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FB Financial (FBK)

Filed: 7 Jun 21, 4:21pm
Exhibit 99.1
EXPLANATORY NOTE

FB Financial Corporation is filing this Exhibit 99.1 to its Current Report on Form 8-K to recast certain segment information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission on March 12, 2021 (the “2020 10-K”). This revision did not impact the Company's consolidated balance sheet or results of operations for any periods presented.

The Company re-evaluated its business segments and revised to align all mortgage activities with the Mortgage segment. Previously, the Company had attributed retail mortgage activities originating from geographical locations within the footprint of the Company's branches to the Banking segment. The financial performance of the Mortgage segment is assessed based on results of operations reflecting direct revenues and expenses and allocated expenses. This approach gives management a better indication of the operating performance of the segment. When assessing the Banking segment’s financial performance, the CEO utilizes reports with indirect revenues and expenses including but not limited to the investment portfolio, electronic delivery channels and areas that primarily support the banking segment operations. Therefore these are included in the results of the Banking segment. The Company began to present the revised reportable segments in the first quarter of 2021.

The Company has recast the relevant parts of the following portions of the 2020 10-K:

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations (up to and not including the subsection entitled “Liquidity and Capital Resources”, except for other balance sheet commitments)
Item 8: Financial Statements and Supplementary Data

The recast items included in this Exhibit 99.1 have been updated to reflect the change in the Company’s segment reporting described above. The Company has not otherwise updated for activities or events occurring after the date the Company filed the 2020 10-K, and the items included in this Exhibit 99.1 do not modify or update any other disclosures therein in any way. Without limitation of the foregoing, this filing does not purport to update the Note About Forward-Looking Statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations or the Risk Factors sections of the 2020 10-K for any information, uncertainties, transactions, risks, events or trends occurring, or becoming known to management subsequent to the date of filing of the 2020 10-K. Therefore, this Exhibit 99.1 should be read in conjunction with the 2020 10-K.
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Table of Contents
 


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PART II
ITEM 7 — Management's discussion and analysis of financial condition and results of operations
Overall Objective
The following is a discussion of our financial condition at December 31, 2020 and December 31, 2019, and our results of operations for the years ended December 31, 2020 and 2019, and should be read in conjunction with our audited consolidated financial statements included elsewhere herein. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth in the "Cautionary note regarding forward-looking statements" and Risk Factors" sections of this Annual Report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.
Discussion and analysis of our financial condition and results of operations for the years ended December 31, 2019 and 2018 are included in the respective sections within "Part II. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of operations" of our Annual Report filed on Form 10-K with the SEC for the year ended December 31, 2019.
Overview
We are a financial holding company headquartered in Nashville, Tennessee. We operate primarily through our wholly owned bank subsidiary, FirstBank, the third largest bank headquartered in Tennessee, based on total assets. FirstBank provides a comprehensive suite of commercial and consumer banking services to clients in select markets in Tennessee, North Alabama, Southern Kentucky, and North Georgia. As of December 31, 2020, our footprint included 81 full-service branches serving the following Tennessee Metropolitan Statistical Areas (“MSAs”): Nashville, Chattanooga (including North Georgia), Knoxville, Memphis, and Jackson in addition to Bowling Green, Kentucky and Florence and Huntsville, Alabama. We also provide banking services to 16 community markets throughout Tennessee and North Georgia. FirstBank also provides mortgage banking services utilizing its bank branch network and mortgage banking offices strategically located throughout the southeastern United States in addition to a national internet delivery channel. As of December 31, 2020, we had total assets of $11.21 billion, loans held for investment of $7.08 billion, total deposits of $9.46 billion, and total shareholders’ equity of $1.29 billion.
We operate through two segments, Banking and Mortgage. We generate most of our revenue in our Banking segment from interest on loans and investments, loan-related fees, trust and investment services and deposit-related fees. Our primary source of funding for our loans is customer deposits, and, to a lesser extent, unsecured credit lines, Federal Home Loan Bank (“FHLB”) advances, brokered and internet deposits, and other borrowings. We generate most of our revenue in our Mortgage segment from origination fees and gains on sales in the secondary market of mortgage loans that we originate from our mortgage offices and through our online ConsumerDirect channel, as well as from mortgage servicing revenues.
Effective, March 31, 2021, the Company re-evaluated its business segments and revised to align all mortgage activities with the Mortgage segment. Previously the Company had attributed retail mortgage activities origination from geographical locations within the footprint of the Company's branches to the Banking segment. Previously disclosed segment results for the years ended December 31, 2020, 2019 and 2018 have been revised to reflect this realignment. There was no impact to the Company's consolidated balance sheet or results of operation as a result of this revision.
Developments in 2020
Mergers and acquisitions
Franklin Financial Network, Inc.
On August 15, 2020, the Company completed its previously announced merger with Franklin Financial Network, Inc ("Franklin"), and its wholly owned subsidiaries, with FB Financial Corporation continuing as the surviving entity. Under the terms of the agreement, the Company acquired total assets of $3.63 billion, loans of $2.79 billion and assumed total deposits of $3.12 billion. Total loans acquired included a non-strategic institutional portfolio with a fair value of $326.2 million the Company classified as held for sale. Franklin common shareholders received 15,058,181 shares of the Company's common stock, net of the equivalent value of 44,311 shares withheld on certain Franklin employee equity awards that vested upon change in control, as consideration in connection with the merger, in addition to $31.3 million in
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cash consideration. The Company also issued replacement restricted stock units to replace those initially granted by Franklin in 2020 that did not vest upon change in control, with a total fair value of $0.7 million attributed to pre-combination service. Based on the closing price of the Company's common stock on the New York Stock Exchange of $29.52 on August 15, 2020, the merger consideration represented approximately $477.8 million in aggregate consideration.
The merger resulted in goodwill of $67.2 million being recorded based on the fair value of total assets acquired and liabilities assumed in the transaction.
The transaction added a new subsidiary to the Company, FirstBank Risk Management ("FBRM"), which provides risk management services to the Company in the form of enhanced insurance coverages. It also added a new subsidiary to the Bank, FirstBank Investments of Tennessee, Inc. ("FBIT"), which provides investment services to the Bank. FBIT has a wholly owned subsidiary, FirstBank Investments of Nevada, Inc. ("FBIN") to provide investment services to FBIT. FBIN has a controlling interest in a subsidiary, FirstBank Preferred Capital, Inc. ("FBPC"), which serves as a real estate investment trust ("REIT"), to allow the Bank to sell real estate loans to the REIT to obtain a tax benefit.
FNB Financial Corp. merger
On February 14, 2020, the Company completed its previously announced acquisition of FNB Financial Corp. and its wholly owned subsidiary, Farmers National Bank of Scottsville (collectively, "Farmers National"). Following the acquisition, Farmers National was merged into the Company with FB Financial Corporation continuing as the surviving entity. The Company acquired total assets of $258.2 million, loans of $182.2 million and deposits of $209.5 million. The consideration is valued at approximately $50.0 million based on 954,797 shares of the Company's common stock (utilizing the Company's market price of $36.70 on February 14, 2020) and $15.0 million in cash consideration. The acquisition resulted in $6.3 million of goodwill.
COVID-19 and the CARES Act
During 2020, the COVID-19 health pandemic created a crisis resulting in volatility in financial markets, sudden, unprecedented job losses, and disruption in consumer and commercial behavior, resulting in governments in the United States and globally to intervene with varying levels of direct monetary support and fiscal stimulus packages. All industries, municipalities and consumers have been impacted by the health crisis to some degree, including the markets that we serve. In attempts to “flatten the curve”, businesses not deemed essential were closed or constrained to capacity limitations, individuals were asked to restrict their movements, observe social distancing and shelter in place. These actions resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses, leading to a loss of revenues and a rapid increase in unemployment, widening of credit spreads, dislocation of bond markets, disruption of global supply chains and changes in consumer spending behavior. As certain restrictions began lifting and more businesses were allowed to open their doors in late 2020, we began to experience a slow improvement in commerce through much of our footprint. Despite the pickup in economic activity late in the year, there is uncertainty regarding the long term effects on the global economy which could have an adverse impact on the Company.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. The CARES Act includes the Paycheck Protection Program ("PPP"), a nearly $670 billion program, as amended, designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee up to 24 weeks of payroll and other costs, including rent and other operating costs, to help those businesses remain viable and allow their workers to continue paying bills. Over the course of 2020, we originated over 2,900 PPP loans, with $314,678 in total balances through the US Small Business Administration ("SBA"). The SBA began accepting PPP forgiveness applications in the last quarter of 2020, which decreased total balances to $212,645 as of December 31, 2020. Balances will continue to decline throughout 2021 as the SBA continues accepting forgiveness applications.
On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the Consolidated Appropriations Act ("CAA") that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “HHSB Act”). Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion for both new first time PPP loans under the existing PPP and the expansion of existing PPP loans for certain qualified, existing PPP borrowers. In addition to extending and amending the PPP, the HHSB Act also creates a new grant program for “shuttered venue operators.” As a participating lender in the PPP, the Company continues to monitor legislative, regulatory, and supervisory developments related thereto, including the most recent changes implemented by the HHSB Act.
On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan
Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further stipulated that a qualified loan modification was exempt by law from classification as a troubled debt restructuring (“TDR”), from the period beginning March 1, 2020 until the earlier of December 31, 2020, or the date that is 60 days after
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the date on which the national emergency concerning the COVID-19 pandemic is terminated. Section 541 of the CAA extends this relief to the earlier of January 1, 2022 or 60 days after the national emergency termination date. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations.
We have numerous customers that have experienced financial distress, as a direct result of COVID-19, and in response we introduced a payment deferral program to assist during these unprecedented times. The total amortized cost of loans deferred during 2020 that were no longer in deferral status was $1.40 billion as of December 31, 2020. We had a recorded investment in loans remaining on Company-sponsored deferred payment programs totaling $202.5 million as of December 31, 2020 , representing approximately 2.9% of our loans held for investment. Of the loans granted deferrals, these modifications typically range between sixty to ninety days and were not considered TDRs under the interagency regulatory guidance or the CARES Act. Additionally, we service mortgages on behalf of Fannie Mae, Freddie Mac and Ginnie Mae, and as of December 31, 2020 approximately 6% of customers serviced on behalf of the aforementioned companies have received forbearance assistance. COVID-19 is expected to continue to influence commerce worldwide and the magnitude to which our financial results will be impacted is uncertain at this time.
Key factors affecting our business
Interest rates
Net interest income is the largest contributor to our net income and is the difference between the interest and fees earned on interest-earning assets (primarily loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (primarily deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the contractual yield on such assets and the contractual cost of such liabilities. These factors are influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the Federal Reserve Board and market interest rates.
The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the Federal Reserve Board’s actions. The yields generated by our loans and securities are typically driven by short-term and long-term interest rates, which are set by the market and are, at times, heavily influenced by the Federal Reserve Board’s actions. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur.
As a result of the COVID-19 pandemic discussed above, interest rates fell to historic lows during the year ended December 31, 2020. On March 3, 2020, the Federal Open Market Committee (‘‘FOMC’’) reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. On March 15, 2020 the Federal Reserve announced it would revive its quantitative easing program to provide liquidity to the U.S. treasury and mortgage markets by committing to buy $500 billion of U.S. Treasuries and $200 billion of agency mortgage backed securities. On March 16, 2020, the FOMC further reduced the target federal funds rate by an additional 100 basis points to a range of 0.00% to 0.25%. On March 23, 2020 the Federal Reserve modified its quantitative easing program initiative to an unlimited purchase program that is expected to exceed the monetary policy support provided during the financial crisis over 10 years ago. These actions could have significant adverse effects on the earnings, financial condition and results of operations of the Company.
For additional information regarding our interest rate risks factors and management, see “Business: Risk management: Liquidity and interest rate risk management” and “Risk factors: Risks related to our business.”
Credit trends
We focus on originating quality loans and have established loan approval policies and procedures to assist us in upholding the overall credit quality of our loan portfolio. However, credit trends in the markets in which we operate and in our loan portfolio can materially impact our financial condition and performance and are primarily driven by the economic conditions in our markets.
During 2020, our percentage of total nonperforming loans to loans held for investment increased to 0.91% as of December 31, 2020, from 0.60% at December 31, 2019. Our loans classified as substandard and doubtful increased to 1.87% of loans held for investment as of December 31, 2020, compared to 1.82% as of December 31, 2019. Our nonperforming assets as of December 31, 2020 were $84.2 million, or 0.75% of total assets, increasing from $47.1 million, or 0.77% of assets as of December 31, 2019.
Our provision for credit losses on loans held for investment and unfunded commitments during the year ended December 31, 2020 was $108.0 million under the current expected credit loss methodology compared with $7.1 million
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under the previous incurred loss model. Our provision was comprised of $94.6 million related to provision for credit losses on loans held for investment and $13.4 million related to provision for unfunded commitments during the year ended December 31, 2020. This increase was greatly impacted by negative economic forecasts in our loss rate allowance for credit losses model promulgated by the adverse impacts of COVID-19. Economic forecasts slowly improved in the last half of 2020, however we believe the true impact of the pandemic on our loan portfolio could lag beyond the economic turnaround as borrower assistance programs are exhausted. While we continue to be sensitive to credit quality risks in our commercial real estate, commercial and industrial, and construction loan portfolios due to our concentration of loans in these categories, we believe our portfolio is well balanced overall. Although we have not experienced significant credit losses to date, we continue to closely monitor industries that present elevated risk of adverse impact. As of December 31, 2020, loans within these industries we consider "of concern" amounted to approximately 23.8% of our total loans held for investment. Additional detail summarizing our exposure to industries "of concern" is further discussed under the "Financial Condition" subheading within this management's discussion and analysis.
For additional information regarding credit quality risk factors for our Company, see “Business: Risk management: Credit risk management” and “Risk factors: Credit Risks.”
Competition
Our profitability and growth are affected by the highly competitive nature of the financial services industry. We compete with commercial banks, savings banks, credit unions, non-bank financial services companies, online mortgage providers, internet banks and other financial institutions operating within the areas we serve, particularly with national and regional banks that often have more resources than we do to invest in growth and technology and community banks with strong local ties, all of which target the same clients we do. Recently, we have seen increased competitive pressures on loan rates. Continued loan pricing pressure may continue to affect our financial results in the future.
For additional information, see “Business: Our markets,” “Business: Competition” and “Risk factors: Risks related to our business.”
Regulatory trends and changes in laws
We are subject to extensive regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment also has heightened supervisory expectations in areas such as consumer compliance, the Bank Secrecy Act and anti-money laundering compliance, risk management and internal audit. As a result of our increase in asset size above $10 billion and these heightened expectations, we expect to incur additional costs for additional compliance, risk management and audit personnel or professional fees associated with advisors and consultants.
As described further under “Business: Supervision and regulation,” we are subject to a variety of laws and regulations, including the Dodd-Frank Act.
See also “Risk factors: Legal, regulatory and compliance risk”.
Overview of recent financial performance
Results of operations
Year ended December 31, 2020 compared to the year ended December 31, 2019
Our net income decreased during the year ended December 31, 2020 to $63.6 million from $83.8 million for the year ended December 31, 2019. Diluted earnings per common share was $1.67 and $2.65 for the years ended December 31, 2020 and 2019, respectively. Our net income represented a ROAA of 0.75% and 1.45% for the years ended December 31, 2020 and 2019, respectively, and a ROAE of 6.58% and 11.6% for the same periods. Our ratio of ROATCE for the years ended December 31, 2020 and 2019 was 8.54% and 15.4%, respectively.
These results were significantly impacted by the economic forecasts incorporated in our CECL loss rate model, leading our provision for credit losses on loans held for investment and unfunded loan commitments increased to $108.0 million for the year ended December 31, 2020 compared with $7.1 million for the year ended December 31, 2019. Our results were also impacted by an increase in merger expenses that totaled $34.9 million relating to our acquisitions of Franklin and Farmers National during year ended December 31, 2020 compared with merger expenses of $5.4 million for the year ended December 31, 2019 related to our acquisition of the Branches.
During the year ended December 31, 2020, net interest income before provision for credit losses increased to $265.7 million compared with $226.0 million in the year ended December 31, 2019.
Our net interest margin, on a tax-equivalent basis, decreased to 3.46% for the year ended December 31, 2020 as compared to 4.34% for the year ended December 31, 2019, influenced by declining interest rates during the current period.
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Noninterest income for the year ended December 31, 2020 increased by $166.5 million to $301.9 million, up from $135.4 million for prior year period. The increase in noninterest income was primarily driven by an increase in mortgage banking income of $154.4 million to $255.3 million.
Noninterest expense increased to $377.1 million for the year ended December 31, 2020, compared with $244.8 million for the year ended December 31, 2019. The increase in noninterest expense is reflective of the increase in mortgage commissions stemming from elevated business activity, as well as the impact of our acquisitions and integration activities, including increases in salaries, commissions and personnel-related costs from the incremental head count.
Year ended December 31, 2019 compared to Year ended December 31, 2018
Our net income increased by 4.46% in 2019 to $83.8 million from $80.2 million in 2018. Pre-tax net income increased by $3.7 million, or 3.48%, from $105.9 million for the year ended December 31, 2018 to $109.5 million for the year ended December 31, 2019. Diluted earnings per common share was $2.65 and $2.55 for the years ended December 31, 2019 and 2018, respectively. Our net income represented a return on average assets, or ROAA, of 1.45% and 1.66% in 2019 and 2018, respectively, and a return on average shareholders’ equity, or ROAE, of 11.6% and 12.7% in 2019 and 2018, respectively. Our ratio of return on average tangible common equity ("ROATCE") for the years ended December 31, 2019 and 2018 was 15.4% and 16.7%, respectively.
During the year ended December 31, 2019, net interest income before provision for loan losses increased to $226.0 million compared to $204.1 million in the year ended December 31, 2018, which was attributable to an increase in interest income and expense, primarily driven by loan and deposit growth driven by declining interest rates and our growth initiatives, including the Atlantic Capital branch acquisition.
Our net interest margin, on a tax-equivalent basis, decreased to 4.34% for the year ended December 31, 2019 as compared to 4.66% for the year ended December 31, 2018, due primarily to the increase in cost of funds partially offset by an increase in contractual loan yield earned on our loan portfolio.
Noninterest income for the year ended December 31, 2019 increased by $4.8 million to $135.4 million from $130.6 million from the same period in the previous year. The increase in noninterest income was largely a result of an increase in ATM and interchange fees related to our growth and volume of business.
Noninterest expense increased to $244.8 million for the year ended December 31, 2019 compared to $223.5 million for the years ended December 31, 2018. The increase in noninterest expense reflects the impact of our acquisition of the Branches, including increases in salaries, commissions and personnel-related costs and increased merger expenses. Noninterest expense for the year ended December 31, 2019 also reflects expenses of $2.0 million related to the sale of our wholesale mortgage origination channels comprising the third party origination ("TPO") and correspondent origination channels (collectively referred to as "mortgage restructuring").
Financial condition
Our total assets grew by 83.0% to $11.21 billion at December 31, 2020, as compared to $6.12 billion at December 31, 2019. The increase reflects additions through acquisitions amounting to $3.63 billion and $258.2 million from Franklin and Farmers National, respectively, which closed on August 15, 2020 and February 14, 2020, respectively. Loans held for investment increased $2.67 billion to $7.08 billion at December 31, 2020, compared to $4.41 billion at December 31, 2019. The increase in loans held for investment for the year ended 2020 includes $2.43 billion and $182.2 million of loans acquired from Franklin and Farmers National, respectively, as well as $212.6 million of PPP loans outstanding as part of the CARES Act.
We grew total deposits by $4.52 billion to $9.46 billion at December 31, 2020, compared to $4.93 billion at December 31, 2019. The increase includes $3.12 billion of deposits assumed in the Franklin acquisition and $209.5 million assumed in the Farmers National acquisition.
Excluding the impact of our merger and acquisition activities, as well as the PPP loans included in loans held for investment, total assets increased 16.0%, total loans decreased 3.4%, and total deposits increased 24.2%, from December 31, 2019 to December 31, 2020.
Business segment highlights
We operate our business in two business segments: Banking and Mortgage. Effective, March 31, 2021, the Company re-evaluated its business segments and revised to align all mortgage activities with the Mortgage segment. Previously the Company had attributed retail mortgage activities origination from geographical locations within the footprint of the Company's branches to the Banking segment. Previously disclosed results for the years ended December 31, 2020, 2019 and 2018 have been revised to reflect this realignment. See Note 21, “Segment reporting” in the notes to our consolidated financial statements for a description of these business segments.
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Banking
The net contribution before taxes from the Banking segment decreased in the year ended December 31, 2020 to a loss of $20.5 million, compared to income $99.9 million for the year ended December 31, 2019. These results were primarily driven by the provisions for credit losses on loans held for investment and unfunded loan commitments totaling $108.0 million during the year ended December 31, 2020 compared to $7.1 million in the previous year. Net interest income increased $39.5 million to $265.6 million during the year ended December 31, 2020 from $226.1 million in the same period in the prior year. Noninterest income increased to $46.5 million in the year ended December 31, 2020 as compared to $34.5 million in the year ended December 31, 2019. Noninterest expense increased $71.0 million, primarily due to merger and other costs associated with our overall growth, including increased salaries, commissions and employee benefits expenses associated with incremental headcount following our acquisitions.
Mortgage
Income before taxes from the Mortgage segment increased to $103.0 million for the year ended December 31, 2020 as compared to $9.7 million for the year ended December 31, 2019 primarily due to increased volume driven by declining interest rates and an increase in refinancing activity. The increase in volume contributed to noninterest income increasing $154.4 million to $255.3 million during the year ended December 31, 2020 compared to $100.9 million for the year ended December 31, 2019.
Noninterest expense for the years ended December 31, 2020 and 2019 was $152.4 million and $91.2 million, respectively. This increase during the year ended December 31, 2020 is mainly attributable to a continued increase in business activity and the result of a conducive interest rate environment for refinancing during the period, which led to an increase in related commissions and incentives expenses.
During 2019, we made a strategic decision to sell our wholesale mortgage operations, which comprise the third party origination ("TPO") and correspondent mortgage delivery channels. The exit of the two wholesale channels better aligns the Mortgage segment with our strategic plan and long-term vision for the Company. This has also allowed additional focus on our retail and Consumer Direct origination channels. In connection with the mortgage restructuring, the Company incurred related expenses, including $0.1 million attributed to the relief of goodwill, totaling $2.0 million for the year ended December 31, 2019, respectively.
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Results of operations
Throughout the following discussion of our operating results, we present our net interest income, net interest margin and efficiency ratio on a fully tax-equivalent basis. The fully tax-equivalent basis adjusts for the tax-favored status of net interest income from certain loans and investments. We believe this measure to be the preferred industry measurement of net interest income, which enhances comparability of net interest income arising from taxable and tax-exempt sources.
The adjustment to convert certain income to a tax-equivalent basis consists of dividing tax exempt income by one minus the combined federal and blended state statutory income tax rate of 26.06% for the years ended December 31, 2020 and 2019.
Net interest income
Net interest income is the most significant component of our earnings, generally comprising over 50% of our total revenues in a given period. Net interest income and margin are shaped by many factors, primarily the volume, term structure and mix of earning assets, funding mechanisms, and interest rate fluctuations. Other factors include accretion income on purchased loans, prepayment risk on mortgage and investment–related assets, and the composition and maturity of earning assets and interest-bearing liabilities. In response to economic uncertainty related to the COVID-19 pandemic, the Federal Reserve remains committed to using all available tools to support the economy and uphold their dual mandate of full employment and stable prices. The FOMC maintained the Federal Funds rate to zero lower bound, and maintained their commitment to open-ended purchases of Treasury securities and agency mortgage-backed securities. During the last half of 2020, the US Treasury yield curve steepened as long-term rates rose. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to continue having a negative impact on net interest income. Other financial impacts could occur, though such potential impacts are unknown at this time.
Year ended December 31, 2020 compared to year ended December 31, 2019
On a tax-equivalent basis, net interest income increased $40.6 million to $268.5 million in the year ended December 31, 2020 as compared to $227.9 million in the year ended December 31, 2019. The increase in tax-equivalent net interest income in the year ended December 31, 2020 was primarily driven by an increase in loan volume influenced by the Franklin merger, which was also impacted by a decrease in overall cost of deposits.
Interest income, on a tax-equivalent basis, was $317.5 million for the year ended December 31, 2020, compared to $284.4 million for the year ended December 31, 2019, an increase of $33.1 million. Interest income on loans held for investment, on a tax-equivalent basis, increased $27.4 million to $278.1 million for the year ended December 31, 2020 from $250.7 million for the year ended December 31, 2019 primarily due to increased loan volume driven by growth in average loan balances of $1.47 billion. The growth in average loan balance reflects the addition of $182.2 million in loans acquired from Farmers National and $2.43 billion in loans acquired in the Franklin merger. In addition, the origination of PPP loans during the period contributed $206.8 million to the increase in average total loans held for investment.                 
The tax-equivalent yield on loans held for investment was 4.95%, down 109 basis points from the year ended December 31, 2019. The decrease in yield was primarily due to the lower interest rate environment and was also impacted by lower-yielding PPP loans originated during the period. Contractual loan interest rates yielded 4.57% in the year ended December 31, 2020 compared with 5.50% in the year ended December 31, 2019. PPP loans contribute 14 basis points of this decline in contractual loan yield.
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The components of our loan yield, a key driver to our NIM for the year ended December 31, 2020, 2019, and 2018 were as follows:
Year Ended December 31,
2020 2019 2018 
(dollars in thousands)Interest
income
Average
yield
Interest
income
Average
yield
Interest
income
Average
yield
Loan yield components:
Contractual interest rate on loans held for
investment (1)(2)
$256,929 4.57 %$228,069 5.50 %$183,116 5.42 %
Origination and other loan fee income (2)
15,978 0.28 %12,977 0.31 %13,093 0.39 %
Accretion on purchased loans3,788 0.07 %8,556 0.21 %7,608 0.23 %
Nonaccrual interest collections1,381 0.03 %885 0.02 %1,375 0.04 %
Syndicated loan fee income— — %206 — %351 0.01 %
Total loan yield$278,076 4.95 %$250,693 6.04 %$205,543 6.09 %
(1)Includes tax-equivalent adjustment.
(2)Includes $2.09 million of loan contractual interest and $3.92 million of loan fees related to PPP loans for the year ended December 31, 2020.
Accretion on purchased loans contributed 5 and 16 basis points to the NIM for the year ended December 31, 2020 and 2019, respectively. The decrease in accretion is due in part to the adoption of CECL and purchase accounting resulting from our merger with Franklin, that contributed a net premium of $11.3 million recorded as of August 15, 2020, to be amortized as a reduction to loan interest income. Contractual interest and origination fees on PPP loans attributed 8 basis points to the NIM for the year ended December 31, 2020. We anticipate recognizing an estimated $2.7 million in deferred origination fees, net of third party costs and deferred salaries, over the remaining life of the PPP loan portfolio.
Our NIM, on a tax-equivalent basis, decreased to 3.46% during the year ended December 31, 2020 from 4.34% in the year ended December 31, 2019, driven by a declining interest rate environment and change in balance sheet mix, partially attributable to our acquisition of Franklin during the year.

