EDGAR 10-K Filing

Company CIK: 1649749
Filing Year: 2023
Filename: 1649749_10-K_2023_0001649749-23-000047.json

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ITEM 1. BUSINESS
Item 1. Business

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ITEM 1A. RISK FACTORS
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 and mitigate 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” included in this Annual Report.
CREDIT AND LOAN RISK
The majority of our assets are loans, which if not repaid would result in losses to the Bank.
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, 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.
We maintain an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, which represents the portion of the loan's amortized cost basis that we do not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. In addition, we record a reserve for unfunded commitments, considering the same items included in the allowance for credit losses with the addition of expected funding. Management’s determination of the appropriateness of the allowance and reserve for unfunded commitments is based on periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses and/or the reserve for unfunded commitments. The model is sensitive to changes in macroeconomic forecasts and incorporates management judgment. 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.
The application of the purchase method of accounting in our acquisitions (and any future acquisitions) also will affect our allowance for credit losses. We are required to determine whether purchased loans held for investment have experienced more-than-insignificant deterioration in credit quality since origination. Loans that have experienced this level of deterioration in credit quality are subject to special accounting at initial recognition. We initially measure the amortized cost of a purchase credit deteriorated loan by adding the acquisition date estimate of expected credit losses to the loan's purchase price (i.e. the "gross up" approach). If we have underestimated credit losses at recognition, we will incur additional expense in our provision for credit losses to maintain an appropriate level of allowance for credit losses on those loans.
In addition, bank regulators periodically review our allowance for credit losses and may require an increase in the provision for credit 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 credit losses, we will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and capital, and may have a material adverse effect on our business, financial condition and results of operations.
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, 2022, approximately 82% 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 credit losses. Thus, declines in the value of real estate collateral could adversely affect our financial condition, results of operations or cash flows.
Weakness in residential real estate market prices, weakness in demand, or increases in building costs could result in a volatile environment including price reductions in home and land values adversely affecting the value of collateral securing some of the construction and development loans that we hold. Should we experience the return of adverse economic and real estate market conditions similar to those we experienced from 2008 through 2010 we may again experience increases in non-performing loans and other real estate owned, increased losses and expenses from the management and disposition of non-performing assets, increases in provision for credit losses, and increases in operating expenses as a result of the allocation of management time and resources to the collection and work out of loans, all of which would negatively impact our financial condition and results of operations.
We are subject to lending concentration risks.
Our exposure to commercial real estate (both owner-occupied and non-owner occupied), commercial and industrial, and construction 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. As of December 31, 2022,
the following loan types accounted for the stated percentages of our loan portfolio: commercial real estate (both owner-occupied and non-owner occupied) - 33%; commercial and industrial - 18%; and construction - 18%.
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.
Our ability to grow our loan portfolio may be hampered.
Our ability to grow our loan portfolio could be limited by, among other reasons, economic conditions, competition in our markets, our ability to hire and train experienced or successful bankers, our ability to generate the deposits needed to grow loan assets, or the drain on liquidity and available deposits that the banking industry has experienced and may continue to experience.
MARKET AND INTEREST RATE RISK
Difficult or volatile market 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 and 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 increased loan delinquencies, foreclosures, and write-downs of asset values, lower demand for our products and services, reduced low cost or noninterest-bearing deposits, and intangible asset impairment. Additionally, difficult market conditions may lead to a deterioration in the value of the collateral for loans made by us, especially real estate, which could reduce our customers' ability to repay outstanding loans and reduce the value of assets associated with our existing loans. Additional issues surrounding weakening economic conditions and volatile markets that could adversely impact us include increased industry regulation and downward pressures on our stock price.
We conduct our banking operations primarily in Tennessee. As of December 31, 2022, approximately 73% of our loans and approximately 82% of our deposits were made to borrowers or received from depositors who live and/or 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.
Changes in interest rates could adversely affect 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 affect 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.
In November 2020, the ICE Benchmark Administration, the London Interbank Offered Rate administrator, announced its intention to continue most U.S. Dollar LIBOR tenors until June 30, 2023. The Financial Conduct Authority announced support for this development, signaling an extension from its prior communication that it would no longer require panel banks to submit rates for LIBOR after 2021. In addition, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a statement encouraging banks to transition away from U.S. Dollar LIBOR as soon as practicable. The Alternative Reference Rates Committee was convened in the U.S. to explore alternative reference rates and support processes to help ensure a successful transition from U.S. Dollar LIBOR to a more robust reference rate. The ARRC is made up of financial and capital markets institutions, is convened by the Federal Reserve Board and the Federal Reserve Bank of New York, and includes participation by various regulators. The ARRC has recommended the Secured Overnight Financing Rate as a successor rate to U.S. Dollar LIBOR and has developed a Paced Transition Plan to facilitate the transition from LIBOR. However, there are conceptual and technical differences between LIBOR and SOFR. In December 2022, the FASB issued ASU 2022-06, "Reference rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848" to extend the date to December 31, 2024 for companies to apply the relief in Topic 848.
The retirement of LIBOR is a significant shift in the industry. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. We established a LIBOR Transition Committee to transition from LIBOR to alternative rates and has continued its efforts consistent with industry timelines. As part of these efforts, during the fourth quarter of 2021, we ceased utilization of LIBOR as an index in newly originated loans or loans that are refinanced. Additionally, we identified existing products that utilize LIBOR and are reviewing contractual language to facilitate the transition to alternative reference rates. Failure to adequately manage this transition process with our customers could adversely impact our reputation.
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 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 materially and adversely affect our net interest income or our results of operations.
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.
LIQUIDITY RISK
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.
MORTGAGE BANKING RISK
Our mortgage revenue is cyclical and is sensitive to the level of interest rates, changes in economic conditions, decreased economic activity, and slowdowns in the housing market.
The success of our mortgage segment is dependent upon our ability to originate loans and sell them to investors. Loan production levels are sensitive to changes in the level of interest rates and changes in economic conditions. As the mortgage industry experienced in 2022, mortgage production, especially refinancing activity, declines when interest rates rise. Our mortgage origination volume could be materially and adversely affected by rising interest rates.
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. If interest 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 further reduce our costs. If we are unable to do so, our continued profitability may be materially and adversely affected.
In 2022, we sold nearly all of the $2.40 billion of mortgage loans held for sale that we closed. 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.
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 prepayment 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 the Bank’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 inhibit 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.
Our business model is materially 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 Government-Sponsored Enterprises, such as Fannie Mae and Freddie Mac, government agencies, including Ginnie Mae, and others that facilitate the issuance of mortgage-backed securities, in the secondary market. Presently, a significant portion 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. 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.
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 $73.6 million in 2022. 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.
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 $11.09 billion of mortgage loans owned by third parties as of December 31, 2022. 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.
LEGAL, REGULATORY AND COMPLIANCE RISK
We are subject to significant government regulation and supervision.
The Company and the Bank are subject to extensive federal and state regulation and supervision by the FDIC, Tennessee Department of Financial Institution, the Federal Reserve Board, and the CFPB, among others, the primary focus of which is to protect customers, depositors, the deposit insurance fund and the safety and soundness of the banking system as a whole, and not shareholders. The quantity and scope of applicable federal and state regulations may place banks at a competitive disadvantage compared to less regulated competitors such as financial technology companies, finance companies, credit unions, mortgage banking companies and leasing companies. These laws and regulations apply to almost every aspect of our business, and affect our lending practices and procedures, capital structure, investment activities, deposit gathering activities, our services and products, risk management practices, dividend policy and growth, including through acquisitions.
Legislation and regulation with respect to our industry has increased in recent years, and we expect that supervision and regulation will continue to expand in scope and complexity. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, or the issuance of new
supervisory guidance, could affect us in substantial and unpredictable ways, and could subject us to additional costs, restrict our growth, limit the services and products we may offer or limit the pricing of banking services and products. In
addition, establishing systems and processes to achieve compliance with laws and regulation increases our costs and could limit our ability to pursue business opportunities.
If we receive less than satisfactory results on regulatory examinations, we could be subject to damage to our reputation, significant fines and penalties, requirements to increase compliance and risk management activities and related costs and restriction on acquisitions, new locations, new lines of business, or continued growth. Future changes in federal and state banking could adversely affect our operating results and ability to continue to compete effectively. For example, the Dodd-Frank Act and related regulations, including the Home Mortgage Disclosure Act, subject us to additional restrictions, oversight and reporting obligations, which have significantly increased costs. And over the last several years, state and federal regulators have focused on enhanced risk management practices, mortgage law and regulation, compliance with the Bank Secrecy Act and anti-money laundering laws, data integrity and security, use of service providers, and fair lending and other consumer protection issues, which has increased our need to build additional processes and infrastructure. Government agencies charged with adopting and interpreting laws, rules and regulations, may do so in an unforeseen manner, including in ways that potentially expand the reach of the laws, rules or regulations more than initially contemplated or currently anticipated. We cannot predict the substance or impact of pending or future legislation or regulation, or the application thereof. Compliance with such current and potential regulation and scrutiny could significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner. Our success depends on our ability to maintain compliance with both existing and new laws and regulations.
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.
The Company 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 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.
As the parent company of the Bank, 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.
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.
TECHNOLOGY AND OPERATIONAL RISKS
We rely on third-party vendors to provide services that are integral to the operation of our business.
We depend on a range of 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 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 and/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 a similar cost.
Being able to maintain these relationships on favorable terms is not guaranteed. 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 significant expenses to replace these services. Our operations could be significantly disrupted if third-party service providers experienced their own difficulties, or terminate their services. If an interruption were to continue for a significant period, our business' financial condition and operations could be adversely affected, perhaps materially. Assuming we were able to replace third-party service providers, it may be at a higher cost. For example, if we experienced issues with our mortgage servicing provider it could result in a range of critical issues including; servicing rights becoming terminated, repurchasing of mortgage loans, and/or reimbursements to investors.
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. We could be liable to our customers for losses arising from a breach of a vendor's data security system. We rely on 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.
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, that are designed to manage the types of risk to which we are subject, including, among others, credit, price, 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 cyber-attacks or data security breaches, could subject us to increased operating costs as well as litigation among 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. Additionally, 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.
Compromised computers, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our network infrastructure. A cybersecurity breach of our information systems could lead to fraudulent activity such as identity theft, losses on the part of our banking customers, additional security costs, negative publicity and damage to our reputation and brand. In addition, our customers could be subject to scams that may result in the release of sufficient information concerning themselves or their accounts to allow unauthorized access to their accounts or our systems (e.g., “phishing” and “smishing”). Claims for compensatory or other damages may be brought against us because of a breach of our systems or fraudulent activity. If we are unsuccessful in defending against such resulting claims, we may be forced to pay damages, which could materially and adversely affect our financial condition and results of operations.
Information security risks have generally increased in recent years in part because of the proliferation of new technologies, use of the internet and telecommunications technologies to conduct financial transactions, increase in
remote working, and the increased sophistication and activities of organized crime, hackers, nation state supported organizations, terrorists, and other external parties. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target. We may be unable to anticipate these techniques or to implement adequate preventative measures. Further, computer viruses or malware could infiltrate our systems and disrupt our delivery of services making our applications unavailable. Although we utilize several preventative and detective security controls in our network, they may be ineffective in preventing computer viruses or malware that could damage our relationships with our merchant customers, cause a decrease in transactions by individual cardholders, or cause us to be in non-compliance with applicable network rules and regulations. In addition, a significant incident of fraud or an increase in fraud levels generally involving our products could result in reputational damage to us, which could reduce the use of our products and services. Such incidents of fraud could also lead to regulatory intervention, which could increase our compliance costs. Compliance with the various complex laws and regulations is costly and time consuming, and failure to comply could have a material adverse effect on our business. Additionally, increased regulatory requirements on our services may increase our costs, which could materially and adversely affect our business, financial condition and results of operations. Accordingly, account data breaches and related fraudulent activity could have a material adverse effect on our future growth prospects, business, financial condition and results of operations.
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 encryption software, systems, vendors, and our customers’ devices themselves may become the target of cyber-attacks or information security breaches. Such events 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 organized cyber-attacks involving unauthorized access, computer hackers, computer viruses, malicious code, and other security problems and system disruptions as we continue to expand client capabilities to utilize internet and other remote channels to transact business. We have invested and intend to continue to devote significant resources to the security of our computer systems, but they may still be vulnerable to these threats. A user who circumvents security measures can misappropriate confidential or proprietary information, including information regarding us, our personnel and/or our clients, or cause interruptions or malfunctions in operations. 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 harm to our business could be even greater if such an event occurs during a period of disproportionately heavy demand for our products or services or traffic on our systems or networks.
