EDGAR 10-K Filing

Company CIK: 1606440
Filing Year: 2021
Filename: 1606440_10-K_2021_0001606440-21-000005.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
OVERVIEW
Reliant Bancorp, Inc. is a Tennessee corporation and the holding company for and the sole shareholder of Reliant Bank. Reliant Bancorp, Inc. is registered as a financial holding company under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). Reliant Bancorp, Inc. was incorporated under the laws of the State of Tennessee on March 4, 2011. Reliant Bancorp, Inc. became the holding company for, and sole shareholder of, Reliant Bank upon the completion of Reliant Bank’s reorganization into a holding company corporate structure on June 6, 2012. On July 7, 2015, Reliant Bancorp, Inc.’s common stock (“common stock”) began trading on The Nasdaq Capital Market (“Nasdaq”), where it trades today under the symbol “RBNC.” Until December 31, 2017, the Company operated under the name “Commerce Union Bancshares, Inc.”
Reliant Bank is a commercial bank chartered under Tennessee law and a member of the Federal Reserve System (the "Federal Reserve"). Reliant Bank opened for business on August 14, 2006. Reliant Bank offers a full range of traditional banking products and services to corporate and consumer clients throughout Middle Tennessee.
In addition to Reliant Bank, Reliant Bancorp, Inc. has a number of other direct and indirect subsidiaries:
•Reliant Risk Management, Inc. Reliant Risk Management, Inc. is a wholly-owned insurance captive subsidiary of Reliant Bancorp, Inc. that began operations on June 1, 2020. Reliant Risk Management, Inc. is a Tennessee-based captive insurance company which insures Reliant Bancorp and the Bank against certain risks unique to their operations and for which insurance may not be currently available or economically practicable in today's insurance marketplace. Reliant Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. Reliant Risk Management, Inc. is subject to regulations of the State of Tennessee and undergoes periodic examinations by the Tennessee Department of Commerce and Insurance.
•Community First Trups Holding Company. Community First Trups Holding Company is a Tennessee corporation and wholly-owned subsidiary of Reliant Bancorp, Inc. Community First Trups Holding Company was chartered on December 19, 2016. The company holds $10 million of trust preferred securities originally issued by Community First, Inc., which Reliant Bancorp, Inc. acquired January 1, 2018.
•Community First Capital Trust I, Community First Capital Trust II, and Community First Capital Trust III. Each of Community First Capital Trust I, Community First Capital Trust II, and Community First Capital Trust III is a Delaware statutory trust wholly-owned by Reliant Bancorp, Inc. Each entity is one through which Community First,
Inc. issued trust preferred securities prior to Reliant Bancorp, Inc.’s acquisition of Community First, Inc. on January 1, 2018.
•Reliant Mortgage Ventures, LLC. Reliant Mortgage Ventures, LLC ("RMV") is a subsidiary of Reliant Bank. RMV was organized as a Tennessee limited liability company on November 15, 2011. RMV is a mortgage company joint venture between VHC Fund 1, LLC ("VHC") and Reliant Bank that offer mortgage banking services to customers within Reliant Bank's market footprint. Reliant Bank holds 51% of the governance rights in RMV and 30% of the financial rights in RMV, subject to VHC’s right to first recover its capital contributions.
•Reliant Investment Holdings, LLC. Reliant Investment Holdings, LLC is a Tennessee limited liability company and wholly-owned subsidiary of Reliant Bank ("Holdings"). Reliant Investment Holdings, LLC was organized on October 26, 2018, and offers investment services to Reliant Bank.
•First Financial Mortgage Corporation of Clarksville. First Financial Mortgage Corporation of Clarksville is a Tennessee corporation and wholly-owned subsidiary of Reliant Bank. Reliant Bank acquired First Financial Mortgage Corporation of Clarksville when Reliant Bank merged with First Advantage Bank on April 1, 2020. The company currently is inactive and has no operations or assets.
As of December 31, 2020, the Company had grown to approximately $3.0 billion in assets, including approximately $2.3 billion of loans held for investment, and approximately $2.6 billion of deposits.
MERGERS AND ACQUISITIONS
The Company has grown significantly in recent years as a result of several mergers and acquisitions.
Combination of Reliant Bank and Legacy Reliant Bank
On April 1, 2015, Reliant Bank (then operating as Commerce Union Bank) and legacy “Reliant Bank,” a Tennessee state-chartered bank established in January 2006 and headquartered in Brentwood, Tennessee (“Legacy Reliant Bank”), completed a merger of equals. Upon completion of this transaction, the Company had approximately $790.8 million in total consolidated assets, gross loans of approximately $561.4 million, and total deposits of approximately $623.9 million. As a result of this transaction, Reliant Bank succeeded to Legacy Reliant Bank’s ownership interest in RMV.
Acquisition of Community First, Inc.
On January 1, 2018, Reliant Bancorp acquired Community First, Inc., the parent company for Community First Bank & Trust, a Tennessee state-chartered bank headquartered in Columbia, Tennessee. Upon completion of this transaction, the Company had approximately $1.6 billion in total consolidated assets, gross loans of approximately $1.1 billion, and total deposits of approximately $1.3 billion. In connection with this transaction, pursuant to supplemental indentures, each dated January 1, 2018, by and between the Company and Wilmington Trust Company, as trustee, the Company assumed all of Community First, Inc.’s obligations with respect to its $23.0 million of outstanding trust preferred securities.
Acquisition of Tennessee Community Bank Holdings, Inc.
On January 1, 2020, Reliant Bancorp acquired Tennessee Community Bank Holdings, Inc., the parent company for Community Bank & Trust, a Tennessee state-chartered bank headquartered in Ashland City, Tennessee. Upon completion of this transaction, the Company had approximately $2.2 billion in total consolidated assets, gross loans of approximately $1.6 billion, and total deposits of approximately $1.8 billion.
Acquisition of First Advantage Bancorp
On April 1, 2020, Reliant Bancorp acquired First Advantage Bancorp, the parent company for First Advantage Bank, a Tennessee state-chartered bank headquartered in Clarksville, Tennessee. Upon completion of this transaction, the Company had approximately $2.9 billion in total consolidated assets, gross loans of approximately $2.2 billion, and total deposits of approximately $2.3 billion.
HUMAN CAPITAL RESOURCES
In order to continue to deliver on our mission of financial inclusion for all, it is crucial that we attract and retain talent who desire to enable financial equality through delivery of capable solutions, thoughtful innovation and equitable consumer options in the markets that we serve. To facilitate talent attraction and retention, we strive to make the Company an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, health and welfare programs.
Employee Profile
As of December 31, 2020, we had approximately 428 employees on a full-time or part-time basis in locations across Middle Tennessee. This represents an increase of 127 employees, or 42%, from December 31, 2019 due primarily to the TCB Holdings Transaction and FABK Transaction. As of December 31, 2020, the Company continued to employ 24 and 87 employees who joined the Company as part of the TCB Holdings Transaction and FABK Transaction, respectively.
December 31, 2020 December 31, 2019
Male Female Total Male Female Total
Mortgage Division 28 47 75 29 49 78
Bank Segment 112 241 353 66 157 223
Total 140 288 428 95 206 301
Using the original hire dates of those employees hired in connection with acquisitions, average employee length of tenure was 5.95 years as of December 31, 2020 and December 31, 2019.
Total Rewards
As part of our compensation philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, an Employee Stock Purchase Plan, a Company-matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, flexible work schedules, adoption assistance, and employee assistance programs.
Health and Safety
The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status and that offer choices where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic, we implemented significant operating environment changes that we determined were in the best interest of our employees, as well as the communities in which we operate. This includes having approximately 40% of our employees work from home, while implementing additional safety measures for employees continuing critical on-site work.
Talent
A core tenet of our talent system is to both develop talent from within and supplement with external hires. This approach has yielded loyalty and commitment in our employee base which in turn promotes business growth, product and service improvement, and customer growth and retention. We also believe that adding new employees and external ideas supports a continuous improvement mindset and our goals of a diverse and inclusive workforce. We believe that our average employee tenure - 5.95 years as of the end of the fiscal year 2020 - reflects the engagement of our employees in this core talent system tenet. Additionally, the Company was named Best Small Bank in Tennessee by Newsweek in its first ranking of financial
institutions that best serve their customers' needs in today's challenging times. The Company was also recognized as a Top Workplace of 2020, an award based solely on employee feedback gathered through a third-party survey administered by research partner Energage. In particular, this award recognizes the Company as an employer that supports the needs of its workforce, offering career-advancement opportunities, great benefits and competitive pay.
We encourage and support the growth and development of our associates and, wherever possible, seek to fill positions by promotion and transfer from within the organization. Continual learning and career development is advanced through quarterly performance and development conversations between associates and their managers, internally-developed training programs, customized corporate training engagements and educational reimbursement programs.
PRODUCTS AND SERVICES
Reliant Bank is a full-service community bank. Our principal business is banking, which consists of lending and deposit gathering activities as well as the offering of other banking-related products and services to businesses and individuals within our market footprint.
Loan Products and Services
We offer a full range of lending products, including commercial, real estate, manufactured housing, and consumer loans. We compete for these loans with other financial institutions or intermediaries who are also well established in our geographic markets.
Our profitability depends upon our responsible lending practices, which are designed to help ensure long-term, balanced growth in assets (including loans), deposits and net income. We strive to grow loans and deposits through organic market share growth and strategic acquisitions; provide customers with a breadth of financial products and services; employ, empower and motivate our employees to provide personalized customer service, consistent with the best traditions of community banking, while maximizing profits; and maintain exceptional asset quality and control overhead expenses.
Depository Products and Services
We seek to establish and maintain a strong base of core deposits, including savings, noninterest-bearing checking, interest-bearing checking, money market and certificate of deposit accounts (including products offered through various Certificate of Deposit Account Registry Service ("CDARS") programs).
Our ability to gather deposits is enhanced by the comprehensive relationships our directors and bankers have built with the businesses and individuals who live and do business in our market footprint. Rates paid on deposits vary among banking markets and deposit categories due to different terms and conditions, individual deposit size, services rendered, and rates paid by competitors on similar deposit products. We act as a depository for a number of state and local governments and governmental agencies or municipalities. Such public fund deposits are often subject to competitive bidding processes and in many cases must be secured by pledging a portion of our investment securities or a letter of credit.
We also offer our commercial clients a comprehensive array of treasury management services, which include remote deposit capture, on-line wire origination, enhanced Automated Clearing House ("ACH") origination services, positive pay, zero balance and sweep accounts, automated bill pay services, electronic receivables processing, merchant card acceptance services, small business and commercial credit cards, and corporate purchasing cards.
Mortgage Banking Services
We originate mortgage loans throughout the Company's footprint as well as through purchases from correspondents. Mortgage loans are typically sold in the secondary market. Mortgage banking has provided the Bank a source of noninterest income and referrals for other banking services including home equity lines of credit and deposit products.
Other Banking Products and Services
We offer a broad array of convenience-centered products and services, including MoneyPass, a nationwide network of surcharge-free ATMs available to our clients, 24-hour telephone and online banking, mobile banking, debit and credit cards, direct deposit and mobile deposit options.
COMPETITIVE ENVIRONMENT
We face competition in all phases of our operations from a variety of competitors, many of which are larger and have access to more financial resources than us. Such competitors include other community banks, regional and national banks, internet banks, savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. Additionally, technology has lowered barriers to entry into the financial services industry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures.
We believe that we are able to successfully compete with other financial institutions in our market footprint by focusing on personal service and offering products that meet the needs of the businesses and consumers who work and live in those markets.
AVAILABLE INFORMATION
We are required to file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (the “SEC”), which are available to the public from commercial document retrieval services and at the SEC's website at http://www.sec.gov.
We also make available on our website (http://www.reliantbank.com) free of charge all of the reports that we file with or furnish to the SEC, including related exhibits and supplemental schedules and amendments to those reports, pursuant to Section 13(a) or Section 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such materials with the SEC. Information contained on our website is not incorporated by reference into this Annual Report. Please note that our website address is provided as an inactive textual reference only. We intend to disclose on our website any amendments or waivers to our Code of Ethics that are required to be disclosed pursuant to Item 5.05 of Form 8-K.
SUPERVISION AND REGULATION
General
We are subject to extensive regulation under both federal and state law. The laws and related regulations to which we are subject are generally intended to protect depositors and other customers, not shareholders. To the extent that the following information describes laws, rules, or regulations, it is qualified in its entirety by reference to the particular law, rule, or regulation. Changes in applicable laws, rules or regulations may have a material effect on our business, operations, and prospects. We cannot accurately predict the nature or extent of the effects on our business and earnings that fiscal or monetary policies or new federal or state legislation or regulations may have in the future.
Holding Company Regulation
Reliant Bancorp is registered as a bank holding company under the Bank Holding Company Act, and we have elected under the Bank Holding Company Act to be a financial holding company. In order to qualify to be a financial holding company, a bank holding company and each of its subsidiary depository institutions must be “well capitalized” and “well managed” and each subsidiary depository institution must have at least a “satisfactory” rating under The Community Reinvestment Act (which is discussed below).
As a financial holding company, we are subject to the supervision of and to regulation and examination by the Federal Reserve and subject to the reporting and other requirements of the Bank Holding Company Act and the regulations promulgated thereunder by the Federal Reserve. Moreover, as the holding company for a bank chartered in Tennessee, we also are subject to the Tennessee Banking Act, and as a Tennessee corporation, we are subject generally to the Tennessee Business Corporation Act.
As a financial holding company, Reliant Bancorp is required by law and Federal Reserve policy to act as a source of financial and managerial strength for its bank subsidiary, Reliant Bank, and to commit resources to support Reliant Bank. This support can be required at times when it would not be in the best interest of Reliant Bancorp’s shareholders or creditors to provide it.
The Bank Holding Company Act and the regulations thereunder place limitations on the activities in which a bank holding company may engage. Subject to certain exceptions, the Bank Holding Company Act and the regulations thereunder generally prohibit a bank holding company from engaging in, or acquiring direct or indirect control of any company engaged in, non-
banking activities. An exception to this prohibition is for activities expressly found by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Financial holding companies, however, are allowed to engage without prior Federal Reserve approval in a broader range of banking and non-banking activities that are deemed to be financial in nature or incidental to a financial activity. These “financial in nature” activities include securities underwriting, dealing and market making; organizing, sponsoring and managing mutual funds; insurance underwriting and agency; merchant banking activities; and other activities that the Federal Reserve has determined to be closely related to banking.
Under the Change in Bank Control Act and associated Federal Reserve regulations, generally, any person that, directly or indirectly or in concert with one or more other persons, seeks to acquire control of a bank holding company or a Federal Reserve member bank (such as Reliant Bank) must give the Federal Reserve 60 days’ prior written notice before acquiring control of the bank holding company or member bank. Under the applicable regulations, control is defined as the ownership or control of or power to vote 25% or more of any class of voting securities of the bank holding company or member bank. The regulations also provide for a presumption of control if a person would own, control, or hold with power to vote 10% or more (but less than 25%) of any class of voting securities of the bank holding company or member bank and either the institution has securities registered under Section 12 of the Exchange Act or no other person owns a greater percentage of that class of voting securities.
Reliant Bancorp is subject to the registration, disclosure, reporting, and other requirements of the Securities Act and the Exchange Act, and the rules and regulations promulgated thereunder and administered by the SEC. Because the Company’s common stock is listed on Nasdaq, the Company is subject to Nasdaq’s rules for listed companies.
Bank Regulation
Reliant Bank is subject to extensive federal and state regulation that significantly affects its business and operations. As a Tennessee state-chartered bank that is a member of the Federal Reserve system, the Bank is primarily subject to supervision and regulation by the Federal Reserve and the Tennessee Department of Financial Institutions (the “TDFI”). The Bank is also subject to various regulations promulgated by the federal Consumer Financial Protection Bureau, an agency responsible for consumer protection in the financial sector.
The Federal Reserve and the TDFI regularly examine the Bank’s operations and have the authority to approve or disapprove of mergers to which the Bank is a party, the Bank’s establishment of new branches, and similar corporate actions. Both regulatory agencies have the power to take enforcement action to prevent or halt the continuance of unsafe or unsound banking practices or other violations of law. The FDIC, as the insurer of the Bank’s deposits, also has certain regulatory authority over and requires certain routine reporting by the Bank.
As a bank chartered under Tennessee law, Reliant Bank is subject to the provisions of the Tennessee Banking Act and, to the extent not inconsistent with the Tennessee Banking Act, the provisions of the Tennessee Business Corporation Act.
Dividends
Reliant Bancorp is a legal entity separate and distinct from Reliant Bank. The principal source of Reliant Bancorp’s cash flow for operations, including the payment of interest on its trust preferred securities and subordinated notes, the payment of other indebtedness, and the payment of dividends to holders of its common stock, is dividends that Reliant Bancorp receives from Reliant Bank.
Various federal and state laws, rules, and regulations limit the amount of dividends that a subsidiary bank can pay to its parent holding company without regulatory approval. Generally, the Bank cannot pay dividends in any calendar year that exceed its net income for that year plus its retained net income for the prior two calendar years without prior regulatory approval. Additionally, the Bank is generally prohibited from paying dividends if the Bank is not adequately capitalized or if payment of the dividends would cause the Bank to become undercapitalized. Under applicable federal capital adequacy guidelines, banks are also subject to dividend limitations and restrictions if they fail to maintain an appropriate capital conservation buffer. Federal and state bank regulators also have the authority to prohibit the payment of dividends by banks if they determine the payment of dividends to be an unsafe and unsound banking practice.
There are also limitations on Reliant Bancorp’s ability to pay dividends to its shareholders. The Federal Reserve has issued a policy statement with regard to the payment of cash dividends by bank holding companies. This policy statement provides generally that a bank holding company should not pay, or should defer or significantly reduce, dividends if the bank holding company’s net income available to shareholders over the last four quarters (net of dividends paid during that period) is not sufficient to fully fund the dividends, if the bank holding company’s prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition, or if the bank holding company will not meet, or is in danger of not meeting, its minimum required regulatory capital ratios. A bank holding company subject to the federal capital adequacy regulations is also subject to dividend limitations and restrictions if it fails to maintain an appropriate capital conservation buffer. Under Tennessee law, Reliant Bancorp is not permitted to pay dividends if, after giving effect to the dividends, it would not be able to pay its debts as they come due in the usual course of business or if its assets would be less than the sum of its liabilities plus the amount necessary to satisfy the rights of preferred shareholders, if any, upon dissolution. The Company may from time to time also be subject to contractual restrictions on its ability to pay dividends to its shareholders.
During the fiscal year ended December 31, 2020, Reliant Bancorp paid dividends totaling $0.40 per share on its common stock for a total of $6,227 in aggregate shareholder dividend payments for the year. The amount and timing of all future dividend payments, if any, is subject to our board’s discretion and our compliance with applicable laws, rules, regulations and regulatory guidance, and will depend on our earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to us.
Transactions with Affiliates and Insiders
Transactions between Reliant Bank and its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W, which generally:
•limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of the bank’s capital stock and surplus;
•limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates to an amount equal to 20.0% of the bank’s capital stock and surplus; and
•require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate.
An affiliate of a bank generally is any company that controls, is controlled by, or is under common control with the bank, but which is not a subsidiary of the bank. The term “covered transaction” includes the making of loans to an affiliate, the purchase of assets from an affiliate, the issuance of a guarantee on behalf of an affiliate, the purchase of securities issued by an affiliate, and other similar types of transactions.
The Federal Reserve Act and the Federal Reserve’s Regulation O impose restrictions on Reliant Bank’s authority to extend credit to its executive officers, directors, and greater than 10% shareholders, as well as companies that such persons control. Among other things, these extensions of credit must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated persons, or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans Reliant Bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.
Capital Adequacy
Federal banking regulators have implemented risk-based capital adequacy guidelines for certain bank or financial holding companies and insured depository institutions.
In July 2013, in response to the statutory requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), federal banking regulators adopted regulations implementing the Basel Capital Adequacy
Accord (“Basel III”), which had been approved by the Basel member central bank governors in 2010 as an agreement among the countries’ central banks and bank regulators on the amount of capital banks must hold as a cushion against losses and insolvency. These regulations provide for the following minimum capital to risk-weighted assets requirements in order for an institution to be considered “adequately capitalized”: a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. Additionally, to be considered “adequately capitalized,” an institution must have a leverage ratio (Tier 1 capital to total assets) of at least 4.0%. In order to be considered “well capitalized,” an institution must have a common equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8.0%, a total capital ratio of 10.0%, and a leverage ratio of 5.0%.
Under Basel III, in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. The capital conservation buffer was phased in starting January 1, 2016, and it became fully phased in on January 1, 2019. A banking organization with a buffer greater than 2.5% is not subject to limitations on capital distributions or discretionary bonus payments. A banking organization with a buffer of less than 2.5% is subject to increasingly stringent limitations as the buffer approaches zero. The regulation also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income. The minimum risk-based capital requirements plus the capital conservation buffer exceed the current prompt corrective action (PCA) well-capitalized thresholds (discussed below).
In July 2019, federal banking regulators issued a final rule intended to simplify certain aspects of the regulatory capital rules for banking organizations, such as Reliant Bank, that are not advanced approaches banking organizations. This final rule is intended to simplify the regulatory capital treatment for mortgage servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and the calculation of minority interests. These changes were effective for Reliant Bank effective January 1, 2020.
Bank holding companies that qualify for the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (the “Small Bank Holding Company Policy Statement”) are exempt from consolidated capital requirements. The Small Bank Holding Company Policy Statement is generally applicable to bank holding companies with consolidated assets of less than $3 billion that are not engaged in significant nonbanking activities, either directly or through a nonbank subsidiary; do not conduct significant off-balance sheet activities, either directly or through a nonbank subsidiary; and do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. Historically, the Company has qualified for the Small Bank Holding Company Policy Statement and, therefore, has not been subject to the Federal Reserve’s capital adequacy guidelines on a consolidated basis at the bank holding company level. As of the end of the third quarter of 2020, however, the Company’s total consolidated assets exceeded $3 billion.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”), enacted May 24, 2018, provided for the simplification of the regulatory capital rules for certain financial institutions and their holding companies with total consolidated assets of less than $10 billion. The Regulatory Relief Act required the federal banking agencies to develop a community bank leverage ratio (“CBLR”) for qualifying banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The Regulatory Relief Act mandated a minimum CBLR of not less than 8% and not more than 10%. In October 2019, the federal banking agencies issued a final rule implementing the CBLR framework and setting the CBLR at 9%. Under the final rule, the CBLR is calculated, generally, as Tier 1 capital divided by average total consolidated assets (minus amounts deducted from Tier 1 capital). Under this final rule, which was effective January 1, 2020, a qualifying community banking organization that has opted to use the CBLR framework is considered to have met the generally applicable risk-based and leverage capital requirements, the capital ratio requirements to be considered “well capitalized” under the prompt corrective action framework (discussed below), and any other capital or leverage requirements to which the qualifying community banking organization is subject, if it maintains a CBLR greater than 9% (which threshold has as discussed below been temporarily reduced). A qualifying community banking organization is a non-advanced approaches banking organization, such as Reliant, that has a leverage ratio of greater than 9% (which threshold has as discussed below been temporarily reduced), total consolidated assets of less than $10 billion, total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets, and total trading assets and trading liabilities of 5% or less of total consolidated assets. Pursuant to the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package signed into law in March 2020 to combat the
economic downturn precipitated by the COVID-19 pandemic, the federal banking agencies in October 2020 adopted a final rule reducing the CBLR to 8% effective for the second quarter of 2020 and 8.5% effective January 1, 2021. The CBLR is scheduled to return to 9% effective January 1, 2022. While we believe we qualify as a qualifying community banking organization, we have not opted into the CBLR framework.