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Interest expense was $49.0 million for the year ended December 31, 2020, a decrease of $7.5 million as compared to the year ended December 31, 2019. The primary driver was the impact of the decrease in interest rates on deposits, resulting in total deposit interest expense decrease of $8.7 million to $42.9 million for the year ended December 31, 2020, compared to $51.6 million for the year ended December 31, 2019. The decrease was largely attributed to money market deposits which decreased to $13.7 million for the year ended December 31, 2020 from $17.4 million for the year ended December 31, 2019 and customer time deposits which decreased to $19.7 million for the year ended December 31, 2020 from $24.1 million for the year ended December 31, 2019. The average rate on money markets decreased to 0.76%, down 66 basis points from the year ended December 31, 2019. Average money market balances increased $587.8 million to $1,807.5 million during the year ended December 31, 2020 from $1,219.7 million for the same period in the previous year. The decrease in interest expense on customer time deposits was primarily driven by decreased interest rates as the average rate on customer time deposits decreased 57 basis points from 2.09% for the year ended December 31, 2019 to 1.52% for the year ended December 31, 2020. Total cost of deposits was 0.62% for the year ended December 31, 2020 compared to 1.10% for the year ended December 31, 2019.
11


Average balance sheet amounts, interest earned and yield analysis
The table below shows the average balances, income and expense and yield and rates of each of our interest-earning assets and interest-bearing liabilities on a tax equivalent basis, if applicable, for the periods indicated.
Year Ended December 31,
2020 2019 2018 
(dollars in thousands on tax-equivalent basis)
Average
balances
(1)
Interest
income/
expense
Average
yield/
rate
Average
balances
(1)
Interest
income/
expense
Average
yield/
rate
Average
balances
(1)
Interest
income/
expense
Average
yield/
rate
Interest-earning assets:
Loans (2)(4)
$5,621,832 $278,076 4.95 %$4,149,590 $250,693 6.04 %$3,376,203 $205,543 6.09 %
Loans held for sale-mortgage420,791 12,699 3.02 %254,689 9,966 3.91 %352,370 15,632 4.44 %
Loans held for sale-commercial84,580 4,166 4.93 %— — — %— — — %
Securities:
Taxable589,393 10,267 1.74 %516,250 13,223 2.56 %478,034 12,397 2.59 %
Tax-exempt (4)
275,786 9,570 3.47 %155,306 6,498 4.18 %119,295 5,473 4.59 %
Total Securities (4)
865,179 19,837 2.29 %671,556 19,721 2.94 %597,329 17,870 2.99 %
Federal funds sold85,402 304 0.36 %31,309 678 2.17 %21,466 412 1.92 %
Interest-bearing deposits with other
financial institutions
662,175 1,960 0.30 %130,145 2,651 2.04 %49,549 998 2.01 %
FHLB stock21,735 441 2.03 %15,146 722 4.77 %12,742 716 5.62 %
Total interest earning assets (4)
7,761,694 317,483 4.09 %5,252,435 284,431 5.42 %4,409,659 241,171 5.47 %
Noninterest Earning Assets:
Cash and due from banks66,177 51,194 49,410 
Allowance for credit losses(121,033)(30,442)(25,747)
Other assets (3)
731,262 504,485 411,543 
Total noninterest earning assets676,406 525,237 435,206 
Total assets$8,438,100 $5,777,672 $4,844,865 
Interest-bearing liabilities:
Interest bearing deposits:
Interest bearing checking$1,461,596 $8,875 0.61 %$950,219 $8,755 0.92 %$894,252 $6,488 0.73 %
Money market deposits(8)
1,807,481 13,707 0.76 %1,219,652 17,380 1.42 %1,027,047 10,895 1.06 %
Savings deposits274,489 232 0.08 %199,535 301 0.15 %178,303 272 0.15 %
Customer time deposits(8)
1,289,552 19,656 1.52 %1,155,058 24,103 2.09 %744,834 10,409 1.40 %
Brokered and internet time deposits(8)
43,372 389 0.90 %45,313 1,029 2.27 %82,113 1,472 1.79 %
Time deposits1,332,924 20,045 1.50 %1,200,371 25,132 2.09 %826,947 11,881 1.44 %
Total interest bearing deposits4,876,490 42,859 0.88 %3,569,777 51,568 1.44 %2,926,549 29,536 1.01 %
Other interest-bearing liabilities:
Securities sold under agreements to
repurchase and federal funds
purchased
32,912 201 0.61 %26,400 291 1.10 %19,528 150 0.77 %
Federal Home Loan Bank advances(6)
212,705 1,093 0.51 %187,509 3,004 1.60 %216,011 4,166 1.93 %
Subordinated debt(7)
86,944 4,475 5.15 %30,930 1,638 5.30 %30,930 1,651 5.34 %
Other borrowings12,939 358 2.77 %— — — %$— $— — %
Total other interest-bearing
 liabilities
345,500 6,127 1.77 %244,839 4,933 2.01 %266,469 5,967 2.24 %
Total interest-bearing liabilities5,221,990 48,986 0.94 %3,814,616 56,501 1.48 %3,193,018 35,503 1.11 %
Noninterest bearing liabilities:
Demand deposits2,092,450 1,130,113 967,663 
Other liabilities157,289 109,449 54,262 
Total noninterest-bearing liabilities2,249,739 1,239,562 1,021,925 
Total liabilities7,471,729 5,054,178 4,214,943 
FB Financial Corporation shareholders'
equity
966,336 723,494 629,922 
Noncontrolling interest35 — — 
Shareholders' equity966,371 723,494 629,922 
Total liabilities and shareholders'
equity
$8,438,100 $5,777,672 $4,844,865 
Net interest income (tax-equivalent
basis)
$268,497 $227,930 205,668 
Interest rate spread (tax-equivalent
basis)
3.15 %3.94 %4.36 %
Net interest margin (tax-equivalent
basis) (5)
3.46 %4.34 %4.66 %
Cost of total deposits0.62 %1.10 %0.76 %
Average interest-earning assets to
average interest-bearing liabilities
148.6 %137.7 %138.1 %
(1)Calculated using daily averages.
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(2)Average balances of nonaccrual loans are included in average loan balances. Loan fees of $16.0 million, $13.0 million, and $13.1 million, accretion of $3.8 million, $8.6 million, and $7.6 million, nonaccrual interest collections of $1.4 million, $0.9 million, and $1.4 million, and syndicated loan fees of $0, $0.2 million, and $0.4 million are included in interest income for the years ended December 31, 2020, 2019, and 2018, respectively.
(3)Includes investments in premises and equipment, other real estate owned, interest receivable, MSRs, core deposit and other intangibles, goodwill and other miscellaneous assets.
(4)Interest income includes the effects of taxable-equivalent adjustments using a U.S. federal income tax rate and, where applicable, state income tax to increase tax-exempt interest income to a tax-equivalent basis. The net taxable-equivalent adjustment amounts included in the above table were $2.8 million, $1.9 million, and $1.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
(5)The NIM is calculated by dividing annualized net interest income, on a tax-equivalent basis, by average total earning assets.
(6)Includes $1.0 million and $0.5 million of gain accretion from other comprehensive income from previously cancelled cash flow hedge for the year ended December 31, 2020 and 2019, respectively. See additional discussion at Note 18."Derivatives."
(7)Includes $0.4 million of accretion on subordinated debt fair value mark for the year ended December 31, 2020.
(8)Includes $0.9 million and $0 of interest rate premium accretion on money market deposits, $2.0 million and $0 on customer time deposits and $0.4 million and $0.1 million on brokered and internet deposits for the years ended December 31, 2020 and 2019, respectively.
Rate/volume analysis
The tables below present the components of the changes in net interest income for the the year ended December 31, 2020 and 2019. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.
Year ended December 31, 2020 compared to year ended December 31, 2019
Year ended December 31, 2020 compared to year ended December 31, 2019 due to changes in
(dollars in thousands on a tax-equivalent basis)VolumeRateTotal
Interest-earning assets:
Loans (1)(2)
$72,822 $(45,439)$27,383 
Loans held for sale - residential5,013 (2,280)2,733 
Loans held for sale - commercial4,166 — 4,166 
Securities available for sale and other securities:
Taxable1,274 (4,230)(2,956)
Tax Exempt (2)
4,181 (1,109)3,072 
Federal funds sold and balances at Federal Reserve Bank193 (567)(374)
Time deposits in other financial institutions1,575 (2,266)(691)
FHLB stock134 (415)(281)
Total interest income (2)
89,358 (56,306)33,052 
Interest-bearing liabilities:
Interest-bearing checking3,105 (2,985)120 
Money market deposits(5)
4,458 (8,131)(3,673)
Savings deposits63 (132)(69)
Customer time deposits(5)
2,050 (6,497)(4,447)
Brokered and internet time deposits(5)
(17)(623)(640)
Securities sold under agreements to repurchase and federal funds
purchased
40 (130)(90)
Federal Home Loan Bank advances(3)
129 (2,040)(1,911)
Subordinated debt(4)
2,883 (46)2,837 
Other borrowings358 — 358 
Total interest expense13,069 (20,584)(7,515)
Change in net interest income (2)
$76,289 $(35,722)$40,567 
(1)Average loans are gross, including nonaccrual loans and overdrafts (before deduction of allowance for credit losses). Loan fees of $16.0 million and $13.0 million, accretion of $3.8 million and $8.6 million, nonaccrual interest collections of $1.4 million and $0.9 million, and syndicated loan fee income of $0 and $0.2 million are included in interest income for the year ended December 31, 2020 and 2019, respectively.
(2)Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.
(3)Includes $1.0 million and $0.5 million of gain accretion from other comprehensive income from a previously cancelled cash flow hedge for the years ended December 31, 2020 and 2019, respectively.
(4)Includes $0.4 million accretion on subordinated debt fair value premium for the year ended December 31, 2020.
(5)Includes $0.9 million and $0 of interest rate premium accretion on money market deposits, $2.0 million and $0 on customer time deposits and $0.4 million and $0.1 million on brokered and internet deposits for the years ended December 31, 2020 and 2019, respectively.

As discussed above, the $27.4 million increase in interest income on loans held for investment during the year ended December 31, 2020 compared to December 31, 2019 was the primary driver of the $40.6 million increase in tax-equivalent net interest income. The increase in loan interest income was driven by an increase in average loans held for
13


investment of $1.47 billion, or 35.5%, to $5.62 billion for the year ended December 31, 2020, as compared to $4.15 billion for the year ended December 31, 2019, which was largely attributable to the acquisition of $182.2 million in loans from the Farmers National acquisition and $2.43 billion in loans from the Franklin merger plus an increase of $206.8 million in average PPP loans. The total decrease in interest expense of $7.5 million was primarily driven by decreases in rates on money market and customer time deposits partially offset by increase in volume, partially related to our acquisitions.


Year Ended December 31, 2019 compared to year ended December 31, 2018
Year Ended December 31, 2019 compared to
year ended December 31, 2018
due to changes in
(dollars in thousands on a tax-equivalent basis)VolumeRateNet increase
(decrease)
Interest-earning assets:
Loans(1)
$46,723 $(1,573)$45,150 
Loans held for sale(3,822)(1,844)(5,666)
Securities available for sale and other securities:
Taxable979 (153)826 
Tax Exempt(2)
1,507 (482)1,025 
Federal funds sold and balances at Federal Reserve Bank213 53 266 
Time deposits in other financial institutions1,642 11 1,653 
FHLB stock115 (109)
Total interest income(2)
47,357 (4,097)43,260 
Interest-bearing liabilities:
Interest bearing checking516 1,751 2,267 
Money market deposits2,745 3,740 6,485 
Savings deposits32 (3)29 
Customer time deposits8,560 5,134 13,694 
Brokered and internet time deposits(836)393 (443)
Securities sold under agreements to repurchase and federal funds purchased76 65 141 
Federal Home Loan Bank advances(457)(705)(1,162)
Subordinated debt— (13)(13)
Total interest expense10,636 10,362 20,998 
Change in net interest income(2)
$36,721 $(14,459)$22,262 
(1) Average loans are gross, including nonaccrual loans and overdrafts (before deduction of allowance for loan losses). Loan fees of $13.0 million and $13.1 million, accretion of $8.6 million and $7.6 million, nonaccrual interest collections of $0.9 million and $1.4 million, and syndicated loan fee income of $0.2 million and $0.4 million are included in interest income for the years ended December 31, 2019 and 2018, respectively.
(2) Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.

14


Provision for credit losses
The provision for credit losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses ("ACL") at an appropriate level under the current expected credit loss model. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. We adopted the expected credit loss methodology under FASB ASC Topic 326 on January 1, 2020. The change in methodology from the previous incurred loss model in place prior to adoption requires additional inputs and the use of reasonable and supportable economic forecasts to estimate loan losses for the entire life of the loan portfolio. As such, the results between models are not necessarily comparable. Refer to Note 1, "Basis of presentation" in the notes to our consolidated financial statements for a detailed discussion regarding ACL methodology.
Year ended December 31, 2020 compared to year ended December 31, 2019
Our provision for credit losses on loans held for investment for the year ended December 31, 2020 was $94.6 million as compared to $7.1 million for the year ended December 31, 2019. The steep increase in provision for credit losses was primarily the result of conforming the acquired loan portfolios to comply with CECL under our established framework and governance model, as CECL requires the establishment of an allowance for credit losses for non-purchased credit deteriorated loans be recognized through the provision for credit losses on the acquisition date. In addition to the impact of the acquired portfolios during the year, our provision for credit losses was impacted by declining economic forecasts resulting from the impact of COVID-19. The provision for credit losses on loans held for investment recognized in expense in conjunction with the Farmers National acquisition on February 14, 2020 amounted to $2.9 million while the provision for credit losses on loans held for investment recognized in expense in conjunction with the Franklin merger on August 15, 2020 amounted to $52.8 million. The remaining $38.9 million included in the provision for credit losses is reflective of activity for both the Company's legacy non-acquired portfolios and the acquired portfolios of Farmers National and Franklin from their respective acquisition dates through the remainder of 2020. Although the portfolio benefited from improving economic forecasts in the last half of 2020, there is much uncertainty surrounding the impact of the COVID-19 pandemic, which may continue to lead to increased volatility in forecasted macroeconomic variables, a key input to our calculated level of allowance for credit losses.
As of December 31, 2020, we determined that all available-for-sale debt securities that experienced a decline in fair value below amortized cost basis were due to noncredit-related factors. Therefore, there was no provision for credit losses recognized on available-for-sale debt securities during the year ended December 31, 2020.
In connection with the adoption of CECL on January 1, 2020, the Company estimates expected credit losses on off-balance sheet loan commitments that are not accounted for as derivatives. When applying the CECL methodology to estimate expected credit loss, the Company considers the likelihood that funding will occur, the contractual period of exposure to credit loss, the risk of loss, historical loss experience, and current conditions along with expectations of future economic conditions. As such, the Company recorded provision for credit losses on unfunded commitments of $13.4 million for the year ended December 31, 2020.
See the section captioned "Allowance for Credit Losses" for more information regarding the Company's ACL methodology.
15


Noninterest income
Our noninterest income includes gains on sales of mortgage loans, unrealized change in fair value of loans held for sale and derivatives, fees on mortgage loan originations, loan servicing fees, hedging results, fees generated from deposit services, investment services and trust income, gains and losses on securities, other real estate owned and other assets and other miscellaneous noninterest income.
The following table sets forth the components of noninterest income for the periods indicated:
 Year Ended December 31,
(dollars in thousands)2020 2019 2018 
Mortgage banking income$255,328 $100,916 $100,661 
Service charges on deposit accounts9,160 9,479 8,502 
ATM and interchange fees14,915 12,161 10,013 
Investment services and trust income7,080 5,244 5,181 
Gain (loss) from securities, net1,631 57 (116)
(Loss) gain on sales or write-downs of other real estate owned(1,491)545 (99)
(Loss) gain from other assets(90)(104)328 
Other15,322 7,099 6,172 
Total noninterest income$301,855 $135,397 $130,642 

Year ended December 31, 2020 compared to year ended December 31, 2019
Noninterest income amounted to $301.9 million for the year ended December 31, 2020, an increase of $166.5 million, or 122.9%, as compared to $135.4 million for the year ended December 31, 2019. Changes in selected components of noninterest income in the above table are discussed below.
Mortgage banking income primarily includes origination fees and realized gains and losses on the sale of mortgage loans, unrealized change in fair value of mortgage loans and derivatives, and mortgage servicing fees, which includes net change in fair value of MSRs and related derivatives. Mortgage banking income is initially driven by the recognition of interest rate lock commitments (IRLCs) at fair value at inception of the IRLCs. This is subsequently adjusted for changes in the overall interest rate environment offset by derivative contracts entered into to mitigate the interest rate exposure. Upon sale of the loan, the net fair value gain is reclassified as a realized gain on sale. Mortgage banking income was $255.3 million and $100.9 million for the years ended December 31, 2020 and 2019, respectively, representing a 153.0% increase year-over-year.
During the year ended December 31, 2020, the Bank’s mortgage operations had sales of $6.24 billion which generated a gain on sales margin of 3.79%. This compares to $4.55 billion and 2.12% for the year ended December 31, 2019. The increase in gain on sales margin is a result of the mortgage restructuring in 2019, and productive market conditions in 2020. The industry benefited greatly from declining interest rates in 2020, causing a sharp increase in volume in 2020. Mortgage banking income from gains on sale and related fair value changes increased to $267.6 million during the year ended December 31, 2020 compared to $100.2 million for the year ended December 31, 2019. Total interest rate lock volume increased $3,036.0 million, or 51.4%, during the year ended December 31, 2020 compared to the previous year. The volume mix of refinances and purchases also shifted during year ended December 31, 2020 to 77.6% refinance volume compared with 56.2% during the previous year.
Our mortgage banking business is directly impacted by the interest rate environment, regulatory environment, consumer demand, economic conditions, and investor demand for mortgage securities. Mortgage production, especially refinance activity, declines in rising interest rate environments. While we have not yet experienced significant slowdowns in our mortgage production volume, our interest rate lock volume is expected to be materially and adversely impacted by rising interest rates, and we expect to see declining refinance activity within the mortgage industry when rates rise.
Income from mortgage servicing of $22.1 million and $17.7 million for year ended December 31, 2020 and 2019, respectively, was offset by declines in fair value of MSRs and related hedging activity of $34.4 million and $17.0 million in the year ended December 31, 2020 and 2019, respectively.
16


The components of mortgage banking income for the year ended December 31, 2020, 2019, and 2018 were as follows:
Year Ended December 31,
(dollars in thousands)2020 2019 2018 
Mortgage banking income:   
Origination and sales of mortgage loans$236,382 $96,710 $98,075 
Net change in fair value of loans held for sale and derivatives31,192 3,518 (9,332)
Change in fair value on MSRs(34,374)(16,989)(8,673)
Mortgage servicing income22,128 17,677 20,591 
Total mortgage banking income$255,328 $100,916 $100,661 
Interest rate lock commitment volume by line of business:
Consumer direct$5,539,862 $2,979,811 $2,685,103 
Third party origination (TPO)— 327,373 860,464 
Retail3,399,174 1,605,158 1,250,136 
Correspondent— 990,646 2,325,555 
Total$8,939,036 $5,902,988 $7,121,258 
Interest rate lock commitment volume by purpose (%):
Purchase22.4 %43.8 %65.7 %
Refinance77.6 %56.2 %34.3 %
Mortgage sales$6,235,149 $4,554,962 6,154,847 
Mortgage sale margin3.79 %2.12 %1.59 %
Closing volume$6,650,258 $4,540,652 $5,958,066 
Outstanding principal balance of mortgage loans serviced$9,787,657 $6,734,496 $6,755,114 
 
Other noninterest income for the year ended December 31, 2020 increased $8.2 million to $15.3 million as compared to other noninterest income of $7.1 million for year ended December 31, 2019. This increase reflects a gain on commercial loans held for sale of $3.2 million related to changes in fair value from Franklin acquisition date to the end of 2020. Additionally, the increase reflect reflects increased swap fee income in addition to overall increases due to our growth and volume of business.
Noninterest expense
Our noninterest expense includes primarily salaries and employee benefits expense, occupancy expense, legal and professional fees, data processing expense, regulatory fees and deposit insurance assessments, advertising and promotion and other real estate owned expense, among others. We monitor the ratio of noninterest expense to the sum of net interest income plus noninterest income, which is commonly known as the efficiency ratio.
The following table sets forth the components of noninterest expense for the periods indicated:
 Year Ended December 31,
(dollars in thousands)2020 2019 2018 
Salaries, commissions and employee benefits$233,768 $152,084 $136,892 
Occupancy and equipment expense18,979 15,641 13,976 
Legal and professional fees7,654 7,486 7,903 
Data processing11,390 10,589 9,100 
Merger costs34,879 5,385 1,594 
Amortization of core deposit and other intangibles5,323 4,339 3,185 
Advertising10,062 9,138 13,139 
Other expense55,030 40,179 37,669 
Total noninterest expense$377,085 $244,841 $223,458 

Year ended December 31, 2020 compared to year ended December 31, 2019
Noninterest expense increased by $132.2 million during the year ended December 31, 2020 to $377.1 million as compared to $244.8 million in the year ended December 31, 2019. Changes in selected components of noninterest expense in the above table are discussed below.
17


Salaries, commissions and employee benefits expense was the largest component of noninterest expenses representing 62.0% and 62.1% of total noninterest expense in the years ended December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, salaries and employee benefits expense increased $81.7 million, or 53.7%, to $233.8 million as compared to $152.1 million for the year ended December 31, 2019. This increase was mainly driven by our increase in headcount as a result of our mergers. During the year ended December 31, 2020, FTE's increased to 1,852 as of December 31, 2020 from 1,377 as of December 31, 2019. Also included in total salaries, commissions and employee benefits expense was an increase of $41.8 million in commissions and incentives expenses resulting from increased mortgage production previously discussed.
Costs resulting from our equity compensation grants during the years ended December 31, 2020 and 2019 amounted to $10.2 million and $7.1 million, respectively. These grants comprise restricted stock units granted to all new full-time associates each year in addition to annual performance grants, employment agreement grants and grants resulting from acquisition. Additionally, during 2020 we began granting performance-based stock units, which resulted in $1.0 million in expense during the year ended December 31, 2020.
Merger costs amounted to $34.9 million for the year ended December 31, 2020 compared to $5.4 million for the year ended December 31, 2019. For the year ended December 31, 2020, merger costs consisted of $7.7 million of contract termination costs, $5.6 million of branch closing and consolidation costs, $7.7 million of professional fees, $6.6 million of severance and separation benefits, $4.5 million of conversion-related costs, and $2.7 million of other acquisition-related costs. Costs during the previous year were related to our acquisition of the Branches, which closed during the second quarter of the previous year. We anticipate to continue incurring severance and separation benefits through the first half of 2021 for certain merger-related employment agreements.
Other noninterest expense primarily includes mortgage servicing expenses, regulatory fees and deposit insurance assessments, software license and maintenance fees and various other miscellaneous expenses. Other noninterest expense increased $14.9 million during the year ended December 31, 2020 to $55.0 million compared to $40.2 million during the year ended December 31, 2019. The increase reflects costs associated with our growth, including the impact of our acquisitions, as well as a one-time prepayment penalty of $6.8 million, incurred in connection with our repayment of $150.0 million in long-term advances and $100.0 million in 90 day fixed rate advances.
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 was 66.4% and 67.7% for the year ended December 31, 2020 and 2019, respectively. Our adjusted efficiency ratio, on a tax-equivalent basis, was 59.2% and 65.4% for the year ended December 31, 2020 and 2019, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” in this Report for a discussion of the adjusted efficiency ratio.
Return on equity and assets
The following table sets forth our ROAA, ROAE, dividend payout ratio and average shareholders’ equity to average assets ratio for the periods indicated:
Year Ended December 31,
2020 2019 2018 
Return on average total assets0.75 %1.45 %1.66 %
Return on average shareholders' equity6.58 %11.6 %12.7 %
Dividend payout ratio22.8 %12.2 %7.93 %
Average shareholders’ equity to average assets11.5 %12.5 %13.0 %

