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March 13, 2020, 4:42 p.m. EDT

10-K: RELIANT BANCORP, INC.

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(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

Net income available to common shareholders totaled $16.2 million or $1.44 per diluted common share, compared to $14.1 million, or $1.23 per diluted common share for 2018.

Return on average assets was 0.90%, compared to 0.86% for the same period in 2018.

Net year-over-year loan growth was $177.2 million.

Core Deposits grew $72.5 million or 8.2% from December 31, 2019.

On December 13, 2019 the Company issued and sold $60.0 million in aggregate principal amount of Subordinated Notes due on December 15, 2029 at a fixed annual rate of 5.125%, payable semi-annually for the initial five years. Beginning January 2024, the interest rate resets quarterly to the then-current three-month Secured Overnight Financing Rate plus 376.5 basis points, payable quarterly.

The Company repurchased 365,931 shares for $8.3 million during the year ended December 31, 2019 as part of a Board-authorized share repurchase program.

Asset quality remains strong with nonperforming assets to total assets of just 0.35%.

Announced two definitive merger agreements in 2019, both are scheduled to close in 2020.

Definitive Agreement to acquire the parent company of First Advantage Bank On October 22, 2019, Reliant Bancorp, entered into a definitive agreement to acquire First Advantage Bancorp ("FABK"), the parent company for FAB, located in Clarksville, Tennessee. The agreement provides for a cash and stock transaction valued at approximately $123.4 million, or $30.67 per share of FABK common stock, based on the closing price for Reliant Bancorp common stock of $23.65 per share on October 22, 2019. The acquisition is anticipated to become effective on April 1, 2020. For more information on this acquisition, see Part I, Item 1.

Definitive Agreement to acquire the parent company of Community Bank and Trust On January 1, 2020, the Company completed the acquisition of TCB Holdings, located in Ashland City, Tennessee. Pursuant to the Agreement and Plan of Merger, dated September 16, 2019; the Company issued 811,210 shares of Company common stock valued at $18,041 and paid approximately $18,505 in cash, which included $430 paid to holders of unexercised options at merger date. All shares of Company's common stock outstanding prior to the merger were unaffected by the TCB Holdings Transaction. For more information on this acquisition, see Part I, Item 1.

In the following sections the terms "Reliant Bancorp," the "Company," "us," "we," "our," or similar terms refer to Reliant Bancorp Inc., and its subsidiaries, including Reliant Bank, which we sometimes refer to as ""Reliant" or the "Bank." The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with Item 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" as well as other information included in this Annual Report. 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

Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to the consolidated financial statements included elsewhere in this report. 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.

Table of Contents

Principles of Consolidation

All significant intercompany balances and transactions have been eliminated in consolidation. As described in Note 22 to our consolidated financial statements included elsewhere in this Annual Report, Reliant Bancorp and Community First merged effective January 1, 2018. The accounting and reporting policies of the Company conform to U.S. GAAP and to general practices in the banking industry.

During 2011, the Bank and another entity organized RMV. Under the related operating agreement, the non-controlling member receives 70% of the profits of RMV, and the Bank receives 30% of the profits once the non-controlling member recovers its aggregate losses. The non-controlling member is responsible for 100% of RMV's net losses. As of December 31, 2019, the cumulative losses to date totaled $13.4 million. RMV will have to generate net income of this amount before the Company will participate in future earnings.

Purchased Loans

ALLL

A specific ALLL component is calculated for loans that meet the definition of impairment. A loan is considered impaired when management believes that principal and interest due on that loan will not be collected in accordance with the terms and conditions of the loan agreement. Once a loan is deemed to be impaired, management must calculate the potential loss for the specific loan based on one of three approved methodologies to estimate the expected recovery from secondary payment sources, which is then deducted from the book value of the loan asset to calculate the amount of specific reserve required, 1) fair value of collateral, less expected cost to sell, 2) discounted cash flows of the expected future loan payments, 3) Expected sale proceeds if loan was sold to another lender.

Interest payments on impaired loans are typically applied to principal unless the principal amount is deemed fully collectible, in which case interest is recognized on a cash basis. When recognition of interest income on a cash basis is appropriate, the amount of income recognized is limited to what would have been accrued on the remaining principal balance at the contractual rate. Cash payments received over this limit, and not applied to reduce the loans remaining principal balance, are recorded as recoveries of prior charge-offs until these charge-offs have been fully recovered.