Our failure to comply with applicable capital adequacy guidelines could lead to limitations on our business and operations, including limitations on our ability to engage in expansionary activities such as mergers and acquisitions and the establishment of new branch officers, as well as mandatory or discretionary actions by our regulators that could have a direct material effect on our financial condition and results of operations.
Federal Deposit Insurance Corporation Improvement Act of 1991
Federal law and regulations establish a capital-based regulatory framework designed to promote early intervention (or “prompt corrective action”) for troubled banks. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires federal banking regulators to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet certain minimum capital requirements. FDICIA established five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under currently applicable prompt corrective action regulations, an FDIC-insured depository institution is considered to be well capitalized if (i) it maintains a Tier 1 leverage capital ratio of no less than 5%, a common equity Tier 1 risk-based capital ratio of no less than 6.5%, a Tier 1 risk-based capital ratio of no less than 8%, and a total risk-based capital ratio of no less than 10% percent and (ii) it is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An FDIC-insured depository institution generally is considered to be adequately capitalized if it maintains a Tier 1 leverage capital ratio of at least 4%, a common equity Tier 1 risk-based capital ratio of at least 4.5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 8%. An FDIC-insured depository institution is considered to be undercapitalized if it has a Tier 1 leverage capital ratio of less than 4%, a common equity Tier 1 risk-based capital ratio of less than 4.5%, a Tier 1 risk-based capital ratio of less than 6%, or a total risk-based capital ratio of less than 8%. An FDIC-insured depository institution is defined to be significantly undercapitalized if it has a Tier 1 leverage capital ratio of less than 3%, a common equity Tier 1 risk-based capital ratio of less than 3%, a Tier 1 risk-based capital ratio of less than 4%, or a total risk-based capital ratio of less than 6%. An institution is considered critically undercapitalized if it fails to maintain tangible equity to total assets of greater than 2%. An insured depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.
A qualifying community banking organization that has opted into the CBLR framework and maintains a CBLR in excess of the required CBLR (currently 8.5% until January 1, 2022 when it will increase to 9%) will generally be considered “well capitalized” under the prompt corrective action regulations. If a qualifying community banking organization that has opted into the CBLR framework subsequently fails to satisfy one or more of the CBLR criteria but continues to report a CBLR in excess of the required minimum CBLR (currently 7.5% until January 1, 2022 when it will increase to 8%), the organization can continue to use the CBLR framework and be deemed to meet the ‘‘well capitalized’’ capital ratio requirements for a grace period of up to two quarters. An organization that is unable to restore compliance with all qualifying criteria during the two-quarter grace period (including coming into compliance with the required leverage ratio requirement) or that reports a leverage ratio not in excess of the required minimum ratio would be subject to the generally applicable prompt corrective action capital requirements. As mentioned above, we have not opted into the CBLR framework.
Federal banking regulators are required to take various mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of the action taken depends upon the capital category in which an institution is placed.
FDICIA generally prohibits an FDIC-insured depository institution from making any capital distributions (including dividend payments) or paying any management fee to its holding company if the depository institution is or would thereafter be undercapitalized. Undercapitalized depository institutions are required to submit capital restoration plans guaranteed by their holding companies (as applicable), are subject to limitations on asset growth, and are subject to limitations on acquisitions, branching, and engaging in new lines of business. Significantly undercapitalized depository institutions (as well as undercapitalized institutions that fail to submit or implement an acceptable capital plan) are subject to a number of increasingly more stringent requirements and restrictions, including orders to sell sufficient stock to become adequately capitalized, limitations on the interest rates paid on deposits, mandates to alter, reduce, or terminate activities determined to pose excessive risk, prohibitions on accepting deposits from correspondent depository institutions, and limitations on compensation paid to
senior executive officers (in addition to the requirements and restrictions applicable to undercapitalized institutions). Critically undercapitalized depository institutions are subject to the appointment of a receiver or conservator.
Additionally, an insured depository institution that is not adequately capitalized may not accept, renew, or roll over brokered deposits unless it has applied for and been granted a waiver and, even if granted a waived, the institution may not pay an effective yield on any such deposits which exceeds certain regulatory thresholds. An undercapitalized institution may not accept, renew, or roll over brokered deposits.
The capital-based prompt corrective action provisions of FDICIA and their implementing regulations apply to FDIC-insured depository institutions and are not directly applicable to companies that control those institutions. However, the Federal Reserve has indicated that, in regulating bank and financial holding companies, it will take appropriate action at the holding company level based on an assessment of the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to these provisions and regulations.
Federal Deposit Insurance
Reliant Bank’s deposits are insured up to prescribed statutory limits by the Deposit Insurance Fund of the FDIC. The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category.
The Bank is subject to deposit insurance assessments to maintain the Deposit Insurance Fund. In this regard, the Bank is required to remit quarterly deposit insurance premiums to the FDIC. Insurance premiums for each insured depository institution are determined based upon the institution’s capital level and supervisory rating provided to the FDIC by the institution’s primary federal regulator and other information the FDIC determines to be relevant to the risk posed to the Deposit Insurance Fund by the institution. The assessment rate determined by considering such information is then applied to the amount of the insured depository institution’s average consolidated total assets less its average tangible equity during the assessment period to determine the insured depository institution’s insurance premiums. An increase in the Bank’s assessment rate could have a material and adverse effect on our earnings, depending on the amount of the increase. The FDIC may also impose special assessments in emergency situations.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC finds that the institution has engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or any other regulatory agency. The termination of the Bank’s deposit insurance would have a material and adverse effect on our financial condition and results of operations.
Community Reinvestment Act
The Community Reinvestment Act of 1977, as amended (the “CRA”), requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practices. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit or other financial assistance to low-income and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings, which ratings are made publicly available by the federal banking agencies. A bank’s CRA performance is also considered by federal banking agencies in evaluating applications seeking approval for things such as mergers, acquisitions, and new branch facilities. Reliant Bank’s CRA performance is evaluated by the Federal Reserve. The Bank’s most recent CRA performance evaluation was in October 2016, and Reliant Bank received an overall rating of “Satisfactory.” Reliant Bank’s failure to fulfill its obligations under the CRA could prohibit or delay us from engaging in expansionary activities or result in regulatory restrictions or conditions being imposed in connection with those activities.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (“GLBA”), enacted in 1999, expanded the universe of activities in which bank holding companies and affiliates of banks are permitted to engage. GLBA eliminated many historical barriers to affiliations among banks and securities firms, insurance companies, and other financial service providers. Under GLBA, a bank holding company which has elected to become a financial holding company, like Reliant Bancorp has done, is able to engage in an expanded range of activities that are financial in nature, incidental to a financial activity, or complementary to a financial activity, subject in certain instances to prior Federal Reserve approval.
Additionally, pursuant to GLBA, federal banking regulators have adopted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. Under GLBA and its implementing regulations, banks and other financial institutions are required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. Pursuant to GLBA and certain state laws, financial institutions are required to notify customers of security breaches resulting in unauthorized access to their personal information.
Bank Secrecy Act and USA PATRIOT Act
The Currency and Foreign Transactions Reporting Act of 1970, better known as the Bank Secrecy Act (the “BSA”), requires all United States financial institutions to assist United States government agencies to detect and prevent money laundering. Specifically, the BSA requires financial institutions to (i) keep records of cash purchases of negotiable instruments; (ii) file reports of cash transactions exceeding a daily aggregate amount of $10,000; (iii) report suspicious activity that might signify money laundering, tax evasion, or other criminal activities; and (iv) obtain and retain information regarding the identify and verification of the beneficial owners of business customers.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposed new compliance and due diligence obligations, defined new crimes and penalties, compelled the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarified the safe harbor from civil liability to customers. The United States Treasury Department has issued a number of regulations implementing the USA PATRIOT Act that apply certain of its requirements to financial institutions such as Reliant Bank. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing.
Under the USA PATRIOT Act, all “financial institutions” (as therein defined) must establish anti-money laundering compliance and due diligence programs. Such programs must include, among other things, adequate policies, the designation of a compliance officer, employee and director training programs, an independent audit function to review and test the program, and the ongoing due diligence and monitoring of customer relationships including the beneficial owners of business customers.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
In July 2010, the Dodd-Frank Act was signed into law bringing about numerous financial institution regulatory reforms. Many of these reforms were implemented between 2011 and 2014 through regulations promulgated by banking and securities regulators. The following discussion describes certain material elements of the regulatory framework. Many of the Dodd-Frank Act provisions are stated to only apply to larger financial institutions and do not directly impact community-based institutions like Reliant Bank. For instance, provisions that regulate derivative transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, impose new regulatory authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital are among the provisions that do not directly impact Reliant Bank either because of exemptions for institutions below a certain asset size or because of the nature of the bank’s operations. Other provisions of the Dodd-Frank Act that impact Reliant Bank include provisions that:
•Changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling for and increased the floor of the Deposit Insurance Fund, and offset the impact of the increase in the floor on institutions with less than $10 billion in assets.
•Made permanent the $250,000 limit for federal deposit insurance.
•Repealed the federal prohibition on payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
•Centralized responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, also known as the Consumer Financial Protection Bureau (the “CFPB”), responsible for implementing federal consumer protection laws, although banks below $10 billion in assets continue to be examined and supervised for compliance with these laws by their primary federal bank regulator.
•Restricted the preemption of state law by federal law and disallowed national bank subsidiaries from availing themselves of such preemption.
•Imposed new requirements for mortgage lending, including new minimum underwriting standards, prohibitions on certain yield-spread compensation to mortgage originators, special consumer protections for mortgage loans that do not meet certain qualifications, prohibitions and limitations on certain mortgage terms, and various new mandated disclosures to mortgage borrowers.
•Made applicable to certain bank and financial holding companies (currently, generally, those with $3 billion or more in total consolidated assets) the same leverage and risk-based capital requirements that apply to insured depository institutions.
•Permit national and state banks to establish de novo interstate branches at any location where a bank based in that state could establish a branch and require that bank and financial holding companies and banks be well-capitalized and well managed in order to acquire banks located outside their home state.
•Imposed new limits on affiliated transactions and cause derivative transactions to be subject to lending limits.
•Implemented corporate governance revisions, including with regard to executive compensation and proxy access to shareholders, that apply to all public companies, not just financial institutions.
The Dodd-Frank Act has increased the regulatory burden, compliance costs, and noninterest expense for community banks. Of particular concern to many community banks is the breadth of the powers of the CFPB, which has previously had and may in the future have significant impacts on consumer compliance regulation resulting in increased regulatory compliance costs, particularly for smaller depository institutions.
Economic Growth, Regulatory Relief and Consumer Protection Act
The Regulatory Relief Act was enacted in 2018 to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While it maintained the majority of the regulatory structure established by the Dodd-Frank Act, the Regulatory Relief Act amended certain aspects for smaller depository institutions with less than $10 billion in assets, such as Reliant Bank. Portions of the Regulatory Relief Act address access to mortgage credit; consumer access to credit; protections for veterans, consumers, and homeowners; rules for certain bank or financial holding companies; capital access; and protections for student borrowers. Reliant Bancorp and Reliant Bank have focused and will continue to focus on the implementing rules and guidance for the various provisions in each section of the Regulatory Relief Act that impact their operations and activities.
As discussed above, the Regulatory Relief Act provided for the simplification of the regulatory capital rules for most financial institutions and their holding companies with total consolidated assets of less than $10 billion by establishing the community bank leverage ratio (CBLR) framework.
The Regulatory Relief Act also expanded the universe of bank holding companies that are permitted to rely on the Small Bank Holding Company Policy Statement by increasing the size of qualifying bank holding companies that can rely on the Small Bank Holding Company Policy Statement from $1 billion in total consolidated assets to $3 billion in total consolidated assets. Bank holding companies that qualify for the Small Bank Holding Company Policy Statement are exempt from consolidated capital requirements, even though their subsidiary depository institutions continue to be subject to capital adequacy guidelines.
The Company historically has qualified for the Small Bank Holding Company Policy Statement. As of the end of the third quarter of 2020, however, the Company’s total consolidated assets exceeded $3 billion.
Further, the Regulatory Relief Act decreased the burden for community banks in regard to call reports, the Volcker Rule (which generally restricts banks from engaging in certain investment activities and limits involvement with hedge funds and private equity firms), mortgage disclosures, and risk weights for some high-risk commercial real estate loans. On December 28, 2018, the federal banking agencies issued a final rule implementing Section 210 of the Regulatory Relief Act that increased the asset threshold to qualify for an 18-month examination cycle from $1 billion to $3 billion for qualifying institutions that are well-capitalized, well-managed and meet certain other requirements.
Any number of the provisions of the Regulatory Relief Act, or regulations issued thereunder, may have the effect of increasing our operating costs and expenses generally, decreasing our revenues, or changing the activities in which we choose to engage.
Developments Related to the COVID-19 Pandemic
The United States Congress, the Federal Reserve, and other federal and state regulatory agencies have taken actions to mitigate disruptions to economic activity and financial stability resulting from the COVID-19 pandemic. The following summarize certain significant government actions taken in response to the COVID-19 pandemic.
CARES Act. The Coronavirus Aid, Relief and Economic Security Act was signed into law on March 27, 2020, and has subsequently been amended. Section 4013 of the CARES Act provides that financial institutions may elect to account for certain COVID-19-related loan modifications as not being troubled debt restructurings. Additionally, on April 7, 2020, federal banking regulators issued an Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus (Revised), which replaced a prior interagency statement predating the CARES Act. The revised interagency statement encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual payment obligations because of the effects of COVID-19. It also addresses loan modifications not meeting the criteria set forth in Section 4013 of the CARES Act or for which financial institutions elect not to apply Section 4013. With respect to these loan modifications, the revised interagency statement provides that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current on their contractual payments at the time of implementation of a modification program are not troubled debt restructurings. We have generally attempted to work within these parameters established by the CARES Act and this interagency guidance.
The CARES Act also provided for a special loan program administered through the United States Small Business Administration (“SBA”) commonly known as the “Paycheck Protection Program.” A primary purpose of the Paycheck Protection Program (“PPP”) is to promote economic stabilization and provide relief to severely distressed businesses by providing for forgivable loans to small businesses to be used for, among other things, payroll costs (including benefits), rent, mortgage interest, and utilities. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders, subject to numerous limitations and eligibility criteria.
The CARES Act also contained protections for homeowners and renters of properties with federally-backed mortgages, including a 60-day moratorium on the initiation of foreclosure proceedings and a 120-day moratorium on the initiation of eviction proceedings. Borrowers on federally-backed mortgages have the right under the CARES Act to request up to 360 days of forbearance on their mortgage payments if they experience financial hardship directly or indirectly due to the COVID-19 pandemic. The Federal Housing Administration, Fannie Mae and Freddie Mac have independently extended their moratorium on foreclosures and evictions for single-family federally backed mortgages as well.
In late December 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) rebooted the PPP. The rebooted program has many of the same parameters as the first program, but there are some important differences. Notable changes include the ability for businesses that previously received a PPP loan to be eligible for a second-draw PPP loan, provided they meet certain criteria. The Economic Aid Act also opened up first-draw PPP loans to additional companies and set aside funds for new and smaller borrowers, low and moderate income borrowers and for community and small lenders. It also allowed additional costs to be eligible for loan forgiveness, and borrowers will have to spend no less than 60% of loan funds on payroll over a covered period.
Federal Reserve Actions. The Federal Reserve has taken a range of actions to support the flow of credit to households and businesses, including reducing the target federal funds rate and maintaining an accommodating stance on monetary policy. The
Federal Reserve also announced that it would increase its holdings of United States Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. Further, the Federal Reserve has encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowings by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements were reduced to zero as of March 26, 2020.
In addition, the Federal Reserve has established a range of facilities and programs to support the United States economy and United States marketplace participants in response to economic disruptions associated with COVID-19. Through these facilities and programs, the Federal Reserve has taken steps to directly or indirectly purchase assets from, or make loans to, United States companies, financial institutions, municipalities and other market participants. The Federal Reserve established the Payroll Protection Program Liquidity Facility under which banks can obtain financing for PPP loans by pledging them to the Federal Reserve. Banks also have the ability to increase their borrowing capacity at the Federal Home Loan Bank by pledging PPP loans.
Additional legislative and regulatory action may be proposed as a result of the COVID-19 pandemic, any of which may include requirements that could significantly impact our business practices and operations. The impact of these legislative and regulatory initiatives on us, the economy and United States consumers will depend upon a wide variety of factors some of which cannot be determined at this time.
Current Expected Credit Loss (CECL)
In June 2016, a new accounting standard changing the method for providing for allowances for loan and lease losses was introduced by the Financial Accounting Standards Board. This new standard is commonly referred to as the Current Expected Credit Loss standard, or “CECL”. Under CECL, financial institutions are required to determine periodic estimates of lifetime expected credit losses on loans and held to maturity securities and recognize the expected credit losses through provision for loan losses, which is a marked departure from the current method of provisioning for incurred loan and lease losses. In December 2018, federal banking agencies issued a joint final rule to revise the regulatory capital rules to, among other things, address the implementation of CECL and provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations may experience upon adopting CECL.
CECL is currently scheduled to become effective for Reliant Bank in 2023. The use of this standard will increase the types of data required to determine the appropriate level of Reliant Bank’s allowance for loan and lease losses. The use of this standard may potentially increase Reliant Bank’s allowance for loan and lease losses. Any increase in Reliant Bank’s allowance for loan and lease losses or expenses incurred in order to make the determination for such allowance could have a material and adverse effect on Reliant Bank’s financial condition and results of operations. The direct effects of CECL on Reliant Bank are not yet known.
Other Laws and Regulations
Loan interest and other charges that Reliant Bank collects or contracts for are subject to state usury laws and federal laws concerning interest rates. Reliant Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:
•The federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;
•The Home Mortgage Disclosure Act, which requires financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligations to help meet the housing needs of the communities it serves;
•The Equal Credit Opportunity Act, which prohibits discrimination in extending credit on the basis of race, color, religion, national origin, sex, marital status, age, or other prohibited factors;
•The Fair Credit Reporting Act, which governs the use of consumer credit information and the provision of information to credit reporting agencies;
•The Fair Debt Collection Practices Act, which governs debt collection practices; and
•The rules and regulations of the various governmental agencies charged with the responsibility of implementing these federal laws.
In addition, Reliant Bank’s deposit operations are subject to the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
Effects of Governmental Policies
Reliant Bank’s earnings are significantly affected by the difference between the interest earned by Reliant Bank on its loans and investments and the interest paid by Reliant Bank on its deposits or other borrowings. The yields on its assets and the rates paid on its liabilities are sensitive to changes in prevailing market rates of interest. Thus, the earnings and growth of Reliant Bank are influenced by general economic conditions, fiscal policies of the federal government, and the policies of regulatory agencies, particularly the Federal Reserve, which establishes national monetary policy. The nature and impact of any future changes in fiscal or monetary policies cannot be predicted.
Commercial banks such as Reliant Bank are affected by the credit policy of various regulatory authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve to implement its objectives are open market operations in United States Government securities, changes in reserve requirements for bank deposits, changes in the discount rate on bank borrowings and limitations on interest rates that banks may pay on deposits. The Federal Reserve uses these instruments in varying combinations to influence the overall growth of bank loans, investments and deposits, and also to affect interest rates charged on loans, received on investments or paid for deposits.
The monetary and fiscal policies of regulatory authorities, including the Federal Reserve, also affect the banking industry. Through changes in the reserve requirements against bank deposits, open market operations in United States Government securities and changes in the discount rate on bank borrowings, the Federal Reserve influences the cost and availability of funds obtained for lending and investing. No prediction can be made with respect to possible future changes in interest rates, deposit levels or loan demand or with respect to the impact of such changes on the business, results of operations, and earnings of Reliant Bank.
Future Legislation and Regulation
Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced in the Tennessee General Assembly or the United States Congress, as evidenced by the sweeping reforms in the Dodd-Frank Act, and the subsequent rollback of portions of the Dodd-Frank Act that began in 2018. Many of the regulations mentioned above were adopted or amended pursuant to the Dodd-Frank Act. Additional legislation, at both the state and federal levels, may create new, or continue to change existing, banking statutes and regulations, and may alter the operating environment of Reliant Bancorp and its subsidiaries, particularly Reliant Bank, in significant and unpredictable ways, and such legislation could significantly increase or decrease our cost of doing business, limit or expand the permissible activities in which we can engage, and/or affect the competitive balance among financial institutions. Current and future political and economic conditions and uncertainty makes the nature and extent of future legislative and regulatory changes affecting financial institutions unpredictable.
Risk Factors Summary
You should carefully read and consider the risk factors set forth under Item 1A, “Risk Factors,” as well as all other information contained in this Annual Report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect us. If any of these risks materialize, our business, financial position, results of operations, cash flows or prospects could be materially, adversely affected. While not an exhaustive list, our risk factors are generally designed to address the following factors:
Economic Risks
•Our operations are geographically concentrated in Middle Tennessee.
•Uncertain market conditions and economic trends could adversely affect our business, financial condition and results of operations.
•Reliant Bancorp may be adversely affected by the soundness of other financial institutions.
Credit and Interest Rate Risks
•Reliant Bank’s decisions regarding credit risk and provision for loan loss may materially and adversely affect its business.
•The amount of our nonperforming assets may increase significantly, resulting in additional losses and costs and expenses that will negatively affect our operations.
•Interest rate shifts could reduce net interest income and otherwise negatively impact our financial condition and results of operations.