As previously discussed, during the year ended December 31, 2020, we recognized significant increases in our provision for credit losses and merger costs, which resulted in return on average total assets of 0.75% for the year ended December 31, 2020, as compared to 1.45% for the year ended December 31, 2019. Return on average shareholders’ equity was 6.58% for the year ended December 31, 2020, as compared to 11.6% for the year ended December 31, 2019.
18


Income taxes
We recorded an income tax expense of $18.8 million and $25.7 million for the years ended December 31, 2020 and 2019, respectively. This represents effective tax rates of 22.84% and 23.48% for the years ended December 31, 2020 and 2019, respectively. The primary differences from the enacted rates are applicable state income taxes reduced for non-taxable income and tax credits, and additional deductions for equity-based compensation upon the distribution of restricted stock units.
Financial condition
The following discussion of our financial condition compares balances as of December 31, 2020 with December 31, 2019.
Total assets
Our total assets were $11.21 billion at December 31, 2020, compared to total assets of $6.12 billion as of December 31, 2019. The increase was attributable to our acquisition of Farmers National, completed on February 14, 2020 and merger with Franklin on August 15, 2020, which added assets of $258.2 million and $3.63 billion, respectively, combined with our participation in the PPP. Additionally, the increase is partially related to the $212.6 million of outstanding PPP loans at December 31, 2020. Additionally, we held cash and cash equivalents of $1.32 billion at December 31, 2020, an increase of $1.09 billion during the year 2020, up from $232.7 million at December 31, 2019. As a result of the COVID-19 pandemic, we have taken appropriate measures to ensure adequate liquidity.
Loan portfolio
Our loan portfolio is our most significant earning asset, comprising 63.2% and 72.0% of our total assets as of December 31, 2020 and December 31, 2019, respectively. Our strategy is to grow our loan portfolio by originating quality commercial and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives. Our overall lending approach is primarily focused on providing credit to our customers directly rather than purchasing loan syndications and loan participations from other banks (collectively, “participated loans”). At December 31, 2020 and December 31, 2019, loans held for investment included approximately $206.8 million and $103.4 million, respectively, related to purchased participation loans. We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.
Loans by type
The following table sets forth the balance and associated percentage of each class of financing receivable in our loan portfolio as of the dates indicated:
As of December 31,
 2020 2019 2018 2017 2016
(dollars in thousands)Amount% of
total
Amount% of
total
Amount% of
total
Amount% of
total
Amount% of
total
Loan Type:          
Commercial and industrial (1)

$1,346,122 19 %$1,034,036 23 %$867,083 24 %$715,075 23 %$386,233 21 %
Construction1,222,220 17 %551,101 13 %556,051 15 %448,326 14 %245,905 13 %
Residential real estate:
1-to-4 family1,089,270 15 %710,454 16 %555,815 16 %480,989 15 %294,924 16 %
Line of credit408,211 %221,530 %190,480 %194,986 %177,190 10 %
Multi-family175,676 %69,429 %75,457 %62,374 %44,977 %
Commercial real estate:
Owner-Occupied924,841 13 %630,270 14 %493,524 13 %495,872 16 %357,346 19 %
Non-Owner Occupied1,598,979 23 %920,744 21 %700,248 19 %551,588 17 %267,902 15 %
Consumer and other317,640 %272,078 %228,853 %217,701 %74,307 %
Total loans$7,082,959 100 %$4,409,642 100 %$3,667,511 100 %$3,166,911 100 %$1,848,784 100 %
(1)Includes $212,645 of loans originated as part of the PPP at December 31, 2020, established by the CARES Act, in response to the COVID-19 pandemic. The PPP is administered by the SBA; loans originated as part of the PPP may be forgiven by the SBA under a set of defined rules.
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Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2020 and December 31, 2019, there were no concentrations of loans exceeding 10% of total loans other than the categories of loans disclosed in the table above. We believe our loan portfolio is diversified relative to industry concentrations across the various loan portfolio categories. While most industries have and are expected to continue to experience adverse impacts as a result of COVID–19, certain industries present more risk than others. As of December 31, 2020, outstanding loan principal balances of loans in deferral status amounted to $202.5 million. The following presents industry loan categories considered to be “of concern” in relation to our total portfolio as of December 31, 2020.
IndustryApproximate % of
total loans
Description of components
Retail lending8.7 %Includes non-owner occupied CRE, automobile, recreational vehicle and boat dealers, gas stations and convenience stores, pharmacies and drug stores, and sporting goods.
Healthcare4.9 %Includes assisted living, nursing and continuing care, medical practices, social assistance, mental health and substance abuse centers.
Hotel4.9 %Vast majority of hotel exposure is built around long-term successful hotel operators and strong flags located within our banking footprint.
Other leisure1.7 %Includes marinas, recreational vehicle parks and campgrounds, fitness and recreational sports centers, sports teams and clubs, historical sites, and theaters.
Transportation1.6 %Includes trucking exposure made up of truckload operators, equipment lessors to owner/operators, and local franchisees of major national trucking companies. Also includes air travel (no commercial airlines) and support and to a lesser extent, consumer charter and transportation and warehousing.
Restaurants2.0 %Majority made up of full service restaurants with no major concentration by operator or brand. Also includes limited service restaurants and bars.
Banking regulators have established thresholds of less than 100% of tier 1 capital plus allowance for credit losses in construction lending and less than 300% of tier 1 capital plus allowance for credit losses in commercial real estate lending that management monitors as part of the risk management process. The construction concentration ratio is a percentage of the outstanding construction and land development loans to total tier 1 capital plus allowance for credit losses. The commercial real estate concentration ratio is a percentage of the outstanding balance of non-owner occupied commercial real estate, multifamily, and construction and land development loans to tier 1 capital plus allowance for credit losses. Management strives to operate within the thresholds set forth above.
When a company's ratios are in excess of one or both of these guidelines, banking regulators generally require an increased level of monitoring in these lending areas by management.
The table below shows concentration ratios for the Bank and Company as of December 31, 2020 and December 31, 2019, which both were within the stated thresholds.
As a percentage (%) of tier 1 capital plus allowance for credit losses
FirstBankFB Financial Corporation
December 31, 2020
Construction93.1 %96.9 %
Commercial real estate228.3 %237.7 %
December 31, 2019
Construction88.4 %87.0 %
Commercial real estate247.4 %243.4 %
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Loan categories
The principal categories of our loans held for investment portfolio are discussed below:
Commercial and industrial loans.    We provide a mix of variable and fixed rate commercial and industrial loans. Our commercial and industrial loans are typically made to small and medium-sized manufacturing, wholesale, retail and service businesses for working capital and operating needs and business expansions, including the purchase of capital equipment and loans made to farmers relating to their operations. This category also includes loans secured by manufactured housing receivables. Commercial and industrial loans generally include lines of credit and loans with maturities of five years or less. This category also includes the loans we originated as part of the PPP, established by the CARES Act. The PPP is administered by the SBA, and loans we originated as part of the PPP may be forgiven by the SBA under a set of defined rules. These federally guaranteed loans were intended to provide up to 24 weeks of payroll and other operating costs as a source of aid to small- and medium-sized businesses. Commercial and industrial loans are generally made with operating cash flows as the primary source of repayment, but may also include collateralization by inventory, accounts receivable, equipment and personal guarantees. We plan to continue to make commercial and industrial loans an area of emphasis in our lending operations in the future. Excluding PPP loans totaling $212.6 million as of December 31, 2020, our commercial and industrial loans comprised $1,133.5 million, or 16% of our loans held for investment.
Commercial real estate owner-occupied loans.    Our commercial real estate owner-occupied loans include loans to finance commercial real estate owner occupied properties for various purposes including use as offices, warehouses, production facilities, health care facilities, retail centers, restaurants, churches and agricultural based facilities. Commercial real estate owner-occupied loans are typically repaid through the ongoing business operations of the borrower, and hence are dependent on the success of the underlying business for repayment and are more exposed to general economic conditions.
Commercial real estate non-owner occupied loans.    Our commercial real estate non-owner occupied loans include loans to finance commercial real estate non-owner occupied investment properties for various purposes including use as offices, warehouses, health care facilities, hotels, mixed-use residential/commercial, manufactured housing communities, retail centers, multifamily properties, assisted living facilities and agricultural based facilities. Commercial real estate non-owner occupied loans are typically repaid with the funds received from the sale of the completed property or rental proceeds from such property, and are therefore more sensitive to adverse conditions in the real estate market, which can also be affected by general economic conditions.
Residential real estate 1-4 family mortgage loans.    Our residential real estate 1-4 family mortgage loans are primarily made with respect to and secured by single family homes, including manufactured homes with real estate, which are both owner-occupied and investor owned. We intend to continue to make residential 1-4 family housing loans at a similar pace, so long as housing values in our markets do not deteriorate from current prevailing levels and we are able to make such loans consistent with our current credit and underwriting standards. First lien residential 1-4 family mortgages may be affected by unemployment or underemployment and deteriorating market values of real estate.
Residential line of credit loans.    Our residential line of credit loans are primarily revolving, open-end lines of credit secured by 1-4 family residential properties. We intend to continue to make residential line of credit loans if housing values in our markets do not deteriorate from current prevailing levels and we are able to make such loans consistent with our current credit and underwriting standards. Residential line of credit loans may be affected by unemployment or underemployment and deteriorating market values of real estate.
Multi-family residential loans.    Our multi-family residential loans are primarily secured by multi-family properties, such as apartments and condominium buildings. These loans may be affected by unemployment or underemployment and deteriorating market values of real estate.
Construction loans.    Our construction loans include commercial construction, land acquisition and land development loans and single-family interim construction loans to small- and medium-sized businesses and individuals. These loans are generally secured by the land or the real property being built and are made based on our assessment of the value of the property on an as-completed basis. We expect to continue to make construction loans at a similar pace so long as demand continues and the market for and values of such properties remain stable or continue to improve in our markets. These loans can carry risk of repayment when projects incur cost overruns, have an increase in the price of building materials, encounter zoning and environmental issues, or encounter other factors that may affect the completion of a project on time and on budget. Additionally, repayment risk may be negatively impacted when the market experiences a deterioration in the value of real estate.
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Consumer and other loans.    Consumer and other loans include consumer loans made to individuals for personal, family and household purposes, including car, boat and other recreational vehicle loans and personal lines of credit. Consumer loans are generally secured by vehicles and other household goods. The collateral securing consumer loans may depreciate over time. The company seeks to minimize these risks through its underwriting standards. Other loans also include loans to states and political subdivisions in the U.S. These loans are generally subject to the risk that the borrowing municipality or political subdivision may lose a significant portion of its tax base or that the project for which the loan was made may produce inadequate revenue. None of these categories of loans represents a significant portion of our loan portfolio.
Loan maturity and sensitivities
The following tables present the contractual maturities of our loan portfolio as of December 31, 2020 and December 31, 2019. Loans with scheduled maturities are reported in the maturity category in which the payment is due. Demand loans with no stated maturity and overdrafts are reported in the “due in 1 year or less” category. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The tables do not include prepayment assumptions or scheduled repayments. As of December 31, 2020 and December 31, 2019, the Company had $22.4 million and $23.1 million, respectively, in fixed-rate loans in which the Company has entered into variable rate swap contracts.
 
Loan type (dollars in thousands)Maturing in one
year or less
Maturing in one
to five years
Maturing after
five years
Total
As of December 31, 2020    
Commercial and industrial$225,384 $955,847 $164,891 $1,346,122 
Commercial real estate:
Owner occupied114,993 453,426 356,422 924,841 
Non-owner occupied134,846 770,849 693,284 1,598,979 
Residential real estate:
1-to-4 family78,600 361,804 648,866 1,089,270 
Line of credit27,970 82,084 298,157 408,211 
Multi-family6,291 74,139 95,246 175,676 
Construction613,153 384,124 224,943 1,222,220 
Consumer and other29,051 77,398 211,191 317,640 
Total ($)$1,230,288 $3,159,671 $2,693,000 $7,082,959 
Total (%)17.4 %44.6 %38.0 %100.0 %
Loan type (dollars in thousands)Maturing in one
year or less
Maturing in one
to five years
Maturing after
five years
Total
As of December 31, 2019    
Commercial and industrial$396,045 $501,693 $136,298 $1,034,036 
Commercial real estate:
Owner occupied97,724 367,072 165,474 630,270 
Non-owner occupied109,172 552,333 259,239 920,744 
Residential real estate:
1-to-4 family63,297 258,570 388,587 710,454 
Line of credit7,179 47,629 166,722 221,530 
Multi-family1,793 57,602 10,034 69,429 
Construction241,872 259,942 49,287 551,101 
Consumer and other38,830 66,016 167,232 272,078 
Total ($)$955,912 $2,110,857 $1,342,873 $4,409,642 
Total (%)21.7 %47.9 %30.4 %100.0 %
 

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For loans due after one year or more, the following tables present the sensitivities to changes in interest rates as of December 31, 2020 and December 31, 2019.
Loan type (dollars in thousands)Fixed
interest rate
Floating
interest rate
Total
As of December 31, 2020   
Commercial and industrial$577,567 $543,171 $1,120,738 
Commercial real estate:
Owner occupied534,035 275,813 809,848 
Non-owner occupied609,100 855,033 1,464,133 
Residential real estate:
1-to-4 family809,012 201,658 1,010,670 
Line of credit4,647 375,594 380,241 
Multi-family86,232 83,153 169,385 
Construction182,761 426,306 609,067 
Consumer and other267,263 21,326 288,589 
Total ($)$3,070,617 $2,782,054 $5,852,671 
Total (%)52.5 %47.5 %100.0 %
Loan type (dollars in thousands)Fixed
interest rate
Floating
interest rate
Total
As of December 31, 2019   
Commercial and industrial$288,666 $349,325 $637,991 
Commercial real estate:
Owner occupied422,684 109,862 532,546 
Non-owner occupied324,951 486,621 811,572 
Residential real estate:
1-to-4 family532,409 114,748 647,157 
Line of credit892 213,459 214,351 
Multi-family49,091 18,545 67,636 
Construction93,342 215,887 309,229 
Consumer and other215,822 17,426 233,248 
Total ($)$1,927,857 $1,525,873 $3,453,730 
Total (%)55.8 %44.2 %100.0 %

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The following table presents the contractual maturities of our loan portfolio segregated into fixed and floating interest rate loans as of December 31, 2020 and December 31, 2019.
(dollars in thousands)Fixed
interest rate
Floating
interest rate
Total
As of December 31, 2020   
One year or less$321,315$908,973$1,230,288
One to five years1,906,3191,253,3523,159,671
More than five years1,164,2981,528,7022,693,000
Total ($)$3,391,932$3,691,027$7,082,959
Total (%)47.9 %52.1 %100.0 %
(dollars in thousands)Fixed
interest rate
Floating
interest rate
Total
As of December 31, 2019   
One year or less$381,148$574,764$955,912
One to five years1,224,977885,8802,110,857
More than five years702,880639,9931,342,873
Total ($)$2,309,005$2,100,637$4,409,642
Total (%)52.4 %47.6 %100.0 %
Of the loans shown above with floating interest rates, many have interest rate floors as follows:
Loans with interest rate floors (dollars in thousands)Maturing in one year or lessWeighted average level of support (bps)Maturing in one to five yearsWeighted average level of support (bps)Maturing after five yearsWeighted average level of support (bps)TotalWeighted average level of support (bps)
As of December 31, 2020      
Loans with current rates above
floors:
1-25 bps$69,504 20.49 $139,196 16.18 $82,042 21.08 $290,742 18.59 
26-50 bps4,765 50.00 3,673 43.38 28,933 46.41 37,371 46.57 
51-75 bps480 74.98 4,603 74.65 56,774 67.11 61,857 67.73 
76-100 bps3,158 100.00 2,194 85.52 15,744 96.65 21,096 95.99 
101-125 bps394 121.69 555 109.97 20,047 116.35 20,996 116.28 
126-150 bps55 150.00 11,810 140.71 15,057 144.89 26,922 143.07 
151-200 bps106 174.56 2,762 171.60 20,209 177.38 23,077 176.68 
201-250 bps— — 717 243.21 9,438 228.83 10,155 229.85 
251 bps and above1,295 373.11 689 284.60 6,335 294.21 8,319 305.69 
Total loans with current rates
above floors
$79,757 32.25 $166,199 33.16 $254,579 80.63 $500,535 57.16 
Loans with current rates below
floors:
1-25 bps$86,217 17.18 $153,278 4.23 $26,069 20.09 $265,564 9.99 
26-50 bps64,281 48.58 75,638 43.29 80,009 47.35 219,928 46.32 
51-75 bps99,110 74.60 68,972 71.02 88,894 64.89 256,976 70.28 
76-100 bps82,053 94.70 119,093 88.57 114,187 91.08 315,333 91.07 
101-125 bps49,771 123.70 35,162 121.94 122,862 119.13 207,795 120.70 
126-150 bps46,392 143.67 52,318 138.73 155,184 139.69 253,894 140.22 
151-200 bps62,612 179.04 75,178 176.50 171,605 171.76 309,395 174.39 
201-250 bps13,548 225.57 34,997 226.31 128,757 225.65 177,302 225.77 
251 bps and above13,094 386.87 47,324 288.85 65,360 297.38 125,778 303.49 
Total loans with current rates
below floors
$517,078 81.44 $661,960 89.26 $952,927 123.13 $2,131,965 102.26 
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Asset quality
In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions, including extensions or interest rate modifications, to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. Furthermore, we are committed to collecting on all of our loans, which can result in us carrying higher nonperforming assets. We believe this practice leads to higher recoveries in the long-term.
Nonperforming assets
Our nonperforming assets consist of nonperforming loans, other real estate owned and other miscellaneous non-earning assets. Nonperforming loans are those on which the accrual of interest has stopped, as well as loans that are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. In our loan review process, we seek to identify and proactively address nonperforming loans.
As of December 31, 2020 and December 31, 2019, we had $84.2 million and $47.1 million, respectively, in nonperforming assets. As of December 31, 2020 and December 31, 2019, other real estate owned included $5.7 million and $9.0 million, respectively, of excess land and facilities held for sale resulting from our acquisitions. Other nonperforming assets, including other repossessed non-real estate, as of December 31, 2020 and December 31, 2019 amounted to $1.2 million and $1.6 million, respectively.
We had net interest recoveries on nonperforming assets previously charged off of $1.4 million and $0.9 million for the years ended December 31, 2020 and 2019, respectively.
At December 31, 2020 and December 31, 2019, there were $151.2 million and $51.7 million of delinquent GNMA loans that had previously been sold; however, we determined there not to be a more-than-trivial benefit of rebooking based on an analysis of interest rates and an assessment of potential reputational risk associated with these loans. As such, these were not recorded on our balance sheets as of December 31, 2020 or December 31, 2019.

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The following table provides details of our nonperforming assets, the ratio of such loans and other nonperforming assets to total assets, and certain other related information as of the dates presented:
As of December 31,
(dollars in thousands)2020 2019 2018 2017 2016 
Loan Type  
Commercial and industrial$16,335 $5,878 $503 $623 $1,424 
Construction4,626 1,129 283 541 271 
Residential real estate:
1-to-4 family mortgage16,393 7,297 3,441 3,504 2,986 
Residential line of credit1,996 828 1,761 833 1,034 
Multi-family mortgage57 — — — — 
Commercial real estate:
Owner occupied7,948 1,793 2,620 2,940 2,007 
Non-owner occupied12,471 7,880 6,962 1,371 2,251 
Consumer and other4,630 1,800 1,156 285 85 
Total nonperforming loans held for investment64,456 26,605 16,726 10,097 10,058 
Loans held for sale6,489 — 397 43,355 — 
Other real estate owned12,111 18,939 12,643 16,442 7,403 
Other1,170 1,580 1,637 2,369 1,654 
Total nonperforming assets$84,226 $47,124 $31,403 $72,263 $19,115 
Total nonperforming loans held for investment as a
percentage of total loans held for investment
0.91 %0.60 %0.46 %0.32 %0.54 %
Total nonperforming assets as a percentage of
total assets
0.75 %0.77 %0.61 %1.53 %0.58 %
Total accruing loans over 90 days delinquent as a
percentage of total assets
0.12 %0.09 %0.06 %0.04 %0.04 %
Loans restructured as troubled debt restructurings$15,988 $12,206 $6,794 $8,604 $8,802 
Troubled debt restructurings as a percentage
of total loans held for investment
0.23 %0.28 %0.19 %0.27 %0.48 %
We have evaluated our nonperforming loans held for investment and believe all nonperforming loans have been adequately reserved for in the allowance for credit losses at December 31, 2020. Management also continually monitors past due loans for potential credit quality deterioration. Loans not considered nonperforming include loans 30-89 days past due amounting to $27.0 million at December 31, 2020 as compared to $18.5 million at December 31, 2019. Periods prior to our adoption of CECL on January 1, 2020 exclude purchased credit impaired ("PCI") loans from nonperforming totals while the current period includes PCD loans at their contractual number of days past due. Loans in deferral status are considered current.
Other real estate owned consists of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure in addition to excess facilities held for sale. These properties are carried at the lower of cost or fair value based on appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the allowance for credit losses. Reductions in the carrying value subsequent to foreclosure are charged to earnings and are included in “Gain on sales or write-downs of other real estate owned” in the accompanying consolidated statements of income. During the year ended December 31, 2020, other real estate owned included write-downs and partial liquidations of $1.8 million, which combined with gains on sales of other real estate, resulted in net losses of $1.5 million. During the year ended December 31, 2019, other real estate owned included write-downs and partial liquidations of $0.5 million, which combined with net gains on sales of other real estate owned, resulted in a net gain $0.5 million.
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Non-TDR Loan Modifications due to COVID-19
During the year ended December 31, 2020, we offered financial relief in the form of a payment deferral program to those experiencing financial hardships related to the COVID-19 pandemic. These modifications were consistent with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" and the CARES Act and did not qualify as TDRs. As of December 31, 2020, the total amortized cost of loans deferred during 2020 that were no longer in deferral status amounted to $1.40 billion. As of December 31, 2020, recorded balances in total loans remaining in deferral status under this program amounted to $202.5 million. The payment deferrals program differs from forbearance, in that all deferred payments are not normally due at the end of the deferral period. Instead, the payment due date is advanced to a future time period. Generally, interest continues to accrue on loans during the deferral period, unless the loan is on nonaccrual. The vast majority of our loans in deferral status are considered performing loans, and we anticipate collecting on these balances. We remain proactive in monitoring our loans in deferral status by reaching out to our borrowers with payment deferrals to determine their financial capacity and whether additional payment deferrals or other loan modifications are necessary.
Classified loans
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. We analyze loans that share similar risk characteristics collectively and loans that do not share similar risk characteristics are evaluated individually. See Note 5, “Loans and allowance for credit losses” in the notes to our consolidated financial statements for a description of these risk categories.
The following tables set forth information related to the credit quality of our loan portfolio as of the dates presented.
Loan type (dollars in thousands)PassWatchSubstandard
Doubtful(1)
Total
As of December 31, 2020    
Commercial and industrial$1,238,409 $68,367 $39,146 $200 $1,346,122 
Construction1,178,821 34,684 8,703 12 1,222,220 
Residential real estate:
1-to-4 family mortgage1,025,911 39,182 23,591 586 1,089,270 
Residential line of credit396,348 6,511 4,756 596 408,211 
Multi-family mortgage175,619 — 57 — 175,676 
Commercial real estate:
Owner occupied828,223 70,059 26,559 — 924,841 
Non-owner occupied1,448,084 130,100 20,795 — 1,598,979 
Consumer and other294,801 15,617 5,466 1,756 317,640 
Total loans$6,586,216 $364,520 $129,073 $3,150 $7,082,959 
(1) This category was added in 2020. Loans considered "Doubtful" were included as part of the "Substandard" risk category prior to January 1, 2020.
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Loan type (dollars in thousands)PassWatchSubstandardTotal
As of December 31, 2019    
Loans, excluding purchased credit impaired loans    
Commercial and industrial$946,247 $66,910 $19,195 $1,032,352 
Construction541,201 4,790 2,226 548,217 
Residential real estate:
1-to-4 family mortgage666,177 11,380 13,559 691,116 
Residential line of credit218,086 1,343 2,028 221,457 
Multi-family mortgage69,366 63 — 69,429 
Commercial real estate:
Owner occupied576,737 30,379 17,263 624,379 
Non-owner occupied876,670 24,342 9,535 910,547 
Consumer and other248,632 3,304 3,057 254,993 
Total loans, excluding purchased credit impaired loans$4,143,116 $142,511 $66,863 $4,352,490 
Purchased credit impaired loans
Commercial and industrial$— $1,224 $460 $1,684 
Construction— 2,681 203 2,884 
Residential real estate:
1-to-4 family mortgage— 15,091 4,247 19,338 
Residential line of credit— — 73 73 
Multi-family mortgage— — — — 
Commercial real estate:
Owner occupied— 4,535 1,356 5,891 
Non-owner occupied— 6,617 3,580 10,197 
Consumer and other— 13,521 3,564 17,085 
Total purchased credit impaired loans$— $43,669 $13,483 $57,152 
Total loans$4,143,116 $186,180 $80,346 $4,409,642 

