securities available for sale from an independent pricing service. The fair value measurements consider observable data that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, cash flows and reference data, including market research publications, among other things.
Interest rate swaps:The fair values of interest rate swaps are determined based on discounted future cash flows.
24
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 4 - FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring basis include the following:
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on the present value of expected payments using the loan’s effective rate as the discount rate or recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Other real estate owned:The fair value of other real estate owned is generally based on 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.
There were no changes in valuation methodologies used during the three months ended March 31, 2016.
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.
25
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 4 - FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)
The following table sets forth the Company’s major categories of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of March 31, 2016 and December 31, 2015:
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
March 31, 2016 | ||||||||||||||||
Assets | ||||||||||||||||
U. S. Treasury and other U. S. government agencies | $ | 4,897 | $ | — | $ | 4,897 | $ | — | ||||||||
State and municipal | 91,938 | — | 91,938 | — | ||||||||||||
Corporate bonds | 2,727 | — | 2,727 | — | ||||||||||||
Mortgage backed securities | 37,087 | — | 37,087 | — | ||||||||||||
Time deposits | 3,250 | 3,250 | — | — | ||||||||||||
Liabilities | ||||||||||||||||
Interest rate swap | $ | 1,235 | $ | — | $ | 1,235 | $ | — | ||||||||
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 | $ | — |
26
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 4 - FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)
The following table sets forth the Company’s major categories of assets and liabilities measured at fair value on a nonrecurring basis, by level within the fair value hierarchy, as of March 31, 2016 and December 31, 2015:
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
March 31, 2016 | ||||||||||||||||
Assets | ||||||||||||||||
Impaired loans | $ | 1,622 | $ | — | $ | — | $ | 1,622 | ||||||||
Other real estate owned | 1,139 | — | — | �� | 1,139 | |||||||||||
December 31, 2015 | ||||||||||||||||
Assets | ||||||||||||||||
Impaired loans | $ | 2,486 | $ | — | $ | — | $ | 2,486 | ||||||||
Other real estate owned | 1,149 | — | — | 1,149 |
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at March 31, 2016 and December 31, 2015:
Valuation Techniques (1) | Significant Unobservable Inputs | Range (Weighted Average) | ||||
Impaired loans | Appraisal | Estimated costs to sell | 10% | |||
Other real estate owned | Appraisal | Estimated costs to sell | 10% |
(1) | The fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent. |
27
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(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 at March 31, 2016 were as follows:
Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and due from banks | $ | 26,107 | $ | 26,107 | $ | 26,107 | $ | — | $ | — | ||||||||||
Federal funds sold | 434 | 434 | 434 | — | — | |||||||||||||||
Loans, net | 614,643 | 616,872 | — | — | 616,872 | |||||||||||||||
Mortgage loans held for sale | 24,682 | 24,682 | — | — | 24,682 | |||||||||||||||
Accrued interest receivable | 3,035 | 3,035 | — | 3,035 | — | |||||||||||||||
Restricted equity securities | 6,244 | 6,244 | — | 6,244 | — | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 657,777 | 658,196 | — | — | 658,196 | |||||||||||||||
Accrued interest payable | 139 | 139 | — | 139 | — | |||||||||||||||
Federal Home Loan Bank advances | 104,798 | 105,315 | — | 105,315 | — |
Carrying amounts and estimated fair values of financial instruments at December 31, 2015 were as follows:
Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and due from banks | $ | 20,289 | $ | 20,289 | $ | 20,289 | $ | — | $ | — | ||||||||||
Federal funds sold | 281 | 281 | 281 | — | — | |||||||||||||||
Loans, net | 608,747 | 611,628 | — | — | 611,628 | |||||||||||||||
Mortgage loans held for sale | 55,093 | 55,093 | — | — | 55,093 | |||||||||||||||
Accrued interest receivable | 3,096 | 3,096 | — | 3,096 | — | |||||||||||||||
Restricted equity securities | 6,244 | 6,244 | — | 6,244 | — | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 640,008 | 639,746 | — | — | 639,746 | |||||||||||||||
Accrued interest payable | 55 | 55 | — | 55 | — | |||||||||||||||
Federal Home Loan Bank advances | 135,759 | 136,138 | — | 136,138 | — |
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.
28
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(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 three months ended March 31, 2016 is as follows:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2016 | 708,921 | $ | 10.73 | |||||||||||||
Granted | 10,000 | 14.70 | ||||||||||||||
Exercised | (280,974 | ) | 10.00 | |||||||||||||
Forfeited or expired | (23,257 | ) | 9.79 | |||||||||||||
|
| |||||||||||||||
Outstanding at March 31, 2016 | 414,690 | 11.37 | 3.50 | $ | 896 | |||||||||||
|
| |||||||||||||||
Exercisable at March 31, 2016 | 323,850 | 10.85 | 2.03 | $ | 856 | |||||||||||
|
|
Shares | Weighted Average Grant-Date Fair Value | |||||||
Non-vested options at January 1, 2016 | 84,160 | $ | 2.90 | |||||
Granted | 10,000 | 3.54 | ||||||
Vested | (3,320 | ) | 2.37 | |||||
Forfeited | — | — | ||||||
|
| |||||||
Non-vested options at March 31, 2016 | 90,840 | 2.99 | ||||||
|
|
29
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 5 - STOCK-BASED COMPENSATION (CONTINUED)
The fair value of options granted during the three months ended March 31, 2016 was determined using the following weighted-average assumptions as of the grant date, resulting in an estimated fair value per option of $3.54.
Risk-free interest rate | 1.94% | |
Expected term | 10 years | |
Expected stock price volatility | 21.00% | |
Dividend yield | 1.50% |
NOTE 6 - REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to regulatory capital requirements administered by the federal and state banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of March 31, 2016 and December 31, 2015, the Bank meets all capital adequacy requirements to which it is subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2016 and December 31, 2015, 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 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.
30
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(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 resented below as of March 31, 2016 and December 31, 2015.