•Reliant Bank’s focus on lending to small to mid-sized community-based businesses may increase Reliant Bank’s credit risk.
•If the underwriting quality supporting our mortgage loan originations is found to be deficient, our profitability could decrease and we may incur losses.
Strategic and Operational Risks
•We may be unable to implement aspects of our growth strategy, which may affect our ability to maintain historical earnings trends.
•Future growth may result in additional risks.
•We may face risks associated with future mergers and acquisitions and organic growth.
•Reliant Bancorp and Reliant Bank are dependent on retaining and recruiting key personnel.
•Our historical operating results may not be indicative of our future operating results.
•Reliant Bank faces strong competition for customers, which could prevent it from obtaining customers and may cause it to pay higher interest rates to attract customers.
•We may not be able to report financial results accurately and timely if we fail to maintain an effective system of disclosure controls and procedures and internal control over financial reporting.
•A failure in or breach of Reliant Bancorp’s or Reliant Bank’s computer or information technology systems or networks, or those of third parties, could disrupt our businesses and adversely impact our financial condition and results of operations, as well as cause us reputational harm.
•We may not be able to implement new technology to stay current with changes in the financial services industry.
•We may be adversely affected by technology or security breaches or failures on our part or that of a third party.
Liquidity Risks
•Liquidity risk could impair our ability to fund our operations and jeopardize our financial condition.
•Economic and other circumstances may require Reliant Bancorp to raise capital at times or in amounts that are unfavorable.
COVID-19 Pandemic Risks
•The COVID-19 pandemic has had and is likely to continue to have an adverse effect, which could be material, on our business, results of operations, and financial condition.
•Unpredictable future developments related to or resulting from the COVID-19 pandemic could materially and adversely affect our business and results of operations.
•The spread of COVID-19, or governmental responses to the same, may disrupt banking and other financial activity in the areas in which we operate and could potentially create business continuity issues for us.
•As a participating lender in the PPP, Reliant Bank is subject to additional risks of litigation from its customers or other parties regarding Reliant Bank’s processing of loans for the PPP, regulatory risks, and risks that the SBA may not fund some or all PPP loan guaranties.
General Risks
•The value of our goodwill and other intangible assets may decline in the future.
•We may be subject to environmental liabilities in connection with foreclosures on real estate assets securing our loan portfolio.
•We may experience increased credit losses and credit related expenses in the event of a major natural disaster, public health crisis (such as the COVID-19 pandemic), other catastrophic event or significant climate change effects.
Legal, Regulatory and Compliance Risks
•We are subject to extensive government regulation and supervision.
•Applicable capital requirements may prevent us from paying dividends or repurchasing shares or adversely impact our operating results.
•Reliant Bank’s FDIC deposit insurance premiums and assessments may increase.
•Laws and regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
•Anti-money laundering and anti-terrorism financing laws could have significant adverse consequences for us.
•Our financial condition and results of operations may be adversely affected by changes in accounting standards and interpretations.
•We are subject to risks related to legal proceedings.
Risks Related to Our Common Stock
•The market price of our common stock may fluctuate causing investors to incur losses.
•Our common stock is less liquid than many other stocks quoted on a national securities exchange.
•Our ability to pay cash dividends is limited, and we may not be able to pay dividend in the future.
•Shares of Reliant Bancorp common stock are not FDIC insured.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should carefully consider the risks described below, together with all other information included in this Annual Report, including the disclosures in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included in “Item 8. Financial Statements and Supplementary Data.” We believe the risks described below are the risks that are material to us as of the date of this Annual Report. If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. In that case, you could experience a partial or complete loss of your investment.
Economic Risks
Reliant Bancorp is geographically concentrated in Middle Tennessee, and changes in local economic conditions impact our profitability.
We currently operate primarily in the Nashville MSA and surrounding Middle Tennessee area, and most of our loan, deposit and other customers live or have operations in this area. Accordingly, our success significantly depends upon the growth in population, income levels, deposits, and housing starts in this market, along with the continued attraction of business ventures to the area, and our profitability is impacted by the changes in general economic conditions in this market. We cannot assure you that economic conditions, including loan demand, in our market will improve during 2021, or thereafter, and if economic conditions do not improve or worsen, we may not be able to grow our loan portfolio in line with our expectations, and the
ability of our customers to repay their loans to us may be negatively impacted and our financial condition and results of operations could be negatively impacted.
Compared to regional or national financial institutions, we are less able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or more favorable economic conditions in our primary market areas if they do occur.
Uncertain market conditions and economic trends could adversely affect our business, financial condition and results of operations.
We operate in an uncertain economic environment, including generally uncertain conditions nationally and locally in our industry and market. Financial institutions continue to be affected by volatility in the real estate market in some parts of the country and uncertain regulatory and interest rate conditions. We retain direct exposure to the residential and commercial real estate markets in Middle Tennessee, particularly in the Nashville MSA, and are affected by these events.
Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our loan portfolio is made more complex by uncertain market and economic conditions. Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. Unfavorable economic trends, sustained high unemployment, and declines in real estate values can cause a reduction in the availability of commercial credit and can negatively impact the credit performance of commercial and consumer loans, resulting in increased write-downs. These negative trends can cause economic pressure on consumers and businesses and diminish confidence in the financial markets, which may adversely affect our business, financial condition, results of operations and ability to access capital. A worsening of these conditions, such as a recession or economic slowdown, would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry.
Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. A national economic recession or deterioration of conditions in our market could drive losses beyond that which is provided for in our allowance for loan losses ("ALL") and result in one or more of the following consequences:
•increases in loan delinquencies;
•increases in nonperforming assets and foreclosures;
•decreases in demand for our products and services, which could adversely affect our liquidity position; and
•decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers’ borrowing power and repayment ability.
Declines in real estate values, declines in volume of home sales and financial stress on borrowers as a result of the uncertain economic environment, including job losses, could have an adverse effect on our borrowers and/or their customers, which could adversely affect our business, financial condition and results of operations.
Reliant Bancorp may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose our Bank to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by the Bank cannot be realized on or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure. Any such losses could have a material adverse effect on our financial condition and results of operations.
Negative public opinion surrounding Reliant Bancorp or the financial institutions industry generally could damage our reputation and adversely impact our earnings.
Reputation risk, or the risk to Reliant Bancorp’s business, earnings and capital from negative public opinion surrounding Reliant Bancorp or the financial institutions industry generally, is inherent in Reliant Bancorp’s business. Negative public opinion can result from Reliant Bancorp’s actual or alleged conduct in any number of areas, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to that actual or alleged conduct. Negative public opinion can adversely affect Reliant Bancorp’s ability to keep and attract clients and employees and can expose it to litigation and regulatory action. Although Reliant Bancorp takes steps to minimize reputation risk in dealing with its clients and communities, this risk will always be present given the nature of Reliant Bancorp’s business.
Credit and Interest Rate Risks
The Bank’s decisions regarding credit risk and provision for loan loss may materially and adversely affect its business.
Making loans and other extensions of credit is an essential element of the Bank’s business. Although the Bank seeks to mitigate risks inherent in lending by adhering to specific underwriting practices, its loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:
•the duration of the credit;
•credit risks of a particular customer;
•changes in microeconomic, macroeconomic, or industry conditions; and
•in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral
The Bank attempts to maintain an appropriate ALL to provide for potential losses in its loan portfolio. The Bank periodically determines the amount of the ALL based on consideration of several factors, including:
•an ongoing review of the quality, mix, and size of the Bank's overall loan portfolio
•the Bank's historical loan loss experience;
•evaluation of microeconomic and macroeconomic conditions;
•regular reviews of loan delinquencies and loan portfolio quality; and
•the amount and quality of collateral, including guarantees, securing loans.
There is no precise method of predicting credit losses; therefore, the Bank faces the risk that charge-offs in future periods will exceed its ALL and that additional increases in the ALL will be required. Additions to the ALL would result in a decrease in Reliant Bancorp’s net income and capital.
Federal and state regulators periodically review the Bank’s ALL and may require the Bank to increase its provision for loan losses or recognize further loan charge-offs, based on judgments different than those of its management. Any increase in the amount of the Bank’s provision or loans charged-off as required by these regulatory agencies could have a negative effect on its operating results.
The amount of our nonperforming assets may increase significantly, resulting in additional losses and costs and expenses that will negatively affect our operations.
At December 31, 2020, we had a total of approximately $11.2 million of nonperforming assets, which represented approximately 0.37% of total assets. Should the amount of nonperforming assets increase in the future, we may incur losses and the costs and expenses to maintain such assets likewise can be expected to increase and potentially negatively affect earnings. Any additional increase in losses due to such assets could have an adverse effect on our business, financial condition and results of operations. Such effects may be particularly pronounced in a market with reduced real estate values and excess inventory.
Interest rate shifts could reduce net interest income and otherwise negatively impact our financial condition and results of operations.
A large portion of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings and cash flows depend to a great extent upon the level of net interest income, or the difference between the interest income earned on loans, investments and other interest-earning assets, and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease net interest income because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly or to a greater degree than interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest income.
An increase in interest rates may also, among other things, reduce the demand for loans and our ability to originate loans and decrease loan repayment rates. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio and increased competition for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume, loan portfolio and overall results. Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in market interest rates, those rates are affected by many factors outside of our control, including governmental monetary policies, inflation, deflation, economic recession, changes in unemployment, the money supply, international disorder and instability in domestic and foreign financial markets.
Additionally, interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default and could result in a decrease in the demand for loans. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates. In addition, in a low interest rate environment, loan customers often pursue long-term fixed rate credits, which could adversely affect our earnings and net interest margin if rates increase. Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Increases in interest rates may have a material adverse effect on our mortgage banking revenue and profitability. RMV may also be adversely affected by other economic factors within our markets such as negative changes in employment levels, job growth, and consumer confidence and availability of mortgage financing, one or all of which could result in reduced demand or price depression from current levels. RMV is also dependent upon the securitization market for mortgage-backed securities and could be materially adversely affected by any fluctuation or downturn in such market. In the event of disruptions within the secondary markets for mortgage loans, we could experience a material adverse effect with respect to sales of mortgage loans and the profitability of our mortgage banking business.
Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. At the same time, we continue to incur a cost to fund the loan, which is reflected as interest expense on deposits and borrowings, without any interest income to offset the associated funding expense. We would incur a higher cost of funds to retain these deposits and borrowings in a rising interest rate environment. Our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans and investment securities. Thus, an increase in the amount of nonperforming assets would have an adverse impact on our net interest income.
The Bank could incur significant costs and expenses related to RMV, and these costs and expenses could have a material adverse effect on our business, financial condition, and results of operations.
RMV provides mortgage banking services to the Bank customers. The Bank holds 51% of the governance rights in RMV and 30% of the financial rights in RMV. VHC is the other member of RMV and holds 49% of the governance rights in RMV and 70% of the financial rights in RMV. Under the terms of the RMV operating agreement, VHC is required to fund RMV’s losses via additional capital contributions to RMV. RMV incurred a net loss of $299.0 thousand for the year ended December 31, 2020 and has incurred cumulative net losses of $13.7 million since inception. Also, per the terms of the RMV operating agreement, VHC is to receive all distributions of cash flow from RMV until such time as VHC has recovered its capital contributions to RMV. After the return to VHC of its capital contributions, VHC is to receive 70% of RMV cash flow distributions and the Bank is to receive 30% of RMV cash flow distributions. There can be no assurance that RMV will ever generate sufficient income to return to VHC its aggregate capital contributions or that the Bank will ever receive cash flow distributions from RMV.
To date, VHC has not failed to make a required contribution of additional capital to RMV to cover losses incurred by the company. In the event VHC fails to make a required contribution of additional capital to cover losses of RMV, the Bank has the right to cause the dissolution of RMV. However, in such event, the Bank could also be required to fund losses of RMV not funded by VHC, which losses could be significant. Additionally, in the event the Bank were to cause the dissolution of RMV, there would be costs and expenses associated with dissolving RMV and winding up the company’s operations or integrating them with those of the Bank, and those costs and expenses could be significant. Accordingly, VHC’s failure to make a required contribution of additional capital to cover losses of RMV and/or the Bank’s decision to cause the dissolution of RMV in the event of such a failure could have a material adverse effect on our business, financial condition, and results of operations.
The Bank may have higher loan losses than it has allowed for in its ALL. Additionally, certain segments of our loan portfolio are traditionally considered to carry increased credit risk.
The Bank’s actual loan losses could exceed its ALL. The Bank’s average loan size continues to increase, and reliance on its historic ALL may not be adequate. A large portion of the Bank’s loan portfolio is composed of construction and development, commercial mortgage, and other commercial loans. Additionally, manufactured housing loans make up a meaningful percentage of the Bank’s overall loan portfolio. Repayment of such loans is generally considered more subject to market risk than that of other loan types such as residential mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of loans will require partial or entire charge-off. Regardless of the underwriting criteria used, losses may be experienced as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value of loan collateral and problems affecting the creditworthiness of the Bank’s borrowers.
Our business may suffer if there are significant declines in the value of real estate.
The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan portfolio could become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, we may not be able to realize the value of the security anticipated when we originated the loan, which in turn could have an adverse effect on our allowance and provision for loan and lease losses and our financial condition, results of operations and liquidity.
Most of our foreclosed assets are comprised of real estate properties. We carry these properties at their estimated fair values less estimated selling costs. While we believe the carrying values for such assets are reasonable and appropriately reflect current market conditions, there can be no assurance that the values of such assets will not further decline prior to sale or that the amount of proceeds realized upon disposition of foreclosed assets will approximate the carrying value of such assets. If the proceeds from any such dispositions are less than the carrying value of foreclosed assets, we will record a loss on the disposition of such assets, which in turn could have an adverse effect on our results of operations.
Compared to national financial institutions, we are less able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or return of more favorable economic conditions in our primary market areas if they do occur.
The Bank’s focus on lending to small to mid-sized community based businesses may increase Reliant Bancorp’s credit risk.
Most of the Bank’s commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. Small to medium-sized businesses frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which characteristics may impair a borrower’s ability to repay a loan. In addition, the success of a small or medium-sized business often depends on the management skills, talents and efforts of a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loans. If general economic conditions in the markets in which the Bank operates negatively impact this important customer sector, Reliant Bancorp’s results of operations and financial condition and the value of its common stock may be adversely affected. Furthermore, the deterioration of the Bank’s borrowers’ businesses may hinder their ability to repay their loans with the Bank, which could have a material adverse effect on Reliant Bancorp’s financial condition and results of operations.
If the underwriting quality supporting our mortgage loan originations is found to be deficient, our profitability could decrease and we may incur losses.
We provide several different loan products to our customers to finance the purchases of their homes. We sell a large number of the mortgage loans we originate into the secondary mortgage market, and those loans are underwritten to the standards and specifications of the ultimate investor. Insofar as we underwrite our originated loans to those standards, we generally bear no increased concentration of credit risk from the issuance of loans, except in certain limited instances where early payment default occurs. In the event that a substantial number of the loans that we have originated fall into default and the investors to whom we sold the loans determine that we did not underwrite the loans in accordance with their requirements, we could be required to repurchase the loans from the investors or indemnify the investors for any losses incurred. This may result in losses that could have a material adverse effect on our profitability and results of operations.
Strategic and Operational Risks
We may be unable to implement aspects of our growth strategy, which may affect our ability to maintain historical earnings trends.
Our business has grown rapidly as the result of a strategy focused on organic growth supplemented by acquisitions. Financial institutions that grow rapidly can experience significant difficulties as a result. We may be unable to execute on aspects of our growth strategy to sustain our historical rate of growth or may be unable to grow at all. More specifically, we may be unable to generate sufficient new loans and deposits within acceptable risk and expense tolerances, obtain the personnel or funding necessary for additional growth or find suitable acquisition candidates. Various factors, such as economic conditions and competition, may impede or prohibit the growth of our operations, the opening of new branches and the consummation of acquisitions. Further, we may be unable to attract and retain experienced bankers, which could adversely affect our growth. The success of our strategy also depends on our ability to effectively manage growth, which is dependent upon a number of factors, including the ability to adapt existing credit, operational, technology and governance infrastructure to accommodate expanded operations. If we fail to build infrastructure sufficient to support rapid growth or fail to implement one or more aspects of our strategy, we may be unable to maintain historical earnings trends, which could have an adverse effect on our business, financial condition and results of operations.
Future growth may result in additional risks.
In 2020, we completed both the TCB Holdings Transaction and the FABK Transaction. We expect to continue to expand in our current markets and in other select markets through the establishment of additional branches and/or through additional acquisitions of other financial institutions. These types of expansionary activities involve various risks, including the risks detailed below.
Growth. In connection with or as a result of potential future acquisition activity and organic growth, we may be unable to successfully:
•maintain acceptable loan quality in the context of significant loan growth;
•attract or retain sufficient deposits and capital to fund anticipated loan growth;
•maintain adequate levels of regulatory capital;
•avoid diversion or disruption of our existing operations or management as well as those of any acquired institution;
•maintain adequate management personnel and systems to oversee and support such growth;
•maintain adequate internal audit, loan review and compliance functions; and
•implement additional policies, procedures and operating systems required to support such growth.
Results of Operations. There is no assurance that future Reliant Bank branch offices will achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Our growth strategy necessarily entails growth in overhead expenses as we routinely add new offices and staff. Our historical results may not be indicative of future results or results that may be achieved as we continue to increase the number and concentration of our branch offices in our newer markets.
Development of Offices. There are considerable costs involved in opening branches, and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, any new branches we establish can be expected to negatively impact our earnings for some period of time until they reach certain economies of scale. The same is true for our efforts to expand in current markets with the hiring of additional seasoned professionals with significant experience in those markets. Our expenses could be further increased if we encounter delays in opening new branches. We may be unable to accomplish future branch expansion plans due to a lack of available satisfactory sites, difficulties in acquiring such sites, failure to receive any required regulatory approvals, increased expenses or loss of potential sites due to complexities associated with zoning and permitting processes, higher than anticipated merger and acquisition costs or other factors. Finally, there can be no assurance any branch will be successful even after it has been established or acquired, as the case may be.
Regulatory and Economic Factors. Our growth and expansion plans may be adversely affected by a number of regulatory and economic developments or other events. Failure to obtain required regulatory approvals, changes in laws and regulations or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may prevent or adversely affect our continued growth and expansion. Such factors may cause us to alter our growth and expansion plans or slow or halt the growth and expansion process, which may prevent us from entering into or expanding in our targeted markets or allow competitors to gain or retain market share in our existing markets.
Transaction Termination. With respect to potential future acquisitions, pending transactions carry the risk of not being completed and subjecting us to contractual termination fees as well as reputational risk.
Failure to successfully address these and other issues related to our expansionary activities could have a material adverse effect on our financial condition and results of operations and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our results of operations and financial condition could be materially adversely affected.
We may face risks with respect to future mergers and acquisitions.
When we attempt to expand our business through mergers and acquisitions (as we have done over the last several years), we seek partners that are culturally similar to us, have experienced management and possess either market presence or have
potential for improved profitability through economies of scale or expanded services. In addition to the general risks associated with our growth plans, which are highlighted above, in general, acquiring or merging with other banks and acquiring businesses or branches, particularly those in markets with which we are less familiar, involves various risks commonly associated with mergers and acquisitions, including, among other things:
•the time and costs associated with identifying and evaluating potential acquisition and merger targets;
•inaccuracies in the estimates and judgements used to evaluate credit, operations, management and market risks with respect to target businesses;
•our ability to finance an acquisition and possible dilution to our existing shareholders;
•the diversion of our management's attention to the negotiation and completion of a transaction and integration of an acquired company's operation with ours;
•entry into new markets where we have limited or no direct prior experience;
•closing delays and increased costs and expenses related to the resolution of lawsuits filed by our shareholders or shareholders of companies we may seek to acquire;
•the inability to receive regulatory approvals timely or at all, including as a result of community objections, or such approvals being restrictively conditional; and
•risks associated with integrating the operations, technologies and personnel of an acquired business.
We expect to continue to evaluate merger and acquisition opportunities that are presented to us in our current markets as well as other markets throughout the region and conduct due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash or equity securities and related capital raising transactions may occur at any time. Generally, acquisitions of financial institutions involve the payment of a premium over book and market values, and, therefore, some dilution of our book value and fully diluted earnings per share may occur in connection with any future transaction. Failure to realize the expected revenue increases, cost savings, increases in product presence and/or other projected benefits from a merger or acquisition could have a material adverse effect on our financial condition and results of operations.
In addition, we may face significant competition from numerous other financial institutions, many of which may have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not be available to us. There can be no assurance that we will be successful in identifying or completing any potential future acquisitions.
Reliant Bancorp and the Bank are dependent on retaining and recruiting key individuals and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.
Reliant Bancorp and the Bank are materially dependent on the performance of our executive management team, loan officers, and other support personnel. The loss of the services of any of these individuals could have a material adverse effect on the business of Reliant Bancorp and the Bank and our results of operations and financial condition. Many of these key personnel have important customer relationships, which are instrumental to the Bank’s operations. Changes in key personnel and their responsibilities may be disruptive to Reliant Bancorp's and the Bank’s business and could have a material adverse effect on Reliant Bancorp's and the Bank’s business, financial condition, and results of operations. Management believes that future results also will depend in part upon attracting and retaining highly skilled and qualified management, especially in the new market areas into which the Bank may enter, as well as sales and marketing personnel. The failure to attract or retain, including as a result of an untimely death or illness, key personnel, or to find suitable replacements for them, could have a negative effect on our operating results. Competition for such personnel is intense, and management cannot be sure that the Bank will be successful in attracting or retaining such personnel.
Reliant Bancorp’s historical operating results may not be indicative of its future operating results.
Reliant Bancorp may not be able to sustain its historical rate of growth, and, consequently, Reliant Bancorp’s historical results of operations will not necessarily be indicative of its future results of operations. Various factors, such as economic conditions, political, regulatory and legislative initiatives and considerations, and competition, may impede Reliant Bancorp’s ability to expand its market presence. If Reliant Bancorp experiences a significant decrease in its historical rate of growth, Reliant Bancorp’s results of operations and financial condition may be adversely affected because a high percentage of its operating costs are fixed expenses.
The Bank faces strong competition for customers, which could prevent it from obtaining customers and may cause it to pay higher interest rates to attract customers.