Allowance for credit losses
As of January 1, 2020, our policy for the allowance changed with the adoption of CECL to a lifetime expected credit loss approach. As permitted, the new guidance was implemented using a modified retrospective approach with the impact of the initial adoption being recorded through retained earnings at January 1, 2020, with no restatement of prior periods. Prior to adoption, we calculated the allowance using an incurred loss approach.
The allowance for credit losses represents the portion of the loan's amortized cost basis that we do not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses is based on the loan's amortized cost basis, excluding accrued interest receivable, as we promptly charge off uncollectible accrued interest receivable. We determine the appropriateness of the allowance through periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. In future quarters, we may update information and forecasts that may cause significant changes in the estimate in those future quarters. See "Critical accounting policies - Allowance for credit losses" for additional information regarding our methodology.
The change in accounting estimate as a result of our adoption of CECL increased the ACL as of January 1, 2020 to $62.6 million from the allowance for loan losses as of December 31, 2019 of $31.1 million. Upon adoption, we recorded a cumulative effect adjustment to decrease retained earnings by $25.0 million, with corresponding adjustments to the allowance for credit losses on loans and unfunded commitments in addition to recording a deferred tax asset on our consolidated balance sheet. Included in our transition adjustment as of January 1, 2020 was the cumulative effect adjustment to gross-up the amortized cost amount of purchased credit deteriorated ("PCD") loans by $0.6 million.
The allowance for credit losses was $170.4 million and $31.1 million and represented 2.41% and 0.71% of loans held for investment at December 31, 2020 and December 31, 2019, respectively. Excluding PPP loans with a recorded investment totaling $212.6 million, our ACL as a percentage of total loans held for investment would have been 7 basis points higher
28


as of December 31, 2020. PPP loans are federally guaranteed as part of the CARES Act, provided PPP loan recipients receive loan forgiveness under the SBA regulations. As such, there is minimal credit risk associated with these loans. Additionally, charge-offs increased to $15,305 as of December 31, 2020. This increase was primarily attributable to a single relationship with a charge-off of $9,932.
In addition, we evaluated for changes in reasonable and supportable forecasts of macroeconomic variables during the year ended December 31, 2020, primarily due to the impact of the COVID-19 pandemic, which resulted in projected credit deterioration requiring us to recognize significant increases in the ACL. Specifically, we performed additional qualitative evaluations for certain categories within our loan portfolio, in line with our established qualitative framework, weighting the impact of the current economic outlook, status of federal government stimulus programs, and other considerations, in order to identify specific industries or borrowers seeing credit improvement or deterioration specific to the COVID-19 pandemic. We also increased the ACL by $82.1 million of which $77.7 million related to loans acquired on August 15, 2020, as part of the Franklin acquisition and $4.5 million related to loans acquired on February 14, 2020, as part of the Farmers National acquisition. Outside of the impact of Franklin on the provision for credit losses, the remaining loan portfolio benefited from improved economic forecasts, seen for the first time in 2020, reflective of the resumption of more normalized commercial activity within our markets. See Note 2, "Mergers and acquisitions" in the notes to our consolidated financial statements for additional details related to PCD loans.
The allowance for credit losses on unfunded commitments increased to $16.4 million at December 31, 2020, and the deferred tax asset related to the ACL increased to $48.4 million at December 31, 2020, compared to $8.1 million at December 31, 2019.
The OCC, the Board of Governors of the Federal Reserve System, and the FDIC (collectively, "the Agencies") initially provided an option within the regulatory capital framework to limit the initial regulatory "day one" adverse impact by allowing a three-year phase in period for said impact. In March 2020, the Agencies subsequently announced an interim final rule, which became final on September 30, 2020, to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). We elected the five-year capital transition relief option.
The following table presents the allocation of the allowance for credit losses by loan category as well as the ratio of loans by loan category compared to the total loan portfolio as of the dates indicated: 
As of December 31,
2020 20192018 2017 2016
(dollars in thousands)Amount% of
Loans
Amount% of
Loans
Amount% of
loans
Amount% of
loans
Amount% of
loans
Loan Type:
Commercial and industrial$14,748 19 %$4,805 23 %$5,348 24 %$4,461 23 %$5,309 21 %
Construction58,477 17 %10,194 13 %9,729 15 %7,135 14 %4,940 13 %
Residential real estate:
1-to-4 family mortgage19,220 15 %3,112 16 %3,428 16 %3,197 15 %3,197 16 %
Residential line of credit10,534 %752 %811 %944 %1,613 10 %
Multi-family mortgage7,174 %544 %566 %434 %504 %
Commercial real estate:
Owner occupied4,849 13 %4,109 14 %3,132 13 %3,558 16 %3,302 19 %
Non-owner occupied44,147 23 %4,621 21 %4,149 19 %2,817 17 %2,019 15 %
Consumer and other11,240 %3,002 %1,769 %1,495 %863 %
Total allowance$170,389 100 %$31,139 100 %$28,932 100 %$24,041 100 %$21,747 100 %
 
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The following table summarizes activity in our allowance for credit losses during the periods indicated:
 Year Ended December 31,
(dollars in thousands)2020 2019 2018 2017 2016 
Allowance for credit losses at beginning of period$31,139 $28,932 $24,041 $21,747 $24,460 
Impact of adopting ASC 326 on non-purchased credit deteriorated loans30,888 — 
Impact of adopting ASC 326 on purchased credit deteriorated loans558 — 
Charge-offs:
Commercial and industrial(11,735)(2,930)(898)(584)(562)
Construction(18)— (29)(27)(2)
Residential real estate:
1-to-4 family mortgage(403)(220)(138)(200)(224)
Residential line of credit(22)(309)(36)(276)(132)
Multi-family mortgage— — — — — 
Commercial real estate:
Owner occupied(304)— (91)(288)(249)
Non-owner occupied(711)(12)— — (527)
Consumer and other(2,112)(2,481)(1,613)(1,152)(1,154)
Total charge-offs$(15,305)$(5,952)$(2,805)$(2,527)$(2,850)
Recoveries:
Commercial and industrial$1,712 $136 $390 1,894 524 
Construction205 11 1,164 1,084 216 
Residential real estate:
1-to-4 family mortgage122 79 171 159 127 
Residential line of credit125 138 178 395 174 
Multi-family mortgage— — — — — 
Commercial real estate:
Owner occupied83 108 143 61 140 
Non-owner occupied— — 51 1,646 195 
Consumer and other756 634 550 532 240 
Total recoveries$3,003 $1,106 $2,647 $5,771 $1,616 
Net recoveries (charge-offs)(12,302)(4,846)(158)3,244 (1,234)
Provision for credit losses94,606 7,053 5,398 (950)(1,479)
Initial allowance on loans purchased with credit deterioration25,500 — — — — 
Adjustments for transfers to loans HFS— — (349)— — 
Allowance for credit losses at the end of period$170,389 $31,139 $28,932 $24,041 $21,747 
Ratio of net charge-offs during the period to average loans outstanding
during the period
(0.22)%(0.12)%— %0.13 %(0.07)%
Allowance for credit losses as a percentage of loans at end of period2.41 %0.71 %0.79 %0.76 %1.18 %
Allowance for credit losses as a percentage of nonperforming loans at end
of period
264.3 %117.0 %173.0 %238.1 %216.2 %


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Loans held for sale
Commercial loans held for sale
On August 15, 2020, the Company acquired a portfolio of commercial loans, including shared national credits and institutional healthcare loans, as part of the Franklin transaction that the Company has elected to account for as held for sale. The loans had an acquisition date fair value of $326.2 million, which declined to $215.4 million at December 31, 2020. The decrease is primarily attributable to loans within the portfolio being paid off through external refinancing. This decrease is also partially offset by a change in fair value after acquisition amounting to a gain of $3.2 million, which is included in 'other noninterest income' on the consolidated statement of income.
Mortgage loans held for sale
Mortgage loans held for sale were $683.8 million at December 31, 2020 compared to $262.5 million at December 31, 2019. Interest rate lock volume for the years ended December 31, 2020 and 2019, totaled $8.94 billion and $5.90 billion, respectively. Generally, mortgage volume increases in lower interest rate environments and robust housing markets and decreases in rising interest rate environments and slower housing markets. The increase in interest rate lock volume for the year ended December 31, 2020, reflects the increased volume in our retail and ConsumerDirect channels, which benefited from the lower interest rate environment when compared to the previous year. Interest rate lock commitments in the pipeline were $1.19 billion at December 31, 2020 compared with $453.2 million at December 31, 2019.
Mortgage loans to be sold are sold either on a “best efforts” basis or under a mandatory delivery sales agreement. Under a “best efforts” sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and we are obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. These loans are typically sold within fifteen to twenty-five days after the loan is funded, depending on the economic environment and competition in the market. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market.
Deposits
Deposits represent the Bank’s primary source of funds. We continue to focus on growing core customer deposits through our relationship driven banking philosophy, community-focused marketing programs, and initiatives such as the development of our treasury management services.
Total deposits were $9.46 billion and $4.93 billion as of December 31, 2020 and December 31, 2019, respectively. Noninterest-bearing deposits at December 31, 2020 and December 31, 2019 were $2.27 billion and $1.21 billion, respectively, while interest-bearing deposits were $7.18 billion and $3.73 billion at December 31, 2020 and December 31, 2019, respectively. The 91.7% increase in total deposits from December 31, 2019 is partially attributed to merger and acquisition activity, including growth of $209.5 million in deposits assumed from Farmers National in the first quarter of 2020, and $3.12 billion in deposits assumed from the Franklin merger in the third quarter of 2020. We've also continued focus on core customer deposit growth, and increased escrow deposits that our third party servicing provider, Cenlar, transferred to the Bank.
Brokered and internet time deposits at December 31, 2020 increased by $41.2 million to $61.6 million compared with $20.4 million at December 31, 2019. This increase was the result of assuming Franklin's brokered and internet time deposits, totaling $107.5 million at August 15, 2020; this balance has declined since acquisition through continued overall balance sheet management as we continue to replace brokered and internet time deposits with less costly funding sources.
Included in noninterest-bearing deposits are certain mortgage escrow and related customer deposits that our third-party servicing provider, Cenlar, transfers to the Bank which totaled $148.0 million and $92.6 million at December 31, 2020 and December 31, 2019, respectively. Additionally, our deposits from municipal and governmental entities (i.e. "public deposits") totaled $1,677.2 million at December 31, 2020, compared to $463.1 million at December 31, 2019.
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Our deposit base also includes certain commercial and high net worth individuals that periodically place deposits with the Bank for short periods of time and can cause fluctuations from period to period in the overall level of customer deposits outstanding. These fluctuations may include certain deposits from related parties as disclosed within Note 25, "Related party transactions" in the notes to our consolidated financial statements included in this Report. Management continues to focus on growing noninterest-bearing deposits while allowing more costly funding sources to mature, repricing downward in our current lower interest rate conditions.
Average deposit balances by type, together with the average rates per period are reflected in the average balance sheet amounts, interest paid and rate analysis tables included in this management's discussion and analysis under the subheading "Results of operations" discussion.
The following table sets forth the distribution by type of our deposit accounts for the dates indicated: 
As of December 31,
2020 2019 2018 
(dollars in thousands)Amount% of total depositsAverage rateAmount% of total depositsAverage rateAmount% of total
deposits
Average rate
Deposit Type
Noninterest-bearing demand$2,274,103 24 %— %$1,208,175 25 %— %$949,135 23 %— %
Interest-bearing demand2,491,765 26 %0.61 %1,014,875 21 %0.92 %863,706 21 %0.73 %
Money market2,902,230 30 %0.76 %1,306,913 26 %1.42 %1,064,191 26 %1.06 %
Savings deposits352,685 %0.08 %213,122 %0.15 %174,940 %0.15 %
Customer time deposits1,375,695 15 %1.52 %1,171,502 24 %2.09 %1,016,638 24 %1.40 %
Brokered and internet time deposits61,559 %0.90 %20,351 — %2.27 %103,107 %1.79 %
Total deposits$9,458,037 100 %0.62 %$4,934,938 100 %1.10 %$4,171,717 100 %0.76 %
Customer Time Deposits
0.00-0.50%$454,429 34 %$18,919 %$34,696 %
0.51-1.00%253,883 18 %140,682 12 %196,032 19 %
1.01-1.50%155,755 11 %55,557 %124,007 12 %
1.51-2.00%169,414 12 %338,997 29 %60,286 %
2.01-2.50%159,699 12 %312,528 27 %260,173 26 %
Above 2.50%182,515 13 %304,819 26 %341,444 34 %
Total customer time deposits$1,375,695 100 %$1,171,502 100 %$1,016,638 100 %
Brokered and Internet Time Deposits
0.00-0.50%$— — %$— — %$787 %
0.51-1.00%— — %— — %548 %
1.01-1.50%5,660 %8,453 42 %21,211 21 %
1.51-2.00%42,311 69 %9,368 46 %15,204 15 %
2.01-2.50%5,312 %2,182 11 %63,167 60 %
Above 2.50%8,276 13 %348 %2,190 %
Total brokered and internet time deposits61,559 100 %20,351 100 %103,107 100 %
Total time deposits$1,437,254 $1,191,853 $1,119,745
 
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The following table sets forth our time deposits segmented by months to maturity and deposit amount as of December 31, 2020 and December 31, 2019: 
 As of December 31, 2020
(dollars in thousands)Time deposits
of $100 and
greater
Time deposits
of less
than $100
Total
Months to maturity:   
Three or less$203,202 $123,080 $326,282 
Over Three to Six228,585 106,223 334,808 
Over Six to Twelve255,486 132,240 387,726 
Over Twelve254,672 133,766 388,438 
Total$941,945 $495,309 $1,437,254 
 As of December 31, 2019
(dollars in thousands)Time deposits
of $100 and
greater
Time deposits
of less
than $100
Total
Months to maturity:   
Three or less$126,604 $66,520 $193,124 
Over Three to Six110,617 68,031 178,648 
Over Six to Twelve295,412 147,724 443,136 
Over Twelve239,828 137,117 376,945 
Total$772,461 $419,392 $1,191,853 

Investment portfolio
Our investment portfolio objectives include maximizing total return after other primary objectives are achieved such as, but not limited to, providing liquidity, capital preservation, and pledging collateral for various types of borrowings. The investment objectives guide the portfolio allocation among securities types, maturities, and other attributes.
The following table shows the carrying value of our total securities available for sale by investment type and the relative percentage of each investment type for the dates indicated:
As of December 31,
202020192018
(dollars in thousands)Carrying value% of totalCarrying value% of totalCarrying
value
% of total
U.S. government agency securities$2,003 — %$— — %$989 — %
Mortgage-backed securities - residential773,336 67 %477,312 69 %498,275 76 %
Mortgage-backed securities - commercial21,588 %13,364 %10,305 %
States and political subdivisions356,329 30 %189,235 28 %138,887 21 %
U.S. Treasury securities16,628 %7,448 %7,242 %
Corporate securities2,516 — %1,022 — %— — %
Total securities available for sale$1,172,400 100 %$688,381 100 %$655,698 100 %
The fair value of our available-for-sale debt securities portfolio at December 31, 2020 was $1,172.4 million compared to $688.4 million at December 31, 2019. During the years ended December 31, 2020 and 2019, we purchased $425.0 million (excluding those acquired from Farmers National and merged from Franklin) and $151.4 million in investment securities, respectively. The trade value of securities sold was $146.5 million during the year ended December 31, 2020. The trade value of securities sold during the year ended December 31, 2019 totaled $24.5 million, respectively. Maturities and calls of securities totaled $220.5 million and $113.0 million, respectively. As of December 31, 2020 and December 31, 2019, net unrealized gains of $34.6 million and $11.7 million, respectively, were unrealized on available-for-sale debt securities.
As of December 31, 2020 and 2019, the Company had $4.6 million and $3.3 million, respectively, in equity securities recorded at fair value that primarily consisted of mutual funds. The change in the fair value of equity securities resulted in a net gain of $296.5 thousand and $148.0 thousand during the years ended December 31, 2020 and 2019, respectively.
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The following table sets forth the fair value, scheduled maturities and weighted average yields for our investment portfolio as of the dates indicated below:
As of December 31,
 2020 2019 
(dollars in thousands)Fair value% of total investment securities
Weighted average yield (1)
Fair value% of total investment securities
Weighted average yield (1)
Treasury securities:
Maturing within one year$16,628 1.4 %1.57 %$— — %— %
Maturing in one to five years— — %— %7,448 1.1 %1.76 %
Maturing in five to ten years— — %— %— — %— %
Maturing after ten years— — %— %— — %— %
Total Treasury securities16,628 1.4 %1.57 %7,448 1.1 %1.76 %
Government agency securities:
Maturing within one year— — %— %— — %— %
Maturing in one to five years— — %— %— — %— %
Maturing in five to ten years2,003 0.2 %2.64 %— — %— %
Maturing after ten years— — %— %— — %— %
Total government agency securities2,003 0.2 %2.64 %— — %— %
States and municipal subdivisions:
Maturing within one year19,034 1.6 %1.07 %1,152 0.2 %5.11 %
Maturing in one to five years24,184 2.1 %2.06 %4,228 0.6 %4.60 %
Maturing in five to ten years37,313 3.2 %2.76 %17,865 2.6 %3.96 %
Maturing after ten years275,798 23.5 %3.12 %165,990 24.1 %3.84 %
Total obligations of state and municipal subdivisions356,329 30.4 %3.07 %189,235 27.5 %3.88 %
Residential and commercial mortgage backed securities guaranteed by FNMA, GNMA and FHLMC:
Maturing within one year— — %— %— — %— %
Maturing in one to five years2,975 0.3 %3.12 %496 0.1 %1.83 %
Maturing in five to ten years30,596 2.6 %2.47 %24,316 3.5 %3.16 %
Maturing after ten years761,353 64.9 %1.45 %465,864 67.7 %2.36 %
Total residential and commercial mortgage backed securities guaranteed by FNMA, GNMA and FHLMC794,924 67.8 %1.50 %490,676 71.3 %2.40 %
Corporate securities:
Maturing within one year— — %— %— — %— %
Maturing in one to five years500 — %5.00 %— — %— %
Maturing in five to ten years2,016 0.2 %4.19 %1,022 0.1 %4.13 %
Maturing after ten years— — %— %— — %— %
Total Corporate securities2,516 0.2 %4.35 %1,022 0.1 %4.13 %
Total investment securities$1,172,400 100.0 %2.29 %$688,381 100.0 %2.94 %
(1)Yields on a tax-equivalent basis.
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The following table summarizes the amortized cost of debt securities classified as available-for-sale and their approximate fair values as of the dates shown:
(dollars in thousands)Amortized costGross unrealized gainsGross unrealized lossesFair value
Securities available for sale    
As of December 31, 2020    
U.S. government agency securities$2,000 $$— $2,003 
Mortgage-backed securities - residential760,099 14,040 (803)773,336 
Mortgage-backed securities - commercial20,226 1,362 — 21,588 
States and political subdivisions336,543 19,806 (20)356,329 
U.S. Treasury securities16,480 148 — 16,628 
Corporate securities2,500 17 (1)2,516 
 $1,137,848 $35,376 $(824)$1,172,400 
As of December 31, 2019
US Government agency securities$— $— $— $— 
Mortgage-backed securities - residential474,144 4,829 (1,661)477,312 
Mortgage-backed securities - commercial12,957 407 — 13,364 
States and political subdivisions181,178 8,287 (230)189,235 
U.S. Treasury securities7,426 22 — 7,448 
Corporate securities1,000 22 — 1,022 
$676,705 $13,567 $(1,891)$688,381 
Borrowed funds
Deposits and investment securities available for sale are the primary source of funds for our lending activities and general business purposes. However, we may also obtain advances from the FHLB, purchase federal funds and engage in overnight borrowing from the Federal Reserve, correspondent banks, or enter into client repurchase agreements. We also use these sources of funds as part of our asset liability management process to control our long-term interest rate risk exposure, even if it may increase our short-term cost of funds.
Our level of short-term borrowing can fluctuate on a daily basis depending on funding needs and the source of funds to satisfy those needs, in addition to the overall interest rate environment and cost of public funds. Borrowings can include securities sold under agreements to repurchase, lines of credit, advances from the FHLB, federal funds, and subordinated debt.
The following table sets forth our total borrowings segmented by years to maturity as of December 31, 2020:
 December 31, 2020
(dollars in thousands)Amount% of totalWeighted average interest rate (%)
Maturing Within:   
December 31, 2021$47,199 20 %0.92 %
December 31, 2022— — %— %
December 31, 2023— — %— %
December 31, 2024— — %— %
December 31, 2025— — %— %
Thereafter189,527 80 %5.08 %
Total$236,726 100 %4.27 %
Securities sold under agreements to repurchase
We enter into agreements with certain customers to sell certain securities under agreements to repurchase the security the following day. These agreements are made to provide customers with comprehensive treasury management programs a short-term return for their excess funds. Securities sold under agreements to repurchase totaled $32.2 million and $23.7 million at December 31, 2020 and 2019, respectively.
35


