BUI LD I NG BETTER
FUTUR E S
| 2 0 1 9 A N N U A L R E P O R T
BUILDING BETTER FUTURES
In 1906, Farmers State Bank began serving the small
community of Scotts Hill, Tenn., to help families,
farmers and small businesses build a better future.
The legacy of the original bank charter that grew
into FirstBank continues today as we help people
across the Southeast reach their goals.
That starts, as all successful building projects do,
by having a solid foundation that will stand the
test of time. Our 2019 results are a testament to
our strong foundation, and our plans for 2020
represent the next exciting chapter in our story.
FirstBank’s success starts with our loyal customers
– they are the reason we do what we do. Through
our commitment to providing excellent service,
they are able to pursue their passions and build
better futures.
Our success is driven by our associates, who are
the heart of the organization – the ones who
build relationships with customers and deliver
the excellent service that keeps them satisfied,
who execute our strategies, and who are actively
involved in their communities. We are focused
on building the highest-performing teams in our
industry to keep ahead of the rapidly changing
banking environment.
Our shareholders provide the foundational
resources through their investments and
confidence that allows us to live out our strategic
vision, which includes delivering attractive returns
on their investments.
All of these groups serve as the foundation for
FirstBank. It was the same convergence of loyal
customers, dedicated associates and trusting
investors that helped build our first branch in
Scotts Hill 114 years ago, and it is what will ensure
we remain strong for many years to come.
TO OUR VALUED SHAREHOLDERS,
CUSTOMERS AND ASSOCIATES:
When FB Financial Corporation launched its initial public
offering in the fall of 2016, we were confident that it
would further propel FirstBank to new heights that would
allow our customers and associates to expand their
influence and compete more strongly in our markets.
We have done just that. After three full years as a public
company, we have hit a steady stride of organic growth and
strategic expansion, while providing solid returns for our
shareholders. We’ve focused on building our community
bank model in each of our markets, guided by local team
members who develop strong customer relationships and
are deeply involved in their communities.
A Year of Successes
Our growth has been strong; but even more important,
it has been healthy. We are particularly proud of our
2019 balance of growth and profitability while building
resources for continued success. (A summary of our
financial highlights is below.)
In the spring, we executed a smooth and successful
conversion of 14 branches acquired from Atlantic Capital
Bank, adding $374 million in loans and $589 million in
deposits while strengthening our presence in and around
Knoxville and Chattanooga, as well as adding a new
community to our North Georgia footprint in Dalton.
In the third quarter, we also announced our agreement to
acquire Farmers National Bank in Scottsville, Ky. When the
acquisition was completed in February 2020, we added
$255 million in assets, $179 million in loans and $203
million in deposits; but the team brings much more to
the table than numbers. It gives FirstBank an entry into
Kentucky and a presence in the growing Bowling Green
market, and is a great fit with our strategy, culture and
geography.
2019 FINANCIAL HIGHLIGHTS
Record revenues of $361.4
million, an 8.0% increase
over 2018
Reported diluted earnings
per share of $2.65, up from
$2.55
Consolidated assets of
$6.12 billion, a 19.2%
increase over 2018
Loans held for investment
of $4.41 billion, a 20.3%
increase over 2018
Strong, customer-focused
balance sheet produced:
• Net interest margin of
4.34%
• Return on average assets
of 1.45%
• Return on average
tangible common equity
of 15.4%*
Record pre-tax income
of $109.5 million, and net
income of $83.8 million
Total deposits of $4.93
billion, an 18.3% increase
over 2018
Net charge-offs as a
percentage of average loans
held for investment of 0.12%
Strong capital base with a
tangible equity to tangible
assets ratio of 9.7%* and
well-capitalized for all
regulatory ratios
Increased tangible book
value per share by 9.0% over
2018, to $18.55*
*See Annual Report on Form
10-K for the year ended
December 31, 2019, for
discussion and reconciliation of
non-GAAP measure.
providing our customers and associates the most
effective tools available to manage their financial needs.
Our investments in technology, revenue producers and
operational capabilities will be essential in improving our
scalable platform and the customer experience.
We are also committed to continuing to focus on our
community-banking model. As FirstBank grows, we will
not lose sight of our mission and philosophy of being a
community bank. We believe that community banking
is not defined by an arbitrary asset number, but by the
way in which banks approach their decision-making to
reflect the needs and styles of their local customers and
markets. We believe our market-driven approach within
our larger corporate framework will continue to serve
our customers and our shareholders well in the future.
FirstBank is extremely well-positioned to have a
successful 2020, and we thank each of you for your
continued partnership and trust, and for your confidence
in our strategic vision. We look forward to delivering
the value, service and growth that is the hallmark of FB
Financial Corporation and the legacy of FirstBank.
James W. Ayers
Executive Chairman of the Board President and CEO
Christopher T. Holmes
In our loan and deposit business, we continue to
pursue sensible opportunities while remaining prudent
and cautious, balancing growth and profitability. We
continually stress organic growth to our local market
decision-makers, and diligence in safeguarding our
balance sheet while pursuing new banking relationships.
We believe this approach serves the long-term interests
of our customers, our shareholders and our organization.
Investing in People
We understand that the driver of our results is people.
We have doubled down on our initiatives to attract,
develop and support the men and women who make
FirstBank among the best banks in the country.
We are fortunate to have so many extremely talented
people working for FirstBank, and we want to do
everything we can to provide them with career
development opportunities and a clear path to
professional success. We are committed to training
managers to understand their associates’ goals and
aspirations, and to prioritize recruitment and retention.
When our associates succeed, we succeed, and our
customers and shareholders are the beneficiaries.
The Road Ahead
We are extremely excited about our recent
announcement of our proposed merger with Franklin
Financial Network (NYSE: FSB), the holding company
for Franklin Synergy Bank. Upon closing later this year,
pending regulatory and shareholders’ approval, the
merger will add over $3.5 billion to FirstBank’s total
assets, which will increase our size to approximately
$10 billion.
Importantly, it will give us a significant boost in the
rapidly growing markets of Williamson County and
Rutherford County, catapulting FirstBank to the market
share lead in Williamson County and to second in
Rutherford County. Overall, we will become the sixth
largest bank in the Nashville MSA in total deposits.
In the future, we will continue to look for opportunities
to form partnerships with banks that fit within our
geographical footprint that also align with our culture
and growth strategy. But our attention will be focused
primarily on integrating the operations of Franklin
Synergy Bank into FirstBank in the coming months.
In 2020 and beyond, we will increase our focus on
attracting and developing an increasing number of
local, talented bankers throughout our footprint. And
we will be investing in our technology to continue
20 1 9 FINANCIAL SNAPSHOT
$4,410
$3,668
$3,167
$1,849
$1,702
$1,341 $1,416
$4,935
$4,172
$3,664
$2,672
$2,438
$1,804
$1,924
2013
2014
2015
2016
2017
2018
2019
2013
2014
2015
2016
2017
2018
2019
LOANS HELD FOR INVESTMENT ($mm)
6-YEAR CAGR 22.0%
TOTAL DEPOSITS ($mm)
6-YEAR CAGR 18.3%
$109.5
$105.8
$1,208
$949
$888
$697
$627
$438
$357
$73.5
$62.3
$50.8
$34.7
$28.8
2013
2014
2015
2016
2017
2018
2019
2013
2014
2015
2016
2017
2018
2019
NON-INTEREST-BEARING DEPOSITS ($mm)
6-YEAR CAGR 22.5%
PRE-TAX INCOME ($mm)
6-YEAR CAGR 24.9%
2.12%
1.21%
2013
2014
0.68% 0.54%
2016
2015
0.32%
2017
0.46%
2018
0.60%
2019
NONPERFORMING LOANS (HFI)/LOANS (HFI)
(152) BPS
1.28% 1.31% 1.37%
1.66%
1.45%
0.97%
0.84%
2013
2014
2015
2016
2017
2018
2019
RETURN ON AVERAGE ASSETS
(C CORPORATION BASIS)
+61 BPS
3.93% 3.97%
4.10%
3.75%
4.66%
4.46%
4.34%
$18.55
$18.05
$17.73
$17.18
$17.02
$14.56
$11.56 $11.58
2013
2014
2015
2016
2017
2018
2019
3Q16
4Q16
4Q17
4Q18
1Q19
2Q19
3Q19
4Q19
NET INTEREST MARGIN
+59 BPS
TANGIBLE BOOK VALUE PER SHARE*
GROWTH: 60.5% SINCE IPO (SEPT. 2016)
*See Annual Report on Form 10-K for the year ended December 31, 2019, for discussion and
reconciliation of non-GAAP measure.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-K
_________________________________________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-37875
_____________________________________________________________
FB FINANCIAL CORPORATION
(Exact name of Registrant as specified in its Charter)
______________________________________________________________
Tennessee
( State or other jurisdiction of
incorporation or organization)
211 Commerce Street, Suite 300
Nashville, Tennessee
(Address of principal executive offices)
62-1216058
(I.R.S. Employer
Identification No.)
37201
(Zip Code)
Registrant’s telephone number, including area code: (615) 564-1212
____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $1.00 Per Share; Common stock traded on the New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. YES NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Small reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO
As of June 28, 2019, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the Registrant’s common
stock held by non-affiliates of the registrant was $621.8 million, based on the closing sales price of $36.60 per share as reported on the New York Stock Exchange.
The number of shares of Registrant’s Common Stock outstanding as of March 5, 2020 was 31,070,901.
Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, which will be filed within 120 days after December 31, 2019,
are incorporated by reference into Part III of this Annual Report on Form 10-K.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, Par Value $1.00 Per Share
Trading Symbol
Name of exchange on which registered
FBK
New York Stock Exchange
(This page intentionally left blank)
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Directors Independence
Principal Accounting Fees and Services
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
Exhibits and Financial Statement Schedules
Form 10-K Summary
Page
5
34
54
54
54
54
55
58
62
103
106
172
172
172
173
173
173
173
173
174
176
177
1
In this Annual Report on Form 10-K (this “Annual Report”), references to “we,” “our,” “us,” “FB Financial,” or “the
Company” refer to FB Financial Corporation, a Tennessee corporation, and our wholly owned banking subsidiary,
FirstBank, a Tennessee state chartered bank, unless otherwise indicated or the context otherwise requires.
References to “Bank” or “FirstBank” refer to FirstBank, our wholly owned banking subsidiary.
Cautionary note regarding forward-looking statements
This Annual Report contains certain forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe
harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. You can find
many of these statements by looking for words such as "anticipates," "expects," "believes," "estimates," "intends" and
"forecast" and words or phrases of similar meaning. We make forward-looking statements regarding our liquidity
position; projected sources of funds; our securities portfolio; loan sales; adequacy of our allowance for loan and lease
losses and reserve for unfunded commitments; impaired loans and future losses; litigation; dividends; fair values of
certain assets and liabilities, including mortgage servicing rights values; tax rates; the effect of accounting
pronouncements; and strategic initiatives and the timing, benefits, costs and synergies of future acquisition,
disposition and other growth opportunities.
These forward-looking statements are not historical facts, and are based upon current expectations, estimates and/or
projections about our industry, management’s beliefs and certain assumptions made by management, many of which,
by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements
should not be regarded as a representation by us or any other person that such expectations, estimates and/or
projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees
of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and that are
beyond our control. Although we believe that the expectations reflected in these forward-looking statements are
reasonable as of the date of this Annual Report, actual results may prove to be materially different from the results
expressed or implied by the forward-looking statements. There are or will be important factors that could cause our
actual results to differ materially from those indicated in these forward-looking statements, including, but not limited
to, the following:
• business and economic conditions nationally, regionally and in our target markets, particularly in Tennessee
•
•
and the geographic areas in which we operate;
the concentration of our loan portfolio in real estate loans and changes in the prices, values and sales volumes
of commercial and residential real estate;
the concentration of our business within our geographic areas of operation in Tennessee and neighboring
markets;
• credit and lending risks associated with our commercial real estate, commercial and industrial, and construction
portfolios;
increased competition in the banking and mortgage banking industry, nationally, regionally and locally;
•
• our ability to execute our business strategy to achieve profitable growth;
•
•
the dependence of our operating model on our ability to attract and retain experienced and talented bankers in
each of our markets;
risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost
deposits and reduce our cost of deposits;
• our ability to increase our operating efficiency;
•
•
failure to keep pace with technological change or difficulties when implementing new technologies;
risks related to our recently completed and pending acquisitions and other strategic opportunities and
initiaitves;
the timing, anticipated benefits and financial impact of the proposed acquisition of Franklin Financial Network,
Inc. ("Franklin");
the anticipated timing of the closing of the proposed acquisition, acceptance by the customers of Franklin of
the Company and Bank's products and services;
•
•
2
• negative impact on our mortgage banking services, including declines in our mortgage originations or
profitability due to future rises in interest rates and increased competition and regulation, increased
prepayments of mortgage loans serviced for others due to future declining interest rates, the Bank’s or third
party’s failure to satisfy mortgage servicing obligations, and the possibility of the Bank being required to
repurchase mortgage loans or indemnify buyers;
failure to timely and accurately implement changes to mortgage laws and regulations into our compliance
processes;
•
• our ability to attract and maintain business banking relationships with well-qualified businesses, real estate
developers and investors with proven track records in our market areas;
•
• our ability to attract sufficient loans that meet prudent credit standards;
•
failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking
regulations;
inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price
risk, compliance risk, operational risk, strategic risk, information security risk, cyber security risk, and
reputational risk;
failure to develop new, and grow our existing, streams of noninterest income;
•
• our ability to oversee the performance of third party service providers that provide material services to our
business;
• our ability to maintain expenses in line with our current projections;
• our dependence on our management team and our ability to motivate and retain our management team;
risks related to any future acquisitions, including failure to realize anticipated benefits from future acquisitions;
•
•
inability to find acquisition candidates that will be accretive to our financial condition and results of operations;
• system failures, data security breaches (including as a result of cyber-attacks), or failures to prevent breaches
of our network security;
• data processing system failures and errors;
•
•
•
fraudulent and negligent acts by individuals and entities that are beyond our control;
fluctuations in the market value, and its impact, of the securities held in our securities portfolio;
the adequacy of our reserves (including allowance for loan losses) and the appropriateness of our methodology
for calculating such reserves;
•
the makeup of our asset mix and investments;
• our focus on small and mid-sized businesses;
• an inability to raise necessary capital to fund our growth strategy or operations, or to meet increased minimum
•
•
•
regulatory capital levels;
the sufficiency of our capital, including sources of such capital and the extent to which capital may be used or
required;
interest rate shifts and its impact on our financial condition and results of operation;
the expenses that we will incur to operate as a public company and our complying with the requirements of
being a public company;
the institution and outcome of litigation and other legal proceeding against us or to which we become subject;
•
• changes in accounting standards, particularly ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments” on our financial conditions or results of operations;
the impact of recent and future legislative and regulatory changes;
•
• governmental monetary and fiscal policies;
• changes in the scope and cost of Federal Deposit Insurance Corporation ("FDIC") insurance assessments and
•
other coverage; and
future equity issuances under our 2016 Incentive Plan and our Employee Stock Purchase Plan and future sales
of our common stock by us, our principal shareholder or our executive officers or directors.
The foregoing factors should not be construed as exhaustive and should be read in conjunction with the sections
entitled “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations”
included in this Annual Report. If one or more events related to these or other risks or uncertainties materialize, or if
3
our underlying assumptions prove to be incorrect, actual results may differ materially from our forward-looking
statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-
looking statement speaks only as of the date of this Annual Report, and we do not undertake any obligation to publicly
update or review any forward-looking statement, whether as a result of new information, future developments or
otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible
for us to predict their occurrence or how they will affect us.
4
ITEM - 1. Business
PART I
In this annual report, the terms "we," "our," "ours," "us," "FB Financial," and "the Company" refer to FB Financial Corporation,
a Tennessee corporation, and our consolidated banking subsidiary, FirstBank, a Tennessee state chartered bank, unless
the context indicates that we refer only to the parent company, FB Financial Corporation. The terms "FirstBank" or "the
Bank" refer to our wholly owned subsidiary and Tennessee banking corporation.
Overview
FB Financial Corporation is a bank holding company, headquartered in Nashville, Tennessee. Our wholly owned bank
subsidiary, FirstBank, is the third largest Tennessee-headquartered bank, based on total assets. FirstBank provides a
comprehensive suite of commercial and consumer banking services to clients in select markets primarily in Tennessee,
North Alabama and North Georgia. As of December 31, 2019, our footprint included 68 full-service bank branches and eight
other banking locations serving the metropolitan markets of Nashville, Chattanooga, Knoxville, Memphis, Tennessee and
Jackson and Huntsville, Alabama in addition to 12 community markets. On February 14, 2020, we closed on our acquisition
of FNB Financial Corp. and its wholly owned subsidiary, Farmers National Bank of Scottsville, adding five full service banking
locations and expanding our footprint into Kentucky. The Company also provides mortgage banking services utilizing its
bank branch network and mortgage banking offices strategically located throughout the southeastern United States in
addition to its national internet delivery channel. As of December 31, 2019, we had total assets of $6.12 billion, loans held
for investment of $4.41 billion, total deposits of $4.93 billion, and total shareholders’ equity of $762.3 million.
Throughout our history, we have steadfastly maintained a community banking approach of personalized relationship-based
service, which is delivered locally through experienced bankers in each market. As we have grown, maintaining this
relationship-based approach utilizing local, talented and experienced bankers in each market has been an integral
component of our success. Our bankers utilize their local knowledge and relationships to deliver timely solutions to our
clients. We empower these bankers by giving them local decision making authority supplemented by appropriate risk
oversight. In our experience, business owners and operators prefer to deal with decision makers, and our banking model is
built to place the decision maker as close to the client as possible. We have designed our operations, technology, and
centralized risk oversight processes to specifically support our operating model. We deploy this operating model universally
in each of our markets, regardless of size. We believe we have a competitive advantage in our markets versus both smaller
community banks and larger regional and national banks. Our robust offering of products, services and capabilities
differentiate us from community banks and our significant local market knowledge, client service level and the speed with
which we are able to make decisions and deliver our services to customers differentiate us from larger regional and national
banks.
We seek to leverage our operating model by focusing on profitable growth opportunities across our footprint, focused
primarily on both high-growth metropolitan markets and stable and growing community markets. As a result, we are able to
strategically deploy our capital across our markets to take advantage of those opportunities that we believe provide the
greatest certainty of profitable growth and the highest returns.
Our operating model is executed by a talented management team lead by our Chief Executive Officer, Christopher T.
Holmes. Mr. Holmes, a 28-year banking veteran originally from Lexington, Tennessee, joined the Bank in 2010 as Chief
Banking Officer and was elected Chief Executive Officer and President in 2013. Mr. Holmes has an extensive background
in both metropolitan and community banking gained from his time at community banks and larger public financial institutions.
Mr. Holmes has assembled a highly effective management team, blending members that have a long history with FirstBank
and members that have significant banking experience at other in-market banks.
Our history
Originally chartered in 1906, we are one of the longest continually operating banks in Tennessee. While our deep community
roots go back over 100 years, our growth trajectory changed in 1984 when Tennessee businessman James W. Ayers, our
Executive Chairman, acquired Farmers State Bank with an associate. In 1988, we purchased the assets of First National
Bank of Lexington, Tennessee and changed our name to FirstBank, forming the foundation of our current franchise. In 1990,
5
Mr. Ayers became our sole shareholder and remained our sole shareholder until our initial public offering in September
2016. Under Mr. Ayers’ ownership, we grew from a community bank with only $14 million in assets in 1984 to the third
largest bank headquartered in Tennessee, based on total assets of $6.12 billion at December 31, 2019.
From 1984 to 2001, we operated as a community bank growing organically and through small acquisitions in community
markets in West Tennessee. In 2001, our strategy evolved from serving purely community markets to include a modest
presence in metropolitan markets, expanding our reach and enhancing our growth. We entered Nashville and Memphis in
2001 by opening a branch in each of those markets. In 2004 and 2008, we opened our first branches in Knoxville and
Chattanooga, respectively. Although we experienced some growth in each metropolitan market, it did not become a major
strategic focus until we implemented our current strategy in the Nashville metropolitan statistical area (“MSA”) in 2012. The
successful implementation of this strategy has resulted in 949.6% deposit growth in the Nashville MSA from June 30, 2012
to June 30, 2019, making it our largest market with 54% of our total deposits. Additionally, we expanded into the Huntsville,
Alabama MSA in 2014 by opening a branch in Huntsville and loan production office in Florence, Alabama, which was
converted to a full service branch in 2019. As a result of this evolution and recent acquisitions discussed below, we now
operate a balanced business model that serves a diverse customer base in both metropolitan and community markets.
Mergers and acquisitions
On September 18, 2015, the Bank completed its acquisition of Northwest Georgia Bank (“NWGB”), a bank headquartered
in Ringgold, Georgia, pursuant to the Agreement and Plan of Merger dated April 27, 2015 by and between the Bank and
NWGB. The Company acquired NWGB in a $1.5 million cash purchase. NWGB was merged with and into the Bank, with
the Bank as the surviving entity. As of September 18, 2015, the estimated fair value of loans acquired and deposits assumed
as a result of the merger was $78.6 million and $246.2 million, respectively.
On July 31, 2017, the Bank completed its merger with Clayton Bank and Trust (“CBT”) and American City Bank (“ACB” and
together with CBT, the “Clayton Banks”), pursuant to the Stock Purchase Agreement with Clayton HC, Inc., a Tennessee
corporation (“Seller”), and James L. Clayton, the majority shareholder of Seller, dated February 8, 2017, as amended on
May 26, 2017, with a purchase price of approximately $236.5 million. The Company issued 1,521,200 shares of common
stock and paid cash of $184.2 million to purchase all of the outstanding shares of the Clayton Banks. At closing, the Clayton
Banks merged with and into FirstBank, with FirstBank continuing as the surviving banking entity. As of July 31, 2017, the
estimated fair value of loans acquired and deposits assumed as a result of the merger was $1,059.7 million and $979.5
million, respectively.
On April 5, 2019, the Bank acquired 11 Tennessee and three Georgia branch locations from Atlantic Capital Bank, N.A.,
further increasing market share in existing markets and expanding the Company's footprint into new locations. Under the
terms of the agreement, the Bank assumed $588.9 million in deposits for a premium of 6.25% and acquired $374.4 million
in loans at 99.32% of principal outstanding.
On January 21, 2020, the Company announced entry into a definitive merger agreement with Franklin Financial Network,
Inc. ("Franklin") pursuant to which Franklin will be merged with and and into FB Financial and Franklin's wholly owned
banking subsidiary, Franklin Synergy Bank, which will be merged into FirstBank. Franklin has 15 branches and had
approximately $3.90 billion in total assets, $2.80 billion in loans, and $3.20 billion in deposits as of December 31, 2019. In
connection with the merger, Franklin shareholders will receive 0.9650 shares of FB Financial common stock and $2.00 in
cash for each share of Franklin stock. Based on FB Financial's closing price of $38.23 per share as of January 21, 2020,
the implied transaction value is approximately $602 million. The merger is expected to close in the third quarter of 2020 and
is subject to regulatory approvals, approval by FB Financial's and Franklin's shareholders and other customary closing
conditions.
On February 14, 2020, the Company completed the acquisition of FNB Financial Corp. and its wholly owned subsidiary,
Farmers National Bank of Scottsville (collectively, "Farmers National"). Farmers National has five branches and reported
total assets of $255.2 million, loans of $178.6 million and deposits of $206.0 million as of December 31, 2019. The Company
issued 954,797 shares of FBK common stock as consideration in connection with the merger, in addition to approximately
$15.0 million 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 $50.0 million in aggregate
6
consideration. The Company is currently in the process of determining the approximate fair value of net assets acquired
and will include preliminary purchase accounting estimates in Form 10-Q for the quarterly period ended March 31, 2020.
See Note 2, “Mergers and acquisitions” in the notes to the consolidated financial statements for further details regarding the
terms and conditions of these acquisitions.
Our markets
Our pro forma market footprint is the southeastern United States, centered around Tennessee, and includes portions of
North Alabama, North Georgia and Kentucky.
Top Metropolitan Markets
Top Community Markets1
Market
Nashville
Chattanooga
Knoxville
Jackson
Bowling Green
Memphis
Huntsville
Market
Rank
6
5
9
3
7
28
19
Branches
(#)
29
8
6
7
5
4
1
Deposits
($mm)
4,460
612
550
371
204
161
52
Deposit
Market
Share
6.9%
6.0%
3.1%
11.7%
6.3%
0.5%
0.6%
Percent of
Total
Deposits Market
54.4 % Lexington
7.5 % Tullahoma
6.7 % Huntingdon
4.5 % Parsons
2.5 % Paris
2.0 % Smithville
0.6 % Waverly
Market
Rank
1
3
2
1
3
3
2
Branches
(#)
6
2
5
1
2
1
1
Deposits
($mm)
293
134
130
116
111
99
73
Deposit
Market
Share
53.5%
Percent of
Total
Deposits
3.6%
13.3%
23.9%
41.5%
16.8%
23.3%
23.6%
1.8%
1.6%
1.4%
1.4%
1.2%
0.9%
Note: Market data as of June 30, 2019 and is presented on a pro forma basis for pending and completed acquisitions as of February 4, 2020. Size of
bubble represents size of company deposits in a given market.
Source: Company data and S&P Global Market Intelligence; 1Statistics based on county data.
Market characteristics and mix.
Metropolitan markets. Our metropolitan markets are generally characterized by attractive demographics and strong
economies and offer substantial opportunity for future growth. We compete in these markets with national and regional
banks that currently have the largest market share positions and with community banks primarily focused only on a particular
geographic area or business niche. We believe we are well positioned to grow our market penetration among our target
clients of small to medium sized businesses as well as large corporate businesses and the consumer base working and
living in these metropolitan markets. In our experience, such clients demand the product sophistication of a larger bank, but
prefer the customer service, relationship focus and local connectivity of a community bank. We believe that our size, product
suite and operating model offer us a competitive advantage in these markets versus our smaller competitors, many of which
are focused only on specific counties or industries. Our operating model driven by local talent with strong community ties
and local authority serves as a key competitive advantage over our larger competitors. We believe that, as a result, we are
well positioned to leverage our existing franchise to expand our market share in our metropolitan markets.
7
Community markets. Our community markets tend to be more stable throughout various economic cycles, with primarily
retail and small business customer opportunities and more limited competition. We believe this leads to an attractive
profitability profile and more granular loan and deposit portfolios. Our community markets are standalone markets and not
suburbs of larger markets. We primarily compete in these markets with community banks that generally have less than $1
billion in total assets. Our strategy is to compete against these smaller community banks by providing a broader and more
sophisticated set of products and capabilities while still maintaining our local service model. We believe these markets are
being deemphasized by national and regional banks which provides us with opportunities to hire talented bankers in these
communities and maintain or grow market share in these community markets.
Our core client profile across our footprint includes small businesses, corporate clients and owners, and investors of
commercial real estate. We target business clients with substantial operating history that have annual revenues of up to
$250 million. Our typical business client would keep business deposit accounts with us, and we would look to provide
banking services to the owners and employees of the business as well. We also have an active consumer lending business
that includes deposit products, mortgages, home equity lines and small consumer finance loans. We continuously strive to
build deeper relationships by actively cross-selling incremental products to meet the banking needs of our clients.
The following tables show our deposit market share ranking among all banks and community banks (which we define as
banks with less than $30 billion in assets) in Tennessee as of June 30, 2019 (the most recent date where such information
is publicly available). Of the 10 largest banks in the state based on total deposits, five are national or regional banks, which
we believe provides us with significant opportunities to gain market share from these banks.
Top 10 banks in Tennessee:
Rank Company name
1
2
3
4
5
6
7
8
9
10
First Horizon National Corp. (TN)
Regions Financial Corp. (AL)
Truist Financial Corp. (NC)
Pinnacle Financial Partners (TN)
Bank of America Corporation (NC)
FB Financial Corp (TN)
U.S. Bancorp (MN)
Wilson Bank Holding Co. (TN)
Reliant Bancorp Inc. (TN)
Fifth Third Bancorp (OH)
Headquarters
Memphis, TN
Birmingham, AL
Winston-Salem, NC
Nashville, TN
Charlotte, NC
Nashville, TN
Minneapolis, MN
Lebannon, TN
Brentwood, TN
Cincinnati, OH
Top 10 banks under $30bn assets in Tennessee:
Rank Company name
Headquarters
1
2
3
4
5
6
7
8
9
10
Pinnacle Financial Partners (TN)
FB Financial Corp (TN)
Wilson Bank Holding Co. (TN)
Reliant Bancorp Inc. (TN)
CapStar Financial Hlgs Inc. (TN)
Simmons First National Corp. (AR)
Home Federal Bank of Tennessee (TN)
SmartFinancial Inc. (TN)
Educational Loan (TN)
Renasant Corp. (MS)
Nashville, TN
Nashville, TN
Lebanon, TN
Brentwood, TN
Nashville, TN
Pine Bluff, AR
Knoxville, TN
Knoxville, TN
Farragut, TN
Tupelo, MS
Branches
Total
deposits
(#)
164
217
147
48
58
75
90
28
31
36
($bn)
25.0
18.4
15.5
13.5
12.6
7.5
3.5
2.3
2.3
2.3
Branches
Total
deposits
(#)
48
75
28
31
22
42
23
24
14
21
($bn)
13.5
7.5
2.3
2.3
2.1
2.0
1.7
1.7
1.6
1.5
Deposit
market
share
(%)
15.6
11.5
9.7
8.5
7.9
4.7
2.2
1.5
1.5
1.4
Deposit
market
share
(%)
8.5
4.7
1.5
1.5
1.3
1.3
1.1
1.1
1.0
0.9
Source: S&P Global Market Intelligence and Company reports as of June 30, 2019; total assets as of December 31, 2019, adjusted for pending and
completed acquisitions as of February 4, 2020.
8
Market mix. The charts below show our branch, loan and deposit mix between our metropolitan and community markets
as of December 31, 2019.
Total: 68
Total: $4.41 billion
Total: $4.93 billion
Our business strategy
Our overall business strategy is comprised of the following core strategies.
Enhance market penetration in metropolitan markets. In recent years, we have successfully grown our franchise in
the Nashville MSA by executing our community bank growth strategy. The strategy is centered on the following: recruiting
the best bankers and empowering them with local authority; developing branch density; building brand awareness and
growing our business and consumer banking presence; and expanding our product offering and capabilities. These
strategies coupled with our personalized, relationship-based client service have contributed significantly to our success.
Additionally, we believe that our scale, resources and sophisticated range of products provides us with a competitive
advantage over the smaller community banks in the Nashville MSA and our other MSAs. As a result of these competitive
advantages and growth strategies, the Nashville MSA has become our largest market. With approximately 6.9% market
share, based on pro forma deposits as of June 30, 2019 for our pending acquisition of Franklin, we intend to continue to
efficiently increase our market penetration through organic growth and acquisitions including Farmers National Bank and
Franklin.
Based on market and competitive similarities, we believe our growth strategies are transferable to our other metropolitan
markets. We implemented these strategies with a focus on the Chattanooga and Knoxville MSAs. Our acquisitions of
Northwest Georgia Bank, the Clayton Banks, and the branches from Atlantic Capital Bank have accelerated our growth and
profitability in the Chattanooga and Knoxville MSAs, and we have continued to build momentum in these markets.
Pursue opportunistic acquisitions. While most of our growth has been organic, we have completed 11 acquisitions
under our current ownership, and have recently entered into a merger agreement with Franklin Synergy Bank. We pursue
acquisition opportunities that meet our internal return targets, maintain or enhance our earnings per share, enhance market
penetration, and possess strong core deposits while minimizing tangible book value. We believe that numerous small to
mid-sized banks or branch networks will be available for acquisition in metropolitan and community markets throughout
Tennessee as well as in attractive contiguous markets in the coming years due to industry trends, such as scale and
operational challenges, regulatory pressure, management succession issues and shareholder liquidity needs. In Tennessee
alone, there are approximately 126 banks with total assets of less than $2 billion, and in the contiguous states of Alabama,
Georgia, Kentucky, North Carolina, South Carolina and Virginia, there are over 475 banks under $2 billion in assets. We
believe that we are positioned as a natural consolidator because of our financial strength, reputation and operating model.
Improve efficiency by leveraging technology and consolidating operations. We have invested significantly in our
bankers, infrastructure and technology in recent years, which we believe has created a scalable platform that will support
future growth across all of our markets. Our bankers and branches, especially in the metropolitan markets, continue to scale
in size, and we believe there is capacity to grow our business without adding significantly to our branch network. We plan
to continue to invest, as needed, in our technology and business infrastructure to support our future growth and increase
9
operating efficiencies. We intend to leverage these investments to consolidate and centralize our operations and support
functions while protecting our decentralized client service model.
Seize opportunities to expand noninterest income. While our primary focus is on capturing opportunities in our core
banking business, we have successfully seized opportunities to grow our noninterest income by providing our people with
the flexibility to take advantage of market opportunities. As part of our strategic focus to grow our noninterest income, we
restructured our mortgage operations in 2019, resulting in the sale of our wholesale delivery channels and maximizing
profitability in our retail and Consumer Direct internet delivery channel. We have also successfully expanded our fee-based
businesses to include more robust treasury management, trust and investment services and capital markets. We intend to
continue emphasizing these business lines, which we believe will serve as strong customer acquisition channels and provide
us with a range of cross-selling opportunities, while making our business stronger and more profitable.
Products and Services
We operate our business in two business segments: Banking and Mortgage. See Note 19, “Segment Reporting,” in the
notes to our consolidated financial statements for a description of these business segments.
Banking services
While we operate through two segments, Banking and Mortgage, Banking has been, and is, the cornerstone of our
operations and underlying philosophy since our beginnings in 1906. As the third largest Tennessee-headquartered bank,
we are dedicated to serving the banking needs of businesses, professionals and individuals in our metropolitan and
community markets through our community banking approach of personalized, relationship-based service. We strive to
become trusted advisers to our clients and achieve long-term relationships. We deliver a wide range of banking products
and services tailored to meet the needs of our clients across our footprint.
Lending activities
Through the Bank, we offer a broad range of lending products to our targeted clients, which includes businesses generally
with up to $250 million in annual revenues, business owners, real estate investors and consumers. Our commercial lending
products include working capital lines of credit, equipment loans, owner-occupied and non-owner-occupied real estate
construction loans, “mini-perm” real estate term loans, and cash flow loans to a diversified mix of clients, including small
and medium sized businesses. Our consumer lending products include first and second residential mortgage loans, home
equity lines of credit and consumer installment loans to purchase cars, boats and other recreational vehicles. At
December 31, 2019, we had loans held for investment of $4.41 billion. Throughout the following discussion of our banking
services, we present our loan information excluding loans held for sale arising from our mortgage operations.
Lending strategy
Our strategy is to grow our loan portfolio by originating commercial and consumer loans that produce revenues consistent
with our financial objectives. Through our operating model and strategies, we seek to be the leading provider of lending
products and services in our market areas to our clients. We market our lending products and services to our clients through
our personalized service. As a general practice, we originate substantially all of our loans, but we occasionally participate
in syndications, limiting participations to loans originated by lead banks with which we have a close relationship and which
share our credit philosophies.
We also actively pursue and maintain a balanced loan portfolio by type, size and location. Our loans are generally secured
and supported by personal guarantees.
10
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 operational needs and business
expansions, including the purchase of capital equipment and loans made to farmers related to their operations. This
category also includes loans secured by manufactured housing assets and receivables. Commercial and industrial loans
generally include lines of credit and loans with maturities of five years or less. Because we are a community bank with long
standing ties to the businesses and professionals operating in our market areas, we are able to tailor our commercial and
industrial loan programs to meet the needs of our clients. We target high-quality businesses in our markets with a proven
track record and up to $250 million in annual revenues. As of December 31, 2019, we had outstanding commercial and
industrial loans of $1,034.0 million, or 23% of our loan portfolio. Growing our commercial and industrial loan portfolio is an
important area of emphasis for us, and we intend to continue to grow this portfolio.
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. As a result, the
repayment risk is subject to the ongoing business operations of the borrower. Any interruption or discontinuance of operating
cash flows from the business, which may be influenced by events not under the control of the borrower such as economic
events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan. Further,
commercial and industrial loans may be secured by the collateral described above, which if the business is unsuccessful,
typically have values insufficient to satisfy the loan without a loss.
Commercial real estate loans. Our commercial real estate loans consist of both owner-occupied and non-owner occupied
commercial real estate loans. The total amount of commercial real estate loans outstanding as of December 31, 2019 was
$1,551.0 million, or 35% of our loan portfolio. The real estate securing our existing commercial real estate loans includes a
wide variety of property types, such as offices, warehouses, production facilities, health care facilities, hotels, mixed-use
residential/commercial, retail centers, restaurants, churches, assisted living facilities and agricultural based facilities. As of
December 31, 2019, $630.3 million of our commercial real estate loan portfolio, or 14% of our loan portfolio, was owner-
occupied commercial real estate loans, and $920.7 million of our commercial real estate loan portfolio, or 21% of our loan
11
portfolio, was non-owner occupied commercial real estate loans. We are primarily focused on growing the owner-occupied
portion of our commercial real estate loan portfolio.
With respect to our owner-occupied commercial real estate loans, we target local companies with a proven operating history
that tend to be business-operators and professionals within our markets. Owner-occupied real estate 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.
With respect to our non-owner occupied commercial real estate loans, we target experienced, local real estate developers
and investors with whom our bankers have long-standing relationships. Our non-owner occupied commercial real estate
loans also tend to involve retail, hotel, office, warehouse, industrial, healthcare, assisted living and mix-used properties.
Non-owner occupied real estate 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.
Commercial real estate loans are often larger and involve greater risks than other types of lending. Adverse developments
affecting commercial real estate values in our market areas could increase the credit risk associated with these loans, impair
the value of property pledged as collateral for these loans, and affect our ability to sell the collateral upon foreclosure without
a loss. Furthermore, adverse developments affecting the business operations of the borrowers of our owner-occupied
commercial real estate loans could significantly increase the credit risk associated with these loans. Due to the larger
average size of commercial real estate loans, we face the risk that losses incurred on a small number of commercial real
estate loans could have a material adverse impact on our financial condition and results of operations.
Residential real estate loans. Our residential real estate loans consist of 1-4 family loans, home equity loans and multi-
family loans. The residential real estate loans described below exclude mortgage loans that are held for sale. As of
December 31, 2019, the total amount of residential real estate loans outstanding was $1,001.4 million, or 23% of our loan
portfolio.
Our 1-4 family mortgage loans are primarily made with respect to and secured by single family homes, including owner-
occupied manufactured homes with real estate. We seek to make our 1-4 family mortgage loans to well-qualified
homeowners and investors with a proven track record that satisfy our credit and underwriting standards. As of December 31,
2019, our 1-4 family mortgage loans comprised $710.5 million, or 16%, of loans.
Our home equity loans are primarily revolving, open-end lines of credit secured by 1-4 family residential properties. We
seek to make our home equity loans to well-qualified borrowers that satisfy our credit and underwriting standards. Our home
equity loans as of December 31, 2019 comprised $221.5 million, or 5%, of loans.
Our multi-family residential loans are primarily secured by multi-family properties, primarily apartment and condominium
buildings. We seek to make multi-family residential loans to experienced real estate investors with a proven track record.
These loans are primarily repaid from the rental payments generated by the multifamily properties. Our multifamily loans as
of December 31, 2019 comprised $69.4 million, or 2% of loans.
We expect to continue to make residential real estate mortgage 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. Like our commercial real estate loans, our residential real estate loans are secured by
real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the
area in which the real estate is located. Adverse developments affecting real estate values in our market areas could
therefore increase the credit risk associated with these loans, impair the value of property pledged as collateral on loans
and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. We primarily make our
residential real estate loans to qualified individuals and investors in accordance with our real estate lending policies, which
detail maximum loan to value ratios and maturities and, as a result, the repayment of these loans are also affected by
adverse personal circumstances.
Construction loans. Our construction real estate loans include commercial construction, land acquisition and land
development loans and single-family interim construction loans to small and medium sized businesses, investors, and
individuals. We target experienced local developers primarily focused on multifamily, hospitality, commercial building, retail
and warehouse developments. These loans typically are disbursed as construction progresses and carry variable interest
12
rates for commercial loans and fixed rates for consumer loans. As of December 31, 2019, the outstanding balance of our
construction loans was $551.1 million, or 13% of our loan portfolio. 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.
Construction loans carry a high degree of risk because repayment of these loans is dependent, in part, on the success of
the ultimate project or, to a lesser extent, the ability of the borrower to refinance the loan or sell the property upon completion
of the project, rather than the ability of the borrower or guarantor to repay principal and interest. Moreover, these loans are
typically based on future estimates of value and economic circumstances, which may differ from actual results or be affected
by unforeseen events. If the actual circumstances differ from the estimates made at the time of approval of these loans, we
face the risk of having inadequate security for the repayment of the loan. Further, these loans are typically secured by the
underlying development and, even if we foreclose on the loan, we may be required to fund additional amounts to complete
the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.
Consumer and other loans. We offer a variety of consumer loans, such as installment 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. Other loans also include loans to states and political subdivisions in the U.S. As of
December 31, 2019, we had outstanding $272.1 million of consumer and other loans, excluding residential real estate loans,
representing 6% of our loan portfolio. Consumer loans typically have shorter terms, lower balances, higher yields and higher
risks of default than residential real estate mortgage loans. The repayment of consumer loans is dependent on the
borrower’s continuing financial stability and are therefore more likely to be affected by adverse personal circumstances,
such as the loss of employment, unexpected medical costs or divorce. These loans are often secured by the underlying
personal property, which typically has insufficient value to satisfy the loan without a loss due to damage to the collateral and
general depreciation. Other 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.
Deposits and other banking services
We offer a full range of transaction and interest-bearing depository products and services to meet the demands of each
segment within our client base. Our target segments include consumer, small business, state, municipal and other
governmental entities, and corporate entities. We solicit deposits from these target segments through our local bankers,
sophisticated product offering and our brand-awareness initiatives, such as our community focused marketing and high-
visibility branch locations. We offer demand, negotiable order of withdrawal, money market, certificates of deposit, municipal
and savings accounts. To complement our account offerings, we also have in place technology to support treasury
management and electronic banking activities which includes consumer online banking and mobile banking. In addition to
these electronic banking activities, we make deposit services accessible to our clients by offering direct deposit, wire
transfer, night depository, banking-by-mail and remote capture for non-cash items. Our commercial clients are served by a
well-developed cash management technology platform and mobile banking. Our treasury management team consults with
our commercial clients to tailor solutions for optimal efficiency. We offer a full array of services to better manage receivables,
payables, implement controls, and automate movement of funds.
13
The following charts show our deposit composition as of December 31, 2019 and our cost of deposits since 2015.
*Includes mortgage servicing-related escrow deposits of $45.4 million, $53.7 million and $53.5 million for the years ended December 31, 2016, 2017 and 2018, respectively,
and $92.6 million as of December 31, 2019. There were no mortgage servicing-related escrow deposits prior to those periods.
The growth of low-cost deposits is an important aspect of our strategic plan, and we believe it is a significant driver of our
value. The primary driver of our noninterest-bearing deposit growth has been our ability to acquire new commercial clients.
This has resulted from the addition of relationship bankers across our markets, improved technology in the cash
management area, and the addition of experienced cash management sales and operational specialists. Our cash
management product offering includes a well-developed online banking platform complimented by a host of ancillary
services including lockbox remittance processing, remote check deposit capture, remote cash capture, fraud protection
services, armored car services, commercial and business card products, and merchant processing solutions.
Our consumer offering is anchored on our rewards based checking product where we currently hold over $272 million in
deposit balances in approximately 39,900 accounts. The “FirstRewards” checking product incents our clients to use their
FirstBank debit card as a primary method of payment at point of sale, utilize online and mobile banking, electronic bill pay,
direct deposit, and receive electronic statements. Additionally, we offer a "FirstRate" money market product to qualifying
"FirstRewards" customers. We currently hold approximately $137.9 million in deposit balances related to "FirstRate" money
market accounts. When meeting certain criteria, clients receive a premium interest rate on balances. The Bank benefits
from higher interchange revenue, lower expense on a per account basis as compared to traditional products, and better
client retention.
The coupling of these strategies delivered through our relationship-based sales model has allowed us to grow noninterest-
bearing deposits and noninterest income without expanding our account level fee structure. This differentiating approach
has set us apart from national and regional competitors and has built loyalty and satisfaction within our client segments.
Mortgage banking services
We offer full-service residential mortgage products and services through our bank branches, our mortgage offices
strategically located throughout the southeastern United States both in and outside our community banking footprint and
our internet delivery channel.
From 2010 to 2017, our mortgage banking services underwent significant expansion, diversifying to offer the following
delivery channels: (1) retail mortgage, which provides residential mortgages to consumers in the Southeast primarily through
our bank branches and mortgage offices; (2) wholesale consisting of third party origination and correspondent lending,
which provides mortgage processing and resale services
to smaller banks and mortgage companies; and
(3) ConsumerDirect, which provides residential mortgages on a national basis via internet delivery. During the year ended
14
December 31, 2019, the Company restructured its mortgage business and sold its wholesale delivery channels, allowing
the Company to focus on the retail and ConsumerDirect delivery channels.
The residential mortgage products and services originated in our community banking footprint and related revenues and
expenses are included in our Banking segment while the residential mortgage products and services originated outside of
our community banking footprint and related revenues and expenses are included in our Mortgage segment.
In accordance with our lending policy, each loan undergoes a detailed underwriting process which incorporates uniform
underwriting standards and oversight that satisfies secondary market standards as outlined by our investors and our internal
policies. Mortgage loans are subject to the same uniform lending policies and consist primarily of loans with relatively
stronger borrower credit scores, with an average FICO score of 743 during the year ended December 31, 2019.
The residential mortgage industry is highly competitive, and we compete with other community banks, regional banks,
national banks, credit unions, mortgage companies, financial service companies and online mortgage companies. Due to
the highly competitive nature of the residential mortgage industry, we expect to face continued industry-wide competitive
pressures related to changing market conditions that could reduce our pricing margins and mortgage revenues generally,
especially in a rising rate environment. While we have experienced rate declines during the year ended December 31, 2019,
increasing interest rate lock commitment volume and profitability of our mortgage business, the mortgage industry remains
sensitive to interest rate changes and our profitability could be adversely impacted by rising interest rates. Our mortgage
banking business is also directly impacted by increased regulations and consumer demand, driven in large part by general
economic conditions and the real estate markets along with investor demand for mortgage securities. While sensitive to
these factors, our mortgage loan office leases are primarily short-term in nature and approximately 59% of our mortgage-
related compensation is in the form of variable compensation, providing scalability to our business model.
During the year ended December 31, 2019, we generated $5.90 billion compared to $7.12 billion during the year ended
December 31, 2018 in interest rate lock commitment volume, with 44% of these commitments being purchase money
mortgage loans. Please see below for a breakdown of our interest rate lock commitment volume by distribution channel
since 2017:
15
Interest rate lock commitment volume by product type and purpose (year ended December 31, 2019)
Note: Conv = Conventional; VA = Veterans Affairs; USDA = United States Department of Agriculture Rural Housing Mortgage; FHA = Federal Housing
Administration
Investment and trust services
The Bank provides our individual clients access to investment services offered through LPL Financial LLC ("LPL Financial"),
an independent third-party broker-dealer that maintains offices in selected bank branches. A full range of investment choices
is available through LPL Financial for our clients, including equities, mutual funds, bonds, tax-exempt municipals, and
annuities, as well as money management consultation. Life insurance products are also offered to our clients through
FirstBank Insurance, Inc., a wholly-owned insurance agency. We also offer our business clients group retirement plan
advisory services. We primarily market these services to retirees or pre-retirees with a minimum of $100,000 of investable
assets, high income professionals earning more than $200,000 and businesses with group retirements plans that have more
than $1 million in assets. We earn noninterest income from the investment and life insurance sales arrangements.
During 2017, the Bank began providing trust administration services through the FirstBank trust department, ("FirstBank
Trust"), which was acquired through the acquisition of the Clayton Banks. With $713.0 million and $556.6 million assets
under management at December 31, 2019 and December 31, 2018, respectively, a disciplined investment philosophy and
a highly competitive fee schedule, FirstBank Trust primarily serves high-wealth bank relationships and a niche of charitable
endowments and foundations.
Risk management
General
Our operating model demands a strong risk culture built to address multiple areas of risk, including credit risk, interest rate
risk, liquidity risk, price risk, compliance risk, information security / cyber risk, operational risk, strategic risk and reputational
risk. Our risk culture is supported by investments in the right people and technologies to protect our business. Our board of
directors and the Bank’s board of directors are ultimately responsible for overseeing risk management at the holding
company and the Bank, respectively. We have a Chief Risk Officer who oversees risk management across our business
(including the Bank). Our board, Chief Executive Officer and Chief Risk Officer are supported by the heads of other functional
areas at the Bank, including credit, legal, IT, audit, compliance, capital markets, credit review, information security and
physical security. Our comprehensive risk management framework is designed to complement our core strategy of
empowering our experienced, local bankers with local-decision making to better serve our clients.
Our credit policies support our goal of maintaining sound credit quality standards while achieving balance sheet growth,
earnings growth, appropriate liquidity and other key objectives. We maintain a risk management infrastructure that includes
16
local authority, centralized policymaking and a strong system of checks and balances under the direction of our Chief Credit
Officer. The fundamental principles of our credit policy and procedures are to maintain credit quality standards, which
enhance our long-term value to our clients, associates, shareholders and communities. Our loan policies provide our
bankers with a sufficient degree of flexibility to permit them to deliver responsive and effective lending solutions to our clients
while maintaining appropriate credit quality. Furthermore, our bankers and associates are hired for the long-term and they
are incentivized to focus on long-term credit quality. Since lending represents credit risk exposure, the board of directors
and its duly appointed committees seek to ensure that the Bank maintains appropriate credit quality standards. We have
established management oversight committees to administer the loan portfolio and monitor credit risk. These committees
include our audit committee and credit committee, and they meet at least quarterly to review the lending activities.
Credit concentration
Diversification of risk is a key factor in prudent asset management. Our loan portfolio is balanced between our metropolitan
and community markets and by type, thereby diversifying our loan concentration. Our granular loan portfolio reflects a
balanced mix of consumer and commercial clients across these markets that we think provides a natural hedge to industry
and market cycles. In addition, risk from concentration is actively managed by management and reviewed by the board of
directors of the Bank, and exposures relating to borrower, industry and commercial real estate categories are tracked and
measured against policy limits. These limits are reviewed as part of our periodic review of the loan policy. Loan concentration
levels are monitored by the Chief Credit Officer and reported to the board of directors.
Loan approval process
The loan approval process at the Bank is characterized by local authority supported by a risk control environment that
provides for prompt and thorough underwriting of loans. Our localized decision making is reinforced through a centralized
review process supported by technology that monitors credits to ensure compliance with our credit policies. Our loan
approval method is based on a hierarchy of individual lending authorities for new credits and renewals granted to our
individual bankers, market presidents, credit officers, senior management and credit committee. The board of directors
establishes the maximum lending limits at each level and our senior management team sets individual authorities within
these maximum limits to each individual based on demonstrated experience and expertise, and are periodically reviewed
and updated. We believe that the ability to have individual loan authority up to specified levels based on experience and
track record coupled with appropriate approval limits for our market presidents and credit officers allows us to provide prompt
and appropriate responses to our clients while still allowing for the appropriate level of oversight.
As a relationship-oriented lender, rather than transaction-oriented lender, substantially all of our loans are made to borrowers
or relationships located or operating in our market area. This provides us with a better understanding of their business,
creditworthiness and the economic conditions in their market and industry. Furthermore, our associates are held
accountable for all of their decisions, which effectively aligns their incentives to reflect appropriate risk management.
In considering loans, we follow the underwriting principles set forth in our loan policy with a primary focus on the following
factors:
• A relationship with our clients that provides us with a thorough understanding of their financial condition and
ability to repay the loan;
• verification that the primary and secondary sources of repayment are adequate in relation to the amount of
the loan;
• adherence to appropriate loan to value guidelines for real estate secured loans;
•
targeted levels of diversification for the loan portfolio, both as to type of borrower and type of collateral;
and
• proper documentation of loans, including perfected liens on collateral.
As part of the approval process for any given loan, we seek to minimize risk in a variety of ways, including the following:
• analysis of the borrower's and/or guarantor's financial condition, cash flow, liquidity, and leverage;
• assessment of the project's operating history, operating projections, location and condition;
•
• consideration of the management's experience and financial strength of the principals of the borrower;
review of appraisals, title commitment and environmental reports;
and
• understanding economic trends and industry conditions.
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The board of directors reviews and approves loan policy changes, monitors loan portfolio trends and credit trends, and
reviews and approves loan transactions that exceed management thresholds as set forth in our loan policies. Loan pricing
is established in conjunction with the loan approval process based on pricing guidelines for loans that are set by the Bank’s
senior management. We believe that our loan approval process provides for thorough internal controls, underwriting, and
decision making.
Lending limits
The Bank is limited in the amount it can loan in the aggregate to a single borrower or related borrowers by the amount of
our regulatory capital. The Bank is a Tennessee chartered bank and therefore all branches, regardless of location, fall under
the legal lending limits of the state of Tennessee. Tennessee’s legal lending limit is a safety and soundness measure
intended to prevent one person or a relatively small and economically related group of persons from borrowing an unduly
large amount of a bank’s funds. It is also intended to safeguard a bank’s depositors by diversifying the risk of loan losses
among a relatively large number of creditworthy borrowers engaged in various types of businesses. Generally, under
Tennessee law, loans and extensions of credit to a borrower may not exceed 15% of our bank’s Tier 1 capital, plus an
additional 10% of the bank’s Tier 1 capital, with approval of the bank’s board. Further, the Bank may elect to conform to
similar standards applicable to national banks under federal law, in lieu of Tennessee law. Because the federal law and
Tennessee state law standards are determined as a percentage of the Bank’s capital, these state and federal limits both
increase or decrease as the Bank’s capital increases or decreases. Based upon the capitalization of the Bank at
December 31, 2019, the Bank’s legal lending limits were approximately $89 million (15%) and $148 million (25%). The Bank
may seek to sell participations in our larger loans to other financial institutions, which will allow us to manage the risk
involved in these loans and to meet the lending needs of our clients requiring extensions of credit in excess of these limits.
