(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 nine months ended September 30, 2019:
Net income attributable to common shareholders totaled $12.1 million, or $1.07 per diluted common share, for the nine months ended September 30, 2019 compared to $10.0 million, or $0.87 per diluted common share, during same period in 2018.
Loans increased $119.5 million for the nine months ended September 30, 2019.
Deposits increased $172.7 million for the nine months ended September 30, 2019.
Asset quality remained strong with nonperforming assets to total assets of just 0.45 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.
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The Bank and CB&T have entered into a separate bank merger agreement providing for the merger of CB&T with and into the Bank following the merger of Reliant Bancorp and TCB Holdings. The combined bank will operate under the Reliant Bank name.
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 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.
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 in arrears via additional capital contributions to RMV. As of September 30, 2019, RMV's cumulative losses to date totaled $12,542. RMV will have to generate net income of this amount before the Bank will participate in future income distributions.
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 is required to establish 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. The Bank records 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 ("allowance") 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.
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A loan is impaired when full payment under the loan terms is not expected. All classified loans and loans on nonaccrual 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.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
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.
Net income attributable to common shareholders amounted to $4,000 and $12,063, or $0.36 and $1.07 per basic share, for the three and nine months ended September 30, 2019, respectively, compared to $4,082 and $9,962, or $0.36 and $0.88 per basic share, for the same periods in 2018. Diluted net income attributable to common shareholders was $0.36 and $1.07 per share for the three and nine months ended September 30, 2019, respectively, compared to $0.36 and $0.87 per share for the three and nine months ended September 30, 2018, respectively. The major components contributing to the change when compared to the prior year are an increase of 7.3% and 1.4% in noninterest expense for the three and nine months ended September 30, 2019, respectively, and an increase of 4.4% and 2.7% in net interest income for the three and nine months ended September 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 nine months ended September 30, 2019, and 2018 (dollars in thousands):
Three Months Ended Three Months Ended September 30, 2019 September 30, 2018 Change Interest Interest Average Rates / Income / Average Rates / Income / Balances Yields (%) Expense Balances Yields (%) Expense Due to Volume Due to Rate Total Interest earning assets Loans $ 1,312,153 5.12 $ 16,934 $ 1,144,307 5.01 $ 14,445 $ 2,165 $ 324 $ 2,489 Loan fees - 0.26 870 - 0.27 781 89 - 89 Loans with fees 1,312,153 5.38 17,804 1,144,307 5.28 15,226 2,254 324 2,578 Mortgage loans held for sale 18,271 5.71 263 22,464 5.19 294 (172 ) 141 (31 ) Deposits with banks 33,410 1.96 165 24,570 1.53 95 39 31 70 Investment securities - taxable 73,115 2.98 549 70,389 2.33 414 16 119 135 Investment securities - tax-exempt 220,233 3.60 1,999 229,934 3.74 2,168 (89 ) (79 ) (169 ) Federal funds sold and other 12,300 5.03 156 12,760 5.75 185 (6 ) (23 ) (29 ) Total earning assets 1,669,482 4.98 20,937 1,504,424 4.85 18,382 2,042 513 2,555 Nonearning assets 136,973 139,972 Total assets $ 1,806,455 $ 1,644,396 Interest bearing liabilities Interest bearing demand 142,702 0.23 81 143,057 0.28 102 - (21 ) (21 ) Savings and money market 350,440 1.10 973 339,487 0.77 657 22 294 316 Time deposits - retail 540,688 2.17 2,956 527,930 1.60 2,128 53 775 828 Time deposits - wholesale 294,750 2.52 1,872 87,262 1.88 414 1,275 183 1,458 Total interest bearing deposits 1,328,580 1.76 5,882 1,097,736 1.19 3,301 1,350 1,231 2,581 Federal Home Loan Bank advances 14,216 1.84 66 102,731 2.34 606 (433 ) (107 ) (540 ) Subordinated debt 11,655 6.77 199 11,577 6.75 197 1 1 2 Total borrowed funds 25,871 4.06 265 114,308 2.79 803 (431 ) (107 ) (538 ) Total interest-bearing liabilities 1,354,451 1.80 6,147 1,212,044 1.34 4,104 919 1,124 2,043 Net interest rate spread (%) / Net interest income ($) 3.18 $ 14,790 3.51 $ 14,278 $ 1,123 $ (612 ) $ 512 Noninterest bearing deposits 227,502 (0.26 ) 221,107 (0.20 ) Other noninterest bearing liabilities 7,415 7,344 Stockholder's equity 217,087 203,901 Total liabilities and stockholders' equity $ 1,806,455 $ 1,644,396 Cost of funds 1.54 1.14 Net interest margin 3.51 3.77
