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Nov. 5, 2019, 11:00 a.m. EST

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 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.

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 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.

Earnings

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.

. . .

Nov 05, 2019

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