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Fair Value of Financial Instruments

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017

Earnings

Net Interest Income







                              Average Balances - Yields and Rates
                                     Year Ended December 31, 2019                      Year Ended December 31, 2018                     Year Ended December 31, 2017
                                                   Rates /      Interest                             Rates /      Interest                           Rates /      Interest
                                                    Yields      Income /                              Yields      Income /                            Yields      Income /
                              Average Balances       (%)         Expense        Average Balances       (%)         Expense       Average Balances      (%)         Expense
        Interest earning
        assets
        Loans               $        1,298,922       5.12     $    66,446     $        1,138,946       4.99     $    56,777     $    714,982           4.59     $    32,839
        Loan fees                            -       0.25           3,253                      -       0.25           2,855                -           0.28           2,012
        Loans with fees              1,298,922       5.37          69,699              1,138,946       5.24          59,632          714,982           4.87          34,851
        Mortgage loans
        held for sale                   18,212       5.28             961                 24,882       5.14           1,278           19,016           4.56             868
        Deposits with
        banks                           34,576       1.69             583                 34,504       1.37             471           15,177           0.71             107
        Investment
        securities -
        taxable                         74,220       2.83           2,099                 70,170       2.62           1,836           31,557           2.19             691
        Investment
        securities -
        tax-exempt                     221,249       3.71           8,199                225,592       3.72           8,393          151,446           4.01           6,081
        Fed funds sold
        and other                       12,870       5.20             669                 11,654       5.87             684            7,769           5.30             412
        Total earning
        assets                       1,660,049       4.95          82,210              1,505,748       4.80          72,294          939,947           4.58          43,010
        Nonearning assets              138,953                                           138,612                                      55,489
        Total assets        $        1,799,002                                $        1,644,360                                $    995,436
        Interest bearing
        liabilities
        Interest bearing
        demand              $          146,518       0.26             384     $          146,717       0.25             366     $     84,171           0.21             173
        Savings and money
        market                         376,927       1.10           4,154                349,986       0.74           2,589          196,939           0.38             748
        Time deposits -
        retail                         559,404       2.10          11,739                531,780       1.55           8,264          319,456           0.98           3,126
        Time deposits -
        wholesale                      227,010       2.48           5,622                 90,510       1.77           1,598           88,114           1.10             969
        Total interest
        bearing deposits             1,309,859       1.67          21,899              1,118,993       1.15          12,817          688,680           0.73           5,016
        Federal Home Loan
        Bank advances                   24,611       2.21             543                 85,706       2.16           1,855           50,730           1.29             655
        Subordinated debt               14,727       6.37             938                 11,566       6.26             724                -              -               -
        Total borrowed
        funds                           39,338       3.76           1,481                 97,272       2.65           2,579           50,730           1.29             655
        Total
        interest-bearing
        liabilities                  1,349,197       1.73          23,380              1,216,265       1.27          15,396          739,410           0.77           5,671
        Net interest rate
        spread (%) / Net
        interest income
        ($)                                          3.22          58,830                              3.53          56,898                            3.81          37,339
        Non-interest
        bearing deposits               231,228     (0.25)                                218,867     (0.20)                          134,408         (0.11)
        Other
        non-interest
        bearing
        liabilities                      3,590                                             5,911                                       3,838
        Stockholder's
        equity              $          214,987                                $          203,317                                $    117,780
        


Table of Contents







        Total
        liabilities
        and
        stockholders'
        equity             1,799,002                            1,644,360                            995,436
        Cost of funds                    1.48                                 1.07                               0.66
        Net interest
        margin                           3.54                                 3.78                               3.97
        


Table Assumptions-Average loan balances include nonperforming loans. Interest income and yields are on a tax equivalent basis. Interest income reflects a state tax credit received on low or zero percent interest loans made to construct low income housing of $1,265, $1,268, and $650 for the years ended December 31, 2019, 2018, and 2017, respectively. Net interest spread is calculated as the yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. Net interest margin is the result of net interest income calculated on a tax-equivalent basis divided by average interest earning assets for the period. Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is change in rate times the previous volume. Changes not due solely to volume or rate changes have been allocated to volume change and rate change in proportion to the relationship of the absolute dollar amounts of the change in each category.







                       Analysis of Changes in Interest Income and Expense
                                                                                           Change for Year Ended December 31, 2018 to
                                       Change for Year Ended December 31, 2019 to 2018                        2017
                                                                                             Due to
                                      Due to Volume      Due to Rate          Total          Volume       Due to Rate        Total
        Interest earning assets
        Loans                        $       8,156       $   1,513       $       9,669     $  20,342     $      2,990     $   23,332
        Loan fees                              398               -                 398           843                -            843
        Loans with fees                      8,554           1,513              10,067        21,185            2,990         24,175
        Mortgage loans held for
        sale                                  (351 )            34                (317 )         290              120            410
        Deposits with banks                      1             111                 112           210              154            364
        Investment securities -
        taxable                                110             153                 263           986              159          1,145
        Investment securities -
        tax-exempt                            (170 )           (24 )              (194 )       3,119             (418 )        2,701
        Fed funds sold and other                67             (82 )               (15 )         224               48            272
        Total earning assets                 8,211           1,705               9,916        26,014            3,053         29,067
        Interest bearing
        liabilities
        Interest bearing demand                  -              18                  18           153               40            193
        Savings and money market               213           1,352               1,565           830            1,011          1,841
        Time deposits - retail                 444           3,031               3,475         2,740            2,398          5,138
        Time deposits - wholesale            3,178             846               4,024            27              602            629
        Total interest bearing
        deposits                             3,835           5,247               9,082         3,750            4,051          7,801
        Federal Home Loan Bank
        advances                            (1,354 )            42              (1,312 )         607              593          1,200
        Subordinated debt                      201              13                 214             -              724            724
        Total borrowed funds                (1,153 )            55              (1,098 )         607            1,317          1,924
        Total interest-bearing
        liabilities                  $       2,682       $   5,302       $       7,984     $   4,357     $      5,368     $    9,725
        Net interest rate spread
        (%) / Net interest income
        ($)                          $       5,529       $  (3,597 )     $       1,932     $  21,657     $     (2,315 )   $   19,342
        


