(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Summary The following is a summary of the Company's financial highlights and significant events for the three months ended March 31, 2019:
Net income available to common shareholders totaled $3.8 million, or $0.33 per diluted common share, for the three months ended March 31, 2019 compared to $3.7 million, or $0.33 per diluted common share, during same period in 2018.
Loans, net of unearned income increased $31.1 million for the three months ended March 31, 2019.
Deposits increased $73.4 million for the three months ended March 31, 2019.
Asset quality remains strong with nonperforming assets to total assets of just 0.45 percent.
In the following section the term "Company" means "Reliant Bancorp, Inc. and all of its subsidiaries" and the term "Bank" means "Reliant Bank." The following discussion and analysis is intended to assist in the understanding and assessment of significant changes and trends related to our financial position and operating results. This discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere herein along with our 10-K filed March 8, 2019. Amounts in the narrative are shown in thousands, except for economic and demographic information, numbers of shares, per share amounts and as otherwise noted.
Critical Accounting Policies
The accounting principles we follow and our methods of applying these principles conform to accounting principles generally accepted in the United States of America ("U.S. GAAP") and with general practices within the banking industry. There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2018. The following is a brief summary of the more significant policies.
Principles of Consolidation
The consolidated financial statements as of and for the periods presented include the accounts of Reliant Bancorp, the Bank, Community First Trups Holding Company, which is wholly owned by Reliant Bancorp ("TRUPS"), Reliant Investment Holdings, LLC ("Holdings"), which is 100% wholly owned by the Bank, and Reliant Mortgage Ventures, LLC ("RMV"), of which the Bank controls 51% of the governance rights (Reliant Bancorp, the Bank, Holdings, TRUPS, and RMV are collectively referred to herein as the "Company"). As described in the notes to our annual consolidated financial statements, RMV is considered a variable interest entity for which the Bank is deemed to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. As described in Note 12, Reliant Bancorp and Community First, Inc. merged effective January 1, 2018. The accounting and reporting policies of the Company conform 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 cash flow distributions of RMV, and the Bank receives 30% of the cash flow distributions, once the non-controlling member recovers its capital contributions to RMV. The non-controlling member is required to fund RMV's losses via additional capital contributions to RMV. As of March 31, 2019, RMV's cumulative losses to date totaled $9,601. RMV will have to generate net income of this amount before the Company will participate in future cash flow distributions.
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The Company maintains an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, because we recorded all acquired loans at fair value as of the date of the merger (discussed below), we did not establish an allowance for loan losses on any of the loans we purchased as of the acquisition date as any credit deterioration evident in the loans was included in the determination of the acquisition date fair values. For purchased credit-impaired loans accounted for under ASC 310-30, management establishes an allowance for loan losses subsequent to the date of acquisition by re-estimating expected cash flows on these loans on a quarterly basis, with any decline in expected cash flows due to a credit triggering impairment recorded as provision for loan losses. The allowance established is the excess of the loan's carrying value over the present value of projected future cash flows, discounted at the current accounting yield of the loan or the fair value of collateral (less estimated costs to sell) for collateral dependent loans. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. While the determination of specific cash flows involves estimates, each estimate is unique to the individual loan, and none is individually significant. For non-purchased credit-impaired loans acquired in the merger and that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by Reliant Bank for loans with similar characteristics as those acquired other than purchased credit-impaired loans. We record an allowance for loan losses only when the calculated amount exceeds the remaining credit mark established at acquisition.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using historical loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions (national and local), and other factors such as changes in interest rates, portfolio concentrations, changes in the experience, ability, and depth of the lending function, levels of and trends in charged-off loans, recoveries, past-due loans and volume and severity of classified loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The entire allowance is available for any loan that, in management's judgment, should be charged off.
A loan is impaired when full payment under the loan terms is not expected. All classified loans and loans on non-accrual status are individually evaluated for impairment. Factors considered in determining if a loan is impaired include the borrower's ability to repay amounts owed, collateral deficiencies, the risk rating of the loan and economic conditions affecting the borrower's industry, among other things. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value (less estimated costs to sell) of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless the principal amount is deemed fully collectible, in which case interest is recognized on a cash basis. When recognition of interest income on a cash basis is appropriate, the amount of income recognized is limited to what would have been accrued on the remaining principal balance at the contractual rate. Cash payments received over this limit, and not applied to reduce the loans remaining principal balance, are recorded as recoveries of prior charge-offs until these charge-offs have been fully recovered.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
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COMPARISON RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND
grew consolidated total assets from $1,125.0 million to $1,636.0 million as of January 1, 2018 after giving effect to purchase accounting;
increased total loans from $762.5 million to $1,075.5 million as of January 1, 2018;
increased total deposits from $883.5 million to $1,316.9 million as of January 1, 2018; and
expanded its employee base from 167 full time equivalent employees to 272 full time equivalent employees as of January 1, 2018.