The Bank maintains lines with certain correspondent banks that provide borrowing capacity in the form of federal funds purchased in the aggregate amount of $335.0 million and $305.0 million as of December 31, 2020 and 2019. There were no borrowings against the line at December 31, 2020 or December 31, 2019.
Federal Home Loan Bank advances
As a member of the FHLB Cincinnati, the Bank receives advances from the FHLB pursuant to the terms of various agreements that assist in funding its mortgage and loan portfolio balance sheet. Under the agreements, we pledge qualifying residential mortgages of $1,248.9 million and qualifying commercial mortgages of $1,532.7 million as collateral securing a line of credit with a total borrowing capacity of $1,276.1 million as of December 31, 2020. As of December 31, 2019, we pledged qualifying residential mortgages of $413.0 million and qualifying commercial mortgages of $545.5 million as collateral securing a line of credit with a total borrowing capacity of $760.6 million.
There were no borrowings against the line as of December 31, 2020, while borrowings against the line totaled $250.0 million as of December 31, 2019, respectively. There were no FHLB advances as of December 31, 2020, while FHLB advances as of December 31, 2019 includes two long-term advances with putable features totaling $150.0 million. These two long-term advances of $100.0 million and $50.0 million carry maximum final terms of 10 years and 7 years, respectively. However, the FHLB owns the option to cancel the advances after one year and quarterly thereafter at predetermined fixed rates of 1.24% and 1.37%, respectively These putable advances were paid off in the fourth quarter of 2020 at a penalty of $4.5 million and $2.3 million, respectively. There were no overnight cash management advances (CMAs) outstanding as of December 31, 2020 or December 31, 2019. Letters of credit with FHLB of $100.0 million and $75.0 million were pledged to secure public funds that required collateral as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, no 90-day fixed-rate advances were included in total FHLB advances. The maximum amount of FHLB borrowing outstanding at any month end was $250.0 million for the years ended December 31, 2020 and 2019. The weighted average interest rate on FHLB borrowings was 0.00% and 1.51% at December 31, 2020 and 2019, respectively.
Additionally, the Bank maintains a line with the Federal Reserve Bank through the Borrower-in-Custody program. As of December 31, 2020 and 2019, $2.46 billion and $1.41 billion of qualifying loans and $0.0 million and $5.0 million of investment securities were pledged to the Federal Reserve Bank, securing a line of credit of $1,695.6 million and $1,013.2 million, respectively.
Subordinated debt
We have two wholly-owned subsidiaries that are statutory business trusts (“Trusts”). The Trusts were created for the sole purpose of issuing 30-year capital trust preferred securities to fund the purchase of junior subordinated debentures issued by the Company. As of December 31, 2020 and 2019, our $0.9 million investment in the Trusts was included in other assets in the accompanying consolidated balance sheets, and our $30.0 million obligation is reflected as junior subordinated debt, respectively. The junior subordinated debt bears interest at floating interest rates based on a spread over 3-month LIBOR plus 315 basis points (3.40% and 5.10% at December 31, 2020 and 2019, respectively) for the $21.7 million debenture and 3-month LIBOR plus 325 basis points (3.50% and 5.19% at December 31, 2020 and 2019, respectively) for the remaining $9.3 million. The $9.3 million debenture may be redeemed prior to the 2033 maturity date upon the occurrence of a special event, and the $21.7 million debenture may be redeemed prior to 2033 at our option.
Additionally, during the third quarter of 2020, we placed $100.0 million of ten year fixed-to-floating rate subordinated notes, maturing September 1, 2030. This subordinated note instrument pays interest semi-annually in arrears based on a 4.5% fixed annual interest rate for the first five years of the notes. For years six through ten, the interest rate resets on a quarterly basis, and will be based on the 3-month Secured Overnight Financing Rate plus a spread of 439 basis points. We are entitled to redeem the notes in whole or in part on any interest payment date on or after September 1, 2025. The Company has classified the issuance, net of unamortized issuance costs of $1,772, as Tier 2 capital at December 31, 2020.
We also assumed two issues of subordinated debt, totaling $60,000, as part of the Franklin merger. The notes, issued in 2016, feature $40,000 of 6.875% fixed-to-floating rate subordinated notes due March 30, 2026 ("March 2026 Subordinated Notes"), and $20,000 of 7% fixed-to-floating rate subordinated notes due July 1, 2026 ("July 2026 Subordinated Notes"). Upon acquisition, we recorded a $0.8 million fair value premium adjustment, and during 2020, we recognized $0.4 million of amortization expense. Both note issuances currently pay interest semi-annually, and will begin resetting interest rates on a quarterly basis after March 30, 2021 and July 1, 2021. For years six through ten, interest for the March 2026 Subordinated Notes will based on the 3-month LIBOR plus 5.636% and interest for the July 2026 Subordinated Notes will be based on the 3-month LIBOR plus 6.04%. We are entitled to redeem in whole or in part after
36


the respective fifth anniversary of each note issuance. Subsequent to December 31, 2020, we issued an irrevocable notice to the holders of the issuance that we intend to exercise our rights to redeem the $40.0 million note in full during the first quarter of 2021. We classified the entire $60,000 in subordinated notes as Tier 2 capital at December 31, 2020.
Other borrowings
During the year ended December 31, 2020, we initiated a credit line in the amount of $20.0 million (1.75% + 1 month LIBOR in effect 2 business days prior to reprice date) and borrowed $15.0 million against the line to fund the cash consideration paid in connection with the Farmers National transaction. An additional $5.0 million remains available for the Company to draw. This line of credit has a term of one year and matured subsequent to December 31, 2020 on February 21, 2021.
Liquidity and capital resources
Bank liquidity management
We are expected to maintain adequate liquidity at the Bank to meet the cash flow requirements of clients who may be either depositors wishing to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our Liquidity and Interest Rate Risk Policy is intended to cause the Bank to maintain adequate liquidity and, therefore, enhance our ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements and otherwise sustain our operations. We accomplish this through management of the maturities of our interest-earning assets and interest-bearing liabilities. We believe that our present position is adequate to meet our current and future liquidity needs.
We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of clients, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.
As a result of the COVID-19 pandemic, we have taken steps to ensure adequate liquidity and access to funding sources. To date, we have not seen significant pressure on liquidity or sources of funding as a result of COVID-19 and have maintained higher than typical levels of liquidity in cash and cash equivalents to allow for flexibility.
As part of our liquidity management strategy, we also focus on minimizing our costs of liquidity and attempt to decrease these costs by growing our noninterest-bearing and other low-cost deposits, while replacing higher cost funding sources including time deposits and borrowed funds. While we do not control the types of deposit instruments our clients choose, we do influence those choices with the rates and the deposit specials we offer.
Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. At December 31, 2020 and 2019, securities with a carrying value of $804.8 million and $373.7 million, respectively, were pledged to secure government, public, trust and other deposits and as collateral for short-term borrowings, letters of credit and derivative instruments. Additionally, we have a FHLB letter of credit to secure public funds totaling $100.0 million and $75.0 million at December 31, 2020 and 2019, respectively.
Additional sources of liquidity include federal funds purchased, FHLB borrowings, and lines of credit. Interest is charged at the prevailing market rate on federal funds purchased and FHLB advances. Funds and advances obtained from the FHLB are used primarily to meet day to day liquidity needs, particularly when the cost of such borrowing compares favorably to the rates that we would be required to pay to attract deposits. There were no outstanding overnight cash management advances ("CMAs") at December 31, 2020 and 2019.  At December 31, 2020 and 2019, the balance of our outstanding additional long-term advances with the FHLB were $0.0 million and $150.0 million, respectively. The remaining balance available with the FHLB was $1,176.1 million and $435.6 million at December 31, 2020 and 2019, respectively. We also maintain lines of credit with other commercial banks totaling $335.0 million and $305.0 million as of December 31, 2020 and 2019, respectively. These are unsecured, uncommitted lines of credit typically maturing at various times within the next twelve months. There were no borrowings against the lines at December 31, 2020 and at December 31, 2019.
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Holding company liquidity management
The Company is a corporation separate and apart from the Bank and, therefore, it must provide for its own liquidity. The Company’s main source of funding is dividends declared and paid to it by the Bank. Statutory and regulatory limitations exist that affect the ability of the Bank to pay dividends to the Company. Management believes that these limitations will not impact the Company’s ability to meet its ongoing short-term cash obligations. For additional information regarding dividend restrictions, see the “Item 1. Business - Supervision and regulation,” "Item 1A. Risk Factors - Risks related to our business" and " Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Dividend Policy," each of which is set forth in our Annual Report.
Due to state banking laws, the Bank may not declare dividends in any calendar year in an amount exceeding the total of its net income for that year combined with its retained net income of the preceding two years, without the prior approval of the Tennessee Department of Financial Institutions ("TDFI"). Based upon this regulation, as of December 31, 2020 and 2019, $185.7 million and $223.7 million of the Bank’s retained earnings were available for the payment of dividends without such prior approval. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. During the year ended December 31, 2020, there were $48.8 million in cash dividends approved by the board for payment from the Bank to the holding company in addition to an asset dividend of an equity security amounting to $1.0 million. None of these required approval from the TDFI. Subsequent to December 31, 2020, the board approved a dividend from the Bank to the holding company for $75.0 million that did not require approval from the TDFI. No dividends from the Bank to the Company were paid during the year ended December 31, 2019.
During the year ended December 31, 2020, the Company declared and paid dividends of 0.36 per share, or $14.5 million, respectively. During the year ended December 31, 2019, the Company declared and paid dividends of $0.32 per share, or $10.2 million, respectively. Subsequent to December 31, 2020, the Company declared a quarterly dividend in the amount of $0.11 per share, payable on February 22, 2021, to stockholders of record as of February 8, 2021.
The Company is party to a registration rights agreement with its former majority shareholder entered into in connection with the 2016 IPO, under which the Company is responsible for payment of expenses (other than underwriting discounts and commissions) relating to sales to the public by the shareholder of shares of the Company's common stock beneficially owned by him. Such expenses include registration fees, legal and accounting fees, and printing costs payable by the Company and expensed when incurred. No such expenses were incurred during the years ended December 31, 2020 and 2019.
During the year ended December 31, 2020, the Company obtained a line of credit for $20.0 million, of which $15.0 million was borrowed to fund the cash consideration paid in connection with the Farmers National acquisition.
Capital management and regulatory capital requirements
Our capital management consists of providing adequate equity to support our current and future operations. We are subject to various regulatory capital requirements administered by state and federal banking agencies, including the TDFI, Federal Reserve and the FDIC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations.
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The Federal Reserve and the FDIC have issued guidelines governing the levels of capital that banks must maintain. Those guidelines specify capital tiers, which include the classifications set forth in the following table. As of December 31, 2020 and 2019, we exceeded all capital ratio requirements under prompt corrective action and other regulatory requirements, as detailed in the table below: 
 Actual
Required for capital
adequacy purposes (1)
To be well
capitalized under
prompt corrective
action provision
(dollars in thousands)AmountRatio
(%)
AmountRatio
(%)
AmountRatio
(%)
December 31, 2020      
Total capital (to risk weighted assets)
FB Financial Corporation$1,358,897 15.0 %$952,736 10.5 %N/AN/A
FirstBank$1,353,279 14.9 %$951,327 10.5 %$906,026 10.0 %
Tier 1 capital (to risk weighted assets)
FB Financial Corporation$1,090,364 12.0 %$771,262 8.5 %N/AN/A
FirstBank$1,142,548 12.6 %$770,122 8.5 %$724,820 8.0 %
Tier 1 Capital (to average assets)
FB Financial Corporation$1,090,364 10.0 %$435,064 4.0 %N/AN/A
FirstBank$1,142,548 10.5 %$435,279 4.0 %$544,098 5.0 %
Common Equity Tier 1 (CET1)      
FB Financial Corporation$1,060,364 11.7 %$635,157 7.0 %N/AN/A
FirstBank$1,142,548 12.6 %$634,218 7.0 %$588,917 6.5 %
December 31, 2019
Total capital (to risk weighted assets)
FB Financial Corporation$633,549 12.2 %$545,268 10.5 %N/AN/A
FirstBank$623,432 12.1 %$540,995 10.5 %$515,233 10.0 %
Tier 1 capital (to risk weighted assets)
FB Financial Corporation$602,410 11.6 %$441,421 8.5 %N/AN/A
FirstBank$592,293 11.5 %$437,782 8.5 %$412,030 8.0 %
Tier 1 Capital (to average assets)
FB Financial Corporation$602,410 10.1 %$238,578 4.0 %N/AN/A
FirstBank$592,293 9.9 %$239,310 4.0 %$299,138 5.0 %
Common Equity Tier 1 (CET1)
FB Financial Corporation$572,410 11.1 %$360,979 7.0 %N/AN/A
FirstBank$592,293 11.5 %$360,526 7.0 %$334,774 6.5 %
(1) Minimum ratios presented exclude the capital conservation buffer.
U.S. Basel III measures capital strength in three tiers and incorporates risk-adjusted assets to determine the risk-based capital ratios. Our CET1 capital primarily includes shareholders' equity less certain deductions for goodwill and other intangibles, net of taxes, net unrealized gains (losses) on AFS securities and derivative instruments, net of tax. Tier 1 capital is primarily comprised of common equity Tier 1 capital and included junior subordinated debentures with a carrying value of $30.0 million as of December 31, 2020 and 2019. Tier 2 capital components include a portion of the allowance for credit losses in excess of Tier 1 statutory limits and our remaining combined trust preferred security debt issuances.
In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule, which became final on September 30, 2020, to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company adopted the capital transition relief over the permissible five-year period.
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Capital Expenditures
As of December 31, 2020, we have not committed to enter any material capital expenditures over the next twelve months.
Shareholders’ equity
Our total shareholders’ equity was $1,291.4 million at December 31, 2020 and $762.3 million, at December 31, 2019. Book value per share was $27.35 at December 31, 2020 and $24.56 at December 31, 2019. The growth in shareholders’ equity during 2020 was primarily attributable to increases in additional paid-in capital and common stock; a result of our acquisitive growth strategy through the merger with Franklin and the acquisition of Farmers National. Other changes in shareholders' equity were driven by earnings retention and changes in accumulated other comprehensive income, partially offset by a cumulative effective adjustment of $25.0 million on January 1, 2020 for the adoption of ASU 2016-13 and to a lesser extent, declared dividends and activity related to equity-based compensation.
Off-balance sheet arrangements
In the normal course of business, we enter into various transactions, which in accordance with GAAP, are not included as part of our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit, standby and commercial letters of credit, and commitments to purchase loans, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. For further information, see Note 17, "Commitments and contingencies" in the notes to the consolidated financial statements included elsewhere in this Report.
Contractual obligations
The following table presents, as of December 31, 2020, our significant fixed and determinable contractual obligations to third parties by payment date (excluding interest). These contractual obligations are discussed in more detail within in the Notes to Consolidated Financial Statements contained in this Annual Report.
As of December 31, 2020 payments due in:
(dollars in thousands)Less than
1 year
1 to 3 years3 to 5 yearsMore than
5 years
Total
Operating Leases$8,042 $13,995 $10,597 $34,053 $66,687 
Finance lease115 234 241 1,225 1,815 
Time Deposits1,048,816 321,343 67,043 52 1,437,254 
Securities sold under agreements to repurchase32,199 — — — 32,199 
Subordinated Debt— — — 189,527 189,527 
Other borrowings15,000 — — — 15,000 
Total$1,104,172 $335,572 $77,881 $224,857 $1,742,482 

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Critical accounting policies
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and general practices within the banking industry. Within our financial statements, certain financial information contain approximate measurements of financial effects of transactions and impacts at the consolidated balance sheet dates and our results of operations for the reporting periods. We monitor the status of proposed and newly issued accounting standards to evaluate the impact on our financial condition and results of operations. Our accounting policies, including the impact of newly issued accounting standards and subsequent adoptions, are discussed in further detail in "Part II- Item 8. Financial Statements and Supplementary Data - Note 1. Basis of Presentation" of this Report.
Allowance for credit losses
The allowance for credit losses represents the portion of the loan's amortized cost basis that we do not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses is based on the loan's amortized cost basis, excluding accrued interest receivable, as we promptly charge off uncollectible accrued interest receivable. Management’s determination of the appropriateness of the allowance is based on periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. In future quarters, we may update information and forecasts that may cause significant changes in the estimate in those future quarters.
As of January 1, 2020, our policy for the allowance for credit losses changed with the adoption of CECL. As permitted, the new guidance was implemented using a modified retrospective approach with the impact of the initial adoption being recorded through retained earnings at January 1, 2020, with no restatement of prior periods. Prior to adopting CECL, we calculated the allowance using an incurred loss approach.
Our methodology to determine the overall appropriateness of the allowance for credit losses includes the use of lifetime loss rate models. The quantitative models require tailored loan data and macroeconomic variables based on the inherent credit risks in each portfolio to more accurately measure the credit risks associated with each. Each of the quantitative models pools loans with similar risk characteristics and collectively assesses the lifetime loss rate for each pool to estimate its expected credit loss. When a loan no longer shares similar risk characteristics with other loans in any given pool, the loan is individually assessed.
We utilize probability-weighted forecasts, which consider multiple macroeconomic variables from a third-party vendor that are applicable to the type of loan. The choice and weighting of the economic forecast scenarios, macroeconomic variables, and the reasonable and supportable period at the macroeconomic variable-level are reviewed and approved by the forecast governance committee based on expectations of future economic conditions.
We consider the need to qualitatively adjust our modeled quantitative expected credit loss estimate for information not already captured in the model loss estimation process. These qualitative factor adjustments may increase or decrease our estimate of expected credit losses. We review the qualitative adjustments so as to validate that information that has already been considered and included in the modeled quantitative loss estimation process is not also included in the qualitative adjustment. We consider the qualitative factors that are relevant to the institution as of the reporting date, which may include, but are not limited to: levels of and trends in delinquencies and performance of loans; levels of and trends in write-offs and recoveries collected; trends in volume and terms of loans; effects of any changes in reasonable and supportable economic forecasts; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; available relevant information sources that contradict our own forecast; effects of changes in prepayment expectations or other factors affecting assessments of loan contractual term; industry conditions; and effects of changes in credit concentrations.
The allowance for credit losses is our best estimate. Actual losses may differ from the December 31, 2020 allowance for credit loss as the CECL estimate is sensitive to economic forecasts and management judgment.
Additional discussion can be found under the subheading "Asset quality" contained within management's discussion and analysis and in "Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Basis of Presentation" and "Part II - Item 8. Financial Statements and Supplementary Data - Note 5. Loans and allowance for credit losses" of this Report.
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Fair Value Measurements
A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial instruments at fair value. See Note 19 "Fair Value" in the consolidated financial statements herein for additional disclosures regarding the fair value of our assets and liabilities, including a description of the fair value hierarchy.
Investment securities
Debt securities are classified as held to maturity and carried at amortized cost, excluding accrued interest, when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Available-for-sale debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of applicable taxes. Beginning January 1, 2020, unrealized losses resulting from credit losses for available-for-sale debt securities are recognized in earnings as a provision for credit losses. Unrealized losses that do not result from credit losses are excluded from earnings and reported as accumulated other comprehensive income, net of applicable taxes, which is included in equity. Accrued interest receivable is separated from other components of amortized cost and presented separately on the consolidated balance sheets.
Equity securities with readily determinable market values are carried at fair value on the balance sheet with any periodic changes in value made through adjustments to the statement of income. Equity securities without readily determinable market values are carried at cost less impairment and included in other assets on the consolidated balance sheets.
Interest income includes the amortization and accretion of purchase premium and discount. Premiums and discounts on securities are amortized on the level-yield method anticipating prepayments based upon the prior three month average monthly prepayments when available. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
We evaluate available-for-sale securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. For securities in an unrealized loss position, consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
When credit losses are expected to occur, the amount of the expected credit loss recognized in earnings depends on our intention to sell the security or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, the expected credit loss recognized in earnings is equal to the entire difference between its amortized cost basis and its fair value at the date it was determined to be impaired due to credit losses or other factors. The previous amortized cost basis less the impairment recognized in earnings becomes the new amortized cost basis of the investment.
However, if we do not intend to sell the security and it is not more likely than not to be required to sell the security before recovery of its amortized cost basis, the difference between the amortized cost and the fair value is separated into the amount representing the credit loss and the amount related to all other factors. If we determine a decline in fair value below the amortized cost basis of an available-for-sale investment security has resulted from credit related factors, beginning January 1, 2020 with the adoption of CECL, we record a credit loss through an allowance for credit losses. The allowance for credit losses is limited by the amount that the fair value is less than amortized cost. The amount of the allowance for credit losses is determined based on the present value of cash flows expected to be collected and is recognized as a charge to earnings. The amount of the impairment related to other, non-credit related, factors is recognized in other comprehensive income, net of applicable taxes.
We did not record any provision for credit losses for its available-for-sale debt securities during the year ended December 31, 2020, as the majority of the investment portfolio is government guaranteed and declines in fair value below amortized cost were determined to be non-credit related.

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Loans held for sale
Loans originated and intended for sale in the secondary market, primarily mortgage loans, are carried at fair value as permitted under the guidance in ASC 825, “Financial Instruments” (“ASC 825”). Net gains (losses) resulting from fair value changes of these mortgage loans are recorded in income. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Mortgage banking income” in the Consolidated Statements of Income. Gains and losses are recognized in Mortgage banking income on the consolidated statements of income at the time the loan is closed. Pass through origination costs and related loan fees are also included in “Mortgage banking income”. Other expenses are classified in the appropriate noninterest expense accounts. Periodically, we will transfer mortgage loans originated for sale in the secondary markets into the loan portfolio based on current market conditions, the overall secondary marketability of the loan and the status of the loan. The loans are transferred into the portfolio at fair value at the date of transfer.
Government National Mortgage Association (GNMA) optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing and was the original transferor. At the servicer’s option and without GNMA’s prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. Under FASB ASC Topic 860, “Transfers and Servicing,” this buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When we are deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for investment, regardless of whether we intend to exercise the buy-back option if the buyback option provides the transferor a more-than-trivial benefit. When repurchased, after meeting certain performance criteria, the loans are transferred to loans held for sale at fair value and are able to be repooled into a new Ginnie Mae guaranteed security.
During the year ended December 31, 2020, the Company acquired a portfolio of commercial loans, including shared national credits and institutional healthcare loans, as part of the Franklin transaction that the Company has elected to account for as held for sale. Changes in fair value from the acquisition date fair value are included in 'other noninterest income' on the consolidated statement of income.
Mortgage servicing rights
The Company accounts for its mortgage servicing rights under the fair value option as permitted under ASC 860-50-35, "Transfers and Servicing". The Company retains the right to service certain mortgage loans that it sells to secondary market investors. The retained mortgage servicing right is initially recorded at the fair value of future net cash flows expected to be realized for performing servicing activities. Fair value is determined using an income approach with various assumptions including expected cash flows, prepayment speeds, market discount rates, servicing costs, and other factors. These mortgage servicing rights are recognized as a separate asset on the date the corresponding mortgage loan is sold.
Derivative financial instruments
We enter into cash flow hedges to mitigate the exposure to variability in expected future cash flows or other types of forecasted transactions. Changes in the fair value of the cash flow hedges, to the extent that the hedging relationship is effective, are recorded as other comprehensive income and are subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. The ineffective portions of the changes in fair value of the hedging instruments are immediately recognized in earnings. The assessment of the effectiveness of the hedging relationship is evaluated under the hypothetical derivative method.
We utilize derivative instruments that are not designated as hedging instruments. The Company enters into swaps, interest rate cap and/or floor agreements with its customers and then enters into an offsetting derivative contract position with other financial institutions to mitigate the interest rate risk associated with these customer contracts. Because these derivative instruments are not designated as hedging instruments, changes in the fair value of the derivative instruments are recognized currently in earnings.
We enter into commitments to originate and purchase loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in other assets or liabilities, with changes in fair value recorded in mortgage banking income. Fair
43


value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments, the difference between current levels of interest rates and the committed rates is also considered.
We utilize forward loan sale contracts to mitigate the interest rate risk inherent in our mortgage loan pipeline and held-for-sale portfolio. Forward loan sale contracts are contracts for delayed delivery of mortgage loans. We agree to deliver on a specified future date, a specified instrument, at a specified price or yield. However, the contract may allow for cash settlement. The credit risk inherent to us arises from the potential inability of counterparties to meet the terms of their contracts. In the event of non-acceptance by the counterparty, we would be subject to the credit and inherent (or market) risk of the loans retained. Such contracts are accounted for as derivatives and, along with related fees paid to investor are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in mortgage banking income. Fair value is based on the estimated amounts that we would receive or pay to terminate the commitment at the reporting date.
We utilize two methods to deliver mortgage loans sold to an investor. Under a “best efforts” sales agreement, the Company enters into a sales agreement with an investor in the secondary market to sell the loan when an interest rate-lock commitment is entered into with a customer, as described above. Under a “best efforts” sales agreement, the Company is obligated to sell the mortgage loan to the investor only if the loan is closed and funded. Thus, the Company will not incur any liability to an investor if the mortgage loan commitment in the pipeline fails to close. The Company also utilizes “mandatory delivery” sales agreements. Under a mandatory delivery sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor should the Company fail to satisfy the contract. Mandatory commitments are recorded at fair value in the Company’s Consolidated Balance Sheets. Gains and losses arising from changes in the valuation of these commitments are recognized currently in earnings and are reflected under the line item “Other noninterest income” on the Consolidated Statements of Income.
Business combinations and accounting for acquired loans with credit deterioration
Business combinations are accounted for by applying the acquisition method in accordance with Accounting Standards Codification ("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, exceed 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.
Beginning January 1, 2020, loans acquired in business combinations with evidence of more-than-insignificant credit deterioration since origination are considered to be Purchased Credit Deteriorated ("PCD"). The Company developed multiple criteria to assess the presence of more–than–insignificant credit deterioration in acquired loans, mainly focused on changes in credit quality and payment status. While general criteria have been established, each acquisition will vary in its specific facts and circumstances and the Company will apply judgment around PCD identification for each individual acquisition based on their unique portfolio mix and risks identified.
We adopted ASC 326 using the prospective transition approach for loans previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption and all PCI loans were transitioned to PCD loans upon adoption. Under PCD accounting,the amount of expected credit losses as of the acquisition date is added to the purchase price of the PCD loan. This establishes the amortized cost basis of the PCD loan. The difference between the unpaid principal balance of the PCD loan and the amortized cost basis of the PCD loan as of the acquisition date is the non-credit discount. Interest income for a PCD loan is recognized by accreting the amortized cost basis of the PCD loan to its contractual cash flows. The discount related to estimated credit losses on acquisition recorded as an allowance for credit losses will not be accreted into interest income. Only the noncredit-related discount will be accreted into interest income and subsequent adjustments to expected credit losses will flow through the provision for credit losses on the income statement.
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to
44


loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded, unless considered derivatives.
For loan commitments that are not accounted for as derivatives and when the obligation is not unconditionally cancellable by the Company, we apply the CECL methodology to estimate the expected credit loss on off-balance-sheet commitments. The estimate of expected credit losses for off-balance-sheet credit commitments is recognized as a liability. When the loan is funded, an allowance for expected credit losses is estimated for that loan using the CECL methodology, and the liability for off-balance-sheet commitments is reduced. When applying the CECL methodology to estimate the expected credit loss, we consider the likelihood that funding will occur, the contractual period of exposure to credit loss, the risk of loss, historical loss experience, and current conditions along with expectations of future economic conditions.
45


ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
 Page
Management’s Assessment of Internal Controls Over Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements: 
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of comprehensive income
Consolidated statements of changes in shareholders’ equity
Consolidated statements of cash flows
Notes to consolidated financial statements

46


Report on Management’s Assessment of Internal Control over Financial Reporting
 
The management of FB Financial Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control system was designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation and fair presentation of the financial statements. No matter how well designed, internal control over financial reporting has inherent limitations, including the possibility that a control can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).  
In conducting the evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2020, the Company has excluded the operations of FNB Financial Corp. and its subsidiary and Franklin Financial Network, Inc. and its subsidiaries as permitted by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission (not to extend more than one year beyond the date of the acquisition or for more than one annual reporting period). In conducting the evaluation of the effectiveness of its disclosure controls and procedures as of December 31, 2020, the Company has excluded those disclosure controls and procedures of the acquired entities that are subsumed by internal control over financial reporting. The mergers of FNB Financial Corp. and Franklin Financial Network, Inc. were completed on February 14, 2020 and August 15, 2020, respectively. As of and for the year ended December 31, 2020, acquired assets represented approximately 35 percent of the Company’s consolidated assets. See "Note 2. Mergers and Acquisitions" for further discussion of the mergers and the impact on the Company’s consolidated financial statements.
Based on this assessment management has determined that, as of December 31, 2020, the Company's internal control over financial reporting is effective based on the specified criteria.
47



Report of Independent Registered Public Accounting Firm

 
Shareholders and the Board of Directors of FB Financial Corporation
Nashville, Tennessee

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of FB Financial Corporation (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.