The banking business is highly competitive, and the Bank experiences competition in its markets from many other financial institutions. The Bank competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, some of which are super-regional, national, and international financial institutions that operate offices in the Bank’s primary market areas and elsewhere. The Bank competes with these institutions both in attracting deposits and in making loans. In addition, the Bank has to attract its customer base from other existing financial institutions and from new residents and businesses that have relocated to the Nashville MSA and Middle Tennessee. Many of the Bank’s competitors are well-established, larger financial institutions. These institutions offer some services, such as extensive and established branch networks, that the Bank does not provide. There is a risk that the Bank will not be able to compete successfully with other financial institutions in the Bank’s markets, and that it may have to pay higher interest rates to attract deposits, resulting in reduced profitability. In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to the Bank.
We may not be able to report our financial results accurately and timely as a publicly listed company if we fail to maintain an effective system of disclosure controls and procedures and internal control over financial reporting.
As a publicly traded company, we are required to file periodic reports containing our consolidated financial statements with the SEC within a specified time following the completion of quarterly and annual periods. Maintaining effective disclosure controls and procedures is necessary to identify information we must disclose in our periodic reports, and maintaining effective internal control over financial reporting is necessary to produce reliable financial statements and to prevent fraud. If we fail to maintain effective disclosure controls and procedures or effective internal control over financial reporting, we may experience difficulty in satisfying our SEC reporting obligations. Any failure by us to file our periodic reports with the SEC in a timely manner could harm our reputation and cause investors and potential investors to lose confidence in us and reduce the market price of our common stock, and could result in Nasdaq suspending or delisting our common stock.
We incur significant costs, and our management is required to devote significant time to compliance-related matters, as a result of being an Exchange Act-reporting company, and additional financial, managerial and other resources would be required if we lose our "smaller reporting company" and "non-accelerated filer" status.
As an Exchange Act-reporting company, we incur significant legal, accounting and other expenses on an ongoing basis for compliance purposes. In addition, the rules of the SEC and Nasdaq have imposed various requirements on public companies, including requirements for the establishment and maintenance of effective disclosure controls and internal control over financial reporting. Our management and other personnel devote a substantial amount of time to these compliance initiatives.
We are currently a “smaller reporting company” and “non-accelerated filer” under applicable SEC rules. As such, we take advantage of exemptions from certain reporting requirements, including exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”), and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Should we lose these statuses, we may no longer be exempt from these requirements and expect that compliance with these requirements would increase our legal and financial compliance costs and would make some activities more time consuming and costly. In addition, our management and other personnel would need to divert attention from operational and other business matters to devote substantial time to these additional public company requirements. In particular, we would expect to incur significant expenses and devote substantial
management effort toward ensuring compliance with the requirements of Section 404(b) of the Sarbanes-Oxley Act. We will continue to qualify as a “smaller reporting company” as long as (i) our public float is less than $250 million or (ii) we have less than $100 million in annual revenues and public float of less than $700 million, and, in general, we will continue as a “non-accelerated filer” as long as we have less than $100 million in annual revenues and public float of less than $700 million. We cannot discern if investors will find our common stock less attractive if we rely on the exemptions and reduced disclosure obligations afforded to smaller reporting companies and non-accelerated filers. For as long as we remain a “smaller reporting company” and “non-accelerated filer,” we intend to take advantage of certain exemptions from reporting requirements that are applicable to other public companies that do not qualify under these categories.
We are subject to certain operational risks, including but not limited to customer or employee fraud.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect employee errors and misconduct may not be effective in all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls and insurance coverage to mitigate against these operational risks. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition or results of operations.
In addition, we rely heavily upon information supplied by third parties, including information contained in credit applications, property appraisals, title information, valuations and employment and income documentation, in deciding which loans we will originate as well as the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, or we may fund a loan that we would not have funded or on terms we would not have extended.
A failure in or breach of Reliant Bancorp’s or the Bank’s computer or information technology systems or networks, or those of third parties, could disrupt our businesses and adversely impact our financial condition and results of operations, as well as cause us reputational harm.
The potential for operational risk exposure exists throughout our organization and, as a result of our interactions with and reliance on third parties, is not limited to our own internal operating functions. Our computer and information technology systems and networks, as well as those of third parties, are integral to our business and performance. We rely on our employees and third parties, including vendors, in the course of our day-to-day operations, any of whom may, as a result of human error, misconduct, malfeasance, or a failure or breach of systems or networks, expose us to risk, including the risk of a cyber-attack, which could disrupt the Bank’s operations and expose the Bank to future cyber-attacks. We have taken measures to implement backup systems and other safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions in or to our computer or information technology systems or networks or those of third parties with whom we interact or upon whom we rely. Reliant Bancorp and the Bank have also prepared and annually test a business continuity plan that would be implemented in the event of a significant technological failure or if a current site become unavailable. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, backup, or other operating or security systems, or those of third parties with whom we interact or upon whom we rely, may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our or such third parties’ control, which could adversely affect our ability to process transactions or provide services. There could be sudden increases in customer transaction volume; electrical, telecommunications, or other major physical infrastructure outages; newly identified vulnerabilities in key hardware or software; natural disasters such as earthquakes, tornadoes, hurricanes, and floods; disease pandemics; and events arising from local or larger scale political or social matters, including terrorist acts. In the event that backup systems are utilized, these systems may not process data as quickly as our primary systems and some data might not have been backed up. We continuously update the systems on which we rely to support our operations and to remain compliant with applicable laws, rules, and regulations. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions. Operational risk exposures could materially and adversely impact our business, financial condition, and results of operations, as well as cause us reputational harm.
The financial services industry is undergoing rapid technological changes and we may not have the resources to implement new technology to stay current with these changes.
The financial services industry is undergoing rapid technological changes, with new technology-driven products and services being frequently introduced. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to provide secure electronic environments as we continue to grow and expand our market area. Many of our larger competitors have substantially greater resources to invest, and have invested significantly more than us, in technological improvements. As a result, they may be able to offer additional or more convenient products compared to those that we will be able to provide, which would put us at a competitive disadvantage. We may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers, which could impair our growth and profitability.
A cyber-attack, information or security breach, or technology failure, on our part or that of a third party, could adversely affect our ability to conduct our business, result in the disclosure or misuse of confidential or proprietary information, or adversely impact our business, financial condition, and results of operations, as well as cause us reputational harm.
Our business is highly dependent on the security and integrity of our computer and information technology systems and networks, as well as those of third parties with whom we interact or on whom we rely. Our business is dependent on the secure processing, transmission, storage, and retrieval of confidential, proprietary, and other information in our computer and information technology systems and networks, and in the computer and information technology systems and networks of third parties. In addition, to access our networks, products, and services, our customers and other third parties may use personal mobile or computing devices that are outside of our network environment and are subject to their own unique cybersecurity risks.
We and our third-party service providers and customers have been subject to, and are likely to continue to be the target of, cyber-attacks. These cyber-attacks include computer viruses, malicious or destructive code, phishing attacks, denials of service or information, or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of confidential, proprietary, or other information of ours or of our employees or customers or third parties, as well as damages to our and third-party computer and information technology systems and networks and the disruption of our or our customers’ or other third parties’ systems, networks, or business. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to protect the integrity of our systems and networks and implement controls, processes, policies, and other protective measures, cyber threats are rapidly evolving, and we may not be able to anticipate or prevent cyber-attacks or security breaches.
Cybersecurity risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies and the use of the internet and telecommunications technologies to conduct financial transactions. Cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years due to the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists, and other external parties. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent. The techniques used by bad actors change frequently, may not be recognized until launched, and may not be recognized until well after a breach has occurred. Additionally, the occurrence of cyber-attacks or security breaches involving third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.
Although to date we have not experienced any material losses or other material consequences relating to technology failures, cyber-attacks, or other information or security breaches, whether directed at us or third parties, there can be no assurance that we will not suffer such losses or other consequences in the future. Our risks associated with these matters remains heightened because of, among other things, the evolving nature of these threats, our size and scale, our role in the financial services
industry, our plans to continue to implement our internet banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served, our continuous transmission of sensitive information to, and storage of such information by, third parties, the outsourcing of some of our business operations, threats of cyber terrorism, and system and customer account updates and conversions. As a result, cybersecurity and the continued development and enhancement of our controls, processes, policies, and other protective measures designed to protect our systems, computers, software, data, and networks from attack, damage, or unauthorized access remain a priority.
We also face indirect technology, cybersecurity, and operational risks relating to the customers and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including financial counterparties; financial intermediaries such as clearing agents, exchanges, and clearing houses; vendors; regulators; providers of critical infrastructure such as internet access and electrical power; and retailers for whom we process transactions. As a result of increasing consolidation, interdependence, and complexity of financial entities and technology systems, a technology failure, cyber-attack, or other information or security breach that significantly degrades, deletes, or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation, interdependence, and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber-attack, or other information or security breach could, among other things, adversely affect our ability to effect transactions, service our customers, manage our exposure to risk, or operate or expand our business.
Cyber-attacks or other information or security breaches, whether directed at us or third parties, may result in us experiencing material losses or have other material adverse consequences on us. Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, could damage our reputation with customers and third parties with whom we do business. A successful penetration or circumvention of the security of our computer or information technology systems or networks could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information or that of our customers, or damage to our customers’ or other third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, and additional compliance costs, all of which could materially and adversely affect our business, financial condition, and results of operations.
Liquidity Risks
Liquidity risk could impair our ability to fund our operations and jeopardize our financial condition.
Liquidity represents a financial institution’s ability to provide funds to satisfy demands from depositors, borrowers and other creditors by either converting assets into cash or accessing new or existing sources of incremental funds. Liquidity risk arises from the possibility that we may be unable to satisfy current or future funding requirements and needs.
The objective of managing liquidity risk is to ensure that our cash flow requirements resulting from depositor, borrower and other creditor demands as well as our operating cash needs are met, and that our cost of funding such requirements and needs is reasonable. We maintain an asset/liability and interest rate risk policy and a liquidity and funds management policy, including a contingency funding plan, that, among other things, include procedures for managing and monitoring liquidity risk. Generally, we rely on deposits, repayments of loans and leases and cash flows from our investment securities as our primary sources of funds. Our principal deposit sources include consumer, commercial and public funds customers in our markets. We have used these funds, together with federal funds purchased and other sources of short-term and long-term borrowings, to make loans and leases, acquire investment securities and other assets and to fund continuing operations.
An inability to maintain or raise funds in amounts necessary to meet our liquidity needs could have a substantial negative effect on the Bank’s liquidity. Our access to funding sources in amounts adequate to finance our activities, or on terms attractive to us, could be impaired by factors that affect us specifically or the financial services industry in general. For example, factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, a reduction in our credit rating, any damage to our reputation or any other decrease in depositor or investor confidence in our creditworthiness and business. Our access to liquidity could also be impaired by factors that are not specific to us, such as severe volatility or disruption in the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Any such event or failure to manage our
liquidity effectively could affect our competitive position, increase our borrowing costs and the interest rates we pay on deposits, limit our access to the capital markets and have a material adverse effect on our results of operations or financial condition.
Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, general economic and market conditions and other factors. Loan and lease repayments are a relatively stable source of funds but are subject to the borrowers’ and lessees’ ability to repay loans and leases, which can be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and other factors. Furthermore, loans and leases generally are not readily convertible to cash. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet growth in demand for loans and leases, deposit withdrawal demands or otherwise fund operations. Such secondary sources include FHLB advances, brokered deposits, secured and unsecured federal funds lines of credit from correspondent banks, Federal Reserve borrowings and/or accessing the equity or debt capital markets.
We anticipate we will continue to rely primarily on deposits, loan and lease repayments, and cash flows from our investment securities to provide liquidity. Additionally, where necessary, the secondary sources of borrowed funds described above will be used to augment our primary funding sources. If we are unable to access any of these secondary funding sources when needed, we might be unable to meet our customers’ or creditors’ needs, which would adversely affect our financial condition, results of operations, and liquidity.
Economic and other circumstances may require Reliant Bancorp to raise capital at times or in amounts that are unfavorable to it. If Reliant Bancorp has to issue shares of common stock, the issuance of the shares will dilute the percentage ownership interests of existing shareholders and may dilute the book value per share of Reliant Bancorp’s common stock and adversely affect the terms on which Reliant Bancorp may obtain additional capital.
We face significant capital and other regulatory requirements as a financial institution. We may need to raise additional capital in the future to provide sufficient capital resources and liquidity to meet our commitments and business needs, which could include financing acquisitions. In addition, we, on a consolidated basis, and the Bank, on a standalone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or reduce our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance.
Reliant Bancorp may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments or to strengthen its capital position. Reliant Bancorp cannot provide assurance that such financing will be available to Reliant Bancorp on acceptable terms or at all, or if Reliant Bancorp does raise additional capital that it will not be dilutive to existing shareholders.
If Reliant Bancorp determines, for any reason, that it needs to raise capital, Reliant Bancorp’s board of directors generally has the authority, without action by or vote of Reliant Bancorp's shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose subject to certain Nasdaq rules. Additionally, Reliant Bancorp is not restricted from issuing additional common stock or preferred stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market price of Reliant Bancorp’s common stock could decline as a result of sales by Reliant Bancorp of a large number of shares of common stock or preferred stock or similar securities in the market or from the perception that such sales could occur. If Reliant Bancorp issues preferred stock that has a preference over its common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if Reliant Bancorp issues preferred stock with voting rights that dilute the voting power of its common stock, the rights of holders of its common stock or the market price of Reliant Bancorp’s common stock could be adversely affected. Any issuance of additional shares of common stock will dilute the percentage ownership interests of Reliant Bancorp’s then current shareholders and may dilute the book value per share of its common stock.
The amount of interest payable on our subordinated notes will vary beginning on December 15, 2024.
On December 13, 2019, Reliant Bancorp issued and sold $60.0 million in aggregate principal amount of its 5.125% Fixed-to-Floating Rate Subordinated Notes due 2029 (the “Subordinated Notes”). The interest rate on the Subordinated Notes will vary beginning on December 15, 2024. The Subordinated Notes will bear interest at an initial rate of 5.125%, payable semi-annually until December 15, 2024, at which time the Subordinated Notes will bear interest at a floating rate equal to the three-month Secured Overnight Financing Rate (“SOFR”) (provided that, in the event three-month SOFR is less than zero, three-month SOFR will be deemed to be zero), plus a spread of 376.5 basis points. If interest rates rise, the cost of the Subordinated Notes may increase, thereby negatively affecting our net income.
COVID-19 Pandemic Risks
The COVID-19 pandemic has had and is likely to continue to have an adverse effect, which could be material, on our business, results of operations, and financial condition.
The COVID-19 pandemic has resulted in widespread economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our customers and other businesses in our market area. The full extent of the effect of the COVID-19 pandemic on our customers and market area, and the resulting impact on our business, financial condition, liquidity and results of operations, is unknown at this time, and will depend on a number of factors beyond our control, including without limitation:
•the duration and ultimate severity of the COVID-19 pandemic, and the timing of development and widespread availability of effective medical treatments and/or vaccines;
•the continued response of governmental authorities, which previously have significantly curtailed business and individual activities;
•the success of monetary, fiscal, and other economic policies and programs adopted or implemented by governmental authorities, such as economic stimulus payments and the Paycheck Protection Program (“PPP”), and designed to provide economic assistance to individuals and small businesses and otherwise mitigate the financial impact of the COVID-19 pandemic on businesses and individuals;
•compliance, operational or reputational risks related to our participation in governmental programs associated with the COVID-19 pandemic, including increased costs and the risk of litigation or regulatory action;
•negative trends in unemployment and consumer confidence; and
•customer demand for our products and services, or lack thereof.
Many of the risks described under Part I, Item 1A. "Risk Factors" in this Annual Report may be exacerbated, and the impact of such risks may be magnified, as a result of the COVID-19 pandemic. The following discussion highlights some areas where the negative impacts of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations could be most severe.
•Credit Quality. Approximately 15.0% of our loan portfolio is comprised of non-owner-occupied loans to borrowers in the hotel and retail industries. These industries have been more severely impacted by the COVID-19 pandemic and governmental responses, such as stay-at-home orders and social distancing requirements, than other industries, and may have a longer recovery period than other industries. Aside from the industries mentioned above, we have other borrowers whose ability to make loan payments is dependent on rental income from their tenants, some of whom are engaged in businesses significantly impacted by the COVID-19 pandemic. Poor economic conditions often result in an increase in tenants failing to make rental payments, and economic relief programs adopted in response to the COVID-19 pandemic may permit tenants to defer or reduce rent payments. As a result of actual or expected credit losses, we may downgrade loans, increase our allowance for credit losses as a result of increases in non-performing assets, and write-down or charge-off credit relationships, any of which will negatively impact our results of operations. In 2020, we offered payment deferrals to many of our customers, and may need to offer further concessions or modifications, which could negatively impact our credit quality. In addition, market upheaval may affect the value of
real estate and commercial assets. In the event of foreclosures, we may be unable to sell the foreclosed assets at a price that will allow us to recoup all or a significant portion of the delinquent loans.
•Increased Demands on Capital and Liquidity. We experienced an increased volume of loan originations, particularly SBA loans pursuant to the PPP. Certain of these SBA loans have mandated interest rates that are lower than our usual rates and may not be purchased by the SBA or other third parties (or, in the case of PPP loans, forgiven) within expected timeframes. In addition, during times of economic distress, borrowers may draw on existing lines of credit or seek additional loans to finance their businesses. These factors may result in reduced levels of capital and liquidity being available to originate more profitable loans, which could negatively impact our ability to serve our existing customers and our ability to attract new customers.
•Even following medical resolution of the COVID-19 pandemic and the loosening of restrictions on business and individual activities, the United States and local economies may not recover quickly and may experience a prolonged recession. Our business and operations would be adversely affected, possibly materially, by a slow economic recovery or a prolonged recession.
•Deposits. As a result of the COVID-19 pandemic, deposit customers may retain higher balances. While increased low-interest deposits could have a positive impact in the short-term, we would not expect these funds to be replenished as customers use deposit funds for liquidity for their business and individual needs. If deposit levels decline, our available liquidity would decline, and we could be forced to obtain liquidity from other sources on terms less favorable than current deposit terms, which would in turn compress margins and negatively impact our results of operations.
•Changes to Operations. We, along with many other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, have implemented a number of operational changes in response to the COVID-19 pandemic, including increased work-from-home arrangements, which may result in a loss of employee engagement and productivity for our employees as well as those employees of other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, which could impact financial results and the operations of the Bank as well as increase risks related to cyber security.
•Growth Strategy. The COVID-19 pandemic has impacted, and may for some time continue to impact, our ability to execute on our growth strategy. The continuation or worsening of the COVID-19 pandemic may limit our ability to grow organically and/or via mergers or acquisitions. Since the COVID-19 pandemic began in the United States, the level of financial institution merger and acquisition activity has significantly declined, and we cannot predict when or if such activity will rebound.
Unpredictable future developments related to or resulting from the COVID-19 pandemic could materially and adversely affect our business and results of operations.
Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of the COVID-19 pandemic’s effects on our business and operations or the global economy as a whole. Future COVID-19 developments are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic.
We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its continuing and ultimate impact on us. However, if the COVID-19 outbreak continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in this Annual Report on Form 10-K may be heightened.
The spread of COVID-19, or governmental responses to the same, may disrupt banking and other financial activity in the areas in which we operate and could potentially create business continuity issues for us.
The spread of COVID-19 and federal, state, and local governmental responses to the same may result in disruption in the services we provide. We rely on our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with needed services or experience interruptions in their ability to provide us with needed services, it could negatively impact our ability to serve our customers. Further, the COVID-19
pandemic could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which we operate and could create widespread issues for us. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to infection, quarantine, or other effects of or restrictions relating to COVID-19 outbreaks in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.
As a participating lender in the PPP, the Bank is subject to additional risks of litigation from its customers or other parties regarding the Bank’s processing of loans for the PPP, regulatory risks, and risks that the SBA may not fund some or all PPP loan guaranties.
The Bank is participating as an eligible lender under the PPP. Since the opening of the PPP, several financial institutions have been subject to litigation regarding the processes and procedures used in processing applications for the PPP. The Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank regarding PPP loans, regarding its processes and procedures used in processing applications for the PPP. In addition to litigation, the Bank’s participation in the PPP exposes the Bank to the possibility of governmental investigations, enforcement actions and negative publicity. If any such litigation or enforcement action is filed or initiated against the Bank and is not resolved in a manner favorable to the Bank, it may result in significant financial liability or adversely affect our reputation. In addition, litigation and investigations can be costly, regardless of outcome. Any financial liability, litigation and investigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on Reliant Bancorp’s business, financial condition and results of operations.
The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Bank.
General Risks
The value of our goodwill and other intangible assets may decline in the future.
As of December 31, 2020, we had $65.7 million of goodwill and other intangible assets. A significant decline in our financial condition, a significant adverse change in the business or economic climate, slower growth rates, or a significant and sustained decline in the price of our common stock may necessitate taking charges in the future related to the impairment of our goodwill and other intangible assets. If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our financial condition and results of operations. Future acquisitions of other financial institutions could result in additional goodwill.
We may be subject to environmental liabilities in connection with foreclosures or repossession of assets securing our loan portfolio.
Hazardous or toxic substances or other environmental hazards may be located on or otherwise affect the properties that secure our loans. If we acquire such properties as a result of foreclosure or otherwise, we could become subject to various environmental liabilities. For example, we could be held liable for the cost of cleaning up or otherwise addressing contamination at or from these properties. We could also be held liable to a governmental entity or third party for property damage, personal injury or other claims relating to any environmental contamination at or from these properties. In addition, we may own and operate certain properties that may be subject to similar environmental liability risks during any given fiscal year. If we were to become subject to significant environmental liabilities, our business, financial condition and results of operations could be adversely affected.
We are exposed to increased credit losses and credit-related expenses in the event of a major natural disaster, public health crisis (such as the COVID-19 pandemic), other catastrophic event or significant climate change effects.
The occurrence of a major natural or environmental disaster, public health crisis or similar catastrophic event, as well as significant climate change effects such as wildfires, especially in densely populated geographic areas, could increase our credit losses and credit-related expenses. A natural disaster, public health crisis or catastrophic event or other significant climate change effect that either damages or destroys residential or multifamily real estate underlying mortgage loans or real estate collateral, or negatively affects the ability of borrowers to continue to make payments on loans, could increase our delinquency rates and average loan loss severity in the affected areas. Such events could also cause downturns in economic and market conditions generally, which could have a material adverse effect on our business and financial results. We may not have adequate insurance coverage for some of these natural, catastrophic, public health or climate change-related events.
Legal, Regulatory and Compliance Risks
We are subject to extensive government regulation and supervision.