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 | |||||||||||||||||||
March 31, 2016 | ||||||||||||||||||||||||
Company | ||||||||||||||||||||||||
Tier I leverage | $ | 89,370 | 10.40 | % | $ | 34,373 | 4.00 | % | N/A | N/A | ||||||||||||||
Common equity tier 1 | 89,370 | 12.81 | % | 35,755 | 5.125 | % | N/A | N/A | ||||||||||||||||
Tier I risk-based capital | 89,370 | 12.81 | % | 46,220 | 6.625 | % | N/A | N/A | ||||||||||||||||
Total risk-based capital | 97,460 | 13.97 | % | 60,171 | 8.625 | % | N/A | N/A | ||||||||||||||||
Bank | ||||||||||||||||||||||||
Tier I leverage | $ | 88,820 | 10.34 | % | $ | 34,360 | 4.00 | % | $ | 42,950 | 5.00 | % | ||||||||||||
Common equity tier 1 | 88,820 | 12.75 | % | 35,702 | 5.125 | % | 45,281 | 6.50 | % | |||||||||||||||
Tier I risk-based capital | 88,820 | 12.75 | % | 46,152 | 6.625 | % | 55,730 | 8.00 | % | |||||||||||||||
Total risk-based capital | 96,910 | 13.91 | % | 60,090 | 8.625 | % | 69,669 | 10.00 | % | |||||||||||||||
December 31, 2015 | ||||||||||||||||||||||||
Company | ||||||||||||||||||||||||
Tier I leverage | $ | 84,608 | 9.92 | % | $ | 34,116 | 4.00 | % | N/A | N/A | ||||||||||||||
Common equity tier 1 | 84,608 | 12.02 | % | 31,675 | 4.50 | % | 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 | ||||||||||||||||||||||||
Tier I leverage | $ | 84,196 | 9.88 | % | $ | 34,087 | 4.00 | % | $ | 42,609 | 5.00 | % | ||||||||||||
Common equity tier 1 | 84,196 | 11.97 | % | �� | 31,653 | 4.50 | % | 45,720 | 6.50 | % | ||||||||||||||
Tier I risk-based capital | 84,196 | 11.97 | % | 42,204 | 6.00 | % | 56,271 | 8.00 | % | |||||||||||||||
Total risk-based capital | 92,019 | 13.08 | % | 56,281 | 8.00 | % | 70,351 | 10.00 | % |
31
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 7 - EARNINGS PER SHARE
The following is a summary of the components comprising basic and diluted earnings per common share of stock (EPS):
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Basic EPS Computation | ||||||||
Net income attributable to common shareholders | $ | 2,237 | $ | 612 | ||||
Weighted average common shares outstanding | 7,450,400 | 3,993,206 | ||||||
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Basic earnings per common share | $ | 0.30 | $ | 0.15 | ||||
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Diluted EPS Computation | ||||||||
Net income attributable to common shareholders | $ | 2,237 | $ | 612 | ||||
Weighted average common shares outstanding | 7,450,400 | 3,993,206 | ||||||
Dilutive effect of stock options | 113,266 | 122,173 | ||||||
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Adjusted weighted average common shares outstanding | 7,563,666 | 4,115,379 | ||||||
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Diluted earnings per common share | $ | 0.30 | $ | 0.15 | ||||
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NOTE 8 - SEGMENT REPORTING
The Company has two reportable business segments: retail banking and residential mortgage banking. Segment information is derived from the internal reporting system utilized by management. Revenues and expenses for segments reflect those, which can be specifically identified and have been assigned based on internally developed allocation methods. Financial results have been presented, to the extent practicable, as if each segment operated on a stand-alone basis.
Retail Banking provides deposit and lending services to consumer and business customers within our primary geographic markets. Our customers are serviced through branch locations, ATMs, online banking, and mobile banking.
Residential Mortgage Bankingoriginates first lien residential mortgage loans throughout the United States. These loans are typically underwritten to government agency standards and sold to third party secondary market mortgage investors.
32
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 8 - SEGMENT REPORTING (CONTINUED)
The following presents summarized results of operations for the Company’s business segments for the periods indicated:
Three Months Ended March 31, 2016 | ||||||||||||
Retail Banking | Residential Mortgage Banking | 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 | |||||||||
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Consolidated net income | 2,237 | 321 | 2,558 | |||||||||
Noncontrolling interest in net income of subsidiary | — | (321 | ) | (321 | ) | |||||||
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Net income attributable to common shareholders | $ | 2,237 | $ | — | $ | 2,237 | ||||||
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Three Months Ended March 31, 2015 | ||||||||||||
Retail Banking | Residential Mortgage Banking | Consolidated | ||||||||||
Net interest income | $ | 3,860 | $ | 209 | $ | 4,069 | ||||||
Provision for loan losses | — | — | — | |||||||||
Noninterest income | (143 | ) | 1,777 | 1,634 | ||||||||
Noninterest expense | 2,921 | 2,057 | 4,978 | |||||||||
Income tax expense | 184 | — | 184 | |||||||||
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Consolidated net income | 612 | (71 | ) | 541 | ||||||||
Noncontrolling interest in net loss of subsidiary | — | 71 | 71 | |||||||||
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Net income attributable to common shareholders | $ | 612 | $ | — | $ | 612 | ||||||
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33
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 9 - DERIVATIVES
During the three months ended March 31, 2015, the Company entered into swap agreements totaling $4.9 million to effectively convert fixed municipal security yields to floating rates. 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 March 31, 2016 and December 31, 2015. At March 31, 2016, the contracts had fair values totaling $1,235 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 March 31, 2016, 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 - 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.
ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs” requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 became effective for the Company on January 1, 2016 and did not have a significant impact on the consolidated financial statements.
ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” adds SEC paragraphs pursuant to an SEC Staff Announcement that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
34
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 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 financial statements.
35
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
ASU 2016-02, “Leases (Topic 842)” requireslessees to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors. ASU 2016-1 will be effective for the Company on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is evaluating the potential impact of ASU 2016-02 on the consolidated financial statements.
ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”requires that all excess tax benefits and tax deficiencies related to share-based payment awards be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such excess tax benefits were recorded as additional paid-in capital, and tax deficiencies were charged to additional paid in capital to the extent of prior excess tax benefits. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. ASU 2016-09 is 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 $324 related to the exercise of stock options during the three months ended March 31, 2016.
NOTE 11 - BUSINESS COMBINATION
On March 10, 2015, the shareholders of Commerce Union Bancshares, Inc. (“Commerce Union”) approved a merger between Commerce Union Bank and Reliant Bank (“Reliant”) which became 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 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 was considered to have acquired Commerce Union in this transaction. As a result, the historical financial statements of the Company prior to April 1, 2015 are the historical financial statements of Reliant. The assets and liabilities of Commerce Union as of the effective date of the Merger were recorded at their respective estimated fair values and added to those of Reliant. Any excess of purchase price over the net estimate fair values of the acquired assets and assumed liabilities of Commerce Union was allocated to all identifiable intangibles assets. Any remaining excess was then allocated to goodwill. Goodwill arising from the acquisition consists primarily of synergies of the combined operations. The goodwill resulting from this business combination is not deductible for tax purposes.
36
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 11 - BUSINESS COMBINATION (CONTINUED)
The following table details the financial impact of the merger, including the calculation of the purchase price, the allocation of the purchase price to the fair values of net assets assumed and goodwill recognized:
Calculation of Purchase Price | ||||
Shares of 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 | ||
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Estimated fair value of CUB common stock | 45,882 | |||
Estimated fair value of CUB stock options | 2,019 | |||
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Total consideration | $ | 47,901 | ||
|
| |||
Allocation of Purchase Price | ||||
Total consideration above | $ | 47,901 | ||
|
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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 | ) | ||
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Total fair value of net assets acquired | 37,270 | |||
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Goodwill | $ | 10,631 | ||
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37
COMMERCE UNION BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
(Dollar amounts in thousands except per share amounts)
NOTE 11 - BUSINESS COMBINATION (CONTINUED)
Actual data for the three months ended March 31, 2016 and comparative proforma data for the three months ended March 31, 2015 in the table below presents information as if the merger occurred on January 1, 2015.