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 technological needs of our customers that will satisfy client demands for convenience in addition to providing secure electronic environments. As we continue to grow and expand our market area, part of our growth strategy is to focus on expanding market share and product offerings through partnerships with financial technology companies that will supplement our existing offerings, such as: remote account opening, remote deposit capture, mobile and digital banking, and other innovative technologies such as blockchain-based products. These technological advances are intended to allow us to acquire new customers and generate additional core deposits at a lower cost. 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.
The nature of technology-driven disruption to our industry is changing, in some cases seeking to displace traditional financial service providers rather than merely enhance traditional services or their delivery.
Technological innovation has expanded the overall market for banking services while siphoning a portion of the revenues from those services away from banks and disrupting prior methods of delivering those services. Certain recent innovations, however, may tend to replace traditional banks as financial service providers rather than merely augment those services. Similarly, innovations based on blockchain technology eventually may be the foundation for enhancing
transactional security and facilitating payments throughout the banking industry, but also eventually may reduce the need for banks as secure deposit-keepers and intermediaries.
To thrive as our industry continues to change, we may need to embrace technological evolution and innovations and redefine the customs of a traditional bank, while also maintaining our commitment to our community banking approach. As a result, this type of transition creates implementation risk. In this process, it is and will continue to be critical that we understand and appreciate our clients’ experiences interacting with us and our systems, including those clients who desire traditionally-delivered services provided through our community-banking model, those who seek and embrace the latest innovations, and those who want services to be convenient, personalized, and understandable.
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.
We rely heavily upon information supplied by third parties, including information contained in credit applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans we originate, as well as the terms of those loans. If any such data 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, disasters, and climate change could negatively affect our local economies, disrupt our operations, adversely affect client activity levels, adversely affect the creditworthiness of our counterparties, and damage our reputation, or result in other consequences which could have an adverse impact on our financial results or condition.
A significant portion of our business is in the Southeast and includes areas which are susceptible to weather-related events such as tornadoes, floods, droughts, and fires, the severity and frequency of which can be impacted by climate change. Such events can disrupt our operations, cause damage to our properties, and negatively affect the local economies in which we operate. Climate change and weather-related events may also have a negative impact on the financial condition of our clients, which may decrease revenues from those clients and increase the credit risk associated with loans and other credit exposures to those clients. 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 and the resulting adverse impact on our borrowers’ ability to timely repay their loans, and/or the value of any collateral held by us.
Further, our reputation and client relationships may be damaged because of our clients’ involvement in certain industries or projects associated with causing or exacerbating climate change or by our failure or our clients’ failure to support sustainability initiatives. New regulations or guidance relating to environmental, social, and governance standards, as well as the perspectives of shareholders, employees, and other stakeholders regarding these standards, may affect our business activities and increase disclosure requirements, which may increase costs.
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.
STRATEGIC AND OTHER BUSINESS RISKS
Our strategy of pursuing acquisitions exposes us to risk.
We intend to continue pursuing a strategy that includes acquisitions, which involves significant operational, strategic, and regulatory risks. Acquisitions may disrupt our business and dilute stockholder value, and integrating acquired companies may be more difficult, costly, or time-consuming than we expect.
The market for acquisition targets is highly competitive, which may adversely affect our ability to find acquisition candidates that fit our strategy and standards. 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 the time and expense associated with identifying and evaluating potential acquisition targets and negotiation terms of potential transactions, which could result in our attention being diverted from the operation of our existing business, unknown or contingent liabilities with no available manner of recourse, using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets, exposure to unexpected problems such as asset quality, the retention of key employees and customers, and other issues that could negatively affect our business. 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, resulting in a dilution of the value of your investment, and the carrying amount of any goodwill that we currently maintain or may acquire may be subject to impairment in future periods.
We may not be able to complete future acquisitions or, if completed, we may not be able to realize some or all of the anticipated benefits or successfully integrate the operations, technology platforms, management, products and services of the entities that we acquire or to realize our attempts to eliminate redundancies. 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. If difficulties arise with respect to the integration process, the economic benefits expected to result from acquisitions might not occur. The integration process may also require significant time and attention from our management that would otherwise be directed toward servicing existing business, developing new business, and may cause 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 increase our operating costs significant and 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.
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.
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.
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, the Company's former Chairman, currently owns approximately 23% 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 20% 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 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.
We could be required to write down goodwill and other intangible assets.
At December 31, 2022, our goodwill and other identifiable intangible assets were $254.9 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.
GENERAL RISKS
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.
Holders of our subordinated debentures have rights that are senior to those of our common shareholders.
We have supported a portion of our growth through the issuance of subordinated notes which are senior in rank to our shares of common stock. As a result, we must make payments on the subordinated notes before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the subordinated notes must be satisfied before any distributions can be made on our common stock.
New lines of business, products, product enhancements or services may subject us to additional risks.
From time to time, we may implement or acquire new lines of business or offer new products and product enhancements as well as new services within our existing lines of business. There are substantial risks and uncertainties associated with these efforts. In acquiring, developing or marketing new lines of business, products, product enhancements or services, we may invest significant time and resources, although there is no guarantee that these new lines of business, products, product enhancements or services will be successful or that we will realize their expected benefits. Further, initial timetables for the introduction and development of new lines of business, products, product enhancements or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the ultimate implementation and success of new lines of business or offerings of new products, product enhancements or services. Furthermore, any new line of business, product, product enhancement or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product enhancements or services could have a material adverse effect on our business, financial condition or results of operation.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete, through alternative methods and delivery channels, financial transactions that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds with an Internet-only bank, or with virtually any bank in the country through online or mobile banking. Consumers can also complete transactions such as purchasing goods and services, paying bills and/or transferring funds directly without the assistance of banks by transacting through non-bank enterprises or through the use of emerging payment technologies such as cryptocurrencies. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer
deposits and the related income generated from those deposits. The loss of these revenue streams and the lower-cost deposits as a source of funds could have an adverse effect on our financial condition, results of operations and liquidity.
We depend on the accuracy and completeness of information about customers.
In deciding whether to extend credit or enter certain transactions, we rely on information furnished by or on behalf of customers, including financial statements, credit reports, tax returns and other financial information. We may also rely on representations of those customers or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading personal information, financial statements, credit reports, tax returns or other financial information, including information falsely provided because of identity theft, could have an adverse effect on our business, financial condition and results of operations.
Negative publicity could impact our reputation.
Reputational risk is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and could expose us to adverse legal and regulator consequences. Negative public opinion could result from our actual, alleged, or perceived conduct related to employees or banking practices. Such negative public opinion could ultimately impact our earnings and stock price.
Pandemics could adversely impact us in the future.
Pandemics could have a significant impact on the Company's ability to conduct business. Such an event could negatively impact the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, and adversely impact the Company.
The COVID-19 pandemic created economic and financial disruptions in the economy, including volatility in financial markets, sudden, unprecedented job losses, labor shortages, disrupted supply chains, supply-demand imbalances affecting real estate markets, and disruption in consumer and commercial behavior, resulting in governments in the United States and globally to intervene with varying levels of direct monetary support and fiscal stimulus packages.
The future impact of the pandemic on global health and economic conditions and activity remain uncertain and depend on future developments that cannot be predicted, including impacts from the expiration of the federal economic aid packages, surges of COVID-19 cases, and the spread of more dangerous variants of COVID-19, the availability, usage and acceptance of effective medical treatments and vaccines, changing client preferences and behavior and future public response and government actions, including travel bans and restrictions, and limitations on business. Pandemics, including the COVID-19 pandemic, may disrupt the U.S. and global economy, including changes in financial and capital markets, and adversely affect our businesses and operations, liquidity, results of operations and financial condition, including from increased allowance for credit losses and noninterest expenses, which are dependent on the pandemic’s duration and severity.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B - Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
ITEM 2 - Properties
Our principal executive offices and FirstBank’s main office are located at 211 Commerce Street, Suite 300, Nashville, Tennessee 37201. We have banking locations in the Tennessee metropolitan markets of Nashville, Chattanooga, Knoxville, Memphis, and Jackson in addition to the metropolitan markets of Birmingham, Huntsville and Florence, Alabama and Bowling Green, Kentucky. As of December 31, 2022, we operated 82 full-service bank branches and nine limited service branch locations throughout our geographic market areas as well as 20 mortgage offices throughout the southeastern United States. We also operate in 16 community markets throughout our footprint. See “ITEM 1. Business - Our Markets” for more detail. We own 70 of these banking locations and lease our other locations, which include 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.

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ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4 - Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. Market for 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 2,193 stockholders of record as of February 14, 2023. 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 18 regional and national publicly traded banks. The graph assumes an initial $100 investment on December 31, 2016 through December 31, 2022. 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.
Index
FB Financial Corporation S&P 500 Total Return Index S&P 500 Bank Total Return Index
12/31/2016 100.00 100.00 100.00
12/31/2017 161.81 121.83 122.55
12/31/2018 135.64 116.49 102.41
12/31/2019 154.70 153.17 144.02
12/31/2020 137.46 181.35 124.21
12/31/2021 175.28 233.41 168.24
12/31/2022 146.36 191.13 135.92
Source: S&P Global Market Intelligence
Dividends
We declared cash dividends on our common stock of $0.52 per share for the year ended December 31, 2022, compared to $0.44 per share for the year ended December 31, 2021. The timing and amount of future dividends are at the discretion of the board of directors and will depend upon 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. Our board of directors anticipates that we will continue to pay quarterly dividends in amounts determined based on the factors discussed above. However, there can be no assurance that we will continue to pay dividends on our common stock at the current levels or at all. For a more complete discussion on the restrictions on dividends, see “Business: Supervision and regulation: Restrictions on bank holding company dividends”, “Business: Bank dividends”, “Management’s discussion and analysis: Holding company liquidity management”, and Note 15 “Dividend Restrictions“ in the notes to the consolidated financial statements.
Stock Repurchase Program
The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2022:
Period (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 (1)
October 1 - October 31 - $ - - $ 73,440,676
November 1 - November 30 - - - 73,440,676
December 1 - December 31 202,144 35.80 202,144 66,198,314
Total 202,144 $ - 202,144 $ 66,198,314
(1) Amounts are inclusive of commissions and fees related to the stock repurchases.
On March 14, 2022, the Company announced the board of directors’ authorization of a share repurchase program pursuant to which the Company may purchase up to $100 million in shares of the Company’s issued and outstanding common stock. The Company purchased 852,144 shares pursuant this plan during the year ended December 31, 2022. The purchase authorizations granted under the new repurchase plan will terminate either on the date on which the maximum dollar amount is repurchased under the new repurchase plan or on January 31, 2024, whichever date occurs earlier. The new repurchase plan will be conducted pursuant to a written plan and is intended to comply with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended.
On February 18, 2021, the Company announced the board of directors’ authorization of a share repurchase program pursuant to which the Company may purchase up to $100 million in shares of the Company’s issued and outstanding common stock. The Company purchased 145,119 shares pursuant this plan during the year ended December 31, 2022. This repurchase plan expired on March 31, 2022. The repurchase plan was conducted pursuant to a written plan that was intended to comply with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended.
Sale of Equity Securities
The Company did not sell any unregistered equity securities during 2022.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6 - [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7 - Management's discussion and analysis of financial condition and results of operations
Overall Objective
The following is a discussion of our financial condition at December 31, 2022 and 2021, and our results of operations for the years ended December 31, 2022 and 2021, and should be read in conjunction with our audited consolidated financial statements included elsewhere herein. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth in the "Cautionary note regarding forward-looking statements" and Risk Factors" sections of this Annual Report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. Discussion and analysis of our financial condition and results of operations for the years ended December 31, 2021 and 2020 are included in the respective sections within "Part II. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of operations" of our Annual Report filed on Form 10-K with the SEC for the year ended December 31, 2021.
Overview
We are a financial holding company headquartered in Nashville, Tennessee. We operate primarily through our wholly-owned bank subsidiary, FirstBank. FirstBank provides a comprehensive suite of commercial and consumer banking services to clients in select markets in Tennessee, Kentucky, Alabama and North Georgia. As of December 31, 2022, our footprint included 82 full-service branches serving the following Tennessee Metropolitan Statistical Areas: Nashville, Chattanooga (including North Georgia), Knoxville, Memphis, and Jackson in addition to Bowling Green, Kentucky and Birmingham, Florence and Huntsville, Alabama. We also provide banking services to 16 community markets throughout Tennessee, Alabama 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. As of December 31, 2022, we had total assets of $12.85 billion, loans held for investment of $9.30 billion, total deposits of $10.86 billion, and total shareholders’ equity of $1.33 billion.