In addition to these legally imposed lending limits, we also employ appropriate limits on our overall loan portfolio and
requirements with respect to certain types of lending and individual lending relationships. For example, we have lending
limits related to maximum borrower, industry and certain types of commercial real estate exposures.
Enterprise risk management
We maintain an enterprise risk management program that helps us to identify, manage, monitor and control potential risks
that may affect us, including credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic
risk and reputational risk. Our operating model demands a strong risk culture built to address the multiple areas of risk we
face, and our risk management strategy is supported by significant investments in the right people and technologies to
protect the organization.
Our comprehensive risk management framework and risk identification is a continuous process and occurs at both the
transaction level and the portfolio level. While our local bankers and associates support our day-to-day risk practices,
management seeks to identify interdependencies and correlations across portfolios and lines of business that may amplify
risk exposure through a thorough centralized review process. Risk measurement helps us to control and monitor risk levels
and is based on the sophistication of the risk measurement tools used to reflect the complexity and levels of assumed risk.
We monitor risks and ensure compliance with our risk policies by timely reviewing risk positions and exceptions, investing
in the technology to monitor credits, requiring senior management authority sign-off on larger credit requests and granting
credit authority to bankers and officers based on demonstrated experience and expertise. This monitoring process ensures
that management’s decisions are implemented for all geographies, products and legal entities.
We control risks through limits that are communicated through policies, standards, procedures and processes that define
responsibility and authority. Such limits serve as a means to control exposures to the various risks associated with our
activities, and are meaningful management tools that can be adjusted if conditions or risk tolerances change. In addition,
we maintain a process to authorize exceptions or changes to risk limits when warranted. These risk management practices
help to ensure effective reporting, compliance with all laws, rules and regulations, avoid damage to our reputation and
related consequences, and attain our strategic goals while avoiding pitfalls and surprises along the way.
The board of directors approves policies that set operational standards and risk limits, and any changes require approval
by the Bank’s board of directors. Management is responsible for the implementation, integrity and maintenance of our risk
management systems ensuring the directives are implemented and administered in compliance with the approved policy.
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Our Chief Risk Officer supervises the overall management of our risk management program, reports to management and
yet also retains independent access to the board of directors.
Credit risk management
Credit risk management is a key component of our risk management program. We employ consistent analysis and
underwriting to examine credit information and prepare underwriting documentation. We monitor and approve exceptions
to our credit policies as required, and we also track and address technical exceptions.
Each loan officer has the primary responsibility for appropriately risk rating each commercial loan that is made. In addition,
our credit administration department is responsible for the ongoing monitoring of loan portfolio performance through the
review of ongoing financial reports, loan officer reports, audit reviews and exception reporting and concentration analysis.
This monitoring process also includes an ongoing review of loan risk ratings and management of our allowance for loan
losses. We have a Chief Credit Officer responsible for maintaining the integrity of our portfolio within the parameters of the
credit policy. We utilize a risk grading system that enables management to differentiate individual loan quality and forecast
future profitability and portfolio loss potential.
We assign a credit risk rating at the time a commercial loan is made and adjust it promptly as conditions warrant. Portfolio
monitoring systems allow management to proactively assess risk and make decisions that will minimize the impact of
negative developments. We promote open communication to minimize or eliminate surprises. Successful credit
management is achieved by lenders consistently meeting with clients and reviewing their financial conditions regularly. This
enables both the recognition of future opportunities and potential weaknesses early.
The board of directors supports a strong loan review program and is committed to its effectiveness as part of the independent
process of assessing our lending activities. We have communicated to our credit and lending staff that the identification of
emerging problem loans begins with the lending personnel knowing their client and, supported by credit personnel, actively
monitoring their client relationships. The loan review process is meant to augment this active management of client
relationships and to provide an independent and broad-based look into our lending activities. We believe that our strong
client relationships support our ability to identify potential deterioration of our credits at an early stage enabling us to address
these issues early on to minimize potential losses.
We maintain a robust loan review function by utilizing an internal loan review team as well as third-party loan review firms
that report to the board of directors to ensure independence and objectivity. The examinations performed by the loan review
department are based on risk assessments of individual loan commitments within our loan portfolio over a period of time.
At the conclusion of each review, the loan review department provides management and the board of directors with a report
that summarizes the findings of the review. At a minimum, the report addresses risk rating accuracy, compliance with
regulations and policies, loan documentation accuracy, the timely receipt of financial statements, and any additional material
issues.
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 to help a borrower with a deteriorating financial condition stay
current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest
rates on loans to rates that are below market rates. Furthermore, we are committed to collecting on all of our loans and, as
a result, at times have lower net charge-offs compared to our peer banks. This practice can result in us carrying higher
nonperforming assets on our books than our peers, however, our nonperforming assets in recent years have been lower
than peers due to strong asset quality. Our commitment to collecting on all of our loans, coupled with our knowledge of our
borrowers, sometimes results in higher loan recoveries. We believe that we are well reserved for losses resulting from our
non-performing assets.
Liquidity and interest rate risk management
Our liquidity planning framework is focused on ensuring the lowest cost of funding available and planning for unpredictable
funding circumstances. To achieve these objectives, we utilize a simple funding and capital structure consisting primarily of
deposits and common equity. We remain continually focused on growing our noninterest-bearing and other low-cost core
deposits while replacing higher cost funding options, including wholesale time deposits and other borrowed debt, to fund
our balance sheet growth. The following chart shows our overall funding structure as of December 31, 2019.
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Funding structure as of December 31, 2019
In addition, we monitor our liquidity risk by adopting policies to define potential liquidity problems, reviewing and maintaining
an updated liquidity contingency plan and providing a prudent capital structure consistent with our credit standing and plans
for strategic growth.
Our interest risk management system is overseen by our board of directors, who has the authority to approve acceptable
rate risk levels. Our board of directors has established the Asset Liability Committee to ensure appropriate risk appetite by
requiring:
• quarterly testing of interest rate risk exposure;
• proactive risk identification and measurement;
• quarterly risk presentations by senior management; and
independent review of the risk management process.
•
Competition
We conduct our core banking operations primarily in Tennessee and compete in the commercial banking industry solely
through our wholly owned banking subsidiary, FirstBank. The banking industry is highly competitive, and we experience
competition in our market areas from many other financial institutions. We compete with commercial banks, credit unions,
savings institutions, mortgage banking firms, online mortgage lenders, online deposit banks, digital banking platforms,
consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual
funds, as well as super-regional, national and international financial institutions that operate offices in our market areas and
elsewhere. In addition, a number of out-of-state financial intermediaries have opened production offices, or otherwise solicit
deposits, in our market areas. Increased competition in our markets may result in reduced loans and deposits, as well as
reduced net interest margin and profitability. Furthermore, the Tennessee market has grown increasingly competitive in
recent years with a number of banks entering this market, with a primary focus on the state’s metropolitan markets. We
believe this trend will continue as banks look to gain a foothold in these growing markets. This trend will result in greater
competition primarily in our metropolitan markets. However, we firmly believe that our market position and client-focused
operating model enhances our ability to attract and retain clients.
See “Our markets” in this section above for a further discussion of the markets we compete in and the competitive landscape
in these markets.
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Our associates
As of December 31, 2019, we had 1,377 full-time equivalent associates and 22 part-time equivalent associates. We pride
ourselves on maintaining good relations with our associates. None of our employees are represented by any collective
bargaining unit or are parties to a collective bargaining agreement.
Information technology systems
We continue to make significant investments in our technology platforms to further strengthen our scalability and
resiliency. In 2019, we have made investments in key underlying technology support components, through upgrading our
client workstation operating systems, our network infrastructure, expanding the deployment of Software Defined Wide Area
Network ("SD-WAN") architecture, and the implementation of an improved workstation management systems, all of which
support our continued growth.
In 2019, we also expanded the adoption of core and ancillary functionality of the Jack Henry technology improving efficiency
and capacity, including the implementation of an improved Teller platform. We have added Mobile Wallet technology,
allowing customers to utilize Apple Pay, Google Pay, and Samsung Pay with their FirstBank debit cards. Additionally, we
have enhanced our online account opening functionality, and streamlined customer interactions by implementing e-sign
capability within our banking and Specialty Lending functions. Finally, working to create a better customer experience for
our digital mortgage offering, we are nearing completion of a new Digital Lending platform, and have deployed it for a small
pilot group. This system streamlines the mortgage application process, resulting in an easier, more competitive experience
for our mortgage customers.
Supervision and regulation
The following is a general summary of the material aspects of certain statutes and regulations applicable to us and the
Bank. These summary descriptions are not complete, and you should refer to the full text of the statutes, regulations, and
corresponding guidance for more information. These statutes and regulations are subject to change, and additional statutes,
regulations, and corresponding guidance may be adopted. We are unable to predict these future changes or the effects, if
any, that these changes could have on our business, revenues, and financial results.
General
As a registered bank holding company, we are subject to regulation, supervision, and examination by the Board of Governors
of the Federal Reserve System, or Federal Reserve, under the Bank Holding Company Act of 1956, as amended (the
“BHCA”). In addition, as a Tennessee state-chartered bank that is not a member of the Federal Reserve System, the Bank
is subject to primary regulation, supervision, and examination by the FDIC and the Bank’s state banking regulator, the
Tennessee Department of Financial Institutions, or TDFI. Supervision, regulation, and examination of the Bank by the bank
regulatory agencies are intended primarily for the protection of consumers, bank depositors and the Deposit Insurance Fund
of the FDIC, rather than holders of our capital stock.
Changes as a result of the Dodd-Frank Act
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or Dodd-Frank Act, the regulatory
framework under which we and the Bank operate has changed. The Dodd-Frank Act brought about a significant overhaul
of many aspects of the regulation of the financial services industry, addressing issues including, among others, systemic
risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, lending limits,
mortgage lending practices, registration of investment advisers and changes among the bank regulatory agencies. In
particular, portions of the Dodd-Frank Act that affected us and the Bank include, but are not limited to:
• The Dodd-Frank Act created the Consumer Financial Protection Bureau, or CFPB, a new federal regulatory
body with broad authority to regulate the offering and provision of consumer financial products and services.
The authority to examine depository institutions with $10 billion or less in assets, such as the Bank, for
compliance with federal consumer laws remain largely with the Bank's primary federal regulator, the FDIC.
However, the CFPB may participate in examinations of smaller institutions on a "sampling basis" and may
refer potential enforcement actions against such institutions to their primary regulators. While the CFPB
21
does not have direct supervisory authority over us or the Bank, it nevertheless has important rulemaking,
examination and enforcement authority with regard to consumer financial products and services.
• The Dodd-Frank Act imposed new duties on mortgage lenders, including a duty to determine the borrower's
ability to repay the loan, and imposed a requirement on mortgage securitizers to retain a minimum level of
economic interest in securitized pools of certain mortgage types.
• The Dodd-Frank Act's Volcker Rule substantially restricted proprietary trading and investments in hedge
funds or private equity funds and requires banking entities to implement compliance programs, as desribed
further under "Other Dodd-Frank Act reforms: Volcker Rule" below.
• The Dodd-Frank Act contained other provisions, including but not limited to: new limitations on federal
preemption; application of new regulatory capital requirements, including changes to leverage and risk-
based capital standards and changes to the components of permissible tiered capital; changes to the
assessment base for deposit insurance premiums; permanently raising the FDIC's standard maximum
deposit insurance amount to $250,000 limit for federal deposit insurance; repeal of the prohibition on the
payment of interest on demand deposits, thereby permitting depository institutions to pay interest on
business transaction and other accounts; a prohibition on incentive-based compensation arrangements that
encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or
that may lead to material losses; requirement that sponsors of asset-backed securities retain a percentage
of the credit risk of the assets underlying the securities; requirement that banking regulators remove
references to and requirements of reliance upon credit ratings from their regulations and replace them with
appropriate alternatives for evaluating credit worthiness.
The list above is not exhaustive. It reflects our current assessment of the Dodd-Frank Act provisions and implementing rules
that are reasonably possible to have a substantial impact on us in the future. After our planned merger with Franklin Synergy
Bank, the Bank will have more than $10 billion in total assets and will be subject to additional federal regulations under
Section 165 of the Dodd-Frank Act.
Changes as a result of Current Expected Credit Losses (CECL) accounting standard
In December 2018, the Office of the Comptroller of the Currency ("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. 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. Effective January 1, 2020, the Company has adopted the
transitional guidance to reduce the impact of the initial adoption on regulatory capital.
Proposed changes of the Economic Growth, Regulatory Relief and Consumer Protection Act (Regulatory Relief Act)
The Regulatory Relief Act was enacted to modify or remove certain financial reform rules and regulations, including some
of those implemented under the Dodd-Frank Act. While it maintains the majority of the regulatory structure established by
the Dodd-Frank Act, the Regulatory Relief Act amends certain aspects for small depository institutions with less than $10
billion in assets. Sections in the Regulatory Relief Act address access to mortgage credit; consumer access to credit;
protections for veterans, consumers, and homeowners; rules for certain bank or financial holding companies; capital access;
and protections for student borrowers.
Among other items, the Regulatory Relief Act simplifies the regulatory capital rules for financial institutions and their holding
companies with total consolidated assets of less than $10 billion. The Regulatory Relief Act requires federal banking
agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total
consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an
appropriate risk profile. The required regulations specify a minimum community bank leverage ratio of not less than 8% and
not more than 10%, as well as procedures for treatment of a qualifying community bank that has a community bank leverage
ratio that falls below the required minimum. Qualifying banks that exceed the minimum community bank leverage ratio will
be deemed to be in compliance with all other capital and leverage requirements. Given the pending acquisition of Franklin,
we do not currently plan on adopting the new capital standard.
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In September 2019, pursuant to the Regulatory Relief Act, the federal banking agencies adopted a final rule setting the
community bank leverage ratio at 9%.
Further, the Regulatory Relief Act decreased the burden for community banks in regards to call reports, the Volcker Rule
(which generally restricts banks from engaging in certain investment activities and limits involvement with hedge funds and
private equity firms), mortgage disclosures, and risk weights for some high-risk commercial real estate loans. On December
28, 2018, the federal banking agencies issued a final rule increasing the asset threshold to qualify for an 18-month
examination cycle from $1 billion to $3 billion for qualifying institutions that are well capitalized, well managed and meet
certain other requirements.
Any number of the provisions of the Regulatory Relief Act may have the effect of increasing our expenses, decreasing our
revenues, or changing the activities in which we choose to engage. The environment in which banking organizations
operate, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate
governance and compensation, changes in fiscal policy and steps to eliminate government support for banking
organizations, may have long-term effects on the profitability of banking organizations that cannot now be foreseen.
Holding company regulation
As a regulated bank holding company, we are subject to various laws and regulations that affect our business. These laws
and regulations, among other matters, prescribe minimum capital requirements, limit transactions with affiliates, impose
limitations on the business activities in which we can engage, limit the dividend or distributions that the Bank can pay to us,
restrict the ability of institutions to guarantee our debt, and impose certain specific accounting requirements on us that may
be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than generally
accepted accounting principles, among other things.
Permitted activities
Under the BHCA, as amended, a bank holding company is generally permitted to engage in, or acquire direct or indirect
control of more than five percent of any class of the voting shares of any company that is not a bank or bank holding
company and that is engaged in, the following activities (in each case, subject to certain conditions and restrictions and
prior approval of the Federal Reserve):
• banking or managing or controlling banks:
•
• any activity that the Federal Reserve determines by regulation or order to be so closely related to banking
furnishing services to or performing services for our subsidiaries:
as to be a proper incident to the business of banking, including:
factoring accounts receivable;
leasing personal or real property;
▪
▪ making, acquiring, brokering or servicing loans and related activities;
▪
▪ operating a nonbank depository instititution, such as a savings association;
▪ performing trust company functions;
▪ conducting financial and investment advisory activities;
▪ underwriting and dealing in government obligations and money market instruments;
▪ providing specified management consulting and counseling activities;
▪ performing selected data processing services and support services;
▪ acting as agent or broker in selling credit life insurance and other types of insurance in connection
with credit transactions;
▪ performing selected insurance underwriting activities;
▪ providing certain community development activities (such as making investments in projects
designed primarily to promote community welfare); and
issuing and selling money orders and similar consumer-type payment instruments.
▪
While the Federal Reserve has found these activities in the past acceptable for other bank holding companies, the Federal
Reserve may not allow us to conduct any or all of these activities, which are reviewed by the Federal Reserve on a case by
case basis upon application by a bank holding company.
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The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities
or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding
company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of
it or any of its bank subsidiaries.
Acquisitions subject to prior regulatory approval
The BHCA requires the prior approval of the Federal Reserve for a bank holding company to acquire substantially all the
assets of a bank or to acquire direct or indirect ownership or control of more than 5% of any class of the voting shares of
any bank, bank holding company, savings and loan holding company or savings association, or to increase any such non-
majority ownership or control of any bank, bank holding company, savings and loan holding company or savings association,
or to merge or consolidate with any bank holding company.
Under the BHCA, if “well capitalized” and “well managed”, as defined under the BHCA and implementing regulations, we or
any other bank holding company located in Tennessee may purchase a bank located outside of Tennessee. Conversely, a
well-capitalized and well-managed bank holding company located outside of Tennessee may purchase a bank located inside
Tennessee. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence
for a limited amount of time or will result in concentrations of deposits exceeding limits specified by statute. For example,
Tennessee law currently prohibits a bank holding company from acquiring control of a Tennessee-based financial institution
until the target financial institution has been in operation for at least three years.
Bank holding company obligations to bank subsidiaries
Under current law and Federal Reserve policy, a bank holding company is expected to act as a source of financial and
managerial strength to its depository institution subsidiaries and to maintain resources adequate to support such
subsidiaries, which could require us to commit resources to support the Bank in situations where additional investments in
a bank may not otherwise be warranted. These situations include guaranteeing the compliance of an “undercapitalized”
bank with its obligations under a capital restoration plan, as described further under “Bank regulation-: Capitalization levels
and prompt corrective action” below. As a result of these obligations, a bank holding company may be required to contribute
additional capital to its subsidiaries in the form of capital notes or other instruments that qualify as capital under regulatory
rules. Any such loan from a holding company to a subsidiary bank is likely to be unsecured and subordinated to the bank’s
depositors and perhaps to other creditors of the bank. If we were to enter bankruptcy or become subject to the orderly
liquidation process established by the Dodd-Frank Act, any commitment by us to a federal bank regulatory agency to
maintain the capital of the Bank would be assumed by the bankruptcy trustee or the FDIC, as appropriate, and entitled to a
priority of payment.
Restrictions on bank holding company dividends.
The Federal Reserve’s policy regarding dividends is that a bank holding company should not declare or pay a cash dividend
which would impose undue pressure on the capital of any bank subsidiary or would be funded only through borrowing or
other arrangements that might adversely affect a bank holding company’s financial position. As a general matter, the Federal
Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and
eliminate, defer or significantly reduce the bank holding company’s dividends if:
•
•
•
its net income available to shareholders for the past four quarters, net of dividends previously paid during
that period, is not sufficient to fully fund the dividends;
its prospective rate of earnings retention is not consistent with its capital needs and overall current and
prospective financial condition; or
it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Should an insured depository institution controlled by a bank holding company be “significantly undercapitalized” under the
applicable federal bank capital ratios, or if the bank subsidiary is “undercapitalized” and has failed to submit an acceptable
capital restoration plan or has materially failed to implement such a plan, federal banking regulators (in the case of the Bank,
the FDIC) may choose to require prior Federal Reserve approval for any capital distribution by the bank holding company.
For more information, see “Bank regulation: Capitalization levels and prompt corrective action.”
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In addition, since our legal entity is separate and distinct from the Bank and does not conduct stand-alone operations, our
ability to pay dividends depends on the ability of the Bank to pay dividends to us, which is also subject to regulatory
restrictions as described below in “Bank regulation: Bank dividends.”
Under Tennessee law, we are not permitted to pay cash dividends if, after giving effect to such payment, we would not be
able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of
our total liabilities plus any amounts needed to satisfy any preferential rights if we were dissolving. In addition, in deciding
whether or not to declare a dividend of any particular size, our board of directors must consider our current and prospective
capital, liquidity, and other needs.
U.S. Basel III capital rules
In July 2013, federal banking regulators, including the Federal Reserve and the FDIC, adopted the U.S. Basel Capital Rules
implementing many aspects of the Basel III Capital Standards.
The U.S. Basel III Capital Rules apply to all national and state banks and savings associations and most bank holding
companies and savings and loan holding companies, which we collectively refer to herein as “covered” banking
organizations. The requirements in the U.S. Basel III Capital Rules started to phase in on January 1, 2015, for many covered
banking organizations, including the Company and the Bank and have been fully phased-in as of January 1, 2019.
The U.S. Basel III Capital Rules impose higher risk-based capital and leverage requirements than those previously in place.
Specifically, the rules impose the following minimum capital requirements applicable to us and the Bank:
• a common equity Tier 1 risk-based capital ratio of 4.5%;
• a Tier 1 risk-based capital ratio of 6%;
• a total risk-based capital ratio of 8%;
• a leverage ratio of 4%; and
• a supplementary leverage ratio of 3%, resulting in a leverage ratio requirement of 7% for such institutions.
Under the U.S. Basel III Capital Rules, Tier 1 Capital is defined to include two components: common equity Tier 1 Capital
and additional Tier 1 Capital. The highest form of capital, Common Equity Tier 1 Capital ("CET1 Capital"), consists solely of
common stock plus related surplus, retained earnings, accumulated other comprehensive income, and limited amounts of
minority interests that are in the form of common stock. Additional Tier 1 Capital includes other perpetual instruments
historically included in Tier 1 Capital, such as non-cumulative perpetual preferred stock.
The rules permit bank holding companies with less than $15.0 billion in total consolidated assets, to continue to include
trust-preferred securities and cumulative perpetual preferred stock issued before May 19, 2010, in Tier 1 Capital, but not in
CET1 Capital, subject to certain restrictions. Tier 2 Capital consists of instruments that currently qualify in Tier 2 Capital plus
instruments that the rule has disqualified from Tier 1 Capital treatment. We have outstanding trust-preferred securities,
issued as debt securities. The first issue was for $21.0 million (21,000 securities priced at $1,000 each) plus $0.7 million in
the related common securities, and the second issue was for $9.0 million (9,000 securities priced at $1,000 each) plus $0.3
million in the related common securities.
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered
banking organization must maintain a capital conservation buffer on top of its minimum risk-based capital requirements.
This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three risk-based measurements (CET1
Captial, Tier 1 Capital and total capital). The capital conservation buffer consists of an additional amount of common equity
equal to 2.5% of risk-weighted assets.
The U.S. Basel III Capital Standards require certain deductions from or adjustments to capital. As a result, deductions from
CET1 Capital are required for goodwill (net of associated deferred tax liabilities); intangible assets such as non-mortgage
servicing assets and purchased credit card relationships (net of associated deferred tax liabilities); deferred tax assets that
arise from net operating loss and tax credit carryforwards (net of any related valuation allowances and net of deferred tax
liabilities); any gain on sale in connection with a securitization exposure; any defined benefit pension fund net asset (net of
any associated deferred tax liabilities) held by a bank holding company; the aggregate amount of outstanding equity
investments (including retained earnings) in financial subsidiaries; and identified losses. Other deductions are required from
different levels of capital. The U.S. Basel III Capital Rules also increase the risk weight for certain assets, meaning that
25
more capital must be held against such assets. For example, commercial real estate loans that do not meet certain
underwriting requirements must be risk-weighted at 150% rather than the current 100%.
Additionally, the U.S. Basel III Capital Standards provide for the deduction of three categories of assets: (i) deferred tax
assets arising from temporary differences that cannot be realized through net operating loss carrybacks (net of related
valuation allowances and of deferred tax liabilities), (ii) mortgage servicing assets (net of associated deferred tax liabilities)
and (iii) investments in more than 10% of the issued and outstanding common stock of unconsolidated financial institutions
(net of associated deferred tax liabilities). The joint agencies issued the Regulatory Capital: Simplifications to the Capital
Rule Pursant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (Capital Simplifications Final Rule)
on July 22, 2019. Under the Capital Simplifications Final Rule, non-advanced approaches banking organizations are subject
to simpler regulatory capital requirements for the three categories of assets discussed above. There is a 25% CET1 Capital
deduction threshold for all three categories combined. In September 2019, the join agencies published an updated allowing
early adoption on January 1, 2020, which we plan to utilize. We do not anticipate any significant impact to the capital ratios.
Accumulated other comprehensive income, or AOCI, is presumptively included in CET1 Capital and often would operate to
reduce this category of capital. The U.S. Basel III Capital Rules provided a one-time opportunity at the end of the first quarter
of 2015 for covered banking organizations to opt out of much of this treatment of AOCI, which we elected. The rules also
have the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility
commercial real estate, mortgage servicing rights not includable in CET1 Capital, equity exposures, and claims on securities
firms, which are used in the denominator of the three risk-based capital ratios.
U.S. Basel III Capital Rules will require us and the Bank to maintain (i) a minimum ratio of CET1 Capital to risk-weighted
assets of at least 4.5%, plus the 2.5% capital conservation buffer, effectively resulting in a minimum ratio of CET1 Capital
to risk-weighted assets of at least 7.0%, (ii) a minimum ratio of Tier 1 Capital to risk-weighted assets of at least 6.0%, plus
the capital conservation buffer, effectively resulting in a minimum Tier 1 Capital ratio of 8.5%, (iii) a minimum ratio of total
capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, effectively
resulting in a minimum total capital ratio of 10.5% and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1
Capital to average assets.
The U.S. Basel III Capital Rules also make important changes to the “prompt corrective action” framework discussed below
in “Bank regulation: Capitalization levels and prompt corrective action.”
Restrictions on affiliate transactions
See “Bank regulation: Restrictions on transactions with affiliates” below.
Change in control
We are a bank holding company regulated by the Federal Reserve. Subject to certain exceptions, the Change in Bank
Control Act, or (“CIBCA”), and its implementing regulations require that any individual or company acquiring “control” of a
bank or bank holding company, either directly or indirectly, give the Federal Reserve 60 days’ prior written notice of the
proposed acquisition. If within that time period the Federal Reserve has not issued a notice disapproving the proposed
acquisition, extended the period for an additional period up to 90 days or requested additional information, the acquisition
may proceed. An acquisition may be made before expiration of the disapproval period if the Federal Reserve issues written
notice that it intends not to disapprove the acquisition. Acquisition of 25 percent or more of any class of voting securities
constitutes control, and it is generally presumed for purposes of the CIBCA that the acquisition of 10 percent or more of any
class of voting securities would constitute the acquisition of control, although such a presumption of control may be rebutted.
Also, under the CIBCA, the shareholdings of individuals and companies that are deemed to be “acting in concert” would be
aggregated for purposes of determining whether such holders “control” a bank or bank holding company. “Acting in concert”
under the CIBCA generally means knowing participation in a joint activity or parallel action towards the common goal of
acquiring control of a bank or a bank holding company, whether or not pursuant to an express agreement. The manner in
which this definition is applied in individual circumstances can vary and cannot always be predicted with certainty. Many
factors can lead to a rebuttable presumption of acting in concert, including where: (i) the shareholders are commonly
controlled or managed; (ii) the shareholders are parties to an oral or written agreement or understanding regarding the
acquisition, voting or transfer of control of voting securities of a bank or bank holding company; (iii) the shareholders are
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immediate family members; or (iv) both a shareholder and a controlling shareholder, partner, trustee or management official
of such shareholder own equity in the bank or bank holding company.
Furthermore, under the BHCA and its implementing regulations, and subject to certain exceptions, any company would be
required to obtain Federal Reserve approval prior to obtaining control of a bank or bank holding company. The Federal
Reserve issued a final rule in 2019, effective April 1, 2020, which established tiered presumptions of control as detailed in
the table below. The final rule provides clarity for circumstances where a company acquires less than 25% of any class of
voting securities; control continues to exist in circumstances where a company directly or indirectly owns, controls or has
power to vote 25% or more of any class of voting securities or control in any manner the election of a majority of the directors
or trustees of the other company. There is a presumption of non-control for any holder of less than 5% of any class of voting
securities, assuming none of the generally applicable presumptions are triggered.
(Presumption triggered if any relationship exceeds the amount on the table)
Summary of Tiered Presumptions
Less than 5% voting
securities
5-9.99% voting
securities
10-14.99% voting
securities
15-24.99% voting
securities
Directors serving on both boards Less than half
Less than a quarter
Less than a quarter
Less than a quarter
Director service as Board Chair NA
Director service on Board
Committees
Business Relationships
Business terms
NA
NA
NA
Officer/employee interlocks
NA
Contractual Powers
No management
agreements
NA
NA
NA
A quarter or less of a
committee with power
to bind the company
No director
representative is chair
of the board
A quarter or less of a
committee with power
to bind the company
First company accounts
for less than 10% of
revenue or expenses of
second company
First company accounts
for less than 5% of
revenue or expenses of
second company
First company accounts
for less than 2% of
revenue or expenses of
second company
NA
Market terms
Market terms
No more than 1
interlock, never CEO
No more than 1
interlock, never CEO
No rights that
significantly restrict
discretion
No rights that
significantly restrict
discretion
No interlocks
No rights that
significantly restrict
discretion
Proxy contests (directors)
NA
NA
No soliciting proxies to
replace more than a
quarter of total directors
of second company
No soliciting proxies to
replace more than a
quarter of total directors
of second company
Total equity
Less than one third of
the second company
Less than one third of
the second company
Less than one third of
the second company
Less than one quarter
of the second company
In addition, in 2008 the Federal Reserve issued a policy statement on equity investments in banks and bank holding
companies, which sets out circumstances under which a minority investor would not be deemed to control a bank or bank
holding company for purposes of the BHCA. Among other things, the 2008 policy statement permits a minority investor to
hold up to 24.9% (or 33.3% under certain circumstances) of the total equity (voting and non-voting combined) and have at
least one representative on the company’s board of directors (with two directors permitted under certain circumstances).
This policy statement remains in effect to the extent not superseded by the final rule.
Compensation and risk management
In 2010, the federal banking agencies issued guidance to regulated banks and bank holding companies intended to ensure
that incentive compensation arrangements at financial organizations take into account risk and are consistent with safe and
sound practices. The guidance is based on three “key principles” calling for incentive compensation plans to: appropriately
balance risks and rewards; be compatible with effective controls and risk management; and be backed up by strong
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corporate governance. Further, in 2016 the federal banking regulators re-proposed rules that would prohibit incentive
compensation arrangements that would encourage inappropriate risks by providing excessive compensation or that could
lead to a material financial loss, and include certain prescribed standards for governance and risk management for incentive
compensation for institutions, such as us, that have over $1 billion in consolidated assets.
Bank regulation
The Bank is a banking institution that is chartered by and headquartered in the State of Tennessee, and it is subject to
supervision and regulation by the TDFI and the FDIC. The TDFI and FDIC supervise and regulate all areas of the Bank’s
operations including, without limitation, the making of loans, the issuance of securities, the conduct of the Bank’s corporate
affairs, the satisfaction of capital adequacy requirements, the payment of dividends, and the establishment or closing of
banking offices. The FDIC is the Bank’s primary federal regulatory agency, which periodically examines the Bank’s
operations and financial condition and compliance with federal consumer protection laws. In addition, the Bank’s deposit
accounts are insured by the FDIC to the maximum extent permitted by law, and the FDIC has certain enforcement powers
over the Bank.
As a state-chartered banking institution in the State of Tennessee, the Bank is empowered by statute, subject to the
limitations contained in those statutes, to take and pay interest on deposits, to make loans on residential and other real
estate, to make consumer and commercial loans, to invest, with certain limitations, in equity securities and in debt obligations
of banks and corporations and to provide various other banking services for the benefit of the Bank’s clients. Various state
consumer laws and regulations also affect the operations of the Bank, including state usury laws, consumer credit and equal
credit opportunity laws, and fair credit reporting. In addition, the Federal Deposit Insurance Corporation Improvement Act of
1991, or FDICIA, generally prohibits insured state chartered institutions from conducting activities as principal that are not
permitted for national banks. The Bank is also subject to various requirements and restrictions under federal and state law,
including but not limited to requirements to maintain reserves against deposits, lending limits, limitations on branching
activities, limitations on the types of investments that may be made, activities that may be engaged in, and types of services
that may be offered. Various consumer laws and regulations also affect the operations of the Bank. Also, the Bank and
certain of its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit,
leases or sales of property, or furnishing products or services.
Capital adequacy
See “Holding company regulation: U.S. Basel III capital rules.”
Capitalization levels and prompt corrective action
Federal law and regulations establish a capital-based regulatory scheme designed to promote early intervention for troubled
banks and require the FDIC to choose the least expensive resolution of bank failures. The capital-based regulatory
framework contains five categories of regulatory capital requirements, including “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A well-capitalized insured depository
institution is one (i) having a total risk-based capital ratio of 10 percent or greater, (ii) having a Tier 1 risk-based capital ratio
of 8 percent or greater, (iii) having a CET1 capital ratio of 6.5 percent or greater, (iv) having a leverage capital ratio of 5
percent or greater and (v) that is not subject to any order or written directive to meet and maintain a specific capital level for
any capital measure.
Generally, a financial institution must be “well capitalized” before the Federal Reserve will approve an application by a bank
holding company to acquire a bank or merge with a bank holding company, and the FDIC applies the same requirement in
approving bank merger applications.
Immediately upon becoming undercapitalized, a depository institution becomes subject to the provisions of Section 38 of
the Federal Deposit Insurance Act, or FDIA, which: (i) restrict payment of capital distributions and management fees;
(ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its
capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution’s assets; and (v) require
prior approval of certain expansion proposals. Bank holding companies controlling financial institutions can be called upon
to boost the institutions’ capital and to partially guarantee the institutions’ performance under their capital restoration plans.
The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary
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supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution
at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These
discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions
with affiliates; (iii) requiring divestiture of the institution or the sale of the institution to a willing purchaser; (iv) requiring the
institution to change and improve its management; (iv) prohibiting the acceptance of deposits from correspondent banks;
(v) requiring prior Federal Reserve approval for any capital distribution by a bank holding company controlling the institution;
and (vi) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.
As of December 31, 2019, the Bank had sufficient capital to qualify as “well capitalized” under the requirements contained
in the applicable regulations, policies and directives pertaining to capital adequacy, and it is unaware of any material violation
or alleged material violation of these regulations, policies or directives. Rapid growth, poor loan portfolio performance, or
poor earnings performance, or a combination of these factors, could change the Bank’s capital position in a relatively short
period of time, making additional capital infusions necessary.
It should be noted that the minimum ratios referred to above in this section are merely guidelines, and the bank regulators
possess the discretionary authority to require higher capital ratios.
Bank reserves
The Federal Reserve requires all depository institutions, even if not members of the Federal Reserve System, to maintain
reserves against some transaction accounts. The balances maintained to meet the reserve requirements imposed by the
Federal Reserve may be used to satisfy liquidity requirements. An institution may borrow from the Federal Reserve Bank
“discount window” as a secondary source of funds, provided that the institution meets the Federal Reserve Bank’s credit
standards.
Bank dividends
The FDIC prohibits any distribution that would result in the bank being “undercapitalized” (<4% leverage ratio, <4.5% CET1
Risk-Based ratio, <6% Tier 1 Risk-Based ratio, or <8% Total Risk-Based ratio). Tennessee law places restrictions on the
declaration of dividends by state chartered banks to their shareholders, including, but not limited to, that the board of
directors of a Tennessee-chartered bank may only make a dividend from the surplus profits arising from the business of the
bank, and may not declare dividends in any calendar year that exceeds the total of its retained net income of that year
combined with its retained net income of the preceding two (2) years without the prior approval of the TDFI commissioner.
Furthermore, the FDIC and the TDFI also have authority to prohibit the payment of dividends by a Tennessee bank when it
determines such payment to be an unsafe and unsound banking practice.
Insurance of accounts and other assessments
The Bank pays deposit insurance assessments to the Deposit Insurance Fund, which is determined through a risk-based
assessment system. The Bank’s deposit accounts are currently insured by the Deposit Insurance Fund, generally up to a
maximum of $250,000 per separately insured depositor. The Bank pays assessments to the FDIC for such deposit
insurance. Under the current assessment system, the FDIC assigns an institution to a risk category based on the institution’s
most recent supervisory and capital evaluations, which are designed to measure risk. Under the FDIA, the FDIC may
terminate a bank’s deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, agreement
or condition imposed by the FDIC.
In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds
issued by the Financing Corporation, or FICO, a federal government corporation established to recapitalize the predecessor
to the Savings Association Insurance Fund. FICO assessments are set quarterly and the assessment rate was .520 (annual)
basis points for all four quarters in 2017 and 0.305 (annual) basis points for all four quarters in 2018. The bonds matured in
2019 and the final FICO assessment was on March 29, 2019.
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Restrictions on transactions with affiliates
The Bank is subject to sections 23A and 23B of the Federal Reserve Act, or FRA, and the Federal Reserve’s Regulation W,
as made applicable to state nonmember banks by section 18(j) of the FDIA. An affiliate of a bank is any company or entity
that controls, is controlled by or is under common control with the Bank, and, in our case, includes, among others, the
Company as well as our Executive Chairman, James W. Ayers and the companies he controls. Accordingly, transactions
between the Bank, on the one hand, and the Company or Mr. Ayers or any of his affiliates, on the other hand, will be subject
to a number of restrictions, including restrictions relating to extensions of credit, contracts, leases and purchases or sale of
assets. Such restrictions and limitations prevent the Company or Mr. Ayers or his affiliates from borrowing from the Bank
unless the loans are secured by specified collateral of designated amounts. Furthermore, such secured loans by the Bank
to the Company or Mr. Ayers and his affiliates are limited, individually, to ten percent (10%) of the Bank’s capital and surplus,
and such secured loans are limited in the aggregate to twenty percent (20%) of the Bank’s capital and surplus.
All such transactions must be on terms that are no less favorable to the Bank than those that would be available from
nonaffiliated third parties. Federal Reserve policies also forbid the payment by bank subsidiaries of management fees which
are unreasonable in amount or exceed the fair market value of the services rendered or, if no market exists, actual costs
plus a reasonable profit.
Loans to insiders
Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or
more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank, which the
Bank refers to as “10% Shareholders,” or to any political or campaign committee the funds or services of which will benefit
those executive officers, directors, or 10% Shareholders or which is controlled by those executive officers, directors or 10%
Shareholders, are subject to Sections 22(g) and 22(h) of the FRA and their corresponding regulations, which are commonly
referred to as Regulation O. Among other things, these loans must be made on terms substantially the same as those
prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be
approved in advance by a disinterested majority of the entire board of directors. Regulation O prohibits loans to any of those
individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus
plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable
collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed
the Bank’s unimpaired capital and unimpaired surplus. Section 22(g) identifies limited circumstances in which the Bank is
permitted to extend credit to executive officers.
Community Reinvestment Act
The Community Reinvestment Act, or CRA, and its corresponding regulations are intended to encourage banks to help
meet the credit needs of their service areas, including low and moderate-income neighborhoods, consistent with safe and
sound operations. These regulations provide for regulatory assessment of a bank’s record in meeting the credit needs of its
service area. Federal banking agencies are required to make public a rating of a bank’s performance under the CRA. The
federal banking agencies consider a bank’s CRA rating when a bank submits an application to establish banking centers,
merge, or acquire the assets and assume the liabilities of another bank. In the case of a bank holding company, the CRA
performance record of all banks involved in the merger or acquisition are reviewed in connection with the filing of an
application to acquire ownership or control of shares or assets of a bank or to merge with any other financial holding
company. An unsatisfactory record can substantially delay, block or impose conditions on the transaction. The Bank received
a satisfactory rating on its most recent CRA assessment.
Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or Riegle-Neal Act, provides that adequately
capitalized and managed bank holding companies are permitted to acquire banks in any state. Previously, under the Riegle-
Neal Act, a bank’s ability to branch into a particular state was largely dependent upon whether the state “opted in” to de
novo interstate branching. Many states did not “opt-in,” which resulted in branching restrictions in those states. The Dodd-
Frank Act amended the Riegle-Neal legal framework for interstate branching to permit national banks and state banks to
establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that
30
state. Under current Tennessee law, our bank may open branch offices throughout Tennessee with the prior approval of the
TDFI. All branching remains subject to applicable regulatory approval and adherence to applicable legal requirements.
Anti-money laundering and economic sanctions
The USA PATRIOT Act provides the federal government with additional powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-
money laundering requirements. By way of amendments to the BSA, the USA PATRIOT Act imposed new requirements that
obligate financial institutions, such as banks, to take certain steps to control the risks associated with money laundering and
terrorist financing.
Among other requirements, the USA PATRIOT Act and implementing regulations require banks to establish anti-money
laundering programs that include, at a minimum:
•
internal policies, procedures and controls designed to implement and maintain the bank's compliance with
all of the requirements of the USE PATRIOT Act, the BSA and related laws and regulations;
• systems and procedures for monitoring and reporting of suspicious transactions and activities;
• designated compliance officer;
• employee training;
• an independent audit function to test the anti-money laundering program;
• procedures to verify the identity of each client upon the opening of accounts; and
• heightened due diligence policies, procedures and controls applicable to certain foreign accounts and
relationships.
Additionally, the USA PATRIOT Act requires each financial institution to develop a customer identification program (“CIP”)
as part of the Bank’s anti-money laundering program. The key components of the CIP are identification, verification,
government list comparison, notice and record retention. The purpose of the CIP is to enable the financial institution to
determine the true identity and anticipated account activity of each client. To make this determination, among other things,
the financial institution must collect certain information from clients at the time they enter into the client relationship with the
financial institution. This information must be verified within a reasonable time through documentary and non-documentary
methods. Furthermore, all clients must be screened against any CIP-related government lists of known or suspected
terrorists. Financial institutions are also required to comply with various reporting and recordkeeping requirements. The
Federal Reserve and the FDIC consider an applicant’s effectiveness in combating money laundering, among other factors,
in connection with an application to approve a bank merger or acquisition of control of a bank or bank holding company.
Likewise, the U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC, is responsible for helping to
ensure that United States entities do not engage in transactions with the subjects of U.S. sanctions, as defined by various
Executive Orders and Acts of Congress. Currently, OFAC administers and enforces comprehensive U.S. economic
sanctions programs against certain specified countries/regions. In addition to the country/region-wide sanctions programs,
OFAC also administers complete embargoes against individuals and entities identified on OFAC’s list of Specially
Designated Nationals and Blocked Persons (“SDN List”). The SDN List includes over 7000 parties that are located in many
jurisdictions throughout the world, including in the United States and Europe. The Bank is responsible for determining
whether any potential and/or existing clients appear on the SDN List or are owned or controlled by a person on the SDN
List. If any client appears on the SDN List or is owned or controlled by a person or entity on the SDN List, such client’s
account must be placed on hold and a blocking or rejection report, as appropriate and if required, must be filed within 10
business days with OFAC. In addition, if a client is a citizen of, has provided an address in, or is organized under the laws
of any country or region for which OFAC maintains a comprehensive sanctions program, the Bank must take certain actions
with respect to such clients as dictated under the relevant OFAC sanctions program. The Bank must maintain compliance
with OFAC by implementing appropriate policies and procedures and by establishing a recordkeeping system that is
reasonably appropriate to administer the Bank’s compliance program. The Bank has adopted policies, procedures and
controls to comply with the BSA, the USA PATRIOT Act and OFAC regulations.
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Regulatory enforcement authority
Federal and state banking laws grant substantial enforcement powers to federal and state banking regulators. This
enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to initiate injunctive actions against banking organizations and “institution-affiliated parties,” such as
management, employees and agents. In general, these enforcement actions may be initiated for violations of laws,
regulations and orders of regulatory authorities, or unsafe or unsound practices. Other actions or inactions, including filing
false, misleading or untimely reports with regulatory authorities, may provide the basis for enforcement action. When issued
by a banking regulator, cease-and-desist and similar orders may, among other things, require affirmative action to correct
any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against
loss. A bank may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions determined to be appropriate by the ordering regulatory agency.
Federal Home Loan Bank system
The Bank is a member of the Federal Home Loan Bank of Cincinnati, which is one of 11 regional Federal Home Loan Banks
(“FHLBs”). Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily
from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB system. It
makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors
of the FHLB.
As a member of the FHLB of Cincinnati, the Bank is required to own capital stock in the FHLB in an amount generally at
least equal to 0.20% (or 20 basis points) of the Bank’s total assets at the end of each calendar year, plus 4.5% of its
outstanding advances (borrowings) from the FHLB of Cincinnati under the activity-based stock ownership requirement.
These requirements are subject to adjustment from time to time. On December 31, 2019, the Bank was in compliance with
this requirement.
Privacy and data security
Under the GLBA, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to
disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies
to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to
nonaffiliated third parties. The GLBA also directed federal regulators, including the FDIC, to prescribe standards for the
security of consumer information. The Bank is subject to such standards, as well as standards for notifying clients in the
event of a security breach.
Consumer laws and regulations
The Bank is also subject to other federal and state consumer laws and regulations that are designed to protect consumers
in transactions with banks. While the list set forth below is not exhaustive, these laws and regulations include the Truth in
Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Check
Clearing for the 21st Century Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Equal Credit
Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair and Accurate Transactions Act, the
Servicemembers Civil Relief Act, the Military Lending Act, the Mortgage Disclosure Improvement Act, and the Real Estate
Settlement Procedures Act, among others. These laws and regulations mandate certain disclosure requirements and
regulate the manner in which financial institutions must deal with consumers when offering consumer financial products and
services.
Rulemaking authority for these and other consumer financial protection laws transferred from the prudential regulators to
the CFPB on July 21, 2011. In some cases, regulators such as the Federal Trade Commission and the U.S. Department of
Justice also retain certain rulemaking or enforcement authority. The CFPB also has broad authority to prohibit unfair,
deceptive and abusive acts and practices (“UDAAP”), and to investigate and penalize financial institutions that violate this
prohibition. While the statutory language of the Dodd-Frank Act sets forth the standards for acts and practices that violate
the prohibition on UDAAP, certain aspects of these standards are untested, and thus it is currently not possible to predict
how the CFPB will exercise this authority. In addition, consumer compliance examination authority remains with the
prudential regulators for smaller depository institutions ($10 billion or less in total assets).
32
The Dodd-Frank Act also authorized the CFPB to establish certain minimum standards for the origination of residential
mortgages, including a determination of the borrower’s ability to repay. Under the Dodd-Frank Act, financial institutions may
not make a residential mortgage loan unless they make a “reasonable and good faith determination” that the consumer has
a “reasonable ability” to repay the loan. The act allows borrowers to raise certain defenses to foreclosure but provides a full
or partial safe harbor from such defenses for loans that are “qualified mortgages.” On January 10, 2013, the CFPB published
final rules to, among other things, specify the types of income and assets that may be considered in the ability-to-repay
determination, the permissible sources for verification, and the required methods of calculating the loan’s monthly payments.
Since then the CFPB made certain modifications to these rules. The rules extend the requirement that creditors verify and
document a borrower’s “income and assets” to include all “information” that creditors rely on in determining repayment
ability. The rules also provide further examples of third-party documents that may be relied on for such verification, such as
government records and check-cashing or funds-transfer service receipts. The new rules were effective beginning on
January 10, 2014. The rules also define “qualified mortgages,” imposing both underwriting standards—for example, a
borrower’s debt-to-income ratio may not exceed 43%—and limits on the terms of their loans. Points and fees are subject to
a relatively stringent cap, and the terms include a wide array of payments that may be made in the course of closing a loan.
Certain loans, including interest-only loans and negative amortization loans, cannot be qualified mortgages.
Other Dodd-Frank Act reforms
Volcker Rule
The Volcker Rule generally prohibits a “banking entity” (which includes any insured depository institution, such as the Bank,
or any affiliate or subsidiary of such depository institution, such as the Company) from (i) engaging in proprietary trading
and (ii) acquiring or retaining any ownership interest in, sponsoring, or engaging in certain transactions with, a “covered
fund”. Both the proprietary trading and covered fund-related prohibitions are subject to a number of exemptions and
exclusions. The final regulations contain exemptions for, among others, market making, risk-mitigating hedging,
underwriting, and trading in U.S. government and agency obligations and also permit certain ownership interests in certain
types of funds to be retained. They also permit the offering and sponsoring of funds under certain conditions. In addition,
the final regulations impose significant compliance and reporting obligations on banking entities.
Executive compensation and corporate governance
The Dodd-Frank Act requires public companies to include, at least once every three years, a separate non-binding “say on
pay” vote in their proxy statement by which shareholders may vote on the compensation of the public company’s named
executive officers. In addition, if such public companies are involved in a merger, acquisition, or consolidation, or if they
propose to sell or dispose of all or substantially all of their assets, shareholders have a right to an advisory vote on any
golden parachute arrangements in connection with such transaction (frequently referred to as “say-on-golden parachute”
vote). Once the Company no longer qualifies as an emerging growth company, we will be subject to the say-on-pay and
say-on-golden-parachute requirements. Other provisions of the act may impact our corporate governance. For instance, the
act requires the SEC to adopt rules prohibiting the listing of any equity security of a company that does not have an
independent compensation committee; and requiring all exchange-traded companies to adopt clawback policies for
incentive compensation paid to executive officers in the event of accounting restatements based on material non-compliance
with financial reporting requirements.
Future legislative developments
Various legislative acts are from time to time introduced in Congress and the Tennessee legislature. This legislation may
change banking statutes and the environment in which we operate in substantial and unpredictable ways. We cannot
determine the ultimate effect that potential legislation, if enacted, or implementing regulations and interpretations with
respect thereto, would have our financial condition or results of operations.
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Available Information
Our website address is www.firstbankonline.com. We file or furnish to the SEC Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and annual reports to shareholders, and from time
to time, amendments to these documents and other documents called for by the SEC. The reports and other documents
filed with or furnished to the SEC are available to investors on or through our website at https://investors.firstbankonline.com
under the heading “Stock & Filings” and then under “SEC Filings.” These reports are available on our website free of charge
as soon as reasonably practicable after we electronically file them with the SEC.
In addition to our website, the SEC maintains an internet site that contains our reports, proxy and information statements
and other information we file electronically with the SEC at https://www.sec.gov.
ITEM 1A - Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including, but not limited to, the material
risks described below. Many of these risks are beyond our control although efforts are made to manage those risks while
simultaneously optimizing operational and financial results. The occurrence of any of the following risks, as well as risks of
which we are currently unaware or currently deem immaterial, could materially and adversely affect our assets, business,
cash flows, condition (financial or otherwise), liquidity, prospects, results of operations and the trading price of our common
stock. It is impossible to predict or identify all such factors and, as a result, you should not consider the following factors to
be a complete discussion of the risks, uncertainties and assumptions that could materially and adversely affect our assets,
business, cash flows, condition (financial or otherwise), liquidity, prospects, results of operations and the trading price of our
common stock.
In addition, certain statements in the following risk factors constitute forward-looking statements. Please refer to the section
entitled “Cautionary note regarding forward-looking statements” beginning on page 2 of this Annual Report.
Risks related to our business
Difficult or volatile conditions in the national financial markets, the U.S. economy generally, or the state of
Tennessee in particular may adversely affect our lending activity or other businesses, as well as our financial
condition.
Our business and financial performance are vulnerable to weak economic conditions in the financial markets and economic
conditions generally or specifically in the state of Tennessee, the principal market in which we conduct business. A
deterioration in economic conditions in our primary market areas could result in the following consequences, any of which
could materially and adversely affect our business: increased loan delinquencies; problem assets and foreclosures;
significant write-downs of asset values; lower demand for our products and services; reduced low cost or noninterest-
bearing deposits; intangible asset impairment; and collateral for loans made by us, especially real estate, may decline in
value, in turn reducing our customers' ability to repay outstanding loans, and reducing the value of assets and collateral
associated with our existing loans. Additional issues surrounding weakening economic conditions and volatile markets that
could adversely impact us include:
•
Increased regulation of our industry, and resulting increased costs associated with regulatory compliance
and potential limits on our ability to pursue business opportunities;
• Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches
we use to select, manage, and underwrite our customers become less predictive of future performance;
• The process we use to estimate losses inherent in our loan portfolio requires difficult, subjective, and
complex judgments, including forecasts of economic conditions and how these economic predictions might
impair the ability of our borrowers to repay their loans, and process may no longer be capable of accurate
estimation and may, in turn, impact its reliability;
• Downward pressure on our stock price.
Additionally, we conduct our banking operations primarily in Tennessee. As of December 31, 2019, approximately 76% of
our loans and approximately 83% of our deposits were made to borrowers or received from depositors who live and/or
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primarily conduct business in Tennessee. Therefore, our success will depend in large part upon the general economic
conditions in this area. This geographic concentration imposes risks from lack of geographic diversification, as adverse
economic developments in Tennessee (including the Nashville MSA, our largest market), among other things, could affect
the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans,
reduce the value of our loans and loan servicing portfolio, reduce the value of the collateral securing our loans and reduce
the amount of our deposits.
Any regional or local economic downturn that affects Tennessee or existing or prospective borrowers, depositors or property
values in this area may affect us and our profitability more significantly and more adversely than our competitors whose
operations are less geographically concentrated.
We face strong competition from financial services companies and other companies that offer banking services.