/s/ Crowe LLP


We have served as the Company's auditor since 2018.

Franklin, Tennessee
March 11, 2021 except for the effects of the adjustments made as a result of the reporting segment change described in Note 21 to the consolidated financial statements, as to which the date is June 7, 2021.
48


FB Financial Corporation and subsidiaries
Consolidated balance sheets
(Amounts are in thousands except share and per share amounts) 


 December 31,
 2020 2019 
ASSETS  
Cash and due from banks$110,991 $48,806 
Federal funds sold121,153 131,119 
Interest-bearing deposits in financial institutions1,085,754 52,756 
Cash and cash equivalents1,317,898 232,681 
Investments:
Available-for-sale debt securities, at fair value1,172,400 688,381 
Equity securities, at fair value4,591 3,295 
Federal Home Loan Bank stock, at cost31,232 15,976 
Loans held for sale, at fair value899,173 262,518 
Loans7,082,959 4,409,642 
Less: allowance for credit losses170,389 31,139 
Net loans6,912,570 4,378,503 
Premises and equipment, net145,115 90,131 
Other real estate owned, net12,111 18,939 
Operating lease right-of-use assets49,537 32,539 
Interest receivable43,603 17,083 
Mortgage servicing rights, at fair value79,997 75,521 
Goodwill242,561 169,051 
Core deposit and other intangibles, net22,426 17,589 
Other assets274,116 122,714 
Total assets$11,207,330 $6,124,921 
LIABILITIES
Deposits
Noninterest-bearing$2,274,103 $1,208,175 
Interest-bearing checking2,491,765 1,014,875 
Money market and savings3,254,915 1,520,035 
Customer time deposits1,375,695 1,171,502 
Brokered and internet time deposits61,559 20,351 
Total deposits9,458,037 4,934,938 
Borrowings238,324 304,675 
Operating lease liabilities55,187 35,525 
Accrued expenses and other liabilities164,400 87,454 
Total liabilities9,915,948 5,362,592 
Commitments and contingencies (Note 17)
SHAREHOLDERS' EQUITY
Common stock, $1 par value per share; 75,000,000 shares authorized;
47,220,743 and 31,034,315 shares issued and outstanding at
December 31, 2020 and December 31, 2019, respectively
47,222 31,034 
Additional paid-in capital898,847 425,633 
Retained earnings317,625 293,524 
Accumulated other comprehensive income, net27,595 12,138 
Total FB Financial Corporation shareholders' equity1,291,289 762,329 
Noncontrolling interest93 — 
Total equity1,291,382 762,329 
Total liabilities and shareholders' equity$11,207,330 $6,124,921 
See the accompanying notes to the consolidated financial statements.
49


FB Financial Corporation and subsidiaries
Consolidated statements of income
(Amounts are in thousands except share and per share amounts)


 Year Ended December 31,
 2020 2019 2018 
Interest income:   
Interest and fees on loans$294,596 $260,458 $221,001 
Interest on securities
Taxable10,267 13,223 12,397 
Tax-exempt7,076 4,805 4,047 
Other2,705 4,051 2,126 
Total interest income314,644 282,537 239,571 
Interest expense:
Deposits42,859 51,568 29,536 
Borrowings6,127 4,933 5,967 
Total interest expense48,986 56,501 35,503 
Net interest income265,658 226,036 204,068 
Provision for credit losses94,606 7,053 5,398 
Provision for credit losses on unfunded commitments13,361 — — 
Net interest income after provisions for credit losses157,691 218,983 198,670 
Noninterest income:
Mortgage banking income255,328 100,916 100,661 
Service charges on deposit accounts9,160 9,479 8,502 
ATM and interchange fees14,915 12,161 10,013 
Investment services and trust income7,080 5,244 5,181 
Gain (loss) from securities, net1,631 57 (116)
(Loss) gain on sales or write-downs of other real estate owned(1,491)545 (99)
(Loss) gain from other assets(90)(104)328 
Other income15,322 7,099 6,172 
Total noninterest income301,855 135,397 130,642 
Noninterest expenses:
Salaries, commissions and employee benefits233,768 152,084 136,892 
Occupancy and equipment expense18,979 15,641 13,976 
Legal and professional fees7,654 7,486 7,903 
Data processing11,390 10,589 9,100 
Merger costs34,879 5,385 1,594 
Amortization of core deposit and other intangibles5,323 4,339 3,185 
Advertising10,062 9,138 13,139 
Other expense55,030 40,179 37,669 
Total noninterest expense377,085 244,841 223,458 
Income before income taxes82,461 109,539 105,854 
Income tax expense18,832 25,725 25,618 
Net income applicable to FB Financial Corporation and noncontrolling
interest
$63,629 $83,814 $80,236 
Net income applicable to noncontrolling interest— — 
Net income applicable to FB Financial Corporation$63,621 $83,814 $80,236 
Earnings per common share
Basic$1.69 $2.70 $2.60 
Diluted1.67 2.65 2.55 
See the accompanying notes to the consolidated financial statements.
50


FB Financial Corporation and subsidiaries
Consolidated statements of comprehensive income  
(Amounts are in thousands)

 Year Ended December 31,
 2020 2019 2018 
Net income$63,629 $83,814 $80,236 
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) in available-for-sale
securities, net of taxes of $5,781, $6,227, and $(2,025)
18,430 17,693 (5,439)
Reclassification adjustment for (gain) loss on sale of securities
included in net income, net of taxes of $(348), $24, and $9
(987)67 44 
Net change in unrealized (loss) gain in hedging activities, net of
taxes of $(363), $(322), and $366
(1,031)(914)1,039 
Reclassification adjustment for gain on hedging activities,
net of taxes of $(337), $(170), and $(45)
(955)(481)(128)
Total other comprehensive income (loss), net of tax15,457 16,365 (4,484)
Comprehensive income79,086 100,179 75,752 
Comprehensive income applicable to noncontrolling interests— — 
Comprehensive income applicable to FB Financial Corporation$79,078 $100,179 $75,752 
 See the accompanying notes to the consolidated financial statements.
51


FB Financial Corporation and subsidiaries
Consolidated statements of changes in shareholders’ equity
(Amounts are in thousands except per share amounts)

 Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income, net
Total common
shareholders' equity
Noncontrolling interestsTotal shareholders' equity
Balance at January 1, 2018$30,536 $418,596 $147,449 $148 $596,729 $— $596,729 
Cumulative effect of change in accounting
    principle
— — (109)109 — — — 
Net income— — 80,236 — 80,236 — 80,236 
Other comprehensive income, net of
taxes
— — — (4,484)(4,484)— (4,484)
Stock based compensation expense17 7,190 — — 7,207 — 7,207 
Restricted stock units vested and
distributed, net of shares withheld
143 (2,807)— — (2,664)— (2,664)
Shares issued under employee stock
   purchase program
29 1,167 — — 1,196 — 1,196 
Dividends declared ($0.20 per share)— — (6,363)— (6,363)— (6,363)
Balance at December 31, 2018$30,725 $424,146 $221,213 $(4,227)$671,857 $— $671,857 
Cumulative effect of change in accounting
principle
— — (1,309)— (1,309)— (1,309)
Balance at January 1, 2019$30,725 $424,146 $219,904 $(4,227)$670,548 $— $670,548 
Net income— — 83,814 — 83,814 — 83,814 
Other comprehensive income, net of
taxes
— — — 16,365 16,365 — 16,365 
Stock based compensation expense12 7,077 — — 7,089 — 7,089 
Restricted stock units vested and
distributed, net of shares withheld
274 (6,371)— — (6,097)— (6,097)
Shares issued under employee stock
   purchase program
23 781 — — 804 — 804 
Dividends declared ($0.32 per share)— — (10,194)— (10,194)— (10,194)
Balance at December 31, 2019$31,034 $425,633 $293,524 $12,138 $762,329 $— $762,329 
Cumulative effect of change in
accounting principle (See Note 1)
— — (25,018)— (25,018)— (25,018)
Balance at January 1, 2020$31,034 $425,633 $268,506 $12,138 $737,311 $— $737,311 
Net income attributable to FB Financial
Corporation and noncontrolling interest
— — 63,621 — 63,621 63,629 
Other comprehensive income, net of taxes— — — 15,457 15,457 — 15,457 
Common stock issued in connection
with acquisition of FNB Financial Corp., net of registration costs (See Note 2)
955 33,892 — — 34,847 — 34,847 
Common stock issued in connection with acquisition of Franklin Financial Network, Inc., net of registration costs (See Note 2)15,058 429,815 — — 444,873 93 444,966 
Stock based compensation expense22 10,192 — — 10,214 — 10,214 
Restricted stock units vested and
distributed, net of shares withheld
123 (1,633)— — (1,510)— (1,510)
Shares issued under employee stock
purchase program
30 948 — — 978 — 978 
Dividends declared ($0.36 per share)— — (14,502)— (14,502)— (14,502)
Noncontrolling interest distribution— — — — — (8)(8)
Balance at December 31, 2020$47,222 $898,847 $317,625 $27,595 $1,291,289 $93 $1,291,382 
See the accompanying notes to the consolidated financial statements.
52

FB Financial Corporation and subsidiaries
Consolidated statements of cash flows
(Amounts are in thousands)
Year Ended December 31,
2020 2019 2018 
Cash flows from operating activities:
Net income$63,629 $83,814 $80,236 
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of fixed assets7,009 5,176 4,334 
Amortization of core deposit and other intangibles5,323 4,339 3,185 
Capitalization of mortgage servicing rights(47,025)(42,151)(54,913)
Net change in fair value of mortgage servicing rights47,660 26,299 2,763 
Stock-based compensation expense10,214 7,089 7,207 
Provision for credit losses94,606 7,053 5,398 
Provision for credit losses on unfunded commitments13,361 — — 
Provision for mortgage loan repurchases2,607 362 174 
Accretion of yield on purchased loans(3,788)(8,556)(7,608)
Accretion of discounts and amortization of premiums on securities, net7,382 3,026 2,768 
Gain from securities, net(1,631)(57)116 
Originations of loans held for sale(6,650,258)(4,540,652)(5,958,066)
Repurchases of loans held for sale— (9,919)(12,232)
Proceeds from sale of loans held for sale6,487,809 4,662,728 6,260,532 
Gain on sale and change in fair value of loans held for sale(270,802)(100,228)(88,743)
Net loss (gain) or write-downs of other real estate owned1,491 (545)99 
Loss (gain) on other assets90 104 (328)
Relief of goodwill— 100 — 
Provision for deferred income taxes(25,530)(1,916)6,359 
Changes in:
Other assets and interest receivable(74,628)(45,180)(22,966)
Accrued expenses and other liabilities63,194 13,019 (16,107)
Net cash (used in) provided by operating activities(269,287)63,905 212,208 
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales146,494 24,498 2,742 
Maturities, prepayments and calls220,549 113,018 73,066 
Purchases(424,971)(151,425)(203,844)
Net change in loans118,414 (364,975)(491,774)
Purchases of FHLB stock(515)(2,544)(2,020)
Proceeds from sale of mortgage servicing rights— 29,160 39,428 
Purchases of premises and equipment(5,934)(6,812)(10,144)
Proceeds from the sale of premises and equipment— 1,275 357 
Proceeds from the sale of other real estate owned6,937 3,860 4,819 
Proceeds from the sale of other assets— — 869 
Net cash received in business combinations (See Note 2)248,447 171,032 — 
Net cash provided by (used in) investing activities309,421 (182,913)(586,501)
Cash flows from financing activities:
Net increase in demand deposits1,519,868 249,348 75,906 
Net decrease in time deposits(328,035)(75,004)431,416 
Net increase (decrease) in securities sold under agreements to repurchase5,262 (908)788 
Payments on FHLB advances(250,000)— (120,607)
Proceeds from FHLB advances— 68,235 — 
Issuance of subordinated debt, net of issuance costs98,228 — — 
Amortization of subordinated debt issuance costs(436)— — 
Proceeds from other borrowings15,000 — — 
Share based compensation withholding payments(1,510)(6,097)(2,664)
Net proceeds from sale of common stock under employee stock purchase program978 804 1,196 
Dividends paid(14,264)(10,045)(6,137)
Noncontrolling interest distribution(8)— — 
Net cash provided by financing activities1,045,083 226,333 379,898 
Net change in cash and cash equivalents1,085,217 107,325 5,605 
Cash and cash equivalents at beginning of the period232,681 125,356 119,751 
Cash and cash equivalents at end of the period$1,317,898 $232,681 $125,356 
Supplemental cash flow information:
Interest paid$48,679 $55,051 $31,992 
Taxes paid20,419 25,920 24,387 
Supplemental noncash disclosures:
Transfers from loans to other real estate owned$2,746 $5,487 $2,138 
Transfers (to) from premises and equipment to other real estate owned(841)4,290 — 
Loans provided for sales of other real estate owned305 166 1,019 
Transfers from loans to loans held for sale11,483 7,891 11,888 
Transfers from loans held for sale to loans55,766 12,259 14,732 
Stock consideration paid in business combination480,867 — — 
Trade date payable - securities— — 2,120 
Dividends declared not paid on restricted stock units238 149 226 
Decrease to retained earnings for adoption of new accounting standards (See Note 1)25,018 1,309 109 
Right-of-use assets obtained in exchange for operating lease liabilities2,393 37,916 — 
See the accompanying notes to the consolidated financial statements.

53

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Note (1)—Basis of presentation:
(A) Organization and Company overview:
FB Financial Corporation (the “Company”) is a financial holding company headquartered in Nashville, Tennessee. The consolidated financial statements include the Company and its wholly-owned subsidiaries, FirstBank (the "Bank") and FirstBank Risk Management, Inc. The Bank operates through 81 full-service branches throughout Tennessee, southern Kentucky, north Alabama, and north Georgia, and a national online mortgage business with office locations across the Southeast, which primarily originates mortgage loans to be sold in the secondary market.
On August 15, 2020, the Company completed its previously announced acquisition of Franklin Financial Network, Inc. ("Franklin"). The transaction added a new subsidiary to the Company, FirstBank Risk Management ("FBRM") (formerly known as Franklin Synergy Risk Management), which provides risk management services to the Company in the form of enhanced insurance coverages. It also added a new subsidiary to the Bank, FirstBank Investments of Tennessee, Inc. ("FBIT"), which provides investment services to the Bank. FBIT has a wholly owned subsidiary, FirstBank Investments of Nevada, Inc. ("FBIN") to provide investment services to FBIT. FBIN has a controlling interest in a subsidiary, FirstBank Preferred Capital, Inc. ("FBPC"), which serves as a real estate investment trust ("REIT"), to allow the Bank to sell real estate loans to the REIT to obtain a tax benefit. Refer to Note 2, "Mergers and acquisitions" for additional information on this acquisition.
The Bank is subject to competition from other financial services companies and financial institutions. The Company and the Bank are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. See "Supervision and regulation" in part 1, item 1, for more details regarding regulatory oversight.
The Company continues to qualify as an emerging growth company as defined by the "Jumpstart Our Business Startups Act" ("JOBS Act").
During 2020, the COVID-19 health pandemic created a crisis resulting in volatility in financial markets, sudden, unprecedented job losses, and disruption in consumer and commercial behavior, resulting in governments in the United States and globally to intervene with varying levels of direct monetary support and fiscal stimulus packages. All industries, municipalities and consumers have been impacted by the health crisis to some degree, including the markets that we serve. In attempts to “flatten the curve”, businesses not deemed essential were closed or constrained to capacity limitations, individuals were asked to restrict their movements, observe social distancing and shelter in place. These actions resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses, leading to a loss of revenues and a rapid increase in unemployment, widening of credit spreads, dislocation of bond markets, disruption of global supply chains and changes in consumer spending behavior. As certain restrictions began lifting and more businesses were allowed to open their doors in late 2020, we began to experience a slow improvement in commerce through much of the Company's footprint. Despite the pickup in economic activity late in the year, there is uncertainty regarding the long term effects on the global economy which could have an adverse impact on the Company.
(B) Basis of presentation:
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported results of operations for the year then ended. Actual results could differ significantly from those estimates. It is possible that the Company's estimate of the allowance for credit losses and determination of impairment of goodwill could change as a result of the continued impact of the COVID-19 pandemic on the economy. The resulting change in these estimates could be material to the Company's financial statements.
The consolidated financial statements include the accounts of the Company, the Bank, and its’ wholly-owned subsidiaries, FirstBank Insurance, Inc., Investors Title Company, in addition to the newly acquired subsidiaries mentioned above. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation without any impact on the reported amounts of net income or shareholders’ equity.
Certain accounting policies identified below were modified during the year ended December 31, 2020. Please refer to the Company's audited financial statements on Form 10-K filed on March 13, 2020 for accounting policies in place as of December 31, 2019.
54

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(C) Cash flows:
For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest earning deposits in other financial institutions with maturities of less than 90 days at the date of purchase. These amounts are reported in the consolidated balance sheets caption “Cash and cash equivalents.” Net cash flows are reported for loans held for investment, deposits and short-term borrowings.
(D) Cash and cash equivalents:
The Company considers all highly liquid unrestricted investments with a maturity of three months or less when purchased to be cash equivalents.
(E) Investment securities:
Debt securities are classified as held to maturity and carried at amortized cost, excluding accrued interest, when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Available-for-sale debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of applicable taxes. Beginning January 1, 2020, unrealized losses resulting from credit losses for available-for-sale debt securities are recognized in earnings as a provision for credit losses. Unrealized losses that do not result from credit losses are excluded from earnings and reported as accumulated other comprehensive income, net of applicable taxes, which is included in equity. Accrued interest receivable is separated from other components of amortized cost and presented separately on the consolidated balance sheets.
Equity securities with readily determinable market values are carried at fair value on the balance sheet with any periodic changes in value made through adjustments to the statement of income. Equity securities without readily determinable market values are carried at cost less impairment and included in other assets on the consolidated balance sheets.
Interest income includes the amortization and accretion of purchase premium and discount. Premiums and discounts on securities are amortized on the level-yield method anticipating prepayments based upon the prior three month average monthly prepayments when available. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
The Company evaluates available-for-sale securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. For securities in an unrealized loss position, consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
When credit losses are expected to occur, the amount of the expected credit loss recognized in earnings depends on the Company's intention to sell the security or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the expected credit loss recognized in earnings is equal to the entire difference between its amortized cost basis and its fair value at the date it was determined to be impaired due to credit losses or other factors. The previous amortized cost basis less the impairment recognized in earnings becomes the new amortized cost basis of the investment.
However, if the Company does not intend to sell the security and it is not more likely than not to be required to sell the security before recovery of its amortized cost basis, the difference between the amortized cost and the fair value is separated into the amount representing the credit loss and the amount related to all other factors. If the Company determines a decline in fair value below the amortized cost basis of an available-for-sale investment security has resulted from credit related factors, beginning January 1, 2020 with the adoption of CECL, the Company records a credit loss through an allowance for credit losses. The allowance for credit losses is limited by the amount that the fair value is less than amortized cost. The amount of the allowance for credit losses is determined based on the present value of cash flows expected to be collected and is recognized as a charge to earnings. The amount of the impairment related to other, non-credit related, factors is recognized in other comprehensive income, net of applicable taxes.
The Company did not record any provision for credit losses for its available-for-sale debt securities during the year ended December 31, 2020, as the majority of the investment portfolio is government guaranteed and declines in fair value below amortized cost were determined to be non-credit related.
55

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(F) Federal Home Loan Bank (FHLB) stock:
The Bank accounts for its investments in FHLB stock in accordance with FASB ASC Topic 942-325 "Financial Services-Depository and Lending-Investments-Other." FHLB stock are equity securities that do not have a readily determinable fair value because its ownership is restricted and lacks a market. FHLB stock is carried at cost and evaluated for impairment.
(G) Loans held for sale:
Loans originated and intended for sale in the secondary market, primarily mortgage loans, are carried at fair value as permitted under the guidance in ASC 825, “Financial Instruments” (“ASC 825”). Net gains (losses) of $24,233, $(2,861), and $(4,539) resulting from fair value changes of these mortgage loans were recorded in income during the years ended December 31, 2020, 2019 and 2018, respectively. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Mortgage banking income” in the Consolidated Statements of Income. Gains and losses are recognized in Mortgage banking income on the consolidated statements of income at the time the loan is closed. Pass through origination costs and related loan fees are also included in “Mortgage banking income”.
Periodically, the Bank will transfer mortgage loans originated for sale in the secondary markets into the loan portfolio based on current market conditions, the overall secondary marketability of the loan and the status of the loan. During the years ended December 31, 2020, 2019, and 2018, the Bank transferred $55,766, $12,259, and $14,732, respectively, of residential mortgage loans into its loans held for investment portfolio. The loans are transferred into the portfolio at fair value at the date of transfer. Additionally, occasionally the Bank will transfer loans from the held for investment portfolio into loans held for sale. At the time of the transfer, loans are marked to fair value through the allowance for credit losses and reclassified to loans held for sale. During the year ended December 31, 2020, the Company transferred $2,116 from the portfolio to loans held for sale. During the year ended December 31, 2018, the Company transferred $11,888 from the portfolio to loans held for sale,resulting in an adjustment to the allowance for loan losses of $349.