Net income attributable to common shareholders amounted to $3,824, or $0.34 per basic share, for the three months ended March 31, 2019, compared to $3,741, or $0.33 per basic share, for the same period in 2018. Diluted net income attributable to common shareholders was $0.33 per share for the three months ended March 31, 2019 and March 31, 2018. The increase of 0.6% in net interest income for the three months ended March 31, 2019 compared to the same period in 2018 accounts for all of the increase in net income attributable to common shareholders. This and other components of earnings are discussed further below.
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Net Interest Income Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of our revenues. The following table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three months ended March 31, 2019, and 2018 (dollars in thousands): Three Months Ended March 31, 2019 Three Months Ended March 31, 2018 Change Interest Interest Rates / Income / Rates / Income / Average Balances Yields (%) Expense Average Balances Yields (%) Expense Due to Volume Due to Rate Total Interest earning assets Loans $ 1,238,341 5.16 $ 15,463 $ 1,088,166 4.81 $ 12,872 $ 1,697 $ 895 $ 2,591 Loan fees - 0.23 706 - 0.26 686 20 - 20 Loans with fees 1,238,341 5.39 16,169 1,088,166 5.07 13,558 1,716 895 2,611 Mortgage loans held for sale 10,747 5.77 153 39,235 4.97 481 (782 ) 454 (328 ) Deposits with banks 27,643 1.73 118 50,206 1.34 166 (267 ) 219 (48 ) Investment securities - taxable 72,464 2.82 503 72,678 2.83 507 (2 ) (2 ) (4 ) Investment securities - tax-exempt 228,497 3.86 1,718 218,246 3.57 1,504 78 136 214 Federal funds sold and other 12,650 5.83 182 9,934 5.96 146 57 (21 ) 36 Total earning assets 1,590,342 5.00 18,843 1,478,465 4.61 16,362 801 1,680 2,481 Nonearning assets 140,835 134,621 Total assets $ 1,731,177 $ 1,613,086 Interest bearing liabilities Interest bearing demand 148,649 0.30 111 154,318 0.20 77 (19 ) 53 34 Savings and money market 400,328 1.14 1,130 344,641 0.56 478 88 564 652 Time deposits - retail 577,270 2.05 2,921 516,424 1.31 1,664 217 1,040 1,257 Time deposits - wholesale 106,625 2.47 650 95,743 1.41 332 42 276 318 Total interest bearing deposits 1,232,872 1.58 4,812 1,111,126 0.93 2,551 328 1,933 2,261 Federal Home Loan Bank advances 56,718 2.70 377 70,172 1.57 272 (312 ) 417 105 Subordinated debt 11,613 6.74 193 11,536 5.52 157 1 35 36 Total borrowed funds 68,331 3.38 570 81,708 2.13 429 (310 ) 451 141 Total interest-bearing liabilities 1,301,203 1.68 5,382 1,192,834 1.01 2,980 17 2,385 2,402 Net interest rate spread (%) / Net interest income ($) 3.32 $ 13,461 3.60 $ 13,382 $ 784 $ (705 ) $ 79 Non-interest bearing deposits 211,122 (0.24 ) 212,614 (0.15 ) Other non-interest bearing liabilities 9,391 6,205 Stockholder's equity 209,461 201,433 Total liabilities and stockholders' equity $ 1,731,177 $ 1,613,086 Cost of funds 1.44 0.86 Net interest margin 3.63 3.79
Table Assumptions-Average loan balances are inclusive of nonperforming loans. Yields computed on tax-exempt instruments are on a tax equivalent basis including a state tax credit included in loan yields of $300 and $25 for the three months ended March 31, 2019 and 2018, 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.
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Analysis-For the three months ended March 31, 2019, we recorded net interest income of approximately $13.5 million which resulted in a net interest margin
Our year-over-year average loan volume increased by approximately 13.8% for the first three months of 2019 compared to the first three months of 2018. Our combined loan and loan fee yield increased from 5.07% to 5.39% for the first three months of 2019 compared to 2018. The increased yield for the three months ended March 31, 2019 is attributable to a 34 basis points increase in contractual loan yields, a nine basis points increase in state tax credits, and partially offset by an eight basis points decrease in purchase accounting accretion and a three basis points decrease in loan fees.
Our tax equivalent yield on tax-exempt investments increased to 3.86% for the three months ended March 31, 2019, from 3.57% for the same period in 2018. This increase was driven by investment restructurings in the first quarter of 2018. Our year-over-year average tax-exempt investment volume increased by approximately 4.7% for the first three months of 2019 compared to the same period in 2018. Our year-over-year average taxable securities volume decreased by 0.3% for the first three months of 2019 compared to the same period in 2018. No material changes to our investment portfolio were made during the first quarter of 2019.