We operate through two segments, Banking and Mortgage. We generate most of our revenue in our Banking segment from interest on loans and investments, loan-related fees, trust and investment services and deposit-related fees. Our primary source of funding for our loans is customer deposits, and, to a lesser extent, unsecured credit lines, 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, as well as from mortgage servicing revenues.
Development in 2022
Mortgage restructuring
During the year ended December 31, 2022, we completed the restructuring of our mortgage business (referred to herein as "Mortgage restructuring"), including the exit from our direct-to-consumer channel, which was one of two delivery channels in the Mortgage segment. As a result of exiting this channel, we recorded restructuring expenses of $12.5 million during the year ended December 31, 2022. The repositioning of our Mortgage segment does not qualify to be reported as discontinued operations. We plan to continue originating and selling residential mortgage loans within our Mortgage segment through our traditional consumer-facing mortgage retail channel, retain mortgage servicing rights and continue holding residential 1-4 family mortgage loans in our loans HFI portfolio.
Key factors affecting our business
Interest rates
Net interest income is the largest contributor to our net income and is the difference between the interest and fees earned on interest-earning assets (primarily loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (primarily deposits and borrowings). The level of net interest income is primarily a function of the
average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the contractual yield on such assets and the contractual cost of such liabilities. These factors are influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the Federal Reserve Board and market interest rates.
The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the Federal Reserve Board’s actions. The yields generated by our loans and securities are typically driven by short-term and long-term interest rates, which are set by the market and are, at times, heavily influenced by the Federal Reserve Board’s actions. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur.
As a result of higher inflation, interest rates increased significantly throughout the year ended December 31, 2022. Volatile interest rates could have significant adverse effects on the earnings, financial condition and results of operations of the Company.
For additional information regarding our interest rate risks factors and management, see “Business: Risk management: Liquidity and interest rate risk management” and “Risk factors: Risks related to our business.”
Credit trends
We focus on originating quality loans and have established loan approval policies and procedures to assist us in upholding the overall credit quality of our loan portfolio. However, credit trends in the markets in which we operate and in our loan portfolio can materially impact our financial condition and performance and are primarily driven by the economic conditions in our markets.
During 2022, our percentage of total nonperforming loans to loans held for investment decreased to 0.49% as of December 31, 2022, from 0.62% as of December 31, 2021. Our classified loans decreased to 0.56% of loans held for investment as of December 31, 2022, compared to 1.66% as of December 31, 2021. Our nonperforming assets as of December 31, 2022 were $87.5 million, or 0.68% of total assets, increasing from $63.0 million, or 0.50% of assets as of December 31, 2021.
Our net provisions for credit losses on loans held for investment and unfunded loan commitments resulted in an expense of $19.0 million for the year ended December 31, 2022 compared to a reversal of $41.0 million for the year ended December 31, 2021. For the year ended December 31, 2022, our expense was comprised of $10.4 million related to provision for credit losses on loans held for investment and $8.6 million related to provision for unfunded commitments. The current period expense resulted from management’s best estimate of losses over the life of loans and unfunded commitments in our portfolio in accordance with the CECL approach, given a decline in economic outlook and forecasts. These evaluations weighed the impact of the current economic outlook, including inflation, employment, global conflicts, supply chain concerns, and other considerations. See further discussion under the subheading "Allowance for credit losses."
For additional information regarding credit quality risk factors for our Company, see “Business: Risk management: Credit risk management” and “Risk factors: Credit Risks.”
Competition
Our profitability and growth are affected by the highly competitive nature of the financial services industry. We compete with commercial banks, savings banks, credit unions, non-bank financial services companies, online mortgage providers, internet banks and other financial institutions operating within the areas we serve, particularly with national and regional banks that often have more resources than we do to invest in growth and technology and community banks with strong local ties, all of which target the same clients we do. Recently, we have seen increased competitive pressures on loan rates. Continued loan pricing pressure may continue to affect our financial results in the future.
For additional information, see “Business: Our markets,” “Business: Competition” and “Risk factors: Risks related to our business.”
Regulatory trends and changes in laws
We are subject to extensive regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment also has heightened supervisory expectations in areas such as consumer compliance, the Bank Secrecy Act and anti-money laundering compliance, risk
management and internal audit. We expect to incur increased costs for compliance, risk management and audit personnel or professional fees associated with advisors and consultants due the current economic environment.
As described further under “Business: Supervision and regulation,” we are subject to a variety of laws and regulations, including the Dodd-Frank Act.
See also “Risk factors: Legal, regulatory and compliance risk”.
Financial highlights
The following table presents certain selected historical consolidated income statement data and key indicators as of the dates or for the years indicated. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
As of or for the years ended December 31,
(Dollars in thousands, except per share data) 2022 2021 2020
Statement of Income Data
Net interest income 412,235 347,370 265,658
Provisions for credit losses 18,982 (40,993) 107,967
Total noninterest income 114,667 228,255 301,855
Total noninterest expense 348,346 373,567 377,085
Income before income taxes 159,574 243,051 82,461
Income tax expense 35,003 52,750 18,832
Net income applicable to noncontrolling interest 16 16 8
Net income applicable to FB Financial Corporation $ 124,555 $ 190,285 $ 63,621
Net income applicable to FB Financial Corporation and noncontrolling interest $ 124,571 $ 190,301 $ 63,629
Net interest income (tax-equivalent basis) $ 415,282 $ 350,456 $ 268,497
Per Common Share
Basic net income $ 2.64 $ 4.01 $ 1.69
Diluted net income 2.64 3.97 1.67
Book value(1)
28.36 30.13 27.35
Tangible book value(4)
22.90 24.67 21.73
Cash dividends declared 0.52 0.44 0.36
Selected Ratios
Return on average:
Assets(2)
1.01 % 1.61 % 0.75 %
Shareholders' equity(2)
9.23 % 14.0 % 6.58 %
Tangible common equity(4)
11.4 % 17.3 % 8.54 %
Average common shareholders' equity to average assets 10.9 % 11.5 % 11.5 %
Net interest margin (tax-equivalent basis) 3.57 % 3.19 % 3.46 %
Efficiency ratio 66.1 % 64.9 % 66.4 %
Adjusted efficiency ratio (tax-equivalent basis)(4)
62.7 % 65.8 % 59.2 %
Yield on interest-earning assets 4.16 % 3.53 % 4.09 %
Cost of interest-bearing liabilities 0.87 % 0.48 % 0.94 %
Cost of total deposits 0.54 % 0.30 % 0.62 %
Credit Quality Ratios
Allowance for credit losses as a percentage of loans HFI(5)
1.44 % 1.65 % 2.41 %
Net charge-offs as a percentage of average loans HFI (0.02) % (0.08) % (0.22) %
Nonperforming assets as a percentage of total assets(6)
0.68 % 0.50 % 0.75 %
Nonperforming loans HFI to total loans HFI, net of unearned income 0.49 % 0.62 % 0.91 %
Capital Ratios (Company)
Total common shareholders' equity to assets 10.3 % 11.4 % 11.5 %
Tier 1 capital (to average assets) 10.5 % 10.5 % 10.0 %
Tier 1 capital (to risk-weighted assets)(3)
11.3 % 12.6 % 12.0 %
Total capital (to risk-weighted assets)(3)
13.1 % 14.5 % 15.0 %
Tangible common equity to tangible assets(4)
8.50 % 9.51 % 9.38 %
Common Equity Tier 1 (to risk-weighted assets) (CET1)(3)
11.0 % 12.3 % 11.7 %
Capital Ratios (Bank)
Total common Shareholders' equity to assets 10.4 % 11.3 % 12.3 %
Tier 1 capital (to average assets) 10.4 % 10.2 % 10.5 %
Tier 1 capital (to risk-weighted assets)(3)
11.1 % 12.3 % 12.6 %
Total capital to (risk-weighted assets)(3)
12.9 % 14.1 % 14.9 %
Common Equity Tier 1 (to risk-weighted assets) (CET1)(3)
11.1 % 12.3 % 12.6 %
(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 46,737,912, 47,549,241, and 47,220,743 as of December 31, 2022, 2021, and 2020, 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 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)These measures are not measures recognized under 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.
(5)Excludes reserve for credit losses on unfunded commitments of $23.0 million, $14.4 million, and $16.4 million recorded in accrued expenses and other liabilities as of December 31, 2022, 2021, and 2020, respectively.
(6)Includes $26,211 of optional rights to repurchase delinquent GNMA loans as of December 31, 2022. There were no such loans that met the criteria to rebook based on our analysis and lack of more-than-trivial benefit as of December 31, 2021 or 2020.
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 common 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.
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:
Years Ended December 31,
(dollars in thousands) 2022 2021 2020
Adjusted efficiency ratio (tax-equivalent basis)
Total noninterest expense $ 348,346 $ 373,567 $ 377,085
Less mortgage restructuring and merger expenses 12,458 - 34,879
Less offering expenses - 605 -
Less gain on lease terminations - (787) -
Less FHLB prepayment penalties - - 6,838
Less certain charitable contributions - 1,422 -
Adjusted noninterest expense $ 335,888 $ 372,327 $ 335,368
Net interest income (tax-equivalent basis) $ 415,282 $ 350,456 $ 268,497
Total noninterest income 114,667 228,255 301,855
Less (loss) gain on change in fair value on commercial loans held for sale (5,133) 11,172 3,228
Less cash life insurance benefit - - 715
Less loss on swap cancellation - (1,510) -
Less (loss) gain on sales or write-downs of other real estate owned (114) 2,504 (1,491)
Less (loss) gain on other assets (151) 323 (90)
Less (loss) gain from securities, net (376) 324 1,631
Adjusted noninterest income $ 120,441 $ 215,442 $ 297,862
Adjusted operating revenue $ 535,723 $ 565,898 $ 566,359
Efficiency ratio (GAAP) 66.1 % 64.9 % 66.4 %
Adjusted efficiency ratio (tax-equivalent basis) 62.7 % 65.8 % 59.2 %
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.
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:
As of December 31,
(dollars in thousands, except share and per share data) 2022 2021 2020
Tangible Assets
Total assets $ 12,847,756 $ 12,597,686 $ 11,207,330
Adjustments:
Goodwill (242,561) (242,561) (242,561)
Core deposit and other intangibles (12,368) (16,953) (22,426)
Tangible assets $ 12,592,827 $ 12,338,172 $ 10,942,343
Tangible Common Equity
Total common shareholders' equity $ 1,325,425 $ 1,432,602 $ 1,291,289
Adjustments:
Goodwill (242,561) (242,561) (242,561)
Core deposit and other intangibles (12,368) (16,953) (22,426)
Tangible common equity $ 1,070,496 $ 1,173,088 $ 1,026,302
Common shares outstanding 46,737,912 47,549,241 47,220,743
Book value per common share $ 28.36 $ 30.13 $ 27.35
Tangible book value per common share $ 22.90 $ 24.67 $ 21.73
Total common shareholders' equity to total assets 10.3 % 11.4 % 11.5 %
Tangible common equity to tangible assets 8.50 % 9.51 % 9.38 %
Return on average tangible common equity
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:
Years Ended December 31,
(dollars in thousands) 2022 2021 2020
Return on average tangible common equity
Total average common shareholders' equity $ 1,349,583 $ 1,361,637 $ 966,336
Adjustments:
Average goodwill (242,561) (242,561) (199,104)
Average intangibles, net (14,573) (19,606) (22,659)
Average tangible common equity $ 1,092,449 $ 1,099,470 $ 744,573
Net income applicable to FB Financial Corporation $ 124,555 $ 190,285 $ 63,621
Return on average common shareholders' equity 9.23 % 14.0 % 6.58 %
Return on average tangible common equity 11.4 % 17.3 % 8.54 %
Overview of recent financial performance
Year ended December 31, 2022 compared to the year ended December 31, 2021
Our net income decreased during the year ended December 31, 2022 to $124.6 million from $190.3 million for the year ended December 31, 2021. Diluted earnings per common share was $2.64 and $3.97 for the years ended December 31, 2022 and 2021, respectively. Our net income represented a return on average assets of 1.01% and 1.61% for the years ended December 31, 2022 and 2021, respectively, and a return on average equity of 9.23% and 14.0% for the same periods. Our ratio of return on average tangible common equity for the years ended December 31, 2022 and 2021 was 11.4% and 17.3%, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” in this Report for a discussion of tangible common equity and return on average tangible common equity.