Reliant Bancorp and its subsidiaries, particularly Reliant Bank, are subject to extensive federal and state regulation and to supervision by, among others, the Federal Reserve, the TDFI, and the SEC. The primary focus of much of this regulation and supervision is the protection of depositors and other customers, the deposit insurance fund and the safety and soundness of the banking system as a whole, and not shareholders. The quantity and scope of applicable federal and state regulations may now or in the future place banks at a competitive disadvantage compared to less regulated competitors such as fintech companies, finance companies, credit unions, mortgage banking companies and leasing companies. Federal and state regulations apply to almost every aspect of our business and affect our lending practices and procedures, capital structure, investment activities, deposit gathering activities, services and products, risk management practices, dividend policy and growth, including growth through acquisitions.
Legislation impacting, and the regulation of, our industry has increased in recent years, and we expect that legislation impacting and supervision and regulation of our industry will continue to expand in scope and complexity. Congress and federal regulatory agencies (and to a lesser extent state lawmakers and regulatory bodies) continually consider new laws, rules, regulations and policies impacting the banking industry, and they also frequently review existing laws, rules, regulations and policies for possible changes. New laws, rules, regulations and policies affecting the banking industry, as well as changes to existing laws, rules, regulations and policies and changes in the interpretation or implementation of applicable laws, rules, regulations and policies, could affect us in material and unpredictable ways and could, among other things, subject us to additional costs, restrict our growth, limit the services and products we may offer or limit the pricing of banking services and products. In addition, establishing systems and processes to achieve compliance with applicable laws, rules, regulations and policies increases our costs and could limit our ability to pursue business opportunities.
Also, if we receive less than satisfactory results on regulatory examinations, we could be subject to damage to our reputation, restrictions on our operations, significant fines and penalties, requirements to increase compliance and risk management activities and related costs and restrictions on acquisitions, new locations, new lines of business, or continued growth.
The future enactment of, or changes in federal or state banking laws, rules, regulations or policies could adversely affect our financial condition, operating results and ability to continue to compete effectively. For example, the Dodd-Frank Act and related regulations have subjected us to additional regulatory oversight and reporting obligations, some of which have materially increased costs. Also, over the last several years, state and federal regulators have focused on enhanced risk management practices, compliance with the BSA and anti-money laundering laws, data integrity and security, use of service providers, and fair lending and other consumer protection issues, which has increased our need to build out additional processes and infrastructure.
Legislative and regulatory bodies and agencies charged with adopting, implementing, and interpreting laws, rules, regulations, and policies may do so in an unforeseen manner, including in ways that potentially expand the reach of the laws, rules, regulations, or policies more than initially contemplated or currently anticipated. We cannot predict the substance of, or the impact on our business, financial condition or results of operations of, pending or future legislation or regulation. Additionally, we may be unable to accurately assess, or may be incorrect in our assessment of, the impact, which may be material, of existing
(including recently-passed or enacted) laws, rules, regulations or policies on our business, financial condition and results of operations.
Compliance with current and potential future laws, rules, regulations and policies, and regulatory scrutiny relative to the same, could significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital, limit our ability to pursue business opportunities and, generally, have a material adverse impact on our business, financial condition or results of operations. Our ability to maintain compliance with both existing and new laws, rules, regulations and policies will be critical to our future success.
We are subject to stringent capital requirements, which may prevent us from paying dividends or repurchasing shares or may adversely impact our operating results.
The Dodd-Frank Act required the federal banking agencies to establish stricter risk-based and leverage capital requirements to apply to banks and bank holding companies. In 2013, the federal banking agencies adopted revised risk-based and leverage capital requirements as well as a revised method for calculating risk-weighted assets. These capital requirements generally apply to all bank holding companies with $3 billion or more in consolidated assets and all banks regardless of size.
These revised capital rules subjected us to higher required capital levels beginning January 1, 2015, with a four-year phase-in period for certain provisions beginning in 2016. As of January 1, 2019, the revised capital requirements were fully phased in. If we are not able to maintain compliance with these requirements, we may have to raise additional capital and may be subject to regulatory actions or restrictions such as the inability to pay dividends or repurchase shares of our stock. Additionally, if we become subject to more stringent capital requirements, this could, again, require us to raise additional capital and could also adversely impact our results of operations, possibly materially.
On October 29, 2019, pursuant to the Regulatory Relief Act, the federal banking agencies adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the CBLR framework. Under the final rule, which became effective on January 1, 2020, community banks and holding companies (which would include Reliant Bancorp and Reliant Bank) that satisfy certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio of greater than 9%, are eligible to opt-in to the CBLR framework. Pursuant to the CARES Act, the federal banking agencies in October 2020 adopted a final rule revising the leverage ratio threshold down to 8% effective for the second quarter of 2020 and 8.5% effective January 1, 2021, with the leverage ratio threshold to return to 9% effective January 1, 2022. Reliant Bancorp and Reliant Bank have not opted-in to, and presently do not intend to opt-in to, the CBLR framework.
Reliant Bank’s FDIC deposit insurance premiums and assessments may increase.
Our deposits are insured up to applicable limits by the Depositors Insurance Fund of the FDIC, and we are subject to deposit insurance assessments to maintain deposit insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC. Although we cannot predict what the insurance assessment rates will be in the future, either deterioration in our risk-based capital ratios or adjustments to the base assessment rates could have a material adverse impact on our business, financial condition, results of operations, and cash flows.
Laws and regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements relating to security breach notification, and we could be negatively impacted by them. For example, we are subject to the GLBA and related implementing regulations and guidance. Among other things, GLBA: (i) imposes certain limitations on the ability of financial institutions to share consumers’ nonpublic personal information with nonaffiliated third parties, (ii) requires that financial institutions provide certain disclosures to consumers about their information collection, sharing and security practices and affords consumers the right to “opt out” of an institution’s disclosure of their personal financial information to nonaffiliated third parties (with certain exceptions) and (iii) requires financial institutions to develop, implement and maintain a written comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and
complexity, the nature and scope of the financial institution’s activities, and the sensitivity of customer information processed by the financial institution, as well as plans for responding to data security breaches.
Moreover, various United States federal agencies, states and foreign jurisdictions have enacted data security breach notification requirements with varying levels of required individual, consumer, regulatory and/or law enforcement notification in certain circumstances in the event of a security breach. Many of these requirements not only apply to us but also apply broadly to our partners that accept payments from our customers. In some countries that have yet to impose data security breach notification requirements, regulators have increasingly used the threat of significant sanctions and penalties by data protection authorities to encourage voluntary notification and discourage data security breaches.
Furthermore, lawmakers and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer and/or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level by the Federal Trade Commission, as well as at the state level, such as with regard to mobile applications.
Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer and/or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could materially and adversely affect our profitability. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions and damage to our reputation and our brand.
Anti-money laundering and anti-terrorism financing laws could have significant adverse consequences for us.
We maintain an enterprise-wide program designed to enable us to comply with applicable anti-money laundering and anti-terrorism financing laws and regulations, including the BSA and the USA PATRIOT Act. This program includes policies, procedures, processes and other internal controls designed to identify, monitor, manage and mitigate the risk of money laundering or terrorist financing posed by our products, services, customers and geographic locale. These controls include procedures and processes to detect and report suspicious transactions, perform customer due diligence, respond to requests from law enforcement, and meet all recordkeeping and reporting requirements related to particular transactions involving currency or monetary instruments. We cannot be sure our policies, procedures, processes and controls will be effective to ensure our compliance with all applicable anti-money laundering and anti-terrorism financing laws and regulations, and our failure to comply could subject us to significant sanctions, fines, penalties and reputational harm, all of which could have a material adverse effect on our business, results of operations and financial condition.
Our financial condition and results of operations may be adversely affected by changes in accounting standards and interpretations.
The FASB and other bodies that establish accounting standards periodically change the financial accounting and reporting standards governing the preparation of our financial statements. Additionally, bodies that establish and interpret accounting and reporting standards (such as the FASB, the SEC and banking regulators) may change prior interpretations or positions regarding how these standards should be applied. Changes in these standards or interpretations thereof may result in material and possibly adverse impacts to our financial results and may require us to change how we process, analyze or report financial information or to change our financial reporting controls.
Of particular note, in June 2016, the FASB issued CECL. The FASB subsequently issued an update, and CECL is currently scheduled to become effective for us in January 2023. This standard amends prior guidance regarding the accounting for credit losses for certain assets, including loans held for investment and held to maturity debt securities. CECL requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses through provision for loan losses. This will change the current method of provisioning for incurred loan and lease losses, which may require Reliant Bank to increase its ALL, and is likely to increase the types of data Reliant Bank would need to collect and
review to determine the appropriate level of its ALL. In addition, this change may result in more volatility in the level of Reliant Bank's ALL. An increase, to the extent material, in Reliant Bank's ALL or expenses incurred to determine the appropriate level of the ALL could have a material adverse effect on our capital levels, financial condition, and results of operations.
We are subject to risks related to legal proceedings.
We are from time to time involved in legal proceedings in the ordinary course of our business. The outcome of these or other legal proceedings in which we may be involved cannot be guaranteed. As a result of legal proceedings in which we may be involved, we may incur or be required to pay monetary damages, fines, penalties, settlement costs, costs of litigation, and other charges, some of which could be significant, and we may also be required to take or refrain from taking certain actions. Further, we may suffer reputational harm as the result of our involvement in certain legal proceedings. While we insure against the risk of legal proceedings, our insurance may not cover all claims that may be asserted against us. Accordingly, these legal proceedings could have a material and adverse effect on our financial condition, results of operations and prospects.
Additionally, supervisory and enforcement actions by our regulators could involve fines, penalties, and other monetary obligations, capital directives, formal or informal agreements with our regulators, significant costs of compliance, and reputational harm, any of which could have a material and adverse effect on our financial condition, results of operations and prospects.
Risks Related to Our Common Stock
Reliant Bancorp’s stock price may fluctuate, which could result in losses to investors and litigation against Reliant Bancorp.
Reliant Bancorp’s common stock is listed on Nasdaq. A number of factors could cause Reliant Bancorp’s stock price to fluctuate substantially in the future. These factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, Reliant Bancorp’s announcement of developments related to its businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, irrational exuberance on the part of investors, new federal or state banking laws, rules or regulations, and other matters related to the financial services industry. Reliant Bancorp’s stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to its performance. General market declines or market volatility in the future, especially in the financial institutions sector, as well as natural disasters or public health issues, could adversely affect the price of Reliant Bancorp’s common stock, and the current market price may not be indicative of future market prices. Stock price volatility may make it more difficult for Reliant Bancorp’s shareholders to resell their common stock when desired and at prices they find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of their securities. Reliant Bancorp could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from Reliant Bancorp’s normal business.
Even though our common stock is currently traded on Nasdaq, it has less liquidity than many other stocks quoted on a national securities exchange.
The trading volume in our common stock on Nasdaq has been relatively low when compared with larger companies listed on Nasdaq or other stock exchanges. Because of this, it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares.
We cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock. We can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock.
The market price of our common stock has fluctuated, and may fluctuate significantly in the future. These fluctuations may be unrelated to our performance. General market or industry price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.
Reliant Bancorp’s ability to pay cash dividends is limited, and Reliant Bancorp may be unable to pay future dividends even if it desires to do so.
Even though our board of directors has approved the payment of cash dividends on Reliant Bancorp’s common stock in recent years, there can be no assurance as to whether or when we may pay dividends on our common stock in the future. Future dividends, if any, will be declared and paid at the discretion of Reliant Bancorp’s board of directors and will depend on a number of factors. Reliant Bancorp’s principal source of funds used to pay cash dividends on its common stock will be dividends that Reliant Bancorp receives from the Bank. The Bank’s asset quality, earnings performance, liquidity, and capital requirements generally will be taken into account before the Bank board of directors declares or pays future dividends to Reliant Bancorp. The Reliant Bancorp board of directors will also consider Reliant Bancorp’s liquidity and capital requirements when considering whether to declare and pay dividends on Reliant Bancorp’s common stock, and, to the extent there is available cash on hand, Reliant Bancorp’s board of directors could determine to declare and pay dividends without relying on dividend payments from the Bank.
Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends we may declare and pay and that the Bank may declare and pay to Reliant Bancorp. For example, Federal Reserve regulations implementing the capital rules required under Basel III do not permit dividends unless capital levels exceed certain higher levels applying capital conservation buffers that became fully phased in beginning January 1, 2019.
In addition, Reliant Bancorp must make payments on its subordinated debentures (and the related trust preferred securities) and the Subordinated Notes before any dividends can be paid on its common stock. Reliant Bancorp may also from time to time enter into other contractual arrangements, including borrowing relationships with other financial institutions, that could limit the ability of Reliant Bancorp to pay dividends on its common stock in the future.
We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of our existing shareholders.
In order to maintain our or Reliant Bank’s capital at desired or regulatory-required levels, we may issue additional shares of our common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. We may sell these shares at prices below the current market price for shares of Reliant Bancorp common stock, and the sale of these shares may significantly dilute existing shareholder ownership. We could also issue additional shares of our common stock in connection with acquisitions of other financial institutions (as we did in connection with our acquisition of Community First, TCB Holdings, and FABK), which could also dilute existing shareholder ownership.
The rights of our common shareholders would likely be subordinate to the rights of the holders of any preferred stock that we may issue in the future.
Our charter authorizes our board of directors to issue an aggregate of up to ten million shares of preferred stock without any further action on the part of our shareholders. Our board of directors also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. Accordingly, you should assume that any shares of preferred stock that we may issue in the future will also be senior to our common stock. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected.
Holders of our debt obligations have rights that are senior to those of our shareholders.
In connection with the Community First acquisition, Reliant Bancorp assumed trust preferred securities and accompanying junior subordinated debentures totaling $23.0 million, of which $10.0 million was owned by a wholly-owned subsidiary of Community First prior to the acquisition which is now wholly-owned by Reliant Bancorp. On December 13, 2019, Reliant Bancorp issued and sold the Subordinated Notes. Payments of the principal and interest on the trust preferred securities are
conditionally guaranteed by Reliant Bancorp, and the accompanying subordinated debentures and the Subordinated Notes are senior to shares of Reliant Bancorp’s common stock. As a result, Reliant Bancorp must make payments on the subordinated debentures (and the related trust preferred securities) and the Subordinated Notes before any dividends can be paid on its common stock and, in the event of Reliant Bancorp’s bankruptcy, dissolution or liquidation, the holders of the subordinated debentures and the Subordinated Notes must be satisfied before any distributions can be made on Reliant Bancorp’s common stock.
Reliant Bancorp may from time to time issue additional debt securities that have to be repaid before Reliant Bancorp’s common stock shareholders would be entitled to receive any of the assets of Reliant Bancorp or the Bank.
If securities or industry analysts do not publish research or publish unfavorable research about our company, our stock price and trading volume could decline.
A lack of research coverage may adversely affect the liquidity of and market price of our common stock. We will not have any control over equity research analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts cease coverage of our company, or fail to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
Shares of Reliant Bancorp common stock are not FDIC insured.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described herein. As a result, if you acquire our common stock, you could lose some or all of your investment.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
As of December 31, 2020, the principal executive office of both Reliant Bancorp and Reliant Bank was located at 1736 Carothers Parkway, Suite 100, Brentwood, Tennessee 37027, and Reliant Bancorp also has a corporate office located at 6100 Tower Circle, Suite 120, Franklin, Tennessee 37067. In addition, as of December 31, 2020, we operated (i) 27 full-service branch offices located in Middle Tennessee, (ii) 7 mortgage offices in Tennessee and Arkansas, and (iii) 1 loan production office in Knoxville, Tennessee.
Although the properties owned are generally considered adequate, we have a continuing program of modernization, expansion and, when necessary, occasional replacement of facilities.
The following table summarizes pertinent details of our retail bank branch locations and mortgage origination offices as of March 9, 2021.
Property Description Owned/Leased Expiration Date Type of Office
101 Creekstone Blvd, Franklin, TN Leased 4/1/2026 Retail Bank Branch
101 Creekstone Blvd, Ste 100, Franklin, TN Leased 4/1/2026 Operations Center
101 Creekstone Blvd, Ste 200, Franklin, TN Leased 1/31/2022 Operations Center
101 W Kingston Springs Rd, Ste A, Kingston Springs, TN Leased 11/30/2021 Retail Bank Branch
1024 Dr Martin L. King Jr. Blvd, Nashville, TN Leased 4/30/2029 Retail Bank Branch
105 Public Sq, Mt Pleasant, TN Owned N/A Retail Bank Branch
1204 Nashville Pike, Gallatin, TN Owned N/A Retail Bank Branch
Property Description Owned/Leased Expiration Date Type of Office
1206 Hwy 48 Ste D, Clarksville, TN Leased 2/29/2024 Retail Bank Branch
1398 Desoto Blvd, Ste C, Hot Springs Village, AR Leased 7/31/2021 Mortgage Operations
1412 Trotwood Ave, Columbia, TN Leased 12/31/2022 Retail Bank Branch
1430 Madison Street Clarksville, TN Owned N/A Retail Bank Branch
170 C Market Pl Blvd, Knoxville, TN Leased 6/30/2025 Manufactured Housing
1736 Carothers Pkwy #100 #200, Brentwood, TN Leased 2/28/2025 Principal Executive Office and Retail Bank Branch
1800 Ft. Campbell Blvd., Clarksville, TN Owned N/A Retail Bank Branch
1835 E Northfield Blvd, Murfreesboro, TN Leased 9/30/2027 Retail Bank Branch
1929 Madison Street, Clarksville, TN Owned N/A Retail Bank Branch
2070 Wilma Rudolph Blvd., Clarksville, TN Owned N/A Retail Bank Branch
2566 Highway 49 East, Pleasant View, TN Owned N/A Retail Bank Branch
308 Main St, Crossett, AR Leased 10/1/2022 Mortgage Operations
314 N Public Sq, Centerville, TN Owned N/A Retail Bank Branch
406 11th Ave N Ste 200, Nashville, TN Leased 3/31/2029 Corporate Office
4108 Hillsboro Pike, Nashville, TN Leased 11/30/2021 Retail Bank Branch
425 East Main Street, Gallatin, TN Owned N/A Retail Bank Branch
4809 Columbia Pike, Thompsons Station, TN Owned N/A Retail Bank Branch
501 S James M Campbell Blvd, Columbia, TN Owned N/A Retail Bank Branch
5109 Peter Taylor Park Dr, Brentwood, TN Leased 7/31/2021 Retail Bank Branch
5200 Highway 100, Lyles, TN Owned N/A Retail Bank Branch
575 South Main Street, Ashland City, TN Owned N/A Retail Bank Branch
6005 Nolensville Rd, Nashville, TN Leased 3/31/2028 Retail Bank Branch
601 N Garden St, Columbia, TN Owned N/A Retail Bank Branch
6100 Tower Cir, Ste 120, Franklin, TN Leased 12/31/2027 Corporate Office
633 Chestnut St, Ste 100, Chattanooga, TN Leased 10/31/2028 Retail Bank Branch
633 Chestnut St, Ste 630, Chattanooga, TN Leased 10/31/2023 Mortgage Operations
701 S. Main Street, Springfield, TN Owned N/A Retail Bank Branch
704 Highway 70, Pegram, TN Owned N/A Retail Bank Branch
711 E Main St, Ste 105, Hendersonville, TN Leased 9/30/2021 Mortgage Operations
761 Old Hickory Blvd, Brentwood, TN Leased 12/31/2021 Mortgage Operations
9041 Executive Park Drive, Suite 104, Knoxville, TN Leased 6/30/2021 Mortgage Operations
9101 N Rodney Parham Rd, Little Rock, AR Leased 2/28/2021 Mortgage Operations

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
Reliant Bancorp or one or more of its subsidiaries are from time to time parties to ordinary routine legal proceedings in the ordinary course of business. As with all legal proceedings, no assurance can be provided as to the outcome of these matters. As of the date hereof, to the knowledge of our management, there are currently no material pending legal proceedings to which Reliant Bancorp or any of its subsidiaries is a party or of which any of the property of Reliant Bancorp or any of its subsidiaries is the subject.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Reliant Bancorp’s common stock is traded on The Nasdaq Capital Market under the symbol “RBNC.” As of March 9, 2021, there were 1,743 holders of record of Reliant Bancorp common stock. This number does not include shareholders with shares in nominee name held by the Depository Trust Company or its nominee.
Dividends
Reliant Bancorp has paid a quarterly cash dividend on its common stock since the second quarter of 2017. We currently expect that comparable cash dividends will continue to be paid in the future. However, no assurances can be given that any dividends will be declared or paid on Reliant Bancorp’s common stock in the future, or, if declared and paid, the amount or frequency of those dividends. The ability of Reliant Bancorp and Reliant Bank to pay dividends is restricted by certain laws and regulations, and the payment of dividends by Reliant Bancorp and Reliant Bank is within the discretion of their respective boards of directors.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for the information required by Item 201(d) of Regulation S-K.
Stock Performance Graph
The following chart, which is furnished not filed, compares the yearly percentage changes in the cumulative shareholder return on our common stock during the five fiscal years ended December 31, 2020, with (i) the Russell 2000 Index and (ii) the SNL Southeast U.S. Bank Index. This comparison assumes $100 was invested on the last trading day of 2015, in our common stock and the comparison indices, and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. Price information from December 31, 2016 to December 31, 2020, was obtained by using the Nasdaq closing prices as of the last trading day of each year.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities for the period ended December 31, 2020.
Issuer Purchases of Securities
The following table contains information regarding shares of our common stock repurchased by Reliant Bancorp during the three months ended December 31, 2020.
Period Total Number of Shares Purchased (1)
Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs (2) (in thousands)
October 1, 2020 to October 31, 2020 1,102 $15.74 - $15,000
November 1, 2020 to November 30, 2020 - $- - $15,000
December 1, 2020 to December 31, 2020 - $- - $15,000
Total 1,102 $15.74 - $15,000
(1)During the quarter ended December 31, 2020, 4,500 shares of restricted stock previously awarded to certain of the participants in our stock plans vested. We withheld 1,102 shares to satisfy tax withholding requirements associated with the vesting of these shares of restricted stock.
(2)On March 10, 2020, Reliant Bancorp's board of directors authorized a stock repurchase plan allowing Reliant Bancorp to repurchase up to $15 million of outstanding Reliant Bancorp common stock (the "Repurchase Plan"). As of December 31, 2020, Reliant Bancorp had not repurchased any shares of Reliant Bancorp common stock under the Repurchase Plan. The Repurchase Plan does not obligate Reliant Bancorp to repurchase any dollar amount or number of shares. On April 27, 2020, we announced that our board of directors suspended the Repurchase Plan to preserve our financial strength during this challenging economic environment. On December 31, 2020, the Repurchase Plan expired.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the following sections the terms “Reliant Bancorp,” the “Company,” “us,” “we,” “our,” or similar terms refer to Reliant Bancorp Inc., and its subsidiaries, including Reliant Bank, which we sometimes refer to as “Reliant” or the “Bank.” The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with “Item 8. Financial Statements and Supplementary Data” as well as other information included in this Annual Report. Amounts in the narrative are shown in thousands, except for economic and demographic information, numbers of shares, per share amounts and as otherwise noted.