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Net interest income | $ | 8,082 | $ | 7,254 | ||||
Net income attributable to common shareholders | 2,237 | 1,553 | ||||||
Earnings per share—basic | 0.30 | 0.22 | ||||||
Earnings per share—diluted | 0.30 | 0.21 |
Proforma information for the three months ended March 31, 2015 excludes $478 of nonrecurring merger related costs.
NOTE 12 - MORTGAGE OPERATIONS AND SUBSEQUENT EVENTS
During the three months ended March 31, 2016, the Company began transitioning most of its out-of-market branches to another bank and closed its Tampa, Florida, office. On April 5, 2016, the Bank entered into a formal 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 has assumed certain lease obligations of the Bank in connection with these locations. The employees transitioning from the Bank to BBMC do not have non-compete agreements with the Bank and have been 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.
In May 2016, the Company received a full payoff of a purchased credit-impaired loan relationship, which increased the Company’s net interest income and pre-tax earnings by approximately $620.
38
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
In the following section the terms “Company” means “Commerce Union Bancshares, Inc.” and “Bank” means “Reliant Bank.” The following discussion and analysis is intended to assist in the understanding and assessment of significant changes and trends related to our financial position and operating results. This discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere herein along with our 10-K filed March 28, 2016. 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 and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to 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 subject to change.
Our accounting policies are integral to understanding the results reported. Accounting policies are described throughout this document which includes the consolidated financial statements. The critical accounting policies require our judgment to ascertain 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. The following is a brief summary of the more significant policies.
Principles of Consolidation
The consolidated financial statements as of and for the three months ended March 31, 2016 include the accounts of Commerce Union Bancshares, Inc., its wholly-owned subsidiary, Reliant Bank, the “Bank” along with its wholly-owned subsidiary, Commerce Union Mortgage Services, Inc. (inactive), the Bank’s wholly-owned subsidiary, Reliant Investments, LLC, and the Bank’s 51% controlled subsidiary, Reliant Mortgage Ventures, LLC, collectively (the “Company”). The consolidated financial statements for the three months ended March 31, 2016 include the accounts of the Company after the reverse merger described below. The comparative 2015 period is comprised of the pre-merger accounts of Reliant Bank, its wholly-owned subsidiary, Reliant Investments, LLC, and its 51% controlled subsidiary, Reliant Mortgage Ventures, LLC. As described in the notes to our 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 accounts and transactions have been eliminated in consolidation.
During 2011, the Bank and another entity organized Reliant Mortgage Ventures, LLC referred to above for the purpose of improving the Bank’s mortgage operations. Under the related operating agreement, the non-controlling member receives 70% of the profits of the mortgage venture, and the Bank receives 30% of the profits once the non-controlling member recovers its aggregate losses. The non-controlling member is responsible for 100% of the mortgage venture’s net losses. As of March 31, 2016, the cumulative losses to date totaled $2,037. 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
39
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.
40
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2016 AND 2015
Merger Between Commerce Union Bancshares, Inc. and Reliant Bank
On March 10, 2015, Commerce Union Bancshares, Inc. approved a merger with Reliant Bank which became effective on April 1, 2015 (“the Merger”). Each outstanding 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, the historical financial statements for the three months ended March 31, 2015, of the Company will be the historical financial statements of Reliant Bank. 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 $39 and $223 for the three months ended March 31, 2016 and 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 period indicated is discussed in more detail below.
As of March 31, 2015, Commerce Union Bancshares, Inc., including its wholly-owned subsidiary Commerce Union Bank, had total assets of $305 million, total loans of $249 million and total deposits of $247 million. Commerce Union Bank held a loan portfolio that was primarily comprised of real estate loans. Immediately prior to the closing of the acquisition, for the three months ended March 31, 2015, Commerce Union Bank’s balance of nonperforming loans totaled 0.61% of total loans.
As a result of the Merger, the Company:
• | grew consolidated total assets from $474.4 million to $790.9 million as of April 1, 2015, after giving effect to purchase accounting; |
• | increased total loans from $313.2 million to $561.4 million as of April 1, 2015; |
• | increased total deposits from $376.6 million to $623.9 million as of April 1, 2015; and |
• | expanded its employee base from 164 full time equivalent employees to 215 full time equivalent employees as of April 1, 2015. |
Earnings
Net income attributable to common shareholders amounted to $2,237, or $0.30 per basic share for the three months ended March 31, 2016, respectively, compared to $612, or $0.15 per basic share for the same period in 2015. Diluted net income attributable to shareholders per share was $0.30 and $0.15 per diluted share for the three months ended March 31, 2016, and 2015, respectively. The largest components of the improvement from the prior-year are mainly attributable to the Merger and include a 98.6% increase in net interest income of $4,013, and an increase in non-interest income of $2,212, for the three months ended March 31, 2016 compared to 2015. The largest factors offsetting the improvement was an increase in provision for loan losses of $165, and an increase in non-interest expenses of $3,659, for the three months ended March 31, 2016 compared to 2015.