Table of Contents

Analysis-For the year ended December 31, 2019, net interest income was approximately $58.8 million (including tax equivalent adjustments), producing a net interest margin of 3.54%. For the year ended December 31, 2018, net interest income was approximately $56.9 million (including tax equivalent adjustments), producing a net interest margin of 3.78%. For the year ended December 31, 2017, net interest income was approximately $37.3 million (including tax equivalent adjustments), generating a net interest margin of 3.97%. For the years ended December 31, 2019, 2018, and 2017, our net interest spread was 3.22%, 3.53% and 3.81%, respectively. Purchased loan accretion and state tax credits increased margin and spread by 0.19%, 0.26% and 0.20% respectively.

Our year-over-year average loan volume increased by approximately 14.0% from 2018 to 2019 and 59.3% from 2017 to 2018. Our combined loan and loan fee yield increased from 5.24% to 5.37% for 2019 compared to 2018, respectively, and increased from 4.87% to 5.24% for 2018 compared to 2017, respectively.

Our tax equivalent yield decreased to 3.71% for the year ended December 31, 2019 from 3.72% for the year ended December 31, 2018 and decreased from 4.01% for the year ended December 31, 2017. The decrease from 2017 was driven by reduction in the federal tax rate.

Our cost of funds increased from 1.07% to 1.48% for 2019 compared to the same period in 2018 and from 0.66% to 1.07% for 2018 compared to the same period in 2017. Our cost of interest-bearing liabilities increased from 1.27% at December 31, 2018 to 1.73% at December 31, 2019 and from 0.77% at December 31, 2017 to 1.27% at December 31, 2018. All categories of interest-bearing liabilities contributed to the increase in our cost of funds due to rate increases by the Federal Reserve as well as competition for core deposits and the use of wholesale funding sources. Additionally, we assumed subordinated debt in the Community First acquisition and issued another $60 million in December 2019 with a combined cost of 6.37%. Our non-interest bearing deposits decreased our cost of funds by 25 basis points for the year ended December 31, 2019 compared to 20 basis points and 11 basis points for years ended December 31, 2018 and 2017, respectively.

Provision for Loan Losses







        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 years ended December 31, 2019, 2018, and 2017 (dollars in
        thousands):
                                                                             Percent                          Percent
                                                                            Increase                         Increase
                                                   Year Ended              (Decrease)                       (Decrease)
                                                  December 31,                              December 31,
                                               2019           2018                              2017
        Non-Interest Income
        Service charges and fees           $    3,746     $    3,419          9.6  %       $      1,251        173.3  %
        Securities gains, net                   1,451             43      3,274.4  %                 59        (27.1 )%
        Gains on mortgage loans sold,
        net                                     4,905          4,418         11.0  %              3,675         20.2  %
        Gain on sale of other real
        estate                                    166            259        (35.9 )%                 27        859.3  %
        Gain (loss) on disposal of
        premises and equipment                      -             13        100.0  %                (52 )      125.0  %
        Bank-owned life insurance               1,119          1,186         (5.6 )%                836         41.9  %
        Other noninterest income:
        Brokerage revenue                          49             99        (50.5 )%                116        (14.7 )%
        Miscellaneous noninterest income          528            209        152.6  %                 98        113.3  %
        Total other non-interest income           577            308         87.3  %                214         44.4  %
        Total non-interest income          $   11,964     $    9,646         24.0  %       $      6,010         54.7  %
        


Noninterest income increased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to gains realized on the sale of securities. The increase for the year ended December 31, 2018 when compared to the same period in 2017 was primarily due to the Community First Transaction. Service charges on deposit accounts generally reflect customer growth trends but also are impacted by changes in our fee pricing structure to help attract and retain customers.

Table of Contents

During the year ended December 31, 2019, the Company sold securities totaling $85,895 and recognized a gain of $1,451. During the year ended December 31, 2018, the Company sold securities totaling $100,737 and recognized a net gain of $43. During the year ended December 31, 2017, the Company sold securities totaling $18,688 and recognized a net gain of $59.

Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans. All of these loan sales transfer servicing rights to the buyer. Gains on mortgage loans sold, net, amounted to $4,905, $4,418 and $3,675, for the years ended December 31, 2019, 2018, and 2017, respectively.

During the years ended December 31, 2019, 2018, and 2017, we recognized gains of $166, $259, and $27, respectively on sales of other real estate and on the recognition of a previously deferred gains from the payoffs of loans.

Noninterest income also includes appreciation in the cash surrender value of bank-owned life insurance (BOLI), which was $1,119, $1,186, and $836 for the years ended December 31, 2019, 2018, and 2017, respectively. Primarily, the increases in earnings on these BOLI policies when compared with 2017 resulted from an additional $10.7 million which came over as part of the Community First acquisition. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in . . .

Mar 13, 2020

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