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10-Q: RELIANT BANCORP, INC.

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(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 (as defined below) financial highlights and significant events for the six months ended June 30, 2019:

Net income attributable to common shareholders totaled $8.1 million, or $0.71 per diluted common share, for the six months ended June 30, 2019 compared to $5.9 million, or $0.51 per diluted common share, during same period in 2018.

Loans increased $81.5 million for the six months ended June 30, 2019.

Deposits increased $112.4 million for the six months ended June 30, 2019.

Asset quality remained strong with nonperforming assets to total assets of just 0.38 percent.

The following discussion and analysis is intended to assist in the understanding and assessment of significant changes and trends related to our financial position and operating results. This discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere herein along with our Annual Report on Form 10-K for the year ended December 31, 2018. 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, Inc. ("Reliant Bancorp"), Reliant Bank (the "Bank"), Community First Trups Holding Company, which is wholly owned by Reliant Bancorp ("TRUPS"), Reliant Investment Holdings, LLC ("Holdings"), which is 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, TRUPS, Holdings, and RMV are, collectively, referred to herein as the "Company"). As described in the notes to our 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 to our consolidated financial statements, effective on January 1, 2018, Reliant Bancorp and Community First, Inc. merged. 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 RMV 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 June 30, 2019, RMV's cumulative losses to date totaled $11,121. RMV will have to generate net income of this amount before the Company will participate in future cash flow distributions.

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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 Merger (as defined 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 the 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 loan's 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 our 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 OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

grew consolidated total assets from $1,125.0 million to $1,636.0 million after giving effect to purchase accounting;

increased total loans from $762.5 million to $1,075.5 million;

increased total deposits from $883.5 million to $1,316.9 million; and

expanded its employee base from 167 to 272 full time equivalent employees.

Earnings

Net income attributable to common shareholders amounted to $4,239 and $8,063, or $0.38 and $0.71 per basic share, for the three and six months ended June 30, 2019, respectively, compared to $2,139 and $5,880, or $0.19 and $0.52 per basic share, for the same periods in 2018. Diluted net income attributable to common shareholders was $0.38 and $0.71 per share and $0.19 and $0.51 per share for the three and six months ended June 30, 2019 and June 30, 2018, respectively. The major components contributing to the increases when compared to the prior year are a decrease of 6.5% and 1.3% in non-interest expense for the three and six months ended June 30, 2019, respectively, and an increase of 3.1% and 1.8% in net interest income for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. These 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 and six months ended June 30, 2019, and 2018 (dollars in thousands):
                                Three Months Ended June 30, 2019              Three Months Ended June 30, 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              $      1,276,197     5.18     $    16,178     $      1,119,884     4.81     $    13,393     $       1,795   $        989   $   2,785
        Loan fees                         -     0.25             782                    -     0.24             673               109              -         109
        Loans with fees           1,276,197     5.43          16,960            1,119,884     5.05          14,066             1,905            989       2,894
        Mortgage loans
        held for sale                14,502     5.48             198               24,611     5.31             326              (196 )           68        (128 )
        Deposits with
        banks                        30,342     1.53             116               36,550     1.21             110               (89 )           95           6
        Investment
        securities -
        taxable                      77,405     3.04             587               67,647     2.69             453                70             64         134
        Investment
        securities -
        tax-exempt                  222,149     3.77           1,650              231,874     3.75           1,708              (134 )           76         (58 )
        Federal funds sold
        and other                    13,308     5.46             181               11,441     5.85             167                73            (59 )        14
        Total earning
        assets                    1,633,903     5.02          19,692            1,492,007     4.66          16,830             1,629          1,233       2,862
        Nonearning assets           139,123                                       137,707
        Total assets       $      1,773,026                              $      1,629,714
        Interest bearing
        liabilities
        Interest bearing
        demand                      141,997     0.24              86              143,811     0.23              84                (6 )            8           2
        Savings and money
        market                      374,406     1.13           1,051              357,475     0.64             574                28            449         477
        Time deposits -
        retail                      612,148     2.14           3,263              517,209     1.43           1,848               382          1,033       1,415
        Time deposits -
        wholesale                   169,956     2.61           1,106               92,197     1.53             351               411            344         755
        Total interest
        bearing deposits          1,298,507     1.70           5,506            1,110,692     1.03           2,857               815          1,834       2,649
        Federal Home Loan
        Bank advances                23,668     2.97             175               79,520     2.00             397            (1,044 )          822        (222 )
        Subordinated debt            11,634     6.83             198               11,556     5.97             172                 1             25          26
        Total borrowed
        funds                        35,302     4.24             373               91,076     2.51             569            (1,043 )          847        (196 )
        Total
        interest-bearing
        liabilities               1,333,809     1.77           5,879            1,201,768     1.14           3,426              (228 )        2,681       2,453
        Net interest rate
        spread (%) / Net
        interest income
        ($)                                     3.25     $    13,813                          3.52     $    13,404     $       1,857   $     (1,448 ) $     409
        Non-interest
        bearing deposits            218,512    (0.25 )                            219,860    (0.17 )
        Other non-interest
        bearing
        liabilities                   8,057                                         5,781
        Stockholder's
        equity                      212,648                                       202,305
        Total liabilities
        and stockholders'
        equity             $      1,773,026                              $      1,629,714
        Cost of funds                           1.52                                          0.97
        Net interest
        margin                                  3.57                                          3.74
        