These results were significantly impacted by the economic forecasts incorporated in our current expected credit loss rate model, leading to a provision for credit losses on loans held for investment and unfunded loan commitments of $19.0 million for the year ended December 31, 2022 compared with a reversal in our provision for credit losses of $41.0 million for the year ended December 31, 2021.
During the year ended December 31, 2022, net interest income before provision for credit losses increased to $412.2 million compared with $347.4 million in the year ended December 31, 2021. Our net interest margin, on a tax-equivalent basis, increased to 3.57% for the year ended December 31, 2022 as compared to 3.19% for the year ended December 31, 2021, influenced by rising interest rates and growth in loans HFI volume during the year ended December 31, 2022.
Noninterest income for the year ended December 31, 2022 decreased by $113.6 million to $114.7 million, down from $228.3 million for prior year period. The decrease in noninterest income was primarily driven by a decrease in mortgage banking income of $94.0 million to $73.6 million for the year ended December 31, 2022, compared to $167.6 million for the prior year period. These results were impacted by increasing interest rates, compressing margins and a decrease in demand for residential mortgages experienced through the industry during the year ended December 31, 2022 compared with the year ended December 31, 2021.
Noninterest expense decreased to $348.3 million for the year ended December 31, 2022, compared with $373.6 million for the year ended December 31, 2021. The decrease in noninterest expense is reflective of the $45.4 million decrease in salaries, commissions and employee-related costs in the Mortgage segment related to the reduction in mortgage production, which was partially offset by mortgage restructuring expenses of $12.5 million incurred during the year ended December 31, 2022 associated with the exit of our direct-to-consumer internet delivery channel.
Year ended December 31, 2021 compared to year ended December 31, 2020
Our net income decreased during the year ended December 31, 2021 to $190.3 million from $63.6 million for the year ended December 31, 2020. Diluted earnings per common share was $3.97 and $1.67 for the years ended December 31, 2021 and 2020, respectively. Our net income represented a return on average assets, of 1.61% and 0.75% for the years ended December 31, 2021 and 2020, respectively, and a return on average equity, of 14.0% and 6.58% for the same periods. Our ratio of return on average tangible common equity for the years ended December 31, 2021 and 2020 was 17.3% and 8.54%, respectively.
These results were significantly impacted by the economic forecasts incorporated in our current expected credit loss rate model, leading to a reversal in our provisions for credit losses on loans held for investment and unfunded loan commitments of $41.0 million for the year ended December 31, 2021 compared with provision expense of $108.0 million for the year ended December 31, 2020. Our results were also impacted by merger expenses of $34.9 million for the year ended December 31, 2020 related to our acquisitions of FNB Financial Corp. and its wholly-owned subsidiary, Farmers National Bank of Scottsville (collectively, "Farmers National") in February 2020 and Franklin Financial Network, Inc. and its wholly-owned subsidiaries, including its primary banking subsidiary, Franklin Synergy Bank, (collectively "Franklin") in August 2020. There were no such business combinations during the year ended December 31, 2021.
During the year ended December 31, 2021, net interest income before provision for loan losses increased to $347.4 million compared to $265.7 million in the year ended December 31, 2020. Our net interest margin, on a tax-equivalent basis, decreased to 3.19% for the year ended December 31, 2021 as compared to 3.46% for the year ended December 31, 2020, influenced by a sustained low interest rate environment.
Noninterest income for the year ended December 31, 2021 decreased by $73.6 million to $228.3 million, down from $301.9 million for prior year period. The decrease in noninterest income was primarily driven by a decrease in mortgage banking income of $87.8 million to $167.6 million for the year ended December 31, 2021, compared to $255.3 million for the prior year.
Noninterest expense increased to $373.6 million for the year ended December 31, 2021 compared to $377.1 million for the year ended December 31, 2020. The decrease in noninterest expense is reflective of a decrease in merger expenses as there were no business combinations during the year ended December 31, 2021 compared with $34.9 million in merger and conversion expenses during the year ended December 31, 2020 related to our acquisitions of Farmers National and Franklin. The decrease in merger expenses was partially offset by increases in salaries, commissions and personnel-related costs from the incremental head count increase associated with our growth and volume of transactions, including the impact of our business combinations during the year ended December 31, 2020.
Business segment highlights
Banking
Year ended December 31, 2022 compared to year ended December 31, 2021
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 decreased in the year ended December 31, 2022 to $182.9 million, compared to $216.6 million for the year ended December 31, 2021. These results were primarily driven by a provision for credit loss expense on loans held for investment and unfunded loan commitments totaling $19.0 million during the year ended December 31, 2022 compared to a net reversal of $41.0 million in the previous year. Net interest income increased $64.9 million to $412.2 million during the year ended December 31, 2022 from $347.3 million in the same period in the prior year. Noninterest income decreased to $41.3 million in the year ended December 31, 2022 as compared to $61.1 million in the year ended December 31, 2021. During the year ended December 31, 2022, the change in the fair value of our commercial loans held for sale decreased $16.3 million, ATM and interchange fees decreased $4.3 million, and gain on sales or write-downs of other real estate owned decreased $2.6 million partially offset by an increase in service charges on deposits of $2.0 million. Noninterest expense increased to $251.7 million during the year ended December 31, 2022 compared with $232.8 million for the year ended December 31, 2021, primarily due to increases in salaries and advertising, and increases in legal and professional fees.
Mortgage
Activity in our Mortgage segment resulted in a pre-tax net loss of $23.3 million for the year ended December 31, 2022 as compared to income of $26.5 million for the year ended December 31, 2021. There was a decrease in mortgage banking income of $94.0 million to $73.6 million during the year ended December 31, 2022 compared to $167.6 million for the year ended December 31, 2021. This was a result of interest rate increases, compressing margins and a decrease in demand for residential mortgages, which lead to a 62.3% decrease in interest rate lock volume for the year ended December 31, 2022 compared with the year ended December 31, 2021.
Noninterest expense for the years ended December 31, 2022 and 2021 was $96.6 million and $140.8 million, respectively. The decrease during the year ended December 31, 2022 is mainly attributable to a $45.4 million decrease in mortgage salaries, commissions and employee benefit costs associated with the decrease in production volume and headcount reduction from the Mortgage restructuring, partially offset by mortgage restructuring expenses of $12.5 million.
Further discussion on the components of mortgage banking income and additional details related to the Mortgage restructuring are included under the subheadings 'Noninterest income' and 'Noninterest expense', respectively, included within this management's discussion and analysis.
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, 2022 and 2021.
Net interest income
Year ended December 31, 2022 compared to year ended December 31, 2021
Net interest income is the most significant component of our earnings, generally comprising over 50% of our total revenues in a given period. Net interest income and margin are shaped by many factors, primarily the volume, term structure and mix of earning assets, funding mechanisms, and interest rate fluctuations. Other factors include accretion or amortization of discounts or premiums on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from client deposits generally costs less than wholesale funding sources. Factors such as general economic activity, Federal Reserve monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding, net interest income, and margin.
During the year ended December 31, 2022, the US Treasury yield curve remained inverted as long-term rates increased at a slower pace than short-term rates. This compares to the year ended December 31, 2021, when the US Treasury yield curve steepened as long-term rates rose and short-term rates remained constant. The Federal Funds Target Rate range was 4.25% - 4.50% and 0% - 0.25% as of December 31, 2022 and December 31, 2021, respectively. In December 2022, the Federal Reserve released projections whereby the midpoint of the projected appropriate target range for the federal funds rate would rise to 5.1% by the end of 2023 and subsequently decrease to 4.1% by the end of 2024. While there can be no such assurance that any increases or decreases in the federal funds rate will occur, these projections imply up to a 75 basis point increase in the federal funds rate during 2023, followed by a 100 basis point decrease in 2024. The target range for the federal funds rate was increased 25 basis points to 4.50% to 4.75% effective February 2, 2023.
On a tax-equivalent basis, net interest income increased $64.8 million to $415.3 million for the year ended December 31, 2022 as compared to $350.5 million for the year ended December 31, 2021. The increase in tax-equivalent net interest income for the year ended December 31, 2022 was primarily driven by an increase in volume in loans HFI in addition to higher interest rates. Further, our net interest income increase was driven by a change in balance sheet mix which is reflected in our average interest-bearing deposits with other financial institutions to average earning assets ratio, which decreased to 7.25% for the year ended December 31, 2022 compared to 13.0% for the year ended December 31, 2021.
Interest income, on a tax-equivalent basis, was $484.5 million for the year ended December 31, 2022, compared to $388.1 million for the year ended December 31, 2021, an increase of $96.4 million. Interest income on loans held for investment, on a tax-equivalent basis, increased $91.0 million to $425.8 million for the year ended December 31, 2022 from $334.9 million for the year ended December 31, 2021. This is due to growth in average loans HFI which increased to $8.54 billion for the year ended December 31, 2022 compared to $7.20 billion for the year ended December 31, 2021. The increase in average loans HFI is due to strong demand in our primary markets during the year ended December 31, 2022. The average yield on loans HFI increased by 34 basis points period-over-period to 4.99% for the year ended December 31, 2022. Contractual loan interest rates yielded 4.69% in the year ended December 31, 2022 compared with 4.27% in the year ended December 31, 2021. Excluding PPP loans, which have a 1% contractual loan yield, our contractual loan yield would have been 4 basis points higher for the year ended December 31, 2021. PPP loans did not impact our contractual loan yield for the year ended December 31, 2022.
Our yield on interest-earning assets increased to 4.16% for the year ended December 31, 2022 from 3.53% for the year ended December 31, 2021 largely due to the change in balance sheet composition discussed above and due to the current interest rate environment. The increase in loans HFI discussed above was partially offset by a $480.4 million decrease in our average mortgage loans HFS portfolio during the year ended December 31, 2022 from $696.3 million for the year ended December 31, 2021. This balance decreased due to lower mortgage origination volumes as a result of the increasing interest rate environment resulting in a decrease in consumer demand for mortgage loans, and continued
housing inventory shortages. Interest income on mortgage loans held for sale decreased $10.3 million during the year ended December 31, 2022, representing a yield of 3.88% compared to 2.68% for the year ended December 31, 2021.
Interest expense was $69.2 million for the year ended December 31, 2022, an increase of $31.6 million as compared to the year ended December 31, 2021. The increase was largely attributed to a rise in interest rates on interest-bearing deposit accounts. Specifically, interest expense on interest-bearing checking deposits increased to $21.9 million for the year ended December 31, 2022 from $10.2 million for the year ended December 31, 2021 and interest expense on money market deposits increased $12.1 million to $22.9 million for the year ended December 31, 2022 compared to $10.8 million for the year ended December 31, 2021. The average rate on interest-bearing checking deposits increased 35 basis points from 0.35% for the year ended December 31, 2021 to 0.70% for the year ended December 31, 2022 and the average rate on money market deposits increased 44 basis points from 0.36% for the year ended December 31, 2021 to 0.80% for the year ended December 31, 2022. Additionally, during the year ended December 31, 2022, we utilized available lines of credit through short-term FHLB advances, which contributed another $5.6 million in interest expense for the year ended December 31, 2022. We did not utilize short-term FHLB advances during the year ended December 31, 2021.
During the year ended December 31, 2022, we entered into three designated fair value hedges to mitigate the effect of changing rates on various fixed rate liabilities, including certain money market deposits and subordinated debt. The fair value hedge on money market deposits increased interest expense by $0.7 million during the year ended December 31, 2022.
The average balance on our subordinated debt decreased to $127.8 million for the year ended December 31, 2022 compared to $149.1 million for the year ended December 31, 2021. As a result, interest expense on subordinated debt decreased to $6.9 million for the year ended December 31, 2022 compared to $7.3 million for the year ended December 31, 2021. The fair value hedge on subordinated debt increased interest expense by $0.4 million during the year ended December 31, 2022.
Overall, our NIM, on a tax-equivalent basis, increased to 3.57% for the year ended December 31, 2022 from 3.19% for the year ended December 31, 2021, driven by the change in balance sheet composition. Our average interest-earning assets to average interest-bearing liabilities increased to 146.0% for the year ended December 31, 2022 from 141.1% for the year ended December 31, 2021. The change in our balance sheet composition was further illustrated by a decrease in excess liquidity, which we estimate to be interest-bearing deposits with other financial institutions in excess of 5% of average tangible assets. Excess liquidity is estimated to have negatively impacted our NIM by approximately 7 basis points for the year ended December 31, 2022. This compares to excess liquidity representing 30 basis points of negative impact to our NIM during the year ended December 31, 2021.