We conduct our banking operations primarily in Tennessee, with our largest market being the Nashville MSA, which is a
highly competitive banking market. Many of our competitors offer the same, or a wider variety of, banking services within
our market areas, and we compete with them for the same customers. These competitors include banks with nationwide
operations, regional banks and community banks. In many instances these national and regional banks have greater
resources than we do, and the smaller community banks may have stronger ties in local markets than we do, which may
put us at a competitive disadvantage. We also face competition from many other types of financial institutions, including
thrift institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other
internet-based companies offering financial services which enjoy fewer regulatory constraints and some may have lower
cost structures. In addition, a number of out-of-state financial institutions have opened offices and solicit deposits in our
market areas. Increased competition in our markets may result in reduced loans and deposits, as well as reduced net
interest margin and profitability. If we are unable to attract and retain banking customers, we may be unable to continue to
grow our loan and deposit portfolios, and our business, financial condition or results of operations may be adversely affected.
Further, a number of larger banks have recently entered the Nashville MSA, and we believe this trend will continue as banks
look to gain a foothold in this growing market. This trend will likely result in greater competition in, and may impair our ability
to grow our share of our largest market.
If we do not effectively manage our asset quality and credit risk, we could experience loan losses.
Making any loan involves various risks, including risks inherent in dealing with individual borrowers, risks of nonpayment,
risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt, and risks
resulting from changes in economic and market conditions. Our credit risk approval and monitoring procedures may fail to
identify or reduce these credit risks, and they cannot completely eliminate all credit risks related to our loan portfolio. If the
overall economic climate, including employment rates, real estate markets, interest rates and general economic growth, in
the United States, generally, or Tennessee (particularly the Nashville MSA), specifically, experiences material disruption,
our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become
illiquid, and the levels of nonperforming loans, charge-offs and delinquencies could rise and require additional provisions
for loan losses, which would cause our net income and return on equity to decrease.
If our allowance for loan losses (including the fair value adjustments with respect to loans acquired in acquisitions)
is not enough to cover losses inherent in our loan portfolio, our results of operations and financial condition could
be negatively affected.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to
expense, which represents management’s best estimate of inherent losses that have been incurred in our existing loan
portfolio. The level of the allowance reflects management’s continuing evaluation of factors including the volume and types
of loans; industry concentrations; specific credit risks; internal loan classifications; trends in classifications; volume and
trends in delinquencies, non-accruals and charge-offs; present economic, political and regulatory conditions; industry and
peer bank loan quality indications; and unidentified losses inherent in the current loan portfolio. The determination of the
appropriate level of the allowance for loan losses inherently involves subjectivity in our modeling and requires us to make
estimates of current credit risks and future trends, all of which may undergo material changes or vary from our historical
experience. Deterioration in economic conditions affecting borrowers, new information regarding existing loans,
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identification of additional problem loans and other factors, both within and outside of our control, may require an increase
in the allowance for loan losses.
The application of the purchase method of accounting in our acquisitions (and any future acquisitions) also will affect our
allowance for loan losses. Under the purchase method of accounting, all acquired loans were recorded in our consolidated
financial statements at their estimated fair value at the time of acquisition and any related allowance for loan loss was
eliminated because credit quality, among other factors, was considered in the determination of fair value. To the extent that
our estimates of fair value are too high, we will incur losses associated with the acquired loans. The allowance associated
with our purchased credit impaired loans reflects deterioration in cash flows after they were acquired resulting from our
quarterly re-estimation of cash flows, which involves complex cash flow projections and significant judgment on timing of
loan resolution.
In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the
provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of
management. Furthermore, if charge-offs in future periods exceed the allowance for loan losses, we will need additional
provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease
in net income and, possibly, capital, and may have a material adverse effect on our business, financial condition and results
of operations.
We implemented CECL on January 1, 2020, which will result in an increase to the allowance for credit losses. In future
periods, CECL may result in increased reserves during or in advance of an economic downturn. Because CECL recognizes
the expected losses over the life of the loan at the time the loan is made, it is possible that CECL implementation may
increase the cost of lending in the industry and result in slower loan growth and lower levels of net income and capital. The
adoption of the CECL model may materially affect how we determine our allowance for credit losses and could require us
to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance
for credit losses. If we are required to materially increase our level of allowance for credit losses for any reason, such
increase could adversely affect our business, financial condition and results of operations.
See the section captioned “Allowance for Loan Losses” in Part II, Item 7 of this Report “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” for further discussion related to our process for determining the
appropriate level of the allowance for loan losses.
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the
economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans
and result in loan and other losses.
As of December 31, 2019, approximately 72% of our loan portfolio was comprised of loans with real estate as a primary or
secondary component of collateral. This includes collateral consisting of income producing and residential construction
properties, which properties tend to be more sensitive to general economic conditions and downturns in real estate markets.
As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated
with our real estate loan portfolio. Adverse changes affecting real estate values and the liquidity of real estate in one or more
of our markets could increase the credit risk associated with our loan portfolio and could result in losses that would adversely
affect credit quality and our financial condition or results of operations. These adverse changes could significantly impair
the value of property pledged as collateral to secure the loans and affect our ability to sell the collateral upon foreclosure
without a loss or additional losses. If real estate values decline, it is also more likely that we would be required to increase
our allowance for loan losses. Thus, declines in the value of real estate collateral could adversely affect our financial
condition, results of operations or cash flows.
We are exposed to higher credit risk from commercial real estate, commercial and industrial, and construction
based lending.
Commercial real estate, commercial and industrial, and construction based lending usually involves higher credit risks than
1-4 family residential real estate lending. As of December 31, 2019, the following loan types accounted for the stated
percentages of our loan portfolio: commercial real estate (both owner-occupied and non-owner occupied) - 35%; commercial
36
and industrial - 23%; and construction - 13%. These loans expose us to greater credit risk than loans secured by other types
of collateral because the collateral securing these loans is typically more difficult to liquidate. Additionally, these types of
loans also often involve larger loan balances to a single borrower or groups of related borrowers. These higher credit risks
are further heightened when the loans are concentrated in a small number of larger borrowers leading to relationship
exposure.
Non-owner occupied commercial real estate loans may be affected to a greater extent than residential loans by adverse
conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans
depends on successful development of their properties. These loans also involve greater risk because they generally are
not fully amortizing over the loan period, and therefore have a balloon payment due at maturity. A borrower’s ability to make
a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely
manner. In addition, banking regulators have been giving commercial real estate lending greater scrutiny, and may require
banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk
management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels
as a result of commercial real estate lending growth and exposures.
Commercial and industrial loans and owner-occupied commercial real estate loans are typically based on the borrowers’
ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability
of funds to repay each loan depends substantially on the success of the business itself. In addition, the assets securing the
loans depreciate over time, are difficult to appraise and liquidate, and fluctuate in value based on the success of the
business.
Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion
of construction or development equals or exceeds the cost of the property construction or development (including interest),
the availability of permanent take-out financing and the builder’s ability to sell the property. During the construction or
development phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if
actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full
repayment when completed through a permanent loan or by foreclosure on collateral.
Commercial real estate loans, commercial and industrial loans, and construction loans are more susceptible to a risk of loss
during a downturn in the business cycle due to the vulnerability of these sectors during a downturn. Our underwriting, review
and monitoring cannot eliminate all of the risks related to these loans.
We also make both secured and unsecured loans to our commercial customers. Unsecured loans generally involve a higher
degree of risk of loss than secured loans because, without collateral, repayment is wholly dependent upon the success of
the borrowers’ businesses. Because of this lack of collateral, we are limited in our ability to collect on defaulted unsecured
loans. Further, the collateral that secures our secured commercial and industrial loans typically includes inventory, accounts
receivable and equipment, which usually have a value that is insufficient to satisfy the loan without a loss if the business
does not succeed.
Our loan concentration in these sectors and their higher credit risk could lead to increased losses on these loans, which
could have a material adverse effect on our financial condition, results of operations or cash flows.
We are exposed to higher credit risk due to relationship exposure with a number of large borrowers.
As of December 31, 2019, we had 36 borrowing relationships in excess of $10 million but less than $15 million and 37
relationships greater than $15 million which accounted for approximately 10% and 19% of our loan portfolio, respectively.
While we are not overly dependent on any one of these relationships and while these credit relationships have not had a
significant impact on the allowance for loan losses in the past, a deterioration of any of these large credits could require us
to increase our allowance for loan losses or result in significant losses to us, which could have a material adverse effect on
our financial condition, results of operations or cash flows.
Our deposit portfolio includes significant concentrations and a large percentage of our deposits are attributable to
a relatively small number of clients.
As a commercial bank, we provide services to a number of clients whose deposit levels may vary considerably and have
seasonality based on their nature. At December 31, 2019, seven commercial and individual clients, maintained balances
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(aggregating all related accounts, including multiple business entities and personal funds of business owners) in excess of
$25.0 million, which amounted to $351.4 million in total deposits at December 31, 2019. These clients are not concentrated
in any particular industry or business but include certain related parties of the Company. In addition, mortgage escrow
deposits that our third-party servicing provider, Cenlar, transfer to the Bank totaled $92.6 million at December 31, 2019.
Further, our deposits from municipal and governmental entities (i.e., “public deposits”) totaled $463.1 million at
December 31, 2019. Of these public deposits, one public entity maintained balances in excess of $25.0 million at
December 31, 2019 totaling $63.1 million. These deposits can and do fluctuate substantially. The loss of any combination
of these depositors, or a significant decline in the deposit balances due to unexpected fluctuations related to these
customers’ businesses, would adversely affect our liquidity and may require us to raise deposit rates to quickly attract new
customer deposits, purchase brokered deposits, purchase federal funds or borrow funds on a short-term basis to replace
such deposits. Depending on the interest rate environment and competitive factors, lower cost deposits may need to be
replaced with higher cost funding, resulting in a decrease in net interest income and net income. While these events could
have a material impact on the Bank’s results, the Bank expects, in the ordinary course of business, that these deposits will
fluctuate and believes it is capable of mitigating this risk, as well as the risk of losing one of these depositors, through
additional liquidity, and business generation in the future. However, should a significant number of these customers leave
the Bank, it could have a material adverse impact on the Bank.
We make loans to small-to-medium sized businesses that may not have the resources to weather a downturn in
the economy.
We make loans to privately-owned businesses, many of which are considered to be small to medium-sized businesses.
Small to medium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to
economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility
in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the
success of a small to medium-sized business often depends on the management talents and efforts of one or two persons
or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material
adverse impact on the business and its ability to repay a loan. Economic downturns, a sustained decline in commodity
prices and other events that negatively impact small businesses in our market areas could cause us to incur substantial
credit losses that could negatively affect our results of operations or financial condition.
We may be materially and adversely affected by the creditworthiness and liquidity of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have
exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the
financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional
customers. Many of these transactions expose us to credit risk in the event of a default by, or questions or concerns about
the creditworthiness of, a counterparty or client, or concerns about the financial services industry generally. In addition, our
credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient
to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse
effect on us.
A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition or results
of operations.
We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and
investment securities to ensure that we have adequate liquidity to fund our operations. In addition to our traditional funding
sources, we also may borrow funds from third-party lenders or issue equity or debt securities to investors. Our access to
funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be
impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the
financial markets or negative views and expectations about the prospects for the financial services industry. Any decline in
available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends
to our shareholders, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any
of which could have a material adverse impact on our liquidity, business, financial condition or results of operations.
38
We may not be able to meet our unfunded credit commitments, or adequately reserve for losses associated with
our unfunded credit commitments.
A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition
established under the agreement. The actual borrowing needs of our customers under these credit commitments have
historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire
without being drawn upon. Because of the credit profile of our customers, we typically have a substantial amount of total
unfunded credit commitments, which is not reflected on our balance sheet. Actual borrowing needs of our customers may
exceed our expected funding requirements, especially during a challenging economic environment when our client
companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing
costs of credit, or the limited availability of financings from other sources. Any failure to meet our unfunded credit
commitments in accordance with the actual borrowing needs of our customers may have a material adverse effect on our
business, financial condition, results of operations or reputation.
Changes in interest rates could have an adverse impact on our results of operations and financial condition.
Our earnings and financial condition are dependent to a large degree upon net interest income, which is the difference, or
spread, between interest earned on loans, securities and other interest-earning assets and interest paid on deposits,
borrowings and other interest-bearing liabilities. When market rates of interest change, the interest we receive on our assets
and the interest we pay on our liabilities may fluctuate. This may cause decreases in our spread and may adversely affect
our earnings and financial condition.
Interest rates are highly sensitive to many factors including, without limitation:
• The rate of inflation;
• Economic conditions;
• Federal monetary policies; and
• Stability of domestic and foreign markets
Although we have implemented procedures we believe will reduce the potential effects of changes in interest rates on our
net interest income, these procedures may not always be successful. Accordingly, changes in levels of market interest rates
could materially and adversely affect our net interest income and our net interest margin, asset quality, loan and lease
origination volume, liquidity or overall profitability. Additionally, changes in interest rates can adversely impact the origination
of mortgage loans held for sale and resulting mortgage banking revenues.
A transition away from LIBOR as a reference rate for financial contracts could negatively affect our income and
expenses and the value of various financial contracts.
LIBOR is used extensively in the United States and globally as a benchmark for various commercial and financial contracts,
including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on
interest rate information reported by certain banks, which may stop reporting such information after 2021. It is uncertain at
this time whether LIBOR will change or cease to exist or the extent to which those entering into financial contracts will
transition to any other particular benchmark. Other benchmarks may perform differently than LIBOR or alternative
benchmarks have performed in the past or have other consequences that cannot currently be anticipated. It is also uncertain
what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding if
LIBOR ceases to exist.
We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that
are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and
additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates
will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and
pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this
transition process with our customers could adversely impact our reputation. Although we are currently unable to assess
what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a
material adverse effect on our business, financial condition and results of operations.
39
If we are unable to grow our noninterest income, our growth prospects will be impaired.
Taking advantage of opportunities to develop new, and expand existing, streams of noninterest income, including our
mortgage business, cash management services, investment services and interchange fees, is a part of our long-term growth
strategy. If we are unsuccessful in our attempts to grow our noninterest income, especially in light of the expected continued
competitive pressure on mortgage revenues from the interest rate environment, our long-term growth will be impaired.
Further, focusing on these noninterest income streams may divert management’s attention and resources away from our
core banking business, which could impair our core business, financial condition and operating results. We also derive a
meaningful amount of our noninterest income from non-sufficient funds and overdraft fees, and such fees are subject to
increased regulatory scrutiny, which could result in an erosion of such fees, and as a result, materially impair our future
noninterest income. Additionally, interchange revenues from electronic transfers will be limited after exceeding $10 billion in
total assets under the Durbin Amendment.
Our recent results may not be indicative of our future results.
We may not be able to grow our business at the same rate of growth achieved in recent years or even grow our business
at all. In the future, we may not have the benefit of several factors that have been favorable to the growth of our business
in past years, such as an interest rate environment where changes in rates occur at a relatively orderly and modest pace
and the ability to find suitable expansion opportunities and acquisition targets. Numerous factors, such as weakening or
impede or
deteriorating economic conditions, regulatory and
restrict our ability to expand our market presence and build our franchise. Even if we are able to grow our business, we
may fail to build the infrastructure sufficient to support such growth, suffer loan losses in excess of reserves for such losses
or experience other risks associated with growth.
legislative considerations, and competition may
Our future success is largely dependent upon our ability to successfully execute our business strategy.
Our future success, including our ability to achieve our growth and profitability goals, is dependent on the ability of our
management team to execute on our long-term business strategy, which requires them to, among other things:
• maintain and enhance our reputation;
• attract and retain experienced and talented bankers in each of our markets;
• maintain adequate funding sources, including by continuing to attract stable, ow-cost deposits;
• enhance our market penetration in our metropolitan markets and maintain our leadership position in our
•
•
•
community markets;
improve our operating efficiency;
implement new technologies to enhance the client experience and keep pace with our competitors;
identify attractive acquisition targets, close on such acquisitions on favorable terms and successfully
integrate acquired businesses;
• attract and maintain business banking relationships with well-qualified businesses, real estate developers
and investors with proven track records in our market areas;
• attract sufficient loans that meet prudent credit standards;
• originate conforming residential mortgage loans for resale into secondary markets to provide mortgage
banking income;
• maintain adequate liquidity and regulatory capital and comply with applicable federal and state banking
laws and regulations;
• manage our credit, interest rate and liquidity risk;
• develop new, and grow our existing streams of noninterest income;
• oversee the performance of third-party vendors that provide material services to our business; and
• control expenses in line with their current projections.
Failure of management to execute our business strategy could negatively impact our business, growth prospects, financial
condition or results of operations. Further, if we do not manage our growth effectively, our business, financial condition,
results of operations and future prospects could be negatively affected, and we may not be able to continue to implement
our business strategy and successfully conduct our operations.
40
We may not be able to complete future financial institution acquisitions.
From time to time, we evaluate and engage in the acquisition of other banking organizations. We must satisfy a number of
meaningful conditions before we can complete an acquisition of another bank or bank holding company, including federal
and state bank regulatory approvals. The process for obtaining required regulatory approvals can be time-consuming and
unpredictable and is subject to numerous regulatory and policy factors, a number of which are beyond our control. We may
fail to pursue or to complete strategic and competitively significant acquisition opportunities as a result of the perceived
difficulty or impossibility of obtaining required regulatory approvals in a timely manner or at all.
Our strategy of pursuing acquisitions exposes us to financial, execution, compliance and operational risks that
could have a material adverse effect on our business, financial condition, results of operations and growth
prospects.
We intend to continue pursuing a strategy that includes acquisitions. An acquisition strategy involves significant risks,
including the following:
finding suitable candidates for acquisition;
retaining customers and key personnel, including bankers;
•
• attracting funding to support additional growth within acceptable risk tolerances;
• maintaining asset quality;
•
• obtaining necessary regulatory approvals, which we may have difficulty obtaining or be unable to obtain;
• conducting adequate due diligence and managing known and unknown risks and uncertainties;
•
integrating acquired businesses; and
• maintaining adequate regulatory capital
The market for acquisition targets is highly competitive, which may adversely affect our ability to find acquisition candidates
that fit our strategy and standards. We face significant competition in pursuing acquisition targets from other banks and
financial institutions, many of which possess greater financial, human, technical and other resources than we do. Our ability
to compete in acquiring target institutions will depend on our available financial resources to fund the acquisitions, including
the amount of cash and cash equivalents we have and the liquidity and market price of our common stock. In addition,
increased competition may also drive up the acquisition consideration that we will be required to pay in order to successfully
capitalize on attractive acquisition opportunities. To the extent that we are unable to find suitable acquisition targets, an
important component of our growth strategy may not be realized.
Acquisitions of financial institutions also involve operational risks and uncertainties, such as unknown or contingent liabilities
with no available manner of recourse, exposure to unexpected problems such as asset quality, the retention of key
employees and customers, and other issues that could negatively affect our business. We may not be able to complete
future acquisitions or, if completed, we may not be able to successfully integrate the operations, technology platforms,
management, products and services of the entities that we acquire or to realize our attempts to eliminate redundancies. The
integration process may also require significant time and attention from our management that would otherwise be directed
toward servicing existing business and developing new business. Failure to successfully integrate the entities we acquire
into our existing operations in a timely manner may increase our operating costs significantly and adversely affect our
business, financial condition and results of operations. Further, acquisitions typically involve the payment of a premium over
book and market values and, therefore, some dilution of our tangible book value and net income per common share may
occur in connection with any future acquisition, and the carrying amount of any goodwill that we currently maintain or may
acquire may be subject to impairment in future periods.
If we continue to grow, we will face risks arising from our increased size. If we do not manage such growth effectively, we
may be unable to realize the benefit from the investments in technology, infrastructure and personnel that we have made to
support our expansion. In addition, we may incur higher costs and realize less revenue growth than we expect, which would
reduce our earnings and diminish our future prospects, and we may not be able to continue to implement our business
strategy and successfully conduct our operations. Risks associated with failing to maintain effective financial and operational
controls as we grow, such as maintaining appropriate loan underwriting procedures, information technology systems,
determining adequate allowances for loan losses and complying with regulatory accounting requirements, including
increased loan losses, reduced earnings and potential regulatory penalties and restrictions on growth, all could have a
negative effect on our business, financial condition and results of operations.
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Acquisitions may disrupt our business and dilute stockholder value, and integrating acquired companies may be
more difficult, costly, or time-consuming than we expect.
Our pursuit of acquisitions may disrupt our business, and any equity that we issue as merger consideration may have the
effect of diluting the value of your investment. In addition, we may fail to realize some or all of the anticipated benefits of
completed acquisitions. We anticipate that the integration of businesses that we may acquire in the future will be a time-
consuming and expensive process, even if the integration process is effectively planned and implemented.
In addition, our acquisition activities could be material to our business and involve a number of significant risks, including
the following:
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incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating
potential transactions, resulting in our attention being diverted from the operating of our existing business;
• using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with
respect to the target company or the assets and liabilities that we seek to acquire;
• exposure to potential asset quality issues of the target company;
• changes to interest rates and/or economic conditions generally may cause significant changes in the fair value of
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the assets and liabilities that we acquire;
intense competition from other banking organizations and other potential acquirers, many of which have
substantially greater resources than we do;
• potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including, without
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limitation, liabilities for regulatory and compliance issues;
inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, an
other projected benefits of the acquisition;
incurring time and expense required to integrate the operations and personnel of the combined businesses;
inconsistencies in standards, procedures, and policies that would adversely affect our ability to maintain
relationships with customers and employees;
losing key employees and customers;
• experiencing higher operating expenses relative to operating income from the new operations;
• creating an adverse short-term effect on our results of operations;
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• significant problems related to the conversion of the financial and customer data of the entity;
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• potential changes in banking or tax laws or regulations that may affect the target company; or
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integration of acquired customers into our financial and customer product systems;
risks of impairment to goodwill.
If difficulties arise with respect to the integration process, the economic benefits expected to result from acquisitions might
not occur. As with any merger of financial institutions, there also may be business disruptions that cause us to lose customers
or cause customers to move their business to other financial institutions. Failure to successfully integrate businesses that
we acquire could have an adverse effect on our profitability, return on equity, return on assets, or our ability to implement
our strategy, any of which in turn could have a material adverse effect on our business, financial condition, and results of
operations.
The value of our Mortgage servicing rights asset is subjective by nature and may be vulnerable to inaccuracies or
other events outside our control.
The value of our mortgage servicing rights asset can fluctuate. Particularly, the asset could decrease in value if prepay
speeds, delinquency rates, or the cost to service increases or overall values decrease causing a lack of liquidity of MSRs
in the market. Similarly, the value may decrease if interest rates decrease or change in a non-parallel manner or are
otherwise volatile. All of which are mostly out of FirstBank’s control. We must use estimates, assumptions and judgments
when valuing this asset. An inaccurate valuation, or changes to the valuation due to factors outside of our control, could
negatively impact our ability to realize the full value of this asset. As a result, our balance sheet may not precisely represent
the fair market value of this and other financial assets.
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We are dependent on U.S. government-sponsored entities and government agencies, and any changes in these
entities, their current roles or the leadership at such entities or their regulators could materially and adversely
affect our business, financial condition, liquidity and results of operations.
Our ability to generate revenues through mortgage loan sales depends on programs administered by GSEs, such as Fannie
Mae and Freddie Mac, government agencies, including Ginnie Mae, and others that facilitate the issuance of
mortgage-backed securities (“MBS”), in the secondary market. Presently, almost all of the newly originated loans that we
originate directly with borrowers qualify under existing standards for inclusion in MBS issued by Fannie Mae or Freddie Mac
or guaranteed by Ginnie Mae. A number of legislative proposals have been introduced in recent years that would wind down
or phase out the GSEs, including a proposal by the current White House administration to end the conservatorship and
privatize Fannie Mae and Freddie Mac. It is not possible to predict the scope and nature of the actions that the U.S.
government, will ultimately take with respect to the GSEs. Any changes in laws and regulations affecting the relationship
between Fannie Mae and Freddie Mac and their regulators or the U.S. federal government, and any changes in leadership
at these entities, could adversely affect our business and prospects. Any discontinuation of, or significant reduction in, the
operation of Fannie Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition,
activity levels in the primary or secondary mortgage markets or in underwriting criteria could materially and adversely affect
our business, financial condition, liquidity and results of operations.
Elimination of the traditional roles of Fannie Mae and Freddie Mac, or any changes to the nature or extent of the guarantees
provided by Fannie Mae and Freddie Mac or the fees, terms and guidelines that govern our selling and servicing
relationships with them, could also materially and adversely affect our ability to sell and securitize loans through our loan
production segment, and the performance, liquidity and market value of our investments. Moreover, any changes to the
nature of the GSEs or their guarantee obligations could redefine what constitutes an Agency MBS and could have broad
adverse implications for the market and our business, financial condition, liquidity and results of operations.
We follow a relationship-based operating model, and our ability to maintain our reputation is critical to the success
of our business.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive
to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining
bankers and other associates who share our core values of being an integral part of the communities we serve, delivering
superior service to our customers and caring about our customers and associates. Further, maintaining our reputation also
depends on our ability to protect our brand and associated intellectual property. If our reputation is negatively affected by
the actions of our associates or otherwise, our business and, therefore, our operating results may be materially and
adversely affected.
We depend on our executive officers and other key individuals to continue the implementation of our long-term
business strategy and could be harmed by the loss of their services and our inability to make up for such loss with
qualified replacements.
We believe that our continued growth and future success will depend in large part on the skills of our senior management
team and our ability to motivate and retain these individuals and other key individuals. The loss of any member of our senior
management team could reduce our ability to successfully implement our long-term business strategy, our business could
suffer and the value of our common stock could be materially and adversely affected.
The success of our operating model is largely dependent on our ability to attract and retain talented bankers in
each of our markets.
We strive to attract and retain talented bankers in each of our markets by fostering an entrepreneurial environment,
empowering them with local decision making authority and providing them with sufficient infrastructure and resources to
support their growth while also providing management with appropriate oversight. However, the competition for bankers in
each of our markets is intense. We compete for talent with both smaller banks that may be able to offer bankers more
responsibility, autonomy and local relationships and larger banks that may be able to offer bankers higher compensation,
resources and support. As a result, we may not be able to effectively compete for talent across our markets. Further, our
bankers may leave us to work for our competitors and, in some instances, may take important banking relationships with
them. If we are unable to attract and retain talented bankers in our markets, our business, growth prospects or financial
results could be materially and adversely affected.
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We may fail to realize all of the anticipated benefits from previously acquired financial institutions or institutions
that we may acquire in the future, or those benefits may take longer to realize than expected. We may also
encounter significant difficulties in integrating financial institutions that we acquire.
Our ability to realize the anticipated benefits of any acquisition of other financial institutions, bank branches and/or mortgage
operations in target markets will depend, to a large extent, on our ability to successfully integrate the acquired businesses.
Such an acquisition strategy will involve significant risks, including the following:
finding suitable markets for expansion;
finding suitable candidates for acquisition;
finding suitable financing sources to fund acquisitions;
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• attracting and retaining qualified management;
• maintaining adequate regulatory approvals; and
• closing on suitable acquisitions on terms that are favorable to us.
The integration and combination of the acquired businesses is a complex, costly and time-consuming process. As a result,
we may be required to devote significant management attention and resources to integrating business practices and
operations. The integration process may disrupt our business and the business of the acquired bank and, if implemented
ineffectively, would restrict the full realization of the anticipated benefits of the acquisition. The failure to meet the challenges
involved in integrating acquired businesses and to fully realize the anticipated benefits of acquisitions could adversely impact
our business, financial condition or results of operations. Further, we cannot assure you that we will be successful in
completing any future acquisitions or integrations, or that we will not incur disruptions or unexpected expenses in negotiating
or consummating such acquisitions or integrations. Additionally, in attempting to make such acquisitions, we anticipate
competing with other financial institutions, some of which have greater financial and operational resources.
Our lending limit may restrict our growth and prevent us from effectively implementing our business strategy.
We are limited by law in the amount we can loan in the aggregate to a single borrower or related borrowers by the amount
of our capital. Tennessee’s legal lending limit is intended to prevent one person or a relatively small and economically related
group of persons from borrowing an unduly large amount of a bank’s funds. It is also intended to safeguard a bank’s
depositors by diversifying the risk of loan losses among a relatively large number of creditworthy borrowers engaged in
various types of businesses. Based upon our capitalization at December 31, 2019, our legal lending limits were
approximately $89 million (15% of capital and surplus) and $148 million (25% of capital and surplus). Therefore, based upon
our current capital levels, the amount we may lend may be significantly less than that of many of our larger competitors and
may discourage potential borrowers who have credit needs in excess of our lending limit from doing business with us. We
may accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy may
not always be available. In addition to these legally imposed lending limits, we also employ appropriate limits on our overall
loan portfolio and requirements with respect to certain types of lending and individual lending relationships. If we are unable
to compete effectively for loans from our target customers, we may not be able to effectively implement our business
strategy, which could have a material adverse effect on our business, financial condition, results of operations or prospects.
Our funding sources may prove insufficient to support our future growth.
Deposits, cash flows from operations (including from our mortgage business) and investment securities for sale are the
primary sources of funds for our lending activities and general business purposes. However, from time to time we also obtain
advances from the Federal Home Loan Bank, purchase federal funds, engage in overnight borrowing from the Federal
Reserve and correspondent banks and sell loans. While we believe our current funding sources to be adequate, our future
growth may be severely constrained if we are unable to maintain our access to funding or if adequate financing is not
available on acceptable terms to accommodate future growth, which could have a material adverse effect on our financial
condition, results of operations or cash flows.
The performance of our investment securities portfolio is subject to fluctuation due to changes in interest rates
and market conditions, including credit deterioration of the issuers of individual securities.
Changes in interest rates may negatively affect both the returns on and fair value of our investment securities. Interest rate
volatility can reduce unrealized gains or increase unrealized losses in our portfolio. Interest rates are highly sensitive to
many factors including monetary policies, domestic and international economic and political issues, and other factors
44
beyond our control. Additionally, actual investment income and cash flows from investment securities that carry prepayment
risk, such as mortgage-backed securities and callable securities, may materially differ from those anticipated at the time of
investment or subsequently as a result of changes in interest rates and market conditions. These occurrences could have
a material adverse effect on our net interest income or our results of operations.
Decreased residential mortgage origination volume and pricing decisions of competitors may adversely affect our
profitability.
Our mortgage operation originates, sells and services residential mortgage loans. Changes in interest rates, housing prices,
applicable government regulations and pricing decisions by our loan competitors may adversely affect demand for our
residential mortgage loan products, the revenue realized on the sale of loans, the revenues received from servicing such
loans for others and, ultimately, reduce our net income. New regulations, increased regulatory reviews, and/or changes in
the structure of the secondary mortgage markets which we utilize to sell mortgage loans may increase costs and make it
more difficult to operate a residential mortgage origination business. Our revenue from the mortgage banking business was
$100.9 million in 2019. This revenue could significantly decline in future periods if interest rates were to rise and the other
risks highlighted in this paragraph were realized, which may adversely affect our profitability.
Our mortgage banking profitability could significantly decline if we are not able to originate and resell a high
volume of mortgage loans and securities.
Mortgage production, especially refinancing activity, declines in rising interest rate environments. Our mortgage origination
volume could be materially and adversely affected by rising interest rates. Moreover, when interest rates increase, there
can be no assurance that our mortgage production will continue at current levels. Further, over half of our mortgage volume
is through our consumer direct internet delivery channel, which targets national customers. As a result, loan originations
through this channel are particularly susceptible to the interest rate environment and the national housing market. Because
we sell a substantial portion of the mortgage loans we originate, the profitability of our mortgage banking business also
depends in large part on our ability to aggregate a high volume of loans and sell them in the secondary market at a gain. In
fact, when rates rise, we expect increasing industry-wide competitive pressures related to changing market conditions to
reduce pricing margins and mortgage revenues generally. If our level of mortgage production declines, our continued
profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage
operations. If we are unable to do so, our continued profitability may be materially and adversely affected.
We may incur costs, liabilities, fines and other sanctions if we fail to satisfy our mortgage loan servicing
obligations.
We act as servicer for approximately $6.73 billion of mortgage loans owned by third parties as of December 31, 2019. As a
servicer for those loans, we have certain contractual obligations to third parties. If we commit a material breach of our
obligations as servicer, we may be subject to termination if the breach is not cured within a specified period of time following
notice, causing us to lose servicing income. For certain investors and/or transactions, we may be contractually obligated to
repurchase a mortgage loan or reimburse the investor for credit losses incurred on the loan as a remedy for origination
errors with respect to the loan. If we have increased repurchase obligations because of claims that we did not satisfy our
obligations as a servicer, or if we have increased loss severity on such repurchases, we may have a significant reduction to
net servicing income within our mortgage banking noninterest income. In addition, we may be subject to fines and other
sanctions imposed by federal or state regulators as a result of actual or perceived deficiencies in our foreclosure practices.
Any of these actions may harm our reputation or negatively affect our residential lending or servicing business and, as a
result, our profitability.
We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances.
In 2019, we sold nearly all of the $4.54 billion of mortgage loans held for sale that we originated and purchased. When
mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required to make customary
representations and warranties to purchasers, guarantors and insurers about the mortgage loans and the manner in which
they were originated. We may be required to repurchase or substitute mortgage loans, or indemnify buyers against losses,
in the event we breach certain representations or warranties in connection with the sale of such loans. If repurchase and
indemnity demands increase, such demands are valid claims and are in excess of our provision for potential losses, our
liquidity, results of operations or financial condition may be materially and adversely affected.
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We rely on third party vendors to provide services that are integral to the operation of our business.
We depend on many third-party service providers that are integral to the operation of our business. These vendors service
our mortgage loan business, provide critical core systems processing services, essential web hosting and other internet
systems, and deposit processing services. If any of these service providers fail to perform servicing duties or perform those
duties inadequately, we could experience a temporary interruption in our business, sustain credit losses on our loans or
incur additional costs to obtain a replacement servicer. There can be no assurance that a replacement servicer could be
retained in a timely manner or at similar rates.
We cannot be sure that we will be able to maintain these relationships on favorable terms. In addition, some of our data
processing services are provided by companies associated with our competitors. The loss of these vendor relationships
could disrupt the services we provide to our customers and cause us to incur significant expense in connection with replacing
these services. If these third-party service providers experience difficulties, or terminate their services, and we are unable
to replace them with other service providers, particularly on a timely basis, our operations could be interrupted. If an
interruption were to continue for a significant period of time, our business, financial condition or results of operations could
be adversely affected, perhaps materially. Even if we are able to replace third-party service providers, it may be at a higher
cost to us, which could adversely affect our business, financial condition or results of operations. If we experienced issues
with our mortgage servicing provider, our servicing rights could be terminated or we may be required to repurchase mortgage
loans or reimburse investors as a result of such failures of our third-party service providers, any of which could adversely
affect our reputation, results of operations or financial condition.
Additionally, we utilize many vendors that provide services to support our operations, including the storage and processing
of sensitive consumer and business customer data. A cyber security breach of a vendor's system may result in theft and/or
unavailability of our data or disruption of business processes. In most cases, we will remain primarily liable to our customers
for losses arising from a breach of a vendor's data security system. We rely on our outsourced service providers to
implement and maintain prudent cyber security controls. We have procedures in place to assess a vendor's cyber security
controls prior to establishing a contractual relationship and to periodically review assessments of those control systems.
However, these procedures are not infallible, and a vendor's system can be breached despite the procedures we employ.
If these third-party service providers experience difficulties, or terminate their services, and we are unable to replace them
with other service providers, particularly on a timely basis, our operations could be interrupted. If an interruption were to
continue for a significant period of time, our business, financial condition or results of operations could be adversely affected,
perhaps materially. Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could
adversely affect our business, financial condition or results of operations.
Failure to timely and accurately implement changes to mortgage laws and regulations into our compliance
processes could adversely affect our ability to mitigate certain risks and losses.
FirstBank must routinely implement changes to mortgage industry law and regulation into our mortgage business practices.
Since the CFPB was created in 2011, even more drastic and frequent changes have occurred. In 2015, the CFPB enacted
rules known as the TILA-RESPA Integrated Disclosure. This new set of rules consolidated and combined certain mortgage
origination rules previously established separately under the Truth-in-Lending Act (TILA) and Real Estate Settlement
Procedures Act (RESPA). Additionally, Congress amended the Home Mortgage Disclosure Act (HMDA) in 2010 and the
CFPB finalized a rule implementing changes to HMDA in 2015. The rule’s provisions require that certain mortgage
origination data be collected and reported on an accurate and timely basis. These new CFPB rules, among others, require
personnel training, technological enhancements, and revisions to policies and procedures. In addition to these past and
future CFPB regulations, FirstBank is subject to additional regulations and rules promulgated by other federal and local
governing authorities and agencies including, HUD, FDIC, GNMA, Fannie Mae, and Freddie Mac, among others. We must
also comply with many ever-changing federal and local consumer protection laws including in part, the Dodd-Frank Act, the
Fair Credit Reporting Act, the Homeowner’s Protection Act, the Gramm-Leach-Bliley Act, the Servicemembers Civil Relief
Act, the Fair Debt Collection Practices Act, the Telephone Consumer Protection Act, and the Equal Credit Opportunity
Act. FirstBank’s response to and implementation of these laws and regulation that are already enacted and those to be
enacted in the future, could materially increase our compliance expenses causing weakness to our overall financial
condition.
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Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage
the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance
risks. Our framework also includes financial or other modeling methodologies that involve management assumptions and
judgment. Our risk management framework may not be effective under all circumstances and may not adequately mitigate
any risk or loss to us. If our framework is not effective, we could suffer unexpected losses and our business, financial
condition, results of operations or prospects could be materially and adversely affected.
System failure or breaches of our network security, including as a result of cyber-attacks or data security breaches,
could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we, and our vendors, use may be vulnerable to physical theft, fire, power
loss, telecommunications failure or a similar catastrophic event, as well as security breaches, denial of service attacks,
viruses, ransomware, and other disruptive problems caused by cyber criminals. Any damage or failure that causes
breakdowns or disruptions in our client relationship management, general ledger, deposit, loan and other systems could
damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could have a material adverse effect on us.
Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and
transmitted through our computer systems and network infrastructure. Information security risks have generally increased
in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications
technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers,
nation state supported organizations, terrorists, and other external parties. Our operations rely on the secure processing,
transmission and storage of confidential information in our computer systems and networks. Although we believe we have
robust information security procedures and controls, our technologies, systems, vendors, networks, and our customers’
devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized
release, gathering, monitoring, misuse, unavailability, loss or destruction of our or our customers’ confidential, proprietary
and other information, or otherwise disrupt our or our customers’ business operations. As cyber threats continue to evolve,
we may be required to expend significant additional resources to continue to modify or enhance our protective measures or
to investigate and remediate any information security vulnerabilities.
We are under continuous threat of loss due to cyber-attacks, especially as we continue to expand client capabilities to utilize
internet and other remote channels to transact business. While we are not aware of any successful cyber-attacks into our,
or our vendors, computer or information technology systems, there can be no assurance that we, or our vendors, will not
be the victim of successful cyber-attacks in the future that could cause us to suffer material losses. The occurrence of any
cyber-attack or information security breach could result in significant potential liabilities to customers and other third parties,
reputational damage, the disruption of our operations and regulatory concerns, all of which could materially and adversely
affect our business, financial condition or results of operations.
The financial services industry is undergoing rapid technological changes and, we may not have the resources to
implement new technology to stay current with these changes.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-
driven products and services. In addition to better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the
needs of our customers by using technology to provide products and services that will satisfy client demands for
convenience as well as to provide secure electronic environments as we continue to grow and expand our market area.
Many of our larger competitors have substantially greater resources to invest, and have invested significantly more than us,
in technological improvements. As a result, they may be able to offer additional or more convenient products compared to
those that we will be able to provide, which would put us at a competitive disadvantage. Accordingly, we may not be able to
effectively implement new technology-driven products and services or be successful in marketing such products and
services to our customers, which could impair our growth and profitability.
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We are subject to certain operational risks, including, but not limited to, client or employee fraud.
Employee errors and employee and client misconduct could subject us to financial losses or regulatory sanctions and
seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper
or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to
prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective
in all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal
controls and insurance coverage to mitigate against these operational risks. If our internal controls fail to prevent or detect
an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse
effect on our business, financial condition or results of operations.
In addition, we rely heavily upon information supplied by third parties, including the information contained in credit
applications, property appraisals, title information, equipment pricing and valuation and employment and income
documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon
which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset
funding, the value of the asset may be significantly lower than expected, or we may fund a loan that we would not have
funded or on terms we would not have extended.
Catastrophic events and disasters could negatively affect our local economies or disrupt our operations or result
in other consequences which could have an adverse impact on our financial results or condition.
A significant portion of our business is located in the Southeast and includes areas which are susceptible to weather-related
events such as tornadoes, floods, droughts, and fires. Such events can disrupt our operations, cause damage to our
properties, and negatively affect the local economies in which we operate. The severity and impact of future natural disasters
such as earthquakes, fires, hurricanes, tornadoes, droughts, floods, and other weather-related events are difficult to predict.
While we maintain insurance covering many of these weather-related events, there is no insurance against the disruption
that such a catastrophic event could cause in the markets that we serve, the resulting adverse impact on our borrowers’
ability to timely repay their loans, and/or the value of any collateral held by us.
In addition, geopolitical matters, including international trade disputes, political unrest, the emergence of widespread health
emergencies or pandemics, cyber attacks or campaigns, and slow growth in the global economy, as well as acts of terrorism,
war, and other violence could result in disruptions in the financial markets or the markets that we serve. These negative
events could have a material adverse effect on our results of operations or financial condition and may affect our ability to
access capital.
In the first quarter of 2020, the novel coronavirus (COVID-19) was identified as a pandemic by the World Health
Organization. We may experience negative impacts from quarantines, market downturns and changes in consumer behavior
related to COVID-19. Although the Company has established a pandemic response plan and procedures, our workforce
may be impacted if the virus becomes widespread in any of our markets, and we could experience an adverse financial
impact due to branch and office closures. In addition, our financial results could be impacted due to an inability of our
customers to meet their loan commitments in a timely manner because of their losses associated with impacts of the
disease, including a decrease in revenues for certain businesses in areas impacted by quarantines during a pandemic or
other changes in consumer behavior. In addition, downturns in the global market related to pandemic fears could result in
a lowering of interest rates as a stimulus to boost consumer spending, which could further negatively impact our results of
operations.
We may need to raise additional capital in the future.
We are required to meet certain regulatory capital requirements and maintain sufficient liquidity. We may need to raise
additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and
business needs, which could include the possibility of financing acquisitions. Our ability to raise additional capital depends
on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions
regarding the banking industry, market conditions, governmental activities, and our financial condition and performance.
Accordingly, we may be unable to raise additional capital if needed or on terms acceptable to us. Further, such additional
capital could result in dilution to our existing shareholders. If we fail to maintain capital to meet regulatory requirements, our
48
financial condition, liquidity, results of operations, as well as our ability to maintain compliance with regulatory capital
requirements, would be materially and adversely affected.
Our FDIC deposit insurance premiums and assessments may increase.
Our deposits are insured by the FDIC up to legal limits, which subjects us to the payment of FDIC deposit insurance
premiums and assessments. The FDIC may increase assessment rates on all institutions or impose special assessments,
especially if failures of financial institutions were to occur in the future. Additionally, after our planned merger with Franklin
Financial Network, Inc. we will have more than $10 billion in total assets, which will change the method that the FDIC uses
to determine the amount of our deposit insurance premium. Any increases in our assessment rate, future special
assessments, or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to
pursue certain business opportunities, which could have a material adverse effect on our assets, business, cash flow,
condition (financial or otherwise), liquidity, prospects or results of operations.
Our financial condition may be affected negatively by the costs of litigation.
We may be involved from time to time in a variety of litigation, investigations or similar matters arising out of our business.
From time to time, and particularly during periods of economic stress, customers may make claims or otherwise take legal
action pertaining to performance of our responsibilities. These claims are often referred to as “lender liability” claims.
Whether customer claims and legal action related to the performance of our responsibilities are founded or unfounded, if
such claims and legal actions are not resolved in a favorable manner, they may result in significant financial liability and/or
adversely affect our market perception, products and services, as well as potentially affecting customer demand for those
products and services. In many cases, we may seek reimbursement from our insurance carriers to cover such costs and
expenses. These claims, as well as supervisory and enforcement actions by our regulators could involve large monetary
claims, capital directives, regulatory agreements and directives and significant defense costs. The outcome of any such
cases or actions is uncertain. Substantial legal liability or significant regulatory action against us could have material adverse
financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. Our
insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit
or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation or investigation
significantly exceed our insurance coverage, they could have a material adverse effect on our business, financial condition
or results of operations.
Prior to our initial public offering, we were treated as an S-corporation, and claims of taxing authorities or our
former sole shareholder related to our prior status as an S-corporation, could harm us.
Prior to our initial public offering, we were an S-corporation for U.S. federal income tax purposes. While we were an S-
corporation, Mr. Ayers, our sole shareholder at the time, was taxed on our income. Following our initial public offering in
2016, our status as an S-corporation was terminated and we became a “C-corporation” under the provisions of the Internal
Revenue Code. If the unaudited, open tax years in which we were an S-corporation are audited by the Internal Revenue
Service (the “IRS”) and we are determined not to have qualified for, or to have violated, our S-corporation status, we will be
obligated to pay back tax, interest and penalties. The amounts that we would be obligated to pay could include tax on all of
our taxable income while we were an S-corporation. Any such claims could result in additional costs to us and could have
a material adverse effect on our results of operations or financial condition.
In addition, in the event of an adjustment to our reported taxable income for periods prior to termination of our S-corporation
status, it is possible that Mr. Ayers would be liable for additional income taxes for those prior periods. Therefore, we entered
into a tax sharing agreement with Mr. Ayers. Pursuant to this agreement, upon our filing any tax return (amended or
otherwise), in the event of any restatement of our taxable income or pursuant to a determination by, or a settlement with, a
taxing authority, for any period during which we were an S-corporation, we may be required to make a payment to Mr. Ayers
in an amount equal to Mr. Ayers’ incremental tax liability. In addition, we have agreed to indemnify Mr. Ayers with respect to
unpaid income tax liabilities to the extent that such unpaid income tax liabilities are attributable to an adjustment to our
taxable income for any period after our S-corporation status terminates. In both cases the amount of the payment will be
based on the assumption that Mr. Ayers is taxed at the highest rate applicable to individuals for the relevant periods. We
will also indemnify Mr. Ayers for any interest, penalties, losses, costs or expenses arising out of any claim under the
agreement. Any such payments to or on behalf of Mr. Ayers would result in additional costs to us and could have a material
adverse effect on our results of operations or financial condition.
49
We could be subject to environmental risks and associated costs on our other real estate owned assets.
A significant portion of our loan portfolio is comprised of loans collateralized by real estate. There is a risk that hazardous
or toxic waste could be discovered on the properties that secure our loans. If we acquire such properties as a result of
foreclosure, we could be held responsible for the cost of cleaning up or removing this waste, and this cost could exceed the
value of the underlying properties and materially and adversely affect us.
We could be required to write down goodwill and other intangible assets.
At December 31, 2019, our goodwill and other identifiable intangible assets were $186.6 million. Under current accounting
standards, if we determine goodwill or intangible assets are impaired because, for example, the acquired business does
not meet projected revenue targets or certain key employees leave, we are required to write down the carrying value of
these assets. We conduct a review at least annually to determine whether goodwill is impaired. Our goodwill impairment
evaluation indicated no impairment of goodwill for our reporting segments. We cannot provide assurance, however, that we
will not be required to take an impairment charge in the future. Any impairment charge would have an adverse effect on our
shareholders' equity and financial results and could cause a decline in our stock price.
Risks related to our regulatory environment
The Dodd-Frank Act and related rules and regulations may adversely affect our business, financial condition or
results of operations.
The Dodd-Frank Act contains a variety of far-reaching changes and reforms for the financial services industry and directs
federal regulatory agencies to study the effects of, and issue implementing regulations for, these reforms. Many of the
provisions of the Dodd-Frank Act could have a direct effect on our performance and, in some cases, impact our ability to
conduct business. Examples of these provisions include, but are not limited to:
•
Increased capital requirements and changes to the quality of capital required to be held by banking
organizations;
• Changes to deposit insurance assessments;
• Regulation of proprietary trading;
• Repeal of the federal prohibitions on the payment of interest on demand deposits, thereby permitting
depository institutions to pay interest on business transaction and other accounts;
• Establishment of the Consumer Financial Protection Bureau (the "CFPB") with broad authority to implement
new consumer protection regulations and, for banks with $10 billion or more in assets, to examine and
enforce compliance with federal consumer laws;
Implementation of risk retention rules for loans (excluding qualified residential mortgages) that are sold by
a bank;
•
• Regulation of debit-card interchange fees; and
• Regulation of lending and the requirements for "qualified mortgages", "qualified residential mortgages" and
the assessment of "ability to repay" requirements.
Many of these provisions have already been the subject of proposed and final rules by regulatory authorities. Many other
provisions, however, remain subject to regulatory rulemaking and implementation, the effects of which are not yet known.
The provisions of the Dodd-Frank Act and any rules adopted to implement those provisions as well as any additional
legislative or regulatory changes may impact the profitability of our business, require that we change certain of our business
practices, materially affect our business model or affect retention of key personnel, require us to raise additional capital and
expose us to additional costs (including increased compliance costs). These and other changes may also require us to
invest significant management attention and resources to make any necessary changes and may adversely affect our ability
to conduct our business as previously conducted or our financial condition or results of operations.
After our planned merger with Franklin Synergy Bank, FirstBank may have more than $10 billion in total assets,
which will subject us additional federal regulations and could materially and adversely affect our business.
On January 21, 2020, we announced that we had executed an agreement to merge with Franklin Financial Network and its
wholly owned subsidiary, Franklin Synergy Bank. At the consummation of this merger, FirstBank may have more than $10
billion in total consolidated assets. Pursuant to Section 165 of the Dodd-Frank Act, banks with greater than $10 billion in
50
total consolidated assets are subject to certain additional regulatory requirements, including limits on the debit card
interchange fees that such banks may collect, changes in the manner in which assessments for FDIC deposit insurance are
calculated, and providing the authority to the Consumer Financial Protection Bureau (“CFPB”) to supervise and examine
such banks. Additionally, compliance with the Dodd-Frank Act’s requirements may necessitate that we hire or contract with
additional compliance or other personnel, design and implement additional internal controls, or incur other significant
expenses, any of which could have a material adverse effect on our business, financial condition or results of operations.
Monetary policies and economic factors may limit our ability to attract deposits or make loans.
The monetary policies of federal regulatory authorities, particularly the Federal Reserve, and economic conditions in our
service area and the United States generally, affect our ability to attract deposits and extend loans. We cannot predict either
the nature or timing of any changes in these monetary policies and economic conditions, including the Federal Reserve’s
interest rate policies, or their impact on our financial performance. Adverse conditions in the economic environment could
also lead to a potential decline in deposits and demand for loans, which could have a material and adverse effect on our
financial condition, results of operations or cash flows.
As the parent company of FirstBank, the Federal Reserve may require us to commit capital resources to support
the Bank.
The Federal Reserve requires us to act as a source of strength to the Bank and to commit capital and financial resources
to support the Bank. This support may be required at times when we might otherwise determine not to provide it. In addition,
if we commit to a federal bank regulator that we will maintain the capital of the Bank, whether in response to the Federal
Reserve’s invoking its source-of-strength authority or in response to other regulatory measures, that commitment will be
assumed by a bankruptcy trustee and, as a result, the Bank will be entitled to priority payment in respect of that commitment,
ahead of our other creditors. Thus, any borrowing that must be done by us in order to support the Bank may adversely
impact our cash flow, financial condition, results of operations or prospects.
Federal and state regulators periodically examine our business and may require us to remediate adverse
examination findings or may take enforcement action against us.
The Federal Reserve, the FDIC and the TDFI periodically examine our business, including our compliance with laws and
regulations. If, as a result of an examination, the Federal Reserve, the FDIC, or the TDFI were to determine that our financial
condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our
operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of
different remedial actions as they deem appropriate. These actions could include requiring the remediation of any such
adverse examination findings.
In addition, these agencies have the power to take enforcement action against us to enjoin “unsafe or unsound” practices,
to require affirmative action to correct any conditions resulting from any violation of law or regulation or unsafe or unsound
practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to direct the
sale of subsidiaries or other assets, to limit dividends and distributions, to restrict our growth, to assess civil monetary
penalties against us or our officers or directors, to remove officers and/or directors or, if it is concluded that such conditions
cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into
receivership or conservatorship. Any regulatory enforcement action against us could have a material adverse effect on our
assets, business, cash flow, condition (financial or otherwise), liquidity, prospects or results of operations.
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or
increase our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws and regulations have been adopted that are intended to eliminate certain lending practices
considered “predatory.” The origination of loans with certain terms and conditions and that otherwise meet the definition of
a “qualified mortgage” may protect us from liability to a borrower for failing to make the necessary determinations. In either
case, we may find it necessary to tighten our mortgage loan underwriting standards in response to applicable regulations,
which may constrain our ability to make loans consistent with our business strategies. It is our policy not to make predatory
loans and to determine borrowers’ ability to repay, but the law and related rules create the potential for increased liability
with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may
51
prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans
that we do make, which in turn could have a material adverse effect on our business, cash flow, condition (financial or
otherwise), liquidity, prospects or results of operations.
We are subject to numerous fair lending laws designed to protect consumers and failure to comply with these laws
could lead to a wide variety of sanctions.
The Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory
lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies and other federal
agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s
compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil
money penalties, injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on
entering new lines of business. Private parties may also have the ability to challenge an institution’s performance under
fair lending laws in private class action litigation. Such actions could have a material adverse effect on our assets, business,
cash flow, condition (financial or otherwise), liquidity, prospects or results of operations.
We could face a risk of noncompliance and enforcement action with the Bank Secrecy Act of 1970 (the “Bank
Secrecy Act”) and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the USA PATRIOT Act and other laws and regulations require financial institutions, among other
duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency
transaction reports as appropriate. The Financial Crimes Enforcement Network, established by the U.S. Department of the
Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those
requirements and engages in coordinated enforcement efforts with the individual federal banking regulators, as well as the
U.S. Department of Justice, Drug Enforcement Administration and IRS. There is also increased scrutiny of compliance with
the rules enforced by the Office of Foreign Assets Control related to U.S. sanctions regimes. If our policies, procedures and
systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already
acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions
such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain
aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition
or results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist
financing could also have serious reputational consequences for us, which could in turn have a material adverse effect on
our business.