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                                     Six Months Ended June 30, 2019               Six Months Ended June 30, 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                  $     1,257,373     5.17     $    31,641     $     1,104,025     4.81     $    26,268     $       3,492   $      1,881   $ 5,373
        Loan fees                            -     0.24           1,488                   -     0.25           1,356               132              -       132
        Loans with fees              1,257,373     5.41          33,129           1,104,025     5.06          27,624             3,624          1,881     5,505
        Mortgage loans held
        for sale                        12,635     5.60             351              31,923     5.10             807              (667 )          211      (456 )
        Deposits with banks             29,000     1.63             234              43,378     1.28             276              (189 )          147       (42 )
        Investment securities
        - taxable                       74,948     2.93           1,090              70,162     2.76             960                68             62       130
        Investment securities
        - tax-exempt                   225,305     3.82           3,368             225,060     3.66           3,212                 4            152       156
        Federal funds sold and
        other                           12,981     5.64             363              10,688     5.91             313                89            (39 )      50
        Total earning assets         1,612,242     5.01          38,535           1,485,236     4.63          33,192             2,929          2,414     5,343
        Nonearning assets              139,964                                      136,163
        Total assets           $     1,752,206                              $     1,621,399
        Interest bearing
        liabilities
        Interest bearing
        demand                         145,304     0.27             197             149,065     0.22             161               (11 )           47        36
        Savings and money
        market                         387,296     1.14           2,181             351,058     0.60           1,052               116          1,013     1,129
        Time deposits - retail         594,805     2.10           6,184             516,816     1.37           3,512               589          2,083     2,672
        Time deposits -
        wholesale                      138,466     2.56           1,756              93,970     1.47             683               418            655     1,073
        Total interest bearing
        deposits                     1,265,871     1.64          10,318           1,110,909     0.98           5,408             1,112          3,798     4,910
        Federal Home Loan Bank
        advances and other              40,101     2.78             552              74,846     1.80             669              (729 )          612      (117 )
        Subordinated debt               11,634     6.78             391              11,546     5.75             329                 2             60        62
        Total borrowed funds            51,735     3.68             943              86,392     2.33             998              (727 )          672       (55 )
        Total interest-bearing
        liabilities                  1,317,606     1.72          11,261           1,197,301     1.08           6,406               385          4,470     4,855
        Net interest rate
        spread (%) / Net
        interest income ($)                        3.29     $    27,274                         3.55     $    26,786     $       2,544   $     (2,056 ) $   488
        Non-interest bearing
        deposits                       214,838    (0.24 )                           216,237    (0.11 )
        Other non-interest
        bearing liabilities              8,698                                        5,992
        Stockholder's equity           211,064                                      201,869
        Total liabilities and
        stockholders' equity   $     1,752,206                              $     1,621,399
        Cost of funds                              1.48                                         0.97
        Net interest margin                        3.60                                         3.76
        