41
Net Interest Income
Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of our revenues. The following table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three months ended March 31, 2016, and 2015 (dollars in thousands):
Three Months Ended March 31, 2016 | Three Months Ended March 31, 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 | $ | 617,600 | 4.76 | % | $ | 7,307 | $ | 319,060 | 4.56 | % | $ | 3,585 | $ | 3,555 | $ | 167 | $ | 3,722 | ||||||||||||||||||
Loan fees | — | 0.30 | 463 | — | 0.25 | 200 | 263 | — | 263 | |||||||||||||||||||||||||||
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Loans with fees | 617,600 | 5.06 | 7,770 | 319,060 | 4.81 | 3,785 | 3,818 | 167 | 3,985 | |||||||||||||||||||||||||||
Mortgage loans held for sale | 39,514 | 3.75 | 368 | 22,011 | 4.62 | 251 | 404 | (287 | ) | 117 | ||||||||||||||||||||||||||
Deposits with banks | 21,143 | 0.36 | 19 | 15,094 | 0.21 | 8 | 4 | 7 | 11 | |||||||||||||||||||||||||||
Investment securities - taxable | 49,255 | 1.93 | 236 | 38,090 | 2.16 | 203 | 153 | (120 | ) | 33 | ||||||||||||||||||||||||||
Investment securities -tax-exempt | 87,116 | 3.06 | 438 | 41,904 | 2.67 | 182 | 226 | 30 | 256 | |||||||||||||||||||||||||||
Fed funds sold and other | 6,553 | 5.09 | 83 | 3,985 | 4.48 | 44 | 32 | 7 | 39 | |||||||||||||||||||||||||||
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Total earning assets | 821,181 | 4.48 | 8,914 | 440,144 | 4.21 | 4,473 | 4,637 | (196 | ) | 4,441 | ||||||||||||||||||||||||||
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Nonearning Assets | 50,780 | 17,351 | ||||||||||||||||||||||||||||||||||
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Total assets | $ | 871,961 | $ | 457,495 | ||||||||||||||||||||||||||||||||
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Interest Bearing Liabilities | ||||||||||||||||||||||||||||||||||||
Interest bearing demand | $ | 89,856 | 0.20 | 44 | $ | 50,935 | 0.18 | 22 | 19 | 3 | 22 | |||||||||||||||||||||||||
Savings and money market | 193,715 | 0.34 | 166 | 111,547 | 0.24 | 65 | 64 | 37 | 101 | |||||||||||||||||||||||||||
Time deposits - retail | 140,508 | 0.70 | 245 | 41,019 | 0.94 | 95 | 313 | (163 | ) | 150 | ||||||||||||||||||||||||||
Time deposits - wholesale | 115,766 | 0.62 | 178 | 102,675 | 0.51 | 129 | 18 | 31 | 49 | |||||||||||||||||||||||||||
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Total interest bearing deposits | 539,845 | 0.47 | 633 | 306,176 | 0.41 | 311 | 414 | (92 | ) | 322 | ||||||||||||||||||||||||||
Federal Home Loan Bank advances | 117,224 | 0.68 | 199 | 57,053 | 0.66 | 93 | 103 | 3 | 106 | |||||||||||||||||||||||||||
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Total interest-bearing liabilities | 657,069 | 0.51 | 832 | 363,229 | 0.45 | 404 | 517 | (89 | ) | 428 | ||||||||||||||||||||||||||
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Net interest rate spread (%) / Net interest income ($) | 3.97 | % | $ | 8,082 | 3.76 | % | $ | 4,069 | $ | 4,120 | $ | (107 | ) | $ | 4,013 | |||||||||||||||||||||
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Non-interest bearing deposits | 110,060 | (0.08 | ) | 49,435 | (0.05 | ) | ||||||||||||||||||||||||||||||
Other non-interest bearing liabilities | 5,595 | 1,288 | ||||||||||||||||||||||||||||||||||
Stockholder’s equity | 99,237 | 43,543 | ||||||||||||||||||||||||||||||||||
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Total liabilities and stockholder’s equity | $ | 871,961 | $ | 457,495 | ||||||||||||||||||||||||||||||||
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Cost of funds | 0.43 | 0.40 | ||||||||||||||||||||||||||||||||||
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Net Interest Margin | 4.08 | % | 3.84 | % | ||||||||||||||||||||||||||||||||
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Table Assumptions—Average loan balances are inclusive of nonperforming loans. Tax exempt investment security yields are shown on a fully 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.
42
Analysis—For the three months ended March 31, 2016, we recorded net interest income of approximately $8.1 million, which resulted in a net interest margin (net interest income divided by the average balance of interest earning assets) of 4.08%. For the three months ended March 31, 2015, we recorded net interest income of approximately $4.1 million, which resulted in a net interest margin of 3.84%. For the three months ended March 31, 2016 and 2015, our net interest spread was 3.97% and 3.76%, respectively.
Our year-over-year average loan volume increased by approximately 93.6% from the first three months of 2015 to the first three months of 2016. Our combined loan and loan fee yield increased from 4.81% to 5.06% for the three months ended March 31, 2015 to 2016, respectively.
The increase in our net interest margin was partially offset by our increase in cost of funds. Our cost of funds increased from 0.40% to 0.43% for the three months ended 2015 compared to the same period in 2016, respectively. The increase for the comparative three months was primarily attributable to the Merger effective April 1, 2015. A partial offset to this increase is we experienced a 122.6% increase in our average non-interest bearing deposits from the three months ended March 31, 2015 to 2016 mainly as a result of a strategic growth initiative and the Merger effective April 1, 2015.
We continue to deploy various asset and liability management strategies to manage our risk to interest rate fluctuations. We believe margin expansion over both the short and the long term will be challenging due to continued pressure on earning asset yields during this extended period of low interest rates. Loan pricing for creditworthy borrowers is very competitive in our markets and has limited our ability to increase pricing on new and renewed loans over the last several quarters.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. Based upon management’s assessment of the loan portfolio, we adjust our allowance for loan losses on a quarterly basis to an amount deemed appropriate to adequately cover probable losses inherent in the loan portfolio.
Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at March 31, 2016. 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 $165 for the three months ended March 31, 2016, compared to no provision for loans losses being recorded for the three months ended March 31, 2015. Our provision for loan losses was impacted by the absolute level of loan growth, the credit quality of the loan portfolio and the amount of net charge-offs and recoveries.
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Non-Interest Income
Our non-interest income is composed of several components, some of which vary significantly between periods. The following is a summary of our non-interest income for the three months ended March 31, 2016, and 2015 (dollars in thousands):
Three Months Ended March 31, | Dollar Increase (Decrease) | Percent Increase (Decrease) | ||||||||||||||
2016 | 2015 | |||||||||||||||
Non-Interest Income | ||||||||||||||||
Service charges and fees | $ | 285 | $ | 147 | $ | 138 | 93.9 | % | ||||||||
Securities gains (losses), net | — | (396 | ) | 396 | -100.0 | % | ||||||||||
Gains on mortgage loans sold, net | 3,342 | 1,777 | 1,565 | 88.1 | % | |||||||||||
Other noninterest income: | ||||||||||||||||
Bank-owned life insurance | 170 | 93 | 77 | 82.8 | % | |||||||||||
Trust and brokerage revenue | 14 | 3 | 11 | 366.7 | % | |||||||||||
Rental income | 2 | — | 2 | 100.0 | % | |||||||||||
Miscellaneous noninterest income | 33 | 10 | 23 | 230.0 | % | |||||||||||
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Total other non-interest income | 219 | 106 | 113 | 106.6 | % | |||||||||||
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Total Non-Interest Income | $ | 3,846 | $ | 1,634 | $ | 2,212 | 135.4 | % | ||||||||
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The most significant reason for the increases during the three months ended March 31, 2016 compared to the same period in 2015 relates to the Merger between Commerce Union Bancshares, Inc. and Reliant Bank that was effective April 1, 2015. However, following is a description of certain components of non-interest income and other reasons for fluctuations.
Service charges on deposit accounts generally reflect customer growth trends but also are impacted by changes in our fee pricing to help attract and retain customers.
Securities gains and losses often fluctuate from period to period and can sometimes be attributable to various balance sheet risk strategies. During the three months ended March 31, 2016, the Company did not sell any securities classified as available for sale. During the first quarter of 2015, the Bank sold securities that were previously classified as held to maturity and recognized a loss on sale of $396. All other securities classified as held to maturity were transferred to available-for-sale during the first quarter of 2015.
Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans. These mortgage fees are for loans originated throughout the U.S. and subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage related revenue increases in lower interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging housing markets. Mortgage-related revenue will fluctuate from quarter to quarter as the rate environment changes and as changes occur with our mortgage operations. Gains on mortgage loans sold, net, amounted to $3,342 for the three months ended March 31, 2016, compared to $1,777 for the same period in 2015. 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.
Noninterest income also includes appreciation in the cash surrender value of bank-owned life insurance which was $170 for the three months ended March 31, 2016, compared to $93 for the three months ended March 31, 2015. Primarily, the increase in earnings on these bank-owned life insurance policies resulted from the Merger effective April 1, 2015. At the end of June 2015, an additional $4.0 million of bank-owned life insurance was purchased with terms similar to our existing policies. Also, during the quarter ended March 31, 2016, an additional $4.0 million of bank-owned life insurance was purchased with terms similar to our existing policies. 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.
44
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.
Non-Interest Expense
The following is a summary of our non-interest expense for the three months ended March 31, 2016 and 2015 (dollars in thousands):
Three Months Ended March 31, | Dollar Increase (Decrease) | Percent Increase (Decrease) | ||||||||||||||
2016 | 2015 | |||||||||||||||
Non-Interest Expense | ||||||||||||||||
Salaries and employee benefits | $ | 5,394 | $ | 2,839 | $ | 2,555 | 90.0 | % | ||||||||
Occupancy | 829 | 700 | 129 | 18.4 | % | |||||||||||
Data processing | 627 | 408 | 219 | 53.7 | % | |||||||||||
Advertising and public relations | 265 | 209 | 56 | 26.8 | % | |||||||||||
Audit, legal and consulting | 281 | 224 | 57 | 25.4 | % | |||||||||||
Federal deposit insurance | 114 | 70 | 44 | 62.9 | % | |||||||||||
Provision for losses on other real estate | 26 | 20 | 6 | 30.0 | % | |||||||||||
Other operating | 1,101 | 508 | 593 | 116.7 | % | |||||||||||
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Total Non-Interest Expense | $ | 8,637 | $ | 4,978 | $ | 3,659 | 73.5 | % | ||||||||
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The most significant reason for the increases during the three months ended March 31, 2016 compared to the same period in 2015 relates to the Merger between Commerce Union Bancshares, Inc. and Reliant Bank that was effective April 1, 2015.
Salaries and employee benefits increased for the three months ended March 31, 2016 compared to the same period in 2015. A portion of this increase is a result of the Merger effective April 1, 2015. Also influencing the increase was an increase in payments made under a management incentive program, the expansion of our mortgage operations and payments made under a retail incentive program to help grow business and consumer deposit accounts.
Certain of our facilities are leased while there are others that we own. Primarily, occupancy costs increased due to the Merger effective April 1, 2015. Other components of the increase related to inflationary increases in the lease of our Franklin operations center as well as increases in rent for our newer mortgage loan production offices.
Data processing costs increased when comparing the three months ended March 31, 2016 to the comparable period in 2015, substantially due to the Merger effective April 1, 2015. The Company operated on two core data processing systems until mid-November 2015 when the conversion to one core system occurred. Costs have declined as a result of this conversion.
Advertising and public relations costs increased when comparing the three months ended March 31, 2016 to the comparable period of 2015, by $56. These costs were substantially attributable to our current retail customer acquisition strategy and the expanded use of mortgage lead-generating platforms. We have engaged a third party to assist with the implementation of a program to grow business and consumer deposit accounts.
Audit, legal and consulting costs increased in the three months ended March 31, 2016 compared to the comparable period in 2015 due to merger-related expenses and the costs associated with being a public company.
Our FDIC expense is based on our outstanding liabilities for the period multiplied by a factor determined by the FDIC, mainly driven by our most recent regulatory rating and certain financial performance factors. Our FDIC expense increased for three months ended March 31, 2016, compared to the same period in 2015 due to the Merger effective April 1, 2015. The remainder of the increase relates to our increase in average liabilities which is the base for determining our premiums. The costs associated with the increase in average liabilities was slightly offset by an improved combined rate post-merger.
We recorded a provision for losses on other real estate of $26 and $20 during the three months ended March 31, 2016 and 2015, respectively. These provisions for each respective period relate to one property that was held in our other real estate portfolio.
45
Other operating expenses increased for the three months ended March 31, 2016, compared to the same period in 2015 mainly due to the Merger effective April 1, 2015. Other increases relate to an increase of $276, in loan-related expenses such as processing costs relating to our mortgage operations. Primarily, this increase relates to volume increases of mortgage originations and sales during the three months ended March 31, 2016.
Income Taxes
During the three months ended March 31, 2016, we recorded consolidated income tax expense of $568, compared to $184, for the three months ended March 31, 2015. The Company files separate Federal tax returns for the operations of the mortgage banking and banking operations. The taxable income or losses of the mortgage banking operations are included in the respective returns of the Bank and non-controlling members for Federal purposes. During the third quarter of 2015, the Company began consolidating the results of the Bank and the mortgage banking operations in its tax filings with the State of Tennessee. Results of the mortgage banking operations were previously reported on the individual state returns of the Bank and mortgage banking operation’s non-controlling members.
Our income tax expense attributable to Bank shareholders for the three months ended March 31, 2016, reflects an effective income tax rate of 19.62% (exclusive of a tax expense from our mortgage banking operations of $22 on pre-tax income of $343), compared to 23.12% (exclusive of a pre-tax loss of $71 from our mortgage banking operations with no tax expense or benefit) for the comparable period of 2015. During the three months ended March 31, 2016, the Company recognized an excess tax benefit of $324 related to the exercise of stock options, thereby reducing our effective tax rate as compared to the three months ended March 31, 2015. The effective tax rate for the three months ended March 31, 2015, was somewhat lower than usual due to losses on securities recognized during the period, effectively lowering the mix of taxable and non-taxable earnings for the quarter. 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 securities and certain federal and state tax credits. The non-deductibility of certain merger related expenses also drives fluctuations in our effective tax rate.
Noncontrolling Interest in Net Income (Loss) of Subsidiary
Our noncontrolling interest in net income (loss) of subsidiary is solely attributable to Reliant Mortgage Ventures, LLC. Reliant Bank has a 51% voting interest in this venture. Under the terms of the related operating agreement, the noncontrolling member receives 70% of the profits of the mortgage venture, and the Bank receives 30% of the profits. The noncontrolling member is responsible for 100% of the mortgage venture’s net losses. During the three months ended March 31, 2016, the Company began transitioning most of its out-of-market mortgage offices to another bank (see Note 12 to the consolidated financial statements included elsewhere herein). The venture had net income of $321, for the three months ended March 31, 2016 compared to a net loss of $71, for the comparable period in 2015. These amounts are included in our consolidated results. Also, see Note 8 for segment reporting in the consolidated financial statements included elsewhere herein.