Our cost of funds increased to 1.44% from 0.86% for the three months ended March 31, 2019 compared to the same period in 2018. The increase in our cost of funds was driven mainly by higher rates being paid on time deposits, FHLB advances, and subordinated debt. We experienced a 0.7% decrease in our average non-interest bearing deposits from the three months ended March 31, 2018.
Our balance sheet has some components that will benefit from rising interest rates, including variable rate loans, some variable rate investment securities and interest rate swaps. Conversely our interest bearing liabilities are negatively impacted with rising interest rates. Our wholesale fundings are particularly sensitive to changes in interest rates mainly due to their short term nature. We added $30 million of pay-fixed receive-variable interest rate swaps in each of the second and third quarters of 2018. We are always looking for opportunities to increase our non-interest bearing and lower cost deposits and have seen some success with a stronger focus on low cost deposits in all of our sales incentive plans. These efforts will continue as well as continuing to evaluate the benefits of fixing a greater portion of our funding costs through interest rate swaps.
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management's evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. Based upon management's assessment of the loan portfolio, we adjust our allowance for loan losses on a quarterly basis to an amount deemed appropriate to adequately cover probable losses inherent in the loan portfolio.
Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at March 31, 2019. 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 no provision for loan losses for the three months ended March 31, 2019 compared to $137 for loan losses recorded for the three months ended March 31, 2018. Our provision for loan losses was impacted by the level of loan growth, the credit quality of the loan portfolio, and the amount of net recoveries for the three months ended March 31, 2019.
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, 2019, and 2018 (dollars in thousands):
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Dollar Percent Three Months Ended March 31, Increase Increase 2019 2018 (Decrease) (Decrease) Non-Interest Income Service charges and fees $ 884 $ 771 $ 113 14.7 % Securities gains, net 131 - 131 100.0 % Gains on mortgage loans sold, net 560 1,705 (1,145 ) (67.2 )% Gain on sale of other real estate - 89 (89 ) (100.0 )% Other noninterest income: Bank-owned life insurance 279 302 (23 ) (7.6 )% Brokerage revenue 11 75 (64 ) (85.3 )% Miscellaneous noninterest income 73 49 24 49.0 % Total other non-interest income 363 426 (63 ) (14.8 )% Total non-interest income $ 1,938 $ 2,991 $ (1,053 ) (35.2 )%
The most significant reasons for the changes in total non-interest income during the three months ended March 31, 2019 compared to the same periods in 2018 are the fluctuation in gains on mortgage loans sold, net, the increase in service charges, and the gains on securities transactions. These and other factors impacting non-interest income are discussed further below.
Service charges on deposit accounts have increased and mainly reflect customer growth trends but have also been impacted by changes in our fee structures. The majority of the 14.7% increase for the three months ended March 31, 2019 was driven by the changes in our fee structures.
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, 2019, the Company sold securities classified as available for sale totaling $10,558 with a gain of $131. During the three months ended March 31, 2018, the Company sold securities classified as available for sale totaling $82,187 with no gain.
Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans and first-lien HELOCs. These mortgage fees are for loans originated and subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage related revenue increases in lower interest rate environments and more robust housing markets and decreases in rising interest rate environments and more challenging housing markets. Mortgage-related revenue will fluctuate from quarter to quarter as the rate environment changes and as changes occur with our mortgage operations including but not limited to the number of loan originators employed and the channels available for loan sales of the venture's products in the secondary markets. Gains on mortgage loans sold, net, amounted to $560 for the three months ended March 31, 2019, compared to $1,705 for the same period in the prior year. As discussed further in the notes to our consolidated financial statements, gains on mortgage loans sold are generally recognized at the time of a loan sale corresponding to the transfer of risk.
During the three months ended March 31, 2019, there was no gain or loss due to the sale of other real estate compared to a gain of $89 in the same period in 2018.
Non-interest income also includes appreciation in the cash surrender value of bank-owned life insurance which was $279 for the three months ended March 31, 2019, compared to $302 for the same period in 2018. The decrease relates to the introductory rate ending from our last purchase.The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in the cash surrender value of the policies) is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support the policies. Earnings on these policies generally are not expected to be taxable.
Our brokerage revenue is solely based on commissions received from established referral relationships and fluctuate based on assets under management.
Non-Interest Expense The following is a summary of our non-interest expense for the three months ended March 31, 2019 and 2018 (dollars in thousands): 42 -------------------------------------------------------------------------------- Table of Contents Dollar Percent Three Months Ended March 31, Increase Increase 2019 2018 (Decrease) (Decrease) Non-Interest Expense Salaries and employee benefits $ 7,265 $ 6,954 $ 311 4.5 % Occupancy 1,352 1,229 123 10.0 % Information technology 1,410 1,349 61 4.5 % . . .
May 07, 2019
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