Executive Overview
The following is a summary of the Company’s financial highlights and significant events for the year December 31, 2020:
•Net income attributable to common shareholders totaled $31.4 million, or $2.02 per diluted common share, for the year ended December 31, 2020 compared to $16.2 million, or $1.44 per diluted common share, during the same period in 2019.
•Successfully closed the TCB Holdings and FABK transactions as well as conversions with Community Bank & Trust and First Advantage Bank.
•Total assets surpassed $3.0 billion.
•Loans increased $882.8 million for the year ended December 31, 2020, $180.3 million of which was from organic growth.
•Deposits increased $994.8 million for the year ended December 31, 2020, $223.7 million of which was from organic growth.
•Net interest margin increased to 4.35% for the year ended December 31, 2020 compared to 3.54% in 2019.
Coronavirus (COVID-19) Impact
During the current fiscal year, the COVID-19 pandemic had a significant impact on our customers, associates, and communities, which collectively impacts our shareholders. Below is a summary of those impacts and our responses related to COVID-19.
As part of our pandemic response, we have encouraged a significant portion of our employees to work from home. We have also extended virtual medical coverage to all employees as well as provided pay to employees who may have been exposed. We are encouraging virtual meetings and conference calls in place of in-person meetings. We are promoting social distancing, frequent hand washing, thorough disinfection of all surfaces, and the use of masks or nose and mouth coverings have been mandated in all of our locations. We have welcomed customers for lobby visits by appointment. Banking center drive-ups, ATMs and online/mobile banking services continue to operate. Infection rates in the communities we serve vary by region and we will make prudent decisions for the safety of our colleagues and our clients.
The Company had applied CARES Act modification guidance to approve initial payment deferral modifications in April and May 2020 for loans with aggregate principal balances of $530.7 million. The majority of these modifications involved extensions of up to three months of either interest-only periods or full payment deferrals. Through September 30, 2020 and December 31, 2020 further modifications were approved for $24.0 million and $23.0 million of the loans previously modified. See "Note 3 - Loans and Allowance for Loan Loss" in the notes to the financial statements for further information.
The Company is participating in the Paycheck Protection Program ("PPP") under the CARES Act, which is being administered by the SBA. As of December 31, 2020 the Bank had 843 PPP loans outstanding totaling $65.5 million with $17.8 million in PPP loans forgiven and repaid during the year. Participation in the PPP will likely have an impact on the Company's asset mix and net interest margin in 2021.
At December 31, 2020, our level of nonperforming assets was 0.37% of total assets and was not materially impacted by the economic pressures of COVID-19. We are closely monitoring credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our commercial and other clients.
We are in regular communication with our customers to gain a better understanding of our highest risk exposures and probable defaults. In the year ended December 31, 2020 we recorded a provision expense of $8.4 million, which can be attributed to increased risk factors related to the COVID-19 pandemic as well as our loan growth. Our losses year-to-date remain low but we continue to build reserves as we anticipate future downgrades and defaults may eventually result in losses.
At this time, we do not believe there exists any impairment to our intangible assets, long-lived assets, right-of-use assets, or available-for-sale investment securities due to the COVID-19 pandemic. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets.
As of December 31, 2020, the Bank's capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by future credit losses.
For additional related information, See "Regulation and Supervision" and "Risk Factors".
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance with the generally accepted in the United States of America ("U.S. GAAP") and conform to general practices within the banking industry. To prepare financial statements in conformity with a U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The ALL and fair value of financial instruments are particularly subject to change.
Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in "Note 1 - Summary of Significant Accounting Policies"of the notes to the consolidated financial statements included elsewhere in this report. The critical accounting policies require our judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established policies and control procedures that are intended to ensure valuation methods are well-controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief summary of the more significant policies.
Allowance for loan losses ("ALL")
The ALL is an estimate of future probable credit losses. Losses on loans held for investment are charged against the ALL when management believes the remaining balance due has become uncollectible. Subsequent recoveries, if any, are credited to the ALL. Management estimates a general component to the ALL based on historical loan loss experience and qualitative factors, which include 1) the nature and volume of the portfolio, 2) current economic conditions (national and local), 3) changes in interest rates, 4) portfolio concentrations, 5) changes in the experience, ability, and depth of the lending function, and 6) levels of and trends in charged-off loans, recoveries, past due loans and volume and severity of classified loans.
A specific ALL component is calculated for loans that meet the definition of impairment. A loan is considered impaired when management believes that principal and interest due on that loan will not be collected in accordance with the terms and conditions of the loan agreement. Once a loan is deemed to be impaired, management must calculate the potential loss for the specific loan based on one of three approved methodologies to estimate the expected recovery from secondary payment sources, which is then deducted from the book value of the loan asset to calculate the amount of specific reserve required: 1) fair value of collateral, less expected cost to sell, 2) discounted cash flows of the expected future loan payments, or 3) Expected sale proceeds if loan was sold to another lender.
Interest payments on impaired loans are typically applied to principal unless the principal amount is deemed fully collectible, in which case interest is recognized on a cash basis. When recognition of interest income on a cash basis is appropriate, the amount of income recognized is limited to what would have been accrued on the remaining principal balance at the contractual rate. Cash payments received over this limit, and not applied to reduce the loans remaining principal balance, are recorded as recoveries of prior charge-offs until these charge-offs have been fully recovered.
Business combinations and accounting for acquired loans with credit deterioration
Business combinations are accounted for by applying the acquisition method in accordance with ASC 805, “Business Combinations” (“ASC 805”). Under the acquisition method, identifiable assets acquired and liabilities assumed and any non-
controlling interest in the acquiree at the acquisition date are measured at their fair values as of that date. Any excess of the purchase price over fair value of net assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including any other identifiable intangible assets, exceeds the purchase price, a bargain purchase gain is recognized. Results of operations of acquired entities are included in the Consolidated Statements of Income from the date of acquisition.
We record purchased loans at fair value as of the date of the acquisition; since any credit deterioration evident in the loans was included in the determination of the acquisition date fair values, no ALL is recorded for purchased loans because all loans are recorded at fair value at the merger date. Impaired purchased loans are accounted for under ASC 310-30, in which an ALL subsequent to the date of acquisition is established by re-estimating expected cash flows on these loans, with any decline in expected cash flows due to a credit triggering impairment recorded as purchased credit impairment (PCI). The impairment amount 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-PCI 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 establish an ALL provision for these loans only when the calculated amount exceeds the remaining credit mark established at acquisition.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in "Note 12 - Fair Value of Assets and Liabilities". 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.
RESULTS OF OPERATIONS
The following is a summary of our results of operations:
Year ended December 31, 2020-2019 Percent Increase (Decrease)
Year ended December 31, 2018
2019-2018 Percent Increase (Decrease)
2020 2019
Interest income $ 130,271 $ 79,185 64.5 % $ 69,207 14.4 %
Interest expense 22,225 23,380 (4.9) % 15,396 51.9 %
Net interest income 108,046 55,805 93.6 % 53,811 3.7 %
Provision for loan losses 8,350 1,211 589.5 % 1,035 17.0 %
Net interest income after provision for loan losses 99,696 54,594 82.6 % 52,776 3.4 %
Noninterest income 21,559 11,964 80.2 % 9,664 23.8 %
Noninterest expense 83,207 53,892 54.4 % 50,561 6.6 %
Net income before income taxes 38,048 12,666 200.4 % 11,879 6.6 %
Income tax expense 6,935 2,129 225.7 % 1,372 55.2 %
Net income 31,113 10,537 195.3 % 10,507 0.3 %
Noncontrolling interest in net loss of subsidiary 299 5,659 (94.7) % 3,578 58.2 %
Net income attributable to common shareholders $ 31,412 $ 16,196 93.9 % $ 14,085 15.0 %
Year ended December 31, 2020-2019 Percent Increase (Decrease)
Year ended December 31, 2018
2019-2018 Percent Increase (Decrease)
2020 2019
Basic net income (loss) attributable to common shareholders, per share $2.03 $1.44 41.0 % $1.24 16.1 %
Diluted net income (loss) attributable to common shareholders, per share $2.02 $1.44 40.3 % $1.23 17.1 %
Return on average assets 1.13 % 0.90 % 25.6 % 0.86 % 4.7 %
Return on average shareholders' equity 10.93 % 7.54 % 45.0 % 6.93 % 8.8 %
Dividend payout ratio 19.70 % 18.75 % 5.1 % 26.61 % (29.5) %
Equity-to-assets 10.32 % 11.95 % (13.6) % 12.36 % (3.3) %
Our financial performance reflects the success of our growth strategies including both organic market expansion as well as our successful acquisitions of both TCB Holdings and FABK in 2020. The following sections provide a more detailed analysis of significant factors affecting our operating results.
Net Interest Income
The largest component of our net income is net interest income - the difference between the income earned on loans, investment securities and other interest earning assets and interest expense on deposit accounts and other interest-bearing liabilities. Net interest income calculated on a tax-equivalent basis divided by total average interest-earning assets represents our net interest margin. The major factors that affect net interest income and net interest margin are changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities. Our margin can also be affected by economic conditions, the competitive environment, loan demand and deposit flow. Our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and our net interest income.
The following tables set 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 years ended December 31, 2020, 2019, and 2018 (dollars in thousands):
For the Year Ended December, 31
2020 2019 2018
Average Balances (1)
Rates / Yields (%) Interest Income / Expense Average Balances (1)
Rates / Yields (%) Interest Income / Expense Average Balances (1)
Rates / Yields (%) Interest Income / Expense
Interest-earning assets
Loans (2) (3)
$ 2,149,447 5.33 $ 111,870 $ 1,298,922 5.12 $ 65,168 $ 1,138,946 4.99 $ 55,496
Loan fees - 0.34 7,389 - 0.25 3,253 - 0.25 2,855
Loans with fees 2,149,447 5.68 119,259 1,298,922 5.37 68,421 1,138,946 5.24 58,351
Mortgage loans held for sale 91,544 3.77 3,450 18,212 5.28 961 24,882 5.14 1,278
Deposits with banks 56,676 0.53 298 37,369 1.58 590 34,504 1.37 471
Investment securities - taxable 71,303 2.13 1,517 74,220 2.83 2,099 70,170 2.62 1,836
Investment securities - tax-exempt (4)
191,045 3.41 5,068 221,249 3.71 6,452 225,592 3.72 6,605
Restricted equity securities 16,287 4.00 652 11,449 5.52 632 10,965 5.93 650
Federal funds sold 3,074 0.88 27 1,421 2.11 30 689 2.32 16
Total earning assets 2,579,376 5.21 130,271 1,662,842 4.94 79,185 1,505,748 4.80 69,207
Nonearning assets 206,876 136,160 138,612
Total assets $ 2,786,252 $ 1,799,002 $ 1,644,360
Interest-bearing liabilities
Interest-bearing demand $ 258,657 0.30 779 $ 146,518 0.26 384 $ 146,717 0.25 366
Savings and money market 707,023 0.67 4,709 376,927 1.11 4,191 349,986 0.74 2,589
Time deposits - retail 656,945 1.19 7,817 559,406 2.09 11,702 531,780 1.58 8,400
Time deposits - wholesale 229,769 1.77 4,063 227,071 2.48 5,622 90,510 1.77 1,598
Total interest-bearing deposits 1,852,394 0.94 17,368 1,309,922 1.67 21,899 1,118,993 1.16 12,953
Federal Home Loan Bank advances and other 75,422 1.20 903 24,611 2.21 543 85,706 2.01 1,719
Subordinated debt 70,446 5.61 3,954 14,729 6.37 938 11,566 6.26 724
Total borrowed funds 145,868 3.33 4,857 39,340 3.76 1,481 97,272 2.51 2,443
Total interest-bearing liabilities 1,998,262 1.11 22,225 1,349,262 1.73 23,380 1,216,265 1.27 15,396
Net interest spread (5)
4.10 108,046 3.21 55,805 3.53 53,811
Noninterest-bearing deposits 466,334 (0.21) 226,855 (0.25) 218,867 (0.20)
Other noninterest-bearing liabilities 34,207 7,988 5,911
Shareholders' equity $ 287,449 $ 214,897 $ 203,317
Total liabilities and shareholders' equity $ 2,786,252 $ 1,799,002 $ 1,644,360
Cost of funds 0.90 1.48 1.07
Net interest margin (6)
4.35 3.54 3.78
(1) Calculated using daily averages.
(2) Average loan balances include nonaccrual loans.
(3) Yields on loans reflects state tax credits received on low or zero percent interest loans made to construct low income housing of $2,687, $1,265, and $1,268, for the years ended December 31, 2020, 2019, and 2018, respectively.
(4) Yields on tax-exempt securities are shown on a tax-equivalent basis.
(5) Net interest spread is calculated as the yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities.
(6) 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.
The following table reflects, for the periods indicated, the changes in our net income due to changes in the volume of interest-earning assets and interest-bearing liabilities and the associated rates earned or paid on the assets or liabilities.
Change for Year Ended
December 31, 2020 to 2019
Change for Year Ended
December 31, 2019 to 2018
Due to Volume Due to Rate Total Due to Volume Due to Rate Total
Interest-earning assets
Loans $ 45,313 $ 2,839 $ 48,152 $ 8,156 $ 1,513 $ 9,669
Loan fees 4,136 - 4,136 398 - 398
Loans with fees 49,449 2,839 52,288 8,554 1,513 10,067
Mortgage loans held for sale 2,837 (348) 2,489 (351) 34 (317)
Deposits with banks 215 (507) (292) 42 77 119
Investment securities - taxable (80) (502) (582) 110 153 263
Investment securities - tax-exempt (1,059) (628) (1,687) (170) (24) (194)
Restricted equity securities 223 (203) 20 28 (46) (18)
Federal funds sold 21 (24) (3) 15 (1) 14
Total earning assets 51,606 627 52,232 8,228 1,706 9,934
Interest-bearing liabilities
Interest-bearing demand 329 66 395 - 18 18
Savings and money market 2,640 (2,122) 518 213 1,389 1,602
Time deposits - retail 1,783 (5,668) (3,885) 457 2,845 3,302
Time deposits - wholesale 66 (1,625) (1,559) 3,178 846 4,024
Total interest-bearing deposits 4,818 (9,349) (4,531) 3,848 5,098 8,946
Federal Home Loan Bank advances and other 702 (342) 360 (1,332) 156 (1,176)
Subordinated Debt 3,141 (125) 3,016 201 13 214
Total borrowed funds 3,843 (467) 3,376 (1,131) 169 (962)
Total interest-bearing liabilities $ 8,661 $ (9,816) $ (1,155) $ 2,717 $ 5,267 $ 7,984
Net interest rate spread $ 42,944 $ 10,443 $ 53,387 $ 5,511 $ (3,561) $ 1,950
2020 compared to 2019
For the year ended December 31, 2020, net interest income was approximately $112.2 million (including tax equivalent adjustments), a 96% increase from the year ended December 31, 2019 net interest income of $58.8 million. This increase is primarily due to increasing loan volumes and a decrease in rates related to interest-bearing liabilities. Our net interest margin was 4.35% and 3.54% for 2020 and 2019, respectively.
For 2020 and 2019, average loan yields increased from 5.37% to 5.68%. The effects of the declining interest rate environment was offset by the realization of twelve and nine months of additional interest income related to the acquisition of TCB Holdings and FABK, respectively, including additional interest income from accretion of purchase accounting adjustments increasing from 0.12% to 0.45%. Year-over-year average loan balances increased by 65.5%, largely driven by the two 2020 acquisitions. Additionally, our continued focus on serving our customers led to organic growth of 13%.
Cost of funds decreased 58 basis points from 2019 to 0.90% in 2020 as our team continues to focus on reducing more costly time deposits and retaining lower cost customer deposits. Average retail time deposits decreased 17.4% versus average total deposits increase of 50.9%. While our acquired deposits drive the majority of this increase, organic deposits increased 14.1%
year-over-year. The decrease in deposit rates was offset by an increase in interest expense related to subordinated debt as the average balance increased 378.3% with the issuance of additional debt in December of 2019.
2019 compared to 2018
For the year ended December 31, 2019, net interest income was approximately $58.8 million (including tax equivalent adjustments), a 3% increase from the year ended December 31, 2018, net interest income of $56.9 million. Our net interest margin was 3.54% and 3.78% for 2019 and 2018, respectively.
For 2019 and 2018, average loan yields increased from 5.24% to 5.37% driven by year-over-year average loan volume increase of 12.3%. Our coupons and fees made up 5.15% and 4.96% of our total loan yield with the remainder being made up of purchase accounting accretion and tax credits.
Our cost of funds increased 41 basis points from 1.07% to 1.48% for 2019 compared to the same period in 2018. All categories of interest-bearing liabilities contributed to the increase in our cost of funds due to rate increases by the Federal Reserve as well as competition for core deposits and the use of wholesale funding sources. Additionally, we assumed subordinated debt in the Community First acquisition and issued another $60 million in December 2019 with a combined cost of 6.37%. Our noninterest-bearing deposits decreased our cost of funds by 25 basis points for the year ended December 31, 2019 compared to 20 basis points for the year ended December 31, 2018.
Provision for Loan Losses
Management considers a number of factors in determining the required level of the allowance for loan losses and the provision required to achieve what is believed to be appropriate reserve level, including historical loss experience, loan growth, credit risk rating trends, nonperforming loan levels, delinquencies, loan portfolio concentrations and economic and market trends. The provision for loan losses represents management’s determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for loan losses at a level that it considered adequate in relation to the estimated losses inherent in the loan portfolio.
The provision for loan losses from continuing operations was $8,350 in 2020, an increase of $7,139, or 589.5% compared to 2019, due to an increase in loan volume as well as economic considerations due to the COVID-19 pandemic. Similarly, we recorded a provision of $1,211 in 2019, an increase of $176, or 17.0%, compared to 2018, due to an increase in loan volume.
Credit quality remains strong with nonperforming loans at December 31, 2020 amounting to 0.26% of total loans as compared to 0.29% at December 31, 2019 and 0.34% at December 31, 2018. Net charge-offs (recoveries) compared to average loans remain low with 0.01%, (0.04)%, and (0.01)% for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively. The allowance for loan loss to total loans at December 31, 2020 was 0.90% compared to 0.89% at December 31, 2019 and 0.88% at December 31, 2018. When including purchase loan discounts, this rises to 1.62%, 1.10%, and 1.25% for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively.
Noninterest Income
Our noninterest income is composed of several components, some of which vary significantly between periods. The following is a summary of our noninterest income for the years ended December 31, 2020, 2019, and 2018 (dollars in thousands):
Year Ended December 31, Percent Increase (Decrease) Year Ended December 31, 2018
Percent Increase (Decrease)
2020 2019
Noninterest Income
Service charges and fees $ 5,747 $ 3,746 53.4 % $ 3,419 9.6 %
Securities (losses) gains, net (270) 1,451 (118.6) % 43 3,274.4 %
Gains on mortgage loans sold, net 12,239 4,905 149.5 % 4,418 11.0 %
Other noninterest income:
Gain on sale of other real estate 28 166 (83) % 259 (36) %
Gain on disposal of assets 31 - 100.0 % 13 (100.0) %
Bank-owned life insurance 2,759 1,119 146.6 % 1,186 (5.6) %
Brokerage revenue 194 49 295.9 % 99 (50.5) %
Miscellaneous noninterest income 831 528 57.4 % 227 132.6 %
Total other noninterest income 3,843 1,862 106.4 % 1,784 4.4 %
Total noninterest income $ 21,559 $ 11,964 80.2 % $ 9,664 23.8 %
2020 compared to 2019
Noninterest income increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to gains on mortgage loans sold.
Service charges on deposit accounts generally reflect customer growth trends but also are impacted by changes in our fee pricing structure to help attract and retain customers. The increase in service charges and fees for 2020 was driven primarily by the incremental increase in transaction volume related to our acquisitions, as well as growth in the volume of our legacy deposit accounts.
During the year ended December 31, 2020, the Company sold securities totaling $151,934 and recognized a loss of $270 as part of a strategy to restructure the investment portfolio which included the sales of those portfolios acquired as part of the FABK and TCB Holdings transactions. Comparatively, during the year ended December 31, 2019, the Company sold securities totaling $85,895 and recognized a gain of $1,451.
Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans. All of these loan sales transfer servicing rights to the buyer. The mortgage banking business is directly impacted by the interest rate environment, increased regulations, consumer demand, and economic conditions. Mortgage production, especially refinance activity, typically rises in declining interest rate environments. Mortgage loans originated for resale totaled $605,020 in 2020 as compared to $179,331 in 2019 as a result of the productive market conditions produced by the low interest rate environment in 2020 as well as an increase in correspondent bank transactions as the Company began these activities mid-2019.
Noninterest income also includes income from bank-owned life insurance (BOLI), which was $2,759, for the year ended December 31, 2020 and includes $1,808 in death benefit proceeds. The remaining increase when compared to the year ended December 31, 2019 is driven by the additional policies acquired from the FABK and TCB Holdings transactions as well as additional purchases in 2020. 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 taxable.
Other noninterest income also includes gains (losses) on other real estate owned and other assets which experienced minimal activity in both 2020 and 2019. Our brokerage revenue is solely based on commissions received from established referral relationships and fluctuate based on related activity.
2019 compared to 2018
Noninterest income increased for the year ended December 31, 2019 compared to the same period in 2018, primarily due to gains on mortgages sold offset by a decrease in gains realized on the sale of securities.
Gains on mortgage loans sold, net, amounted to $4,905 and $4,418 for the years ended December 31, 2019, and 2018, respectively. The industry began to experience rates decline during the first quarter of 2019 after rising through much of 2018. Mortgage loans originated for resale totaled $179,331 in 2019 as compared to $141,783 in 2018 as a result of the productive market conditions produced by the low interest rate environment.
Noninterest income also includes appreciation in the cash surrender value of bank-owned life insurance (BOLI), gains/(losses) from sales of other real estate owned and other assets as well as brokerage revenue which fluctuates based on volume and market conditions but did not experience significant change from 2018.