46
COMPARISON OF BALANCE SHEETS AT MARCH 31, 2016 AND DECEMBER 31, 2015
Overview
The Company’s total assets were $868,545 at March 31, 2016 and $876,404 at December 31, 2015. Our assets decreased by 0.90% from December 31, 2015 to March 31, 2016. The decrease in assets from December 31, 2015 to March 31, 2016, was substantially attributable to decline in mortgage loans held for sale during the period of $30,411, or 55.2%. Substantially all remaining components of total assets increased. The increase in cash and cash equivalents was $6.0 million; increase in net loans of approximately $6.0 million; a net increase in our securities portfolio of $6.1 million discussed further below; and a $4.2 million increase in bank-owned life insurance. The Company’s total liabilities were $767 million at March 31, 2016 and $780 million at December 31, 2015, a decrease of 1.7%. The decrease in liabilities from December 31, 2015 to March 31, 2016, was substantially attributable to a decline in Federal Home Loan Bank advances of $31.0 million during the period. The most significant increase in total liabilities related to total deposits, which increased 2.8% from December 31, 2015 to March 31, 2016. 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. Our goal is to steadily grow our loan portfolio, focusing on quality. This is not always possible for various factors, including but not limited to, scheduled maturities or early payoffs exceeding new loan volume. Early payoffs typically increase in lowering rate environments as customers identify advantageous opportunities for refinancing. We have been adding experienced lending officers to our staff to help with loan growth as the local market has continued to improve. Total loans, net, at March 31, 2016, and December 31, 2015, were $614,643 and $608.747, respectively. This represented an increase of 1.0% from December 31, 2015 to March 31, 2016.
The table below provides a summary of the loan portfolio composition for the dates noted (including purchased credit-impaired (PCI) loans).
March 31, 2016 | December 31, 2015 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Commercial, Industrial and Agricultural | $ | 140,893 | 22.6 | % | $ | 143,770 | 23.3 | % | ||||||||
Real estate: | ||||||||||||||||
1-4 Family Residential | 114,302 | 18.3 | % | 110,736 | 17.9 | % | ||||||||||
1-4 Family HELOC | 48,952 | 7.9 | % | 49,665 | 8.0 | % | ||||||||||
Multifamily and Commercial | 202,976 | 32.6 | % | 202,736 | 32.8 | % | ||||||||||
Construction, Land Development and Farmland | 94,888 | 15.2 | % | 89,763 | 14.6 | % | ||||||||||
Consumer | 15,268 | 2.4 | % | 15,271 | 2.5 | % | ||||||||||
Other | 6,274 | 1.0 | % | 5,556 | 0.9 | % | ||||||||||
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623,553 | 100.0 | % | 617,497 | 100.0 | % | |||||||||||
Less: | ||||||||||||||||
Deferred loan fees | 820 | 927 | ||||||||||||||
Allowance for possible loan losses | 8,090 | 7,823 | ||||||||||||||
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Loans, net | $ | 614,643 | $ | 608,747 | ||||||||||||
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The table below provides a summary of PCI loans as of March 31, 2016 and December 31, 2015:
March 31, 2016 | December 31, 2015 | |||||||
Commercial, Industrial and Agricultural | $ | 1,418 | $ | 1,558 | ||||
Real estate: | ||||||||
1-4 Family Residential | 886 | 1,016 | ||||||
1-4 Family HELOC | 39 | 40 | ||||||
Multifamily and Commercial | 4,532 | 4,565 | ||||||
Construction, Land Development and Farmland | 1,586 | 1,598 | ||||||
Consumer | — | — | ||||||
Other | — | — | ||||||
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Total gross PCI loans | 8,461 | 8,777 | ||||||
Less: | ||||||||
Remaining purchase discount | 1,598 | 1,671 | ||||||
Allowance for possible loan losses | 227 | 247 | ||||||
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Loans, net | $ | 6,636 | $ | 6,859 | ||||
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Commercial loans above consist 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 $140,893 at March 31, 2016, decreased 2.0% compared to $143,770 as of December 31, 2015.
Real estate loans comprised 74.0% of the loan portfolio at March 31, 2016. Residential loans included in this category consist mainly of revolving, open-end loans secured by 1-4 family residential properties extended under home equity lines of credit and closed-end loans secured by first and second liens that are not held for sale. The Company increased the residential portfolio from December 31, 2015 to March 31, 2016. 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 $202,976 at March 31, 2016, increased 0.1% compared to the $202,736 held as of December 31, 2015. Real estate construction loans consist of 1-4 family residential construction loans, other construction loans, land loans, and loans secured by farmland. Construction lending also increased during 2015 and into the first three months of 2016, 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. We have no credit card loans although we do offer credit cards to customers through a third party. We have a relatively small number of automobile loans.
Our other loans consist mainly of loans to other depository institutions and were minimal for the periods presented.
The repayment of loans is a source of additional liquidity for us. The following table sets forth the loans repricing or maturing within specific intervals at March 31, 2016, excluding unearned net fees and costs.
One Year or Less | One to Five Years | Over Five Years | Total | |||||||||||||
Gross loans | $ | 193,720 | $ | 286,169 | $ | 143,664 | $ | 623,553 | ||||||||
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Fixed interest rate | $ | 432,661 | ||||||||||||||
Variable interest rate | 190,892 | |||||||||||||||
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Total | $ | 623,553 | ||||||||||||||
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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.
48
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 March 31, 2016, the allowance for loan losses was $8,090 compared to $7,823 at December 31, 2015. The allowance for loan losses as a percentage of total loans was 1.3% at March 31, 2016 and December 31, 2015. The allowance was adjusted upward from December 31, 2015 to March 31, 2016. This increase in our allowance for loan losses is directly attributable to our loan growth. Charge-off and general economic activity has continued to improve for our area and our customers and nonperforming assets have continued to decline.
49
The following table sets forth the activity in the allowance for loan losses for the periods presented.