Risks related to our common stock
We have a shareholder who owns a significant portion of our stock and that shareholders' interests in our business
may be different than our other shareholders.
Mr. Ayers, our Executive Chairman, currently owns approximately 44% of our common stock. Further, Mr. Ayers has the
right under the shareholder's agreement, by and between the Company and Mr. Ayers and entered into in connection with
the Company's initial public offering, to designate up to 40% of our directors and at least one member of the nominating and
corporate governance and compensation committees of our board of directors for so long as permitted under applicable
law. So long as Mr. Ayers continues to own a significant portion of our common stock, he will have the ability to significantly
influence the vote in any election of directors and will have the ability to significantly influence a vote regarding a transaction
that requires shareholder approval regardless of whether others believe the transaction is in our best interests. In any of
these matters, the interests of Mr. Ayers may differ from or conflict with the interests of our other shareholders. Moreover,
this concentration of stock ownership may also adversely affect the trading price of our common stock to the extent investors
perceive disadvantages in owning stock of a company with a significant shareholder.
Our corporate organization documents contain certain provisions that could have an anti-takeover effect and may
delay, make more difficult or prevent an attempted acquisition of us that our shareholders may favor.
Our governing documents and certain agreements to which we are a party contain provisions that make a change-in-control
difficult to accomplish, and may discourage a potential acquirer. These include a provision that directors cannot be removed
except for cause and a provision that requires the affirmative vote of eighty percent (80%) of the shares outstanding to
52
amend certain provisions of our charter. These anti-takeover provisions may have an adverse effect on the market for our
common stock.
We have the ability to incur debt and pledge our assets, including our stock in the Bank, to secure that debt.
Absent special and unusual circumstances, a holder of any indebtedness for borrowed money has rights that are superior
to those of holders of any common stock. For example, interest must be paid to the lender before dividends can be paid to
any shareholders, and loans must be paid off before any assets can be distributed to any shareholders if we were to
liquidate. Further, we would have to make principal and interest payments on our indebtedness, which could reduce our
profitability or result in net losses on a consolidated basis even if the Bank were profitable.
The price of our common stock could be volatile.
The market price of our common stock may be volatile and could be subject to wide fluctuations in price in response to
various factors, some of which are beyond our control. In addition, if the market for stocks in our industry, or the stock market
in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons
unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock
price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to
management which could materially adversely affect our business, financial condition or results of operations.
Future sales of our common stock or securities convertible into our common stock may dilute our shareholders’
ownership in us and may adversely affect us or the market price of our common stock.
We are generally not restricted from issuing additional shares of our common stock up to the authorized number of shares
set forth in our charter. We may issue additional shares of our common stock or securities convertible into our common
stock in the future pursuant to current or future employee stock option plans, employee stock grants, upon exercise of
warrants or in connection with future acquisitions or financings. In addition, Mr. Ayers has registration rights that allow him
to sell additional shares of common stock in subsequent offerings. We cannot predict the size of any such future issuances
or the effect, if any, that any such future issuances will have on the trading price of our common stock. Any such future
issuances of shares of our common stock or securities convertible into common stock may have a dilutive effect on the
holders of our common stock and could have a material negative effect on the trading price of our common stock.
Future sales of our common stock in the public market could lower our share price, and any additional capital
raised by us through the sale of equity or convertible debt securities may dilute our shareholders ownership in us
and may adversely affect us or the market price of our common stock.
We or Mr. Ayers, may sell additional shares of common stock in subsequent public offerings. We may also issue additional
shares of common stock or convertible securities to finance future acquisitions. We cannot predict the size of future
issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the
market price of our common stock. Sales of substantial amounts of our common stock (including sales that may occur
pursuant to registration rights and shares that may be issued in connection with acquisitions), or the perception that such
sales could occur, may adversely affect prevailing market prices for our common stock.
Applicable laws and regulations restrict both the ability of the Bank to pay dividends to us and our ability to pay
dividends to our shareholders.
We and the Bank are subject to various regulatory restrictions relating to the payment of dividends. In addition, the Federal
Reserve has the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting
their business. These federal and state laws, regulations and policies are described in greater detail in “Business:
Supervision and regulation: Bank regulation: Bank dividends” and “Business: Supervision and regulation: Holding company
regulation: Restriction on bank holding company dividends,” and generally consider previous results and net income, capital
needs, asset quality, existence of enforcement or remediation proceedings, and overall financial condition in determining
whether a dividend payment is appropriate. For the foreseeable future, the majority, if not all, of our revenue will be from
any dividends paid to us by the Bank. Accordingly, our ability to pay dividends also depends on the ability of the Bank to
pay dividends to us. Further, the present and future dividend policy of the Bank is subject to the discretion of its board of
directors. We cannot guarantee that we or the Bank will be permitted by financial condition or applicable regulatory
restrictions to pay dividends, that the board of directors of the Bank will elect to pay dividends to us, or the timing or amount
53
of any dividend actually paid. See “Dividend policy.” If we do not pay dividends, market perceptions of our common stock
may be adversely affected, which could in turn create downward pressure on our stock price.
We are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable
to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions
from various regulatory and reporting requirements that are applicable to public companies that are emerging growth
companies, including, but not limited to, exemptions from being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if
we comply with the greater obligations of public companies that are not emerging growth companies, we may avail ourselves
of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an
emerging growth company. We will remain an emerging growth company for up to five years, though we will cease to be an
emerging growth company earlier if we have more than $1 billion in annual gross revenues, have more than $700 million in
market value of our common stock held by non-affiliates, or issue more than $1 billion of non-convertible debt in a three-
year period. Investors and securities analysts may find it more difficult to evaluate our common stock because we will rely
on one or more of these exemptions and, as a result, investor confidence or the market price of our common stock may be
materially and adversely affected.
Securities that we issue, including our common stock, are not FDIC insured.
Securities that we issue, including our common stock, are not savings or deposit accounts or other obligations of any bank,
insured by the FDIC, any other governmental agency or instrumentality, or any private insurer, and are subject to investment
risk, including the possible loss of our shareholders’ investments.
ITEM 1B - Unresolved Staff Comments
None.
ITEM 2 - Properties
Our principal executive offices and FirstBank’s main office are located at 211 Commerce Street, Suite 300, Nashville,
Tennessee 37201. As of December 31, 2019, we operated 68 full-service bank branches and eight limited service branch
locations throughout our geographic market areas as well as 29 mortgage offices throughout the southeastern United
States. We have banking locations in the metropolitan markets of Nashville, Chattanooga, Knoxville, Memphis, Jackson,
Tennessee and Huntsville, Alabama in addition to 12 community markets. See “ITEM 1. Business – Our Markets” for more
detail. We own 48 of these banking locations and lease our other banking locations, nearly all of our mortgage offices and
our principal executive office. We believe that our offices and banking locations are in good condition, are suitable to our
needs and, for the most part, are relatively new or refurbished. Additionally, we continue to upgrade our properties to make
them more energy efficient and protect the environment.
ITEM 3 - Legal Proceedings
Various legal proceedings to which FB Financial Corporation or a subsidiary of FB Financial Corporation is party arise from
time to time in the normal course of business. As of the date hereof, there are no material pending legal proceedings to
which FB Financial Corporation or any of its subsidiaries is a party or of which any of its or its subsidiaries' assets or
properties are subject.
ITEM 4 - Mine Safety Disclosures
Not applicable.
54
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market Information and Holders of Record
FB Financial Corporation's common stock is traded on the New York Stock Exchange under the symbol "FBK" and has
traded on that market since September 16, 2016.
The Company had approximately 744 stockholders of record as of March 5, 2020. A substantially greater number of holders
of FBK common stock are "street name" or beneficial holders, whose shares of record are held by banks, brokers, and other
financial institutions.
Stock Performance Graph
The performance graph and table below compares the cumulative total stockholder return on the common stock of the
Company with the cumulative total return on the equity securities included in the Standard & Poor’s 500 Index (S&P 500),
which reflects overall stock market performance and the S&P 500 Bank Industry Group, which is a GICS Level 2 industry
group consisting of 19 regional and national publicly traded banks. The graph assumes an initial $100 investment on
December 31, 2018 through December 31, 2019. Data for the S&P 500 and S&P 500 Bank Industry Group assumes
reinvestment of dividends. Returns are shown on a total return basis. The performance graph represents past performance
and should not be considered to be an indication of future performance. The information in this paragraph and the following
stock performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation
14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act,
except to the extent that we specifically request that such information be treated as soliciting material or specifically
incorporate it by reference into a filing under the Securities Act or the Exchange Act.
55
9/16/2016
12/29/2017
12/31/2018
12/31/2019
FB Financial Corporation
109.21
221.00
185.25
211.28
S&P 500 Total Return Index S&P 500 Bank Total Return Index
98.77
158.91
132.79
186.75
99.62
127.79
122.18
160.65
Index
Source: S&P Global Market Intelligence
Dividends
During the second quarter of 2018, our board of directors declared a dividend to shareholders of record for the first time as
a public company and have done so for each subsequent quarter since . Our dividend declarations have also been
applicable to outstanding restricted stock units, for which related cash distributions are made on the vesting dates of the
underlying units.
The following table shows the dividends that have been declared on our common stock with respect to the periods indicated
below. Per share amounts are presented to the nearest cent.
(dollars in thousands, except per share data)
Quarterly period
2018:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
Amount
per share
Total cash
dividend
— $
0.06
0.06
0.08
0.08 $
0.08
0.08
0.08
—
1,909
1,909
2,545
2,545
2,555
2,555
2,539
Subsequent to December 31, 2019, our board of directors declared a dividend of $0.09 per share to shareholders of record
as of February 15, 2020 payable March 2, 2020.
Any future determination or changes relating to our dividend policy will be made by our board of directors and will depend
on a number of factors, including general and economic conditions, industry standards, our financial condition and operating
results, our available cash and current and anticipated cash needs, capital requirements, banking regulations, contractual,
legal, tax and regulatory restrictions and implications on the payment of dividends by us to our shareholders or by the Bank
to us, and such other factors as our board of directors may deem relevant.
As a bank holding company, any dividends paid by us are subject to various federal and state regulatory limitations and
also may be subject to the ability of the Bank to make distributions or pay dividends to us. The Bank is also subject to
various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to
us. Our ability to pay dividends is limited by minimum capital and other requirements prescribed by law and regulation.
Furthermore, we are generally prohibited under Tennessee corporate law from making a distribution to a shareholder to the
extent that, at the time of the distribution, after giving effect to the distribution, we would not be able to pay our debts as they
become due in the usual course of business or our total assets would be less than the sum of its total liabilities plus (unless
the charter permits otherwise) the amount that would be needed, if we were to be dissolved at the time of the distribution,
to satisfy the preferential rights upon dissolution of any shareholders who may have preferential rights superior to those
receiving the distribution. In addition, financing arrangements that we may enter into in the future may include restrictive
covenants that may limit our ability to pay dividends.
56
Stock Repurchase Program
(a)
Total number of
shares purchased
(b)
Average price paid
per share
(c)
Total number of
shares purchased as
part of publicly
announced plans or
programs
(d)
Maximum number (or
approximate dollar
value) of shares that
may yet be
purchased under the
plans or programs
—
—
—
—
—
—
—
—
— $
—
—
—
25,000,000
25,000,000
25,000,000
25,000,000
Period
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
On October 22, 2018, the Company announced that its board of directors approved a stock repurchase program (the
“Program”), and on March 22, 2019, the Company’s board of directors approved an amendment to the Program. As
amended, the Program contemplates that the Company may purchase up to $50 million of its common stock in the
aggregate as follows: (i) up to $25 million in shares during the year ending December 31, 2019, and (ii) up to an additional
$25 million in shares during the year ending December 31, 2020. The Program will be conducted pursuant to a written plan
and is intended to comply with Rule 10b-18 promulgated under the Exchange Act.
Sale of Equity Securities
The Company did not sell any unregistered equity securities during 2019.
57
ITEM 6 - Selected Financial Data
The following selected historical consolidated financial data of the Company should be read in conjunction with, and are
qualified by reference to, “Management’s discussion and analysis of financial condition and results of operations” and the
consolidated financial statements and notes thereto included elsewhere herein. Our historical results for any prior period
are not necessarily indicative of results to be expected in any future period.
(Dollars in thousands, except per share data)
2019
2018
As of or for the year ended December 31,
2015
2016
2017
Statement of Income Data
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Total noninterest income
Total noninterest expense
Net income before income taxes
Income tax expense
Net income
Net interest income (tax—equivalent basis)
Per Common Share
Basic net income
Diluted net income
Book value(1)
Tangible book value(5)
Cash dividends declared
Pro Forma Statement of Income and Per Common Share Data(4)
Pro forma provision for income tax
Pro forma net income
Pro forma net income per common share—basic
Pro forma net income per common share—diluted
Selected Balance Sheet Data
Cash and cash equivalents
Loans held for investment
Allowance for loan losses
Loans held for sale
Investment securities, at fair value
Other real estate owned, net
Total assets
Customer deposits
Brokered and internet time deposits
Total deposits
Borrowings
Total shareholders' equity
Selected Ratios
Return on average:
Assets(2)
Shareholders' equity(2)
Tangible common equity(5)
Average shareholders' equity to average assets
Net interest margin (tax-equivalent basis)
Efficiency ratio
Adjusted efficiency ratio (tax-equivalent basis)(5)
Loans held for investment to deposit ratio
Yield on interest-earning assets
Cost of interest-bearing liabilities
Cost of total deposits
$
$
$
$
$
$
$
$
$
$
282,537
56,501
226,036
7,053
135,397
244,841
109,539
25,725
83,814
227,930
2.70
2.65
24.56
18.55
0.32
25,725
83,814
2.70
2.65
239,571
35,503
204,068
5,398
130,642
223,458
105,854
25,618
80,236
205,668
2.60
2.55
21.87
17.02
0.20
25,618
80,236
2.60
2.55
$
$
169,613
16,342
153,271
$
120,494
9,544
110,950
(950)
(1,479)
141,581
222,317
73,485
21,087
52,398
156,094
1.90
1.86
19.54
14.56
—
21,087
52,398
1.90
1.86
$
$
$
$
144,685
194,790
62,324
21,733
40,591
113,311
2.12
2.10
13.71
11.58
4.03
22,902
39,422
2.06
2.04
$
$
$
$
$
$
$
$
102,782
8,910
93,872
(3,064)
92,380
138,492
50,824
2,968
47,856
95,887
2.79
2.79
13.78
10.66
1.37
17,829
32,995
1.92
1.92
232,681
$
4,409,642
(31,139)
262,518
691,676
18,939
6,124,921
4,914,587
20,351
4,934,938
304,675
762,329
$
125,356
3,667,511
(28,932)
278,815
658,805
12,643
5,136,764
4,068,610
103,107
4,171,717
227,776
671,857
$
119,751
3,166,911
(24,041)
526,185
543,992
16,442
4,727,713
3,578,694
85,701
3,664,395
347,595
596,729
136,327
$
1,848,784
(21,747)
507,442
582,183
7,403
3,276,881
2,670,031
1,531
2,671,562
216,453
330,498
97,723
$
1,701,863
(24,460)
273,196
649,387
11,641
2,899,420
2,432,843
5,631
2,438,474
179,749
236,674
1.45%
11.6%
15.4%
12.5%
4.34%
67.7%
65.4%
89.4%
5.42%
1.48%
1.10%
1.66%
12.7%
16.7%
13.0%
4.66%
66.8%
65.8%
87.9%
5.47%
1.11%
0.76%
1.37%
11.2%
14.0%
12.2%
4.46%
75.4%
68.1%
86.4%
4.93%
0.66%
0.42%
1.35%
14.7%
17.6%
9.2%
4.10%
76.2%
70.6%
69.2%
4.45%
0.48%
0.29%
1.86%
20.9%
18.7%
8.9%
3.97%
74.4%
73.1%
69.8%
4.34%
0.49%
0.30%
58
Pro Forma Selected Ratios
Pro forma return on average assets(2)(4)
Pro forma return on average equity(2)(4)
Credit Quality Ratios
Allowance for loan losses to loans, net of unearned income
Allowance for loan losses to nonperforming loans
Nonperforming loans to loans, net of unearned income
Capital Ratios (Company)
Shareholders' equity to assets
Tier 1 capital (to average assets)
Tier 1 capital (to risk-weighted assets(3)
Total capital (to risk-weighted assets)(3)
Tangible common equity to tangible assets(5)
Common Equity Tier 1 (to risk-weighted assets) (CET1)(3)
Capital Ratios (Bank)
Shareholders' equity to assets
Tier 1 capital (to average assets)
Tier 1 capital (to risk-weighted assets)(3)
Total capital to (risk-weighted assets)(3)
Common Equity Tier 1 (to risk-weighted assets) (CET1)(3)
2019
2018
1.45%
11.6%
1.66%
12.7%
0.71%
117.0%
0.60%
0.79%
173.0%
0.46%
12.4%
10.1%
11.6%
12.2%
9.7%
11.1%
12.8%
9.9%
11.5%
12.1%
11.5%
13.1%
11.4%
12.4%
13.0%
10.5%
11.7%
13.2%
10.9%
11.9%
12.5%
11.9%
As of or for the year ended December 31,
2015
2016
2017
1.37%
11.2%
0.76%
238.1%
0.32%
12.6%
10.5%
11.4%
12.0%
9.7%
10.7%
12.6%
9.8%
10.7%
11.3%
10.7%
1.31%
14.3%
1.18%
216.2%
0.54%
10.1%
10.1%
12.2%
13.0%
8.7%
11.0%
9.9%
9.0%
10.9%
11.7%
10.9%
1.28%
14.5%
1.50%
211.1%
0.68%
8.2%
7.6%
9.6%
11.2%
6.4%
8.2%
9.2%
7.7%
9.6%
11.0%
9.6%
(1) Book value per share equals our total shareholders’ equity as of the date presented divided by the number of shares of our common stock outstanding as of the date
presented. The number of shares of our common stock outstanding was 31,034,315, 30,724,532, 30,535,517, 24,107,660, and 17,180,000 as of December 31, 2019,
2018, 2017, 2016 and 2015, respectively.
(2) We have calculated our return on average assets and return on average equity for a period by dividing net income for that period by our average assets and average
equity, as the case may be, for that period. We have calculated our pro forma return on average assets and pro forma return on average equity for a period by calculating
our pro forma net income for that period as described in footnote 4 below and dividing that by our average assets and average equity, as the case be, for that period. We
calculate our average assets and average equity for a period by dividing the sum of our total asset balance or total stockholder’s equity balance, as the case may be, as
of the close of business on each day in the relevant period and dividing by the number of days in the period.
(3) We calculate our risk-weighted assets using the standardized method of the Basel III Framework.
(4) We have calculated our pro forma net income, pro forma net income per share, pro forma returns on average assets and pro forma return on average equity for each
period shown by calculating a pro forma provision for federal income tax using a combined effective income tax rate of 36.75% and 35.08% for the years ended
December 31, 2016 and 2015, respectively, and adjusting our historical net income for each period to give effect to the pro forma provision for U.S. federal income tax for
such period.
(5) These measures are not measures recognized under generally accepted accounting principles (United States) (“GAAP”), and are therefore considered to be non-GAAP
financial measures. See “GAAP reconciliation and management explanation of non-GAAP financial measures” for a reconciliation of these measures to their most
comparable GAAP measures.
GAAP reconciliation and management explanation of non-GAAP financial measures
We identify certain financial measures discussed in this Report as being "non-GAAP financial measures." The non-GAAP
financial measures presented in this Report are adjusted efficiency ratio (tax equivalent basis), tangible book value per
common share, tangible common equity to tangible assets and return on average tangible equity.
In accordance with the SEC's rules, we classify a financial measure as being a non-GAAP financial measure if that financial
measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts,
that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in
accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or
statements of cash flows.
The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for
the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in
which we calculate the non-GAAP financial measures that we discuss in our selected historical consolidated financial data
may differ from that of other companies reporting measures with similar names. You should understand how such other
banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures
we have discussed in our selected historical consolidated financial data when comparing such non-GAAP financial
measures. The following reconciliation tables provide a more detailed analysis of these, and reconciliation for, each of non-
GAAP financial measures.
59
Adjusted efficiency ratio (tax equivalent basis)
The adjusted efficiency ratio (tax equivalent basis) is a non-GAAP measure that excludes certain gains (losses), merger
and offering-related expenses and other selected items. Our management uses this measure in its analysis of our
performance. Our management believes this measure provides a greater understanding of ongoing operations and
enhances comparability of results with prior periods, as well as demonstrates the effects of significant gains and
charges. The most directly comparable financial measure calculated in accordance with GAAP is the efficiency ratio.
The following table presents, as of the dates set forth below, a reconciliation of our adjusted efficiency ratio (tax-equivalent
basis) to our efficiency ratio:
(dollars in thousands)
Adjusted efficiency ratio (tax-equivalent basis)
Total noninterest expense
Less vesting of one time equity grants
Less variable compensation charge related to
cash settled equity awards previously issued
Less merger and conversion, offering and
mortgage restructuring expenses
Less impairment of MSRs
Less loss on sale of MSRs
Adjusted noninterest expense
Net interest income (tax-equivalent basis)
Total noninterest income
Less bargain purchase gain
Less gain (loss) on sales of other real estate
Less (loss) gain on other assets
Less gain (loss) on securities
Adjusted noninterest income
Adjusted operating revenue
Efficiency ratio (GAAP)
Adjusted efficiency ratio (tax-equivalent basis)
2019
2018
2017
2016
2015
Year Ended December 31,
$ 244,841
—
$ 223,458
—
$ 222,317
—
$ 194,790
2,960
$ 138,492
—
—
—
635
1,254
—
7,380
—
—
$ 237,461
$ 227,930
135,397
—
545
(104)
57
$ 134,899
$ 362,829
2,265
—
—
$ 221,193
$ 205,668
130,642
—
(99)
328
(116)
$ 130,529
$ 336,197
19,034
—
249
$ 202,399
$ 156,094
141,581
—
774
(664)
285
$ 141,186
$ 297,280
3,268
4,678
4,447
$ 178,183
$ 113,311
144,685
—
1,282
(103)
4,407
$ 139,099
$ 252,410
3,543
194
—
$ 134,755
$ 95,887
92,380
2,794
(317)
(393)
1,844
$ 88,452
$ 184,339
67.7%
65.4%
66.8%
65.8%
75.4%
68.1%
76.2%
70.6%
74.4%
73.1%
Tangible book value per common share and tangible common equity to tangible assets
Tangible book value per common share and tangible common equity to tangible assets are non-GAAP measures that
exclude the impact of goodwill and other intangibles used by the Company’s management to evaluate capital
adequacy. Because intangible assets such as goodwill and other intangibles vary extensively from company to company,
we believe that the presentation of this information allows investors to more easily compare the Company’s capital position
to other companies. The most directly comparable financial measure calculated in accordance with GAAP is book value
per common share and our total shareholders’ equity to total assets.
60
The following table presents, as of the dates set forth below, tangible common equity compared with total shareholders’
equity, tangible book value per common share compared with our book value per common share and common equity to
tangible assets compared to total shareholders’ equity to total assets:
(dollars in thousands, except share and
per share data)
Tangible Assets
Total assets
Adjustments:
Goodwill
Core deposit and other intangibles
Tangible assets
Tangible Common Equity
Total shareholders' equity
Adjustments:
Goodwill
Core deposit and other intangibles
Tangible common equity
Common shares outstanding
Book value per common share
Tangible book value per common share
Total shareholders' equity to total assets
Tangible common equity to tangible assets
Return on average tangible common equity
2019
2018
2017
2016
2015
$ 6,124,921
$ 5,136,764
$ 4,727,713
$ 3,276,881
$ 2,899,420
As of December 31,
(169,051)
(17,589)
(137,190)
(11,628)
(137,190)
(14,902)
$ 5,938,281
$ 4,987,946
$ 4,575,621
$ 3,225,451
(46,867)
(4,563)
(46,804)
(6,695)
$ 2,845,821
$
762,329
$
671,857
$
596,729
$
330,498
$
236,674
$
$
$
(169,051)
(17,589)
575,689
31,034,315
24.56
18.55
12.4%
9.7%
$
$
$
(137,190)
(11,628)
523,039
30,724,532
21.87
17.02
13.1%
10.5%
$
$
$
(137,190)
(14,902)
444,637
30,535,517
19.54
14.56
12.6%
9.7%
(46,867)
(4,563)
$
$
$
$
$
$
279,068
24,107,660
13.71
11.58
10.1%
8.7%
(46,904)
(6,695)
183,075
17,180,000
13.78
10.66
8.2%
6.4%
Return on average tangible common equity is a non-GAAP measure that uses average shareholders' equity and excludes
the impact of goodwill and other intangibles. This measurement is also used by the Company's management to evaluate
capital adequacy. The following table presents, as of the dates set forth below, reconciliations of total average tangible
common equity to average shareholders' equity and return on average tangible common equity to return on average
shareholders equity:
(dollars in thousands)
2019
2018
2017
2016
2015
Year Ended December 31,
Pro forma return on average tangible common
equity
Total average shareholders' equity
Average goodwill
Average intangibles, net
Average tangible common equity
Net income
$ 723,494
(160,587)
$ 629,922
(137,190)
$ 466,219
(84,997)
$ 276,587
(46,867)
$ 228,844
(46,904)
(17,236)
$ 545,671
83,814
$
(12,815)
$ 479,917
80,236
$
(8,047)
$ 373,175
52,398
$
(5,353)
$ 224,367
40,591
$
(5,095)
$ 176,845
47,856
$
Return on average shareholders' equity
11.6%
12.7%
11.2%
14.7%
20.9%
Pro forma return on average tangible common
equity
15.4%
16.7%
14.0%
17.6%
18.7%
61
ITEM 7 – Management’s discussion and analysis of financial condition and results of operations
The following is a discussion of our financial condition at December 31, 2019 and December 31, 2018 and our results of
operations for the years ended December 31, 2019 and 2018 and should be read in conjunction with our audited
consolidated financial statements included elsewhere herein. 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, 2018 and
2017 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 for the year ended December 31, 2018.
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 loan losses
The allowance for loan losses is established through a provision for loan losses charged to expense. Management
periodically reviews the allowance for loan losses. Loans are charged against the allowance for loan losses when
management believes that the collectability of principal is unlikely. Recoveries of amounts previously charged off are credited
to the allowance. In the event management concludes that the allowance for loan losses is more than adequate to absorb
potential loan losses, a reverse provision may be recorded whereby a credit is made to the expense account.
The allowance for loan losses is maintained at a level that management considers adequate to absorb probable incurred
credit losses on outstanding loans. Factors considered in management’s evaluation of the adequacy of the allowance are
current and anticipated economic conditions, previous loan loss experience, changes in the nature, volume and composition
of the loan portfolio, industry or other concentrations of credit, review of specific problem loans, the level of classified and
nonperforming loans, the results of regulatory examinations, the estimated fair value of underlying collateral and overall
quality of the loan portfolio. The allowance consists of specific and general components. The specific component relates to
loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows or the
collateral value, less estimated selling costs, of the impaired loan is lower than the carrying value of that loan. The general
component covers non-impaired loans and is based on historical loss experience with the overall level, adjusted for
qualitative, economic and other factors impacting the future collectability of the loan portfolio.
Certain loans acquired in acquisitions or mergers are accounted for under ASC 310-30 “Loans and Debt Securities Acquired
with Deteriorated Credit Quality,” which prohibits the carryover of an allowance for loan losses for loans acquired in which
the acquirer concludes that it will not collect the contractual amount. As a result, these loans are carried at values which
represent management’s estimate of the future cash flows of these loans. Increases in expected cash flows to be collected
from the contractual cash flows are required to be recognized as an adjustment to the loan’s yield over its remaining life,
while decreases in expected cash flows are required to be recognized as impairment charges to the provision for loan
losses.
Effective January 1, 2020, we adopted ASU 2016-13, "Financial Instruments - Measurement of Current Expected Credit
Losses on Financial Instruments" ("CECL"), which modifies the accounting for the allowance for loan losses from an incurred
loss model to an expected loss model, as discussed more fully under the subheading "Asset quality" contained within
62
management's discussion and analysis and in "Part II - Item 8. Financial Statements and Supplementary Data - Note 1.
Basis of Presentation" of this Report.
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 17 "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 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. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income (loss), net of applicable taxes. Gains and losses on sales are recorded on the trade date and
determined using the specific identification method as no ready market exists for this stock and it has no quoted market
value.
In periods prior to 2018, equity securities were classified as available-for-sale. As such, equity securities were carried at fair
value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of applicable taxes.
As of January 1, 2018, the Company adopted ASU 2016-01, "Recognition and Measurement of Financial Assets and
Liabilities" requiring that equity securities with readily determinable fair values be carried at fair value on the balance sheet
with any periodic changes in value adjusted through the income statement. The change in accounting policy resulted in a
one-time adjustment to retained earnings for the after-tax decrease in fair value below book value at January 1, 2018 and
a reclassification of certain investments that did not meet the definition of equity securities with readily determinable fair
values to other assets. These other investments are carried at cost less any identified impairment.
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.
We evaluate available-for-sale securities for other-than-temporary impairment (“OTTI”) 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 length of time and the extent to which the fair value has been less than cost, the financial
condition and near-term prospects of the issuer, and our intent and ability to retain our 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 OTTI is determined to have occurred, the amount of the OTTI recognized in earnings depends on whether 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, less any current-period credit loss. 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, less any current-period credit loss, the OTTI
recognized in earnings is equal to the entire difference between its amortized cost basis and its fair value at the balance
sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security
before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing
the credit loss and the amount related to all other factors. The amount of the total related to the credit loss 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 OTTI related to other factors is recognized in other comprehensive income (loss), net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
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.” Gains and losses are recognized in income at the time
the loan is closed. These gains and losses are classified under the line item “Mortgage banking income” in our consolidated
63
financial statements. 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.
Mortgage servicing rights
We began retaining the right to service certain mortgage loans in 2014 that we sell to secondary market investors.
In periods prior to 2017, mortgage servicing rights were amortized in proportion to and over the period of estimated net
servicing income. These servicing rights were carried at amortized cost less any impairment. Impairment losses on
mortgage servicing rights were recognized to the extent by which the unamortized cost exceeded fair value.
As of January 1, 2017, the Company elected to account for its mortgage servicing rights under the fair value option as
permitted under ASC 860-50-35, "Transfers and Servicing." The change in accounting policy resulted in a one-time
adjustment to retained earnings for the after-tax increase in fair value above book value at the time of adoption. Subsequent
changes in fair value are recorded in earnings in Mortgage banking income.
Retained mortgage servicing rights are measured at fair value as of the date of the related loan sale. We use quoted market
prices when available. Subsequent fair value measurements are determined using a discounted cash flow model. In order
to determine the fair value of the MSR, the present value of expected net future cash flows is estimated. Assumptions used
include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income
net of servicing costs. This model is periodically validated by an independent model validation group. The model
assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to
MSR broker valuations and industry surveys, as available.
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 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
64
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 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.
Loans acquired in business combinations with evidence of credit deterioration since origination and for which it is probable
that all contractually required payments will not be collected are considered to be credit-impaired. Purchased credit impaired
loans (“PCI” loans) are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated
credit quality, in accordance with ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC
310-30”), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the
life of the loans. We evaluate on a quarterly basis, the present value of the acquired loans determining the effective interest
rates. Increases in expected cash flows to be collected on these loans are recognized as an adjustment of the loan’s yield
over its remaining life, while decreases in expected cash flows are recognized as an impairment. As a result, related
discounts are recognized subsequently through accretion based on the expected cash flow of the acquired loans or through
adjustment to the allowance for loan loss for any impairment identified subsequent to acquisitions.
Overview
We are a bank 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, and North Georgia. As of December 31, 2019, our footprint included 68 full-service bank branches serving the
following Metropolitan Statistical Areas (“MSAs”): Nashville, Chattanooga (including North Georgia), Knoxville, Memphis,
Jackson, and Huntsville, Alabama and 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 and a national internet delivery channel.
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, mortgage originations from mortgage offices within our banking
footprint, trust and investment services and deposit-related fees. Our primary source of funding for our loans is customer
deposits, and, to a lesser extent, 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 outside our Banking footprint and through
our online ConsumerDirect channel, as well as from mortgage servicing revenues.
On April 1, 2019, we announced our intention to sell our wholesale mortgage operations, comprising the third party
origination ("TPO") and correspondent mortgage delivery channels (collectively referred to as "mortgage restructuring").
The sale of the two wholesale channels better aligns the Mortgage segment with our strategic plan and long-term vision for
the Company. The exit also allows additional focus on our retail and ConsumerDirect origination channels. The sale of
TPO channel was completed on June 7, 2019 and the sale of correspondent channel was completed on August 1, 2019. In
connection with the mortgage restructuring, the Company incurred certain related and miscellaneous expenses of $2.0
million for the year ended December 31, 2019.
65
Mergers and acquisitions
Franklin Financial Network, Inc.
On January 21, 2020, the Company announced entry into a definitive merger agreement with Franklin Financial Network,
Inc ("Franklin"). pursuant to which Franklin will be merged with and and into the Company. Franklin has 15 branches and
reported approximately $3.90 billion of total assets, $2.80 billion of loans, and $3.20 billion of deposits as of December 31,
2019. According to the terms of the merger agreement, Franklin shareholders will receive 0.9650 shares of FB Financial
Corporation's common stock and $2.00 in cash for each share of Franklin stock. Based on the Company's closing price of
$38.23 per share as of January 21, 2020, the implied transaction value is approximately $602 million. The merger is
expected to close in the third quarter of 2020 and is subject to regulator approvals, approval by the Company's and Franklin's
shareholders and other customary closing conditions.
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"). Farmers National reported total
assets of $255.2 million, loans of $178.6 million and deposits of $206.0 million as of December 31, 2019. The consideration
is valued at approximately $50.0 million based on 954,797 shares of FBK common stock (utilizing the market price of $36.70
per FBK on February 14, 2020) and $15.0 million in cash consideration. The Company is currently in the process of
determining the approximate fair value of net assets acquired and will include preliminary purchase accounting estimates
in Form 10-Q for the quarterly period ended March 31, 2020. See Note 2, “Mergers and acquisitions” in the notes to the
consolidated financial statements included in this Report for further details regarding the terms and conditions of this merger.
Atlantic Capital Bank, N.A. Branches
On April 5, 2019, the Bank completed its previously-announced 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"), further
increasing market share in existing markets and expanding the Company's footprint into new locations. After finalizing
purchase accounting adjustments, the branch acquisition added $588.9 million in customer deposits at a premium of 6.25%
and $374.4 million in loans. All of the operations of the Branches are included in the Banking segment. We incurred merger
costs of $4.8 million during the year ended December 31, 2019, in connection with this transaction. See Note 2, “Mergers
and acquisitions” in the notes to the consolidated financial statements included in this Report for further details regarding
the terms and conditions of this acquisition.
Key factors affecting our business
Economic conditions
Our business and financial performance are affected by economic conditions generally in the United States and more
directly in the markets where we primarily operate. The significant economic factors that are most relevant to our business
and our financial performance include the general economic conditions in the U.S. and in our markets, unemployment
rates, real estate markets and interest rates.
The United States economy grew at a moderate 2.1% rate in the final three months of 2019, capping a year when growth
slowed significantly due to weaker global economy and trade war uncertainties. According to the U.S. Bureau of Labor
Statistics, the seasonally adjusted unemployment rate at December 31, 2019 was 3.5% compared to 3.9% at December 31,
2018 and 4.1% at December 31, 2017. The Federal Reserve Board increased its federal funds target range by 25 basis
points in October 2019 to 150-175 basis points, the third decrease to its target range in 2019.
Existing home sales in the United States, as indicated by the National Association of Realtors, fell to a seasonally adjusted
annual rate of 5.53 million units in December 2019, compared to 4.99 million units in December 2018 and 5.56 million units
in December 2017. New home sales showed slightly lower growth, falling to a seasonally adjusted annual rate of 719
thousand units in December 2019, down from 600 thousand units in December 2018, and 643 thousand units in
December 2017. Home values, as indicated by the seasonally adjusted S&P CoreLogic Case-Shiller 20-City Composite
Home Price Index, showed an increase of 2.84% from December 31, 2018 to December 31, 2019. Bankruptcy filings, per
66
the U.S. Court Statistics, also improved with total filings down 0.9% for the twelve month period ending March 31, 2019,
compared with the year ending March 31, 2018.
According to the Beige Book published by the Federal Reserve Board in January 2020, overall economic activity generally
continued to expand modestly in the final six weeks of 2019. The Dallas and Richmond Districts noted above-average
growth, while Philadelphia, St. Louis, and Kansas City reported sub-par growth. Consumer spending grew at a modest to
moderate pace, with a number of Districts noting some pickup from the prior reporting period. On balance, holiday sales
were said to be solid, with several Districts noting the growing importance of online shopping. Vehicle sales generally
expanded moderately, though a handful of Districts reported flat sales. Tourism was mixed, with growth reported in the
eastern seaboard Districts but activity little changed in the Midwest and West. Manufacturing activity was essentially flat in
most Districts, as in the previous report. Business in nonfinancial services was mixed but, on balance, growing modestly.
Transportation activity was also mixed across Districts, with a majority reporting flat to weaker activity. Banks mostly
characterized loan volume as steady to expanding moderately. Home sales trends varied widely across Districts but were
flat overall, while residential rental markets strengthened. Some Districts pointed to low inventories as restraining home
sales. New residential construction expanded modestly. Commercial real estate activity varied substantially across Districts.
Agricultural conditions were little changed, as was activity in the energy sector. In many Districts, tariffs and trade uncertainty
continued to weigh on some businesses. Expectations for the near-term outlook remained modestly favorable across the
nation.
The unemployment rate for the state of Tennessee, as indicated by the U.S. Bureau of Labor Statistics, remained steady at
3.3% as of December 31, 2019 and December 31, 2018. Nashville's unemployment rate increased to 2.4% as of
December 31, 2019 from 2.3% as of December 31, 2018.
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. Since December of 2016, the Federal Open Market Committee has
raised the Fed Funds Target rate eight times, which has caused other short term yields such as 1-month and 3-month
LIBOR to rise. Although short-term interest rates have risen, the Federal Reserve now maintains a neutral monetary policy,
and we expect interest rates to increase nominally or remain flat throughout 2019. Subsequent declines in the yield curve
or a decline in longer-term yields relative to short-term yields (a flatter yield curve) would have an adverse impact on our
net interest margin and net interest income. Continued rate increases may have the effect of decreasing our mortgage
origination and our general mortgage banking profitability. 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.
67
Underlying credit quality declined slightly during 2019 compared to 2018, which is consistent with our overall portfolio quality.
Our percentage of total nonperforming loans to loans held for investment increased to 0.60% as of December 31, 2019,
from 0.46% at December 31, 2018. Our loans classified as substandard increased to 1.82% of loans held for investment for
the year ended December 31, 2019, compared to 1.81% for 2018. Our nonperforming assets for the year ended
December 31, 2019 were $47.1 million, or 0.77% of assets, increasing from $31.4 million, or 0.61% of assets for the year
ended December 31, 2018.
Although, overall we have experienced favorable credit trends in 2019 and 2018, we are 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. For additional information regarding credit quality risk factors for our Company, see “Business: Risk
management: Credit risk management” and “Risk factors: Risks related to our business.”
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 and terms and increased competition for deposits. 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 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. The Dodd-Frank Act is complex, and many aspects of it are subject to final rulemaking that
continues to emerge. Implementation of the Dodd-Frank Act will continue to impact our earnings through higher compliance
costs and imposition of new restrictions on our business. The Dodd-Frank Act may also continue to have a material adverse
impact on the value of certain assets and liabilities held on our balance sheet. The ultimate impact of the Dodd-Frank Act
on our business will depend on regulatory interpretation and rulemaking as well as the success of any of our actions to
mitigate the negative impacts of certain provisions. Key parts of the Dodd-Frank Act that will specifically impact our business
include the repeal of a previous prohibition against payment of interest on demand deposits, the implementation of the Basel
III capital adequacy standards, a change in the basis for FDIC deposit insurance assessments, substantial revisions to the
regulatory regime applicable to the mortgage market, and enhanced emphasis on consumer protection generally.
See also “Risk factors: Risks related to our regulatory environment.”
Factor affecting comparability of financial results
Tax legislation changes
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted into law. The Tax Reform Act
provides for significant changes to the U.S. tax code that impact businesses. Effective January 1, 2018, the Tax Reform Act
reduces the U.S. federal tax rate for corporations from 35% to 21% for U.S. taxable income and requires a one-time
remeasurement of deferred taxes to reflect their value at a lower tax rate of 21%. The Tax Reform Act includes other
changes, including, but not limited to, immediate deductions for certain new investments instead of deductions for
depreciation expense over time, additional limitations on the deductibility of executive compensation and limitations on the
deductibility of interest. For more information regarding the impact of the Tax Reform Act on the Company, see Note 14,
“Income Taxes” in the notes to our consolidated financial statements.
68
Overview of recent financial performance
Results of operations
Year ended December 31, 2019 compared to year ended December 31, 2018
Our financial performance history reflects the success of our growth strategies and the continued favorable economic
conditions in our markets, as described above. As a result, we have improved our profitability over each of the last three
years. Our net income increased by 4.5% 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 ("ROATE") for the years ended December 31, 2019
and 2018 was 15.4% and 16.7%, respectively. Our ratio of average shareholders’ equity to average assets in 2019 and
2018 was 12.5% and 13.0%, 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 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 our mortgage restructuring.
Year ended December 31, 2018 compared to year ended December 31, 2017
Our net income increased by 53.1% in 2018 to $80.2 million from $52.4 million in 2017. Pre-tax net income increased
by $32.4 million, or 44.0%, from $73.5 million for the year ended December 31, 2017 to $105.9 million for the year
ended December 31, 2018. Diluted earnings per common share was $2.55 and $1.86 for the years ended December 31,
2018 and 2017, respectively. Our net income represented a return on average assets, or ROAA, of 1.66% and
1.37% in 2018, 2017, respectively, and a return on average shareholders’ equity, or ROAE, of 12.7% and 11.2% in 2018
and 2017, respectively. Our ratio of return on average tangible common equity ("ROATE") for the years ended December 31,
2018 and 2017 was 16.7% and 14.0%, respectively. Our ratio of average shareholders’ equity to average assets in 2018
and 2017 was 13.0% and 12.2%, respectively.
During the year ended December 31, 2018, net interest income before provision for loan losses increased to $204.1 million
compared to $153.3 million for the year ended December 31, 2017, which was attributable to an increase in interest income
and expense, primarily driven by loan and deposit growth, reflecting the incorporation of a full year of results from the
Clayton Banks merger in addition to increased overall interest rates. Our net interest margin, on a tax-equivalent basis,
increased to 4.66% for the year ended December 31, 2018 as compared to 4.46% for the year ended December 31, 2017,
due to loan and deposit growth, including the impact of the product mix acquired from the Clayton Banks, in addition to an
increase in contractual loan yield during the period offset by elevated costs of funds.
Noninterest income for the year ended December 31, 2018 decreased by $10.9 million to $130.6 million from $141.6 million
in the same period in the previous year. The decrease in noninterest income was largely a result of a decrease in mortgage
banking income.
69
Noninterest expense increased to $223.5 million for the year ended December 31, 2018 compared to $222.3 million for the
year ended December 31, 2017. This increase was largely a result of costs associated with our overall growth and added
operational costs resulting from the merger with the Clayton Banks offset by the decrease in merger and conversion costs
resulting from the 2017 transaction.
Financial condition
Our total assets grew by 19.2% to $6.12 billion at December 31, 2019 as compared to $5.14 billion at December 31, 2018.
The increase was driven by the acquisition of $640.0 million in assets acquired in the Atlantic Capital branch acquisition,
which closed on April 5, 2019. Loans held for investment increased $742.1 million to $4.41 billion at December 31, 2019
compared to $3.67 billion at December 31, 2018, which included $374.4 million in loans acquired in the Atlantic Capital
branch acquisition.
We grew total deposits by $763.2 million to $4.93 billion at December 31, 2019 as compared to $4.17 billion at December 31,
2018. The increase includes $588.9 million of customer deposits acquired in the Atlantic Capital branch acquisition.
Excluding the impact of assets acquired and liabilities assumed in the Atlantic Capital branch transaction, total assets
increased 6.78%, total loans increased 10.0%, and total deposits increased 4.18%, in each case from December 31, 2018
to December 31, 2019.
Business segment highlights
We operate our business in two business segments: Banking and Mortgage. See Note 20, “Segment Reporting,” in the
notes to our consolidated financial statements for a description of these business segments.
Banking
Income before taxes from the Banking segment increased by $2.4 million, or 2.29% in the year ended December 31, 2019
to $107.1 million as compared to $104.7 million in the year ended December 31, 2018. The results were primarily driven by
increases in net interest income of $21.6 million and noninterest income of $9.5 million which was partially offset by an
increase in noninterest expense. Noninterest income increased to $64.9 million in the year ended December 31, 2019 as
compared to $55.4 million in the year ended December 31, 2018. Noninterest expense increased $27.0 million, primarily
due to costs associated with our overall growth, including merger costs from the Atlantic Capital branch acquisition and
increased salaries, commissions and employee benefits expenses. Results of our Banking Segment also include mortgage
retail footprint pre-tax net contribution of $7.2 million in the year ended December 31, 2019 compared to $3.8 million for the
year ended December 31, 2018.
Mortgage
Income before taxes from the Mortgage segment increased to $2.5 million in the year ended December 31, 2019 as
compared to $1.2 million in the year ended December 31, 2018 primarily due to increased volume driven by declining
interest rates and higher margins produced by our ConsumerDirect and retail delivery channels. Noninterest income
decreased $4.7 million to $70.5 million during the year ended December 31, 2019 compared to the year ended
December 31, 2018 mainly due to a decrease in loan servicing income. Mortgage servicing income decreased $11.2 million
to $0.7 million for the year ended December 31, 2019 compared to the prior year. This decrease included a negative change
in fair value of mortgage servicing rights of $26.3 million for the year ended December 31, 2019 , which was partially offset
by gains of $9.3 million in derivative hedging instruments used to hedge the exposure on the MSRs. The negative change
in fair value of MSRs was driven by faster than expected prepayment of loans.
Noninterest income also included fees from origination, gains on sale and fair value changes from loans held for sale, which
are primarily driven by interest rate lock volume, interest rates. and overall market conditions. While overall interest rate
lock commitment volume decreased $1.22 billion, or 17.1%, during the year ended December 31, 2019 compared to the
previous year, interest rate lock commitment volume within our ConsumerDirect and retail delivery channels increased a
combined $649.7 million, or 16.5% during the year ended December 31, 2019, again compared to the year prior. The
decrease in total interest rate lock commitment volume is a result of the mortgage restructuring completed during the third
quarter of 2019, which allowed us to concentrate on maximizing profitability of the historically higher margin delivery
channels.
70
Noninterest expense for the year ended December 31, 2019 and 2018 was $68.0 million and $73.6 million, respectively.
This decrease is mainly attributable to the mortgage restructuring and decreased mortgage servicing expenses. During the
years ended December 31, 2019 and 2018, we sold $29.2 million and $39.4 million, respectively, in mortgage servicing
rights. No material gains or losses were recognized in connection with these transactions.
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, 2019 and
2018.
Net interest income
Our net interest income is primarily affected by the interest rate environment and by the volume and the composition of our
interest-earning assets and interest-bearing liabilities. We utilize net interest margin (“NIM”) which represents net interest
income, on a tax-equivalent basis, divided by average interest-earning assets, to track the performance of our investing and
lending activities. We earn interest income from interest, dividends and fees earned on interest-earning assets, as well as
from amortization and accretion of discounts on acquired loans. Our interest-earning assets include loans, time deposits in
other financial institutions and securities available for sale. We incur interest expense on interest-bearing liabilities, including
interest-bearing deposits, borrowings and other forms of indebtedness as well as from amortization of premiums on
purchased deposits. Our interest-bearing liabilities include deposits, advances from the FHLB, repurchase agreements and
subordinated debt.
Year ended December 31, 2019 compared to year ended December 31, 2018
Net interest income increased 10.8% to $226.0 million in the year ended December 31, 2019 compared to $204.1 million in
the year ended December 31, 2018. On a tax-equivalent basis, net interest income increased $22.3 million to $227.9 million
in the year ended December 31, 2019 as compared to $205.7 million in the year ended December 31, 2018. The increase
in tax-equivalent net interest income in the year ended December 31, 2019 was primarily driven by increased volume in
loans held for investment offset by an increase in deposit volume and rates, both partially driven by the product mix acquired
from the Branches.
Interest income, on a tax-equivalent basis, was $284.4 million for the year ended December 31, 2019, compared to $241.2
million for the year ended December 31, 2018, an increase of $43.3 million. The two largest components of interest income
are loan income and investment income. Loan income consists primarily of interest earned on our loans held for investment
portfolio and secondarily, our loans held for sale. Investment income consists primarily of interest earned on our investment
portfolio made up of both taxable and tax-exempt securities. Interest income on loans held for investment, on a tax-
equivalent basis, increased $45.2 million to $250.7 million for the year ended December 31, 2019 from $205.5 million for
the year ended December 31, 2018 primarily due to increased loan volume driven by growth in average loan balances of
$773.4 million, partially attributable to the $374.4 million in loans acquired from the Branches.
Partially offsetting the increase in average volume of loans held for investment was a decrease in yields. The tax-equivalent
yield on loans held for investment was 6.04%, down 5 basis points from the year ended December 31, 2018. The decrease
in yield was primarily due to lower loan fees and accretion on purchased loans which yielded 0.31% and 0.21%, respectively,
in the year ended December 31, 2019 compared with 0.39% and 0.23%, respectively, in the year ended December 31,
2018. Partially offsetting this decrease was an increase in contractual loan interest rates which yielded 5.50% in the year
ended December 31, 2019 compared with 5.42% in the year ended December 31, 2018. Also included in the loan yield are
nonaccrual interest collections and syndicated loan fee income which contributed 2 and 0 basis points, respectively, for the
year ended December 31, 2019 and 4 and 1 basis points, respectively, for the year ended December 31, 2018.
The components of our loan yield, a key driver to our NIM for the years ended December 31, 2019, 2018 and 2017, were
as follows:
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(dollars in thousands)
Loan yield components:
Contractual interest rate on loans held for
investment(1)
Origination and other loan fee income
Accretion on purchased loans
Nonaccrual interest collections
Syndicated loan fee income
Total loan yield
Includes tax equivalent adjustment
(1)
Interest
income
2019
Average
yield
Interest
income
Year Ended December 31,
2017
Average
yield
Interest
income
2018
Average
yield
$ 228,069
5.50% $ 183,116
5.42% $ 119,617
12,977
8,556
885
206
0.31%
0.21%
0.02%
—%
13,093
7,608
1,375
351
$ 250,693
6.04% $ 205,543
0.39%
0.23%
0.04%
0.01%
6.09% $ 136,950
7,638
5,419
3,266
1,010
4.95%
0.32%
0.22%
0.14%
0.03%
5.66%
Accretion on purchased loans contributed 16 and 17 basis points to the NIM for the year ended December 31, 2019 and
2018, respectively. Additionally, nonaccrual interest collections and syndicated loan fees contributed 2 and 0 basis points,
respectively, to the NIM for the year ended December 31, 2019 compared to 3 and 1 basis points, respectively, to the NIM
for the year ended December 31, 2018.
Our NIM, on a tax-equivalent basis, decreased to 4.34% during the year ended December 31, 2019 from 4.66% in the year
ended December 31, 2018, primarily a result of decreased interest income from loans held for sale and increased cost of
deposits driven by changes in both volume and rates.
For the year ended December 31, 2019, interest income on loans held for sale decreased $5.7 million to $10.0 million
compared to $15.6 million for the year ended December 31, 2018 due to a decrease in volume contributing a decline of
$3.8 million. The average balance of loans held for sale decreased $97.7 million to $254.7 million for the year ended
December 31, 2019 compared to $352.4 million for the year ended December 31, 2018. This decrease includes the impact
of the mortgage restructuring, which was completed during the third quarter of 2019. For additional information on the sale,
refer to the discussion in this section under the heading "Noninterest income".
Investment securities interest income, on a tax-equivalent basis, increased during the year ended December 31, 2019 to
$19.7 million from $17.9 million for the year ended December 31, 2018 driven by increased volume. The average balance
in the investment portfolio for the year ended December 31, 2019 was $671.6 million compared to $597.3 million for the
year ended December 31, 2018.
Interest expense was $56.5 million for the year ended December 31, 2019, an increase of $21.0 million as compared to the
year ended December 31, 2018. The primary driver for the increase in total interest expense is the increase in interest
expense on deposits of $22.0 million to $51.6 million for the year ended December 31, 2019, compared to $29.5 million for
the year ended December 31, 2018. The increase was largely attributed to money market and customer time deposits which
increased to $17.4 million and $24.1 million, respectively, for the year ended December 31, 2019 from $10.9 million and
$10.4 million, respectively, for the year ended December 31, 2018. The $6.5 million increase in money market interest
expense during the year ended December 31, 2019 was primarily attributed to increased rates with a secondary driver of
increased volume. The average rate on money markets rose to 1.42%, up 36 basis points from the year ended
December 31, 2018. Average money market balances increased $192.6 million to $1,219.7 million during the year ended
December 31, 2019 from $1,027.0 million for the same period in the previous year. The $13.7 million increase in customer
time deposit interest expense during the year ended December 31, 2019 was primarily attributed to increased volume with
a secondary driver of higher rates. Average customer time deposits increased $410.2 million from $744.8 million during the
year ended December 31, 2018 to $1,155.1 million during the year ended December 31, 2019. The average rate on
customer time deposits increased 69 basis points from 1.40% for the year ended December 31, 2018 to 2.09% for the year
ended December 31, 2019.