The components of our loan yield, a key driver to our net interest margin for the years ended December 31, 2022, 2021, and 2020 were as follows:
Years Ended December 31,
2022 2021 2020
(dollars in thousands) Interest
income Average
yield Interest
income Average
yield Interest
income Average
yield
Loans HFI yield components:
Contractual interest rate on loans HFI (1)(2)
$ 400,154 4.69 % $ 307,429 4.27 % $ 256,929 4.57 %
Origination and other loan fee income (2)
22,818 0.27 % 26,029 0.36 % 15,978 0.28 %
(Amortization) accretion on purchased loans (1,020) (0.01) % (853) (0.01) % 3,788 0.07 %
Nonaccrual interest collections 2,712 0.03 % 2,256 0.03 % 1,381 0.03 %
Syndicated loan fee income 1,150 0.01 % - - % - - %
Total loans HFI yield $ 425,814 4.99 % $ 334,861 4.65 % $ 278,076 4.95 %
(1)Includes tax equivalent adjustment using combined marginal tax rate of 26.06%.
(2)Includes $0.8 million and $2.1 million of loan contractual interest and $3.3 million and $3.9 million of loan fees related to PPP loans for the years ended December 31, 2021 and 2020, respectively. Amounts for the year ended December 31, 2022 are not meaningful.
Net amortization on purchased loans lowered the NIM by 1 basis points for both the years ended December 31, 2022 and 2021. Net amortization is due to the continued impact of purchase accounting resulting from our mergers, which can fluctuate based on volume of early pay-offs. As of December 31, 2022 and December 31, 2021, the remaining net discount on all acquired loans amounted to $3.3 million and $2.3 million, respectively. Excluding PPP loans, our NIM would have been 4 basis points higher for the year ended December 31, 2021. PPP loans did not impact our NIM for the year ended December 31, 2022.
Average balance sheet amounts, interest earned and yield analysis
The table below shows the average balances, income and expense and yield and rates of each of our interest-earning assets and interest-bearing liabilities on a tax equivalent basis, if applicable, for the periods indicated.
Years Ended December 31,
2022 2021 2020
(dollars in thousands on tax-equivalent basis) Average
balances(1)
Interest
income/
expense Average
yield/
rate Average
balances(1)
Interest
income/
expense Average
yield/
rate Average
balances (1)
Interest
income/
expense Average
yield/
rate
Interest-earning assets:
Loans (2)(3)
$ 8,541,650 $ 425,814 4.99 % $ 7,197,213 $ 334,861 4.65 % $ 5,621,832 278,076 4.95 %
Mortgage loans held for sale(4)
215,952 8,385 3.88 % 696,313 18,690 2.68 % 420,791 12,699 3.02 %
Commercial loans held for sale 51,075 2,627 5.14 % 136,359 6,098 4.47 % 84,580 4,166 4.93 %
Securities:(4)
Taxable 1,439,745 25,469 1.77 % 1,050,207 15,186 1.45 % 589,393 10,267 1.74 %
Tax-exempt (3)
305,212 9,916 3.25 % 321,911 10,356 3.22 % 275,786 9,570 3.47 %
Total securities (3)
1,744,957 35,385 2.03 % 1,372,118 25,542 1.86 % 865,179 19,837 2.29 %
Federal funds sold and reverse repurchase
agreements 197,235 3,414 1.73 % 128,724 379 0.29 % 85,402 304 0.36 %
Interest-bearing deposits with other financial
institutions 843,779 7,275 0.86 % 1,427,332 1,902 0.13 % 662,175 1,960 0.30 %
FHLB stock 43,969 1,569 3.57 % 30,022 612 2.04 % 21,735 441 2.03 %
Total interest earning assets (3)
11,638,617 484,469 4.16 % 10,988,081 388,084 3.53 % 7,761,694 317,483 4.09 %
Noninterest Earning Assets:
Cash and due from banks 107,814 128,977 66,177
Allowance for credit losses (127,499) (153,301) (121,033)
Other assets (5)
758,918 884,703 731,262
Total noninterest earning assets 739,233 860,379 676,406
Total assets $ 12,377,850 $ 11,848,460 $ 8,438,100
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing checking $ 3,121,638 $ 21,857 0.70 % $ 2,924,388 $ 10,174 0.35 % $ 1,461,596 $ 8,875 0.61 %
Money market deposits(6)
2,846,101 22,868 0.80 % 2,973,662 10,806 0.36 % 1,807,481 13,707 0.76 %
Savings deposits 500,189 268 0.05 % 421,252 233 0.06 % 274,489 232 0.08 %
Customer time deposits(6)
1,167,947 11,555 0.99 % 1,246,912 8,384 0.67 % 1,289,552 19,656 1.52 %
Brokered and internet time deposits(6)
6,935 94 1.36 % 34,943 592 1.69 % 43,372 389 0.90 %
Time deposits 1,174,882 11,649 0.99 % 1,281,855 8,976 0.70 % 1,332,924 20,045 1.50 %
Total interest-bearing deposits 7,642,810 56,642 0.74 % 7,601,157 30,189 0.40 % 4,876,490 42,859 0.88 %
Other interest-bearing liabilities:
Securities sold under agreements to
repurchase and federal funds purchased 28,497 66 0.23 % 36,453 98 0.27 % 32,912 201 0.61 %
Federal Home Loan Bank advances 171,142 5,583 3.26 % - - - % 212,705 1,093 0.51 %
Subordinated debt(7)
127,799 6,868 5.37 % 149,097 7,316 4.91 % 86,944 4,475 5.15 %
Other borrowings 1,468 28 1.91 % 2,626 25 0.95 % 12,939 358 2.77 %
Total other interest-bearing liabilities 328,906 12,545 3.81 % 188,176 7,439 3.95 % 345,500 6,127 1.77 %
Total interest-bearing liabilities 7,971,716 69,187 0.87 % 7,789,333 37,628 0.48 % 5,221,990 48,986 0.94 %
Noninterest-bearing liabilities:
Demand deposits 2,877,266 2,545,494 2,092,450
Other liabilities 179,192 151,903 157,289
Total noninterest-bearing liabilities 3,056,458 2,697,397 2,249,739
Total liabilities 11,028,174 10,486,730 7,471,729
FB Financial Corporation common
shareholders' equity 1,349,583 1,361,637 966,336
Noncontrolling interest 93 93 35
Shareholders' equity 1,349,676 1,361,730 966,371
Total liabilities and shareholders' equity $ 12,377,850 $ 11,848,460 $ 8,438,100
Net interest income (tax-equivalent basis) $ 415,282 $ 350,456 $ 268,497
Interest rate spread (tax-equivalent basis) 3.29 % 3.05 % 3.15 %
Net interest margin (tax-equivalent basis) (8)
3.57 % 3.19 % 3.46 %
Cost of total deposits 0.54 % 0.30 % 0.62 %
Average interest-earning assets to average
interest-bearing liabilities 146.0 % 141.1 % 148.6 %
(1)Calculated using daily averages.
(2)Average balances of nonaccrual loans and overdrafts (before deduction of ACL) are included in average loan balances. Syndication fee income of $1.2 million, $-, and $-, origination and other loan fee income of $22.8 million, $26.0 million, and $16.0 million, net (amortization) accretion of $(1.0) million, $(0.9) million, and $3.8 million and nonaccrual interest collections of $2.7 million, $2.3 million, and $1.4 million are included in interest income for the years ended December 31, 2022, 2021, and 2020, respectively.
(3)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 was $3.0 million, $3.1 million, and $2.8 million for years ended December 31, 2022, 2021, and 2020, respectively.
(4)Excludes the average balance for unrealized gains (losses) for mortgage loans held for sale and investments carried at fair value.
(5)Includes investments in premises and equipment, OREO, interest receivable, mortgage servicing rights, core deposit and other intangibles, goodwill and other miscellaneous assets.
(6)Includes $3.7 million, $3.7 million and $0.9 million of interest rate premium accretion on money market deposits, $0.8 million, $2.2 million, and $2.0 million on customer time deposits and $0.1 million, $0.5 million, and $0.4 million on brokered and internet time deposits for the years ended December 31, 2022, 2021, and 2020, respectively. Money market interest expense for the year ended December 31, 2022 also includes $0.7 million addition to interest expense from fair value hedging instruments.
(7)Includes $0.4 million of interest expense from fair value hedging instrument for the year ended December 31, 2022; also includes $0.4 million and $0.4 million of accretion on subordinated debt fair value premium for the years ended December 31, 2021 and 2020, respectively.
(8)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 years ended December 31, 2022 and 2021. 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, 2022 compared to year ended December 31, 2021
Year ended December 31, 2022 compared to year ended December 31, 2021 due to changes in
(dollars in thousands on a tax-equivalent basis) Volume Yield/ rate Net increase
(decrease)
Interest-earning assets:
Loans(1)
$ 67,022 $ 23,931 $ 90,953
Loans held for sale - mortgage (18,651) 8,346 (10,305)
Loans held for sale - commercial (4,387) 916 (3,471)
Securities available-for-sale and other securities:
Taxable 6,891 3,392 10,283
Tax Exempt(2)
(543) 103 (440)
Federal funds sold and reverse repurchase agreements
1,186 1,849 3,035
Time deposits in other financial institutions (5,031) 10,404 5,373
FHLB stock 498 459 957
Total interest income(2)
46,985 49,400 96,385
Interest-bearing liabilities:
Interest-bearing checking 1,381 10,302 11,683
Money market deposits(4)
(1,025) 13,087 12,062
Savings deposits 42 (7) 35
Customer time deposits(4)
(781) 3,952 3,171
Brokered and internet time deposits(4)
(380) (118) (498)
Securities sold under agreements to repurchase and federal funds
purchased (18) (14) (32)
Federal Home Loan Bank advances 5,583 - 5,583
Subordinated debt(3)
(1,145) 697 (448)
Other borrowings (22) 25 3
Total interest expense 3,635 27,924 31,559
Change in net interest income(2)
$ 43,350 $ 21,476 $ 64,826
(1)Average loans are gross, including nonaccrual loans and overdrafts (before deduction of ACL). Syndication fee income $1.2 million and $-, origination and other loan fee income of $22.8 million and $26.0 million, net amortization of $1.0 million and $0.9 million, and nonaccrual interest collections of $2.7 million and $2.3 million are included in interest income for the years ended December 31, 2022 and 2021, respectively.
(2)Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.
(3)Includes $0.4 million of interest expense from fair value hedging instrument for the year ended December 31, 2022; also includes $0.4 million of accretion on subordinated debt fair value premium for the year ended December 31, 2021.
(4)Includes $3.7 million and $3.7 million of interest rate premium accretion on money market deposits, $0.8 million and $2.2 million on customer time deposits and $0.1 million and $0.5 million on brokered and internet time deposits for the years ended December 31, 2022 and 2021, respectively. Money market interest expense for the year ended December 31, 2022 also includes $0.7 million addition to interest expense from fair value hedging instruments.
Year ended December 31, 2021 compared to year ended December 31, 2020
Year ended December 31, 2021 compared to year ended December 31, 2020 due to changes in
(dollars in thousands on a tax-equivalent basis) Volume Rate Net increase
(decrease)
Interest-earning assets:
Loans(1)
$ 73,297 $ (16,512) $ 56,785
Loans held for sale - mortgage 7,395 (1,404) 5,991
Loans held for sale - commercial 2,316 (384) 1,932
Securities available-for-sale and other securities:
Taxable 6,663 (1,744) 4,919
Tax Exempt(2)
1,484 (698) 786
Federal funds sold and reverse repurchase agreements
128 (53) 75
Time deposits in other financial institutions 1,020 (1,078) (58)
FHLB stock 169 2 171
Total interest income(2)
92,472 (21,871) 70,601
Interest-bearing liabilities:
Interest-bearing checking 5,089 (3,790) 1,299
Money market deposits(4)
4,238 (7,139) (2,901)
Savings deposits 81 (80) 1
Customer time deposits(4)
(287) (10,985) (11,272)
Brokered and internet time deposits(4)
(143) 346 203
Securities sold under agreements to repurchase and federal funds
purchased 10 (113) (103)
Federal Home Loan Bank advances (1,093) - (1,093)
Subordinated debt(3)
3,050 (209) 2,841
Other borrowings (98) (235) (333)
Total interest expense 10,847 (22,205) (11,358)
Change in net interest income(2)
$ 81,625 $ 334 $ 81,959
(1) Average loans are gross, including nonaccrual loans and overdrafts (before deduction of ACL). Loan fees of $26.0 million, and $16.0 million, net (amortization) accretion of $(0.9) million, and $3.8 million, and nonaccrual interest collections of $2.3 million and $1.4 million, are included in interest income for the years ended December 31, 2021 and 2020, respectively.