Noninterest Expense
The following is a summary of our noninterest expense for the years ended December 31, 2020, 2019, and 2018 (dollars in thousands):
Year Ended December 31, Percent Increase (Decrease) Year Ended December 31, 2018
Percent Increase (Decrease)
2020 2019
Noninterest Expense
Salaries and employee benefits $ 46,332 $ 30,514 51.8 % $ 27,510 10.9 %
Occupancy 7,756 5,423 43.0 % 4,949 9.6 %
Data processing and software 8,594 6,213 38.3 % 5,333 16.5 %
Professional fees 2,676 2,302 16.2 % 2,848 (19.2) %
Regulatory fees 1,797 908 97.9 % 1,077 (15.7) %
Merger expenses 6,895 1,603 330.1 % 2,774 (42.2) %
Other operating expense 9,157 6,929 32.2 % 6,070 14.2 %
Total noninterest expense $ 83,207 $ 53,892 54.4 % $ 50,561 6.6 %
2020 compared to 2019
Noninterest expense increased significantly during the year ended December 31, 2020 when compared to December 31, 2019 which is primarily driven by incremental costs incurred following the TCB Holdings and FABK transactions as well as the merger expenses incurred.
The increase in salaries and employee benefits is related to the TCB Holdings and FABK transactions as well as our year over year growth and severance for three executive officers. The staffing levels have normalized during the third quarter but we experienced an overall increase in FTEs from 301 to 428.
The 43.0% increase in occupancy expense from December 31, 2020 to December 31, 2019 was largely attributable to increased depreciation and other facilities-related expenses associated with the TCB Holdings and FABK transactions as well as the expansion of RMV.
Data processing and software expense increased from December 31, 2020 to December 31, 2019 and is mainly attributable to an increased volume of accounts and transactions services as well as continued investments in information technology infrastructure. Both the volume and location increases are primarily due to the TCB Holdings Transaction, the FABK Transaction, and the expansion of RMV.
Professional fees increased 16.2% in the year ended December 31, 2020 as compared to the year ended December 31, 2019 which is primarily driven by increased costs at the Company in both the Bank and Mortgage segments as activity increased.
Regulatory fees are largely made up of FDIC insurance expenses based on our outstanding deposits for the period multiplied by a factor determined by the FDIC, mainly driven by our most recent regulatory rating and certain financial performance factors. The increase in the year ended December 31, 2020 is due to an increase in average liabilities following the TCB Holdings and FABK transactions as well as a $375 small bank assessment credit received in 2019.
Other noninterest expenses include advertising expenses, insurance expenses, core deposit intangibles (CDI) amortization, provision for losses on other real estate owned, and franchise taxes. The TCB and FABK transactions increased CDI amortization when comparing the year ended December 31, 2020 to December 31, 2019. These increases were partially offset by decreases in travel and entertainment expenses and advertising. Additionally, the Company recorded no provision or write-downs for other real estate owned in 2020 compared to $98 in 2019.
2019 compared to 2018
Noninterest expense increased significantly during the year ended December 31, 2019 when compared to 2018 which is primarily driven by the increase in salaries and employee benefits as the Company continues to grow the mortgage banking business through RMV, as well as our de novo Murfreesboro and Chattanooga branches.
Occupancy costs increased during the year ended December 31, 2019 compared to the same period in 2018 mainly due to the commencement of Murfreesboro and Chattanooga leases. Additionally, RMV established leases for mortgage production offices in Memphis and Chattanooga in Tennessee and in Little Rock, Arkansas in 2019.
Data processing and software expense increased for the year ended December 31, 2019 when compared to 2018. This increase is mainly attributable to increasing volume of accounts and transactions due to the new de novo branch offices that served to increase data processing costs incrementally. Additionally, we have made investments in technology to improve our network performance, strengthen our cybersecurity infrastructure and enhance our ability to deliver digital products to our commercial and consumer clients.
Professional fees decreased $546 when comparing the year ended December 31, 2019 to the similar period in 2018. This decrease is mainly attributable to the higher legal fees and consulting fees incurred during 2018 by RMV which decreased $713 in 2019.
Regulatory fees decreased $169 for year ended December 31, 2019, compared to the same period in 2018. This decrease was attributable to an approximately $375 credit received from the FDIC offset by an increase in average liabilities.
Other noninterest expenses increased by $859 for the year ended December 31, 2019 compared to the same period in 2018 due to increased travel and entertainment costs and advertising expenses incurred by RMV. We recorded a provision for losses on other real estate of $98 for the year ended December 31, 2019 compared to none in 2018. The provision in 2019 related to a property sold in January 2020.
Efficiency ratio
The efficiency ratio is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. We calculate this ratio by dividing noninterest expense by the sum of net interest income and noninterest income. For an adjusted efficiency ratio, we exclude certain gains, losses and expenses we do not consider core to our business.
Our efficiency ratio of our banking segment was 59.36% and 68.02% for the years ended December 31, 2020 and 2019, respectively. Our adjusted efficiency ratio, on a tax-equivalent basis, was 51.40% and 64.00% for the years ended December 31, 2020 and 2019, respectively. See “Non-GAAP Financial Measures” in this Report for a discussion of the adjusted efficiency ratio.
Income Taxes
2020 compared to 2019
During the years ended December 31, 2020 and 2019, we recorded consolidated income tax expense of $6,935 and $2,129, respectively. The Company files separate federal tax returns for RMV and the bank segment. The taxable income or losses of the mortgage banking operations are included in the respective franchise and excise returns of the Bank and non-controlling member for federal purposes.
Income tax expense for the year ended December 31, 2020, reflects an effective income tax rate of 18.12% (exclusive of a tax benefit of $17 realized on RMV's pre-tax loss of $316) compared to 13.47% (exclusive of a tax benefit of $393 on RMV's pre-tax loss of $6,052). Our effective tax rate differs from the statutory tax rate by our investments in municipal securities, bank-owned life insurance (BOLI), and state tax credits, net of the effect of certain non-deductible expenses and the recognition of excess tax benefits related to stock compensation. The effective tax rate in 2020 increased as compared to 2019 as the proportion of tax-exempt income to total income decreased as compared to 2019.
Our effective tax rate for 2020 and 2019 represents our blended federal and state rate of 26.1% which is then reduced by the impact of anticipated favorable permanent differences between our book and taxable income such as BOLI, income earned on tax-exempt securities and certain federal and state tax credits. The non-deductibility of certain merger-related expenses also drives fluctuations in our effective tax rate.
2019 compared to 2018
During the years ended December 31, 2019 and 2018, we recorded consolidated income tax expense of $2,129 and $1,372. Income tax expense for the year ended December 31, 2019 reflects an effective income tax rate of 13.47% (exclusive of a tax benefit of $393 realized on RMV's pre-tax loss of $6,052) compared to 10.25% (exclusive of a tax benefit of $236 on RMV's pre-tax loss of $3,814). The higher effective tax rate in 2019 is mainly the result of higher excess tax benefits in 2018 related to exercise of stock options and restricted shares vesting which reduces the effective rate.
Noncontrolling Interest in Net Income (Loss) of Subsidiary
RMV incurred a net loss of $299, $5,659, and $3,578 for the years ended December 31, 2020, 2019, and 2018, respectively. The net loss for the year ended December 31, 2020 results in a cumulative net loss of $13,655. These amounts are included in our consolidated results. However, RMV losses are 100% the responsibility of the noncontrolling interest and are not attributable to the Company's shareholders. See "Note 17 - Segment Reporting".
FINANCIAL CONDITION
Overview
Total assets increased $1,124.7 million, or 59.1%, to $3,026.5 million at December 31, 2020 compared to December 31, 2019. This increase was substantially attributable to an increase in net loans held for investment of approximately $890.8 million, a net increase in our mortgage loans held for sale of $110.0 million, an increase of $43.4 million in cash and cash equivalents, and an increase of $31.4 million in the cash surrender value of life insurance contracts. Total liabilities increased $1,026.5 million, or 61.2%, to $2,704.6 million at December 31, 2020 compared to December 31, 2019. This increase was substantially attributable to the increase in total deposits of $994.8 million. These and other components of our balance sheets are primarily attributable to the TCB and FABK Transactions and are discussed further below.
Investment Securities
The investment securities portfolio is intended to provide the Bank with liquidity, meet customer collateral needs, and provide flexible asset/liability management and a source of stable income. The portfolio consists of securities classified as available-for-sale. All available-for-sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in our best interest. Unrealized gains and losses are excluded from earnings, but are reported as other comprehensive income in a separate component of stockholders’ equity, net of income tax. Premium amortization and discount accretion are recognized as adjustments to interest income using the interest method. Realized gains or losses on sales are based on the net proceeds and the adjusted carrying value amount of the securities sold using the specific identification method.
Securities totaled $256,653 at December 31, 2020, a 1.4% decrease from the December 31, 2019 total of $260,293. During 2020, the Company restructured its investment portfolio which included selling those securities obtained in the FABK and TCB transactions. These proceeds were utilized to fund loan growth.
The following table summarizes the Company’s investment portfolio at amortized cost and fair value, aggregated by investment category for the periods presented:
December 31, 2020 December 31, 2019 December 31, 2018
Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total Amortized Cost Fair Value % of Total
U.S. Treasury and other U.S. government agencies $ 47 $ 48 0.02 % $ 59 $ 59 0.02 % $ 568 $ 554 0.19 %
State and municipal 184,102 200,988 78.31 % 186,283 196,660 75.56 % 232,589 229,298 77.38 %
Corporate bonds 23,750 24,113 9.40 % 7,880 7,845 3.01 % 3,130 3,017 1.02 %
Mortgage-backed securities 28,084 28,442 11.08 % 38,126 37,761 14.51 % 32,172 31,958 10.78 %
Asset-backed securities 3,083 3,062 1.19 % 18,374 17,968 6.90 % 28,635 27,996 9.45 %
Time deposits - - - % - - - % 3,500 3,500 1.18 %
Total $ 239,066 $ 256,653 100.00 % $ 250,722 $ 260,293 100.00 % $ 300,594 $ 296,323 100.00 %
The table below summarizes the maturities and tax-equivalent yield characteristics of available-for-sale securities portfolio as of December 31, 2020. This maturity schedule excludes security prepayment and call features.
One year or less Over one year through five years Over five year through ten years Over ten years Total
Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield
U.S. Treasury and other U.S. government agencies $ - - % $ 48 2.03 % $ - - % $ - - % $ 48 2.03 %
State and municipal - - % 85 5.54 % 8,969 4.11 % 191,934 3.77 % 200,988 3.79 %
Corporate bonds - - % 2,010 4.25 % 21,103 4.81 % 1,000 5.00 % 24,113 4.77 %
Mortgage-backed securities - - % 13,990 4.13 % 8,867 3.06 % 5,585 3.71 % 28,442 3.72 %
Asset-backed securities - - % 359 2.29 % 729 1.71 % 1,974 1.73 % 3,062 1.79 %
Total $ - - % $ 16,492 4.11 % $ 39,668 4.20 % $ 200,493 3.76 % $ 256,653 3.85 %
Loans Held For Investment
Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. As previously discussed, the competition for quality loans in our markets has remained intense. Our goal is to steadily grow our loan portfolio, focusing on quality. This is not always possible for various factors, including but not limited to, scheduled maturities or early payoffs exceeding new loan volume. Early payoffs typically increase in lowering rate environments as customers identify advantageous opportunities for refinancing. Total loans held for investment, net, at December 31, 2020, and December 31, 2019, were $2,280,147 and $1,397,374, respectively, an increase of 63.2%.
The table below provides a summary of the loan portfolio composition for the dates noted (including PCI loans).
December 31,
2020 2019 2018
Amount Percent Amount Percent Amount Percent
Commerical, Industrial and Agricultural $ 459,739 19.9 % $ 245,515 17.4 % $ 213,850 17.4 %
Real Estate:
1-4 Family Residential 323,473 14.0 % 227,529 16.2 % 225,863 18.3 %
1-4 Family HELOC 100,525 4.4 % 96,228 6.8 % 88,112 7.2 %
Multifamily and Commercial 834,000 36.2 % 536,845 38.1 % 447,840 36.4 %
Construction, Land Development and Farmland 365,058 15.8 % 273,872 19.4 % 220,801 17.9 %
Consumer 213,863 9.3 % 16,855 1.2 % 20,495 1.7 %
Other 8,669 0.4 % 13,180 0.9 % 14,106 1.1 %
2,305,327 100.0 % 1,410,024 100.0 % 1,231,067 100.0 %
Less:
Deferred loan fees (cost) 4,544 72 (9)
ALL 20,636 12,578 10,892
Loans, net $ 2,280,147 $ 1,397,374 $ 1,220,184
As of December 31,
2017 2016
Amount Percent Amount Percent
Commerical, Industrial and Agricultural $ 138,706 18.0 % $ 134,404 20.1 %
Real Estate:
1-4 Family Residential 111,932 14.4 % 113,031 16.9 %
1-4 Family HELOC 72,017 9.3 % 57,460 8.6 %
Multifamily and Commercial 261,044 33.8 % 215,639 32.3 %
Construction, Land Development and Farmland 156,452 20.3 % 115,889 17.4 %
Consumer 17,605 2.3 % 17,240 2.6 %
Other 14,694 1.9 % 13,745 2.1 %
772,450 100.0 % 667,408 100.0 %
Less:
Deferred loan fees (cost) 231 625
ALL 9,731 9,082
Loans, net $ 762,488 $ 657,701
The table below provides a summary of PCI loans held for investment as of December 31, 2020, and December 31, 2019:
December 31, 2020 December 31, 2019
Commercial, Industrial and Agricultural $ 919 $ -
Real Estate:
1-4 Family Residential 1,004 231
1-4 Family HELOC 19 -
Multifamily and Commercial 1,325 217
Construction, Land Development and Farmland 992 1,021
Consumer 1,924 -
Total gross PCI loans 6,183 1,469
Less:
Remaining purchase discount 2,596 246
Allowance for possible loan losses - -
Loans, net $ 3,587 $ 1,223
Commercial loans consist of commercial and industrial loans made to U.S.-domiciled customers. These include loans used for working capital needs, equipment purchases or other expansionary projects. Commercial loans held for investment of $459,739 at December 31, 2020, increased 87.3% compared to $245,515 as of December 31, 2019.
Real estate loans comprised 70% of the loans held for investment portfolio at December 31, 2020. Residential loans included in this category consist mainly of closed-end loans secured by first and second liens that are not held for sale and revolving, open-end loans secured by 1-4 family residential properties extended under home equity lines of credit. The Company increased the residential portfolio 31.0% from December 31, 2019 to December 31, 2020. Commercial loans included in the real estate category above include (in typical order of prominence) loans secured by non-owner-occupied nonfarm nonresidential properties, loans secured by owner-occupied nonfarm nonresidential properties, and loans secured by multi-family residential properties. Multi-family and commercial real estate loans of $834,000 at December 31, 2020, increased 55.4% compared to $536,845 as of December 31, 2019. Real estate construction loans consist of 1-4 family residential construction loans, other construction loans, land loans, and loans secured by farmland. Construction lending also increased 33.3% from December 31, 2019 to December 31, 2020, based on a strong local economy.
Consumer loans consist of loans to individuals for household, family, and other personal expenditures under revolving credit plans and other consumer loans. Our consumer loans held for investment experienced an increase from December 31, 2019 to December 31, 2020, of 1,168.8%.
Other loans consist mainly of loans to states and political subdivisions and loans to other depository institutions and experienced a 34.2% decrease from December 31, 2019 to December 31, 2020.
Loan repayments are significant source of liquidity for the Bank. The following table sets forth the loans maturing within specific intervals at December 31, 2020, excluding unearned net fees and costs.
One Year or Less One to Five Years Over Five Years Total
Commercial, Industrial and Agricultural $ 67,717 $ 287,168 $ 104,854 $ 459,739
Real Estate:
1-4 Family Residential 29,040 117,819 176,614 323,473
1-4 Family HELOC 4,378 21,241 74,906 100,525
Multifamily and Commercial 64,839 407,954 361,207 834,000
Construction, Land Development and Farmland 123,049 196,123 45,886 365,058
Consumer 6,655 12,929 194,279 213,863
Other 546 3,232 4,891 8,669
Total $ 296,224 $ 1,046,466 $ 962,637 $ 2,305,327
Fixed interest rate $ 109,156 $ 842,023 $ 385,458 $ 1,336,637
Variable interest rate 187,068 204,443 577,179 968,690
Total $ 296,224 $ 1,046,466 $ 962,637 $ 2,305,327
The information presented in the above table is based upon the contractual maturities of the individual loans including those which may be subject to renewal at their contractual maturity. Renewal is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, we believe this treatment presents fairly the structure of the loan portfolio.
ALL
At December 31, 2020, the ALL was $20,636 compared to $12,578 at December 31, 2019. The ALL as a percentage of total loans was 0.90% at December 31, 2020 and 0.89% at December 31, 2019. The ALL was adjusted upward from December 31, 2019 to December 31, 2020, due to loan growth and economic concerns over the COVID-19 pandemic. Loan charge-offs continue to be minimal.
The following table sets forth the activity in ALL for the years presented.
Analysis of Changes in Allowance for Loan Losses
2020 2019 2018 2017 2016
Beginning Balance, January 1 $ 12,578 $ 10,892 $ 9,731 $ 9,082 $ 7,823
Loans charged off:
Commercial, Industrial and Agricultural (521) (396) (381) (976) (84)
Real Estate:
1-4 Family Residential (86) (29) (36) (14) (25)
1-4 Family HELOC (98) - (6) - -
Multifamily and Commercial - - (76) - -
Construction, Land Development and Farmland (114) (60) (215) (45) -
Consumer (705) (50) (26) (36) -
Other - (35) (47) - (36)
Total loans charged off (1,524) (570) (787) (1,071) (145)
Recoveries on loans previously charged off:
Commercial, Industrial and Agricultural 187 393 590 378 323
Real estate:
1-4 Family Residential 774 225 12 - 66
1-4 Family HELOC 20 12 10 19 11
Multifamily and Commercial 29 65 221 - 18
Construction, Land Development and Farmland 56 - 44 5 6
Consumer 166 51 34 2 12
Other - 299 2 - -
Total loan recoveries 1,232 1,045 913 404 436
Net (charge-offs) recoveries (292) 475 126 (667) 291
Provision for loan losses 8,350 1,211 1,035 1,316 968
Total allowance at end of period $ 20,636 $ 12,578 $ 10,892 $ 9,731 $ 9,082
Gross loans at end of period (1) $ 2,305,327 $ 1,410,024 $ 1,231,067 $ 772,450 $ 667,408
Average gross loans (1) $ 2,149,447 $ 1,298,922 $ 1,138,946 $ 714,982 $ 640,592
Allowance to total loans 0.90 % 0.89 % 0.88 % 1.26 % 1.36 %
Net charge-offs (recoveries) to average gross loans 0.01 % (0.04) % (0.01) % 0.09 % (0.05) %
(1) Loan balances exclude loans held for sale.
The following table summarizes the ALL by category and loans held for investment in each category as a percentage of total loans, for the years presented.
December 31, 2020 December 31, 2019 December 31, 2018
Amount % of
Allowance
To Total % of Loan
Type to
Total Loans Amount % of
Allowance
To Total % of Loan
Type to
Total Loans Amount % of
Allowance
To Total % of Loan
Type to
Total Loans
Commercial, Industrial and Agricultural $ 5,441 26.4 % 19.9 % $ 2,529 20.1 % 17.4 % $ 1,751 16.1 % 17.4 %
Real Estate:
1-4 Family Residential 2,445 11.8 % 14.0 % 1,280 10.2 % 16.2 % 1,333 12.2 % 18.3 %
1-4 Family HELOC 1,416 6.9 % 4.4 % 624 5.0 % 6.8 % 656 6.0 % 7.2 %
Multifamily and Commercial 8,535 41.4 % 36.2 % 5,285 42.0 % 38.1 % 4,429 40.6 % 36.4 %
Construction, Land Development and Farmland 1,841 8.9 % 15.8 % 2,649 21.0 % 19.4 % 2,500 23.0 % 17.9 %
Consumer 928 4.5 % 9.3 % 177 1.4 % 1.2 % 184 1.7 % 1.7 %
Other 30 0.1 % 0.4 % 34 0.3 % 0.9 % 39 0.4 % 1.1 %
$ 20,636 100.0 % 100.0 % $ 12,578 100.0 % 100.0 % $ 10,892 100.0 % 100.0 %
December 31, 2017 December 31, 2016
Amount % of
Allowance
To Total % of Loan
Type to
Total Loans Amount % of
Allowance
To Total % of Loan
Type to
Total Loans
Commercial, Industrial and Agricultural $ 2,538 26.1 % 18.0 % $ 2,432 26.8 % 20.1 %
Real Estate:
1-4 Family Residential 773 7.9 % 14.4 % 1,178 13.0 % 16.9 %
1-4 Family HELOC 595 6.1 % 9.3 % 704 7.8 % 8.6 %
Multifamily and Commercial 3,166 32.5 % 33.8 % 2,737 30.1 % 32.3 %
Construction, Land Development and Farmland 2,434 25.0 % 20.3 % 1,786 19.7 % 17.4 %
Consumer 183 1.9 % 2.3 % 208 2.3 % 2.6 %
Other 42 0.5 % 1.9 % 37 0.3 % 2.1 %
$ 9,731 100.0 % 100.0 % $ 9,082 100.0 % 100.0 %
Nonperforming Assets
Nonperforming assets consist of nonperforming loans plus real estate acquired through foreclosure or deed in lieu of foreclosure as well as any retired branches and repossessed collateral. Nonperforming loans by definition consist of nonaccrual loans and loans past due 90 days or more and still accruing interest. When we place a loan on nonaccrual status, interest accruals cease, and uncollected interest is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis, or cost-recovery method, until qualifying for return to accrual.
The following table provides information with respect to the Company’s nonperforming assets.
December 31, 2020 December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2016
Nonaccrual loans $ 5,986 $ 4,071 $ 4,194 $ 5,161 $ 5,634
Past due loans 90 days or more and still accruing interest 1 64 6 - -
Troubled Debt Restructurings ("TDRs") 2,588 1,799 2,469 2,170 2,953
Total nonperforming loans 8,575 5,934 6,669 7,331 8,587
Other real estate ("OREO") 1,246 750 1,000 - -
Repossessed Collateral 1,424 - - - -
Total nonperforming assets $ 11,244 $ 6,684 $ 7,669 $ 7,331 $ 8,587
Total nonperforming loans as a percentage of total loans 0.37 % 0.42 % 0.54 % 0.95 % 1.29 %
Total nonperforming assets as a percentage of total assets 0.37 % 0.35 % 0.44 % 0.65 % 0.94 %
Allowance for loan losses as a percentage of nonperforming loans 240.66 % 211.96 % 163.32 % 132.74 % 105.76 %
Premises and Equipment
Premises and equipment, net, totaled $31,462 at December 31, 2020 compared to $21,064 at December 31, 2019, a net increase of $10,398 or 49.4%. Asset purchases amounted to approximately $2,873 during the year ended December 31, 2020 while related depreciation expense amounted to $2,867. Please refer to" Item 2, Properties" for additional information.