Deposit growth was the result of a time deposit campaign implemented during the second half of 2018 and the $147.1
million in time deposits acquired in the Atlantic Capital branch acquisition. Total cost of total deposits was 1.10% for the year
ended December 31, 2019 compared to 0.76% for the year ended December 31, 2018.
Offsetting the increase in total deposit interest expense was a decrease in interest expense on total borrowings, which
decreased $1.0 million to $4.9 million during the year ended December 31, 2019 compared to $6.0 million during the year
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ended December 31, 2018. The cost of total borrowings decreased to 2.01% for the year ended December 31, 2019 from
2.24% for the year ended December 31, 2018. This decrease was primarily driven by lower interest rates on FHLB
advances, with a secondary driver of decreased volume. Average FHLB advances decreased $28.5 million to $187.5 million
for the year ended December 31, 2019 compared to $216.0 million for the year ended December 31, 2018. This decrease
in average FHLB advances was primarily due to paying down higher rate advances with additional liquidity obtained from
the Atlantic Capital branch acquisition. For more information about our borrowings, refer to the discussion in this section
under the heading “Financial condition: Borrowed funds.”
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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 interesting-earning
assets and interest-bearing liabilities on a tax equivalent basis, if applicable, for the periods indicated.
(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
2019
2018
Year Ended December 31,
2017
Interest-earning assets:
Loans(2)(4)
Loans held for sale
Securities:
Taxable
Tax-exempt(4)
Total Securities(4)
Federal funds sold
Interest-bearing deposits with other
financial institutions
FHLB stock
Total interest earning assets(4)
Noninterest Earning Assets:
Cash and due from banks
Allowance for loan losses
Other assets(3)
Total noninterest earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing deposits:
$ 4,149,590 $ 250,693
9,966
254,689
6.04% $ 3,376,203 $ 205,543
15,632
352,370
3.91%
6.09% $ 2,418,261
419,290
4.44%
$ 136,950
17,256
516,250
155,306
671,556
31,309
13,223
6,498
19,721
678
130,145
15,146
5,252,435
2,651
722
284,431
2.56%
4.18%
2.94%
2.17%
2.04%
4.77%
5.42%
478,034
119,295
597,329
21,466
12,397
5,473
17,870
412
2.59%
4.59%
2.99%
1.92%
441,568
116,384
557,952
20,175
49,549
12,742
4,409,659
998
716
241,171
2.01%
75,567
8,894
5.62%
5.47% 3,500,139
10,084
6,592
16,676
140
954
460
172,436
51,194
(30,442)
504,485
525,237
$ 5,777,672
49,410
(25,747 )
411,543
435,206
$ 4,844,865
53,653
(22,967)
280,333
311,019
$ 3,811,158
Interest-bearing checking
$
Money market
Savings deposits
Customer time deposits
Brokered and internet time deposits
Time deposits
Total interest-bearing deposits
Other interest-bearing liabilities:
Securities sold under agreements to
repurchase and federal funds
purchased
Federal Home Loan Bank advances
Subordinated debt
Total other interest-bearing
liabilities
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
Total noninterest-bearing
liabilities
Total liabilities
Shareholders' equity
950,219 $
1,219,652
199,535
1,155,058
45,313
1,200,371
3,569,777
8,755
17,380
301
24,103
1,029
25,132
51,568
0.92% $
1.42%
0.15%
2.09%
2.27%
2.09%
1.44%
894,252 $
1,027,047
178,303
744,834
82,113
826,947
2,926,549
6,488
10,895
272
10,409
1,472
11,881
29,536
0.73% $
1.06%
0.15%
1.40%
1.79%
762,918
888,258
156,328
467,507
44,234
511,741
1.44%
1.01% 2,319,245
$
3,640
5,387
245
3,077
682
3,759
13,031
26,400
187,509
30,930
291
3,004
1,638
244,839
3,814,616
4,933
56,501
1.10%
1.60%
5.30%
2.01%
1.48%
19,528
216,011
30,930
150
4,166
1,651
0.77%
1.93%
5.34%
16,968
110,764
30,930
266,469
3,193,018
5,967
35,503
2.24%
158,662
1.11% 2,477,907
42
1,778
1,491
3,311
16,342
1,130,113
109,449
1,239,562
5,054,178
723,494
967,663
54,262
1,021,925
4,214,943
629,922
814,643
52,389
867,032
3,344,939
466,219
Total liabilities and shareholders'
equity
$ 5,777,672
$ 4,844,865
$ 3,811,158
Net interest income (tax-equivalent
basis)
Interest rate spread (tax-equivalent
basis)
Net interest margin (tax-equivalent
basis)(5)
Cost of total deposits
Average interest-earning assets to
average interest-bearing liabilities
$ 227,930
$ 205,668
156,094
3.94%
4.34%
1.10%
137.7%
74
4.36%
4.66%
0.76%
138.1%
5.66%
4.12%
2.28%
5.66%
2.99%
0.69%
1.26%
5.17%
4.93%
0.48%
0.61%
0.16%
0.66%
1.54%
0.73%
0.56%
0.25%
1.61%
4.82%
2.09%
0.66%
4.27%
4.46%
0.42%
141.3%
(1) Calculated using daily averages.
(2) Average balances of nonaccrual loans are included in average loan balances. Loan fees of $13.0 million, $13.1 million, and $7.6 million, accretion of $8.6 million, $7.6
million, and $5.4 million, nonaccrual interest collections of $0.9 million, $1.4 million, and $3.3 million, and syndicated loan fees of $0.2 million, $0.4 million, and $1.0 million
are included in interest income in the years ended December 31, 2019, 2018, and 2017 respectively.
Includes investments in premises and equipment, other real estate owned, interest receivable, MSRs, core deposit and other intangibles, goodwill and other miscellaneous
assets.
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 $1.9 million, $1.6 million, and $2.8 million for
the years ended December 31, 2019, 2018, and 2017 respectively.
(4)
(3)
(5) The NIM is calculated by dividing annualized net interest income, on a tax-equivalent basis, by average total earning assets.
Rate/volume analysis
The tables below present the components of the changes in net interest income for the year ended December 31, 2019 and
2018. 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, 2019 compared to year ended December 31, 2018
(dollars in thousands on a tax-equivalent basis)
Volume
Rate
Net increase
(decrease)
Year ended December 31, 2019 compared to
year ended December 31, 2018
due to changes in
Interest-earning assets:
Loans(1)(2)
Loans held for sale
Securities available for sale and other securities:
Taxable
Tax Exempt(2)
Federal funds sold and balances at Federal Reserve Bank
Time deposits in other financial institutions
FHLB stock
Total interest income(2)
Interest-bearing liabilities:
Interest-bearing checking
Money market
Savings deposits
Customer time deposits
Brokered and internet time deposits
Securities sold under agreements to repurchase and federal funds
purchased
Federal Home Loan Bank advances
$
46,723 $
(3,822)
(1,573) $
(1,844)
979
1,507
213
1,642
115
47,357
516
2,745
32
8,560
(836)
76
(153)
(482)
53
11
(109)
(4,097)
1,751
3,740
(3)
5,134
393
65
45,150
(5,666)
826
1,025
266
1,653
6
43,260
2,267
6,485
29
13,694
(443)
141
(1,162)
Subordinated debt
(13)
20,998
Total interest expense
22,262
Change in net interest income(2)
(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.
Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.
10,362
(14,459) $
$
(2)
(457)
—
10,636
36,721 $
(705)
(13)
As discussed above, the $45.2 million increase in interest income on loans held for investment during the year ended
December 31, 2019 compared to December 31, 2018 was the primary driver of the $22.3 million increase in tax-
equivalent net interest income. The increase in loan interest income was driven by an increase in average loans held for
investment of $773.4 million, or 22.9%, to $4.15 billion for the year ended December 31, 2019, as compared to $3.38
billion for the year ended December 31, 2018, which was largely attributable to strong organic loan growth, the acquisition
of $374.4 million in loans from the Branches and continued favorable economic conditions in many of our markets. The
increase in loan income was partially offset by an increase in interest expense of $21.0 million driven by increases in rates
and volume of customer deposits slightly offset by lower interest rates and volume in FHLB advances.
75
Year ended December 31, 2018 compared to year ended December 31, 2017
(dollars in thousands on a tax-equivalent basis)
Volume
Rate
due to changes in
Net increase
(decrease)
Year Ended December 31, 2018 compared to
year ended December 31, 2017
Interest-earning assets:
Loans(1)(2)
Loans held for sale
Securities available for sale and other securities:
Taxable
Tax Exempt(2)
Federal funds sold and balances at Federal Reserve Bank
Time deposits in other financial institutions
FHLB stock
Total interest income(2)
Interest-bearing liabilities:
Interest-bearing checking
Money market
Savings deposits
Customer time deposits
Brokered and internet time deposits
Securities sold under agreements to repurchase and federal funds
purchased
Federal Home Loan Bank advances
Subordinated debt
$
58,319 $
(2,969)
10,274 $
1,345
946
134
25
(524)
216
56,147
953
1,472
34
3,876
679
1,367
(1,253)
247
568
40
12,588
1,895
4,036
(7)
3,456
111
68,593
(1,624)
2,313
(1,119)
272
44
256
68,735
2,848
5,508
27
7,332
790
20
2,030
—
9,064
47,083 $
88
358
160
10,097
2,491 $
108
2,388
160
19,161
49,574
Total interest expense
Change in net interest income(2)
(1) Average loans are gross, including nonaccrual loans and overdrafts (before deduction of allowance for loan losses). Loan fees of $13.1 million and $7.6 million, accretion
of $7.6 million and $5.4 million, nonaccrual interest collections of $1.4 million and $3.3 million, and syndicated loan fee income of $0.4 million and $1.0 million are included
in interest income for the years ended December 31, 2018 and 2017, respectively.
Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.
$
(2)
Provision for loan losses
The provision for loan losses charged to operating expense is an amount which, in the judgment of management, is
necessary to maintain the allowance for loan losses at a level that is believed to be adequate to meet the inherent risks of
losses in our loan portfolio. Factors considered by management in determining the amount of the provision for loan losses
include the internal risk rating of individual credits, historical and current trends in net charge-offs, trends in nonperforming
loans, trends in past due loans, trends in the market values of underlying collateral securing loans and the current economic
conditions in the markets in which we operate. The determination of the amount is complex and involves a high degree of
judgment and subjectivity. See discussion under subheading “Allowance for Loan Losses” in Part II, Item 7 of this Report
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion related to
our January 1, 2020 adoption of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments".
Year ended December 31, 2019 compared to year ended December 31, 2018
Our provision for loan losses for the year ended December 31, 2019 was $7.1 million as compared to $5.4 million for the
year ended December 31, 2018. The increase is primarily attributable to our loan growth during the period and increased
net charge-offs from the previous year. The provision for the year ended December 31, 2019 and 2018 also included $0.8
million and $0.9 million of subsequent deterioration on PCI loans related to our previously completed acquisitions. Net
charge-offs for the year ended December 31, 2019 were $4.8 million compared to $0.2 million for the year ended
December 31, 2018.
76
Noninterest income
Our noninterest income includes gains on sales of mortgage loans, 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:
(dollars in thousands)
Mortgage banking income
Service charges on deposit accounts
ATM and interchange fees
Investment services and trust income
Gain (loss) from securities, net
Gain (loss) on sales or write-downs of other real estate owned
(Loss) gain from other assets
Other
Total noninterest income
Year Ended December 31,
$
$
2019
100,916 $
9,479
12,161
5,244
57
545
(104 )
7,099
135,397 $
2018
100,661 $
8,502
10,013
5,181
(116)
(99)
328
6,172
130,642 $
2017
116,933
7,426
8,784
3,949
285
774
(664)
4,094
141,581
Year ended December 31, 2019 compared to year ended December 31, 2018
Noninterest income was $135.4 million for the year ended December 31, 2019, an increase of $4.8 million, or 3.64%, as
compared to $130.6 million for the year ended December 31, 2018. Noninterest income to average assets (excluding any
gains or losses from sale of securities, OREO and other assets) was 2.3% in the year ended December 31, 2019 as
compared to 2.7% in the year ended December 31, 2018.
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 vale 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 $100.9 million and
$100.7 million for the year ended December 31, 2019 and 2018, respectively.
During the year ended December 31, 2019, the Bank’s mortgage operations had sales of $4.55 billion which generated a
sales margin of 2.12%. This compares to $6.15 billion and 1.59% for the year ended December 31, 2018. The increase in
sales margin is a result of change in product mix due to the mortgage restructuring and market conditions. The overcapacity
and slow-down of the mortgage market and overall compressing margins experienced during most of the first quarter of
2019 began to improve during the second quarter of 2019 with lowered interest rates bumping production. Mortgage
banking income from gains on sale and related fair value changes increased to $100.2 million during the year ended
December 31, 2019 compared to $88.7 million for the year ended December 31, 2018. While total interest rate lock volume
decreased $1,218.3 million, or 17.1%, during the year ended December 31, 2019 as a result of our mortgage restructuring,
interest rate lock volume in our ConsumerDirect and retail delivery channels increased 16.5% from year ended
December 31, 2018. The increased volume in our ConsumerDirect and retail channels was driven by lower interest rates
during the year ended December 31, 2019, leading to an increase in refinancing activity during the last half of 2019.
Income from mortgage servicing of $17.7 million and $20.6 million for year ended December 31, 2019 and 2018,
respectively, were partially offset by declines in fair value of MSRs and related hedging activity of $17.0 million and $8.7
million in the year ended December 31, 2019 and 2018, respectively.
77
The components of mortgage banking income for the December 31, 2019, 2018 and 2017 were as follows:
(in thousands)
Mortgage banking income:
Origination and sales of mortgage loans
Net change in fair value of loans held for sale and derivatives
Change in fair value on MSRs
Mortgage servicing income
Total mortgage banking income
Interest rate lock commitment volume by line of business:
ConsumerDirect
Third party origination (TPO)
Retail
Correspondent
Total
Interest rate lock commitment volume by purpose (%):
Purchase
Refinance
Mortgage sales
Mortgage sale margin
Closing volume
Outstanding principal balance of mortgage loans serviced
$
$
$
Year Ended December 31,
2019
2018
2017
$
96,710
3,518
(16,989)
17,677
100,916
$
$
98,075
(9,332)
(8,673)
20,591
100,661
$
103,735
3,454
(3,424)
13,168
116,933
$
2,979,811
327,373
1,605,158
990,646
$
2,685,103
860,464
1,250,136
2,325,555
2,859,992
1,013,802
1,256,243
2,440,350
$
5,902,988
$
7,121,258
$
7,570,387
43.8%
56.2%
65.7%
34.3%
57.6%
42.4%
4,554,962
6,154,847
6,349,717
2.12%
4,540,652
6,734,496
$
$
1.59%
5,958,066
6,755,114
$
$
1.63%
6,331,458
6,529,431
$
$
Mortgage banking income attributable to our Banking segment from retail operations within the Bank footprint was $30.4
million and $25.5 million for the year ended December 31, 2019 and 2018, respectively, and mortgage banking income
attributable to our Mortgage segment was $70.5 million and $75.2 million for the years ended December 31, 2019 and 2018,
respectively.
Service charges on deposit accounts include analysis and maintenance fees on accounts, per item charges, non-sufficient
funds and overdraft fees. Service charges on deposit accounts were $9.5 million, an increase of $1.0 million, or 11.5%, for
the year ended December 31, 2019, compared to $8.5 million for the year ended December 31, 2018. This increase is
attributable to our 20.7% growth in average deposits, which is partially attributable to our branch acquisition from Atlantic
Capital Bank.
ATM and interchange fees include debit card interchange, ATM and other consumer fees. These fees increased $2.1 million
to $12.2 million during the year ended December 31, 2019 as compared to $10.0 million for the year ended December 31,
2018. This increase is also attributable to our growth in deposits and increased volume of transactions.
Investment services and trust income includes fees for discretionary portfolio management and trust administration for
individuals and businesses. Investment services and trust income was $5.2 million for both the years ended December 31,
2019 and 2018.
Gain on securities for the year ended December 31, 2019 was $57 thousand compared to a loss on securities for the year
ended December 31, 2018 of $116 thousand. Activity is typically driven by sales activity within our available-for-sale
securities portfolio in addition to change in fair value of equity securities with readily determinable market values. Sales
activity is attributable to management taking advantage of portfolio structuring opportunities to maintain comparable interest
rates and maturities and to fund current loan growth in addition to overall asset liability management. The gain in the year
ended December 31, 2019 is related to a net loss on available-for-sale securities of $91 thousand resulting primarily from
the sale of $24.5 million in available-for-sale securities, which was offset by a net gain of $148 thousand related to changes
in fair value of equity securities with readily determinable fair values. The loss in the year ended December 31, 2018 is
related to the sale of approximately $2.7 million in available-for-sale debt securities and also includes a net loss of $81
thousand related to changes in fair value of equity securities with readily determinable fair values.
78
Gain on sales or write-downs of other real estate owned for the year ended December 31, 2019 was $0.5 million compared
to a net loss of $0.1 million for the year ended December 31, 2018. This change was the result of specific sales and valuation
transactions of other real estate.
Loss on other assets includes sales of repossessed assets and other miscellaneous assets in addition to any identified
impairment during the period. Net loss on other assets for the year ended December 31, 2019 was $0.1 million compared
to a gain of $0.3 million for the year ended December 31, 2018. The gain during the year ended December 31, 2018 resulted
from the sale of restricted marketable securities received in satisfaction of a previously charged-off loan.
Other noninterest income for the year ended December 31, 2019 increased $0.9 million to $7.1 million as compared to other
noninterest income of $6.2 million for year ended December 31, 2018. This increase reflected a $0.3 million increase in
income from manufactured housing loan servicing along with miscellaneous costs associated with our overall growth, which
is partially attributable to the branch acquisition from Atlantic Capital Bank.
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:
(dollars in thousands)
Salaries, commissions and employee benefits
Occupancy and equipment expense
Legal and professional fees
Data processing
Merger costs
Amortization of core deposit and other intangibles
Advertising
Other expense
Total noninterest expense
$
$
2019
152,084 $
15,641
7,486
10,589
5,385
4,339
9,138
40,179
244,841 $
Year Ended December 31,
2017
130,005
13,010
5,737
6,488
19,034
1,995
12,957
33,091
222,317
2018
136,892 $
13,976
7,903
9,100
1,594
3,185
13,139
37,669
223,458 $
Year ended December 31, 2019 compared to year ended December 31, 2018
Noninterest expense increased by $21.4 million during the year ended December 31, 2019 to $244.8 million as compared
to $223.5 million in the year ended December 31, 2018. This increase resulted primarily from a $15.2 million increase in
salaries, commissions and employee benefits expense in addition to merger costs and increased operational costs
associated with our growth and acquisition of the Branches.
Salaries, commissions and employee benefits expense was the largest component of noninterest expenses representing
62.1% and 61.3% of total noninterest expense in the year ended December 31, 2019 and 2018, respectively. During the
year ended December 31, 2019, salaries and employee benefits expense increased $15.2 million, or 11.1%, to $152.1
million as compared to $136.9 million for the year ended December 31, 2018. This increase was mainly driven by several
key employee hires in the Banking segment in addition to the impact of our acquisition of the Branches and increased
commissions related to swap activity and increased mortgage production in the last half of 2019.
Costs resulting from our equity compensation grants during the year ended December 31, 2019 and 2018 amounted to $7.1
million and $7.4 million, respectively. These grants comprise restricted stock units that were granted in conjunction with our
2016 IPO to all full-time associates and extended to new associates each year, in addition to annual performance grants.
Occupancy and equipment expense includes depreciation expense, rent expense related to leased properties, property
taxes and costs related to the ongoing operation and repair and maintenance of our properties. Occupancy and equipment
expense in the year ended December 31, 2019 was $15.6 million, an increase of $1.7 million, compared to $14.0 million for
the year ended December 31, 2018. The increase is attributable to an increase in lease costs and property taxes, which are
partially attributable to our acquisition of the Branches.
79
Legal and professional fees includes litigation expense, accounting, audit and tax service fees, professional licenses and
fees, quality control and consulting fees. Legal and professional fees were $7.5 million for the year ended December 31,
2019 as compared to $7.9 million for the year ended December 31, 2018.
Data processing costs include computer expenses and data processing fees for authorization, clearing, settlement and
other various processing activity. Data processing costs increased $1.5 million, or 16.4%, to $10.6 million for the year ended
December 31, 2019 from $9.1 million for the year ended December 31, 2018. The increase for the year ended December 31,
2019 was attributable to our growth and increased volume of transaction processing.
Merger costs amounted to $5.4 million for the year ended December 31, 2019 compared to $1.6 million for the year ended
December 31, 2018. Merger costs during the year ended December 31, 2019 include costs associated with our acquisition
and conversion of the Branches in addition to due diligence and other costs associated with our previously announced
mergers with Farmers National and Franklin.
Amortization of core deposits and other intangibles represents amortization of core deposit intangible assets acquired
through acquisitions and other miscellaneous intangibles. Amortization of core deposit and other intangible assets totaled
$4.3 million for the year ended December 31, 2019 compared to $3.2 million for the year ended December 31, 2018. The
increase is due to the additional core deposit intangible of $10.8 million recorded in our acquisition of the Branches, which
closed on April 5, 2019.
Advertising costs for the year ended December 31, 2019 were $9.1 million, a decrease of $4.0 million compared to $13.1
million for the year ended December 31, 2018. The decrease is attributable to lower costs from our mortgage business and
a time deposit campaign that took place during the year ended December 31, 2018.
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 $2.5 million during the year ended December 31, 2019 to $40.2 million compared to $37.7 million during
the year ended December 31, 2018. The increase includes costs resulting from our mortgage restructuring amounting to
$2.0 million in addition to other miscellaneous costs associated with our growth, including the impact of the Atlantic Capital
branch acquisition.
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 67.7% and 66.8% for the years ended December 31, 2019 and 2018, respectively. Our adjusted
efficiency ratio, on a tax-equivalent basis, was 65.4% and 65.8% for the years ended December 31, 2019 and 2018,
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:
Return on average total assets
Return on average shareholders' equity
Dividend payout ratio
Average shareholders’ equity to average assets
Year Ended December 31,
2019
1.45%
11.6%
12.2%
12.5%
2018
1.66%
12.7%
7.93%
13.0%
2017
1.37%
11.2%
—%
12.2%
80
Income tax
Income tax expense was $25.7 million and $25.6 million for the years ended December 31, 2019 and 2018, respectively.
This represents effective tax rates of 23.5% and 24.2% for the year ended December 31, 2019 and 2018 , respectively. The
primary differences from the enacted rates are applicable state income taxes reduced for non-taxable income and additional
deductions for equity-based compensation upon the distribution of RSUs.
Financial condition
The following discussion of our financial condition compares the year ended December 31, 2019 with the year ended
December 31, 2018.
Total assets
Our total assets were $6.12 billion at December 31, 2019. This compares to total assets of $5.14 billion as of December 31,
2018. This increase was largely attributable to an increase of $742.1 million in loans held for investment driven by strong
demand for loan products in our markets and the success of our growth initiatives, including $374.4 million of loans acquired
through our branch acquisition from Atlantic Capital Bank.
Loan portfolio
Our loan portfolio is our most significant earning asset, comprising 72.0% and 71.4% of our total assets as of December 31,
2019 and December 31, 2018, 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.
Currently, our loan portfolio is diversified relative to industry concentrations across the various loan portfolio categories. At
December 31, 2019 and December 31, 2018, our outstanding loans to the broader healthcare industry made up less than
5% of our total outstanding loans and are spread across nursing homes, assisted living facilities, outpatient mental health
and substance abuse centers, home health care services, and medical practices within our geographic markets. Additionally,
at December 31, 2019 and December 31, 2018, our outstanding loans to hotels made up less than 5% of our total
outstanding loans. 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, 2019 and December 31, 2018, loans held for investment included approximately $103.4 million and $88.8
million, respectively, related to participated loans. We believe our loan portfolio is well-balanced, which provides us with the
opportunity to grow while monitoring our loan concentrations.
Loans
Loans increased $742.1 million, or 20.2%, to $4.41 billion as of December 31, 2019 as compared to $3.67 billion as of
December 31, 2018. Our loan growth during the year ended December 31, 2019 has been composed of increases of $167.0
million, or 19.3%, in commercial and industrial loans, $136.7 million, or 27.7%, in owner occupied commercial real estate
loans, $220.5 million, or 31.5%, in non-owner occupied commercial real estate loans, $179.7 million, or 21.9%, in residential
real estate loans and $43.2 million, or 18.9%, in consumer and other loans, respectively. These increases were offset by a
decrease of $5.0 million, or 0.9%, in construction loans. The increase in loans during the year ended December 31, 2019
is attributable to our Atlantic Capital branch acquisition, continued strong demand in our metropolitan markets, and continued
favorable economic conditions and interest rates throughout much of our geographic footprint.
81
Loans by type
The following table sets forth the balance and associated percentage of each major category in our loan portfolio of loans
as of the dates indicated:
(dollars in thousands)
Loan Type:
Commercial and industrial
Construction
Residential real estate:
1-to-4 family
Line of credit
Multi-family
Commercial real estate:
Owner-Occupied
Non-Owner Occupied
Consumer and other
Total loans
2019
% of
total Amount
2018
% of
total
Amount
2017
As of December 31,
2015
2016
Amount
% of
total
Amount
% of
total
Amount
% of
total
$ 1,034,036
551,101
23% $
13%
867,083
556,051
24% $ 715,075
448,326
15%
23% $ 386,233
245,905
14%
21%$ 318,791
238,170
13%
19%
14%
710,454
221,530
69,429
16%
5%
2%
555,815
190,480
75,457
16%
5%
2%
480,989
194,986
62,374
15%
6%
2%
294,924
177,190
44,977
16%
10%
2%
290,704
171,526
59,510
17%
10%
3%
630,270
14%
920,744 21%
272,078
6%
495,872
16%
551,588 17%
217,701
7%
5%
$ 4,409,642 100% $ 3,667,511 100% $ 3,166,911 100% $ 1,848,784 100%$ 1,701,863 100%
493,524
13%
700,248 19%
228,853
6%
357,346
19%
267,902 15%
74,307
4%
337,664
207,871
77,627
20%
12%
Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other conditions. At December 31, 2019 and
December 31, 2018, there were no concentrations of loans exceeding 10% of loans other than the categories of loans
disclosed in the table above.
Banking regulators have established thresholds of less than 100% for concentrations in construction lending and less than
300% for concentrations 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 risk-based capital. 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 total risk-based capital.
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, 2019 and December 31, 2018,
which both were within the stated thresholds.
December 31, 2019
Construction
Commercial real estate
December 31, 2018
Construction
Commercial real estate
As a percentage (%) of risk based capital
FirstBank
FB Financial
Corporation
88.4%
247.4%
99.1%
237.5%
87.0%
243.4%
95.4%
228.6%
82
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.
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 personal guarantees. We plan to continue to make
commercial and industrial loans an area of emphasis in our lending operations in the future. As of December 31, 2019, our
commercial and industrial loans comprised $1,034.0 million, or 23% of loans, compared to $867.1 million, or 24% of loans,
as of December 31, 2018.
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.
As of December 31, 2019, our owner occupied commercial real estate loans comprised $630.3 million, or 14% of loans,
compared to $493.5 million, or 13%, of loans, as of December 31, 2018.
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. As of December 31, 2019, our non-owner occupied commercial real estate loans
comprised $920.7 million, or 21%, of loans, compared to $700.2 million, or 19% of loans, as of December 31, 2018.
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. As of December 31, 2019, our
residential real estate mortgage loans comprised $710.5 million, or 16% of loans, compared to $555.8 million, or 16%, of
loans as of December 31, 2018.
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. Our home equity loans as of December 31, 2019 comprised $221.5 million
or 5% of loans compared to $190.5 million, or 5%, of loans as of December 31, 2018.
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. Our multifamily loans as of December 31, 2019 comprised $69.4 million, or 2%
of loans, compared to $75.5 million, or 2%, of loans as of December 31, 2018.
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
83
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. As of December 31, 2019, our construction loans comprised $551.1 million, or 13% of loans compared
to $556.1 million, or 15% of loans as of December 31, 2018.
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. As of
December 31, 2019, our consumer and other loans comprised $272.1 million, or 6% of loans, compared to $228.9 million,
or 6% of loans as of December 31, 2018.
Loan maturity and sensitivities
The following tables present the contractual maturities of our loan portfolio as of December 31, 2019 and December 31,
2018. 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 or scheduled repayments. As of December 31, 2019 and December 31, 2018, the Company had $23.1
million and $39.9 million, respectively, in fixed-rate loans in which the Company has entered into variable rate swap
contracts.
Loan type (dollars in thousands)
Maturing in one
year or less
Maturing in one
to five years
Maturing after
five years
Total
As of December 31, 2019
Commercial and industrial
Commercial real estate:
Owner occupied
Non-owner occupied
Residential real estate:
1-to-4 family
Line of credit
Multi-family
Construction
Consumer and other
Total ($)
Total (%)
$
396,045
$
501,693
$
136,298
$
1,034,036
97,724
109,172
63,297
7,179
1,793
241,872
38,830
955,912
$
367,072
552,333
258,570
47,629
57,602
259,942
66,016
2,110,857
$
165,474
259,239
388,587
166,722
10,034
49,287
167,232
1,342,873
$
630,270
920,744
710,454
221,530
69,429
551,101
272,078
4,409,642
21.7%
47.9%
30.4%
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, 2018
Commercial and industrial
Commercial real estate:
Owner occupied
Non-owner occupied
Residential real estate:
1-to-4 family
Line of credit
Multi-family
Construction
Consumer and other
Total ($)
Total (%)
$
316,253
$
442,720
$
108,110
$
867,083
82,141
92,418
55,553
10,382
2,226
233,108
31,580
823,661
$
296,303
345,241
223,346
41,024
18,706
256,079
52,516
1,675,935
$
115,080
262,589
276,916
139,074
54,525
66,864
144,757
1,167,915
$
493,524
700,248
555,815
190,480
75,457
556,051
228,853
3,667,511
22.5%
45.7%
31.8%
100.0%
$
84
For loans due after one year or more, the following tables present the sensitivities to changes in interest rates as of
December 31, 2019 and December 31, 2018.
Loan type (dollars in thousands)
As of December 31, 2019
Commercial and industrial
Commercial real estate:
Owner occupied
Non-owner occupied
Residential real estate:
1-to-4 family
Line of credit
Multi-family
Construction
Consumer and other
Total ($)
Total (%)
Loan type (dollars in thousands)
As of December 31, 2018
Commercial and industrial
Commercial real estate:
Owner occupied
Non-owner occupied
Residential real estate:
1-to-4 family
Line of credit
Multi-family
Construction
Consumer and other
Total ($)
Total (%)
Fixed
interest rate
Floating
interest rate
Total
$
288,666
$
349,325
$
637,991
422,684
324,951
532,409
892
49,091
93,342
215,822
1,927,857
$
109,862
486,621
114,748
213,459
18,545
215,887
17,426
1,525,873
$
532,546
811,572
647,157
214,351
67,636
309,229
233,248
3,453,730
55.8 %
44.2%
100.0%
$
Fixed
interest rate
Floating
interest rate
Total
$
195,589
$
355,241
$
550,830
346,356
289,990
468,048
25,196
69,301
121,451
193,115
1,709,046
$
65,027
317,840
32,214
154,902
3,930
201,492
4,158
1,134,804
$
411,383
607,830
500,262
180,098
73,231
322,943
197,273
2,843,850
60.1 %
39.9%
100.0%
$
The following table presents the contractual maturities of our loan portfolio segregated into fixed and floating interest rate
loans as of December 31, 2019 and December 31, 2018.
(dollars in thousands)
As of December 31, 2019
One year or less
One to five years
More than five years
Total ($)
Total (%)
(dollars in thousands)
As of December 31, 2018
One year or less
One to five years
More than five years
Total ($)
Total (%)
Fixed
Floating
interest rate
interest rate
Total
$
$
$
$
381,148
1,224,977
702,880
2,309,005
$
$
574,764
885,880
639,993
2,100,637
$
$
955,912
2,110,857
1,342,873
4,409,642
52.4 %
47.6%
100.0%
Fixed
interest rate
Floating
interest rate
Total
346,928
993,441
715,605
2,055,974
$
$
476,733
682,494
452,310
1,611,537
$
$
823,661
1,675,935
1,167,915
3,667,511
56.1 %
43.9%
100.0%
85
Of the loans shown above with floating interest rates totaling $2.10 billion as of December 31, 2019, many of such have
interest rate floors as follows:
Maturing
in one
year or
less
Weighted
average
level of
support
(bps)
Maturing
in one to
five years
Weighted
average
level of
support
(bps)
Weighted
average
level of
support
(bps)
Maturing
after five
years
Weighted
average
level of
support
(bps)
Total
$
28,614
35,368
41,672
12,873
31,853
14,074
2,450
2,817
18
15.00 $
34.96
75.00
98.67
124.38
150.00
178.07
246.37
323.65
15,902
13,884
16,562
27,713
33,390
16,019
12,172
3,241
2,434
15.98 $
50.00
75.00
95.42
119.30
148.89
178.43
228.26
349.01
30,797
19,900
15,546
18,070
28,435
44,528
63,436
17,605
13,725
3.68 $
48.46
72.86
96.45
118.48
148.38
179.18
228.47
347.19
75,313
69,152
73,780
58,656
93,678
74,621
78,058
23,663
16,177
10.58
41.86
74.55
96.45
120.78
148.80
179.03
230.57
347.44
$ 169,739
78.18
$ 141,317
105.89
$ 252,042
135.23
$ 563,098
110.67
$
67,045
7,479
6,262
51
1,198
7
7
—
482
14.10 $ 186,954
16,120
42.77
27,902
74.81
6,184
99.91
6,009
123.80
8,022
136.00
193.63
4,337
12,024
—
—
1,008.92
9.61
44.37
74.82
87.96
120.96
147.09
175.05
233.05
—
$51,932
17,728
24,570
5,006
28,949
12,927
24,766
574
78
15.09
39.92
70.59
89.00
116.99
134.15
161.38
227.90
331.00
$305,931
41,327
58,734
11,241
36,156
20,956
29,110
12,598
560
11.52
42.17
73.05
88.48
117.88
139.10
163.42
232.82
915.04
$
82,531
9.42
$ 267,552
25.95
$ 166,530
30.93
$ 516,613
24.02
Loans with interest rate floors
(dollars in thousands)
As of December 31, 2019
Loans with current rates above
floors:
1-25 bps
26-50 bps
51-75 bps
76-100 bps
101-125 bps
126-150 bps
151-200 bps
200-250 bps
251 bps and above
Total loans with current rates
above floors
Loans with current rates below
floors:
1-25 bps
26-50 bps
51-75 bps
76-100 bps
101-125 bps
126-150 bps
151-200 bps
200-250 bps
251 bps and above
Total loans with current rates
below floors
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 and 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.
Purchased credit impaired (“PCI”) loans are considered past due or delinquent when the contractual principal or interest
due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment.
However, these loans are considered to be performing, even though they may be contractually past due, as any non-
payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included
in the resulting recognition of current period covered loan loss provision or future period yield adjustments. The accrual of
86
interest is discontinued on PCI loans if management can no longer reliably estimate future cash flows on the loan. No PCI
loans were classified as nonaccrual at December 31, 2019 or December 31, 2018 as the carrying value of the respective
loan or pool of loans cash flows were considered estimable and probable of collection. Therefore, interest revenue, through
accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all
PCI loans. PCI contractually past due 30-89 days amounted to $3.0 million and $3.6 million as of December 31, 2019 and
December 31, 2018, respectively, and an additional $0.8 million and $4.1 million were contractually past due 90 days or
more as of December 31, 2019 and December 31, 2018, respectively.
As of December 31, 2019 and December 31, 2018, we had $47.1 million and $31.4 million, respectively, in nonperforming
assets. As of December 31, 2019 and December 31, 2018, other real estate owned included $9.0 million and $5.4 million,
respectively, of excess land and facilities resulting from our acquisitions. Other nonperforming assets, including other
repossessed non-real estate, as of December 31, 2019 and December 31, 2018 amounted to $1.6 million and $1.6 million,
respectively.
At December 31, 2019 and 2018, there were $51.7 million and $67.4 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 sheet as of December 31, 2019 or 2018. We continue to assess this on a quarterly basis.
We had net interest recoveries of $0.9 million and $1.4 million during the year ended December 31, 2019 and 2018,
respectively.
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:
(dollars in thousands)
Loan Type
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total nonperforming loans held for investment
Loans held for sale
Other real estate owned
Other
Total nonperforming assets
Total nonperforming loans held for investment as a
percentage of total loans held for investment
Total nonperforming assets as a percentage of
total assets
Total accruing loans over 90 days delinquent as a
percentage of total assets
Loans restructured as troubled debt restructurings
Troubled debt restructurings as a percentage
of total loans held for investment
2019
5,878
1,129
7,297
828
—
1,793
7,880
1,800
26,605
—
18,939
1,580
47,124
$
$
2018
2017
As of December 31,
2016
2015
$
$
503
283
$
623
541
3,441
1,761
—
2,620
6,962
1,156
16,726
397
12,643
1,637
31,403
$
3,504
833
—
2,940
1,371
285
10,097
43,355
16,442
2,369
72,263
$
$
1,424
271
2,986
1,034
—
2,007
2,251
85
10,058
—
7,403
1,654
19,115
$
$
1,732
305
2,392
1,437
—
1,974
3,512
235
11,587
—
11,641
1,654
24,882
0.60%
0.77%
0.09%
$
12,206
$
0.46%
0.32%
0.54%
0.68%
0.61%
1.53%
0.58%
0.86%
0.06%
6,794
$
0.04%
8,604
$
0.04%
8,802
$
0.03%
15,289
0.28%
0.19%
0.27%
0.48%
0.90%
Total nonperforming loans as a percentage of loans were 0.60% as of December 31, 2019 as compared to 0.46% as of
December 31, 2018. Our coverage ratio, or our allowance for loan losses as a percentage of our nonperforming loans, was
117.0% as of December 31, 2019 as compared to 173.0% as of December 31, 2018.
87
Management has evaluated the aforementioned loans and other loans classified as nonperforming and believes that all
nonperforming loans have been adequately reserved for in the allowance for loan losses at December 31, 2019.
Management also continually monitors past due loans for potential credit quality deterioration. Excluding PCI loans, loans
30-89 days past due were $18.5 million at December 31, 2019, as compared to $9.2 million at December 31, 2018.
For acquired loans, neither the credit portion nor any other portion of the fair value discount is reflected in the reported
allowance for loan and lease losses. However, as of December 31, 2019 and December 31, 2018, the allowance included
$1.7 million and $0.9 million, respectively, in reserves related to subsequent deterioration on loans acquired in our previous
mergers and acquisitions.
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 market value based on
appraised value less estimated selling costs. Losses arising at the time of foreclosure of properties are charged against the
allowance for loan losses. Reductions in the carrying value subsequent to foreclosure are charged to earnings and are
included in “(Loss) gain on sales or write-downs of other real estate owned” in the accompanying consolidated statements
of income. Other real estate owned with a cost basis of $4.0 million were sold as of year ended December 31, 2019, resulting
in a net gain of $0.5 million. Other real estate owned with a cost basis of $5.8 million were sold during the year ended
December 31, 2018, resulting in a net loss of $99 thousand.
Classified loans
Accounting standards require us to identify loans, where full repayment of principal and interest is doubtful, as impaired
loans. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted
at the loan’s effective interest rate, or using one of the following methods: the observable market price of the loan or the fair
value of the underlying collateral if the loan is collateral dependent. We have implemented these standards in our quarterly
review of the adequacy of the allowance for loan losses and identify and value impaired loans in accordance with guidance
on these standards. As part of the review process, we also identify loans classified as watch, which have a potential
weakness that deserves management’s close attention.
Loans totaling $80.3 million and $66.5 million were classified as substandard under our policy at December 31, 2019 and
December 31, 2018, respectively. As of December 31, 2019 and December 31, 2018, $13.5 million and $22.3 million,
respectively, of substandard loans were purchased credit impaired in connection with our mergers and acquisitions. The
following table sets forth information related to the credit quality of our loan portfolio at December 31, 2019 and
December 31, 2018.
88
Loan type (dollars in thousands)
As of December 31, 2019
Loans, excluding purchased credit impaired loans
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total loans, excluding purchased credit impaired loans
Purchased credit impaired loans
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total purchased credit impaired loans
Total loans
Loan type (dollars in thousands)
As of December 31, 2018
Loans, excluding purchased credit impaired loans
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total loans, excluding purchased credit impaired loans
Purchased credit impaired loans
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total purchased credit impaired loans
Total loans
Pass
Watch Substandard
Total
$
946,247 $
541,201
66,910 $
4,790
19,195 $
2,226
1,032,352
548,217
666,177
218,086
69,366
576,737
876,670
248,632
4,143,116 $
— $
—
—
—
—
—
—
—
— $
4,143,116 $
$
$
$
$
11,380
1,343
63
30,379
24,342
3,304
142,511 $
1,224 $
2,681
15,091
—
—
4,535
6,617
13,521
43,669 $
186,180 $
13,559
2,028
—
691,116
221,457
69,429
17,263
9,535
3,057
66,863 $
624,379
910,547
254,993
4,352,490
460 $
203
4,247
73
—
1,684
2,884
19,338
73
—
1,356
3,580
3,564
13,483 $
80,346 $
5,891
10,197
17,085
57,152
4,409,642
Pass
Watch Substandard
Total
$
804,447 $
543,953
52,624 $
5,012
519,541
186,753
75,381
456,694
667,447
204,279
3,458,495 $
— $
—
—
—
—
—
—
—
— $
3,458,495 $
$
$
$
$
89
8,697
1,039
76
16,765
8,881
2,763
95,857 $
964 $
3,229
14,681
—
—
4,110
8,266
15,422
46,672 $
142,529 $
8,564 $
1,331
8,200
2,688
—
865,635
550,296
536,438
190,480
75,457
14,049
7,654
1,674
44,160 $
487,508
683,982
208,716
3,598,512
484 $
2,526
4,696
—
—
1,906
8,000
4,715
22,327 $
66,487 $
1,448
5,755
19,377
—
—
6,016
16,266
20,137
68,999
3,667,511
Allowance for loan losses
The allowance for loan losses is the amount that, based on our judgment, is required to absorb probable credit losses
inherent in our loan portfolio and that, in management’s judgment, is appropriate under GAAP. The determination of the
amount of the allowance is complex and involves a high degree of judgment and subjectivity. Among the material estimates
required to establish the allowance are loss exposure at default, the amount and timing of future cash flows on impacted
loans, value of collateral and determination of the loss factors to be applied to the various elements of the portfolio.
Our methodology for assessing the adequacy of the allowance for loan losses includes a general allowance for performing
loans, which are grouped based on similar characteristics, and an allocated allowance for individual impaired loans. Actual
credit losses or recoveries are charged or credited directly to the allowance.
The appropriate level of the allowance is established on a quarterly basis after input from management and our loan review
staff and is based on an ongoing analysis of the credit risk of our loan portfolio. In making our evaluation of the credit risk
of the loan portfolio, we consider factors such as the volume, growth and composition of our loan portfolio, the diversification
by industry of our commercial loan portfolio, the effect of changes in the local real estate market on collateral values, trends
in past dues, our experience as a lender, changes in lending policies, the effects on our loan portfolio of current economic
indicators and their probable impact on borrowers, historical loan loss experience, industry loan loss experience, the amount
of nonperforming loans and related collateral and the evaluation of our loan portfolio by our loan review function.
In addition, on a regular basis, management and the board of directors review credit metrics. These metrics include the
allowance for loan losses as a percentage of loans, net charge-offs as a percentage of average loans, the provision for loan
losses as a percentage of average loans, nonperforming loans as a percentage of loans and the allowance coverage on
nonperforming loans. Also, management reviews past due ratios by relationship manager, individual markets and the Bank
as a whole. The allowance for loan losses was $31.1 million and $28.9 million and represented 0.71% and 0.79% of loans
held for investment at December 31, 2019 and December 31, 2018, respectively. This decrease is the result of current
credit quality and was also impacted by the addition of purchased loans from our branch acquisition from Atlantic Capital,
which contributed to this decrease as newly purchased loans were recorded at fair value as of the acquisition date and do
not carry a significant allowance for loan losses as of December 31, 2019.
Effective January 1, 2020, we adopted new accounting guidance which requires current expected credit losses ("CECL")
be estimated that management expects to be incurred over the life of the loan portfolio, resulting in the transition from our
historical allowance for loan losses to an allowance for credit losses ("ACL"). This change in accounting estimate is currently
expected to result in an ACL as of January 1, 2020 in the range of $60.0 million to $70.0 million, increasing from the
allowance for loan losses reported as of December 31, 2019 of $31.1 million. This would result in an estimated $20.0 million
to $31.0 million reduction, net of taxes, to retained earnings upon adoption. Additionally, the adoption will result in an
increase to future reported nonperforming loans as purchased credit deteriorated ("PCD") loans (formerly PCI loans) will no
longer be excluded from our nonperforming metrics. If PCI loans would have been included in nonperforming loans held for
investment at December 31, 2019, our total nonperforming loans would have increased by $5.1 million and our
nonperforming loans held for investment as a percentage of our total loans held for investment would have been 0.72% of
total loans held for investment. These estimates are contingent upon continued refinement of assumptions, methodologies
and judgments, which we will continue to finalize through the first quarter of 2020.
We have adopted the option provided by the regulatory capital framework that permits institutions to limit the initial regulatory
capital day-one adverse impact by allowing a three-year phase in period for this impact. Based on the three-year phase in
option allowed by the regulatory framework, we expect that all capital ratios will remain well in excess of minimum capital
ratios.
90
The following table presents the allocation of the allowance for loan losses by loan category as of the periods indicated:
2019
2018
2017
As of December 31,
2015
2016
(dollars in thousands)
Amount
% of
loans Amount
% of
loans Amount
% of
loans Amount
% of
loans Amount
% of
loans
Loan Type:
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total allowance
$ 4,805
10,194
23% $ 5,348
9,729
13%
24% $ 4,461
7,135
15%
23% $ 5,309
4,940
14%
21% $ 5,135
5,143
13%
3,112
752
544
16%
5%
2%
3,428
811
566
16%
5%
2%
3,197
944
434
15%
6%
2%
3,197
1,613
504
16%
10%
2%
4,176
2,201
311
19%
14%
17%
10%
3%
4,109
4,621
3,002
$ 31,139
14%
21%
6%
3,132
4,149
1,769
100% $ 28,932
13%
19%
6%
3,558
2,817
1,495
100% $ 24,041
16%
17%
7%
3,302
2,019
863
100% $ 21,747
19%
15%
4%
3,682
2,622
1,190
100% $ 24,460
20%
12%
5%
100%
The following table summarizes activity in our allowance for loan losses during the periods indicated:
(dollars in thousands)
Allowance for loan loss at beginning
of period
Charge-offs:
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total charge-offs
Recoveries:
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total recoveries
Net (charge-offs) recoveries
Provision for loan losses
Adjustments for transfers to loans HFS
Allowance for loan loss at the end of period
Ratio of net (charge-offs) recoveries during the
period to average loans outstanding
during the period
$
$
Allowance for loan loss as a
percentage of loans at end of period
Allowance of loan loss as a percentage
of nonperforming loans
2019
2018
2017
Year Ended December 31,
2015
2016
$
28,932
$
24,041
$
21,747
$
24,460
$
29,030
(2,930 )
—
(220 )
(309 )
—
—
(12 )
(2,481 )
(898)
(29)
(138)
(36)
—
(91)
—
(1,613)
(584)
(27)
(200)
(276)
—
(288)
—
(1,152)
(562 )
(2 )
(224 )
(132 )
—
(249 )
(527 )
(1,154 )
$
(5,952)
$
(2,805)
$
(2,527) $
(2,850)
$
136
11
79
138
—
108
—
634
1,106
(4,846 )
7,053
—
31,139
$
$
390
1,164
171
178
—
143
51
550
2,647
(158)
5,398
(349)
28,932
$
$
1,894
1,084
159
395
—
61
1,646
532
5,771
3,244
(950)
—
24,041
$
$
524
216
127
174
—
140
195
240
1,616
(1,234 )
(1,479 )
—
21,747
$
$
(953)
(81)
(828)
(230)
—
(1,062)
(54)
(1,136)
(4,344)
112
1,354
161
286
—
35
342
548
2,838
(1,506)
(3,064)
—
24,460
(0.12 )%
0.71 %
— %
0.79 %
0.13%
0.76%
(0.07 )%
1.18 %
(0.10)%
1.50 %
117.0 %
173.0 %
238.1%
216.2 %
211.1 %
91
Mortgage loans held for sale
Mortgage loans held for sale were $262.5 million at December 31, 2019 compared to $278.8 million at December 31, 2018.
Interest rate lock volume for the year ended December 31, 2019 and 2018 totaled $5.90 billion and $7.12 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 decrease in interest rate lock volume for
the year ended December 31, 2019, reflects the impact of our mortgage restructuring offset by increased volume in our
retail and ConsumerDirect channels, which benefited from decreased interest rates when compared to the same period in
the previous year. Interest rate lock commitments in the pipeline were $453.2 million at December 31, 2019 compared with
$318.7 million at December 31, 2018.
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 thirty days after the loan is funded. 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 $4.93 billion and $4.17 billion as of December 31, 2019 and December 31, 2018, respectively.
Noninterest-bearing deposits at December 31, 2019 and December 31, 2018 were $1,208.2 million and $949.1 million,
respectively, while interest-bearing deposits were $3.73 billion and $3.22 billion at December 31, 2019 and December 31,
2018, respectively. The 18.3% increase in total deposits is partially attributed to the acquisition of $588.9 million in deposits
acquired from the Branches, 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, 2019 and December 31, 2018 were $20.4 million and $103.1 million,
respectively. The decrease of $82.8 million was due to expected maturity of brokered deposits while replacing with lower
cost funds, which is consistent with our asset liability management strategy.
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 $92.6 million and $53.5 million at December 31, 2019 and
December 31, 2018, respectively. Additionally, our deposits from municipal and governmental entities (i.e. "public deposits")
totaled $463.1 million at December 31, 2019 compared to $448.2 million at December 31, 2018. The increase in public
deposits is mainly attributed to notable increase concentrated in a few large customers and the addition of new customers.
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 from period to period cause fluctuations in the overall level of customer deposits
outstanding. These fluctuations may include certain deposits from related parties as disclosed in Note 24 to the consolidated
financial statements included in this Annual Report. The mix between noninterest-bearing and interest-bearing deposits as
of December 31, 2019 shifted slightly due to growth of noninterest-bearing deposits and the maturity and non-renewal of
brokered, internet and other time deposits when compared to December 31, 2018. Management continues to focus on
growing noninterest-bearing deposits while allowing more costly funding sources to mature.
Average deposit balances by type, together with the average rates per periods are reflected in the average balance sheet
amounts, interest paid and rate analysis tables included above under the discussion of net interest income.
92
The following table sets forth the distribution by type of our deposit accounts for the dates indicated:
As of December 31,
2017
Average
rate
—%
0.48%
0.61%
0.16%
0.66%
1.54%
0.42%
(dollars in thousands)
Amount % of total
2019
Average
rate
Amount % of total
2018
Average
rate
Amount % of total
Deposit Type
Noninterest-bearing demand
Interest-bearing demand
Money market
Savings deposits
Customer time deposits
Brokered and internet time
deposits
Total deposits
Customer Time Deposits
0.00-0.50%
0.51-1.00%
1.01-1.50%
1.51-2.00%
2.01-2.50%
Above 2.50%
Total customer time deposits
Brokered and Internet Time
Deposits
0.00-0.50%
0.51-1.00%
1.01-1.50%
1.51-2.00%
2.01-2.50%
Above 2.50%
$ 1,208,175
1,014,875
1,306,913
213,122
1,171,502
20,351
$ 4,934,938
$
18,919
140,682
55,557
338,997
312,528
304,819
$ 1,171,502
$
—
—
8,453
9,368
2,182
348
Total brokered and internet
time deposits
Total time deposits
20,351
$ 1,191,853
25%
21%
26%
4%
24%
—%
100%
1%
12%
5%
29%
27%
26%
100%
—%
—%
42%
46%
11%
1%
100%
—% $ 949,135
863,706
0.92%
1.42% 1,064,191
174,940
0.15%
2.09% 1,016,638
2.27%
103,107
1.10% $ 4,171,717
$
34,696
196,032
124,007
60,286
260,173
341,444
$ 1,016,638
$
787
548
21,211
15,204
63,167
2,190
103,107
$ 1,119,745
23%
21%
26%
4%
24%
2%
100%
3%
19%
12%
6%
26%
34%
100%
1%
1%
21%
15%
60%
2%
100%
—% $ 888,200
895,140
0.73%
1.06% 1,014,406
178,320
0.15%
602,628
1.40%
1.79%
85,701
0.76% $ 3,664,395
$ 112,980
258,790
127,091
87,038
11,791
4,938
$ 602,628
681
713
59,419
20,922
3,618
348
85,701
$ 688,329
24%
24%
29%
5%
16%
2%
100%
19%
43%
21%
14%
2%
1%
100%
1%
1%
70%
24%
4%
—%
100%
The following table sets forth our time deposits segmented by months to maturity and deposit amount as of December 31,
2019 and December 31, 2018:
(dollars in thousands)
Months to maturity:
Three or less
Over Three to Six
Over Six to Twelve
Over Twelve
Total
(dollars in thousands)
Months to maturity:
Three or less
Over Three to Six
Over Six to Twelve
Over Twelve
Total
As of December 31, 2019
Time deposits
of $100 and
greater
Time deposits
of less
than $100
126,604 $
110,617
295,412
239,828
772,461 $
66,520 $
68,031
147,724
137,117
419,392 $
Total
193,124
178,648
443,136
376,945
1,191,853
As of December 31, 2018
Time deposits
of $100 and
greater
Time deposits
of less
than $100
142,472 $
86,877
241,516
236,972
707,837 $
95,209 $
57,592
132,204
126,903
411,908 $
Total
237,681
144,469
373,720
363,875
1,119,745
$
$
$
$
93
Investment portfolio
Our investment portfolio provides liquidity and certain investment securities in our portfolio serve as collateral for certain
deposits and other types of borrowings. Our investment strategy aims to maximize earnings while maintaining liquidity in
securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and
projected liquidity and interest rate sensitivity positions.