(2) Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.
(3) Includes $0.4 million of accretion on subordinated debt fair value premium for both the years ended December 31, 2021 and 2020.
(4) Includes $3.7 million and $0.9 million of interest rate premium accretion on money market deposits, $2.2 million and $2.0 million on customer time deposits and $0.5 million and $0.4 million on brokered and internet time deposits for the years ended December 31, 2021 and 2020, respectively.
Provision for credit losses
The provision for credit losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses at an appropriate level under the current expected credit loss model. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Refer to Note 1, "Basis of presentation" in the notes to our consolidated financial statements for a detailed discussion regarding ACL methodology.
Our allowance for credit losses calculation as of December 31, 2022 resulted from management’s best estimate of losses over the life of loans and unfunded commitments in our portfolio in accordance with the CECL approach. Our calculation included qualitative adjustments for projected slower GDP growth over the next two to three years, expected elevated unemployment levels, and expected interest rate increases from the Federal Reserve. We also considered the current global economic environment, including continued pressures on supply chains (and more specifically, oil and energy) and increased uncertainty due primarily to inflation surrounding the potential impact and hardship on the U.S. economy. The qualitative evaluations above include considered projections that the economy may be nearing a recession. These factors may continue to lead to increased volatility in forecasted macroeconomic variables, a key input to our calculated level of allowance for credit losses.
Year ended December 31, 2022 compared to year ended December 31, 2021
We recognized a provision for credit losses on loans HFI for the year ended December 31, 2022 of $10.4 million. This compares to a reversal in provision for credit losses on loans HFI of $39.0 million recorded for the year ended December 31, 2021. The current period provision resulted from management’s best estimate of losses over the life of loans in our portfolio in accordance with the CECL approach driven by an $1.69 billion increase in loans HFI outstanding from December 31, 2021 to December 31, 2022 and the increased possibility of a future recession and inflationary pressures as discussed in further detail above. For the year ended December 31, 2021, the reversal in total provision for credit losses was primarily the result of improving economic forecasts allowing for a reduction of our reserves.
We also estimate expected credit losses on off-balance sheet loan commitments that are not accounted for as derivatives. When applying the CECL methodology to estimate expected credit loss, we consider the likelihood that funding will occur, the contractual period of exposure to credit loss, the risk of loss, historical loss experience, and current conditions along with expectations of future economic conditions. For the year ended December 31, 2022, we recorded a provision for credit losses on unfunded commitments of $8.6 million compared to a release in provision of $2.0 million for the year ended December 31, 2021. The increase in the provision for credit losses on unfunded commitments is primarily due to the increase in the total loan commitment balance combined with the qualitative evaluations discussed above.
During the year ended December 31, 2022, the unrealized value in our available-for-sale debt securities portfolio declined $239.1 million from an unrealized gain position of $4.7 million as of December 31, 2021. During the year ended December 31, 2021, our available-for-sale debt securities portfolio unrealized value declined $29.8 million from an unrealized gain position of $34.6 million as of December 31, 2020. The majority of the investment portfolio was either government guaranteed or an issuance of a government sponsored entity or highly rated by major credit rating agencies and we historically have not recorded any losses associated with these investments. As such, it was determined that all available-for-sale debt securities that experienced a decline in fair value below amortized cost basis were due to noncredit-related factors. Further, the Company does not intend to sell those available-for-sale securities that have an unrealized loss as of December 31, 2022, and it is not likely that the Company will be required to sell the securities before recovery of their amortized cost basis. Based on our evaluation of potential credit risk in the portfolio, no provision for credit losses on available-for-sale debt securities was required during the years ended December 31, 2022 or 2021.
Noninterest income
The following table sets forth the components of noninterest income for the periods indicated:
Years Ended December 31,
(dollars in thousands) 2022 2021 2020
Mortgage banking income $ 73,580 $ 167,565 $ 255,328
Service charges on deposit accounts 12,049 10,034 9,160
ATM and interchange fees 15,600 19,900 14,915
Investment services and trust income 8,866 8,558 7,080
(Loss) gain from securities, net (376) 324 1,631
(Loss) gain on sales or write-downs of other real estate owned (114) 2,504 (1,491)
(Loss) gain from other assets (151) 323 (90)
Other income 5,213 19,047 15,322
Total noninterest income $ 114,667 $ 228,255 $ 301,855
Year ended December 31, 2022 compared to year ended December 31, 2021
Noninterest income amounted to $114.7 million for the year ended December 31, 2022, a decrease of $113.6 million, or 49.8%, as compared to $228.3 million for the year ended December 31, 2021. Changes in selected components of noninterest income in the above table are discussed below.
Mortgage banking income primarily includes origination fees and realized gains and losses on the sale of mortgage loans, unrealized change in fair value of mortgage loans and derivatives, and mortgage loan servicing fees, which includes the net change in fair value of MSRs and related derivatives. Mortgage banking income is initially driven by the recognition of interest rate lock commitments 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 $73.6 million and $167.6 million for the years ended December 31, 2022 and 2021, respectively, representing a $94.0 million, or 56.1% decrease year-over-year.
During the year ended December 31, 2022, we exited our direct-to-consumer internet delivery channel within our Mortgage segment. Our direct-to-consumer channel was particularly dependent on the support of a strong refinance market and the unfavorable interest rate environment resulted in lack of demand and profitability in this delivery channel. For the years ended December 31, 2022 and 2021, direct-to-consumer comprised 24.6% and 52.3% our total interest rate lock volume and 34.5% and 53.7% of our sales volume, respectively. We incurred restructuring charges of $12.5 million during the year ended December 31, 2022 as a result of exiting this channel.
During the year ended December 31, 2022, our mortgage operations had sales of $2.99 billion which generated a gain on sales margin of 2.36%. This compares to $6.20 billion and 2.97% for the year ended December 31, 2021. Sales of mortgage loans began to slow with the continual rise of interest rates in 2022 and affordability constraints in many of our markets. The decrease in gain on sales is a result of over-capacity in the industry and compressing margins. Mortgage banking income from gains on sale and related fair value changes decreased to $52.9 million during the year ended December 31, 2022 compared to $150.8 million for the year ended December 31, 2021. Total interest rate lock volume decreased $4.46 billion, or 62.3%, during the year ended December 31, 2022 compared to the previous year. Market conditions during the year ended December 31, 2022, including declining consumer demand for mortgages and increased interest rates, have also shifted the mix of interest rate lock commitments by purpose down to 28.7% refinance volume for the year ended December 31, 2022 compared with 62.4% refinance interest rate lock volume for the previous year.
Income from mortgage servicing was $30.8 million and $28.9 million for years ended December 31, 2022 and 2021, respectively, and was partially offset by losses on changes in fair value of MSRs and related hedging activity of $10.1 million and $12.1 million for years ended December 31, 2022 and 2021, respectively.
The components of mortgage banking income for the years ended December 31, 2022, 2021, and 2020 were as follows:
Years Ended December 31,
(dollars in thousands) 2022 2021 2020
Mortgage banking income
Origination and sales of mortgage loans $ 70,549 $ 184,076 $ 236,382
Net change in fair value of loans held for sale and derivatives (17,633) (33,284) 31,192
Change in fair value on MSRs (10,099) (12,117) (34,374)
Mortgage servicing income 30,763 28,890 22,128
Total mortgage banking income $ 73,580 $ 167,565 $ 255,328
Interest rate lock commitment volume by delivery channel:
Direct-to-consumer $ 663,848 $ 3,745,430 $ 5,539,862
Retail 2,036,658 3,414,638 3,399,174
Total $ 2,700,506 $ 7,160,068 $ 8,939,036
Interest rate lock commitment volume by purpose (%):
Purchase 71.3 % 37.6 % 22.4 %
Refinance 28.7 % 62.4 % 77.6 %
Mortgage sales $ 2,990,659 $ 6,202,077 $ 6,235,149
Mortgage sale margin 2.36 % 2.97 % 3.79 %
Closing volume $ 2,403,476 $ 6,300,892 $ 6,650,258
Outstanding principal balance of mortgage loans serviced $ 11,086,582 $ 10,759,286 $ 9,787,657
ATM and interchange fees decreased $4.3 million to $15.6 million during the year ended December 31, 2022 as compared to $19.9 million for the year ended December 31, 2021. The decrease was primarily attributable to the expiration of our temporary exemption from the Durbin amendment during the second half of the year ended December 31, 2022. The Durbin amendment limits the amount of interchange transaction fees that banks with asset sizes greater than $10 billion are permitted to charge retailers for debit card processing. Interchange fee income varies with size and volume of transactions, which can fluctuate with seasonality, consumer spending habits and economic conditions. While our volume of interchange transactions increased approximately 6.00% during the year ended December 31, 2022 from the previous year, interchange fee income declined by 22.4%, the majority of which related to the application of the fee cap imposed by the Durbin amendment during the second half of the year ended December 31, 2022.
Other income decreased $13.8 million to $5.2 million during the year ended December 31, 2022 as compared to $19.0 million during the year ended December 31, 2021. This decrease is primarily related to a $5.1 million loss associated with the change in fair value of the commercial loans held for sale portfolio during the year ended December 31, 2022 compared to a $11.2 million gain for the year ended December 31, 2021. Other noninterest income during the year ended December 31, 2021 also included a $1.5 million loss on the cancellation of an interest rate swap associated with a loan HFI that was resolved during the year.
Noninterest expense
The following table sets forth the components of noninterest expense for the periods indicated:
Years Ended December 31,
(dollars in thousands) 2022 2021 2020
Salaries, commissions and employee benefits $ 211,491 $ 248,318 $ 233,768
Occupancy and equipment expense 23,562 22,733 18,979
Legal and professional fees 15,028 9,161 7,654
Data processing 9,315 9,987 11,390
Merger costs - - 34,879
Amortization of core deposit and other intangibles 4,585 5,473 5,323
Advertising 11,208 13,921 10,062
Mortgage restructuring expense 12,458 - -
Other expense 60,699 63,974 55,030
Total noninterest expense $ 348,346 $ 373,567 $ 377,085
Year ended December 31, 2022 compared to year ended December 31, 2021
Noninterest expense decreased by $25.2 million during the year ended December 31, 2022 to $348.3 million as compared to $373.6 million in the year ended December 31, 2021. Changes in selected components of noninterest expense in the above table are discussed below.
Salaries, commissions and employee benefits expense was the largest component of noninterest expenses representing 60.7% and 66.5% of total noninterest expense in the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, salaries and employee benefits expense decreased $36.8 million, or 14.8%, to $211.5 million as compared to $248.3 million for the year ended December 31, 2021. This decrease includes a $29.4 million decrease in incentive and commission compensation during the year ended December 31, 2022, which was driven by the decrease in mortgage production volume and decline in profitability during the period in addition to the impact of the reduction in headcount from the Mortgage restructuring.
Legal and professional expense includes expenses related to legal, consulting, external audit and tax advisory services, compliance, and other professional licenses and fees. Legal and professional expense increased by $5.9 million during the year ended December 31, 2022 to $15.0 million as compared to $9.2 million in the year ended December 31, 2021. The increase in legal and professional expenses was due to increases in consulting, legal, and other fees related to the acceleration of internal projects.
During the year ended December 31, 2022, we incurred mortgage restructuring expenses of $12.5 million related to the exit from our direct-to-consumer internet delivery channel. These expenses include $10.0 million related to salaries, commissions and employee benefits expense, including severance and the acceleration of vesting on restricted stock units. Other components of this expense includes $1.1 million related to software license and maintenance fees, $0.4 million impairment of our operating lease right-of-use assets, and $0.9 million loss on disposal of fixed assets.
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 decreased $3.3 million during the year ended December 31, 2022 to $60.7 million compared to $64.0 million during the year ended December 31, 2021. The change includes a $1.9 million reduction in charitable contributions made during the year ended December 31, 2022, partially due to a $1.4 million non-recurring charitable contribution made during the year ended December 31, 2021. Additionally, during the year ended December 31, 2021, we incurred $0.6 million in offering costs under our registration rights agreement from the secondary offering completed during the period. There were no such costs during the year ended December 31, 2022.
Efficiency ratio
The efficiency ratio is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. We calculate this ratio by dividing noninterest expense by the sum of net interest income and noninterest income. For an adjusted efficiency ratio, we exclude certain gains, losses and expenses we do not consider core to our business.
Our efficiency ratio was 66.1% and 64.9% for the years ended December 31, 2022 and 2021, respectively. Our adjusted efficiency ratio, on a tax-equivalent basis, was 62.7% and 65.8% for the years ended December 31, 2022 and 2021, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” in this Report for the calculation and discussion of the adjusted efficiency ratio.