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Nine Months Ended Nine Months Ended September 30, 2019 September 30, 2018 Change Interest Interest Average Rates / Income / Average Rates / Income / Balances Yields (%) Expense Balances Yields (%) Expense Due to Volume Due to Rate Total Interest earning assets Loans $ 1,275,834 5.15 $ 49,181 $ 1,117,743 4.88 $ 40,770 $ 6,045 $ 2,365 $ 8,410 Loan fees - 0.25 2,358 - 0.26 2,137 221 - 221 Loans with fees 1,275,834 5.40 51,539 1,117,743 5.14 42,907 6,266 2,365 8,631 Mortgage loans held for sale 14,534 5.65 614 28,636 5.14 1,101 (648 ) 161 (487 ) Deposits with banks 30,487 1.75 399 36,837 1.35 371 (98 ) 126 28 Investment securities - taxable 74,330 2.95 1,639 70,276 2.61 1,374 81 184 265 Investment securities - tax-exempt 223,596 3.75 6,264 226,601 3.69 6,258 (120 ) 126 6 Federal funds sold and other 12,751 5.44 519 11,389 5.85 498 72 (51 ) 21 Total earning assets 1,631,532 5.00 60,974 1,491,482 4.71 52,509 5,554 2,911 8,465 Nonearning assets 138,926 137,606 Total assets $ 1,770,458 $ 1,629,088 Interest bearing liabilities Interest bearing demand 144,427 0.26 278 147,022 0.24 263 (7 ) 22 15 Savings and money market 374,876 1.12 3,154 347,184 0.66 1,709 149 1,296 1,445 Time deposits - retail 576,568 2.12 9,139 520,717 1.45 5,640 659 2,840 3,499 Time deposits - wholesale 191,133 2.60 3,713 91,466 1.60 1,097 1,662 954 2,616 Total interest bearing deposits 1,287,004 1.69 16,284 1,106,389 1.05 8,709 2,463 5,112 7,575 Federal Home Loan Bank advances and other 31,378 2.28 534 84,176 2.03 1,275 (971 ) 230 (741 ) Subordinated debt 11,634 6.78 590 11,556 6.09 526 4 60 64 Total borrowed funds 43,012 3.49 1,124 95,732 2.52 1,801 (967 ) 290 (677 ) Total interest-bearing liabilities 1,330,016 1.75 17,408 1,202,121 1.17 10,510 1,496 5,402 6,898 Net interest rate spread (%) / Net interest income ($) 3.25 $ 43,566 3.54 $ 41,999 $ 4,058 $ (2,491 ) $ 1,567 Noninterest bearing deposits 219,106 (0.25 ) 217,957 (0.18 ) Other noninterest bearing liabilities 8,229 6,464 Stockholder's equity 213,107 202,546 Total liabilities and stockholders' equity $ 1,770,458 $ 1,629,088 Cost of funds 1.50 0.99 Net interest margin 3.57 3.76
Table Assumptions-Average loan balances are inclusive of nonperforming loans. Interest income and yields computed on tax-exempt instruments are on a tax equivalent basis including a state tax credit included in loan yields of $300 and $900 for the three and nine months ended September 30, 2019, respectively, and $350 and $400 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.
Analysis-For the three and nine months ended September 30, 2019, we recorded net interest income on a tax equivalent basis of approximately $14,790 and $43,566, respectively, which resulted in a net interest margin (net interest income divided by the average balance of interest earning assets) of 3.51% and 3.57%, respectively. For the three and nine months ended September 30, 2018, we recorded net interest income on a tax equivalent basis of approximately $14,278 and $41,999, respectively, which resulted in a net interest margin of 3.77% 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.
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Our year-over-year average loan volume increased by approximately 14.1% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. Our combined loan and loan fee yield increased from 5.14% to 5.40% for the nine months ended September 30, 2019 compared to the same period in 2018. The increased yield for the nine months ended September 30, 2019 is primarily attributable to a 23 basis points increase in contractual loan yields including adjustment for purchase accounting accretion and a four basis points increase in state tax credits, and partially offset by a one basis point decrease in loan fees. For the three months ended September 30, 2019, our combined loan and loan fee yield increased from 5.28% to 5.38% compared to the same period in 2018. The increased yield for the three months ended September 30, 2019 is primarily attributable to a 14 basis points increase in contractual loan yields including purchase accounting accretion, partially offset by a three basis points decrease in state tax credits and a one basis point decrease in loan fees.
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Nov 05, 2019
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