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:
(dollars in thousands)
U.S. Government agency securities
Mortgage-backed securities
Municipals, tax exempt
Treasury securities
Corporate securities
$
Total securities available for sale
$
Carrying
value
—
490,676
189,235
7,448
1,022
688,381
2019
% of
total
—% $
71%
28%
1%
—%
100% $
Carrying
value
989
508,580
138,887
7,242
—
655,698
2018
% of
total
—% $
78%
21%
1%
—%
100% $
Carrying
value
986
418,781
109,251
7,252
—
536,270
December 31,
2017
% of
total
—%
78%
21%
1%
—%
100%
The balance of our available-for-sale debt securities portfolio at December 31, 2019 was $688.4 million compared to $655.7
million at December 31, 2018. During the years ended December 31, 2019, 2018, and 2017 we purchased $151.4 million,
$203.8 million and $81.4 million in investment securities, respectively. Mortgage-backed securities and collateralized
mortgage obligations, or CMOs, in the aggregate, comprised 52.4%, 81.4%, and 73.4% of these purchases, respectively.
CMOs are included in the “Mortgage-backed securities” line item in the above table. The mortgage-backed securities and
CMOs held in our investment portfolio are primarily issued by government sponsored entities. Municipal securities
accounted for 46.9%, 18.6%, and 26.6%, respectively of total securities purchased in the years ended December 31, 2019,
2018, and 2017, respectively. Corporate securities accounted for 0.7% of total securities purchased in the year ended
December 31, 2019. The carrying value of securities sold during the years ended December 31, 2019, 2018, and 2017
totaled $24.5 million, $2.7 million, and $94.7 million, respectively. Maturities and calls of securities during the years ended
December 31, 2019, 2018, and 2017 totaled $113.0 million, $73.1 million, and $83.3 million, respectively. As of
December 31, 2019 and 2018, net unrealized gains of $11.7 million and losses of $12.3 million, respectively, were recorded
on available-for-sale debt securities.
As of December 31, 2019 and December 31, 2018, the Company had $3.3 million and $3.1 million, respectively, in equity
securities recorded at fair value. The change in the fair value of equity securities resulted in net gains of $148 thousand,
respectively, during the year ended December 31, 2019 compared to net losses of $81 thousand, respectively, during the
year ended December 31, 2018. As of January 1, 2018, the Company adopted ASU 2016-01 and reclassified $3.6 million
of other securities without readily determinable market values to other assets. The provisions of this update require that
equity securities be carried at fair value on the balance sheet with any periodic changes in value as adjustments to the
income statement.
94
The following table sets forth the fair value, scheduled maturities and weighted average yields for our investment portfolio
as of the dates indicated below:
(dollars in thousands)
Treasury securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total Treasury securities
Government agency securities:
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total government agency securities
Obligations of state and municipal
subdivisions:
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total obligations of state and municipal
subdivisions
Residential mortgage backed securities
guaranteed by FNMA, GNMA and FHLMC:
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total residential mortgage backed
securities guaranteed by FNMA,
GNMA and FHLMC
Corporate securities:
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total Corporate securities
Total investment securities
(1) Yields on a tax-equivalent basis.
Fair
value
% of total
investment
securities
2019
Weighted
average
yield(1)
As of December 31,
Fair
value
% of total
investment
securities
2018
Weighted
average
yield(1)
$
—
7,448
—
—
7,448
—
—
—
—
—
1,152
4,228
17,865
165,990
189,235
—
496
24,316
465,864
—%
1.1%
—%
—%
1.1%
—%
—%
—%
—%
—%
0.2%
0.6%
2.6%
24.1%
27.5%
—%
0.1%
3.5%
67.7%
—% $
1.76%
—%
—%
1.76%
—%
—%
—%
—%
—%
5.11%
4.60%
3.96%
3.84%
3.88%
—%
1.83%
3.16%
2.36%
—
7,242
—
—
7,242
989
—
—
—
989
15,039
6,498
18,387
98,963
138,887
—
—
11,988
496,592
—%
1.1%
—%
—%
1.1%
0.2%
—%
—%
—%
0.2%
2.3%
1.0%
2.8%
15.1%
21.2%
—%
—%
1.8%
75.7%
— %
1.76 %
— %
— %
1.76 %
1.43 %
— %
— %
— %
1.43 %
6.14 %
4.86 %
4.68 %
4.13 %
4.46 %
— %
— %
3.07 %
2.67 %
490,676
71.3%
2.40%
508,580
77.5%
2.68 %
—
—
1,022
—
1,022
688,381
$
—%
—%
0.1%
—%
0.1%
—%
—%
4.13%
—%
4.13%
100.0%
2.94% $
—
—
—
—
—
655,698
—%
—%
—%
—%
—%
— %
— %
— %
— %
— %
100.0%
2.99 %
95
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)
Available-for-sale debt securities
As of December 31, 2019
Mortgage-backed securities
Municipals, tax exempt
Treasury securities
Corporate securities
As of December 31, 2018
US Government agency securities
Mortgage-backed securities
Municipals, tax exempt
Treasury securities
Borrowed funds
Amortized
cost
Gross
unrealized
Gross
unrealized
gains
losses
Fair value
$
$
$
$
487,101 $
181,178
7,426
1,000
676,705 $
1,000 $
520,654
138,994
7,385
668,033 $
5,236 $
8,287
22
22
13,567 $
— $
1,191
1,565
—
2,756 $
(1,661) $
(230)
—
—
(1,891) $
(11) $
(13,265)
(1,672)
(143)
(15,091) $
490,676
189,235
7,448
1,022
688,381
989
508,580
138,887
7,242
655,698
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 purchase 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. This may include match funding of fixed-rate loans.
Our level of short-term borrowing can fluctuate on a daily basis depending on funding needs and the source of funds to
satisfy the needs in addition to the overall interest rate environment and cost of public funds. Borrowings 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, 2019:
(dollars in thousands)
Maturing Within:
December 31, 2020
December 31, 2021
December 31, 2022
December 31, 2023
December 31, 2024
Thereafter
Total
Amount
123,745
—
—
—
—
180,930
304,675
$
$
December 31, 2019
Weighted average
interest rate (%)
% of
total
41%
—%
—%
—%
—%
59%
100%
1.67%
—%
—%
—%
—%
1.94%
1.83%
Securities sold under agreements to repurchase and federal funds purchased
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 $23.7 million and $15.1
million at December 31, 2019 and December 31, 2018, respectively.
The Bank maintains lines with certain correspondent banks that provide borrowing capacity in the form of federal funds
purchased in the aggregate amount of $305.0 million and $240.0 million as of December 31, 2019 and 2018, respectively.
There were no borrowings against the line at December 31, 2019 or 2018.
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 $413.0 million and qualifying commercial mortgages of $545.5 million as collateral securing a line
96
of credit with a total borrowing capacity of $760.6 million as of December 31, 2019. As of December 31, 2018, we pledged
qualifying residential mortgages of $619.0 million and qualifying commercial mortgages of $608.7 million as collateral
securing a line of credit with a total borrowing capacity of $737.0 million.
Borrowings against our line totaled $250.0 million and $181.8 million as of December 31, 2019 and 2018, respectively. The
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
predeterminable fixed rates of 1.24% and 1.37%, respectively. Long-term advances of $1.8 million as of December 31,
2018, contain no such putable features. There were no overnight cash management advances (CMAs) as of December
31, 2019 and $80.0 million as of December 31, 2018, respectively. In addition, a letter of credit with FHLB of $75.0 million
and $100.0 million was pledged to secure public funds that required collateral at December 31, 2019 and 2018, respectively.
Included in total FHLB advances is $100.0 million borrowed during the third quarter of 2017 as part of the funding strategy
for the Clayton Banks merger. These advances have 90 day fixed rate repricing terms. An additional line of $800.0 million
has been secured with the FHLB for overnight borrowing; however, additional collateral may be needed to draw on the line.
The maximum amount of FHLB borrowing outstanding at any month end was $250.0 million and $388.1 million for the years
ended December 31, 2019 and 2018, respectively. The weighted average interest rate on FHLB borrowings was 1.51%
and 1.93% at December 31, 2019 and 2018.
Additionally, the Bank maintains a line with the Federal Reserve Bank through the Borrower-in-Custody program. As of
December 31, 2019 and 2018, $1.41 billion and $1.34 billion of qualifying loans and $5.0 million and $8.6 million of
investment securities were pledged to the Federal Reserve Bank, securing a line of credit of $1,013.2 million and $934.7
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, 2019 and 2018, 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 (5.10% and 5.97% at December 31, 2019 and 2018, respectively) for the $21.7 million debenture and
3-month LIBOR plus 325 basis points (5.19% and 5.65% at December 31, 2019 and December 31, 2018, 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.
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 shareholder. 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 part of our liquidity management strategy, we are also focused on minimizing our costs of liquidity and attempt to
decrease these costs by growing our noninterest-bearing and other low-cost deposits and replacing higher cost funding
including time deposits and borrowed funds. While we do not control the types of deposit instruments our clients choose,
97
we do influence those choices with the rates and the deposit specials we offer. As a result of these strategies, we have been
able to maintain a relatively low cost of funds.
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, 2019 and 2018, securities with a carrying value of $373.7 million
and $326.2 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 FHLB line of credit to secure public
funds totaling $75.0 million at December 31, 2019.
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 CMAs at December 31,
2019 and $80.0 million at December 31, 2018. During the third quarter of 2017, $100.0 million of 90 day fixed-rate advances
were borrowed as part of the funding strategy for the merger with the Clayton Banks as described in management’s
discussion and analysis on lines of credit and other borrowings. At December 31, 2019 and 2018, the balance of our
outstanding additional long-term advances with the FHLB were $150.0 million and $1.8 million, respectively. The remaining
balance available with the FHLB was $435.6 million and $455.2 million at December 31, 2019 and 2018. We also maintain
lines of credit with other commercial banks totaling $305.0 million and $240.0 million as of December 31, 2019 and 2018.
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, 2019 and at December 31, 2018.
See discussion of deposit composition and seasonality in management's discussion and analysis of deposits.
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, 2019 and 2018,
$223.7 million and $164.9 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. No cash dividends from the Bank to the
Company were paid during the years ended December 31, 2019 or 2018.
During the year ended December 31, 2019, the Company declared dividends of $0.32 per share, or $10.2 million,
respectively. Subsequent to December 31, 2019, the Company declared its fourth quarter dividend in the amount of $0.09
per share, or $2.9 million payable to stockholders of record as of February 15, 2020 on March 2, 2020. The Company will
continue to maintain cash balances on deposit with the Bank for ongoing corporate needs and may receive dividends in
future from the Bank to fund such future dividends.
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. During the year ended December 31, 2018, the Company paid $0.7 million under
this agreement. No such expenses were incurred for the year ended December 31, 2019.
98
Subsequent to the year ended December 31, 2019, 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 merger.
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. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators
about components of capital, risk weightings and other factors.
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, 2019
and December 31, 2018, we exceeded all capital ratio requirements under prompt corrective action and other regulatory
requirements, as detailed in the table below:
(dollars in thousands)
December 31, 2019
Total capital (to risk weighted assets)
FB Financial Corporation
FirstBank
Tier 1 capital (to risk weighted assets)
FB Financial Corporation
FirstBank
Tier 1 Capital (to average assets)
FB Financial Corporation
FirstBank
Common Equity Tier 1 (CET1)
FB Financial Corporation
FirstBank
December 31, 2018
Total capital (to risk weighted assets)
FB Financial Corporation
FirstBank
Tier 1 capital (to risk weighted assets)
FB Financial Corporation
FirstBank
Tier 1 Capital (to average assets)
FB Financial Corporation
FirstBank
Common Equity Tier 1 (CET1)
FB Financial Corporation
FirstBank
Actual
Required for capital
adequacy purposes(1)
To be well capitalized under
prompt corrective
action provision
Amount
Ratio (%)
Amount
Ratio (%)
Amount
Ratio (%)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
633,549
623,432
602,410
592,293
602,410
592,293
572,410
592,293
582,945
561,327
554,013
532,395
554,013
532,395
524,013
532,395
12.2 % $
12.1 % $
415,442
412,186
11.6 % $
11.5 % $
311,591
309,022
10.1 % $
9.9 % $
238,578
239,310
11.1 % $
11.5 % $
232,058
231,767
13.0 % $
12.5 % $
358,735
359,249
12.4 % $
11.9 % $
268,071
268,434
11.4 % $
10.9 % $
194,391
195,374
11.7 % $
11.9 % $
201,543
201,326
8.0%
8.0% $
6.0%
6.0% $
4.0%
4.0% $
4.5%
4.5% $
8.0%
8.0% $
6.0%
6.0% $
4.0%
4.0% $
4.5%
4.5% $
N/A
515,233
N/A
412,030
N/A
299,138
N/A
334,774
N/A
449,062
N/A
357,913
N/A
244,218
N/A
290,804
N/A
10.0%
N/A
8.0%
N/A
5.0%
N/A
6.5%
N/A
10.0%
N/A
8.0%
N/A
5.0%
N/A
6.5%
(1) Minimum ratios presented exclude the capital conservation buffer.
We also have outstanding junior subordinated debentures with a carrying value of $30.0 million at December 31, 2019 and
2018, which are included in our Tier 1 capital.
The Federal Reserve Board issued rules in March 2005 providing stricter quantitative limits on the amount of securities that,
similar to our junior subordinated debentures, are includable in Tier 1 capital. This guidance, which became fully effective
in March 2009, did not impact the amount of debentures we include in Tier 1 capital. While our existing junior subordinated
debentures are unaffected and are included in our Tier 1 capital, the Dodd-Frank Act specifies that any such securities
issued after May 19, 2010 may not be included in Tier 1 capital.
99
In July 2013, the Federal Reserve and the FDIC approved the implementation of the U.S. Basel III Capital Rules affecting
certain changes required by the Dodd-Frank Act, that called for broad and comprehensive revision of regulatory capital
standards for U.S. banking organizations. The U.S. Basel III Capital Rules implemented a new minimum CET1 Capital
requirement, a higher minimum Tier 1 capital requirement and other items that impact the calculation of the numerator of a
banking organization’s risk-based capital ratios. Additionally, U.S. Basel III Capital Rules apply limits to a banking
organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a
specified amount of CET1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.
When fully implemented on January 1, 2019, the CET1 Capital ratio includes common equity as defined under GAAP and
does not include any other type of non-common equity under GAAP. With U.S. Basel III Capital Rules fully effective in 2019,
banks are required to have CET1 Capital of 4.5% of average assets, Tier 1 capital of 6% of risk-weighted assets, and total
capital of 8% of risk-weighted assets to be categorized as adequately capitalized.
The U.S. Basel III Capital Rules do not require the phase-out of trust preferred securities as Tier 1 capital of bank holding
companies whose asset size is under $15 billion.
Further, the U.S. Basel III Capital Rules changed the agencies’ general risk-based capital requirements for determining risk-
weighted assets, which affect the calculation of the denominator of a banking organization’s risk-based capital ratios. The
U.S. Basel III Capital Rules have revised the agencies’ rules for calculating risk-weighted assets to enhance risk sensitivity
and incorporate certain international capital standards of the Basel Committee on Banking Supervision set forth in the
standardized approach of the “International Convergence of Capital Measurement and Capital Standards: A Revised
Framework”.
The calculation of risk-weighted assets in the denominator of the U.S. Basel III capital ratios is adjusted to reflect the higher
risk of certain types of loans.
Specifically, as applicable to the Company and the Bank:
• Commercial mortgages: 150% risk weight for certain high volatility commercial real estate acquisition, development
and construction loans.
• Nonperforming loans: 150% risk weight for loans, other than residential mortgages, that are 90 days past due or on
nonaccrual status.
• Securities pledged to overnight repurchase agreements: 20% risk weight for repurchase agreements secured by
mortgage back securities.
• Unfunded lines of credit: 20% or higher based on risk category of collateral or guarantee for unfunded lines of credit
maturing in one year or less.
Calculations under the new rules related to deductions from capital have been fully phased-in. Under the prior rules, the
Bank deducted 10% of the value of MSRs (net of deferred tax) from Tier 1 capital ratios. However, under the U.S. Basel III
Capital Rules, the Bank and the Company deduct a much larger portion of the value of MSRs from Tier 1 capital.
• MSRs net of deferred tax in excess of 10% of Tier 1 capital before threshold based deductions must be deducted
from common equity at 80%.
•
In addition, the combined balance of MSRs and deferred tax assets is limited to approximately 15% of the Bank's
and the Company's common equity Tier 1 capital. These combined assets must be deducted from common equity
to the extent that they exceed the 15% threshold.
• Any portion of the Bank's and the Company's MSRs that are not deducted from the calculation of common equity
Tier 1 is subject to a 100% risk weight.
As of December 31, 2019 and 2018, the Bank and Company met all capital adequacy requirements to which it is subject.
Also, as of September 30, 2018, the date of the most recent FDIC examination, the Bank was well capitalized under the
regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management believes have changed the Bank’s category. As
part of our ongoing balance sheet and capital management during the year ended December 31, 2019, the Company sold
100
$29.2 million of mortgage servicing rights on $2.03 billion of serviced mortgages. There was not a material gain or loss
recognized in this transaction; however, the sale provided approximately $9.2 million in regulatory capital relief to support
continued growth in the Banking segment of our business.
On December 21, 2018, federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address
the upcoming implementation of the CECL accounting standard under GAAP; (ii) provide an optional three-year phase-in
period for the day-one adverse regulatory capital effects that banking organizations are expected to experience upon
adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing
cycle for certain banking organizations. See "Part II - Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional discussion.
In September 2019, the federal banking agencies adopted a final rule to simplify the regulatory capital requirements for
eligible banks and holding companies with less than $10 billion in consolidated assets that opt into the Community Bank
Leverage Ratio (“CBLR”) framework, as required by the Regulatory Relief Act. A qualifying community banking organization
that elects the CBLR framework and maintains a leverage ratio of greater than 9% will be considered to have satisfied the
generally applicable risk-based and leverage capital requirements and will be considered to have met the well-capitalized
ratio requirements. Currently, we do not plan to opt into the CBLR framework.
On July 9, 2019, the federal banking agencies issued a final rule to simplify certain aspects of the Regulatory Capital Rules
for standardized approach banking organizations. The final rule simplifies, for these banking organizations, the regulatory
capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences, and
investments in the capital of unconsolidated financial institutions. The final rule replaces multiple deduction thresholds with
a single 25% deduction threshold for each of these categories and requires that a 250% risk weight be applied to mortgage
servicing assets and deferred tax assets that are not deducted from capital. The final rule also simplifies the calculation of
the amount of capital issued by a consolidated subsidiary of a banking organization and held by third parties that is permitted
to be included in regulatory capital. In addition, the final rule makes certain technical amendments to the Regulatory Capital
Rules that are applicable to standardized approach banking organizations as well as advanced approaches banking
organizations. The technical amendments were effective on October 1, 2019, and the simplification changes are effective
on April 1, 2020. Early adoption is permitted for non-advanced approaches institutions as of January 1, 2020. The Company
does not expect the new guidance to have a material impact on capital amounts or ratios.
Capital Expenditures
As of December 31, 2019, we had capital commitments amounting to $1.8 million to be paid over the next twelve months.
Additionally, we plan on investing an additional $1.5 million in branch improvements across our markets over the next twelve
months.
Shareholders’ equity
Our total shareholders’ equity was $762.3 million at December 31, 2019 and $671.9 million, at December 31, 2018. Book
value per share was $24.56 at December 31, 2019 and $21.87 at December 31, 2018. The growth in shareholders’ equity
was attributable to earnings retention and changes in accumulated other comprehensive income offset by declared
dividends and activity related to equity-based compensation.
Off-balance sheet arrangements
We enter into loan commitments and standby letters of credit in the normal course of our business. Loan commitments are
made to accommodate the financial needs of our clients. Standby letters of credit commit us to make payments on behalf
of clients when certain specified future events occur. Both arrangements have credit risk essentially the same as that
involved in extending loans to clients and are subject to our normal credit policies. Collateral (e.g., securities, receivables,
inventory, equipment, etc.) is obtained based on management’s credit assessment of the client.
101
Loan commitments and standby letters of credit do not necessarily represent our future cash requirements because while
the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being
drawn upon. Our unfunded loan commitments and standby letters of credit outstanding at the dates indicated were as
follows:
Commitments to extend credit, excluding interest rate lock commitments
Standby letters of credit
December 31, 2019
$
1,086,173 $
19,569
December 31, 2018
1,032,390
19,024
We closely monitor the amount of our remaining future commitments to borrowers in light of prevailing economic conditions
and adjust these commitments as necessary. We will continue this process as new commitments are entered into or existing
commitments are renewed.
For more information about our off-balance sheet arrangements, see "Part II. Item 8. Financial Information - Notes to
Consolidated Financial Statements - Note 16 - Commitments and contingencies" in this this Report.
Contractual obligations
The following tables present, as of December 31, 2019, our significant fixed and determinable contractual obligations to
third parties by payment date. 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, 2019 payments due in:
(dollars in thousands)
Operating Leases
Time Deposits(1)
Securities sold under agreements to repurchase(1)
FHLB Advances(1)
Junior Subordinated Debt(1)
Total
(1) Excludes interest
Less than
1 year
4,417 $
$
1 to 3
years 3 to 5 years
7,428 $
More than
5,604 $
85,893
—
—
—
5 years
Total
35,525
18,076 $
1,191,853
88
23,745
—
250,000
150,000
30,930
30,930
91,497 $ 199,094 $ 1,532,053
814,908
23,745
100,000
—
290,964
—
—
—
$
943,070 $ 298,392 $
102
ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity
Our market risk arises primarily from interest rate risk inherent in the normal course of lending and deposit-taking activities.
Management believes that our ability to successfully respond to changes in interest rates will have a significant impact on
our financial results. To that end, management actively monitors and manages our interest rate risk exposure.
The Asset Liability Management Committee (“ALCO”), which is authorized by our board of directors, monitors our interest
rate sensitivity and makes decisions relating to that process. The ALCO’s goal is to structure our asset/liability composition
to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest
rates on net interest income and capital in either a rising or declining interest rate environment. Profitability is affected by
fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because
the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis.
We monitor the impact of changes in interest rates on our net interest income and economic value of equity (“EVE”) using
rate shock analysis. Net interest income simulations measure the short-term earnings exposure from changes in market
rates of interest in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding
future business to calculate net interest income under varying hypothetical rate scenarios. EVE measures our long-term
earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present
value of liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term
earnings capacity of the balance sheet assuming that the rate change remains in affect over the life of the current balance
sheet.
The following analysis depicts the estimated impact on net interest income and EVE of immediate changes in interest rates
at the specified levels for the periods presented:
Change in interest rates
(in basis points)
+400
+300
+200
+100
-100
-200
December 31,
2019
8.4 %
6.4 %
4.4 %
2.2 %
(4.9)%
(8.5)%
Year 1
December 31,
2018
9.7 %
7.4 %
5.1 %
2.5 %
(5.9)%
(14.2)%
Percentage change in:
Net interest income(1)
Year 2
December 31,
2018
12.3 %
9.4 %
6.6 %
3.3 %
(7.7)%
(18.1)%
December 31,
2019
9.7 %
7.6 %
5.4 %
2.9 %
(6.6 )%
(11.6 )%
Change in interest rates
Percentage change in:
Economic value of equity(2)
December 31,
2018
(in basis points)
(3.0)%
+400
(1.9)%
+300
(0.6)%
+200
(0.1)%
+100
(2.6)%
-100
-200
(11.8)%
(1) The percentage change represents the projected net interest income for 12 months and 24 months on a flat balance sheet in a stable interest rate environment versus the
December 31,
2019
(3.8 )%
(2.4 )%
(1.0 )%
(0.1 )%
(4.7 )%
(14.5 )%
projected net income in the various rate scenarios.
(2) The percentage change in this column represents our EVE in a stable interest rate environment versus EVE in the various rate scenarios.
The results for the net interest income simulations as of December 31, 2019 and December 31, 2018 resulted in an asset
sensitive position. The primary influence of our asset sensitivity is the floating rate structure in many of our loans held for
investment as well as the composition of our liabilities which is primarily core deposits. Non-interest bearing deposits
continue be a strong source of funding which also increases asset sensitivity. Beta assumptions on loans and deposits were
consistent for both time periods.
103
The preceding measures assume no change in the size or asset/liability compositions of the balance sheet. Thus, the
measures do not reflect the actions the ALCO may undertake in response to such changes in interest rates. The scenarios
assume instantaneous movements in interest rates in increments of 100, 200, 300 and 400 basis points. Furthermore, it
has been the Federal Reserve’s policy to adjust the target federal funds rate incrementally over time. As interest rates are
adjusted over a period of time, it is our strategy to proactively change the volume and mix of our balance sheet in order to
mitigate our interest rate risk. The computation of the prospective effects of hypothetical interest rate changes requires
numerous assumptions regarding characteristics of new business and the behavior of existing positions. These business
assumptions are based upon our experience, business plans and published industry experience. Key assumptions
employed in the model include asset prepayment speeds, competitive factors, the relative price sensitivity of certain assets
and liabilities and the expected life of non-maturity deposits. Because these assumptions are inherently uncertain, actual
results may differ from simulated results.
We utilize derivative financial instruments as part of an ongoing effort to mitigate interest rate risk exposure to interest rate
fluctuations and facilitate the needs of our customers.
The Company enters into derivative instruments that are not designated as hedging instruments to help its commercial
customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with customer
contracts, the Company enters into an offsetting derivative contract. The Company manages its credit risk, or potential risk
of default by its commercial customers through credit limit approval and monitoring procedures.
The Company has entered into interest rate swap contracts to hedge interest rate exposure on short term liabilities, as well
as interest rate swap contracts to hedge interest rate exposure on subordinated debentures. These interest rate swaps are
all accounted for as cash flow hedges, with the Company receiving a variable rate of interest and paying a fixed rate of
interest.
The Company enters into rate lock commitments and forward loan sales contracts as part of our ongoing efforts to mitigate
our interest rate risk exposure inherent in our mortgage pipeline and held for sale portfolio. Under the interest rate lock
commitments, interest rates for a mortgage loan are locked in with the client for a period of time, typically 30 days. Once an
interest rate lock commitment is entered into with a client, we also enter into a forward commitment to sell the residential
mortgage loan to secondary market investors. Forward loan sale contracts are contracts for delayed sale and delivery of
mortgage loans to a counter party. We agree to deliver on a specified future date, a specified instrument, at a specified price
or yield. 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.
Additionally, the Company enters into forward commitments, options and futures contracts that are not designated as
hedging instruments, which serve as economic hedges of the change in fair value of its MSRs.
For more information about our derivative financial instruments, see Note 17, “Derivative Instruments,” in the notes to our
consolidated financial statements.
104
Quarterly Results of Operations
Summarized unaudited quarterly operating results for the Company for the year ending December 31, 2019 and 2018 are
as follows:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income tax expense
Net income
Weighted average common shares outstanding:
Basic
Fully diluted
Earnings per share
Basic
Fully diluted
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income tax expense
Net income
Weighted average common shares outstanding:
Basic
Fully diluted
Earnings per share
Basic
Fully diluted
2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
65,933 $
12,917
53,016
1,391
51,625
29,039
55,101
5,975
19,588 $
71,719 $
14,696
57,023
881
56,142
32,979
64,119
6,314
18,688 $
73,242 $
14,937
58,305
1,831
56,474
38,145
62,935
7,718
23,966 $
71,643
13,951
57,692
2,950
54,742
35,234
62,686
5,718
21,572
30,786,684
31,349,198
30,859,596
31,378,018
30,899,583
31,425,573
30,934,092
31,470,565
0.63 $
0.62 $
0.60 $
0.59 $
2018
0.77 $
0.76 $
0.69
0.68
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
54,848 $
6,419
48,429
317
48,112
33,275
56,151
5,482
19,754
$
59,043 $
7,526
51,517
1,063
50,454
35,763
56,358
7,794
22,065
$
62,612 $
9,857
52,755
1,818
50,937
34,355
57,213
6,702
21,377
$
63,068
11,701
51,367
2,200
49,167
27,249
53,736
5,640
17,040
30,613,284
31,421,830
30,678,732
31,294,044
30,692,668
31,339,628
30,717,008
31,344,949
0.65 $
0.63 $
0.72 $
0.70 $
0.69 $
0.68 $
0.55
0.54
$
$
$
$
$
$
$
$
105
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
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
Page
107
108
110
111
112
113
114
115
106
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, 2019. 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).
Based on this assessment management has determined that, as of December 31, 2019, the Company's internal control
over financial reporting is effective based on the specified criteria.
107
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors
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, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in
shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, 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, 2019 and 2018, and the results of its operations
and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
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 13, 2020
108
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of FB Financial Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’
equity and cash flows of FB Financial Corporation and its subsidiaries (the Company) for the year ended December 31,
2017, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion,
the financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows
for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of
America.
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 audit. 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 U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/ RSM US LLP
We served as the Company's auditor from 2015 to 2017.
Jacksonville, Florida
March 16, 2018
109
FB Financial Corporation and subsidiaries
Consolidated balance sheets
(Amounts are in thousands except share and per share amounts)
ASSETS
Cash and due from banks
Federal funds sold
Interest-bearing deposits in financial institutions
Cash and cash equivalents
Investments:
Available-for-sale debt securities, at fair value
Equity securities, at fair value
Federal Home Loan Bank stock, at cost
Loans held for sale, at fair value
Loans
Less: allowance for loan losses
Net loans
Premises and equipment, net
Other real estate owned, net
Operating lease right-of-use assets
Interest receivable
Mortgage servicing rights, at fair value
Goodwill
Core deposit and other intangibles, net
Other assets
Total assets
LIABILITIES
Deposits
Noninterest-bearing
Interest-bearing checking
Money market and savings
Customer time deposits
Brokered and internet time deposits
Total deposits
Borrowings
Operating lease liabilities
Accrued expenses and other liabilities
Total liabilities
SHAREHOLDERS' EQUITY
Common stock, $1 par value per share; 75,000,000 shares authorized;
31,034,315 and 30,724,532 shares issued and outstanding at
December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
110
2019
48,806 $
131,119
52,756
232,681
688,381
3,295
15,976
262,518
4,409,642
31,139
4,378,503
90,131
18,939
32,539
17,083
75,521
169,051
17,589
122,714
6,124,921 $
1,208,175 $
1,014,875
1,520,035
1,171,502
20,351
4,934,938
304,675
35,525
87,454
5,362,592
31,034
425,633
293,524
12,138
762,329
6,124,921 $
December 31,
2018
38,381
31,364
55,611
125,356
655,698
3,107
13,432
278,815
3,667,511
28,932
3,638,579
86,882
12,643
—
14,503
88,829
137,190
11,628
70,102
5,136,764
949,135
863,706
1,239,131
1,016,638
103,107
4,171,717
227,776
—
65,414
4,464,907
30,725
424,146
221,213
(4,227 )
671,857
5,136,764
$
$
$
$
FB Financial Corporation and subsidiaries
Consolidated statements of income
(Amounts are in thousands except share and per share amounts)
Interest income:
Interest and fees on loans
Interest on securities
Taxable
Tax-exempt
Other
Total interest income
Interest expense:
Deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Mortgage banking income
Service charges on deposit accounts
ATM and interchange fees
Investment services and trust income
Gain (loss) from securities, net
Gain (loss) on sales or write-downs of other real estate owned
(Loss) gain from other assets
Other income
Total noninterest income
Noninterest expenses:
Salaries, commissions and employee benefits
Occupancy and equipment expense
Legal and professional fees
Data processing
Merger costs
Amortization of core deposit and other intangibles
Advertising
Other expense
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share
Basic
Fully diluted
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2019
2018
2017
$
260,458 $
221,001 $
153,969
13,223
4,805
4,051
282,537
51,568
4,933
56,501
226,036
7,053
218,983
100,916
9,479
12,161
5,244
57
545
(104)
7,099
135,397
152,084
15,641
7,486
10,589
5,385
4,339
9,138
40,179
244,841
109,539
25,725
83,814 $
2.70 $
2.65
12,397
4,047
2,126
239,571
29,536
5,967
35,503
204,068
5,398
198,670
100,661
8,502
10,013
5,181
(116)
(99)
328
6,172
130,642
136,892
13,976
7,903
9,100
1,594
3,185
13,139
37,669
223,458
105,854
25,618
80,236 $
2.60 $
2.55
10,084
4,006
1,554
169,613
13,031
3,311
16,342
153,271
(950)
154,221
116,933
7,426
8,784
3,949
285
774
(664)
4,094
141,581
130,005
13,010
5,737
6,488
19,034
1,995
12,957
33,091
222,317
73,485
21,087
52,398
1.90
1.86
$
$
111
FB Financial Corporation and subsidiaries
Consolidated statements of comprehensive income
(Amounts are in thousands)
Year Months Ended December 31,
$
2019
83,814 $
2018
80,236 $
2017
52,398
17,693
(5,439)
1,162
67
(914)
(481)
16,365
100,179 $
44
1,039
(128)
(4,484)
75,752 $
(173)
685
—
1,674
54,072
Net income
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) in available-for-sale
securities, net of taxes of $6,227, $2,025, and $493
Reclassification adjustment for loss (gain) on sale of securities
included in net income, net of taxes of $24, $9,and $112
Net change in unrealized (loss) gain in hedging activities, net of
taxes of $322, $366 and $442
Reclassification adjustment for gain on hedging activities,
net of taxes of $170, $45, and $0
Total other comprehensive income (loss), net of tax
Comprehensive income
$
See accompanying notes to consolidated financial statements.
112
FB Financial Corporation and subsidiaries
Consolidated statements of changes in shareholders’ equity
(Amounts are in thousands except per share amounts)
Balance at January 1, 2017
Initial fair value election on mortgage servicing rights,
net of taxes of $396
Net income
Other comprehensive income, net of taxes
Reclassification of the income tax effects of the Tax
Cuts and Jobs Act to Retained earnings (Note 14)
Common stock issued, net of offering costs
Common stock issued in conjunction with
acquisition of the Clayton Banks
Stock based compensation expense
Restricted stock units vested and distributed,
net of shares withheld
Shares issued under employee stock
purchase program
Balance at December 31, 2017
Initial adoption of ASU 2016-01 (See Note 1)
Net income
Other comprehensive loss, net of taxes
Stock based compensation expense
Restricted stock units vested and distributed,
net of shares withheld
Shares issued under employee stock
purchase program
Dividends declared ($0.20 per share)
Balance at December 31, 2018
Initial adoption of ASU 2016-02 (See Note 1)
Net income
Other comprehensive income, net of taxes
Stock based compensation expense
Restricted stock units vested and distributed,
net of shares withheld
Shares issued under employee stock
purchase program
Dividends declared ($0.32 per share)
Balance at December 31, 2019
Common
stock
24,108 $
$
Additional
paid-in
capital
213,480 $
—
—
—
—
4,807
1,521
18
63
19
30,536 $
—
—
—
17
143
29
—
30,725 $
—
—
—
12
274
23
—
—
—
—
147,914
50,763
6,742
(919)
616
418,596 $
—
—
—
7,190
(2,807)
1,167
—
424,146 $
—
—
—
7,077
(6,371)
781
$
$
Retained
earnings
93,784 $
615
52,398
—
652
—
—
—
—
—
147,449 $
(109)
80,236
—
—
—
—
(6,363)
221,213 $
(1,309)
83,814
—
—
—
—
Accumulated
other
comprehensive
income, net
(874) $
—
—
1,674
(652)
—
—
—
—
—
148 $
109
—
(4,484)
—
—
—
—
(4,227) $
—
—
16,365
—
—
—
Total
shareholders'
equity
330,498
615
52,398
1,674
—
152,721
52,284
6,760
(856)
635
596,729
—
80,236
(4,484)
7,207
(2,664)
1,196
(6,363)
671,857
(1,309)
83,814
16,365
7,089
(6,097)
804
—
31,034 $
—
425,633 $
$
(10,194)
293,524 $
—
12,138 $
(10,194)
762,329
See accompanying notes to consolidated financial statements.
113
FB Financial Corporation and subsidiaries
Consolidated statements of cash flows
(Amounts are in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Amortization of core deposit and other intangibles
Capitalization of mortgage servicing rights
Net change in fair value of mortgage servicing rights
Stock-based compensation expense
Provision for loan losses
Provision for mortgage loan repurchases
Accretion of yield on purchased loans
Accretion of discounts and amortization of premiums on securities, net
(Gain) loss from securities, net
Originations of loans held for sale
Repurchases of loans held for sale
Proceeds from sale of loans held for sale
Gain on sale and change in fair value of loans held for sale
Loss on sale of mortgage servicing rights
Net (gain) loss or write-downs of other real estate owned
Loss (gain) on other assets
Relief of goodwill
Provision for deferred income taxes
Changes in:
Other assets and interest receivable
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales
Maturities, prepayments and calls
Purchases
Net increase in loans
Purchases of FHLB stock
Proceeds from sale of mortgage servicing rights
Purchases of premises and equipment
Proceeds from the sale of premises and equipment
Proceeds from the sale of other real estate owned
Proceeds from the sale of other assets
Net cash received (paid) in business combination (See Note 2)
Net cash used in investing activities
Cash flows from financing activities:
Net increase in demand deposits
Net (decrease) increase in time deposits
Net increase in securities sold under agreements to repurchase and federal funds purchased
Net increase (decrease) in FHLB advances
Share based compensation witholding payment
Net proceeds from sale of common stock
Dividends paid
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
Supplemental cash flow information:
Interest paid
Taxes paid
Supplemental noncash disclosures:
Transfers from loans to other real estate owned
Transfers from premises and equipment to other real estate owned at fair value
Loans provided for sales of other real estate owned
Transfers from loans to loans held for sale
Transfers from loans held for sale to loans
Rebooked GNMA loans under optional repurchase program
Derecognition of rebooked GNMA delinquent loans
Stock consideration paid in business combination
Trade date payable - securities
Dividends declared not paid on restricted stock units
Decrease to retained earnings for adoption of new accounting standards (See Note 1)
Right-of-use assets obtained in exchange for operating lease liabilities
Fair value election of mortgage servicing rights
See accompanying notes to consolidated financial statements.
114
$
$
$
2019
Year Ended December 31,
2018
2017
$
83,814 $
80,236 $
52,398
5,176
4,339
(42,151)
26,299
7,089
7,053
362
(8,556)
3,026
(57)
(4,540,652)
(9,919)
4,662,728
(100,228)
—
(545)
104
100
(1,916)
(45,180)
13,019
63,905
24,498
113,018
(151,425)
(364,975)
(2,544)
29,160
(6,812)
1,275
3,860
—
171,032
(182,913)
249,348
(75,004)
(908)
68,235
(6,097)
804
(10,045)
226,333
107,325
125,356
232,681 $
55,051 $
25,920
5,487 $
4,290
166
7,891
12,259
—
—
—
—
149
1,309
37,916
—
4,334
3,185
(54,913)
2,763
7,207
5,398
174
(7,608)
2,768
116
(5,958,066)
(12,232)
6,260,532
(88,743)
—
99
(328)
—
6,359
(22,966)
(16,107)
212,208
2,742
73,066
(203,844)
(491,774)
(2,020)
39,428
(10,144)
357
4,819
869
—
(586,501)
75,906
431,416
788
(120,607)
(2,664)
1,196
(6,137)
379,898
5,605
119,751
125,356 $
31,992 $
24,387
2,138 $
—
1,019
11,888
14,732
—
43,035
—
2,120
226
109
—
—
4,316
1,995
(58,984)
4,023
6,760
(950)
810
(5,419)
2,693
(285)
(6,331,458)
—
6,408,198
(107,189)
249
(774)
664
—
6,458
6,478
47,627
37,610
94,743
83,344
(81,353)
(241,379)
—
11,686
(4,545)
39
5,438
—
(135,141)
(267,168)
14,682
(1,367)
(7,268)
53,579
—
153,356
—
212,982
(16,576)
136,327
119,751
15,470
22,292
3,605
3,466
256
—
11,706
43,035
—
52,284
348
—
—
—
1,011
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 bank holding company headquartered in Nashville, Tennessee. The
Company operates through its wholly-owned subsidiary, FirstBank (the "Bank"), with 68 full-service branches throughout
Tennessee, 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. See Note 2, "Mergers and
acquisitions" for information related to the impact of the Company's 2019 branch acquisition, subsequent acquisition, and
subsequent definitive merger agreement.
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.
On May 26, 2017, the Company entered into Securities Purchase Agreements with accredited investors, pursuant to which
the Company agreed to sell an aggregate of 4,806,710 shares of the Company’s common stock at a purchase price of
$33.00 per share. Total proceeds received from such sale, net of placement agent and other offering costs of $5,901, were
approximately $152,721.
Prior to May 31, 2018, the Company was considered a "controlled company" and was controlled by the Company's
Executive Chairman and former majority shareholder, James W. Ayers. During the second quarter of 2018, the Company
completed a secondary offering of 3,680,000 shares of common stock pursuant to the Company's effective registration
statement on Form S-3 whereby James W. Ayers was the seller. As a result of this transaction, the Company ceased to
qualify as a "controlled company" as the selling shareholder's ownership was reduced below 50% of the voting power of the
Company's issued and outstanding shares of common stock.
The Company continues to qualify as an emerging growth company as defined by the "Jumpstart Our Business Startups
Act" ("JOBS Act").
(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.
The consolidated financial statements include the accounts of the Company, the Bank, and its’ wholly-owned subsidiaries,
FirstBank Insurance, Inc. and Investors Title Company. 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.
(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 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.
115
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(E) Investment securities:
Debt securities are classified as held to maturity and carried at amortized cost 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.
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 balance sheet.
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 other-than-temporary impairment 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 length of time and 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 OTTI is determined to have occurred, the amount of the OTTI 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 OTTI 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 OTTI. 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 OTTI is separated into the amount representing the credit loss and the amount
related to all other factors. The amount of the total related to the credit loss 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 OTTI related to other
factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the
OTTI recognized in earnings becomes the new amortized cost basis of the investment. During the years ended
December 31, 2019, 2018 and 2017, the Company did not record any OTTI on the available-for-sale portfolio; however,
during the year ended December 31, 2017, the Company recognized impairment of $945 on one of its equity securities
without a readily determinable market value as discussed in Note 4. There were no such impairment charges taken during
the years ended December 31, 2019 or 2018.
(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 (losses) gains of $(2,861), $(4,539),
and $9,111 resulting from fair value changes of these mortgage loans were recorded in income during the years ended
December 31, 2019, 2018 and 2017, respectively. The amount does not reflect changes in fair values of related derivative
116
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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 2019, 2018,
and 2017, the Bank transferred $12,259, $14,732, and $11,706, respectively, of residential mortgage loans into its portfolio.
The loans are transferred into the portfolio at fair value at the date of transfer. On occasion, the Bank is able to restructure
and sell certain of these mortgage loans previously originated to sell in the secondary market that were included in the
Bank's loans held for investment portfolio. At the time of transfer, loans are marked to fair value through adjustment to the
allowance for loan losses and reclassified to loans held for sale. During the year ended December 31, 2018, the Company
transferred $11,888 of loans held for investment to loans held for sale, resulting in an adjustment to the allowance for loan
losses of $349. There were no such transfers during the years ended December 31, 3019 or 2017.
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 as loans held for sale, regardless of whether the Company intends to exercise the
buy-back option if the buyback option provides the transferor a more-than-trivial benefit. As of December 31, 2019 and
2018, there were $51,705 and $67,362, respectively, of delinquent GNMA loans that had previously been sold; 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 rebook any GNMA loans as of
December 31, 2019 or 2018.
(H) Loans (excluding purchased credit impaired 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.
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.
117
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(I) Allowance for loan losses:
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the
nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management’s judgment, should be charged off.
Factors considered by management in determining impairment include payment status, collateral value, and the probability
of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays
and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans over $250 are individually evaluated for impairment. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows
using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups
of smaller balance homogeneous loans, such as consumer, residential real estate loans, commercial and commercial real
estate loans less than $250 are collectively evaluated for impairment, and accordingly, they are not separately identified for
impairment disclosures.
Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. TDRs are separately identified
for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective
rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the
collateral.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors.
The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by
the Company over the most recent 5 years. This actual loss experience is supplemented with other economic factors based
on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and
trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms
of loans; 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; national and local economic
trends and conditions; industry conditions; and effects of changes in credit concentrations.
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
118
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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.
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.
As discussed more fully under the subheading "Newly issued not yet effective accounting standards, the Company adopted
Accounting Standards Update 2016-13, "Financial Instruments- Credit Losses: Measurement of Credit Losses on Financial
Instruments" effective January 1, 2020, which replaces the incurred loss model described above with a model that estimates
current expected losses of the loan portfolio over its lifetime.
119
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(J) Business combinations and accounting for acquired loans with credit deterioration:
Business combinations are accounted for by applying the acquisition method in accordance with ASC 805, “Business
Combinations” (“ASC 805”). Under the acquisition method, identifiable assets acquired and liabilities assumed and any non-
controlling interest in the acquiree at the acquisition date are measured at their fair values as of that date. Any excess of
the purchase price over fair value of net assets acquired is recorded as goodwill. To the extent the fair value of net assets
acquired, including any other identifiable intangible assets, 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.
Loans acquired in business combinations with evidence of credit deterioration since origination and for which it is probable
that all contractually required payments will not be collected are considered to be credit-impaired. Purchased credit-impaired
loans (“PCI” loans) are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated
credit quality, in accordance with ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC
310-30”), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the
life of the loans. Increases in expected cash flows to be collected on these loans are recognized as an adjustment of the
loan’s yield over its remaining life, while decreases in expected cash flows are recognized as an impairment. As a result,
related discounts are recognized subsequently through accretion based on the expected cash flow of the acquired loans or
through adjustment to the allowance for loan loss for any impairment identified subsequent to acquisitions.
(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 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 7. 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
120
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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 estimated economic useful life. 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 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.
As of January 1, 2017, the Company elected to account for its mortgage servicing rights under the fair value option as
permitted under ASC 860-50-35, "Transfers and Servicing". The change in accounting policy resulted in a one-time
adjustment to retained earnings of $615 for the after-tax increase in fair value above book value at the time of adoption.
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 either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an
121
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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 two-step 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. No impairment was identified through the qualitative annual assessments for impairment performed as of
December 31, 2019 and 2018. A quantitative assessment was performed for the year ended December 31, 2017 which also
indicated no impairment.
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 8 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 interest and penalties recognized for the years
ended December 31, 2019, 2018 or 2017.
(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, 2019 and 2018.
(S) Off-balance sheet financial instruments:
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.
(T) 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.
122
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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
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.
(U) 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
123
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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, 2019 and 2018, the Company
had on deposit with the FHLB-Cincinnati $11,225 and $5,225, respectively, in these LRA’s. Additionally, as of December
31, 2019 and 2018, the Company estimated the guaranty account to be $5,546 and $2,646, 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.
(V) 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.
(W) 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.
(X) 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 13, "Borrowings" in the Notes to the consolidated financial
statements for additional details regarding securities sold under agreements to repurchase.
(Y) Advertising expense:
Advertising costs, including costs related to internet mortgage marketing, lead generation, and related costs, are expensed
as incurred. For the years ended December 31, 2019, 2018 and 2017, advertising costs were $9,138, $13,139 and $12,957,
respectively.
(Z) 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
124
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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:
Basic earnings per common share calculation:
Net income
Dividends paid on and undistributed earnings allocated to
participating securities
Earnings attributable to common shareholders
Weighted-average basic shares outstanding
Basic earnings per common share
Diluted earnings per common share:
Earnings attributable to common shareholders
Weighted-average basic shares outstanding
Weighted-average diluted shares contingently issuable
Weighted-average diluted shares outstanding
Diluted earnings per common share
(AA) Segment reporting:
2019
Year Ended December 31,
2017
2018
83,814 $
80,236 $
52,398
(447)
83,367 $
30,870,474
2.70 $
83,367
30,870,474
532,423
31,402,897
2.65 $
(428)
79,808 $
30,675,755
2.60 $
79,808
30,675,755
639,226
31,314,981
2.55 $
—
52,398
27,627,228
1.90
52,398
27,627,228
580,374
28,207,602
1.86
$
$
$
$
The Company’s Mortgage division represents a distinct reportable segment which 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 20.
(BB) Stock-based compensation:
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.
Recently adopted accounting standards:
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The update requires lessees to recognize right-of-
use assets and lease liabilities for all leases not considered short term leases. The provisions of the update also include
(a) defining direct costs to only include those incremental costs that would not have been incurred if the lease had not been
entered into, (b) circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for
as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor, and (c) additional disclosure
requirements. The provisions of this update became effective for the Company on January 1, 2019.
In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases” and 2018-11, “Leases (Topic
842): Targeted Improvements”. ASU No. 2018-10 provides improvements related to ASU No. 2016-02 to provide
corrections or improvements to a number of areas within FASB Accounting Standards Codification ("ASC") Topic 842 and
provides additional and optional transition method to adopt the new lease standard. ASU No. 2018-11 allows entities to
initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. ASU 2018-11 also allows lessors to not separate non-lease
components from the associated lease component if certain conditions are met. The amendments in these updates became
effective for the Company on January 1, 2019.
125
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company elected the optional transition method permitted by ASU 2018-11. Under this method, an entity shall
recognize and measure leases that exist at the application date and prior comparative periods are not adjusted. Additionally,
the Company elected to adopt the practical expedients allowed under the updates and therefore did not reassess 1) whether
any expired or existing contract contain leases, 2) the lease classification for any expired or existing leases, or 3) initial
direct costs for any existing leases.
On January 1, 2019, the Company adopted these updates and recognized a right of use asset ("ROU") and lease liability
of $32,545 and $34,876, respectively, and recorded a cumulative effect adjustment to retained earnings of $1,309, net of
deferred taxes of $461, in addition to adjustments to leasehold improvements of $1,022 and a reclassification from a
previously-recognized lease intangible asset for $460. The difference between the asset and liability amounts represents
lease incentive liabilities, deferred rent and a lease intangible asset that was reclassified to the ROU asset upon adoption.
This adoption did not have a significant impact on the Company's consolidated statements of income and did not have an
impact on the Company's cash flows. Disclosures required by the update are presented in Note 7, "Leases" in the notes to
the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20):
Premium Amortization on Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization
period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be
amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount,
which continue to be amortized to maturity. Public business entities were required to prospectively apply the amendments
in this ASU to annual periods beginning after December 15, 2018, including interim periods. The adoption of this update did
not have an impact on the Company's consolidated financial statements.
In July 2019, the FASB issued ASU No. 2019-07, “Codification Updates to SEC Sections-Amendments to SEC Paragraphs
Pursuant to SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-
10442, Investment Company Reporting Modernization, and Miscellaneous Updates.” These amendments modify FASB
Codification to reflect previously issued SEC rules for disclosure updates and simplification and investment company
reporting modernization. The SEC adopted these rules to improve its regulations on financial reporting and disclosure. Other
miscellaneous updates were made to agree to the electronic Code of Federal Regulations. The amendments in this update
became effective upon issuance on July 26, 2019. This update did not significantly impact the consolidated financial
statements.
Newly issued not yet effective accounting standards:
In June 2016, the 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 require the measurement of all current
expected credit losses ("CECL") 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. 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. Additionally, disclosure of credit quality indicators
related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage).
The new model 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. The Update 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.
ASU 2016-13 became effective for the Company on January 1, 2020 and management is in the process of finalizing
qualitative factors and conducting a thorough review of the calculation and documentation supporting the allowance for
126
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
credit losses ("ACL") and updating its policy documents and internal controls accordingly. The Company will continue to
analyze and modify the calculation throughout the first quarter of 2020, however the Company is currently expecting the
impact of adoption of ASU 2016-13 to result in an increase in reserve from the allowance for loan losses reported at
December 31, 2019. The Company will record a cumulative effect adjustment for the increase, net of taxes, to retained
earnings as of January 1, 2020, which will be included in the Company's quarterly report on From 10-Q for the period ended
March 31, 2020.
In December 2018, the Office of the Comptroller of the Currency ("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. The Company has adopted this transitional guidance to reduce the impact of the initial adoption on regulatory
capital.
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 will 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 recognizing 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.
An entity will still 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 interim and annual periods beginning after December
15, 2019. The adoption of this standard did not have any impact on the Company's consolidated financial statements or
disclosures.
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
adoption of this standard did not have an 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 new disclosure guidance is effective for fiscal years
beginning after December 15, 2019. The adoption of of this update did not have a significant impact to the Company's
consolidated financial statements or disclosures.
In March 2019, the FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements", which align 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
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 amendments in this
update became effective for fiscal years beginning after December 15, 2019. This adoption did not have a significant impact
to the Company's consolidated financial statements or disclosures.
127
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes" to simplify various aspects of the current guidance to promote consistent application of the standard among reporting
entities by moving certain exceptions to the general principles. The amendments are effective for fiscal years beginning
after December 15, 2020, with early adoption permitted. The company does not expect adoption of this update to have a
significant impact on the Company's consolidated financial statements or disclosures.
Note (2)—Mergers and acquisitions:
Franklin Financial Network, Inc.
On January 21, 2020, the Company entered into a definitive merger agreement with Franklin Financial Network, Inc
("Franklin"). pursuant to which Franklin will be merged with and and into the Company. Franklin has 15 branches and
approximately $3.90 billion in total assets, $2.80 billion in loans, and $3.20 billion in deposits as of December 31, 2019.