Government National Mortgage Association (GNMA) optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing and was the original transferor. At the servicer’s option and without GNMA’s prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. Under FASB ASC Topic 860, “Transfers and Servicing,” this buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When the Company is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet, regardless of whether the Company intends to exercise the buy-back option if the buyback option provides the transferor a more-than-trivial benefit. When this criteria is met and these are repurchased, after a period of borrower performance, the loans are transferred to loans held for sale at fair value and are able to be repooled into new Ginnie Mae guaranteed securities. During the years ended December 31, 2020 and 2019, the Company transferred $9,367 and $7,891, respectively, of these repurchased loans from loans held for investment to loans held for sale. There was no such activity during the year ended December 21, 2018. As of December 31, 2020, and 2019, there were $151,184 and $51,705, respectively, of delinquent GNMA loans that had previously been sold which the Company had the option to repurchase; however, the Company determined there not to be a "more-than-trivial benefit" based on an analysis of interest rates and assessment of potential reputational risk associated with these loans. As such, the Company did not record these loans on the balance sheets.
During the year ended December 31, 2020 , the Company acquired a portfolio of commercial loans, including shared national credits and institutional healthcare loans, as part of the Franklin transaction that the Company has elected to account for as held for sale. Changes in fair value from the acquisition date fair value are included in 'other noninterest income' on the consolidated statement of income.
(H) Loans (excluding purchased credit deteriorated loans):
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the principal amount outstanding less any purchase accounting discount net of any accretion recognized to date. Interest on loans is recognized as income by using the simple interest method on daily balances of the principal amount outstanding plus any accretion of purchase accounting discounts.
56

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest is discontinued on loans past due 90 days or more unless the credit is well secured and in the process of collection. Also, a loan may be placed on nonaccrual status prior to becoming past due 90 days if management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of principal or interest is doubtful. The decision to place a loan on nonaccrual status prior to becoming past due 90 days is based on an evaluation of the borrower’s financial condition, collateral liquidation value, economic and business conditions and other factors that affect the borrower’s ability to pay. When a loan is placed on nonaccrual status, the accrued but unpaid interest is charged against current period operations. Thereafter, interest on nonaccrual loans is recognized only as received if future collection of principal is probable. If the collectability of outstanding principal is doubtful, interest received is applied as a reduction of principal. A loan may be restored to accrual status when principal and interest are no longer past due or it otherwise becomes both well secured and collectability is reasonably assured. The Company continues to monitor the level of accrued interest receivable, however an allowance for credit losses was not required as of December 31, 2020.
(I) Allowance for credit losses:
The allowance for credit losses represents the portion of the loan's amortized cost basis that the Company does not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses is based on the loan's amortized cost basis, excluding accrued interest receivable, as the Company promptly charges off uncollectible accrued interest receivable. Management’s determination of the appropriateness of the allowance is based on periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. In future quarters, the Company may update information and forecasts that may cause significant changes in the estimate in those future quarters.
As of January 1, 2020, the Company’s policy for the allowance for credit losses changed with the adoption of CECL. As permitted, the new guidance was implemented using a modified retrospective approach with the impact of the initial adoption being recorded through retained earnings at January 1, 2020, with no restatement of prior periods. Prior to adopting CECL, the Company calculated the allowance using an incurred loss approach. Beginning January 1, 2020, the Company calculates the allowance using a lifetime expected credit loss approach as described in the previous paragraph. See Note 5, "Loans and allowance for credit losses" for additional details related to the Company's specific calculation methodology.
The allowance for credit losses is the Company’s best estimate. Actual losses may differ from the December 31, 2020 allowance for credit loss as the CECL estimate is sensitive to economic forecasts and management judgment.
The following portfolio segments have been identified:
Commercial and industrial loans. The Company provides a mix of variable and fixed rate commercial and industrial loans. Commercial and industrial loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital and operating needs and business expansions, including the purchase of capital equipment and loans made to farmers relating to their operations. This category also includes loans secured by manufactured housing receivables. Commercial and industrial loans generally include lines of credit and loans with maturities of five years or less. The loans are generally made with operating cash flows as the primary source of repayment, but may also include collateralization by inventory, accounts receivable, equipment and/or personal guarantees. The ability of the borrower to collect accounts receivable, and to turn inventory into sales are risk factors in the repayment of the loan.
Construction loans. Construction loans include commercial construction, land acquisition and land development loans and single-family interim construction loans to small- and medium-sized businesses and individuals. These loans are generally secured by the land or the real property being built and are made based on our assessment of the value of the property on an as-completed basis. We expect to continue to make construction loans at a similar pace so long as demand continues and the market for and values of such properties remain stable or continue to improve in our markets. These loans can carry risk of repayment when projects incur cost overruns, have an increase in the price of building materials, encounter zoning and environmental issues, or encounter other factors that may affect the completion of a project on time and on budget. Additionally, repayment risk may be negatively impacted when the market experiences a deterioration in the value of real estate.
57

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Residential real estate 1-4 family mortgage loans. The Company’s residential real estate 1-4 family mortgage loans are primarily made with respect to and secured by single family homes, which are both owner-occupied and investor owned and include manufactured homes with real estate. The Company intends to continue to make residential 1-4 family housing loans at a similar pace, so long as housing values in our markets do not deteriorate from current prevailing levels and we are able to make such loans consistent with our current credit and underwriting standards. First lien residential 1-4 family mortgages may be affected by unemployment or underemployment and deteriorating market values of real estate.
Residential line of credit loans. The Company’s residential line of credit loans are primarily revolving, open-end lines of credit secured by 1-4 residential properties. The Company intends to continue to make home equity loans if housing values in our markets do not deteriorate from current prevailing levels and we are able to make such loans consistent with our current credit and underwriting standards. Second lien residential 1-4 family mortgages may be affected by unemployment or underemployment and deteriorating market values of real estate.
Multi-family residential loans. The Company’s multi-family residential loans are primarily secured by multi-family properties, such as apartments and condominium buildings. These loans also may be affected by unemployment or underemployment and deteriorating market values of real estate.
Commercial real estate loans. The Company’s commercial real estate owner-occupied loans include loans to finance commercial real estate owner occupied properties for various purposes including use as offices, warehouses, production facilities, health care facilities, retail centers, restaurants, churches and agricultural based facilities. Commercial real estate owner-occupied loans are typically repaid through the ongoing business operations of the borrower, and hence are dependent on the success of the underlying business for repayment and are more exposed to general economic conditions.
Commercial real estate non-owner occupied loans. The Company’s commercial real estate non-owner occupied loans include loans to finance commercial real estate non-owner occupied investment properties for various purposes including use as offices, warehouses, health care facilities, hotels, mixed-use residential/commercial, manufactured housing communities, retail centers, assisted living facilities and agricultural based facilities. Commercial real estate non-owner occupied loans are typically repaid with the funds received from the sale of the completed property or rental proceeds from such property, and are therefore more sensitive to adverse conditions in the real estate market, which can also affected by general economic conditions.
 
Consumer and other loans. The Company’s consumer and other loans include loans to individuals for personal, family and household purposes, including car, boat and other recreational vehicle loans, manufactured homes without real estate, and personal lines of credit.   Consumer loans are generally secured by vehicles and other household goods. The collateral securing consumer loans may depreciate over time. The company seeks to minimize these risks through its underwriting standards. Other loans also include loans to states and political subdivisions in the U.S. These loans are generally subject to the risk that the borrowing municipality or political subdivision may lose a significant portion of its tax base or that the project for which the loan was made may produce inadequate revenue.
(J) Business combinations, accounting for acquired loans with credit deterioration and off-balance sheet financial instruments:
Business combinations are accounted for by applying the acquisition method in accordance with Accounting Standards Codification ("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, exceed 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.
Beginning January 1, 2020, loans acquired in business combinations with evidence of more-than-insignificant credit deterioration since origination are considered to be Purchased Credit Deteriorated ("PCD"). The Company developed multiple criteria to assess the presence of more–than–insignificant credit deterioration in acquired loans, mainly focused on changes in credit quality and payment status. While general criteria have been established, each acquisition will vary in its specific facts and circumstances and the Company will apply judgment around PCD identification for each individual acquisition based on their unique portfolio mix and risks identified.
The Company adopted ASC 326 using the prospective transition approach for loans previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, management did not
58

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
reassess whether PCI assets met the criteria of PCD assets as of the date of adoption and all PCI loans were transitioned to PCD loans upon adoption. Under PCD accounting,the amount of expected credit losses as of the acquisition date is added to the purchase price of the PCD loan. This establishes the amortized cost basis of the PCD loan. The difference between the unpaid principal balance of the PCD loan and the amortized cost basis of the PCD loan as of the acquisition date is the non-credit discount. Interest income for a PCD loan is recognized by accreting the amortized cost basis of the PCD loan to its contractual cash flows. The discount related to estimated credit losses on acquisition recorded as an allowance for credit losses will not be accreted into interest income. Only the noncredit-related discount will be accreted into interest income and subsequent adjustments to expected credit losses will flow through the provision for credit losses on the income statement.
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded, unless considered derivatives.
For loan commitments that are not accounted for as derivatives and when the obligation is not unconditionally cancellable by the Company, the Company applies the CECL methodology to estimate the expected credit loss on off-balance-sheet commitments. The estimate of expected credit losses for off-balance-sheet credit commitments is recognized as a liability. When the loan is funded, an allowance for expected credit losses is estimated for that loan using the CECL methodology, and the liability for off-balance-sheet commitments is reduced. When applying the CECL methodology to estimate the expected credit loss, the Company considers the likelihood that funding will occur, the contractual period of exposure to credit loss, the risk of loss, historical loss experience, and current conditions along with expectations of future economic conditions.
(K) Premises and equipment:
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Provisions for depreciation are computed principally on the straight-line method and are charged to occupancy expense over the estimated useful lives of the assets. Maintenance agreements are amortized to expense over the period of time covered by the agreement. Costs of major additions, replacements or improvements are capitalized while expenditures for maintenance and repairs are charged to expense as incurred.
For financial statement purposes, the estimated useful life for premises is the lesser of the remaining useful life per third party appraisal or forty years, for furniture and fixtures the estimated useful life is seven to ten years, for leasehold improvements the estimated useful life is the lesser of twenty years or the term of the lease and for equipment the estimated useful life is three to seven years.
(L) Other real estate owned:
Real estate acquired through, or in lieu of, loan foreclosure is initially recorded at fair value less the estimated cost to sell at the date of foreclosure, which may establish a new cost basis. Other real estate owned may also include excess facilities and properties held for sale as described in Note 8. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan. After initial measurement, valuations are periodically performed by management and the asset is carried at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations are included in other noninterest income and noninterest expenses. Losses due to the valuation of the property are included in gain (loss) on sales or write-downs of other real estate owned.
(M) Leases:
The Company leases certain banking, mortgage and operations locations. Effective January 1, 2019, the Company records leases on the balance sheet in the form of a lease liability for the present value of future minimum payments under the lease terms and a right-of-use asset equal to the lease liability adjusted for items such as deferred or prepaid rent, incentive liabilities, leasehold intangibles and any impairment of the right-of-use asset. In determining whether a contract contains a lease, management conducts an analysis at lease inception to ensure an asset was specifically identified and the Company has control of use of the asset. For contracts determined to be leases entered into after January 1, 2019, the Company performs additional analysis to determine whether the lease should be classified as a finance or operating lease. The Company considers a lease to be a finance lease if future minimum lease payments amount to greater than 90% of the asset's fair value or if the lease term is equal to or greater than 75% of the asset's
59

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
estimated economic useful life. As of December 31, 2020, the Company has one finance lease that resulted from the Franklin transaction. As of December 31, 2019, the Company did not have any leases that were determined to be finance leases. The Company does not record leases on the consolidated balance sheets that are classified as short term (less than one year). Additionally, the Company has not recorded equipment leases or leases in which the Company is the lessor on the consolidated balance sheets as these are not material to the Company.
At lease inception, the Company determines the lease term by adding together the minimum lease term and all optional renewal periods that it is reasonably certain to renew. This determination is at management's full discretion and is made through consideration of the asset, market conditions, competition and entity based economic conditions, among other factors. The lease term is used in the economic life test and also to calculate straight-line rent expense. The depreciable life of leasehold improvements is limited by the estimated lease term, including renewals.
Operating leases are expensed on a straight-line basis over the life of the lease beginning when the lease commences. Rent expense and variable lease expense are included in occupancy and equipment expense on the Company's Consolidated statements of income. The Company's variable lease expense include rent escalators that are based on the Consumer Price Index or market conditions and include items such as common area maintenance, utilities, parking, property taxes, insurance and other costs associated with the lease.
There are no residual value guarantees or restrictions or covenants imposed by leases that will impact the Company's ability to pay dividends or cause the Company to incur additional expenses. The discount rate used in determining the lease liability is based upon incremental borrowing rates the Company could obtain for similar loans as of the date of commencement or renewal.
(N) Mortgage servicing rights:
The Company accounts for its mortgage servicing rights under the fair value option as permitted under ASC 860-50-35, "Transfers and Servicing". The Company retains the right to service certain mortgage loans that it sells to secondary market investors. The retained mortgage servicing right is initially recorded at the fair value of future net cash flows expected to be realized for performing servicing activities. Fair value is determined using an income approach with various assumptions including expected cash flows, prepayment speeds, market discount rates, servicing costs, and other factors. These mortgage servicing rights are recognized as a separate asset on the date the corresponding mortgage loan is sold.
Subsequent changes in fair value, including the write downs due to pay offs and paydowns, are recorded in earnings in Mortgage banking income.
(O) Transfers of financial assets:
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
(P) Goodwill and other intangibles:
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment. Goodwill is assigned to the Company’s reporting units, Banking or Mortgage as applicable. Goodwill is evaluated for impairment by first performing a qualitative evaluation to determine whether it is necessary to perform the quantitative goodwill impairment test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill.  If an entity does a qualitative assessment and determines that it is not more likely than not the fair value of a reporting unit is less than its carrying amount, then goodwill of the reporting unit is not considered impaired, and it is not necessary to continue to the quantitative goodwill impairment test. If the estimated implied fair value of goodwill is less than the carrying amount, an impairment loss would be recognized in noninterest expense to reduce the carrying amount to the estimated implied fair value, which could be material to our operating results for any particular reporting period. The Company performed a quantitative assessment in 2020 and determined it was more likely than not that the fair value of the reporting units exceeded its carrying value, including goodwill. No impairment was identified through the annual assessments for impairment performed as of December 31, 2020, 2019 or 2018.
60

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions in addition to both a customer trust intangible and manufactured housing loan servicing intangible. All intangible assets are initially measured at fair value and then amortized over their estimated useful lives. See Note 9,"Goodwill and intangible assets" for additional information on other intangibles.
(Q) Income taxes:
Income tax expense is the total of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company’s policy is to recognize interest and penalties on uncertain tax positions in “Income tax expense” in the Consolidated Statements of Income. There were no amounts related to uncertain tax positions recognized for the years ended December 31, 2020, 2019 or 2018.
(R) Long-lived assets:
Premises and equipment, core deposit intangible assets, and other long-lived assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. No long-lived assets were deemed to be impaired at December 31, 2020 and 2019.
(S) Derivative financial instruments and hedging activities:
All derivative financial instruments are recorded at their fair values in other assets or other liabilities in the consolidated balance sheets in accordance with ASC 815, “Derivatives and Hedging.” If derivative financial instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. If derivative financial instruments are not designated as hedges, only the change in the fair value of the derivative instrument is included in current earnings.
Cash flow hedges are utilized to mitigate the exposure to variability in expected future cash flows or other types of forecasted transactions. For the Company’s derivatives designated as cash flow hedges, changes in the fair value of cash flow hedges are, to the extent that the hedging relationship is effective, recorded as other comprehensive income and are subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. The ineffective portions of the changes in fair value of the hedging instruments are immediately recognized in earnings. The assessment of the effectiveness of the hedging relationship is evaluated under the hypothetical derivative method.  
The Company also utilizes derivative instruments that are not designated as hedging instruments. The Company enters into interest rate cap and/or floor agreements with its customers and then enters into an offsetting derivative contract position with other financial institutions to mitigate the interest rate risk associated with these customer contracts. Because these derivative instruments are not designated as hedging instruments, changes in the fair value of the derivative instruments are recognized currently in earnings.
The Company also enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Rate-lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in other assets or liabilities, with changes in fair value recorded in the line item “Mortgage banking income” on the Consolidated Statements of Income. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments, the difference between current levels of interest rates and the committed rates is also considered.
The Company utilizes forward loan sale contracts and forward sales of residential mortgage-backed securities to mitigate the interest rate risk inherent in the Company’s mortgage loan pipeline and held-for-sale portfolio. Forward sale contracts are contracts for delayed delivery of mortgage loans or a group of loans pooled as mortgage-backed securities. The Company agrees to deliver on a specified future date, a specified instrument, at a specified price or yield. However, the
61

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
contract may allow for cash settlement. The credit risk inherent to the Company arises from the potential inability of counterparties to meet the terms of their contracts. In the event of non-acceptance by the counterparty, the Company would be subject to the credit and inherent (or market) risk of the loans retained. Such contracts are accounted for as derivatives and, along with related fees paid to investor are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the line item “Mortgage banking income” on the Consolidated Statements of Income. Fair value is based on the estimated amounts that the Company would receive or pay to terminate the commitment at the reporting date.
The Company utilizes two methods to deliver mortgage loans sold to an investor. Under a “best efforts” sales agreement, the Company enters into a sales agreement with an investor in the secondary market to sell the loan when an interest rate-lock commitment is entered into with a customer, as described above. Under a “best efforts” sales agreement, the Company is obligated to sell the mortgage loan to the investor only if the loan is closed and funded. Thus, the Company will not incur any liability to an investor if the mortgage loan commitment in the pipeline fails to close. The Company also utilizes “mandatory delivery” sales agreements. Under a mandatory delivery sales agreement, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor should the Company fail to satisfy the contract. Mandatory commitments are recorded at fair value in the Company’s Consolidated Balance Sheets. Gains and losses arising from changes in the valuation of these commitments are recognized currently in earnings and are reflected under the line item “Mortgage banking income” on the Consolidated Statements of Income.
(T) Lender risk account:
During 2018, the Company began selling qualified mortgage loans to FHLB-Cincinnati via the Mortgage Purchase Program (“MPP”).  All mortgage loans purchased from members through the MPP are held on the FHLB’s balance sheet. FHLB does not securitize MPP loans for sale to other investors.  They mitigate their credit risk exposure through their underwriting and pool composition requirements and through the establishment of the Lender Risk Account (“LRA”) credit enhancement. The LRA protects the FHLB against possible credit losses by setting aside a portion of the initial purchase price into a performance based escrow account that can be used to offset possible loan losses.  The LRA amount is established as a percentage applied to the sum of the initial unpaid principal balance of each mortgage in the aggregated pool at the time of the purchase of the mortgage as determined by the FHLB-Cincinnati and is funded by the deduction from the proceeds of sale of each mortgage in the aggregated pool to the FHLB-Cincinnati.  As of December 31, 2020 and 2019, the Company had on deposit with the FHLB-Cincinnati $12,729 and $11,225, respectively, in these LRA’s. Additionally, as of December 31, 2020 and 2019, the Company estimated the guaranty account to be $6,183 and $5,546, respectively. The Company bears the risk of receiving less than 100% of its LRA contribution in the event of losses, either by the Company or other members selling mortgages in the aggregated pool.  Any losses will be deducted first from the individual LRA contribution of the institution that sold the mortgage of which the loss was incurred. If losses incurred in the aggregated pool are greater than the member’s LRA contribution, such losses will be deducted from the LRA contribution of other members selling mortgages in that aggregated pool.  Any portion of the LRA not used to pay losses will be released over a thirty year period and will not start until the end of five years after the initial fill-up period.
(U) Comprehensive income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale securities and derivatives designated as cash flow hedges, net of taxes.
(V) Loss contingencies:
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
(W) Securities sold under agreements to repurchase:
The Company routinely sells securities to certain customers and then repurchases the securities the next business day. Securities sold under agreements to repurchase are recorded on the consolidated balance sheets at the amount of cash received in connection with each transaction in the line item "Borrowings". These are secured liabilities and are not covered by the Federal Deposit Insurance Corporation ("FDIC"). See Note 14, "Borrowings" in the Notes to the consolidated financial statements for additional details regarding securities sold under agreements to repurchase.
62

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(X) Advertising expense:
Advertising costs, including costs related to internet mortgage marketing, lead generation, and related costs, are expensed as incurred.
(Y) Earnings per common share:
Basic earnings per common share ("EPS") excludes dilution and is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares issuable under the restricted stock units granted but not yet vested and distributable. Diluted EPS is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding for the year, plus an incremental number of common-equivalent shares computed using the treasury stock method.
Unvested share-based payment awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered to participate with common shareholders in undistributed earnings for purposes of computing EPS. Companies that have such participating securities, including the Company, are required to calculate basic and diluted EPS using the two-class method. Certain restricted stock awards granted by the Company include non-forfeitable dividend equivalents and are considered participating securities. Calculations of EPS under the two-class method (i) exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities and (ii) exclude from the denominator the dilutive impact of the participating securities.
The following is a summary of the basic and diluted earnings per common share calculation for each of the periods presented:
Year Ended December 31,
 202020192018
Basic earnings per common share calculation:
Net income applicable to FB Financial Corporation$63,621 $83,814 $80,236 
Dividends paid on and undistributed earnings allocated to
   participating securities
— (447)(428)
Earnings available to common shareholders$63,621 $83,367 $79,808 
Weighted average basic shares outstanding37,621,720 30,870,474 30,675,755 
Basic earnings per common share$1.69 $2.70 $2.60 
Diluted earnings per common share:
Earnings available to common shareholders63,621 83,367 79,808 
Weighted average basic shares outstanding37,621,720 30,870,474 30,675,755 
Weighted average diluted shares contingently issuable(1)
478,024 532,423 639,226 
Weighted average diluted shares outstanding38,099,744 31,402,897 31,314,981 
Diluted earnings per common share$1.67 $2.65 $2.55 
 (1) Excludes 239,813 restricted stock units outstanding considered to be antidilutive as of December 31, 2020.
(Z) Segment reporting:
The Company’s Mortgage division represents a distinct reportable segment that differs from the Company’s primary business of Banking. Accordingly, a reconciliation of reportable segment revenues, expenses and profit to the Company’s consolidated total has been presented in Note 21. During the three months ended March 31, 2021, the Company reevaluated its business segments to align all retail mortgage activities with the Mortgage segment. Previously, the Company assigned retail mortgage activities within the Banking geographical footprint to the Banking segment. Results for the years ended December 31, 2020, 2019 and 2018 have been revised to conform to the new methodology without impacting the Company's consolidated financial condition or results of operations. See Note 12, "Segment reporting" for additional information on this change.
63

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(AA) Stock-based compensation:
The Company grants restricted stock units ("RSUs") under compensation arrangements for the benefit of employees, executive officers, and directors. Restricted stock unit grants are subject to time-based vesting. The total number of restricted stock units granted represents the maximum number of restricted stock units eligible to vest based upon the service conditions set forth in the grant agreements.
During 2020, the Company began awarding performance-based restricted stock units ("PSUs") to executives and other officers and employees. Under the terms of the award, the number of units that will vest and convert to shares of common stock will be based on the extent to which the Company achieves specified performance criteria during a fixed three-year performance period.
Stock-based compensation expense is recognized in accordance with ASC 718-20, “Compensation – Stock Compensation Awards Classified as Equity”. Expense is recognized based on the fair value of the portion of stock-based payment awards that are ultimately expected to vest, reduced for forfeitures based on grant-date fair value. The restricted stock unit awards and related expense are amortized over the required service period, if any. Compensation expense for PSUs is estimated each period based on the fair value of the stock at the grant date and the most probable outcome of the performance condition, adjusted for the passage of time within the vesting period of the awards. The reconciliation of RSUs, PSUs, and Stock-based compensation expense is presented in Note 24.
(BB) Subsequent Events:
ASC Topic 855, "Subsequent Events", establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated all events or transactions that occurred after December 31, 2020 through the date of the issued financial statements.
Recently adopted accounting standards:
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 and its subsequent amendments issued by the FASB requires the measurement of all current expected credit losses for financial assets (including off-balance sheet credit exposures) held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Additionally, the update requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. The new methodology requires institutions to calculate all probable and estimable losses that are expected to be incurred through the financial asset's entire life through a provision for credit losses, including certain loans obtained as a result of any acquisition. For available-for-sale debt securities that have experienced a deterioration in credit, Topic 326 requires an allowance for credit losses to be recognized, instead of a direct write-down, which was previously required under the other-than-temporary impairment ("OTTI") model. Topic 326 eliminates the concept of OTTI impairment and instead focuses on determining whether any impairment is a result of a credit loss or other factors. As a result, the standard says the Company may not use the length of time a debt security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist, as the Company was previously allowed under the OTTI model.
ASU 2016-13 eliminates the existing guidance for PCI loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance will be added to the purchase price rather than recorded as provision expense referred herein as the PCD asset gross-up approach. The Company applied the new PCD asset gross-up approach at transition to all assets that were accounted for as PCI prior to adoption. Any change in the allowance for credit losses for these assets as a result of applying the new guidance is accounted for as an adjustment to the asset’s amortized cost basis and not as a cumulative-effect adjustment to beginning retained earnings. Additionally, ASU 2016-13 requires additional disclosures related to loans and debt securities. See Note 4, “Investment securities” and Note 5, “Loans and allowance for credit losses” for these disclosures.
The Company formed a cross–functional working group to oversee the adoption of CECL at the effective date. The working group developed a project plan focused on understanding the new standard, researching issues, identifying data needs for modeling inputs, technology requirements, modeling considerations, and ensuring overarching governance was achieved for each objective and milestone. The key data driver for each model was identified, populated, and internally validated. The Company also completed data and model validation testing. The Company has performed model sensitivity
64

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
analysis, developed a framework for qualitative adjustments, created supporting analytics, and executed the enhanced governance and approval process. Internal controls related to the CECL process were finalized prior to adoption.
ASU 2016-13 was adopted effective January 1, 2020 using a modified retrospective approach with no adjustments to prior period comparative financial statements. Upon adoption, the Company recorded a cumulative effective adjustment to decrease retained earnings by $25,018, with corresponding adjustments to the allowance for credit losses on loans and unfunded commitments in addition to recording a deferred tax asset on its consolidated balance sheet.
As of that date, the Company also recorded a cumulative effect adjustment to gross-up the amortized cost amount of its PCD loans by $558, with a corresponding adjustment to the allowance for credit losses on its consolidated balance sheet.
A summary of the impact to the consolidated balance sheet as of the adoption date is presented in the table below:
Balance before adoption of ASC 326Cumulative effect adjustment to adopt ASC 326Impact of the adjustment to adopt ASC 326Balance at January 1, 2020 (post ASC 326 adoption)
ASSETS:
   Loans$4,409,642 $558 Increase$4,410,200 
   Allowance for credit losses(31,139)(31,446)Increase(62,585)
      Total impact to assets$(30,888)Net decrease
LIABILITIES AND EQUITY:
Allowance for credit losses on unfunded commitments$— $2,947 Increase$2,947 
   Net deferred tax liability20,490 (8,817)Decrease11,673 
   Retained earnings293,524 (25,018)Decrease268,506 
      Total impact to liabilities and equity$(30,888)Net decrease

In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule, which became final on September 30, 2020 to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company elected the five-year capital transition relief option.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates step two from the goodwill impairment test. Instead, an entity may perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Entities have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. ASU 2017-04 became effective for the Company on January 1, 2020. The adoption of this standard did not have any impact on the Company's consolidated financial statements or disclosures.
In August 2018, the FASB issued "Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements." This update is part of the disclosure framework project and eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. The update became effective on January 1, 2020 and did not have an impact on the Company's consolidated financial statements or disclosures.
In March 2019, FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements", which aligns the guidance for fair value of the underlying assets by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value in Topic 820, Fair Value Measurement should be
65

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
applied. ASU No. 2019-01 also requires lessors within the scope of Topic 942, "Financial Services—Depository and Lending", to present all “principal payments received under leases” within investing activities. The adoption of this standard on January 1, 2020 did not have a material impact on the Company's consolidated financial statements or disclosures.
In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments". The amendments related to Topic 326 address accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, vintage disclosures, and contractual extensions and renewal options and became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The improvements and clarifications related to Topic 815 address partial-term fair value hedges of interest-rate risk, amortization, and disclosure of fair value hedge basis adjustments and consideration of hedged contractually specified interest rates under the hypothetical method and became effective for the annual reporting period beginning January 1, 2020. The amendments related to Topic 825 contain various improvements to ASU 2016-01, including scope; held-to-maturity debt securities fair value disclosures; and remeasurement of equity securities at historical exchange rates and became effective as of January 1, 2020. The amendments in this update did not have a material impact on the financial statements.
Newly issued not yet effective accounting standards:
In June 2018, FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting", which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Consistent with the accounting for employee share-based payment awards, nonemployee share-based payment awards will be measured at grant-date fair value of the equity instruments obligated to be issued when the good has been delivered or the service rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. This ASU is effective for all entities for fiscal years beginnings after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company adopted the update effective January 1, 2021. The adoption of this standard did not have a significant impact on the consolidated financial statements or disclosures.