Income taxes
Income tax expense was $35.0 million and $52.8 million for the years ended December 31, 2022 and 2021, respectively. This represents effective tax rates of 21.9% and 21.7% for the years ended December 31, 2022 and 2021, respectively. The primary differences from the enacted rates are applicable state income taxes and certain expenses that are not deductible reduced for non-taxable income and additional adjustments for equity-based compensation upon vesting of restricted stock units. State taxes, net of federal benefits, increased our effective tax rate by 2.4% and 3.5% for the years ended December 31, 2022 and 2021, respectively. We had a net operating loss carryforward generated as a result of one of our previous acquisitions which amounted to $5.2 million and $6.5 million as of December 31, 2022 and December 31, 2021, respectively. The net operating loss carryforward can be used to offset taxable income in future periods and reducing income tax liabilities in those future periods. While net operating losses are subject to certain annual utilization limits under Section 382, we believe the net operating loss carryforwards will be realized based on the projected annual limitation and the length of the net operating loss carryover period. Our determination of the realization of the net deferred
tax asset is based on its assessment of all available positive and negative evidence. The net operating loss carryforward will begin to expire in 2029.
We are subject to Section 162(m), which limits the deductibility of compensation paid to certain individuals. The restricted stock unit plans that existed prior to the corporation being public vested after the reliance period as defined in the underlying Treasury Regulations. It is our policy to apply the Section 162(m) limitations to stock-based compensation, including our restricted stock unit plan, first and then followed by cash compensation. As a result of the vesting of these units and cash compensation paid to date, we have disallowed a portion of compensation paid to the applicable individuals.
Financial condition
The following discussion of our financial condition compares balances as of December 31, 2022 and 2021.
Loan portfolio
The following table sets forth the balance and associated percentage of each class of financing receivable in our loan portfolio as of the dates indicated:
December 31,
2022 2021
(dollars in thousands) Committed Amount Outstanding % of total outstanding Committed Amount Outstanding % of total outstanding
Loan Type:
Commercial and industrial (1)
$ 2,671,861 $ 1,645,783 18 % $ 2,060,028 $ 1,290,565 17 %
Construction 3,296,503 1,657,488 18 % 2,886,088 1,327,659 17 %
Residential real estate:
1-to-4 family mortgage 1,573,950 1,573,121 17 % 1,272,477 1,270,467 17 %
Residential line of credit 1,151,750 496,660 5 % 935,571 383,039 5 %
Multi-family mortgage 496,664 479,572 5 % 339,882 326,551 4 %
Commercial real estate:
Owner-occupied 1,156,534 1,114,580 12 % 1,005,534 951,582 13 %
Non-owner occupied 2,109,218 1,964,010 21 % 1,839,990 1,730,165 23 %
Consumer and other 393,632 366,998 4 % 351,153 324,634 4 %
Total loans $ 12,850,112 $ 9,298,212 100 % $ 10,690,723 $ 7,604,662 100 %
(1)Includes $0.8 million and $4.0 million of PPP loans outstanding as of December 31, 2022 and 2021, respectively.
Our loans HFI portfolio is our most significant earning asset, comprising 72.4% and 60.4% of our total assets as of December 31, 2022 and 2021, respectively. Our strategy is to grow our loan portfolio by originating quality commercial and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives. Our overall lending approach is primarily focused on providing credit to our customers directly in the markets we serve, but we are also party to loan syndications and participations from other banks (collectively, “participated loans”). At December 31, 2022 and 2021, loans held for investment included approximately $280.5 million and $263.9 million, respectively, related to purchased participated loans. We also sell loan participations to unaffiliated third parties as part of our credit risk management and balance sheet management strategy. During the years ended December 31, 2022 and 2021, we sold $160.8 million and $174.6 million loan participations, respectively. All loans, whether or not we act as a participant, are underwritten to the same standards as all other loans we originate. We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.
Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Our lending activity is heavily concentrated in the geographic market areas we serve, with highest concentration in Tennessee. This geographic concentration subjects our loan portfolio to the general economic conditions within the state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses. As of December 31, 2022 and 2021, there were no concentrations of loans exceeding 10% of total loans other than the categories of loans disclosed in the table above. We believe our loan portfolio is diversified relative to industry concentrations across the various loan portfolio categories.
Banking regulators have established thresholds of less than 100% of tier 1 capital plus allowance for credit losses in construction lending and less than 300% of tier 1 capital plus allowance for credit losses in commercial real estate lending
that management monitors as part of the risk management process. The construction concentration ratio is a percentage of the outstanding construction and land development loans to total tier 1 capital plus allowance for credit losses. The commercial real estate concentration ratio is a percentage of the outstanding balance of non-owner occupied commercial real estate, multifamily, and construction and land development loans to tier 1 capital plus allowance for credit losses. Management strives to operate within the thresholds set forth above.
When our 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, 2022 and 2021.
As a percentage (%) of tier 1 capital plus allowance for credit losses
FirstBank FB Financial Corporation
December 31, 2022
Construction 119.0 % 117.2 %
Commercial real estate 296.5 % 291.9 %
December 31, 2021
Construction 102.7 % 99.8 %
Commercial real estate 263.5 % 256.0 %
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. 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. Growth in our commercial and industrial loans portfolio is expected to decrease as we position for potential economic headwinds in 2023 and beyond.
Construction loans.
Our construction loans include commercial construction, land acquisition and land development loans and single-family interim construction loans to small- and medium-sized businesses and individuals. These loans are generally secured by the land or the real property being built and are made based on our assessment of the value of the property on an as-completed basis. 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. We expect to make construction loans at a more moderate pace compared to recent periods due to our current macroeconomic forecasts, the potential of a recession in near future, and the heightened inherent risk associated with these loans.
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. Our future origination volume could be impacted by any deterioration of housing values in our markets and increased unemployment or underemployment.
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 also be affected by unemployment or underemployment and deteriorating market values of real estate.
Multi-family residential loans.
Our multi-family residential loans are primarily secured by multi-family properties, such as apartments and condominium buildings. The value of these loans and growth in this area of our portfolio may be affected by unemployment or underemployment and deteriorating market values of real estate.
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. Due to current market conditions and macroeconomic forecasts, we expect growth in commercial real estate owner-occupied loans to be moderated compared to historical growth.
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. We expect growth in commercial real estate non-owner occupied loans to be reduced in comparison to historical growth due to our current macroeconomic outlook.
Consumer and other loans.
Consumer and other loans include consumer loans made to individuals for personal, family and household purposes, including car, boat, manufactured homes (without real estate) and other recreational vehicle loans and personal lines of credit. These loans are generally secured by vehicles, manufactured homes, and other household goods. The collateral securing consumer loans may depreciate over time. We seek 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 represent a significant portion of our loan portfolio.
Loan maturity and sensitivities
The following table presents the contractual maturities of our loan portfolio as of December 31, 2022. Loans with scheduled maturities are reported in the maturity category in which the payment is due. Demand loans with no stated maturity and overdrafts are reported in the “due in 1 year or less” category. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The tables do not include prepayment assumptions or scheduled repayments.
Loan type (dollars in thousands) Maturing in one
year or less Maturing in one
to five years Maturing in
five to fifteen years Maturing after
fifteen years Total
As of December 31, 2022
Commercial and industrial $ 608,008 $ 843,288 $ 193,492 $ 995 $ 1,645,783
Commercial real estate:
Owner-occupied 124,064 537,673 423,648 29,195 1,114,580
Non-owner occupied 193,062 823,537 919,179 28,232 1,964,010
Residential real estate:
1-to-4 family mortgage 87,480 419,183 297,574 768,884 1,573,121
Residential line of credit 35,554 97,101 363,489 516 496,660
Multi-family mortgage 41,787 270,171 133,831 33,783 479,572
Construction 917,133 557,487 176,765 6,103 1,657,488
Consumer and other 34,779 67,274 67,730 197,215 366,998
Total ($) $ 2,041,867 $ 3,615,714 $ 2,575,708 $ 1,064,923 $ 9,298,212
Total (%) 22.0 % 38.9 % 27.7 % 11.4 % 100.0 %
For loans due after one year or more, the following table presents the interest rate composition for loans outstanding as of December 31, 2022.
Loan type (dollars in thousands) Fixed
interest rate Floating
interest rate Total
As of December 31, 2022
Commercial and industrial $ 517,618 $ 520,157 $ 1,037,775
Commercial real estate:
Owner-occupied 767,304 223,212 990,516
Non-owner occupied 951,952 818,996 1,770,948
Residential real estate:
1-to-4 family mortgage 1,175,605 310,036 1,485,641
Residential line of credit 4,680 456,426 461,106
Multi-family mortgage 307,597 130,188 437,785
Construction 276,492 463,863 740,355
Consumer and other 318,354 13,865 332,219
Total ($) $ 4,319,602 $ 2,936,743 $ 7,256,345
Total (%) 59.5 % 40.5 % 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, 2022. As of December 31, 2022 and 2021, we had $17.4 million and $21.5 million, respectively, in fixed-rate loans in which we have entered into variable rate swap contracts.
(dollars in thousands) Fixed
interest rate Floating
interest rate Total
As of December 31, 2022
One year or less $ 637,515 $ 1,404,352 $ 2,041,867
One to five years 2,252,295 1,363,419 3,615,714
Five to fifteen years 1,303,577 1,272,131 2,575,708
Over fifteen years 763,730 301,193 1,064,923
Total ($) $ 4,957,117 $ 4,341,095 $ 9,298,212
Total (%) 53.3 % 46.7 % 100.0 %
Of the loans shown above with floating interest rates as of December 31, 2022, many have interest rate floors as follows:
Loans with interest rate floors (dollars in thousands) Maturing in one year or less Weighted average level of support (bps) Maturing in one to five years Weighted average level of support (bps) Maturing in five years to fifteen years Weighted average level of support (bps) Maturing after
fifteen years Weighted average level of support (bps) Total Weighted average level of support (bps)
Loans with
current rates
above floors:
1-25 bps $ 12 5.00 $ 2,344 17.12 $ 20 25.00 $ - - $ 2,376 17.12
26-50 bps 1,034 50.00 - - 1,509 39.36 - - 2,543 43.68
51-75 bps - - 9,609 71.52 399 55.56 2,155 53.90 12,163 67.87
76-100 bps 859 100.00 6,836 99.91 17,390 85.20 4,669 88.07 29,754 89.46
101-125 bps 8,530 125.00 16,239 120.38 23,127 114.75 3,495 106.10 51,391 117.64
126-150 bps 8,227 136.22 14,080 148.29 13,181 134.18 2,538 128.78 38,026 139.49
151-200 bps 20,079 199.46 35,936 180.08 70,463 171.75 3,722 198.71 130,200 179.10
201-250 bps 33,686 236.20 74,115 228.80 38,595 224.62 14,820 223.23 161,216 228.83
251-300 bps 74,535 287.75 91,652 277.09 135,221 274.21 20,685 276.14 322,093 278.28
301-350 bps 224,859 343.14 170,872 341.62 153,009 331.98 30,868 334.72 579,608 339.30
351 bps and
above 661,055 413.24 559,681 412.15 471,609 411.76 172,978 430.73 1,865,323 414.16
Total loans with
current rates
above floors $ 1,032,876 373.78 $ 981,364 349.84 $ 924,523 334.04 $ 255,930 374.41 $ 3,194,693 354.97
Loans at interest
rate floors
providing
support:
1-25 bps $ - - $ - - $ 434 22.00 $ 139 22.00 $ 573 22.00
101-125 bps - - - - 287 122.00 - - 287 122.00
126-150 bps - - 41 137.00 - - - - 41 137.00
Total loans at
interest rate
floors
providing
support $ - - $ 41 137.00 $ 721 61.81 $ 139 22.00 $ 901 59.04
Asset quality
In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions, including extensions or interest rate modifications, to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. Furthermore, we are committed to collecting on all of our loans, which can result in us carrying higher nonperforming assets. We believe this practice leads to higher recoveries in the long-term.
Nonperforming assets
Our nonperforming assets consist of nonperforming loans, other real estate owned and other repossessed non-earning assets. As of December 31, 2022 and 2021, we had $87.5 million and $63.0 million, respectively, in nonperforming 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. Accrued interest receivable written off as an adjustment to interest income amounted to $1.1 million and $0.8 million for the years ended December 31, 2022 and 2021, respectively. Additionally, we had net interest recoveries on nonperforming assets previously charged off of $2.7 million and $2.3 million for the years ended December 31, 2022 and 2021, respectively.