According to the terms of the merger agreement, Franklin shareholders will receive 0.9650 shares of FB Financial
Corporation's common stock and $2.00 in cash for each share of Franklin stock. Based on the Company's closing price on
the New York Stock Exchange of $38.23 per share as of January 21, 2020, the implied transaction value is approximately
$602,000. The merger is expected to close in the third quarter of 2020 and is subject to regulatory approvals, approval by
the Company's and Franklin's shareholders and other customary closing conditions.
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. Prior to closing,
Farmers National operated five branches and reported total assets of $255,172, loans of $178,603 and deposits of $205,957
as of December 31, 2019. FNB Financial Corp. shareholders received 954,797 shares of FBK common stock as
consideration in connection with the merger, in addition to approximately $15,000 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. The Company is currently in the process of
determining the approximate fair value of the net assets acquired and will include preliminary purchase accounting estimates
in Form 10-Q for the quarterly period ended March 31, 2020.
Atlantic Capital Bank, N.A. branch acquisition
On April 5, 2019, the Bank completed its previously-announced 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. (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. Upon
consummation, the Branches were merged with and into FirstBank, consolidating three of the purchased branches across
the existing bank footprint. Under the terms of the agreement, the Bank assumed $588,877 in deposits for a premium of
6.25% and acquired $374,399 in loans at 99.32% of principal outstanding.
The acquisition of the Branches was accounted for in accordance with FASB ASC Topic 805 "Business Combinations."
Accordingly, the assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the
acquisition date. For income tax purposes, the transaction was treated as an asset purchase. As such, the values of assets
and liabilities are the same for both financial reporting and income tax purposes; therefore, no deferred taxes were recorded
at the date of acquisition. Additionally, this treatment allows for the deductibility of recorded intangibles for income tax
purposes over 15 years. Goodwill of $31,961 recorded in connection with the transaction resulted from the ongoing business
contribution of the Branches. Also, goodwill represents anticipated synergies arising from the combination of certain
operational areas of the Branches and the Company. Goodwill is included in the Banking segment as all of the operations
resulting from the Branches are in alignment with the Company's core banking business.
128
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company incurred $4,778 in merger expenses during the year ended December 31, 2019 in connection with this
transaction. These expenses are primarily comprised of professional services and employee-related costs in addition to
branch closings and conversion and integration costs.
As of December 31, 2019, the Company finalized its valuation of all assets acquired and liabilities assumed, resulting in
insignificant changes to preliminary purchase accounting adjustments. The following tables present the final fair values of
assets acquired and liabilities assumed as of the April 5, 2019 acquisition date and an allocation of the consideration to net
assets acquired:
As of April 5, 2019
As Recorded by FB Financial
Corporation(1)
Assets
Cash and cash equivalents(1)
Loans, net of fair value adjustments
Premises and equipment
Operating lease right-of-use assets
Core deposit intangible
Accrued interest and other assets
Total assets
Liabilities
Deposits
Noninterest-bearing
Interest-bearing checking
Money market and savings
Customer time deposits
Total deposits
Customer repurchase agreements
Operating lease liabilities
Accrued expenses and other liabilities
Total liabilities
Total net assets acquired
$
$
$
$
(1) Cash and cash equivalents were reduced in settlement by the deposit premium paid of $36,790 to reflect net cash received of $171,032.
Consideration:
Deposit premium
Preliminary allocation of consideration:
Fair value of net assets acquired
Goodwill
Total consideration
$
$
$
207,822
374,399
9,650
4,133
10,760
1,272
608,036
118,405
112,225
211,135
147,112
588,877
9,572
4,133
625
603,207
4,829
36,790
4,829
31,961
36,790
129
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 the fair value of acquired purchased credit impaired loans accounted for in accordance with
ASC 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" from the Atlantic Capital branch
acquisition as of the acquisition date:
Contractually-required principal and interest
Nonaccretable difference
Best estimate of contractual cash flows expected to be collected
Accretable yield
Fair value
April 5, 2019
11,949
$
2,200
9,749
1,167
8,582
$
The following unaudited pro forma condensed consolidated financial information presents the results of operations for the
year ended December 31, 2019 and 2018 as though the merger had been completed as of January 1, 2018. The unaudited
estimated pro forma information combines the historical results of the Branches 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 acquisition taken place on January 1, 2018 and does not include the effect of all cost-
saving or revenue-enhancing strategies.
Net interest income
Total revenues
Net income
Year ended December 31,
2018
2019
220,269
229,607 $
354,258
365,794 $
78,762
79,923 $
$
$
$
The Company's operating results for the year ended December 31, 2019 include the operating results of the acquired assets
and assumed liabilities of the Branches subsequent to the acquisition date. Due to the timing of the data conversion and
the integration of operations of the Branches onto the Company's existing operations, historical reporting of the acquired
Branches is impracticable, and therefore, disclosure of the amounts of revenue and expenses attributable to the acquired
Branches since the acquisition date are not available.
Clayton Bank and Trust and American City Bank
On July 31, 2017, the Bank completed its mergers with Clayton Bank and Trust ("CBT") and American City Bank ("ACB"
and together with CBT, the "Clayton Banks"), pursuant to the Stock Purchase Agreement with Clayton HC, Inc, a Tennessee
corporation ("Seller"), and James L. Clayton, the majority shareholder of Seller, dated February 8, 2017, as amended on
May 26, 2017, with a purchase price of approximately $236,484. The Company issued 1,521,200 shares of common stock
and paid cash of $184,200 to purchase all outstanding shares of Clayton Banks. At closing, the Clayton Banks merged with
and into FirstBank, with FirstBank continuing as the surviving banking entity. Prior to the merger, Clayton Banks operated
18 banking locations across Tennessee. The merger with the Clayton Banks has allowed the Company to further its strategic
initiatives by expanding its geographic footprint in Knoxville and other Tennessee markets and accelerates the growth of the
Company’s Banking segment.
Goodwill of $90,323 recorded in connection with the transaction resulted primarily from anticipated synergies arising from
the combination of certain operational areas of the Clayton Banks and the Company as well as the purchase premium
inherent to buying a complete and successful banking operation. Goodwill is included in the Banking segment as
substantially all of the operations resulting from the Clayton Banks merger is included in the Banking segment.
130
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
In connection with the transaction, the Company incurred $19,034 in merger and conversion expenses during the year
ended December 31, 2017. This amount includes $10,000 contributed to a charitable foundation established to invest in the
communities across the markets of the Clayton Banks.
For income tax purposes, the merger with the Clayton Banks was treated as an asset purchase. As an asset purchase for
income tax purposes, the value of assets and liabilities for the Clayton Banks are the same for both financial reporting and
income tax purposes; therefore, no deferred taxes were recorded at the date of acquisition. Additionally, this treatment
allows for the deductibility of the goodwill and core deposit intangible for income tax purposes over 15 years.
The Company accounted for the Clayton Banks transaction under the acquisition method under ASC Topic 805. Accordingly,
the fair value of the assets acquired and liabilities assumed along with the resulting goodwill was recorded as of the date of
the merger. The Company’s operating results for 2017 include the operating results of the acquired assets and assumed
liabilities of the Clayton Banks subsequent to the acquisition date.
As of December 31, 2017, the Company finalized its valuation of all assets acquired and liabilities assumed, resulting in no
material changes to preliminary purchase accounting adjustments. The following tables present the final estimated fair value
of net assets acquired as of the July 31, 2017 acquisition date and the consideration paid and an allocation of the purchase
price to net assets acquired:
As of July 31, 2017
As Recorded by FB Financial
Corporation(1)
$
$
$
$
$
49,059
59,493
3,409
1,059,728
18,866
6,888
12,334
5,978
1,215,755
670,054
309,464
84,831
5,245
1,069,594
146,161
Assets
Cash and cash equivalents
Investment securities
FHLB stock
Loans, net of fair value adjustments
Premises and equipment
Other real estate owned
Core deposit and other intangibles
Other assets
Total assets
Liabilities
Interest-bearing deposits
Noninterest-bearing deposits
Borrowings
Accrued expenses and other liabilities
Total liabilities
Net assets acquired (excluding goodwill recognized)
131
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Purchase price:
Equity consideration
Common stock issued
Price per share as of July 31, 2017
Total equity consideration
Cash consideration
Total consideration paid
Preliminary allocation of consideration paid:
Fair value of net assets acquired including identifiable intangible assets
Goodwill
Total consideration paid
$
1,521,200
34.37
$
$
$
$
52,284
184,200 (2)
236,484
146,161
90,323
236,484
(1) Amounts include certain reclassifications of opening balances to conform to the Company's presentation.
(2) Amounts was deposited into an interest-bearing deposit account with the Bank in the name of the Seller as of July 31, 2017.
The following unaudited pro forma condensed consolidated financial information presents the results of operations for the
year ended December 31, 2017 as though the merger had been completed as of January 1, 2016. The unaudited estimated
pro forma information combines the historical results of the Clayton Banks with the Company’s historical consolidated results
and includes certain adjustments reflecting the estimated impact of certain fair value adjustments including loan discount
accretion, amortization of core deposit and other intangibles, and amortization of the discount on time deposits for the
periods presented. The pro forma information is not indicative of what would have occurred had the acquisition taken place
on January 1, 2016 and does not reflect any assumptions regarding cost-savings, revenue enhancements, provision for
credit losses or asset dispositions. Actual revenues and earnings of the Clayton Banks since the merger date have not been
disclosed as it is not practicable as the Clayton Banks were merged into the Company and separate financial information is
not readily available.
Net interest income
Total revenues
Net income
For the year ended,
2017
192,633
336,404
75,659
$
$
$
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 at December 31, 2019 was $20,881. 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 $131,119 and $31,364 as
of December 31, 2019 and 2018, respectively.
132
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Note (4)—Investment securities:
The amortized cost of securities and their fair values at December 31, 2019 and December 31, 2018 are shown below:
Amortized cost
Gross unrealized
gains
Gross unrealized
losses
Fair Value
December 31, 2019
Investment Securities
Available-for-sale debt securities
Mortgage-backed securities - residential
Municipals, tax exempt
Treasury securities
Corporate securities
Total
$
$
487,101 $
181,178
7,426
1,000
676,705 $
5,236 $
8,287
22
22
13,567 $
(1,661) $
(230)
—
—
(1,891) $
490,676
189,235
7,448
1,022
688,381
December 31, 2018
Investment Securities
Available-for-sale debt securities
U.S. government agency securities
Mortgage-backed securities - residential
Municipals, tax exempt
Treasury securities
Total
Amortized cost
Gross unrealized
gains
Gross unrealized
losses
Fair Value
$
$
1,000 $
520,654
138,994
7,385
668,033 $
— $
1,191
1,565
—
2,756 $
(11 ) $
(13,265)
(1,672)
(143)
(15,091 ) $
989
508,580
138,887
7,242
655,698
As of December 31, 2019 and December 31, 2018, the Company had $3,295 and $3,107 in marketable equity securities
recorded at fair value, respectively.
Securities pledged at December 31, 2019 and December 31, 2018 had carrying amounts of $373,674 and $326,215,
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.
At December 31, 2019 and December 31, 2018, there were $0 and $2,120, respectively, in 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, 2019 and December 31, 2018
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.
Due in one year or less
Due in one to five years
Due in five to ten years
Due in over ten years
Mortgage-backed securities - residential
Total debt securities
2019
Available-for-sale
2018
Available-for-sale
Amortized cost
Fair value Amortized cost
$
$
1,148 $
11,553
18,287
158,616
189,604
487,101
676,705 $
1,152 $
11,676
18,887
165,990
197,705
490,676
688,381 $
15,883 $
13,806
18,539
99,151
147,379
520,654
668,033 $
Fair value
16,028
13,740
18,387
98,963
147,118
508,580
655,698
133
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Sales and other dispositions of available-for-sale securities were as follows:
Proceeds from sales
Proceeds from maturities, prepayments and calls
Gross realized gains
Gross realized losses
$
2019
24,498 $
113,018
7
98
Year Months Ended December 31,
2018
2,742 $
73,066
9
44
2017
94,743
83,344
1,278
48
Additionally, net gains on the change in fair value of equity securities of $148 were recognized during the year ended
December 31, 2019. Net losses on the change in fair value of equity securities of $81 were recognized in the year ended
December 31, 2018.
The following tables show gross unrealized losses at December 31, 2019 and December 31, 2018, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss position:
Less than 12 months
Unrealized
Loss
Fair Value
12 months or more
Unrealized
Loss
Fair Value
December 31, 2019
Total
Unrealized
loss
Fair Value
Mortgage-backed securities - residential
Municipals, tax exempt
Total
$
$
47,641 $
15,433
63,074 $
(164) $
(230)
(394) $
175,730 $
—
175,730 $
(1,497) $
—
(1,497) $
223,371 $
15,433
238,804 $
(1,661)
(230)
(1,891)
Less than 12 months
Unrealized
Loss
Fair Value
12 months or more
Unrealized
Loss
Fair Value
December 31, 2018
Total
Unrealized
loss
Fair Value
U.S. government agency securities
Mortgage-backed securities - residential
Municipals, tax exempt
Treasury securities
Total
$
$
— $
60,347
27,511
—
87,858 $
— $
(478)
(366)
—
(844) $
989 $
335,769
25,343
7,242
369,343 $
(11) $
(12,787)
(1,306)
(143)
(14,247) $
989 $
396,116
52,854
7,242
457,201 $
(11)
(13,265)
(1,672)
(143)
(15,091)
As of December 31, 2019 and December 31, 2018, the Company’s securities portfolio consisted of 365 and 360 securities,
58 and 174 of which were in an unrealized loss position, respectively.
The Company evaluates available-for-sale debt securities with unrealized losses for other-than-temporary impairment
("OTTI") on a quarterly basis and recorded no OTTI for the year ended December 31, 2019 and 2018. During the year
ended December 31, 2017, the Company recognized impairment of $945 on one of the equity securities without readily
determinable market value. On January 1, 2018, this investment was reclassified to other assets.The Company considers
an investment security impaired if the fair value of the security is less than its cost or amortized cost basis. For debt
securities, the unrealized losses associated with these investment securities are primarily driven by interest rates and are
not due to the credit quality of the securities. The Company currently does not intend to sell those investments with
unrealized losses, and it is unlikely that the Company will be required to sell the investments before recovery of their
amortized cost basis, which may be maturity.
134
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 loan losses:
Loans outstanding at December 31, 2019 and 2018, by major lending classification are as follows:
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Gross loans
$
2019
1,034,036 $
551,101
710,454
221,530
69,429
630,270
920,744
272,078
4,409,642
(31,139)
4,378,503 $
December 31,
2018
867,083
556,051
555,815
190,480
75,457
493,524
700,248
228,853
3,667,511
Net loans
Less: Allowance for loan losses
(28,932 )
3,638,579
As of December 31, 2019 and 2018, $412,966 and $618,976, respectively, of qualifying residential mortgage loans
(including loans held for sale) and $545,540 and $608,735, 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. As of
December 31, 2019 and 2018, $1,407,662 and $1,336,092, respectively, of qualifying loans were pledged to the Federal
Reserve Bank under the Borrower-in-Custody program.
$
As of December 31, 2019 and 2018, the carrying value of PCI loans accounted for under ASC 310-30 "Loans and Debt
Securities Acquired with Deteriorated Credit Quality", were $57,152 and $68,999, respectively. The following table presents
changes in the value of the accretable yield for PCI loans for the periods indicated.
Balance at the beginning of period
Additions through business combinations
Principal reductions and other reclassifications from nonaccretable
difference
Recoveries
Accretion
Changes in expected cash flows
Balance at end of period
$
$
2019
(16,587) $
(1,167)
61
—
7,003
(360)
(11,050) $
Year Ended December 31,
2017
(2,444)
(18,868)
2018
(17,682) $
—
(4,047 )
—
9,010
(3,868 )
(16,587) $
(1,841)
(23)
5,299
195
(17,682)
Included in the ending balance of the accretable yield on PCI loans at December 31, 2019 and 2018, is a purchase
accounting liquidity discount of $292 and $2,436, respectively. There is also a purchase accounting nonaccretable credit
discount of $3,537 and $4,355 related to the PCI loan portfolio at December 31, 2019 and 2018, respectively, and an
accretable credit and liquidity discount on non-PCI loans of $8,964 and $3,924 as of December 31, 2019 and $7,527 and
$2,197, respectively, as of December 31, 2018.
Interest revenue, through accretion of the difference between the recorded investment of the loans and the expected cash
flows, is being recognized on all PCI loans. Accretion of interest income amounting to $7,003, $9,010, and $5,299 was
recognized on PCI loans during the years ended December 31, 2019, 2018, and 2017, respectively. This includes both the
contractual interest income recognized and the purchase accounting contribution through accretion of the liquidity discount
for changes in estimated cash flows. The total purchase accounting contribution through accretion excluding contractual
interest collected for all purchased loans was $8,556, $7,608, and $5,419 for the years ended December 31, 2019, 2018,
and 2017, respectively.
135
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 loan losses by portfolio segment for the years December 31, 2019,
2018, and 2017:
Commercial
and industrial Construction
1-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, 2019
Beginning balance -
December 31, 2018
$
Provision for loan losses
Recoveries of loans
previously charged-off
Loans charged off
Ending balance -
December 31, 2019
$
$
5,348
2,251
136
(2,930)
$
4,805
$
9,729
454
$
3,428
(175)
11
—
79
(220)
$
10,194
$
3,112
$
811
112
138
(309)
$
752
$
566
(22)
$
3,132
869
$
4,149
484
1,769
3,080
$ 28,932
7,053
—
—
108
—
—
(12)
634
1,106
(2,481 )
(5,952)
$
544
$
4,109
$
4,621
$ 31,139
3,002
Commercial
and industrial Construction
1-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, 2018
Beginning balance -
December 31, 2017
$
Provision for loan losses
Recoveries of loans
previously charged-off
Loans charged off
Adjustments for transfers to
loans HFS
Ending balance -
December 31, 2018
$
$
4,461
1,395
$
7,135
1,459
$
3,197
547
$
944
(275)
$
434
132
$
3,558
(478)
$
2,817
1,281
1,495
1,337
$ 24,041
5,398
390
(898 )
—
1,164
(29)
—
$
5,348
$
9,729
171
(138)
(349)
$
3,428
178
(36)
—
—
—
—
143
(91)
—
51
—
—
550
2,647
(1,613)
(2,805)
—
(349)
$
811
$
566
$
3,132
$
4,149
$ 28,932
1,769
Commercial
and industrial Construction
1-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, 2017
Beginning balance -
December 31, 2016
$
Provision for loan losses
Recoveries of loans
previously charged-off
Loans charged off
Ending balance -
December 31, 2017
$
5,309
(2,158)
1,894
(584)
$
4,940
1,138
1,084
(27)
3,197
$
41
159
(200)
$
1,613
(788)
395
(276)
$
504
(70)
—
—
$
3,302
483
61
(288)
$
2,019
(848)
863
1,252
$ 21,747
(950)
1,646
532
5,771
—
(1,152 )
(2,527)
$
4,461
$
7,135
$
3,197
$
944
$
434
$
3,558
$
2,817
$
1,495
$ 24,041
136
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following tables provides the allocation of the allowance for loan losses by loan category broken out between loans
individually evaluated for impairment, loans collectively evaluated for impairment and loans acquired with deteriorated credit
quality as of December 31, 2019, 2018, and 2017:
Commercial
and
industrial Construction
1-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
December 31, 2019
$
241
$
—
$
$
8
$
9
—
$
238
$
399
$
—
$
895
4,457
10,192
2,940
107
2
164
743
—
544
—
3,853
3,909
1,933
28,571
18
313
1,069
1,673
$
4,805
$
10,194
$
3,112
$
752
$
544
$
4,109
$
4,621
$
3,002
$ 31,139
Commercial
and
industrial Construction
1-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
December 31, 2018
$
$
3
—
$
$
7
—
$
—
$
53
$
205
$
—
$
268
5,247
9,677
3,205
98
52
216
811
—
566
—
3,066
3,628
1,583
27,783
13
316
186
881
$
5,348
$
9,729
$
3,428
$
811
$
566
$
3,132
$
4,149
$
1,769
$ 28,932
Commercial
and
industrial Construction
1-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
December 31, 2017
$
20
$
—
$
18
$
—
$
—
$
120
$
33
$
—
$
191
4,441
7,135
3,179
—
—
—
944
—
434
—
3,438
2,784
1,495
23,850
—
—
—
—
$
4,461
$
7,135
$
3,197
$
944
$
434
$
3,558
$
2,817
$
1,495
$ 24,041
Amount of allowance
allocated to:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Acquired with deteriorated
credit quality
Ending balance -
December 31, 2019
Amount of allowance
allocated to:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Acquired with deteriorated
credit quality
Ending balance -
December 31, 2018
Amount of allowance
allocated to:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Acquired with deteriorated
credit quality
Ending balance-
December 31, 2017
137
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following tables provides the amount of loans by loan category broken between loans individually evaluated for
impairment, loans collectively evaluated for impairment and loans acquired with deteriorated credit quality as of
December 31, 2019, 2018, and 2017:
Commercial
and
industrial Construction
1-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
December 31, 2019
$
9,026
$
2,061
$
1,347
$
579
$
—
$
2,993
$
7,755
$
49
$
23,810
1,023,326
546,156
689,769
220,878
69,429
621,386
902,792
254,944
4,328,680
1,684
2,884
19,338
73
—
5,891
10,197
17,085
57,152
$
1,034,036
$
551,101
$
710,454
$
221,530
$
69,429
$
630,270
$
920,744
$ 272,078
$ 4,409,642
Commercial
and
industrial Construction
1-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
December 31, 2018
$
1,847
$
1,221
$
987
$
245
$
—
$
2,608
$
6,735
$
73
$
13,716
863,788
549,075
535,451
190,235
75,457
484,900
677,247
208,643
3,584,796
1,448
5,755
19,377
—
—
6,016
16,266
20,137
68,999
$
867,083
$
556,051
$
555,815
$
190,480
$
75,457
$
493,524
$
700,248
$ 228,853
$ 3,667,511
Commercial
and
industrial Construction
1-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
December 31, 2017
$
1,579
$
1,289
$
1,262
$
—
$
978
$
2,520
$
1,720
$
25
$
9,373
711,352
439,309
456,229
194,986
61,376
481,390
531,704
192,357
3,068,703
2,144
7,728
23,498
—
20
11,962
18,164
25,319
88,835
$
715,075
$
448,326
$
480,989
$
194,986
$
62,374
$
495,872
$
551,588
$ 217,701
$ 3,166,911
Loans, net of unearned
income
Individually evaluated for
impairment
Collectively evaluated for
impairment
Acquired with deteriorated
credit quality
Ending balance -
December 31, 2019
Loans, net of unearned
income
Individually evaluated
for impairment
Collectively evaluated
for impairment
Acquired with deteriorated
credit quality
Ending balance -
December 31, 2018
Loans, net of unearned
income
Individually evaluated
for impairment
Collectively evaluated
for impairment
Acquired with deteriorated
credit quality
Ending balance-
December 31, 2017
138
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company categorizes 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. The Company analyzes loans individually by classifying the loans as to
credit risk. The Company uses the following definitions for risk ratings:
Watch. Loans rated as watch includes loans in which management believes conditions have occurred, or may
occur, which could result in the loan being downgraded to a worse rated category. Also included in watch are loans rated as
special mention, which have a potential weakness that deserves management’s close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position
at some future date.
Substandard. Loans rated as substandard are inadequately protected by the current net worth and paying capacity
of the obligor or of the collateral pledged, if any. Loans so rated have a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected. Also included in this category are loans considered doubtful, which have all the weaknesses
previously described and management believes those weaknesses may make collection or liquidation in full, on the basis
of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above are considered to be pass rated loans.
The following tables show credit quality indicators by portfolio class at December 31, 2019 and 2018:
December 31, 2019
Pass
Watch Substandard
Total
Loans, excluding purchased credit impaired loans
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
$
946,247 $
541,201
66,910 $
4,790
19,195 $
2,226
1,032,352
548,217
666,177
218,086
69,366
576,737
876,670
248,632
11,380
1,343
63
30,379
24,342
3,304
13,559
2,028
—
17,263
9,535
3,057
691,116
221,457
69,429
624,379
910,547
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
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total purchased credit impaired loans
Total loans
— $
—
—
—
—
—
—
—
— $
4,143,116 $
1,224 $
2,681
15,091
—
—
4,535
6,617
13,521
43,669 $
186,180 $
460 $
203
4,247
73
—
1,356
3,580
3,564
13,483 $
80,346 $
1,684
2,884
19,338
73
—
5,891
10,197
17,085
57,152
4,409,642
$
$
$
139
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
December 31, 2018
Loans, excluding purchased credit impaired loans
Pass
Watch Substandard
Total
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
$
804,447 $
543,953
52,624 $
5,012
8,564 $
1,331
519,541
186,753
75,381
456,694
667,447
204,279
8,697
1,039
76
16,765
8,881
2,763
8,200
2,688
—
14,049
7,654
1,674
865,635
550,296
536,438
190,480
75,457
487,508
683,982
208,716
Total loans, excluding purchased credit impaired loans
$
3,458,495
$
95,857
$
44,160
$
3,598,512
Purchased credit impaired loans
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total purchased credit impaired loans
Total loans
$
$
$
— $
—
—
—
—
—
—
—
— $
3,458,495 $
14,681
—
—
4,110
8,266
15,422
46,672 $
142,529 $
1,448
5,755
19,377
—
—
4,696
—
—
1,906
8,000
4,715
22,327 $
66,487 $
6,016
16,266
20,137
68,999
3,667,511
964 $
3,229
484 $
2,526
Nonperforming loans include loans that are no longer accruing interest (nonaccrual loans) and loans past due ninety or
more days and still accruing interest. Nonperforming loans and impaired loans are defined differently. Some loans may be
included in both categories, whereas other loans may only be included in one category.
PCI loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms
of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans are considered
to be performing, even though they may be contractually past due, as any non-payment of contractual principal or interest
is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current
period covered loan loss provision or future period yield adjustments. As such, PCI loans are excluded from past due
disclosures presented below. The accrual and/or accretion of interest is discontinued on PCI loans if management can no
longer reliably estimate future cash flows on the loan. No PCI loans were classified as nonaccrual at December 31, 2019
or December 31, 2018 as the present value of the respective loan or pool of loans cash flows were considered estimable
and probable of collection. Therefore, interest income, through accretion of the difference between the carrying value of the
loans and the expected cash flows, is being recognized on all PCI loans. PCI loans contractually past due 30-89 days
amounted to $2,951 and $3,605 as of December 31, 2019 and 2018, respectively, and an additional $751 and $4,076 were
contractually past due 90 days or more as of December 31, 2019 and 2018, respectively.
140
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following tables provide the period-end amounts of loans that are past due thirty to eighty-nine days, past due ninety
or more days and still accruing interest, loans not accruing interest and loans current on payments accruing interest by
category at December 31, 2019 and 2018:
December 31, 2019
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total
$
30-89 days
90 days or more
and accruing
$
past due
1,918 $
1,021
interest
291 $
42
Non-
accrual
loans
5,587 $
1,087
Purchased
Credit
Impaired
loans
1,684 $
2,884
Loans current
on payments
and accruing
interest
Total
1,024,556 $ 1,034,036
551,101
546,067
10,738
658
63
1,375
327
2,377
18,477 $
3,965
412
—
3,332
416
—
19,338
73
—
673,081
219,971
69,366
710,454
221,530
69,429
—
—
833
5,543 $
1,793
7,880
967
21,062 $
5,891
10,197
17,085
57,152 $
621,211
902,340
250,816
630,270
920,744
272,078
4,307,408 $ 4,409,642
December 31, 2018
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total
$
30-89
days
90 days or more
and accruing
past due
999 $
109
$
interest
65 $
—
Non-
accrual
loans
438 $
283
Purchased
Credit
Impaired
loans
1,448 $
5,755
Loans current
on payments
and accruing
interest
Total
864,133 $ 867,083
556,051
549,904
4,919
726
—
407
61
1,987
9,208 $
737
957
—
2,704
804
—
197
77
1,008
3,041 $
2,423
6,885
148
13,685 $
19,377
—
—
6,016
16,266
20,137
68,999 $
528,078
187,993
75,457
555,815
190,480
75,457
484,481
676,959
205,573
493,524
700,248
228,853
3,572,578 $ 3,667,511
141
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Impaired loans recognized in conformity with ASC 310 at December 31, 2019 and 2018, segregated by class, were as
follows:
December 31, 2019
With a related allowance recorded:
Commercial and industrial
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Commercial real estate:
Owner occupied
Non-owner occupied
Total
With no related allowance recorded
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total
Total impaired loans
December 31, 2018
With a related allowance recorded:
Commercial and industrial
Residential real estate:
1-to-4 family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Total
With no related allowance recorded:
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total
Total impaired loans
Recorded
investment
Unpaid
principal
Related
allowance
$
6,080 $
8,350 $
264
320
756
6,706
14,126 $
2,946 $
2,061
1,083
259
2,237
1,049
49
9,684 $
23,810 $
324
320
1,140
6,747
16,881 $
3,074 $
2,499
1,449
280
2,627
1,781
49
11,759 $
28,640 $
241
8
9
238
399
895
—
—
—
—
—
—
—
—
895
Recorded
investment
Unpaid
principal
Related
allowance
618 $
145
560
5,686
7,009 $
1,229 $
1,221
842
245
2,048
1,049
73
6,707 $
13,716 $
732 $
145
641
5,686
7,204 $
1,281 $
1,262
1,151
249
2,780
1,781
73
8,577 $
15,781 $
3
7
53
205
268
—
—
—
—
—
—
—
—
268
$
$
$
$
$
$
$
$
$
142
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Average recorded investment and interest income on a cash basis recognized during the years ended December 31, 2019
2018, and 2017 on impaired loans, segregated by class, were as follows:
2019
2018
December 31,
2017
Average
recorded
investment
Interest
income
recognized
(cash basis)
Average
recorded
investment
Interest
income
recognized
(cash basis)
Average
recorded
investment
Interest
income
recognized
(cash basis)
With a related allowance recorded:
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total
With no related allowance recorded:
Commercial and industrial
Construction
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Multi-family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total
Total impaired loans
$
3,349 $
—
474 $
—
335 $
—
121 $
—
205
160
—
658
6,196
—
10,568 $
2,088 $
1,641
963
252
—
2,143
1,049
61
8,197 $
18,765 $
$
$
$
$
13
1
—
27
109
—
624 $
201 $
167
68
1
—
133
—
5
575 $
1,199 $
170
—
—
702
2,915
—
4,122 $
1,377 $
1,255
955
123
489
1,862
1,313
49
7,423 $
11,545 $
9
—
—
43
2
—
175 $
70 $
74
74
15
26
148
7
4
418 $
593 $
454 $
—
149
—
—
740
648
1
1,992 $
1,074 $
1,988
1,718
156
1,003
1,897
1,313
26
9,175 $
11,167 $
2
—
9
—
—
48
5
—
64
38
46
63
—
46
122
19
1
335
399
As of December 31, 2019 and 2018, the Company has a recorded investment in troubled debt restructurings of $12,206
and $6,794, respectively. The modifications included extensions of the maturity date and/or a stated rate of interest to one
lower than the current market rate. The Company has allocated $360 and $63 of specific reserves for those loans at
December 31, 2019 and 2018, respectively. There were no commitments to lend any additional amounts to these customers
for either period end. Of these loans, $5,201 and $2,703 were classified as non-accrual loans as of December 31, 2019 and
2018, respectively.
143
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following tables present the financial effect of TDRs recorded during the periods indicated.
Year Ended December 31, 2019
Number of loans
Pre-modification
outstanding recorded
investment
Post-modification
outstanding recorded
investment
Commercial and industrial
Construction
Commercial real estate:
Owner occupied
Non-owner occupied
Residential real estate:
1-to-4 family mortgage
Residential line of credit
Total
3 $
2
2
1
2
2
12 $
3,204 $
1,085
1,494
1,366
175
333
7,657 $
3,204 $
1,085
1,495
1,366 $
175
333
7,658 $
Year Ended December 31, 2018
Commercial and industrial
Commercial real estate:
Owner occupied
Residential real estate:
1-4 family mortgage
Consumer and other
Total
Number of loans
Pre-modification
outstanding recorded
investment
Post-modification
outstanding recorded
investment
2 $
1
1
5
9 $
887 $
143
249
61
1,340 $
887 $
143
249
61
1,340 $
Year ended December 31, 2017
Number of loans
Pre-modification
outstanding recorded
investment
Post-
modification
outstanding
recorded
investment
Commercial and industrial
Commercial real estate:
Owner occupied
Non-owner occupied
Residential real estate:
1-4 family mortgage
Consumer and other
Total
2 $
1
2
1
1
7 $
627 $
377
711
143
25
1,883 $
627 $
377
711
143
25
1,883 $
Charge offs
and specific
reserves
—
—
—
106
—
9
115
Charge offs
and specific
reserves
—
—
—
—
—
Charge offs
and specific
reserves
—
—
68
8
—
76
There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months
following the modification during the years ended December 31, 2019 and 2018, and 2017. A loan is considered to be in
payment default once it is 90 days contractually past due under the modified terms.
The terms of certain other loans were modified during the years ended December 31, 2019 and 2018, and 2017 that did
not meet the definition of a troubled debt restructuring. The modification of these loans involved either a modification of the
terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to
be insignificant.
144
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability
that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This
evaluation is performed under the company’s internal underwriting policy.
Note (6)—Premises and equipment:
Premises and equipment and related accumulated depreciation as of December 31, 2019 and 2018, are as follows:
Land
Premises
Furniture and fixtures
Leasehold improvements
Equipment
Construction in process
Less: accumulated depreciation
Total Premises and Equipment
$
$
2019
26,283 $
65,569
23,545
12,989
15,575
800
144,761
(54,630)
90,131 $
2018
25,821
60,995
23,220
11,819
13,774
869
136,498
(49,616)
86,882
Depreciation expense was $5,176, $4,334 and $4,316 for the years ended December 31, 2019, 2018 and 2017,
respectively.
Note (7)—Other real estate owned:
The amount reported as other real estate owned includes property acquired through foreclosure in addition to excess
facilities held for sale and is carried at fair value less estimated cost to sell the property. The following table summarizes the
other real estate owned for the years ended December 31, 2019 and 2018:
Balance at beginning of period
Transfers from loans
Transfers from premises and equipment
Acquired through merger or acquisition
Proceeds from sale of other real estate owned
Gain on sale of other real estate owned
Loans provided for sales of other real estate owned
Write-downs and partial liquidations
Balance at end of period
$
$
2019
12,643 $
5,487
4,290
—
(3,860 )
1,058
(166 )
(513 )
18,939 $
Year Ended
December 31,
2017
7,403
3,605
3,466
6,888
(5,438 )
1,080
(256 )
(306 )
16,442
2018
16,442 $
2,138
—
—
(4,819)
271
(1,019)
(370)
12,643 $
Foreclosed residential real estate properties included in the table above totaled $4,295 and $2,101 as of December 31,
2019 and 2018, respectively. The recorded investment in residential mortgage loans secured by residential real estate
properties for which foreclosure proceedings are in process totaled $82 and $478 at December 31, 2019 and 2018,
respectively.
Excess land and facilities held for sale resulting from branch consolidations totaled $8,956 as of December 31, 2019,
including $891 acquired in the Atlantic Capital branch acquisition, and $5,381 as of December 31, 2018, respectively.
145
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Note (8)—Goodwill and intangible assets:
The following table summarizes changes in goodwill during the year ended December 31, 2019. There was no such activity
during the year ended December 31, 2018.
Balance at December 31, 2018
Addition from acquisition of Atlantic Capital branches (see Note 2)
Relief due to sale of third party origination ("TPO") mortgage delivery channel
Balance at December 31, 2019
Goodwill
137,190
31,961
(100)
169,051
$
$
Goodwill relief of $100 for the year ended December 31, 2019 is related to goodwill assigned to the third party origination
channel in the Mortgage segment, which was sold during the year ended December 31, 2019.
Goodwill is tested annually, or more often if circumstances warrant, for impairment. If the implied fair value of goodwill is
lower than its carrying amount, goodwill impairment is indicated and is written down to its implied fair value. Subsequent
increases in goodwill values are not recognized in the financial statements. No impairment was indicated in the Company's
goodwill impairment analysis for the years ended December 31, 2019 or 2018.
Core deposit and other intangibles include core deposit intangibles, customer base trust intangible and manufactured
housing servicing intangible. The composition of core deposit and other intangibles as of December 31, 2019 and 2018 are
as follows:
December 31, 2019
Core deposit intangible
Customer base trust intangible
Manufactured housing servicing intangible
Total core deposit and other intangibles
December 31, 2018
Core deposit intangible
Leasehold intangible(1)
Customer base trust intangible
Manufactured housing servicing intangible
Total core deposit and other intangibles
Core deposit and other intangibles
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
$
$
$
49,675 $
1,600
1,088
52,363 $
38,915 $
587
1,600
1,088
42,190 $
(33,861 ) $
(387)
(526)
(34,774 ) $
(29,901 ) $
(127)
(227)
(307)
(30,562 ) $
15,814
1,213
562
17,589
9,014
460
1,373
781
11,628
(1) In conjunction with the adoption of ASU 2016-02 "Leases" (Topic 842) on January 1, 2019, the Company reclassified leasehold intangibles from core
deposit and other intangibles to operating lease right-of-use assets on the Consolidated balance sheets. See Note 9. Leases for additional discussion.
During the second quarter of 2019, the Company recorded $10,760 of core deposit intangibles resulting from the Atlantic
Capital branch acquisition, which is being amortized over a weighted average life of approximately 6 years.
Amortization expense for core deposit and other intangibles for the years ended December 31, 2019, 2018 and 2017 was
$4,339, $3,185, and $1,995, respectively.
146
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The estimated aggregate future amortization expense of core deposit and other intangibles is as follows:
December 31, 2020
December 31, 2021
December 31, 2022
December 31, 2023
December 31, 2024
Thereafter
Note (9)—Leases:
$
$
4,262
3,663
2,972
2,247
1,737
2,708
17,589
On January 1, 2019, the Company adopted ASU 2016-02 "Leases" (Topic 842) and all subsequent updates that modified
Topic 842. For the Company, the adoption primarily affected the accounting treatment for operating lease agreements in
which the Company is the lessee.
Substantially all the leases for which the Company is the lessee are comprised of real estate for branches, mortgage, and
operations locations. As of December 31, 2019, the Company had 36 operating leases with terms greater than one year to
36 years. Leases with initial terms of less than one year are not recorded on the balance sheet. The Company elected not
to include equipment leases and leases in which the Company is the lessor on the consolidated balance sheets as these
are not material.
Most leases include one or more options to renew, with renewal terms that can extend the lease up to an additional 20 years
or more. Certain lease agreements contain provisions to periodically adjust rental payments for inflation. Renewal options
that management is reasonably certain to renew are included in the ROU asset and lease liability.
Information related to the Company's operating leases is presented below:
Right-of-use assets
Lease liabilities
Weighted average remaining lease term (in years)
Weighted average discount rate
$
December 31,
2019
32,539
35,525
14.07
3.44%
The components of lease expense included in Occupancy and equipment expense were as follows:
Operating lease cost (1)
Short-term lease cost
Variable lease cost
Total lease cost
(1) Includes amortization of favorable lease intangible
Year Ended
December 31, 2019
5,057
365
682
6,104
$
$
The Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to
account for them as a single lease component. Variable lease cost primarily represents variable payments such as common
area maintenance, utilities, and property taxes.
Prior to the adoption of ASU 2016-02, lease expense and amortization of the favorable lease intangible included in
occupancy and equipment expense during the year ended December 31, 2018 amounted to $5,019 and $90, respectively.
147
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
A maturity analysis of operating lease liabilities and a reconciliation of undiscounted cash flows to the total operating lease
liability is as follows:
Lease payments due on or before:
December 31, 2020
December 31, 2021
December 31, 2022
December 31, 2023
December 31, 2024
Thereafter
Total undiscounted cash flows
Discount on cash flows
Total lease liability
December 31,
2019
5,465
4,979
4,161
3,805
3,307
24,333
46,050
(10,525)
35,525
$
$
Note (10)—Mortgage servicing rights:
Changes in the Company’s mortgage servicing rights were as follows for years ended December 31, 2019, 2018, and 2017:
Carrying value at beginning of period
Fair value impact of change in accounting policy (See Note 1)
Carrying value at beginning of period
Capitalization
Sales
Loss on sale
Change in fair value:
Due to pay-offs/pay-downs
Due to change in valuation inputs or assumptions
Carrying value at end of period
$
$
2019
88,829 $
—
88,829
42,151
(29,160)
—
(16,350)
(9,949)
75,521 $
Year Ended December 31,
2017
32,070
1,011
33,081
58,984
(11,686)
(249)
2018
76,107 $
—
76,107
54,913
(39,428)
—
(11,062)
8,299
88,829 $
(3,104)
(919)
76,107
The following table summarizes servicing income and expense, which are included in mortgage banking income and other
noninterest expense, respectively, within the Mortgage Segment operating results for the years ended December 31, 2019,
2018, and 2017:
Servicing income:
Servicing income
Change in fair value of mortgage servicing rights
Change in fair value of derivative hedging instruments
Servicing income
Servicing expenses:
Loss on sale of mortgage servicing rights, related hedges and
transaction costs on sale
Other servicing expenses
Total servicing expenses
Net servicing (loss) income(1)
(1) - Excludes benefit of custodial service related noninterest bearing deposits held by the Bank.
148
Year Ended December 31,
2019
2018
2017
$
$
17,677 $
(26,299)
9,310
688
—
6,832
6,832
(6,144) $
20,591 $
(2,763)
(5,910)
11,918
—
7,675
7,675
4,243 $
13,168
(4,023)
599
9,744
249
4,896
5,145
4,599
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Data and key economic assumptions related to the Company’s mortgage servicing rights as of December 31, 2019 and
2018 are as follows:
Unpaid principal balance
Weighted-average prepayment speed (CPR)
Estimated impact on fair value of a 10% increase
Estimated impact on fair value of a 20% increase
Discount rate
Estimated impact on fair value of a 100 bp increase
Estimated impact on fair value of a 200 bp increase
Weighted-average coupon interest rate
Weighted-average servicing fee (basis points)
Weighted-average remaining maturity (in months)
$
$
$
$
$
December 31,
2019
2018
6,734,496
$
6,755,114
10.05%
(2,839) $
(5,474) $
9.68%
(3,086) $
(5,932) $
4.20%
29
335
8.58%
(2,072)
(4,006)
10.45%
(2,505)
(4,807)
4.21%
30
325
The Company hedges the mortgage servicing rights portfolio with various derivative instruments to offset changes in the
fair value of the related mortgage servicing rights. See Note 17, "Derivatives" for additional information on these hedging
instruments.
From time to time, the Company enters agreements to sell certain tranches of mortgage servicing rights. Upon
consummation of the sale, the Company generally continues to subservice the underlying mortgage loans until they can be
transferred to the purchaser. During the years ended December 31, 2019, 2018, and 2017, the Company sold $29,160,
$39,428, and $11,686 of mortgage servicing rights on $2,034,374, $3,181,483, and $1,086,465 of serviced mortgage loans,
respectively. There was not a significant gain or loss recognized in connection with the sales during the years ended
December 31, 2019 or 2018. As of December 31, 2019 and 2018, there were no loans being serviced that related to the
bulk sale of mortgage servicing rights. As of December 31, 2019 and 2018, mortgage escrow deposits totaled to $92,610
and $53,468, respectively.
Note (11)—Other assets and other liabilities:
Included in other assets are:
Other assets
Cash surrender value on bank owned life insurance
Prepaid expenses
Software
Mortgage lending receivable
Derivatives (See Note 17)
FHLB lender risk account receivable (See Note 1)
Pledged collateral on derivative instruments
Other assets
Total other assets
As of December 31,
$
$
2019
11,357 $
4,575
1,999
10,765
21,981
11,225
33,616
27,196
122,714 $
2018
11,115
3,283
1,313
3,876
14,316
5,225
13,904
17,070
70,102
149
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Included in other liabilities are:
Other liabilities
Deferred compensation
Accrued payroll
Mortgage servicing escrows
Mortgage buyback reserve
Accrued interest
Derivatives (See Note 17)
Deferred tax liability (See Note 14)
FHLB lender risk account guaranty
Other liabilities
Total other liabilities
Note (12)—Deposits:
As of December 31,
2019
1,718 $
16,517
4,526
3,529
6,465
17,933
20,490
5,546
10,730
87,454 $
2018
3,836
8,026
4,441
3,273
5,015
11,637
16,663
2,646
9,877
65,414
$
$
The aggregate amount of time deposits with a minimum denomination greater than $250 was $343,756 and $353,134 at
December 31, 2019 and 2018, respectively.
At December 31, 2019, the scheduled maturities of time deposits are as follows:
Scheduled maturities of time deposits
Due on or before:
December 31, 2020
December 31, 2021
December 31, 2022
December 31, 2023
December 31, 2024
Thereafter
Total
$
$
814,908
254,840
36,124
64,610
21,283
88
1,191,853
At December 31, 2019 and 2018, the Company had $3,487 and $2,738, respectively, of deposit accounts in overdraft status
and thus have been reclassified to loans on the accompanying consolidated balance sheets.
Note (13)—Borrowings:
Borrowings include securities sold under agreements to repurchase, lines of credit, Federal Home Loan Bank advances,
and subordinated debt.
Securities sold under agreements to repurchase and federal funds purchased
Securities sold under agreements to repurchase are financing arrangements that mature daily. The Company enters 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 and a short-term
return for their excess funds. Securities sold under agreements to repurchase totaled $23,745 and $15,081 at December 31,
2019 and 2018, respectively.
150
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Information concerning securities sold under agreements to repurchase is summarized as follows:
Balance at year end
Average daily balance during the year
Average interest rate during the year
Maximum month-end balance during the year
Weighted average interest rate at year-end
$
$
2019
23,745
22,798
0.84%
30,273
0.89%
2018
15,081
16,128
0.28%
19,651
0.74%
The Bank maintains lines with certain correspondent banks that provide borrowing capacity in the form of federal funds
purchased in the aggregate amount of $305,000 and $240,000 as of December 31, 2019 and 2018, respectively. There
were no borrowings against at December 31, 2019 or 2018.
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 production. Under these agreements, the Company
pledged qualifying loans of $958,506 as collateral securing a line of credit with a total borrowing capacity of $760,607 as of
December 31, 2019. As of December 31, 2018, the Company pledged qualifying loans of $1,227,711 as collateral securing
a line of credit with a total borrowing capacity of $736,962. A letter of credit with the FHLB of $75,000 and $100,000 was
pledged to secure public funds that require collateralization as of December 31, 2019 and 2018, respectively. Additionally,
there was an additional line of $800,000 with the FHLB for overnight borrowing as of December 31, 2019 and 2018; however,
additional collateral may be needed to draw on the line.
Borrowings against our line totaled $250,000 and $181,765 as of December 31, 2019 and December 31, 2018, respectively.
Total borrowings as of December 31, 2019 comprised $150,000 in long term advances, $0 in overnight cash management
advances (CMAs) and $100,000 in 90 day fixed rate advances. The long-term advances as of December 31, 2019 contain
putable features and are composed 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
predeterminable fixed rates of 1.24% and 1.37%, respectively.
Total borrowings as of December 31, 2018 comprised $1,765 in long term advances, $80,000 in CMAs and $100,000 in 90
day fixed rate advances. The long-term advances as of December 31, 2018 contain no such putable features. FHLB
advances includes both fixed and floating rates ranging from 1.24% to 1.86% at December 31, 2019. The weighted average
interest rate on outstanding advances at December 31, 2019 was 1.60%.
Maturities of FHLB advances as of December 31, 2019 are as follows:
Due on or before:
December 31, 2020
December 31, 2021
December 31, 2022
December 31, 2023
December 31, 2024
Due thereafter
Total
FHLB advances
100,000
—
—
—
—
150,000
250,000
$
$
The Company maintained a line with the Federal Reserve Bank through the Borrower-in-Custody program in 2019 and
2018. As of December 31, 2019 and 2018, $1,407,662 and $1,336,092 of qualifying loans and $4,963 and $8,569 of
investment securities were pledged to the Federal Reserve Bank through the Borrower-in-Custody program securing a line
of credit of $1,013,239 and $934,745, respectively.
151
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Subordinated Debt
In 2003, two separate trusts formed by the Company issued $9,000 of floating rate trust preferred securities (“Trust I”) and
$21,000 of floating rate trust preferred securities (“Trust II”), respectively, as part of a pooled offering of such securities. The
Company issued junior subordinated debentures of $9,280, which included proceeds of common securities purchased by
the Company of $280, and junior subordinated debentures of $21,650, which included proceeds of common securities of
$650. Both issuances were to the trusts in exchange for the proceeds of the securities offerings, which represent the sole
asset of the trusts. Trust I pays interest quarterly based upon the 3-month LIBOR plus 3.25%. Trust II pays interest quarterly
based upon the 3-month LIBOR plus 3.15%. Rates for the two issues at December 31, 2019, were 5.19% and 5.10%,
respectively. Rates for the two issues at December 31, 2018, were 5.65% and 5.97%, respectively. The Company may
redeem the first junior subordinated debenture listed, in whole or in part, on any distribution payment date within 120 days
of the occurrence of a special event, at the redemption price. The Company may redeem the second junior subordinated
debentures listed, in whole or in part, any time after June 26, 2008, on any distribution payment date, at the redemption
price. The junior subordinated debentures must be redeemed no later than 2033. The Company has classified $30,000 of
subordinated debt as Tier 1 capital at both December 31, 2019 and 2018.
Note (14)—Income taxes:
An allocation of federal and state income taxes between current and deferred portions is presented below:
Current
Deferred
Total
For the Year Ended December 31,
2019
27,641 $
(1,916)
25,725 $
2018
19,259 $
6,359
25,618 $
2017
14,629
6,458
21,087
$
$
Federal income tax expense differs from the statutory federal rate of 21% for the years ended December 31, 2019 and
2018 and 35% for the year ended December 31, 2017 due to the following:
Federal taxes calculated at statutory rate
Increase (decrease) resulting from:
2019
For the Year Ended December 31,
2017
2018
$
23,003
21.0 % $
22,230
21.0 % $
25,720
35.0 %
State taxes, net of federal benefit
4,792
4.4 %
4,666
4.4 %
3,053
4.2 %
Revaluation of net deferred tax liability as a result
of the Tax Cuts and Jobs Act
Benefit of equity based compensation
Municipal interest income, net of interest
disallowance
Bank owned life insurance
Merger and stock offering costs
Other
Income tax expense, as reported
$
—
(1,353)
— %
(1.2)%
—
(870)
— %
(0.8 )%
(908)
(0.8)%
(837)
(0.8 )%
(51)
66
176
25,725
(0.1)%
0.1 %
0.1 %
23.5 % $
(51)
141
339
25,618
— %
0.1 %
0.3 %
24.2 % $
(5,894)
(310)
(1,402)
(85)
—
5
21,087
(8.0)%
(0.4)%
(1.9)%
(0.2)%
— %
— %
28.7 %
152
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The components of the net deferred tax liability at December 31, 2019 and December 31, 2018, are as follows:
December 31,
December 31,
Deferred tax assets:
Allowance for loan losses
Operating lease liability
Amortization of core deposit intangible
Deferred compensation
Unrealized loss on debt securities
Unrealized loss on equity securities
Other
Subtotal
Deferred tax liabilities:
FHLB stock dividends
Operating lease - right of use asset
Depreciation
Unrealized gain on cash flow hedges
Unrealized gain on debt securities
Mortgage servicing rights
Goodwill
Other
Subtotal
Net deferred tax liability
$
2019
8,113 $
9,373
1,386
5,231
54
60
2,388
26,605
(550)
(8,641)
(5,078)
(203)
(3,051)
(19,678)
(8,859)
(1,035)
(47,095)
$
(20,490) $
2018
7,539
—
1,012
5,878
3,278
21
1,998
19,726
(550 )
—
(4,812 )
(736 )
—
(23,146 )
(6,583 )
(562 )
(36,389 )
(16,663)
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law, among other things permanently reducing
the corporate tax rate from 35 percent to 21 percent, effective for tax years beginning January 1, 2018. Under the guidance
of ASC 740, “Income Taxes” (“ASC 740”), the Company revalued its net deferred tax assets on the date of enactment based
on the reduction in the overall future tax benefit expected to be realized at the lower tax rate implemented by the new
legislation. After reviewing the Company’s inventory of deferred tax assets and liabilities on the date of enactment and giving
consideration to the future impact of the lower corporate tax rates and other provisions of the new legislation, the Company’s
revaluation of its net deferred tax liabilities resulted in a $5,894 reduction, which was included in “income tax expense” in
the Consolidated Statements of Income.
The Company is no longer subject to examination by taxing authorities for tax years before 2016 for federal taxes and before
2015 for various state jurisdictions.
Note (15)—Dividend restrictions:
Due to regulations of the Tennessee Department of Financial Institutions (“TDFI”), the Bank may not declare dividends in
any calendar year that exceeds the total of its net income of that year combined with its retained net income of the preceding
two years without the prior approval of the TDFI Commissioner. Based upon this regulation, $223,730 and $164,859 was
available for payment of dividends without such prior approval at December 31, 2019 and 2018, respectively.
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.
No cash dividends were declared from the Bank to the Company during the years ended December 31, 2019 or 2018.
153
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Note (16)—Commitments and contingencies:
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to
meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as
conditions established in the contract are met, and usually have expiration dates.
Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as
are used for loans, including obtaining collateral at exercise of the commitment.
Commitments to extend credit, excluding interest rate lock commitments
$
Letters of credit
Balance at end of period
December 31,
2019
1,086,173 $
19,569
2018
1,032,390
19,024
$
1,105,742
$
1,051,414
In connection with the sale of mortgage loans to third party investors, the Bank makes usual and customary representations
and warranties as to the propriety of its origination activities. Occasionally, the investors require the Bank to repurchase
loans sold to them under the terms of the warranties. When this happens, the loans are recorded at fair value with a
corresponding charge to a valuation reserve. The total principal amount of loans repurchased (or indemnified for) was
$6,475, $6,646, and$4,704 for the years ended December 31, 2019, 2018, and 2017. The Company has established a
reserve associated with loan repurchases. This reserve is recorded in accrued expenses and other liabilities on the
consolidated balance sheets.