Analysis of Changes in Allowance for Loan Losses
March, 31 2016 | March, 31 2015 | |||||||
Beginning Balance, January 1 | $ | 7,823 | $ | 7,353 | ||||
Loans charged off | ||||||||
Commercial, Industrial and Agricultural | (8 | ) | — | |||||
Real estate | ||||||||
1-4 Family Residential | — | — | ||||||
1-4 Family HELOC | — | — | ||||||
Multifamily and Commercial | — | — | ||||||
Construction, Land Development and Farmland | — | — | ||||||
Consumer | (4 | ) | — | |||||
Other | — | (4 | ) | |||||
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Total loans charged off | (12 | ) | (4 | ) | ||||
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Recoveries on loans previously charged off | ||||||||
Commercial, Industrial and Agricultural | 91 | 48 | ||||||
Real estate | ||||||||
1-4 Family Residential | 4 | — | ||||||
1-4 Family HELOC | 4 | 8 | ||||||
Multifamily and Commercial | 1 | 1 | ||||||
Construction, Land Development and Farmland | 1 | 2 | ||||||
Consumer | 13 | — | ||||||
Other | — | — | ||||||
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Total loan recoveries | 114 | 59 | ||||||
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Net recoveries (charge-offs) | 102 | 55 | ||||||
Provision for loan losses | 165 | — | ||||||
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Total allowance, March 31 | $ | 8,090 | $ | 7,408 | ||||
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Gross loans at end of period(1) | $ | 623,553 | $ | 313,663 | ||||
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Average gross loans(1) | $ | 617,600 | $ | 319,060 | ||||
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Allowance to total loans | 1.30 | % | 2.36 | % | ||||
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Net charge offs (recoveries) to average loans | -0.07 | % | -0.07 | % | ||||
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(1) | Loan balances exclude loans held for sale. |
50
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, 2016 | December 31, 2015 | |||||||||||||||||||||||
Amount | % of Allowance To Total | % of Loan Type to Total Loans | Amount | % of Allowance To Total | % of Loan Type to Total Loans | |||||||||||||||||||
Commercial, Industrial and Agricultural | $ | 2,344 | 29.0 | % | 22.6 | % | $ | 2,198 | 28.1 | % | 23.3 | % | ||||||||||||
Real estate: | ||||||||||||||||||||||||
1-4 Family Residential | 1,276 | 15.8 | % | 18.3 | % | 1,214 | 15.5 | % | 17.9 | % | ||||||||||||||
1-4 Family HELOC | 694 | 8.6 | % | 7.9 | % | 699 | 8.9 | % | 8.0 | % | ||||||||||||||
Multifamily and Commercial | 2,382 | 29.4 | % | 32.6 | % | 2,591 | 33.1 | % | 32.8 | % | ||||||||||||||
Construction, Land Development and Farmland | 1,164 | 14.4 | % | 15.2 | % | 894 | 11.4 | % | 14.6 | % | ||||||||||||||
Consumer | 195 | 2.4 | % | 2.4 | % | 192 | 2.5 | % | 2.5 | % | ||||||||||||||
Other | 35 | 0.4 | % | 1.0 | % | 35 | 0.5 | % | 0.9 | % | ||||||||||||||
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$ | 8,090 | 100.0 | % | 100.0 | % | $ | 7,823 | 100.0 | % | 100.0 | % | |||||||||||||
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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, 2016 | December 31, 2015 | |||||||
Non-accrual loans | $ | 4,342 | $ | 5,004 | ||||
Past due loans 90 days or more and still accruing interest | — | — | ||||||
Restructured loans | 3,049 | 1,706 | ||||||
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Total non-performing loans | 7,391 | 6,710 | ||||||
Other real estate | 1,139 | 1,149 | ||||||
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Total non-performing assets | $ | 8,530 | $ | 7,859 | ||||
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Total non-performing loans as a percentage of total loans | 1.19 | % | 1.09 | % | ||||
Total non-performing assets as a percentage of total assets | 0.98 | % | 0.90 | % | ||||
Allowance for loan losses as a percentage of non-performing loans | 109.46 | % | 116.59 | % |
Investment Securities and Other Earning Assets
The investment securities portfolio is intended to provide the Company with adequate liquidity, flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of securities classified as available-for-sale. All available-for-sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in our best interest. Unrealized gains and losses on this portfolio are excluded from earnings, but are reported as other comprehensive income in a separate component of stockholders’ equity, net of income tax. Premium amortization and discount accretion are recognized as adjustments to interest income using the interest method. Realized gains or losses on sales are based on the net proceeds and the adjusted carrying value amount of the securities sold using the specific identification method.
51
Securities are a component of the Company’s earning assets. Securities totaled $139,899 at March 31, 2016. This represents a 4.5% increase from the December 31, 2015 total of $133,825. The increase is attributable to purchasing $6,687 securities available for sale during the three months ended March 31 2016, offset by principal paydowns and maturities of $1,288 during the same period.
Restricted equity securities totaled $6,244 at March 31, 2016, and December 31, 2015, and consist of Federal Reserve Bank and Federal Home Loan Bank stock.
The following table shows the Company’s investments’ amortized cost and fair value, aggregated by investment category for the periods presented:
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||
Available-For-Sale | Amortized Cost | Fair Value | % of Total | Amortized Cost | Fair Value | % of Total | ||||||||||||||||||
U.S. Treasury and other U.S. government agencies | $ | 4,915 | $ | 4,897 | 3.50 | % | $ | 4,918 | $ | 4,836 | 3.61 | % | ||||||||||||
State and municipal | 90,508 | 91,938 | 65.72 | % | 86,604 | 87,595 | 65.46 | % | ||||||||||||||||
Corporate bonds | 2,683 | 2,727 | 1.95 | % | 2,000 | 1,979 | 1.48 | % | ||||||||||||||||
Mortgage backed securities | 37,083 | 37,087 | 26.51 | % | 36,617 | 36,165 | 27.02 | % | ||||||||||||||||
Time deposits | 3,250 | 3,250 | 2.32 | % | 3,250 | 3,250 | 2.43 | % | ||||||||||||||||
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Total | $ | 138,439 | $ | 139,899 | 100.00 | % | $ | 133,389 | $ | 133,825 | 100.0 | % | ||||||||||||
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The table below summarizes the contractual maturities of securities available for sale at March 31, 2016:
Amortized Cost | Estimated Fair Value | |||||||
Due within one year | $ | — | $ | — | ||||
Due in one to five years | 17,351 | 17,493 | ||||||
Due in five to ten years | 12,719 | 12,912 | ||||||
Due after ten years | 71,286 | 72,407 | ||||||
Mortgage backed securities | 37,083 | 37,087 | ||||||
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Total | $ | 138,439 | $ | 139,899 | ||||
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Premises and Equipment
Premises and equipment, net, totaled $9,213 at March 31, 2016 compared to $9,196 at December 31, 2015, a net increase of $17 or 0.2%. Asset purchases amounted to approximately $258 during the first three months of 2016 while related depreciation expense amounted to $241. At March 31, 2016, we operated from nine retail banking locations as well as eight stand-alone mortgage loan production offices. Two of our bank branch locations, including our main office, are in Brentwood, Tennessee. Our other seven bank branch locations are in Franklin, Springfield, Gallatin, Murfreesboro and Nashville, Tennessee. As of March 31, 2016 our eight mortgage loan production offices were located in Tennessee cities of Brentwood and Hendersonville, as well as Timonium, Maryland, Louisville, Kentucky, Reynoldsburg, Ohio, Columbus, Ohio, and Schaumburg, Illinois. During the three months ended March 31, 2016, the Company began transitioning most of it out-of-market branches to another bank as more fully described in Note 12 in the consolidated financial statements included elsewhere herein. 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.