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 $600 for the three and six months ended June 30, 2019, respectively, and $25 and $50 for the same periods in 2018. 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 and six months ended June 30, 2019, we recorded net interest income of approximately $13.8 million and $27.3 million, respectively, which resulted in a net interest margin (net interest income divided by the average balance of interest earning assets) of 3.57% and 3.60%, respectively. For the three and six months ended June 30, 2018, we recorded net interest income of approximately $13.4 million and $26.8 million, respectively, which resulted in a net interest margin of 3.74% and 3.76%, respectively. The main factor contributing to the slight increase in our net interest income was an increase in our loans and the related yield. Our net interest income increase was partially offset by the increase in our cost of funds.

Our year-over-year average loan volume increased by approximately 13.9% for the first six months of 2019 compared to the first six months of 2018. Our combined loan and loan fee yield increased from 5.06% to 5.41% for the first six months of 2019 compared to 2018, while our combined loan and loan fee yield increased from 5.05% to 5.43% for the three months ended June 30, 2019 compared to the same period in 2018. The increased yield for the six months ended June 30, 2019 is primarily attributable to a 28 basis points increase in contractual loan yields and an eight basis points increase in state tax credits, and partially offset by a one basis point decrease in loan fees. The increased yield for the three months ended June 30, 2019 is primarily attributable to a 26 basis points increase in contractual loan yields, a six basis points increase in state tax credits, a two basis points increase in accretion and a one basis point increase in loan fees.

Our tax equivalent yield on tax-exempt investments increased to 3.77% and 3.82% for the three and six months ended June 30, 2019, respectively, from 3.75% and 3.66% for the same periods in 2018, respectively. This increase was primarily driven by investment restructurings in the first and second quarters of 2019. Our year-over-year average tax-exempt investment volume remained flat for the first six months of 2019 compared to the same period in 2018. Our year-over-year average taxable securities volume increased by 6.8% for the first six months of 2019 compared to the same period in 2018.

Our cost of funds increased to 1.52% and 1.48% from 0.97% and 0.97% for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018. The increase in our cost of funds was primarily driven by an across the board increase in all of our interest bearing deposits and interest bearing liabilities as well as an increase in our wholesale deposits from 28.6% of our deposit portfolio at March 31, 2019 to 30.3% at June 30, 2019. We experienced a 0.6% increase in our average non-interest bearing deposits for the three and six months ended June 30, 2019 when compared to the same periods in 2018.

The Bank strives to maintain a strong net interest margin that is insulated from changes in market interest rates. Our net interest margin, while generally considered fairly neutral, is currently subject to slightly contract in a rising rate environment and slightly expand in a falling rate environment. In the lowering interest rate environment that we anticipate, the shorter durations of our non-core funding sources are expected to contribute to interest expense savings that are expected to be slightly higher than (i) the anticipated loss of interest income that are likely to be driven by certain variable rate loans and investments repricing and (ii) the increased expenses to be incurred on our interest rate swaps.

Provision for Loan Losses

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net recoveries have been added bringing the allowance to a level which, in management's best estimate, is necessary to absorb inherent losses within the existing 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 June 30, 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 and 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 of $200 for loan losses for each of the three and six months ended June 30, 2019 compared to $300 and $437 for loan losses recorded for the three and six months ended June 30, 2018, respectively. 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 and six months ended June 30, 2019. Additionally, four out of the five previous quarters have ended with net recoveries. See "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Balance Sheets at June 30, 2019 and December 31, 2018 - Allowance for Loan Losses" included herein for further analysis of the provision for loan losses.

Non-Interest Income

. . .

Aug 06, 2019

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