Note (2)—Mergers and acquisitions:
The following mergers and acquisitions were accounted for pursuant to FASB ASC 805. Accordingly, the purchase price of each acquisition was allocated to the acquired assets and liabilities assumed based on estimated fair values as of the respective acquisition dates. The excess of the purchase price over the net assets acquired was recorded as goodwill.
Franklin Financial Network, Inc. merger
Effective August 15, 2020, the Company completed its previously announced merger with Franklin Financial Network, Inc. and its wholly owned subsidiaries, with FB Financial Corporation continuing as the surviving entity. After consolidating duplicative locations the merger added 10 branches and expanded the Company's footprint in middle Tennessee and the Nashville metropolitan statistical area. Under the terms of the agreement, the Company acquired total assets of $3.63 billion, loans of $2.79 billion and assumed total deposits of $3.12 billion. Total loans acquired includes a non-strategic institutional portfolio with a fair value of $326,206 the Company classified as held for sale. Franklin common shareholders received 15,058,181 shares of the Company's common stock, net of the equivalent value of 44,311 shares withheld on certain Franklin employee equity awards that vested upon change in control, as consideration in connection with the merger, in addition to $31,330 in cash consideration. Also included in the purchase price, the Company issued replacement restricted stock units for awards initially granted by Franklin during 2020 that did not vest upon change in control, with a total fair value of $674 attributed to pre-combination service. Based on the closing price of the Company's common stock on the New York Stock Exchange of $29.52 on August 15, 2020, the merger consideration represented approximately $477,830 in aggregate consideration.
Goodwill of $67,191 recorded in connection with the transaction resulted from the ongoing business contribution, reputation, operating model and expertise of Franklin. Measurement period adjustments recorded during the fourth quarter of 2020 amounting to $6,546 related to the finalization of valuations relating primarily to commercial loans held for sale, deposits and premises and equipment. The goodwill is not deductible for income tax purposes. Goodwill is included in the Banking segment as substantially all of the operations resulting from the acquisition of Franklin are in alignment with the Company's banking business.
66

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company incurred $32,364 in merger expenses during the year ended December 31, 2020 in connection with this transaction. These expenses are primarily comprised of professional services, employee-related costs, costs associated with branch consolidation, and integration costs.

67

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following table presents an allocation of the consideration to net assets acquired:
Purchase Price:
Equity consideration
Franklin shares outstanding(1)
15,588,337 
Franklin options converted to net shares62,906 
15,651,243 
Exchange ratio to FB Financial shares0.965 
FB Financial shares to be issued as merger consideration(2)
15,102,492 
Issuance price as of August 15, 2020$29.52 
Value of FB Financial stock to be issued as merger consideration$445,826 
Less: tax withholding on vested restricted stock awards, units and options(3)
(1,308)
Value of FB Financial stock issued$444,518 
FB Financial shares issued15,058,181 
Franklin restricted stock units that do not vest on change in control114,915 
Replacement awards issued to Franklin employees118,776 
Fair value of replacement awards$3,506 
Fair value of replacement awards attributable to pre-combination service$674 
Cash consideration
Total Franklin shares and net shares outstanding15,651,243 
Cash consideration per share$2.00 
Total cash to be paid to Franklin(4)
$31,330 
Total purchase price$477,830 
Fair value of net assets acquired410,639 
Goodwill resulting from merger$67,191 
(1)Franklin shares outstanding includes restricted stock awards and restricted stock units that vested upon change in control.
(2)Only factors in whole share issuance. Cash was paid in lieu of fractional shares.
(3)Represents the equivalent value of approximately 44,311 shares of FB Financial Corporation stock on August 15, 2020.
(4)Includes $28 of cash paid in lieu of fractional shares.
FNB Financial Corp. merger
Effective February 14, 2020, the Company completed its previously announced acquisition of FNB Financial Corp. and its wholly owned subsidiary, Farmers National Bank of Scottsville (collectively, "Farmers National"). Following the acquisition, Farmers National was merged into the Company with FB Financial Corporation continuing as the surviving entity. The transaction added four branches and expanded the Company's footprint into Kentucky. Under the terms of the agreement, the Company acquired total assets of $258,218, loans of $182,171 and assumed total deposits of $209,535. Farmers National shareholders received 954,797 shares of the Company's common stock as consideration in connection with the merger, in addition to $15,001 in cash consideration. Based on the closing price of the Company's common stock on the New York Stock Exchange of $36.70 on February 14, 2020, the merger consideration represented approximately $50,042 in aggregate consideration.
Goodwill of $6,319 recorded in connection with the transaction resulted from the ongoing business contribution of Farmers National and anticipated synergies arising from the combination of certain operational areas of the Company. Goodwill resulting from this transaction is not deductible for income tax purposes. Goodwill is included in the Banking segment as substantially all of the operations resulting from the acquisition of Farmers National are in alignment with the Company's core banking business.
The Company incurred $2,338 in merger expenses during the year ended December 31, 2020 in connection with this transaction. These expenses are primarily comprised of professional services, employee-related costs, and integration costs. The following table presents the total purchase price, fair value of net assets acquired, and the goodwill as of the acquisition date.
68

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Consideration:
Net shares issued954,797 
Purchase price per share on February 14, 2020$36.70 
Value of stock consideration$35,041 
Cash consideration paid15,001 
Total purchase price$50,042 
Fair value of net assets acquired43,723 
Goodwill resulting from merger$6,319 
Atlantic Capital Bank, N.A. Branches
On April 5, 2019, the Bank completed its branch acquisition to purchase 11 Tennessee and three Georgia branch locations (the "Branches") from Atlantic Capital Bank, N.A., a national banking association and a wholly owned subsidiary of Atlantic Capital Bancshares, Inc., a Georgia corporation (collectively, "Atlantic Capital") in a transaction valued at $36,790, further increasing market share in existing markets and expanding the Company's footprint into new locations. The branch acquisition added $588,877 in customer deposits at a premium of 6.25%, $374,966 in loans at 99.32% of principal outstanding and $31,961 of goodwill. All of the operations of the Branches are included in the Banking segment.
Net assets acquired
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the respective acquisition dates:
As of August 15, 2020As of February 14, 2020
Franklin Financial Network, Inc.FNB Financial Corp.
ASSETS
Cash and cash equivalents$284,004 $10,774 
Investments373,462 50,594 
Mortgage loans held for sale, at fair value38,740 — 
Commercial loans held for sale, at fair value326,206 — 
Loans held for investment, net of fair value adjustments2,427,527 182,171 
Allowance for credit losses on PCD loans(24,831)(669)
Premises and equipment45,471 8,049 
Operating lease right-of-use assets23,958 14 
Mortgage servicing rights5,111 — 
Core deposit intangible7,670 2,490 
Other assets124,571 4,795 
Total assets$3,631,889 $258,218 
LIABILITIES
Deposits:
Noninterest-bearing$505,374 $63,531 
Interest-bearing1,783,379 26,451 
Money market and savings342,093 37,002 
Customer time deposits383,433 82,551 
Brokered and internet time deposits107,452 — 
Total deposits3,121,731 209,535 
Borrowings62,435 3,192 
Operating lease liabilities24,330 14 
Accrued expenses and other liabilities12,661 1,754 
Total liabilities assumed3,221,157 214,495 
Noncontrolling interests acquired93 — 
Net assets acquired$410,639 $43,723 

69

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Purchased credit-deteriorated loans
Under CECL, the Company is required to determine whether purchased loans held for investment have experienced more-than-insignificant deterioration in credit quality since origination. Loans that have experienced this level of deterioration in credit quality are subject to special accounting at initial recognition and measurement. The Company initially measures the amortized cost of a PCD loan by adding the acquisition date estimate of expected credit losses to the loan's purchase price (i.e. the "gross up" approach). There is no provision for credit loss recognized upon acquisition of a PCD loan because the initial allowance is established through gross-up of the loans' amortized cost.
The Company determined that 27.9% of the Franklin loan portfolio had more-than-insignificant deterioration in credit quality since origination as of the acquisition date. This included deterioration in credit metrics, such as delinquency, nonaccrual status or risk ratings as well as certain loans within designated industries of concern that have been negatively impacted by COVID-19. Additionally, it was determined that 10.1% of the Farmers National loan portfolio had more-than-insignificant deterioration in credit quality since origination as of the February acquisition date. These were primarily delinquent loans as of February 14, 2020, or loans that Farmers National had classified as nonaccrual or TDR prior to the Company's acquisition.
As of August 15, 2020As of February 14, 2020
Franklin Financial Network, Inc.FNB Financial Corp.
Purchased credit-deteriorated loans
Principal balance$693,999 $18,964 
Allowance for credit losses at acquisition(24,831)(669)
Net premium attributable to other factors8,810 63 
Loans purchased credit-deteriorated fair value$677,978 $18,358 
Loans recognized through the acquisition of Franklin and Farmers National that have not experienced more-than-insignificant credit deterioration since origination are initially recognized at the purchase price. Expected credit losses are measured under CECL through the provision for credit losses. The Company recorded provisions for credit losses in the amounts of $52,822 and $2,885 as of August 15, 2020 and February 14, 2020, respectively, in the income statement related to estimated credit losses on non-PCD loans from Franklin and Farmers National, respectively. Additionally, the Company estimates expected credit losses on off-balance sheet loan commitments that are not accounted for as derivatives. The Company recorded an increase in provision for credit losses from unfunded commitments of $10,499 as of August 15, 2020 related to the Franklin acquisition.
Pro forma financial information (unaudited)
The results of operations of the acquisitions have been included in the Company's consolidated financial statements prospectively beginning on the date of each acquisition. The acquisitions have been fully integrated with the Company's existing operations. Accordingly, post-acquisition net interest income, total revenues, and net income are not discernible.The following unaudited pro forma condensed consolidated financial information presents the results of operations for the year ended December 31, 2020 and 2019, respectively, as though the Franklin merger and Farmers National acquisition had been completed as of January 1, 2019, and the Atlantic Capital acquisition had been completed as of January 1, 2018. The unaudited estimated pro forma information combines the historical results of the mergers with the Company’s historical consolidated results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the periods presented. Merger expenses are reflected in the periods they were incurred. The pro forma information is not indicative of what would have occurred had the transactions taken place on January 1, 2019 and January 1, 2018, and does not include the effect of cost-saving or revenue-enhancing strategies.
Year Ended December 31,
2020 2019 2018 
Net interest income$338,092 $348,660 $220,269 
Total revenues$654,374 $504,273 $354,258 
Net income$65,135 $99,898 $78,762 




70

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)

Note (3)—Cash and cash equivalents concentrations:
The Bank is required to maintain an average reserve balance with the Federal Reserve Bank or maintain such reserve balance in the form of cash. The required balance was $0 and $20,881 as of December 31, 2020 and 2019. The Bank maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Bank has not experienced any losses in such correspondent accounts and believes it is not exposed to any significant credit risk from cash and cash equivalents.
The Bank had cash in the form of Federal funds sold included in cash and cash equivalents of $121,153 and $131,119 as of December 31, 2020 and 2019, respectively.

Note (4)—Investment securities:
The following tables summarize the amortized cost, allowance for credit losses and fair value of the available-for-sale debt securities and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income at December 31, 2020 and 2019:  
December 31, 2020
 Amortized costGross unrealized gainsGross unrealized lossesAllowance for credit losses for investmentsFair Value
Investment Securities    
Available-for-sale debt securities  
U.S. government agency securities$2,000 $$— $— $2,003 
Mortgage-backed securities - residential760,099 14,040 (803)— 773,336 
Mortgage-backed securities - commercial20,226 1,362 — — 21,588 
States and political subdivisions336,543 19,806 (20)— 356,329 
U.S. Treasury securities16,480 148 — — 16,628 
Corporate securities2,500 17 (1)— 2,516 
Total$1,137,848 $35,376 $(824)$— $1,172,400 

December 31, 2019
 Amortized costGross unrealized gainsGross unrealized lossesFair Value
Investment Securities    
Available-for-sale debt securities    
Mortgage-backed securities - residential$474,144 $4,829 $(1,661)$477,312 
Mortgage-backed securities - commercial12,957 407 — 13,364 
States and political subdivisions181,178 8,287 (230)189,235 
U.S. Treasury securities7,426 22 — 7,448 
Corporate securities1,000 22 — 1,022 
Total$676,705 $13,567 $(1,891)$688,381 
The components of amortized cost for debt securities on the consolidated balance sheets excludes accrued interest receivable since the Company elected to present accrued interest receivable separately on the consolidated balance sheets. As of December 31, 2020 and 2019, total accrued interest receivable on debt securities was $4,540 and $2,843, respectively.
As of December 31, 2020 and 2019, the Company had $4,591 and $3,295, respectively, in marketable equity securities recorded at fair value, respectively.
Securities pledged at December 31, 2020 and 2019 had carrying amounts of $804,821 and $373,674, respectively, and were pledged to secure a Federal Reserve Bank line of credit, public deposits and repurchase agreements.
There were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity during any period presented.
71

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
At December 31, 2020 and December 31, 2019, there were no trade date payables that related to purchases settled after period end.
 
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2020 and December 31, 2019 are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgage underlying the security may be called or repaid without any penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.
December 31,December 31,
 2020 2019 
 Available-for-saleAvailable-for-sale
 Amortized costFair valueAmortized costFair value
Due in one year or less$35,486 $35,662 $1,148 $1,152 
Due in one to five years24,278 24,684 11,553 11,676 
Due in five to ten years40,038 41,332 18,287 18,887 
Due in over ten years257,721 275,798 158,616 165,990 
357,523 377,476 189,604 197,705 
Mortgage-backed securities - residential760,099 773,336 474,144 477,312 
Mortgage-backed securities - commercial20,226 21,588 12,957 13,364 
Total debt securities$1,137,848 $1,172,400 $676,705 $688,381 
Sales and other dispositions of available-for-sale securities were as follows:
 Year Ended December 31,
 2020 2019 2018
Proceeds from sales$146,494 $24,498 $2,742 
Proceeds from maturities, prepayments and calls220,549 113,018 73,066 
Gross realized gains1,606 
Gross realized losses271 98 44 
Additionally, net unrealized gains on equity securities of $296 and $148 were recognized in the years ended December 31, 2020 and 2019, respectively.
The following tables show gross unrealized losses for which an allowance for credit losses has not been recorded at December 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
December 31, 2020
 Less than 12 months12 months or moreTotal
 Fair ValueUnrealized LossFair ValueUnrealized LossFair ValueUnrealized Loss
U.S. government agency securities$— $— $— $— $— $— 
Mortgage-backed securities - residential182,012 (803)— — 182,012 (803)
States and political subdivisions3,184 (20)— — 3,184 (20)
Corporate securities499 (1)— — 499 (1)
Total$185,695 $(824)$— $— $185,695 $(824)
 December 31, 2019
 Less than 12 months12 months or moreTotal
 Fair ValueUnrealized LossFair ValueUnrealized LossFair ValueUnrealized loss
Mortgage-backed securities - residential$47,641 $(164)$175,730 $(1,497)$223,371 $(1,661)
States and political subdivisions15,433 (230)— — 15,433 (230)
Total$63,074 $(394)$175,730 $(1,497)$238,804 $(1,891)
As of December 31, 2020 and December 31, 2019, the Company’s securities portfolio consisted of 514 and 365 securities, 16 and 58 of which were in an unrealized loss position, respectively.
72

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
As of December 31, 2020, Company evaluated available-for-sale debt securities with unrealized losses for expected credit loss and recorded no allowance for credit loss as the majority of the investment portfolio was either government guaranteed or an issuance of a government sponsored entity, was highly rated by major credit rating agencies and have a long history of zero losses. As such, no provision for credit losses was recorded during the year ended December 31, 2020.
Prior to the adoption of ASC 326, the Company evaluated available-for-sale debt securities with unrealized losses for OTTI and recorded no OTTI for the year ended December 31, 2019.

73

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Note (5)—Loans and allowance for credit losses:
Loans outstanding at December 31, 2020 and 2019, by class of financing receivable are as follows:
 December 31,December 31,
 2020 2019 
Commercial and industrial (1)
$1,346,122 $1,034,036 
Construction1,222,220 551,101 
Residential real estate:
1-to-4 family mortgage1,089,270 710,454 
Residential line of credit408,211 221,530 
Multi-family mortgage175,676 69,429 
Commercial real estate:
Owner occupied924,841 630,270 
Non-owner occupied1,598,979 920,744 
Consumer and other317,640 272,078 
Gross loans7,082,959 4,409,642 
Less: Allowance for credit losses(170,389)(31,139)
Net loans$6,912,570 $4,378,503 
(1)Includes $212,645 of loans originated as part of the PPP at December 31, 2020, established by the CARES Act, in response to the COVID-19 pandemic. The PPP is administered by the SBA; loans originated as part of the PPP may be forgiven by the SBA under a set of defined rules. PPP loans are federally guaranteed as part of the CARES Act, provided PPP loan recipients receive loan forgiveness under the SBA regulations. As such, there is minimal credit risk associated with these loans.
As of December 31, 2020 and December 31, 2019, $1,248,857 and $412,966, respectively, of qualifying residential mortgage loans (including loans held for sale) and $1,532,749 and $545,540, respectively, of qualifying commercial mortgage loans were pledged to the Federal Home Loan Bank of Cincinnati securing advances against the Bank’s line of credit. Additionally, as of December 31, 2020 and December 31, 2019, $2,463,281 and $1,407,662, respectively, of qualifying loans were pledged to the Federal Reserve Bank under the Borrower-in-Custody program.
The components of amortized cost for loans on the consolidated balance sheet excludes accrued interest receivable as the Company elected to present accrued interest receivable separately on the balance sheet. As of December 31, 2020, total accrued interest receivable on loans was $38,316.
Allowance for Credit Losses
As of January 1, 2020, the Company’s policy for the allowance changed with the adoption of CECL. As permitted, the new guidance was implemented using a modified retrospective approach with the impact of the initial adoption being recorded through retained earnings at January 1, 2020, with no restatement of prior periods. Before January 1, 2020, the Company calculated the allowance on an incurred loss approach. As of January 1, 2020, the Company calculated an expected credit loss using a lifetime loss rate methodology. As a result of the difference in methodology between periods, disclosures presented below may not be comparative in nature.
The Company utilizes probability-weighted forecasts, which consider multiple macroeconomic variables from a third-party vendor that are applicable to the type of loan. Each of the Company's loss rate models incorporate forward-looking macroeconomic projections throughout the reasonable and supportable forecast period and the subsequent historical reversion at the macroeconomic variable input level. In order to estimate the life of a loan, the contractual term of the loan is adjusted for estimated prepayments based on market information and the Company’s prepayment history.
The Company's loss rate models estimate the lifetime loss rate for pools of loans by combining the calculated loss rate based on each variable within the model (including the macroeconomic variables). The lifetime loss rate for the pool is then multiplied by the loan balances to determine the expected credit losses on the pool.
The Company considers the need to qualitatively adjust its modeled quantitative expected credit loss estimate for information not already captured in the model loss estimation process. These qualitative factor adjustments may increase or decrease the Company’s estimate of expected credit losses. The Company reviews the qualitative adjustments so as to validate that information that has already been considered and included in the modeled quantitative loss estimation process is not also included in the qualitative adjustment. The Company considers the qualitative factors that are relevant to the institution as of the reporting date, which may include, but are not limited to: levels of and trends in delinquencies and performance of loans; levels of and trends in write-offs and recoveries collected; trends in volume and terms of loans;
74

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
effects of any changes in reasonable and supportable economic forecasts; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and expertise; available relevant information sources that contradict the Company’s own forecast; effects of changes in prepayment expectations or other factors affecting assessments of loan contractual terms; industry conditions; and effects of changes in credit concentrations.
The quantitative models require loan data and macroeconomic variables based on the inherent credit risks in each portfolio to more accurately measure the credit risks associated with each. Each of the quantitative models pools loans with similar risk characteristics and collectively assesses the lifetime loss rate for each pool to estimate its expected credit loss.
When a loan no longer shares similar risk characteristics with other loans in any given pool, the loan is individually assessed. The Company has determined the following circumstances in which a loan may require an individual evaluation: collateral dependent loans; loans for which foreclosure is probable; TDRs and reasonably expected TDRs. A loan is deemed collateral dependent when 1) the borrower is experiencing financial difficulty and 2) the repayment is expected to be primarily through sale or operation of the collateral. The allowance for credit losses for collateral dependent loans as well as loans where foreclosure is probable is calculated as the amount for which the loan’s amortized cost basis exceeds fair value. Fair value is determined based on appraisals performed by qualified appraisers and reviewed by qualified personnel. In cases where repayment is to be provided substantially through the sale of collateral, the Company reduces the fair value by the estimated costs to sell. Loans experiencing financial difficulty for which a concession has not yet been provided may be identified as reasonably expected TDRs.
Reasonably expected TDRs use the same methodology as TDRs. In cases where the expected credit loss can only be captured through a discounted cash flow analysis (such as an interest rate modification for a TDR loan), the allowance is measured by the amount which the loan’s amortized cost exceeds the discounted cash flow analysis. The allowance for credit losses on a TDR or a reasonably expected TDR is calculated individually using a discounted cash flow methodology, unless the loan is deemed to be collateral dependent or foreclosure is probable.
The Company’s acquisitions and changes in reasonable and supportable forecasts of macroeconomic variables, primarily due to the impact of the COVID-19 pandemic, resulted in projected credit deterioration requiring the Company to recognize significant increases in the provision for credit losses during the year ended December 31, 2020. Specifically, the Company performed additional qualitative evaluations by class of financing receivable in line with the Company's established qualitative framework, weighting the impact of the current economic outlook, status of federal government stimulus programs, and other considerations, in order to identify specific industries or borrowers seeing credit improvement or deterioration specific to the COVID-19 pandemic.
Loans acquired during the period from Franklin increased the allowance for credit losses by $77,653 as of the August 15, 2020 acquisition date and Farmers National increased the allowance for credit losses by $4,494 as of the February 14, 2020 acquisition date. See Note 2, "Mergers and acquisitions" for additional details related to PCD loans acquired during the year ended December 31, 2020.
75

FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following provides the changes in the allowance for credit losses by class of financing receivable for the years ended December 31, 2020, 2019, and 2018:
<
 Commercial
and industrial
Construction1-to-4
family
residential
mortgage
Residential
line of credit
Multi-family
residential
mortgage
Commercial
real estate
owner
occupied
Commercial
real estate
non-owner
occupied
Consumer
and other
Total
Year Ended December 31, 2020
Beginning balance -
December 31, 2019
$4,805 $10,194 $3,112 $752 $544 $4,109 $4,621 $3,002 $31,139 
Impact of adopting ASC
326 on non-purchased
credit deteriorated loans
5,300 1,533 7,920 3,461 340 1,879 6,822 3,633 30,888 
Impact of adopting ASC
326 on purchased credit
deteriorated loans
82 150 421 (3)— 162 184 (438)558 
Provision for credit losses13,830 40,807 6,408 5,649 5,506 (1,739)17,789 6,356 94,606 
Recoveries of loans
previously charged-off
1,712 205 122 125 — 83 — 756 3,003 
Loans charged off(11,735)(18)(403)(22)— (304)(711)(2,112)(15,305)