The following table summarizes the activity in the repurchase reserve:
Balance at beginning of period
Provision for loan repurchases or indemnifications
Recoveries on previous losses
Losses on loans repurchased or indemnified
Balance at end of period
Note (17)—Derivatives:
For the Year Ended December 31,
2019
3,273 $
362
(106)
—
3,529 $
2018
3,386 $
174
3
(290)
3,273 $
2017
2,659
810
—
(83 )
3,386
$
$
The Company utilizes derivative financial instruments as part of its ongoing efforts to manage its interest rate risk exposure
as well as the exposure for its customers. Derivative financial instruments are included in the Consolidated Balance Sheets
line item “Other assets” or “Other liabilities” at fair value in accordance with ASC 815, “Derivatives and Hedging.”
The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to
funding (rate-lock commitments). Under such commitments, interest rates for mortgage loans are typically locked in for up
to sixty days with the customer. These interest rate lock commitments are recorded at fair value in the Company’s
Consolidated Balance Sheets. The Company also enters into best effort or mandatory delivery forward commitments to
sell residential mortgage loans to secondary market investors. Gains and losses arising from changes in the valuation of
the rate-lock commitments and forward commitments are recognized currently in earnings and are reflected under the line
item “Mortgage banking income” on the Consolidated Statements of Income.
154
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company enters into forward commitments, futures and options contracts that are not designated as hedging
instruments as economic hedges to offset the changes in fair value of MSRs. Gains and losses associated with these
instruments are included in earnings and are reflected under the line item “Mortgage banking income” on the Consolidated
Statements of Income.
Additionally, the Company enters into derivative instruments that are not designated as hedging instruments to help its
commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with
customer contracts, the Company enters into an offsetting derivative contract. The Company manages its credit risk, or
potential risk of default by its commercial customers through credit limit approval and monitoring procedures.
The Company also maintains two interest rate swap agreements with notional amounts totaling $30,000 used to hedge
interest rate exposure on outstanding subordinated debentures included in long-term debt totaling $30,930. Under these
agreements, the Company receives a variable rate of interest equal to 3-month LIBOR and pays a weighted average fixed
rate of interest of 2.08%. The interest rate swap contracts, which mature in June of 2024, are designated as cash flow
hedges with the objective of reducing the variability in cash flows resulting from changes in interest rates. As of
December 31, 2019 and 2018, the fair value of these contracts was $(515) and $721, respectively.
In July 2017, the Company entered into three interest rate swap contracts on floating rate liabilities at the Bank level with
notional amounts of $30,000, $35,000 and $35,000 for a period of three, four and five years, respectively. These interest
rate swaps were designated as cash flow hedges with the objective of reducing the variability of cash flows associated with
$100,000 of FHLB borrowings obtained in conjunction with the Clayton Banks acquisition. During the first quarter of 2018,
these swaps were canceled, locking in a tax-adjusted gain of $1,564 in other comprehensive income to be accreted over
the three, four and five-year terms of the underlying contracts. As of December 31, 2019 and 2018, there was $955 and
$1,436, respectively, remaining in the other comprehensive income to be accreted.
Certain financial instruments, including derivatives, may be eligible for offset in the Consolidated Balance Sheets when the
“right of setoff” exists or when the instruments are subject to an enforceable master netting agreement, which includes the
right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the
counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the
Company’s derivative instruments are subject to master netting agreements. The Company has not elected to offset such
financial instruments in the Consolidated Balance Sheets.
Most derivative contracts with clients are secured by collateral. Additionally, in accordance with the interest rate agreements
with derivatives dealers, the Company may be required to post margin to these counterparties. At December 31, 2019 and
2018, the Company had minimum collateral posting thresholds with certain derivative counterparties and had collateral
posted of $33,616 and $13,904, respectively, against its obligations under these agreements. Cash collateral related to
derivative contracts is recorded in other assets in the Consolidated Balance Sheets.
The following table provides details on the Company’s derivative financial instruments as of the dates presented:
Not designated as hedging:
Interest rate contracts
Forward commitments
Interest rate-lock commitments
Futures contracts
Option contracts
Total
December 31, 2019
Notional Amount
Asset
Liability
$
440,556 $
684,437
453,198
389,000
—
$
1,967,191 $
14,929 $
—
7,052
—
—
21,981 $
14,929
866
—
1,623
—
17,418
155
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Not designated as hedging:
Interest rate contracts
Forward commitments
Interest rate-lock commitments
Futures contracts
Options contracts
Total
Designated as hedging:
Interest rate swaps
Designated as hedging:
Interest rate swaps
Notional Amount
Asset
Liability
December 31, 2018
$
$
295,333 $
474,208
318,706
166,000
3,800
1,258,047 $
6,679 $
—
6,241
649
26
13,595 $
6,679
4,958
—
—
—
11,637
Notional Amount
Asset
Liability
December 31, 2019
$
30,000 $
— $
515
Notional Amount
Asset
Liability
December 31, 2018
$
30,000 $
721 $
—
Gains (losses) included in the Consolidated Statements of Income related to the Company’s derivative financial
instruments were as follows:
Year Ended December 31,
2019
2018
(2,112) $
12,170
(6,723)
(47)
3,288 $
(527) $
3,864
(2,981 )
(58 )
298 $
2017
340
(11,987)
315
22
(11,310)
Year Ended December 31,
2019
2018
2017
481
$
115
596 $
128
$
32
160 $
—
(168)
(168)
Not designated as hedging instruments (included in mortgage banking income):
Interest rate lock commitments
Forward commitments
Futures contracts
Option contracts
Total
Designated as hedging:
Amount of gain reclassified from other comprehensive
income and recognized in interest expense on
borrowings, net of taxes of $170, $45, and $0
Gain (loss) included in interest expense on borrowings
Total
$
$
$
$
156
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following discloses the amount included in other comprehensive income (loss), net of tax, for derivative instruments
designated as cash flow hedges for the periods presented:
Designated as hedging:
Amount of (loss) gain recognized in other comprehensive
income, net of tax
Note (18)—Fair value of financial instruments:
Year Ended December 31,
2019
2018
2017
$
(914) $
1,039
$
685
FASB ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability
(exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820-10 also establishes a framework for measuring the fair value of assets
and liabilities according to a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets
and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The hierarchy maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used
when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on
market data obtained from sources independent of the Company. Unobservable inputs are inputs that are derived from
assumptions based on management’s estimate of assumptions that market participants would use in pricing the asset or
liability based on the best information available under the circumstances.
The hierarchy is broken down into the following three levels, based on the reliability of inputs:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by
observable market data.
Level 3: Significant unobservable inputs for assets or liabilities that are derived from assumptions based on
management’s estimate of assumptions that market participants would use in pricing the assets or liabilities.
The Company records the fair values of financial assets and liabilities on a recurring and non-recurring basis using the
following methods and assumptions:
Investment securities-Investment securities are recorded at fair value on a recurring basis. Fair values for securities are
based on quoted market prices, where available. If quoted prices are not available, fair values are based on quoted market
prices of similar instruments or are determined by matrix pricing, which is a mathematical technique widely used in the
industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying
on the pricing relationship or correlation among other benchmark quoted securities. Investment securities valued using
quoted market prices of similar instruments or that are valued using matrix pricing are classified as Level 2. When significant
inputs to the valuation are unobservable, the available-for-sale securities are classified within Level 3 of the fair value
hierarchy.
Where no active market exists for a security or other benchmark securities, fair value is estimated by the Company with
reference to discount margins for other high-risk securities.
Loans held for sale-Loans held for sale are carried at fair value. Fair value is determined using current secondary market
prices for loans with similar characteristics, that is, using Level 2 inputs.
157
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Derivatives-The fair value of the interest rate swaps are based upon fair values provided from entities that engage in
interest rate swap activity and is based upon projected future cash flows and interest rates. Fair value of commitments 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. These financial instruments are classified as
Level 2.
Other real estate owned (“OREO”) - OREO is comprised of commercial and residential real estate obtained in partial or
total satisfaction of loan obligations and excess land and facilities held for sale. OREO acquired in settlement of
indebtedness is recorded at the lower of the carrying amount of the loan or the fair value of the real estate less costs to
sell. Fair value is determined on a nonrecurring basis based on appraisals by qualified licensed appraisers and is adjusted
for management’s estimates of costs to sell and holding period discounts. The valuations are classified as Level 3.
Mortgage servicing rights ("MSRs") - MSRs are carried at fair value. Fair value is determined using an income approach
with various assumptions including expected cash flows, market discount rates, prepayment speeds, servicing costs, and
other factors. As such, mortgage servicing rights are considered Level 3.
Impaired loans-Loans considered impaired under FASB ASC 310, "Receivables", are loans for which, based on current
information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Fair value adjustments for impaired loans are recorded on a non-recurring basis as either
partial write downs based on observable market prices or current appraisal of the collateral. Impaired loans are classified
as Level 3.
The following table contains the estimated fair values and the related carrying values of the Company's financial
instruments. Items which are not financial instruments are not included.
December 31, 2019
Financial assets:
Cash and cash equivalents
Investment securities
Loans, net
Loans held for sale
Interest receivable
Mortgage servicing rights
Derivatives
Financial liabilities:
Deposits:
Without stated maturities
With stated maturities
Securities sold under agreement to
repurchase and federal funds sold
Federal Home Loan Bank advances
Subordinated debt
Interest payable
Derivatives
Fair Value
$
Carrying
amount
232,681 $
691,676
4,378,503
262,518
17,083
75,521
21,981
Level 1
Level 2
Level 3
Total
232,681 $
—
—
—
—
—
—
— $
691,676
—
262,518
3,282
—
21,981
— $
—
4,363,903
—
13,801
75,521
—
232,681
691,676
4,363,903
262,518
17,083
75,521
21,981
$ 3,743,085 $ 3,743,085 $
1,191,853
—
— $
1,200,145
— $ 3,743,085
1,200,145
—
23,745
250,000
30,930
6,465
17,933
23,745
—
—
376
—
—
250,213
29,706
6,089
17,933
—
—
—
—
—
23,745
250,213
29,706
6,465
17,933
158
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
December 31, 2018
Financial assets:
Cash and cash equivalents
Investment securities
Loans, net
Loans held for sale
Interest receivable
Mortgage servicing rights
Derivatives
Financial liabilities:
Deposits:
Without stated maturities
With stated maturities
Securities sold under agreement to
repurchase and federal funds sold
Federal Home Loan Bank advances
Subordinated debt
Interest payable
Derivatives
Fair Value
$
Carrying
amount
125,356 $
658,805
3,638,579
278,815
14,503
88,829
14,316
Level 1
Level 2
Level 3
Total
125,356 $
— $
—
—
—
—
—
—
658,805
—
278,815
2,848
—
14,316
— $
—
3,630,500
—
11,655
88,829
—
125,356
658,805
3,630,500
278,815
14,503
88,829
14,316
$ 3,051,972 $ 3,051,972 $
— $
1,119,745
—
1,122,076
— $ 3,051,972
1,122,076
—
15,081
181,765
30,930
5,015
11,637
15,081
—
—
530
—
—
181,864
30,000
4,485
11,637
—
—
—
—
—
15,081
181,864
30,000
5,015
11,637
The balances and levels of the assets measured at fair value on a recurring basis at December 31, 2019 are presented
in the following table:
December 31, 2019
Recurring valuations:
Financial assets:
Available-for-sale securities:
Mortgage-backed securities
Municipals, tax-exempt
Treasury securities
Corporate securities
Equity securities
Total
Loans held for sale
Mortgage servicing rights
Derivatives
Financial Liabilities:
Derivatives
Quoted prices
in active
markets for
identical assets
(liabilities)
(level 1)
Significant
other
observable
inputs
(level 2)
Significant
unobservable
inputs
(level 3)
$
$
$
— $
—
—
—
—
— $
— $
—
—
—
490,676 $
189,235
7,448
1,022
3,295
691,676 $
262,518 $
—
21,981
17,933
— $
—
—
—
—
— $
— $
75,521
—
—
Total
490,676
189,235
7,448
1,022
3,295
691,676
262,518
75,521
21,981
17,933
159
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The balances and levels of the assets measured at fair value on a non-recurring basis at December 31, 2019 are presented
in the following table:
At December 31, 2019
Non-recurring valuations:
Financial assets:
Other real estate owned
Impaired loans(1):
Commercial and industrial
Residential real estate:
1-4 family mortgage
Residential line of credit
Commercial real estate:
Owner occupied
Non-owner occupied
Consumer and other
Total
Quoted prices
in active
markets for
identical assets
(liabilities)
(level 1)
Significant
other
observable
inputs
(level 2)
Significant
unobservable
inputs
(level 3)
$
$
$
— $
— $
—
—
—
—
—
— $
— $
— $
—
—
—
—
—
— $
9,774 $
6,481 $
378
321
951
2,560
—
10,691 $
Total
9,774
6,481
378
321
951
2,560
—
10,691
(1) Includes both impaired non-purchased loans and collateral-dependent PCI loans.
The balances and levels of the assets measured at fair value on a recurring basis at December 31, 2018 are presented in
the following table:
At December 31, 2018
Recurring valuations:
Financial assets:
Available-for-sale securities:
U.S. government agency securities
Mortgage-backed securities
Municipals, tax-exempt
Treasury securities
Equity securities
Total
Loans held for sale
Mortgage servicing rights
Derivatives
Financial Liabilities:
Derivatives
Quoted prices
in active
markets for
identical assets
(liabilities)
(level 1)
Significant
other
observable
inputs
(level 2)
Significant
unobservable
inputs
(level 3)
$
$
$
— $
—
—
—
—
— $
— $
—
—
—
989 $
508,580
138,887
7,242
3,107
658,805 $
278,815 $
—
14,316
11,637
160
Total
989
508,580
138,887
7,242
3,107
658,805
278,815
88,829
14,316
— $
—
—
—
—
— $
— $
88,829
—
—
11,637
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The balances and levels of the assets measured at fair value on a non-recurring basis at December 31, 2018 are presented
in the following table:
At December 31, 2018
Non-recurring valuations:
Financial assets:
Other real estate owned
Impaired Loans(1):
Commercial and industrial
Construction
Residential real estate:
1-4 family mortgage
Commercial real estate:
Owner occupied
Non-owner occupied
Total
Quoted prices
in active
markets for
identical assets
(liabilities)
(level 1)
Significant
other observable
inputs
(level 2)
Significant
unobservable
inputs
(level 3)
Total
$
$
$
— $
— $
—
—
—
—
— $
— $
— $
—
—
—
—
— $
2,266 $
2,266
732 $
832
146
87
6,921
8,718 $
732
832
146
87
6,921
8,718
(1) Includes both impaired non-purchased loans and collateral-dependent PCI loans.
There were no transfers between Level 1, 2 or 3 during the periods presented.
The following table provides a reconciliation for assets and liabilities measured at fair value on a recurring basis using
significant unobservable inputs, or Level 3 inputs, during the years ended December 31, 2019 and 2018:
Balance at beginning of period
Reclassification of equity securities without a readily determinable fair value to other assets
Balance at end of period
$
$
Available-for-sale
securities
Year Ended December 31,
2018
3,604
— $
2019
—
— $
(3,604)
—
The following table presents information as of December 31, 2019 about significant unobservable inputs (Level 3) used
in the valuation of assets measured at fair value on a nonrecurring basis:
Financial instrument
Impaired loans(1)
Other real estate owned
$
$
Fair Value
Valuation technique
10,691 Valuation of collateral
9,774 Appraised value of property less
costs to sell
Significant Unobservable
inputs
Range of
inputs
Discount for comparable
sales
0%-30%
Discount for costs to sell
0%-15%
(1) Includes both impaired non-purchased loans and collateral-dependent PCI loans.
161
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 information as of December 31, 2018 about significant unobservable inputs (Level 3) used
in the valuation of assets measured at fair value on a nonrecurring basis:
Financial instrument
Fair Value
Valuation technique
Impaired loans(1)
Valuation of collateral
Other real estate owned
$
$
8,718
Appraised value of property less
2,266
costs to sell
Significant Unobservable
inputs
Range of
inputs
Discount for comparable
sales
0%-30%
Discount for costs to sell
0%-15%
(1) Includes both impaired non-purchased loans and collateral-dependent PCI loans.
Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value
of the collateral less estimated selling costs. Impaired loans are reviewed and evaluated on at least a quarterly basis for
additional impairment and adjusted accordingly, based on changes in market conditions from the time of valuation and
management's knowledge of the client and client's business. Other real estate owned acquired in settlement of
indebtedness is recorded at fair value of the real estate less estimated costs to sell. Subsequently, it may be necessary to
record nonrecurring fair value adjustments for declines in fair value. Any write-downs based on the asset's fair value at the
date of foreclosure are charged to the allowance for loan losses. Appraisals for both collateral-dependent impaired loans
and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential
appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company.
Once received, a member of the lending administrative department reviews the assumptions and approaches utilized in
the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market
data or industry wide statistics.
Fair value option
The Company elected to measure all loans originated for sale at fair value under the fair value option as permitted under
ASC 825. Electing to measure these assets at fair value reduces certain timing differences and better matches the changes
in fair value of the loans with changes in the fair value of derivative instruments used to economically hedge them.
Net losses of $2,861 and $4,539 resulting from fair value changes of the mortgage loans were recorded in income during
the years ended December 31, 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 loans held for sale and the related derivative instruments are recorded in Mortgage Banking Income in
the Consolidated Statements of Income. Election of the fair value option allows the Company to reduce the accounting
volatility that would otherwise result from the asymmetry created by accounting for the financial instruments at the lower of
cost or fair value and the derivatives at fair value.
As of December 31, 2019 and 2018, there was $51,705 and $67,362, respectively, of GNMA loans previously sold that the
Company did not record on its Consolidated balance sheets as the Company determined there not to be a more-than-
trivial benefit based on an analysis of interest rates and an assessment of potential reputational risk associated with these
loans.
The Company’s valuation of loans held for sale incorporates an assumption for credit risk; however, given the short-term
period that the Company holds these loans, valuation adjustments attributable to instrument-specific credit risk is nominal.
Interest income on loans held for sale measured at fair value is accrued as it is earned based on contractual rates and is
reflected in loan interest income in the Consolidated Statements of Income.
162
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following table summarizes the differences between the fair value and the principal balance for loans held for sale
measured at fair value as of December 31, 2019 and December 31, 2018:
December 31, 2019
Mortgage loans held for sale measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
December 31, 2018
Mortgage loans held for sale measured at fair value
Past due loans of 90 days or more
Nonaccrual loans
Aggregate
fair value
262,518 $
—
—
Aggregate
Unpaid
Principal
Balance
254,868 $
—
—
Difference
7,650
—
—
278,418 $
267,907 $
—
397
—
397
10,511
—
—
$
$
Note (19)—Parent company only financial statements:
Balance sheet
Assets
Cash and cash equivalents(1)
Investments in Bank subsidiary(1)
Other assets
Goodwill
Total assets
Liabilities and shareholders' equity
Liabilities
Borrowings
Accrued expenses and other liabilities
Total liabilities
Shareholders' equity
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total shareholders' equity
Total liabilities and shareholders' equity
(1) Eliminates in Consolidation
As of December 31,
2018
2019
4,673 $
782,565
6,292
29
793,559
30,930 $
300
31,230
31,034
425,633
293,524
12,138
762,329
793,559 $
17,400
679,097
7,364
29
703,890
30,930
1,103
32,033
30,725
424,146
221,213
(4,227)
671,857
703,890
$
$
$
163
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Income Statements
Income
Other interest income
Loss on investments
(Loss) gain on other assets
Other income
Total income
Expenses
Interest expense
Salaries, legal and professional fees
Other noninterest expense
Total expenses
Loss before income tax benefit and equity in undistributed earnings of
bank subsidiary
Federal and state income tax benefit
Loss before equity in undistributed earnings of bank subsidiary
Earnings from Bank subsidiary(1)
Net income
(1) Eliminates in Consolidation
Statement of Cash Flows
Operating Activities
Net income
For the years ended December 31,
2019
2018
— $
—
(16)
211
195
1,638
1,056
120
2,814
(2,619)
(683)
(1,936)
85,750
83,814 $
— $
—
297
—
297
1,651
1,481
960
4,092
(3,795)
(746)
(3,049)
83,285
80,236 $
2017
41
(945)
—
—
(904)
1,491
893
296
2,680
(3,584)
(1,269)
(2,315)
54,713
52,398
$
$
For the years ended December 31,
2019
2018
2017
$
83,814 $
80,236 $
52,398
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiary bank
Loss on investments
Loss (gain) on other assets
Stock-based compensation expense
Decrease (increase) in other assets
Decrease in other liabilities
Net used in operating activities
Investing Activities
Proceeds from sale of other assets
Net cash provided by investing activities
Financing Activities
Equity contribution to Bank
Payment of dividends
Net proceeds from sale of common stock
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental noncash disclosures:
Dividends declared not paid on restricted stock units
Noncash dividend from Bank
(85,750)
—
16
7,089
1,056
(9,711)
(3,486)
—
—
—
(10,045)
804
(9,241)
(12,727)
17,400
4,673 $
(83,285)
—
(297)
7,207
(441)
(7,737)
(4,317)
869
869
—
(6,137)
1,196
(4,941)
(8,389)
25,789
17,400 $
(54,713)
945
—
—
(2,439)
(551)
(4,360)
—
—
(154,200)
—
153,356
(844)
(5,204)
30,993
25,789
149 $
—
226 $
572
—
—
$
$
164
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Note (20)—Segment reporting:
The Company and the Bank are engaged in the business of banking and provide a full range of financial services. The
Company determines reportable segments based on the significance of the segment’s operating results to the overall
Company, the products and services offered, customer characteristics, processes and service delivery of the segments
and the regular financial performance review and allocation of resources by the Chief Executive Officer (“CEO”), the
Company’s chief operating decision maker. The Company has identified two distinct reportable segments—Banking and
Mortgage. The Company’s primary segment is Banking, which provides a full range of deposit and lending products and
services to corporate, commercial and consumer customers. The Company offers full-service conforming residential
mortgage products, including conforming residential loans and services through the Mortgage segment utilizing mortgage
offices outside of the geographic footprint of the Banking operations. Additionally, the Mortgage segment includes the
servicing of residential mortgage loans and the packaging and securitization of loans to governmental agencies. The
residential mortgage products and services originated in our Banking footprint and related revenues and expenses are
included in our Banking segment. The Company’s mortgage division represents a distinct reportable segment which differs
from the Company’s primary business of commercial and retail banking.
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.
Other indirect revenue and expenses related to general administrative areas are also included in the internal financial
results reports of the Banking segment utilized by the CEO for analysis and are thus included for Banking segment
reporting. The Mortgage segment utilizes funding sources from the Banking segment in order to fund mortgage loans that
are ultimately sold on the secondary market. The Mortgage segment uses the proceeds from loan sales to repay obligations
due to the Banking segment.
During the first quarter of 2019, the Company's Board of Directors approved management's strategic plan to exit its
wholesale mortgage delivery channels. On June 7, 2019, the Company completed the sale of its third party origination
("TPO") channel and on August 1, 2019, the Company completed the sale of its correspondent channel. The mortgage
segment incurred $1,995 in restructuring and miscellaneous charges during the year ended December 31, 2019 related to
these sales.
165
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following tables provide segment financial information for the years ended December 31, 2019, 2018, and 2017 as
follows:
Banking
$
Mortgage
Consolidated
Total assets
Goodwill(3)
(1) Included in mortgage banking income.
(2) Included $5,385 in merger costs in the Banking segment and $1,995 in the Mortgage segment related to mortgage restructuring charges.
(3) Recognized $100 of goodwill relief related to the sale of the third party origination channel in the Mortgage segment. See Note 8. Goodwill and intangible assets.
5,795,888 $
169,051
$
Banking
$
Mortgage
Consolidated
Year Ended December 31, 2019
Net interest income
Provision for loan loss
Mortgage banking income
Change in fair value of mortgage servicing rights, net of hedging(1)
Other noninterest income
Depreciation and amortization
Amortization of intangibles
Other noninterest mortgage banking expense
Other noninterest expense(2)
Income before income taxes
Income tax expense
Net income
Year Ended December 31, 2018
Net interest income
Provision for loan loss
Mortgage banking income
Change in fair value of mortgage servicing rights, net of hedging(1)
Other noninterest income
Depreciation and amortization
Amortization of intangibles
Other noninterest mortgage banking expense
Other noninterest expense(2)
Income before income taxes
Income tax expense
Net income
226,098 $
7,053
30,429
—
34,481
4,670
4,339
23,216
144,658
107,072 $
204,517 $
5,398
25,460
—
29,981
3,827
3,185
21,671
121,200
104,677 $
$
$
(62) $
—
87,476
(16,989)
—
506
—
65,457
1,995
2,467 $
$
329,033 $
—
226,036
7,053
117,905
(16,989)
34,481
5,176
4,339
88,673
146,653
109,539
25,725
83,814
6,124,921
169,051
(449) $
—
83,874
(8,673)
—
507
—
73,068
—
1,177 $
$
384,653 $
100
204,068
5,398
109,334
(8,673)
29,981
4,334
3,185
94,739
121,200
105,854
25,618
80,236
5,136,764
137,190
Total assets
Goodwill
(1) Included in mortgage banking income.
(2) Included $1,594 in merger costs and $671 in costs related to follow-on secondary offering in the Banking segment.
$
4,752,111 $
137,090
166
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Year Ended December 31, 2017
Net interest income
Provision for loan loss
Mortgage banking income
Change in fair value of mortgage servicing rights(1)
Other noninterest income
Depreciation and amortization
Amortization of intangibles
Loss on sale of mortgage servicing rights
Other noninterest mortgage banking expense
Other noninterest expense(2)
Income before income taxes
Income tax expense
Net income
Total assets
Goodwill
(1)
(2)
Included in mortgage banking income.
Included $19,034 in merger and conversion expenses.
$
$
$
Banking
153,018 $
(950)
26,737
—
24,648
3,801
1,995
—
21,714
117,461
60,382 $
4,130,349 $
137,090
Mortgage
253 $
—
93,620
(3,424)
—
515
—
249
76,582
—
13,103 $
$
597,364 $
100
Consolidated
153,271
(950)
120,357
(3,424)
24,648
4,316
1,995
249
98,296
117,461
73,485
21,087
52,398
4,727,713
137,190
Our Banking segment provides our Mortgage segment with a warehouse line of credit that is used to fund mortgage loans
held for sale. The warehouse line of credit, which is eliminated in consolidation, had a prime interest rate of 4.75%, 5.50%,
and 4.50% as of December 31, 2019 and 2018, 2017, respectively, and further limited based on interest income earned
by the Mortgage segment. The amount of interest paid by our Mortgage segment to our Banking segment under this
warehouse line of credit is recorded as interest income to our Banking segment and as interest expense to our Mortgage
segment, both of which are included in the calculation of net interest income for each segment. The amount of interest
paid by our Mortgage segment to our Banking segment under this warehouse line of credit was $11,183, $16,057, and
$16,932 for the December 31, 2019, 2018, and 2017, respectively.
Note (21)—Minimum capital requirements:
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking
agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative
measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements
can initiate regulatory action.
Under regulatory guidance for non-advanced approaches institutions, the Bank and Company are required to maintain
minimum amounts and ratios of common equity Tier I capital to risk-weighted assets. Additionally, under U.S. Basel III
Capital Rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital.
As of December 31, 2019 and 2018, the Bank and Company met all capital adequacy requirements to which they are
subject.
Beginning in 2016, an additional conservation buffer was added to the minimum requirements for capital adequacy
purposes, subject to a three year phase-in period. As of December 31, 2019 and 2018, the buffer was 2.50% and 1.88%,
respectively. The capital conservation buffer was fully phased in on January 1, 2019.
167
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Actual and required capital amounts and ratios are presented below at period-end.
December 31, 2019
Total Capital (to risk-weighted assets)
FB Financial Corporation
FirstBank
Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation
FirstBank
Tier 1 Capital (to average assets)
FB Financial Corporation
FirstBank
Common Equity Tier 1 Capital (to risk-
weighted assets)
FB Financial Corporation
FirstBank
December 31, 2018
Total Capital (to risk-weighted assets)
FB Financial Corporation
FirstBank
Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation
FirstBank
Tier 1 Capital (to average assets)
FB Financial Corporation
FirstBank
Common Equity Tier 1 Capital (to risk-
weighted assets)
FB Financial Corporation
FirstBank
Actual
For capital adequacy
purposes
Minimum Capital
adequacy with
capital buffer
To be well capitalized
under prompt corrective
action provisions
Amount
Ratio Amount
Ratio Amount
Ratio
Amount
Ratio
$ 633,549
623,432
12.2 % $ 415,442
412,186
12.1 %
8.0% $ 545,268
540,995
8.0%
10.5%
N/A
10.5% $ 515,233
N/A
10.0%
$ 602,410
592,293
11.6 % $ 311,591
309,022
11.5 %
6.0% $ 441,421
437,782
6.0%
8.5%
N/A
8.5% $ 412,030
$ 602,410
592,293
10.1 % $ 238,578
239,310
9.9 %
4.0%
4.0%
N/A
N/A
N/A
N/A
N/A $ 299,138
$ 572,410
592,293
11.1 % $ 232,058
231,767
11.5 %
4.5% $ 360,979
360,526
4.5%
7.0%
N/A
7.0% $ 334,774
N/A
8.0%
N/A
5.0%
N/A
6.5%
Actual
For capital adequacy
purposes
Amount
Ratio Amount
Ratio Amount
Minimum Capital
adequacy with
capital buffer
Ratio
To be well capitalized
under prompt corrective
action provisions
Ratio
Amount
$ 582,945
561,327
13.0 % $ 358,735
359,249
12.5 %
8.0% $ 442,814
443,448
8.0%
N/A
9.9%
9.9% $ 449,062
N/A
10.0%
$ 554,013
532,395
12.4 % $ 268,071
268,434
11.9 %
6.0% $ 351,843
352,320
6.0%
7.9%
N/A
7.9% $ 357,913
$ 554,013
532,395
11.4 % $ 194,391
195,374
10.9 %
4.0%
4.0%
N/A
N/A
N/A
N/A
N/A $ 244,218
$ 524,013
532,395
11.7 % $ 201,543
201,326
11.9 %
4.5% $ 285,520
285,212
4.5%
6.4%
N/A
6.4% $ 290,804
N/A
8.0%
N/A
5.0%
N/A
6.5%
Note (22)—Employee benefit plans:
(A)—401(k) plan:
The Bank has a 401(k) Plan (the “Plan”) whereby substantially all employees participate in the Plan. Employees may
contribute the maximum amount of their eligible compensation subject to certain limits based on the federal tax laws. During
the year ended December 31, 2019, the Bank increased the employer match to 50% of participant contributions not to
exceed 6% of an employee’s total compensation. Prior to 2019, the employer match was 25% of participant contributions
not to exceed 6% of an employee's total compensation with an additional discretionary 25% match. Additionally, during
2019, the vesting term of profit sharing contributions was changed to a three-year rateable period from five years in 2018
and 2017. For the years ended December 31, 2019, 2018 and 2017, the matching portions provided by the Bank to this
168
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Plan were $2,325 and $2,211 and $2,344 respectively, which includes an additional discretionary contribution of 25% match
for 2018 and 2017.
(B)—Acquired supplemental retirement plans:
In prior years, the Company assumed certain nonqualified supplemental retirement plans for certain former employees of
acquired entities. At December 31, 2019 and 2018, other liabilities on the consolidated balance sheet included post-
retirement benefits payable of $1,315 and $1,260, respectively, related to these plans. For the years ended December 31,
2019, 2018 and 2017, the Company recorded expense of $1, $4 and $4, respectively, related to these plans and payments
to the participants were $150, $191 and $191 in 2019, 2018 and 2017, respectively. The Company also acquired single
premium life insurance policies on these individuals. At December 31, 2019 and 2018, other assets on the consolidated
balance sheet include $11,357 and $11,115 and reported cash value income (net of related insurance premium expense)
of $240, $158 and $164 in 2019, 2018 and 2017, respectively.
(C)—Deferred compensation plans and agreements:
2012 EBI Plan— The Bank granted awards (“EBI Units”) to certain employees pursuant to the the FirstBank 2012 Equity
Based Incentive Plan (the “2012 EBI Plan”). Prior to the initial public offering, awards granted under the 2012 EBI Plan were
settled in cash only. Following the initial public offering, participants in the EBI Plans were given the one-time option to elect,
for each EBI Unit vested to such participant, either (i) an amount in cash or (ii) a number of shares of Company common
stock determined pursuant to a conversion formula that took into account the effect of the initial public offering. Consistent
with the terms of the EBI Plans and approved by the Board of Directors, outstanding EBI Units were adjusted to reflect the
100-for-one stock split that was effectuated prior to the IPO. EBI Units granted under the 2012 EBI Plan were fully vested
and paid out during the year ended December 31, 2019. No further grants will be made under the 2012 EBI Plan.
Deferred Compensation Agreement—Effective December 31, 2014, the Bank entered into an agreement with the Bank’s
Chief Executive Officer to reward his prior service, pursuant to which he is entitled to receive a fixed lump sum cash payment
equal to $3,000,000 on December 31, 2019 or the earlier occurrence of his separation of service or a change in control of
the Company. On August 19, 2016, the Bank entered into an amendment to the deferred compensation agreement, pursuant
to which the award was converted to 157,895 deferred stock units, determined by dividing $3,000,000 by $19.00 (the IPO
price). On December 31, 2019, the deferred stock units were converted on a 1-for-1 basis into shares of Company common
stock and distributed. No other awards have been made under this agreement.
Summary—At December 31, 2018, the accompanying consolidated balance sheets included liabilities for cash-settled
awards under the EBI Plans amounting to $993 representing 29,172 units for those employees who elected cash settlement
of EBI units. As of January 31, 2019, these cash-settled awards were fully distributed. For the years ended December 31,
2019, 2018, and 2017, the Company incurred expenses related to these plans and agreements totaling $484, $3,787, and
$3,685, respectively, which is included in salaries, commissions and employee benefits in the accompanying statement of
income. Additionally, payments under the plans totaled $1,191, $1,818 and $5,163 for years ended December 31, 2019,
2018 and 2017, respectively.
Note (23)—Stock-Based Compensation
The Company grants restricted stock units 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.
169
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following table summarizes information about vested and unvested restricted stock units, excluding cash-settled EBI
units discussed in Note 22, outstanding at December 31, 2019:
For the Year Ended
2019
Balance at beginning of period
Grants
Released and distributed (vested)
Forfeited/expired
Balance at end of period
Restricted
Stock
Units
Outstanding
1,140,215 $
168,697
(440,033)
(42,616)
826,263 $
Weighted
Average Grant
Date
Fair Value
21.96
34.08
22.55
27.15
23.76
The total fair value of restricted stock units vested and released, excluding cash-settled EBI units, was $9,923, $4,562, and
$2,202 for the years ended December 31, 2019, 2018, and 2017, respectively.
The compensation cost related to stock grants and vesting of restricted stock units, excluding cash-settled EBI units, was
$7,089, $7,436, and $8,184 for the years ended December 31, 2019, 2018, and 2017, respectively. This included $724,
$645 and $551 paid to Company independent directors during the years ended December 31, 2019, 2018 and 2017,
respectively, related to independent director grants and compensation elected to be settled in stock. The year ended
December 31, 2018 also includes a one-time expense of $249 related to the modification of vesting terms of certain grants.
As of December 31, 2019 and 2018, there were $11,449 and $12,371, respectively, of total unrecognized compensation
cost related to unvested restricted stock units which is expected to be recognized over a weighted-average period of 2.0
years and 2.2 years, respectively. At December 31, 2019 and 2018, there were $375 and $226, respectively, accrued in
other liabilities related to dividends declared to be paid upon vesting and distribution of the underlying RSUs.
Employee Stock Purchase Plan:
The Company maintains an employee stock purchase plan (“ESPP”) under which employees, through payroll deductions,
are able to purchase shares of Company common stock. The purchase price is 95% of the lower of the market price on the
first or last day of the offering period. The maximum number of shares issuable during any offering period is 200,000 shares
and a participant may not purchase more than 725 shares during any offering period (and, in any event, no more than
$25,000 worth of common stock in any calendar year). During the years ended December 31, 2019 and 2018, there were
23,171 and 28,609 shares of common stock issues under the ESPP, respectively. As of December 31, 2019 and 2018, there
were 2,409,185 and 2,432,356 shares available for issuance under the ESPP, respectively.
Note (24)—Related party transactions:
(A) Loans: The Bank has made and expects to continue to make loans to the directors, certain management and executive
officers of the Company and their affiliates in the ordinary course of business, in compliance with regulatory requirements.
An analysis of loans to executive officers, certain management, and directors of the Bank and their affiliates is presented
below:
Loans outstanding at January 1, 2019
New loans and advances
Change in related party status
Repayments
Loans outstanding at December 31, 2019
170
$
$
32,264
13,370
(10,067)
(4,687)
30,880
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Unfunded commitments to certain executive officers, certain management and directors and their associates totaled
$19,404 and $15,000 at December 31, 2019 and 2018, respectively.
(B) Deposits:
The Bank held deposits from related parties totaling $238,781 and $287,156 as of December 31, 2019 and 2018,
respectively.
(C) Leases:
The Bank leases various office spaces from entities owned by certain directors of the Company under varying terms. The
Company had $86 and $116 in unamortized leasehold improvements related to these leases at December 31, 2019 and
2018, respectively. These improvements are being amortized over a term not to exceed the length of the lease. Lease
expense for these properties totaled $509, $516, and $504 for the years ended December 31, 2019, 2018, and 2017,
respectively.
(D) Aviation time sharing agreement:
The Company is a participant to aviation time sharing agreements with entities owned by a certain director of the Company.
During the years ended December 31, 2019, 2018 and 2017, the Company made payments of $266, $208 and $176,
respectively, under these agreements.
(E) Registration rights agreement:
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. During 2018, the Company paid $671 under this agreement. No such expenses
were incurred for the year ended December 31, 2019 or 2017.
Note (25)—Subsequent event:
The Company has evaluated subsequent events through March 13, 2020, the date these financial statements were available
to be issued.
As disclosed in Note 2, "Mergers and acquisitions," on January 21, 2020, the Company announced entry into a definitive
merger agreement with Franklin Financial Network, Inc. pursuant to which Franklin will be merged with and into FB Financial.
The merger is expected to close in the third quarter of 2020 and is subject to regulator approvals, approval by FB Financial's
and Franklin's shareholders and other customary closing conditions.
Additionally, 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.
There were no other subsequent events, other than what was disclosed above, that occurred after December 31, 2019, but
prior to the issuance of these financial statements that would have a material impact on the Company’s consolidated
financial statements.
171
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the “Act”)) as of December 31, 2019 was carried out under the supervision and with the
participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior
management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019,
the Company’s disclosure controls and procedures were effective for ensuring that information the Company is required to
disclose in reports that it files or submits under the Act, as amended, is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated
to the Company’s senior management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The information required to be provided pursuant to this item is set forth under the headings “Report on Management’s
Assessment of Internal Control over Financial Reporting” in Item 8, Financial Statements and Supplementary Data.
This Annual Report does not include an attestation report from our registered public accounting firm regarding our internal
control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm
pursuant to rules of the SEC that permit emerging growth companies, which we are, to provide only Management’s Annual
Report on Internal Control over Financial Reporting in this Annual Report.
Changes in Internal Controls
There was no change in our internal control over financial reporting that occurred during the fourth quarter ended
December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Limitations on the Effectiveness of Controls
The Company’s management recognizes that a control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues, errors and instances of fraud, if any, within the Company have been detected.
ITEM 9B. Other Information
None.
172
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s
definitive proxy statement for the 2020 annual meeting of shareholders which will be filed with the SEC within 120 days of
December 31, 2019.
Item 11. Executive Compensation
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s
definitive proxy statement for the 2020 annual meeting of shareholders which will be filed with the SEC within 120 days of
December 31, 2019.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s
definitive proxy statement for the 2020 annual meeting of shareholders which will be filed with the SEC within 120 days of
December 31, 2019.
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s
definitive proxy statement for the 2020 annual meeting of shareholders which will be filed with the SEC within 120 days of
December 31, 2019.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s
definitive proxy statement for the 2020 annual meeting of shareholders which will be filed with the SEC within 120 days of
December 31, 2019.
173
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
PART IV
The following consolidated financial statements of FB Financial Corporation and our subsidiaries and related reports of our
independent registered public accounting firm are incorporated in this Item 15. by reference from Part II - Item 8. Financial
Statements and Supplementary Data of this Report.
Consolidated balance sheets as of December 31, 2019 and 2018
Consolidated statements of income for the years ended December 31, 2019, 2018 and 2017
Consolidated statements of comprehensive income for the years ended December 31, 2019, 2018 and 2017
Consolidated statements of changes in shareholders’ equity for the years ended December 31,
2019, 2018 and 2017
Consolidated statements of cash flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedules
None are applicable because the required information has been incorporated in the consolidated financial statements
and notes thereto of FB Financial and our subsidiaries which are incorporated in this Annual Report by reference.
3. Exhibits
The following exhibits are filed or furnished herewith or are incorporated herein by reference to other documents
previously filed with the SEC.
Exhibit
Number Description
EXHIBIT INDEX
2.1
3.1
3.2
4.1
4.2
10.1
10.2
Agreement and Plan of Merger, dated as of January 21, 2020, by and among FB Financial Corporation,
Franklin Financial Network, Inc. and Paisley Acquisition Corporation (incorporated by reference to Exhibit 2.1
the Company's Form 8-K filed on January 24, 2020)
Amended and Restated Charter of FB Financial Corporation (incorporated by reference as Exhibit 3.1 to the
Company’s Registration Statement on Form S-1/A (File No. 333-213210), filed on September 6, 2016)
Amended and Restated Bylaws of FB Financial Corporation (incorporated by reference as Exhibit 3.2 to the
Company’s Form 10-Q for the quarter ended September 30, 2016)
Registration Rights Agreement (incorporated by reference as Exhibit 4.1 to the Company’s Form 10-Q for the
quarter ended September 30, 2016)
Description of Registrant's Securities
Deferred Compensation Agreement between FB Financial Corporation and Christopher T. Holmes
(incorporated by reference as Exhibit 10.3 of the Company’s Registration Statement on Form S-1/A (File No.
333-213210), filed on September 6, 2016) †
Amendment to Deferred Compensation Agreement between FB Financial Corporation and Christopher
T. Holmes (incorporated by reference as Exhibit 10.4 to the Company’s Registration Statement on Form S-
1/A (File No. 333-213210), filed on September 6, 2016) †
174
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
16
21
23.1
23.2
24.1
Employment Agreement between FB Financial Corporation and Christopher T. Holmes (incorporated by
reference as Exhibit 10.5 to the Company’s Registration Statement on Form S-1/A (File No. 333-213210), filed
on September 6, 2016) †
FB Financial Corporation 2016 Incentive Plan (incorporated by reference as Exhibit 10.6 to the Company’s
Registration Statement on Form S-1/A (File No. 333-213210), filed on September 6, 2016)
Form of Restricted Stock Unit Award Certificate pursuant to the FB Financial Corporation 2016 Long-Term
Incentive Plan (incorporated by reference as Exhibit 10.8 to the Company’s Registration Statement on Form
S-1/A (File No. 333-213210), filed September 6, 2016) †
Form of Restricted Stock Unit Award Certificate (2017) pursuant to the FB Financial Corporation 2016
Incentive Plan (incorporated by reference as Exhibit 10.6 to the Company’s Form 10-K (File No. 001-37875),
for the period ending December 31, 2016) †
Form of Restricted stock Unit Award Certificate (2018) pursuant to the FB Financial Corporation 2016
Incentive Plan(incorporated by reference as Exhibit 10.8 to the Company's Form 10-K (File No. 001-37975),
for the period ending December 31, 2017) †
Tax Sharing Agreement (incorporated by reference as Exhibit 10.11 to the Company’s Form 10-Q for the
quarter ended September 30, 2016)
Shareholder's Agreement (incorporated by reference as Exhibit 10.12 to the Company’s Form 10-Q for the
quarter ended September 30, 2016)
First Amendment to Shareholder's Agreement, dated as of January 21, 2020 (incorporated by reference to
Exhibit 10.1 the Company's Form 8-K filed on January 24, 2020).
Securities Purchase Agreement, dated May 26, 2017, by and among FB Financial Corporation and the
purchases named therein and their permitted transferees (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on May 26, 2017)
Letter to Securities and Exchange Commission from RSM US LLP (incorporated by reference as Exhibit 16.1
to the Company's Current Report on Form 8-K filed on April 6, 2018)
Subsidiaries of FB Financial Corporation*
Consent of Independent Registered Public Accounting Firm (Crowe LLP)*
Consent of Independent Registered Public Accounting Firm (RSM US LLP)*
Powers of Attorney contained on the signature pages of this Annual Report on Form 10-K and incorporated
herein by reference
Rule 13a-14(a) Certification of Chief Executive Officer*
Rules 13a-14(a) Certification of Chief Financial Officer*
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer**
31.1
31.2
32.1
101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB XBRL Taxonomy Extension Label Linkbase Document*
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*
*
**
†
Filed herewith.
Furnished herewith.
Represents a management contract or a compensatory plan or arrangement.
175
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
ITEM 16. FORM 10-K SUMMARY
None.
176
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed by the undersigned, thereunto duly authorized.
March 13, 2020
FB Financial Corporation
/s/ James R. Gordon
James R. Gordon
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Christopher T. Holmes and James R. Gordon and each of them, his or her true and lawful
attorney(s)-in-fact and agent(s), with full power of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any or all amendments to this report and to
file the same, with all exhibits and schedules thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney(s)-in-fact and agent(s) full power
and authority to do and perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorney(s)-in-fact and agent(s), or their substitute(s), may lawfully do
or cause to be done by virtue hereof.
177
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
James W. Ayers
Executive Chairman of the Board
March 13, 2020
/s/ Christopher T. Holmes
Christopher T. Holmes
/s/ James R. Gordon
James R. Gordon
/s/ William F. Andrews
William F. Andrews
/s/ J. Jonathan Ayers
J. Jonathan Ayers
/s/ William F. Carpenter III
William F Carpenter
/s/ Agenia Clark
Agenia Clark
/s/ James L. Exum
James L. Exum
/s/ Orrin H. Ingram
Orrin H. Ingram
/s/ Raja J. Jubran
Raja J. Jubran
/s/ Emily J. Reynolds
Emily J. Reynolds
Director, President and Chief Executive Officer
(Principal Executive Officer)
March 13, 2020
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 13, 2020
Director
March 13, 2020
Director
March 13, 2020
Director
March 13, 2020
Director
March 13, 2020
Director
March 13, 2020
Director
March 13, 2020
Director
March 13, 2020
Director
March 13, 2020
178
FI RSTBANK LEADERS HIP TEAM
James W. Ayers
Executive Chairman
of the Board
James L. Clayton, Sr.
East Tennessee
Chairman
Christopher T. Holmes
President and CEO
Travis K. Edmondson
East Tennessee
Regional President
Gordon E. Inman
Director Emeritus and
Middle Tennessee
Chairman
Timothy L. Johnson
Chief Risk Officer
J. Gregory Bowers
Chief Credit Officer
David G. Burden
West Tennessee
Regional President
Wilburn J. Evans
President,
FirstBank Ventures
Troy D. Martin
South Central
Area President
James R. Gordon
Chief Financial Officer
J. Michael McCrary
North Alabama
Area President
R. Wade Peery
Chief Administrative Officer
Jeanie M. Rittenberry
Director of Marketing
and Communications
Beth W. Sims
General Counsel and
Secretary
FB FINANCIAL CORPORATION B O A RD O F D IRE C T O RS
James W. Ayers
Executive Chairman of the Board
FirstBank/FB Financial Corporation
William F. Carpenter
Retired corporate executive
Orrin H. Ingram
President and CEO
Ingram Industries, Inc.
Christopher T. Holmes
President and CEO
FirstBank/FB Financial Corporation
William F. Andrews
Retired corporate executive
J. Jonathan Ayers
Owner
Ayers Real Estate Service
Agenia W. Clark
President and CEO
Girl Scouts of Middle Tennessee
James L. Exum
Executive Vice President Emeritus
Murray Guard, Inc.
Raja J. Jubran
Co-owner and CEO
Denark Construction, Inc.
Emily J. Reynolds
Former Secretary
U.S. Senate
For full biographies of each member of the leadership team and board of directors, visit firstbankonline.com.
2020 WOMEN ON BOARDS REC O G NIT I ON
For the second year in a row, FB Financial
Corporation was recognized by a national
organization that advocates for increasing the
numbers of women on corporate boards.
We are proud of Agenia’s and Emily’s many
accomplishments and all they do for FirstBank in
helping us build better futures.
Agenia Clark
Emily Reynolds
FB Financial was honored as a 2020 Women
on Boards Winning “W” Company for meeting
or exceeding having 20% women on its board
membership. The board includes Agenia Clark,
president and CEO of the Girl Scouts of Middle
Tennessee, and Emily Reynolds, former Secretary of
the U.S. Senate, two highly successful women who
contribute greatly to FB Financial’s board oversight.
20 1 9 HEADLINES
FOOTPRINT EXPANSION
IN NORTH ALABAMA
FirstBank increased its presence in the
North Alabama market with the opening of
a full-service financial center in downtown
Florence. FirstBank initially entered the
Alabama market by opening a financial
center in Huntsville.
PARTNERSHIP ANNOUNCED WITH
THE UNIVERSITY OF TENNESSEE
AT CHATTANOOGA
FirstBank has launched a new partnership with
The University of Tennessee at Chattanooga to become
the official bank sponsor of UTC’s athletic programs.
“FirstBank is a great partner for UTC,” said Zach
Huston, general manager of Mocs Sports Properties.
“FirstBank is known for being deeply involved in
the communities it serves, and it is great having a
Tennessee-based financial services provider as the
official bank of our athletic programs.”
HOLMES RECEIVES AWARD,
NAMED TBA CHAIRMAN-ELECT
FirstBank President and CEO Chris Holmes
received the Champion of Financial Literacy
Award for his longtime contribution to the
Tennessee Financial Literacy Commission. The
award was presented by State Treasurer David
H. Lilliard Jr. at a ceremony attended by Gov. Bill
Lee. Also in 2019, Holmes was named chairman-
elect of the Tennessee Bankers Association. He
will assume the chairman’s role this summer.
WORK BEGINS ON NEW
KNOXVILLE HQ BUILDING
FirstBank has begun construction on its
new Knoxville headquarters office building,
which is expected to open in the fall of 2020.
The 17,000-square-foot building will include
a full-service financial center. The two-
story headquarters will house 50 FirstBank
associates, including members of the
Knoxville market leadership team.
FIRSTBANK EXPANDS INTO GROWING
BOWLING GREEN, KY., MSA
FB Financial Corporation completed the previously
announced acquisition of FNB Financial Corp. and its
wholly owned subsidiary, Farmers National Bank of
Scottsville. The acquisition provides FirstBank with
its first entry into Kentucky and the attractive Bowling
Green MSA.
AYERS RECEIVES 2019
HORATIO ALGER AWARD
FirstBank Executive Chairman of the Board Jim
Ayers was formally inducted into the Horatio Alger
Association of Distinguished Americans during
ceremonies in Washington, D.C., honoring the
achievements of 13 prominent Americans. Ayers
joined other business, civic and cultural leaders
from across North America in receiving the 2019
honors, bestowed annually upon individuals who
have succeeded despite facing adversities and have
shown lifelong commitments to higher education
and charitable endeavors.
ATLANTIC CAPITAL BRANCH ACQUISITION
AND CONVERSION FINALIZED
FirstBank completed its acquisition of 14 Atlantic
Capital branches in East Tennessee and North Georgia,
announced in 2018, significantly improving market
positions in Chattanooga and Knoxville, as well as
establishing a new presence in Dalton, Georgia.
SIMS NAMED GENERAL COUNSEL
Prominent Nashville attorney Beth Sims has
joined FirstBank and FB Financial Corporation
as executive vice president and general counsel.
Sims previously was a partner at Butler Snow
and head of the law firm’s securities team. She
replaced Will Martin as FirstBank general counsel
after his retirement in January.
FIRSTBANK DONATES $5 MILLION
FOR KNOXVILLE ZOO PROJECT
Zoo Knoxville broke ground on a new 2.5-acre Amphibian and Reptile Conservation Campus,
thanks in large part to a $5 million donation from the FirstBank-Clayton Donor Advised Fund,
managed by the East TN Foundation. The Clayton Family ARC Campus, named in honor of
FirstBank East Tennessee Chairman Jim Clayton, will include the FirstBank ARC Center, a reptile
facility and an ecological habitat.
Corporate Headquarters
211 Commerce Street, Suite 300
Nashville, TN 37201
615-313-0080
Investors.FirstBankOnline.com
Stock Listing
Shares of FB Financial Corporation
common stock are traded under the symbol
“FBK” on the New York Stock Exchange.
Transfer Agent and Registrar
Computershare Investor Services
www-us.computershare.com/investor
Auditors
Crowe LLP
Franklin, Tennessee
Shareholder Inquiries and
Availability of Form 10-K Report
Shareholders and others seeking a copy
of the Company’s public filings should
visit our Investor Relations website at
Investors.FirstBankOnline.com or contact:
Investor Relations
FB Financial Corporation
211 Commerce Street, Suite 300
Nashville, TN 37201
615-564-1212
Investors@FirstBankOnline.com
Annual Meeting of Shareholders
The 2020 annual meeting of shareholders will be held on Thursday, April 30, 2020, at 1:00 p.m.
Central Time at the Frist Art Museum located at 919 Broadway, Nashville, TN 37203. Additional
information regarding the annual meeting can be found in our definitive proxy statement for
the annual meeting which accompanies this Annual Report.