Deposits
At December 31, 2020, total deposits were $2,579 million, an increase of $995 million, or 62.8%, compared to $1,584 million at December 31, 2019. During the year ended December 31, 2020, we increased noninterest-bearing deposits by $315 million or 120.7%, interest-bearing demand deposits increased by $198 million, or 129.4%, savings and money market deposits increased by $448 million, or 109.7% and time deposits increased by $34 million, or 4.5%. While a majority of our deposit growth is driven by our acquisition activity, we did increase total deposits $224 million, or 14%, through organic measures. We are continuing to focus on growth of our noninterest-bearing deposits and using alternative sources of funds to better manage our cost of funds. As of December 31, 2020, noninterest-bearing deposits represent 22% of total deposits.
The average amounts for deposits for 2020, 2019 and 2018 are detailed in the following schedule (in thousands, except for percentages).
2020 2019 2018
Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate
Noninterest-bearing deposits $ 466,334 - % $ 226,855 - % $ 218,867 - %
Interest-bearing demand 258,657 0.30 % 146,518 0.26 % 146,717 0.25 %
Savings and money market 707,023 0.67 % 376,927 1.11 % 349,986 0.74 %
Time deposits-retail 656,945 1.19 % 559,406 2.09 % 531,780 1.58 %
Time deposits-wholesale 229,769 1.77 % 227,071 2.48 % 90,510 1.77 %
Total deposits $ 2,318,728 0.73 % $ 1,536,777 1.42 % $ 1,337,860 0.96 %
The following table shows maturity of time deposits segmented by months to maturity and deposit amounts:
December 31, 2020
Time deposits of $100 and greater Time deposits of less than $100 Total
Three months or less $ 226,770 $ 38,961 $ 265,731
Over three months through six months 120,828 31,290 152,118
Over six months through 12 months 209,470 57,869 267,339
Over one year through three years 68,833 24,401 93,234
Over three years through five years 12,056 5,863 17,919
Over five years - 3 3
Total $ 637,957 $ 158,387 $ 796,344
Market and Liquidity Risk Management
Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. Our Asset Liability Management Committee (ALCO) is charged with the responsibility of monitoring these policies, which are designed to ensure acceptable composition of asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.
Interest Rate Sensitivity-Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items to maximize long-term earnings and mitigate interest rate risk. Measurements we use to help us manage interest rate sensitivity include an earnings simulation model and an economic value of equity model. These measurements are used in conjunction with competitive pricing analysis and are further described below.
Earnings Simulation Model-We believe interest rate risk is effectively measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with simulated forecasts of interest rates for the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from a flat interest rate forecast over the next 12 and 24 months, our estimated change in net interest income as well as our policy limits are as follows:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to Estimated Change in Net Interest Income and Policy of Maximum Percentage Decline in Net Interest Income
Next 12 Next 24
Months Months
Estimate Policy Estimate Policy
-200 bp (1.8)% (15)% (3.7)% (15)%
-100 bp (1.6)% (10)% (3.1)% (10)%
+100 bp 1.8% (10)% 4.7% (10)%
+200 bp 4.2% (15)% 9.2% (15)%
+300 bp 7.0% (20)% 14.0% (20)%
+400 bp 9.9% (25)% 19.0% (25)%
We were in compliance with the earnings simulation model policies monitored by the Bank as of December 31, 2020, indicating what we believe to be a fairly neutral profile.
Economic value of equity-Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.
To help monitor our related risk, we have established the following policy limits regarding simulated changes in our economic value of equity:
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to Maximum Percentage Decline in Economic Value of Equity from the Economic Value of Equity at Currently Prevailing Interest Rates
-200 bp 25%
-100 bp 15%
+100 bp 15%
+200 bp 25%
+300 bp 30%
+400 bp 35%
Non-parallel shifts 35%
At December 31, 2020, our model indicated that we were within these policy limits.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. Our ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies.
Liquidity Risk Management -The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.
Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.
Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.
The Company has established a line of credit with the FHLB of Cincinnati which is secured by a blanket pledge of 1-4 family residential mortgages, multi-family residential, home equity loans, and available-for-sale securities.
At December 31, 2020, FHLB advances totaled $10,000 compared to $10,737 as of December 31, 2019.
At December 31, 2020, the scheduled maturities of these advances and interest rates were as follows (scheduled maturities will differ from scheduled repayments):
Scheduled Maturities Amount Weighted Average Rates
2021 $ 10,000 0.19%
2022 - -%
2023 - -%
2024 - -%
2025 - -%
Thereafter - -%
$ 10,000 0.19%
Capital
Shareholders’ equity was $321,973 at December 31, 2020, an increase of $98,220, or 43.9%, from $223,753 at December 31, 2019. During the twelve months ended December 31, 2020, the Company completed the TCB Holdings Transaction which increased shareholders' equity $18,041 and the FABK Transaction which increased shareholders' equity $51,915. Net income of $31,412 and other comprehensive income of $1,162 also contributed to the increase. This increase was primarily offset by dividends declared of $6,227. Contributions from the noncontrolling interest of $299 were recognized in the twelve months ended December 31, 2020. The increase in shareholders' equity mitigated by the growth in the Bank's assets led to an increase in the Bank’s December 31, 2020 Tier 1 leverage ratio to 10.64% compared with 10.30% at December 31, 2019. See other ratios discussed further below. Additionally, the subordinated debentures qualify as Tier 1 and Total risk-based capital for the Company due to asset size at the time of issuance.
On December 4, 2018, the Company announced that its board of directors has authorized a stock repurchase plan pursuant to which the Company may purchase up to $12 million of shares of the Company’s outstanding common stock, par value $1.00 per share. Stock repurchases under the plan will be made from time to time in the open market or privately negotiated transactions, or otherwise, at the discretion of management of the Company and in accordance with applicable legal requirements. As part of this plan, the Company purchased 365,931 shares for $8,291 during 2019.
On March 10, 2020, the Company announced that its board of directors has authorized the Repurchase Plan. As of December 31, 2020, Reliant Bancorp had not repurchased any shares of Reliant Bancorp common stock under the Repurchase Plan. On April 27, 2020, we announced that our board of directors suspended the Repurchase Plan to preserve our financial strength during this challenging economic environment. The Repurchase Plan expired on December 31, 2020.
On August 24, 2020, the Company filed a Registration Statement on Form S-3 to offer, issue and sell from time to time in one or more offerings any combination of (i) common stock, (ii) preferred stock, (iii) debt securities, (iv) depository shares, (v) warrants, (vi) units, (vii) purchase contracts, and (viii) rights, up to a maximum aggregate offering price of $100,000. The net proceeds from any offering will be used for general corporate purposes including repayment of debt or payment of interest thereon, capital expenditures, acquisitions, investments, and any other purposes that we may specify in any prospectus supplement. Until allocated to such purposes, it is expected that we will invest any proceeds in short-term, interest-bearing instruments or other investment-grade securities
Banks as regulated institutions are required to maintain certain levels of capital. The Federal Reserve Board of Governors, the primary federal regulator for the Bank, has adopted minimum capital regulations or guidelines that categorize capital components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with applicable regulations and guidelines. We regularly review our capital adequacy to ensure compliance with these regulations and guidelines and to help ensure that sufficient capital is available for current and future needs. It is management’s intent to maintain an optimal capital and leverage mix for growth and for shareholder returns.
Prompt corrective action regulations provide five bank capital classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since these notifications that management believes have changed the institution’s category.
Actual and required capital amounts and ratios are presented below as of December 31, 2020 and December 31, 2019 for Reliant Bancorp and the Bank.
Actual
Regulatory
Capital Minimal Capital Adequacy Minimum Required
Capital Including
Capital Conservation
Buffer To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
December 31, 2020
Company
Tier I leverage $ 262,282 8.91 % $ 117,747 4.00 % $ 117,747 4.000 % $ 147,184 5.00 %
Common equity Tier 1 250,513 10.22 % 110,304 4.50 % 171,584 7.000 % 159,328 6.50 %
Tier I risk-based capital 262,282 10.70 % 147,074 6.00 % 208,355 8.500 % 196,099 8.00 %
Total risk-based capital 342,246 13.96 % 196,130 8.00 % 257,420 10.500 % 245,162 10.00 %
Bank
Tier I leverage $ 313,633 10.64 % $ 117,907 4.00 % $ 117,907 4.000 % $ 147,384 5.00 %
Common equity Tier 1 313,633 12.83 % 110,004 4.50 % 171,117 7.000 % 158,894 6.50 %
Tier I risk-based capital 313,633 12.83 % 146,672 6.00 % 207,785 8.500 % 195,562 8.00 %
Total risk-based capital 334,919 13.71 % 195,430 8.00 % 256,503 10.500 % 244,288 10.00 %
December 31, 2019
Company
Tier I leverage $ 176,748 9.74 % N/A - % $ 72,586 4.000 % $ 90,733 5.00 %
Common equity Tier 1 165,063 10.55 % N/A - % 109,520 7.000 % 101,698 6.50 %
Tier I risk-based capital 176,748 11.30 % N/A - % 132,952 8.500 % 125,131 8.00 %
Total risk-based capital 249,751 15.97 % N/A - % 164,207 10.500 % 156,388 10.00 %
Bank
Tier I leverage $ 186,734 10.30 % N/A - % $ 72,518 4.000 % $ 90,648 5.00 %
Common equity Tier 1 186,734 11.95 % N/A - % 109,384 7.000 % 101,571 6.50 %
Tier I risk-based capital 186,734 11.95 % N/A - % 132,823 8.500 % 125,010 8.00 %
Total risk-based capital 199,737 12.79 % N/A - % 163,975 10.500 % 156,167 10.00 %
Non-GAAP Financial Measures
This Annual Report contains certain financial measures that are considered "non-GAAP financial measures" and should be read along with the accompanying tables. Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position, or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with U.S. GAAP. Management believes that non-GAAP financial measures provide a greater understanding of ongoing performance and operations and enhance comparability across periods. Non-GAAP financial measures should not, however, be considered as an alternative to any measure of performance or financial condition as determined in accordance with U.S. GAAP, and readers should consider the
Company’s performance and financial condition as reported under U.S. GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and readers should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under U.S. GAAP. Non-GAAP financial measures presented by the Company may not be comparable to non-GAAP financial measures (even those with the same or similar names) presented by other companies.
Company management uses, and believes that investors benefit from referring to, the following non-GAAP financial measures, among others, to assess the Company's operating results and trends: (i) tax-equivalent net interest income; (ii) adjusted net interest income; (iii) adjusted net interest margin; (iv) adjusted net income attributable to common shareholders; (v) adjusted net income attributable to common shareholders, per diluted share; (vi) adjusted return on average assets; (vii) adjusted return on average shareholders' equity; (viii) average tangible shareholders' equity; (ix) return on average tangible common equity (ROATCE); (x) adjusted ROATCE; and (xi) adjusted efficiency ratio. In the following table, the Company has provided a reconciliation of these non-GAAP financial measures to their most comparable U.S. GAAP financial measures.
Twelve Months Ended
December 31, 2020 December 31, 2019 December 31,
NON-GAAP FINANCIAL MEASURES
Adjusted net interest margin (1)(3)
Net interest income $ 108,046 $ 55,805 $ 53,811
Fully tax-equivalent adjustments:
Loans $ 2,728 $ 1,278 $ 1,281
Tax-exempt investment securities $ 1,444 $ 1,747 $ 1,788
Tax-equivalent net interest income (1)(2)
$ 112,218 $ 58,831 $ 56,880
Purchase accounting adjustments (12,545) (1,673) (1,993)
Adjusted net interest income (1)
$ 99,673 $ 57,158 $ 54,887
Net interest margin (tax-equivalent basis) 4.35 % 3.54 % 3.78 %
Adjusted net interest margin 3.86 % 3.44 % 3.65 %
Adjusted net income attributable to common shareholders and related impact (1)
Net income attributable to common shareholders $ 31,412 $ 16,196 $ 14,085
Merger expenses 6,895 1,603 2,774
Tax effect of adjustments to net income (1,607) (200) (725)
After tax adjustments to net income 5,288 1,403 2,049
Adjusted net income attributable to common shareholders 36,700 17,599 16,134
Net income attributable to common shareholders, per diluted share $ 2.02 $ 1.44 $ 1.23
Adjusted net income attributable to common shareholders, per diluted share (1)
$ 2.36 $ 1.56 $ 1.41
Twelve Months Ended
December 31, 2020 December 31, 2019 December 31,
Return on average:
Return on average assets 1.13 % 0.90 % 0.86 %
Adjusted return on average assets (1)
1.32 % 0.98 % 0.98 %
Return on average shareholders' equity 10.93 % 7.54 % 6.93 %
Adjusted return on average shareholders' equity (1)
12.77 % 8.19 % 7.94 %
Average tangible shareholders' equity: (1)
Average shareholders' equity $ 287,449 $ 214,897 $ 203,317
Less: average goodwill 52,092 43,642 43,552
Less: average core deposit intangibles 11,753 7,715 8,667
Average tangible shareholders' equity $ 223,604 $ 163,541 $ 151,098
Return on average tangible common equity (ROATCE) (1)
14.05 % 9.90 % 9.32 %
Adjusted ROATCE (1)
16.41 % 10.76 % 10.68 %
Adjusted Efficiency Ratio - Bank Segment
Operating Expense
Noninterest expense $ 68,234 $ 42,382 $ 41,512
Less: Merger expenses (6,895) (1,603) (2,774)
Operating Expense $ 61,339 $ 40,779 $ 38,738
Operating Revenue
Tax Equiv Net interest income (2)
$ 109,800 $ 58,278 $ 56,059
Total noninterest income 9,320 7,059 5,250
Less: Loss (Gain) on sale of securities available for sale 270 (1,451) (43)
Less: (Gain) Loss on sale of other real estate owned (28) (166) (259)
Less: (Gain) Loss on disposal of premises and equipment (31) - (13)
Operating Revenue $ 119,331 $ 63,720 $ 60,994
Bank Segment Efficiency Ratio 62.1 % 72.7 % 74.1 %
Adjusted Efficiency Ratio (1)(2)
51.4 % 64.0 % 63.5 %
(1) Not a recognized measure under U.S. GAAP.
(2) Amount includes tax equivalent adjustment to quantify the tax equivalent net interest income.
(3) Prior calculation of this ratio removed tax credits related to certain tax-preference-qualified loans and tax-exempt securities. The Company views these credits as normal course of business and as such removal is unnecessary.
Emerging Growth Company Status
On December 31, 2020, our status as an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), terminated. As an “emerging growth company,” we took advantage of some reduced disclosure and other requirements that were otherwise applicable generally to public companies. As a result, the information that we provided to our shareholders prior to this report may be different from the information provided by other public reporting companies. With the filing of this report, we began providing the information required from “non-accelerated filers” and “smaller reporting companies” as each term is defined in Rule 12b-2 under the Exchange Act in periodic reports required under the Exchange Act.
Effects of Inflation and Changing Prices
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions’ cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase and can reduce our earnings from such activities.
Impact of Recent Accounting Guidance
Please see "Note 1 - Summary of Significant Accounting Policies" where we discuss the impact of recent accounting guidance.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please see headings: “Market and Liquidity Risk Management,” “Interest Rate Sensitivity” and “Effect of Inflation and Changing Prices” under “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are included as a separate section of this report commencing on page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Reliant Bancorp maintains disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act, which are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to Reliant Bancorp’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Reliant Bancorp carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of December 31, 2020. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2020, Reliant Bancorp’s disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
The report of Reliant Bancorp’s management on internal control over financial reporting is set forth on page of this Annual Report on Form 10-K. This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Changes in Internal Controls
There were no changes in Reliant Bancorp’s internal control over financial reporting during Reliant Bancorp’s fiscal quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, Reliant Bancorp’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this item is set forth in our definitive proxy statement relating to the 2021 annual meeting of shareholders (the “2021 Proxy Statement”), to be filed with the SEC within 120 days of the end of the fiscal year ended December 31, 2020, and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is set forth in our 2021 Proxy Statement, and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The response to this Item regarding security ownership of certain beneficial owners and management will be included in, and is incorporated by reference to, the 2021 Proxy Statement, under the caption “Security Ownership of Certain Beneficial Owners and Management.”
The following table summarizes the Company’s equity compensation plan information as of December 31, 2020:
Plan category Number of securities
to be issued upon
exercise of outstanding
options, warrants and rights Weighted average
exercise price of
outstanding options, warrants and rights Number of securities
remaining available
for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a) (b) (c)
Equity compensation plans approved by security holders 249,271 $18.97 935,945
Equity compensation plans not approved by security holders - - -
Total 249,271 $18.97 935,945
(a)Includes shares of common stock to be issued upon the exercise of outstanding restricted stock units.
(b)Excludes restricted stock units which do not have an exercise price.
(c)This number includes 434,186 securities available to be issued under the Commerce Union Bancshares, Inc. Amended and Restated Stock Option Plan. Although this plan will remain in effect until March 23, 2021, the Company has no intentions to issue new awards under the plan. Future awards are intended to be issued under the Commerce Union Bancshares, Inc. 2015 Equity Incentive Plan, under which the number of securities remaining available for future issuance is 501,759.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this item is set forth in our 2021 Proxy Statement and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by this item is set forth in our 2021 Proxy Statement, and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as a part of this Annual Report on Form 10-K
(1) Financial statements
The following consolidated financial statements of the Company are incorporated in this Item 15 by reference from Part II - Item 8 of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
(2) Financial statement schedules
All schedules have been omitted because they are either not applicable, not required or the information called for therein appears in the consolidated financial statements or notes thereto.
(3) Exhibits
See Item 15(b) of this Annual Report on Form 10-K
(b) Exhibits
Incorporated by reference (File No. 001-37391, unless otherwise indicated)
Exhibit
No. Description
2.1* Agreement and Plan of Merger dated August 22, 2017, by and among Commerce Union Bancshares, Inc., Pioneer Merger Sub, Inc., Reliant Bank, Community First, Inc., and Community First Bank & Trust (incorporated by reference herein to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 23, 2017).
2.2* Agreement and Plan of Merger dated September 16, 2019, by and among Reliant Bancorp, Inc., Tennessee Community Bank Holdings, Inc., and Community Bank & Trust (incorporated by reference herein to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 17, 2019).
Exhibit
No. Description
2.3* Agreement and Plan of Merger dated October 22, 2019, by and among Reliant Bancorp, Inc., PG Merger Sub, Inc., and First Advantage Bancorp (incorporated by reference herein to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 23, 2019).
3.1 Amended and Restated Charter of Reliant Bancorp, Inc. (Restated for SEC filing purposes) (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 6, 2018).
3.2 Third Amended and Restated Bylaws of Reliant Bancorp, Inc., as amended (Restated for SEC filing purposes) (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 7, 2020).
4.1 Common Stock Specimen Certificate (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 (File No. 333-228889) filed with the SEC on December 19, 2018).
4.2† Description of the Company's Securities. of the Company's Securities.
4.3 The rights of securities holders are defined in the Charter and Bylaws provided in Exhibits 3.1 and 3.2
4.4 Indenture, dated as of December 13, 2019, by and between Reliant Bancorp, Inc. and UMB Bank, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2019).
4.5 Form of 5.125% Fixed-to-Floating Rate Subordinated Note due 2029 of Reliant Bancorp, Inc. (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2019).
10.1# Commerce Union Bancshares, Inc. Amended and Restated Stock Option Plan (incorporated by reference to Appendix E to the Company’s Registration Statement on Form S-4 (File No. 333-197248) filed with the SEC on July 3, 2014).
10.2# Commerce Union Bancshares, Inc. 2015 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A filed with the SEC on May 14, 2015).
10.3†# Amended and Restated Reliant Bancorp, Inc. 2018 Employee Stock Purchase Plan.
10.4# Form of Management Incentive Stock Option Agreement for grants under 2015 Equity Compensation Plan (incorporated by reference to Exhibit to Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2016).
10.5# Employment Agreement, dated as of April 15, 2018, by and among DeVan D. Ard, Jr., Reliant Bancorp, Inc., and Reliant Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 20, 2018).
10.6# First Amendment to Employment Agreement, dated June 22, 2020, by and among Reliant Bancorp, Inc., Reliant Bank, and DeVan D. Ard, Jr. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 10, 2020).
10.7# Form of 2019 Restricted Stock Unit Agreement (for Employees) (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 24, 2019).
10.8# Form of 2019 Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 24, 2019).
10.9# Form of Employees Restricted Stock Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2019).
10.10# Form of Directors Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 6, 2019).
10.11# Form of 2019 Restricted Stock Unit Agreement (for Directors) (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2019).
10.12# Executive Separation Agreement and Release, dated June 1, 2020, by and between James Daniel Dellinger and Reliant Bancorp, Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 1, 2020).
Exhibit
No. Description
10.13# Employment Agreement, dated May 27, 2020, by and among Reliant Bancorp, Inc., Reliant Bank, and Jerry Cooksey (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 1, 2020).
10.14# Employment Agreement, dated June 22, 2020, by and among Reliant Bancorp, Inc., Reliant Bank, and John R. Wilson (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 22, 2020).
10.15# Executive Separation Agreement and Release, dated June 22, 2020, by and among Louis E. Holloway, Reliant Bancorp, Inc., and Reliant Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2020).
10.16# Employment Agreement, dated September 21, 2020, by and among Reliant Bancorp, Inc., Reliant Bank, and Mark Seaton (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2020).
21.1† Subsidiaries of Reliant Bancorp, Inc.
23.1† Consent of Maggart & Associates, P.C.
24.1† Power of Attorney (included on the signature page to this Annual Report on Form 10-K).
31.1† Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
31.2† Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
32.1** Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS XBRL Instance Document †
101.SCH XBRL Taxonomy Extension Schema Document †
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document †
101.DEF XBRL Taxonomy Extension Definition Linkbase Document †
101.LAB XBRL Taxonomy Extension Label Linkbase Document †
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document †
* The registrant has omitted schedules to the subject agreement pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule to the SEC upon request.
† Filed herewith
** Furnished herewith
# Indicates management contract or compensatory plan or arrangement
(c) Schedules to the consolidated financial statements are omitted, as the required information is not applicable.