52
At March 31, 2016, total deposits were $657,777, an increase of $17,769, or 2.8%, compared to $640,008 at December 31, 2015. During the first three months of 2016, we increased non-interest bearing demand deposits by $5.1 million, increased savings and money market deposits by $18.7 million, while time deposits decreased $1.2 million and interest-bearing demand deposits decrease $4.8 million.
The following table shows maturity of time deposits of $100 or more by category based on time remaining until maturity or repricing at March 31, 2016.
March 31, 2016 | ||||
Twelve months or less | $ | 87,642 | ||
Over twelve months through three years | 21,457 | |||
Over three years | 13,336 | |||
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Total | $ | 122,435 | ||
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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% of assets. We were in compliance with our policy as of March 31, 2016. 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.
53
Earnings Simulation Model—We believe interest rate risk is effectively measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with simulated forecasts of interest rates for the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from management’s flat interest rate forecast over the next 12 and 24 months, limits in the decline in net interest income 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 | % |
We were in compliance with our earnings simulation model policies as of March 31, 2016, indicating what we believe to be a fairly neutral profile.
Economic value of equity—Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.
To help monitor our related risk, we’ve established the following policy limits regarding simulated changes in our economic value of equity:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to | Maximum Percentage Decline in Economic Value of Equity from the Economic Value of Equity at Currently Prevailing Interest Rates | |
±100 bp | 15% | |
±200 bp | 25% | |
±300 bp | 30% | |
±400 bp | 35% | |
Non-parallel shifts | 35% |
At March 31, 2016, 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.
54
Liquidity Risk Management —The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.
Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.
Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.
The Company has established a line of credit with the Federal Home Bank of Cincinnati which is secured by a blanket pledge of1-4 family residential mortgages, multi-family residential, and home equity loans, and available-for-sale securities.
At March 31, 2016, advances totaled $104,798 compared to $135,759 as of December 31, 2015. The decline in FHLB advances is attributable to our decline in mortgage loans held for sale relating to the seasonal reduction of originations of mortgage loans.
At March 31, 2016, 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 | ||||
2016 | $ | 90,636 | 0.54% | |||
2017 | 1,000 | 1.03% | ||||
2018 | 6,000 | 2.74% | ||||
2019 | — | 0.00% | ||||
2020 | — | 0.00% | ||||
Thereafter | 7,162 | 1.94% | ||||
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$ | 104,798 | 0.76% | ||||
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Capital
Stockholders’ equity was $102,022 at March 31, 2016, an increase of $5,271, or 5.4%, from $96,751 at December 31, 2015. The Company raised $2.8 million of capital through the exercise of Company stock options. The additional capital was pushed-down to the Bank and when combined with the accretion of earnings to capital led to an increase in the Bank’s March 31, 2016 Tier 1 leverage ratio to 10.34% compared with 9.88% at December 31, 2015 (see other ratios discussed further below). Common dividends of $1,489 (declared during the fourth quarter of 2015) were paid during the three months ended March 31, 2016.
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.
55
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 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 notifications that management believes have changed the institution’s category. Actual and required capital amounts and ratios are presented below as of March 31, 2016 and December 31, 2015 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, 2016 | ||||||||||||||||||||||||
Company | ||||||||||||||||||||||||
Common equity Tier 1 | $ | 89,370 | 12.81 | % | $ | 35,755 | 5.125 | % | N/A | N/A | ||||||||||||||
Tier I leverage | 89,370 | 10.40 | % | 34,373 | 4.00 | % | N/A | N/A | ||||||||||||||||
Tier I risk-based capital | 89,370 | 12.81 | % | 46,220 | 6.625 | % | N/A | N/A | ||||||||||||||||
Total risk-based capital | 97,460 | 13.97 | % | 60,171 | 8.625 | % | N/A | N/A | ||||||||||||||||
Bank | ||||||||||||||||||||||||
Common equity Tier 1 | $ | 88,820 | 12.75 | % | $ | 35,702 | 5.125 | % | $ | 45,281 | 6.50 | % | ||||||||||||
Tier I leverage | 88,820 | 10.34 | % | 34,360 | 4.00 | % | 42,950 | 5.00 | % | |||||||||||||||
Tier I risk-based capital | 88,820 | 12.75 | % | 46,152 | 6.625 | % | 55,730 | 8.00 | % | |||||||||||||||
Total risk-based capital | 96,910 | 13.91 | % | 60,090 | 8.625 | % | 69,669 | 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 shareholders’ equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce our earnings from such activities.
56
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, 2016 | ||||
Unused lines of credit | $ | 129,134 | ||
Standby letters of credit | 9,819 | |||
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Total commitments | $ | 138,953 | ||
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Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will remain an emerging growth company for up to five years, though it may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, it is deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if total annual gross revenues equal or exceed $1 billion in a fiscal year. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.
Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected to take advantage of the extended transition period that allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies, which means that the financial statements included in this filing, as well as the financial statements we will file in the future, will be subject to all new or revised accounting standards generally applicable to private companies. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-public companies.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
The information required by this Item 3 is discussed in Part 1 – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Market and Liquidity Risk” onpages 53 - 55.
Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended March 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. | Legal Proceedings. |
Commerce Union and its wholly-owned subsidiary, Reliant Bank, are periodically involved as a plaintiff or defendant in various legal actions in the ordinary course of its business. Neither Commerce Union nor Reliant Bank is involved in any litigation that is expected to have a material impact on our financial position or results of operations. Management believes that any claims pending against Commerce Union or its subsidiaries are without merit or that the ultimate liability, if any, resulting from them will not materially affect Reliant Bank’s financial condition or Commerce Union’s consolidated financial position.
Item 1A. | Risk Factors. |
Investing in Commerce Union involves various risks which are particular to our company, our industry, and our market area. We believe all significant risks to investors in Commerce Union have been outlined in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. However, other risks may prove to be important in the future, and new risks may emerge at any time. We cannot predict with certainty all potential developments which could materially affect our financial performance or condition. There has been no material change to our risk factors as previously disclosed in the above described Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
Not applicable.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
10.1 | Mutual Cooperation Agreement, dated April 5, 2016, by and between BBMC Mortgage, LLC and Commerce Union Bancshares, Inc. | |
31.1 | Certification pursuant to Rule 13a-14(a)/15d-14(a) | |
31.2 | Certification pursuant to Rule 13a-14(a)/15d-14(a) | |
32.1 | Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002 | |
32.2 | Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002 | |
101 | Interactive Data Files* |
* | The documents formatted in eXtensible Business Reporting Language (XBRL) and attached as Exhibit 101 to this report are deemed not filed as part of a registration statement or prospectus for purposes of Section 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise not subject to liability under these sections. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMERCE UNION BANCSHARES, INC. | ||||
May 13, 2016 | /s/ William Ronald DeBerry | |||
William Ronald DeBerry | ||||
Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
May 13, 2016 | /s/ J. Daniel Dellinger | |||
J. Daniel Dellinger | ||||
Chief Financial Officer | ||||
(Principal Financial Officer) |
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