In addition to loans HFI, we also include loans HFS that have stopped accruing interest or become 90 days or more past due. As such, our nonperforming commercial loans HFS represent a pool of previously acquired shared national credits and institutional healthcare loans that amounted to $9.3 million and $5.2 million as of December 31, 2022 and 2021, respectively.
During the year ended December 31, 2022, we identified a more-than-trivial benefit associated with serviced GNMA loans previously sold that are contractually delinquent greater than 90 days and recorded this right to repurchase option on the balance sheet. See Note 1, "Basis of presentation" within this Report for additional information. As of December 31, 2022, we had $26.2 million of these delinquent GNMA loans previously sold included on our consolidated balance sheets in loans held for sale. These are considered nonperforming assets as we do not earn any interest on the unexercised option to repurchase these loans. Rebooked GNMA optional repurchase loans do not meet the requirements under FASB ASC Topic 825 to be accounted for under the fair value option. As of December 31, 2021, there was $91.9 million of delinquent GNMA loans previously sold that we did not record on our consolidated balance sheets as we 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. These rebooked GNMA optional repurchase loans negatively impacted our NPA ratio by 20 bps as of December 31, 2022.
As of December 31, 2022 and 2021, other real estate owned included $2.1 million and $3.3 million, respectively, of excess land and facilities held for sale resulting from branch consolidations from our prior acquisitions. Other nonperforming assets also included other repossessed non-real estate amounting to $0.4 million and $0.7 million as of December 31, 2022 and 2021, 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:
December 31,
(dollars in thousands) 2022 2021
Loan Type
Commercial and industrial $ 1,443 $ 1,583
Construction 389 4,340
Residential real estate:
1-to-4 family mortgage 23,115 13,956
Residential line of credit 1,531 1,736
Multi-family mortgage 42 49
Commercial real estate:
Owner-occupied 5,410 6,710
Non-owner occupied 5,956 14,084
Consumer and other 7,960 4,845
Total nonperforming loans held for investment $ 45,846 $ 47,303
Commercial loans held for sale 9,289 5,217
Mortgage loans held for sale(1)
26,211 -
Other real estate owned 5,794 9,777
Other 351 686
Total nonperforming assets $ 87,491 $ 62,983
Nonperforming loans held for investment as a percentage of total loans HFI 0.49 % 0.62 %
Nonperforming assets as a percentage of total assets 0.68 % 0.50 %
Nonaccrual loans HFI as a percentage of loans HFI 0.30 % 0.47 %
Loans restructured as troubled debt restructurings $ 13,854 $ 32,435
Troubled debt restructurings as a percentage of total loans held for investment 0.15 % 0.43 %
(1) Represents optional right to repurchase government guaranteed GNMA mortgage loans previously sold that have become past due greater than 90 days as of
December 31, 2022.
We have evaluated our nonperforming loans held for investment and believe all nonperforming loans have been adequately reserved for in the allowance for credit losses as of December 31, 2022 and 2021. Management also continually monitors past due loans for potential credit quality deterioration. Loans not considered nonperforming include loans 30-89 days past due that continue to accrue interest amounting to $31.3 million at December 31, 2022 as compared to $26.5 million at December 31, 2021.
Allowance for credit losses
We calculate our expected credit loss using a lifetime loss rate methodology. We utilize probability-weighted forecasts, which consider multiple macroeconomic variables from a third-party vendor that are applicable to the type of loan. Each of our loss rate models incorporate forward-looking macroeconomic projections throughout the reasonable and supportable forecast period and the subsequent historical reversion at the macroeconomic variable input level. In order to estimate the life of a loan, the contractual term of the loan is adjusted for estimated prepayments based on market information and our prepayment history.
The allowance for credit losses represents the portion of the loan's amortized cost basis that we do not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses is based on the loan's amortized cost basis, excluding accrued interest receivable, as we promptly charge off accrued interest receivable determined to be uncollectible. We determine the appropriateness of the allowance through periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. In future quarters, we may update information and forecasts that may cause significant changes in the estimate in those future quarters. See "Critical Accounting Estimates - Allowance for credit losses" and Note 5 “Loans and allowance for credit losses“ in the notes to the consolidated financial statements for additional information regarding our methodology.
The following table presents the allocation of the allowance for credit losses by loan category as well as the ratio of loans by loan category compared to the total loan portfolio as of the dates indicated:
December 31,
2022 2021
(dollars in thousands) Amount % of
Loans ACL
as a % of loans HFI category Amount % of
Loans ACL
as a % of loans HFI category
Loan Type:
Commercial and industrial $ 11,106 18 % 0.67 % $ 15,751 17 % 1.22 %
Construction 39,808 18 % 2.40 % 28,576 17 % 2.15 %
Residential real estate:
1-to-4 family mortgage 26,141 17 % 1.66 % 19,104 17 % 1.50 %
Residential line of credit 7,494 5 % 1.51 % 5,903 5 % 1.54 %
Multi-family mortgage 6,490 5 % 1.35 % 6,976 4 % 2.14 %
Commercial real estate:
Owner occupied 7,783 12 % 0.70 % 12,593 13 % 1.32 %
Non-owner occupied 21,916 21 % 1.12 % 25,768 23 % 1.49 %
Consumer and other 13,454 4 % 3.67 % 10,888 4 % 3.35 %
Total allowance $ 134,192 100 % 1.44 % $ 125,559 100 % 1.65 %
The following table summarizes activity in our allowance for credit losses during the periods indicated:
Years Ended December 31,
(dollars in thousands) 2022 2021 2020
Allowance for credit losses at beginning of period $ 125,559 $ 170,389 $ 31,139
Impact of adopting ASC 326 on non-purchased credit deteriorated loans - - 30,888
Impact of adopting ASC 326 on purchased credit deteriorated loans - - 558
Charge-offs:
Commercial and industrial (2,087) (4,036) (11,735)
Construction - (30) (18)
Residential real estate:
1-to-4 family mortgage (77) (154) (403)
Residential line of credit - (18) (22)
Multi-family mortgage - (1) -
Commercial real estate:
Owner occupied (15) - (304)
Non-owner occupied (268) (1,566) (711)
Consumer and other (2,254) (2,063) (2,112)
Total charge-offs $ (4,701) $ (7,868) $ (15,305)
Recoveries:
Commercial and industrial $ 2,005 $ 861 $ 1,712
Construction 11 3 205
Residential real estate:
1-to-4 family mortgage 54 125 122
Residential line of credit 17 115 125
Commercial real estate:
Owner-occupied 88 156 83
Consumer and other 766 773 756
Total recoveries $ 2,941 $ 2,033 $ 3,003
Net charge-offs (1,760) (5,835) (12,302)
Provision for credit losses 10,393 (38,995) 94,606
Initial allowance for credit losses on loans purchased with credit deterioration - - 25,500
Allowance for credit losses at the end of period(1)
$ 134,192 $ 125,559 $ 170,389
Ratio of net charge-offs during the period to average loans outstanding during the period (0.02) % (0.08) % (0.22) %
Allowance for credit losses as a percentage of loans at end of period(1)
1.44 % 1.65 % 2.41 %
Allowance for credit losses as a percentage of nonaccrual loans HFI(1)
489.2 % 353.0 % 335.7 %
Allowance for credit losses as a percentage of nonperforming loans at end of period(1)
292.7 % 265.4 % 264.3 %
(1) Excludes reserve for credit losses on unfunded commitments of $23.0 million, $14.4 million, and $16.4 million recorded in accrued expenses and other liabilities
on our consolidated balance sheets as of December 31, 2022, 2021, and 2020 respectively.
The following tables details our provision for credit losses and net charge-offs to average loans outstanding by loan category during the periods indicated:
Provision for credit losses(1)
Net (charge-offs) recoveries Average loans HFI Ratio of annualized net (charge-offs) recoveries to average loans HFI
(dollars in thousands)
Year ended December 31, 2022
Commercial and industrial $ (4,563) $ (82) $ 1,466,685 (0.01) %
Construction 11,221 11 1,549,622 - %
Residential real estate:
1-to-4 family mortgage 7,060 (23) 1,438,801 - %
Residential line of credit 1,574 17 431,826 - %
Multi-family mortgage (486) - 411,509 - %
Commercial real estate:
Owner-occupied (4,883) 73 1,060,523 0.01 %
Non-owner occupied (3,584) (268) 1,839,577 (0.01) %
Consumer and other 4,054 (1,488) 343,107 (0.43) %
Total $ 10,393 $ (1,760) $ 8,541,650 (0.02) %
Year ended December 31, 2021
Commercial and industrial $ 4,178 $ (3,175) $ 1,271,476 (0.25) %
Construction (29,874) (27) 1,138,769 - %
Residential real estate:
1-to-4 family mortgage (87) (29) 1,130,019 - %
Residential line of credit (4,728) 97 392,907 0.02 %
Multi-family mortgage (197) (1) 310,874 - %
Commercial real estate:
Owner occupied 7,588 156 917,334 0.02 %
Non-owner occupied (16,813) (1,566) 1,683,413 (0.09) %
Consumer and other 938 (1,290) 352,421 (0.37) %
Total $ (38,995) $ (5,835) $ 7,197,213 (0.08) %
Year ended December 31, 2020
Commercial and industrial $ 13,830 $ (10,023) $ 1,278,794 (0.78) %
Construction 40,807 187 787,881 0.02 %
Residential real estate:
1-to-4 family mortgage 6,408 (281) 874,270 (0.03) %
Residential line of credit 5,649 103 301,449 0.03 %
Multi-family mortgage 5,506 - 127,257 - %
Commercial real estate:
Owner occupied (1,739) (221) 708,874 (0.03) %
Non-owner occupied 17,789 (711) 1,239,644 (0.06) %
Consumer and other 6,356 (1,356) 303,663 (0.45) %
Total $ 94,606 $ (12,302) $ 5,621,832 (0.22) %
1) Excludes provision (reversal of provision) for credit losses on unfunded commitments of $8.6 million, $(2.0) million, and $13.4 million recorded for the years ended December 31, 2022, 2021, and 2020. respectively.
The allowance for credit losses was $134.2 million and $125.6 million and represented 1.44% and 1.65% of loans held for investment as of December 31, 2022 and 2021, respectively. For the year ended December 31, 2022, we experienced improved net charge-offs of $1.8 million, or 0.02% of average loans HFI, compared to $5.8 million, or 0.08% for the year ended December 31, 2021. Our ratio of total nonperforming loans HFI as a percentage of total loans HFI decreased to 0.49% at December 31, 2022 compared to 0.62% at December 31, 2021.
The primary reason for the increase in the allowance for credit losses is due to loan growth and a tightening monetary policy environment during the year ended December 31, 2022. Specifically, we performed qualitative evaluations within our established qualitative framework, weighting the impact uncertainty due to inflation, negative economic forecasts, predicted Federal Reserve rate increases, status of federal government stimulus programs, supply chain disruptions for our customers and other considerations. Further, the increase in estimated required reserve was attributable to forecasted deterioration in asset quality projected over life of the loan portfolio. As a ratio of ACL to loans HFI by loan type, our
construction, consumer and other, and residential 1-4 family mortgage portfolios incurred the largest increases year-over-year due to weighted projections that the economy may be nearing a recession. These portfolios are heavily reliant on the strength of the economy; and therefore, they are adversely affected by inflation, supply chain disruptions, and unemployment.
We also maintain an allowance for credit losses on unfunded commitments, which increased to $23.0 million as of December 31, 2022 from $14.4 million as of December 31, 2021 due to an increase in unfunded loan commitments, particularly in our commercial and construction unfunded pipelines, and change in macroeconomic forecasts as discussed above.
Loans held for sale
Commercial loans held for sale
Our loans held for sale includes a previously acquired portfolio of commercial loans, including shared national credits and institutional healthcare loans that are accounted for as held for sale. These loans had a fair value of $30.5 million as of December 31, 2022 compared to $79.3 million as of December 31, 2021. The change is primarily attributable to loans within the portfolio being paid off through external refinancing and pay-downs, net of loan fundings on pre-existing loan commitments.
This decrease for the year ended December 31, 2022 also includes a loss recognized on the change in fair value of the portfolio of $5.1 million included in 'other noninterest income' on the consolidated statements of income, representing a decrease of $10.0 million from the gain recorded in the previous year of $4.9 million recognized on the change in fair value of the portfolio. In addition to the change in fair value for the year ended December 31, 2021, we also recognized a gain of $6.3 million related to the pay-off of a loan that had been partially charged off prior to acquisition of the portfolio, resulting in a total gain of $11.2 million during the period included in 'other noninterest income'. As of December 31, 2022, there were three relationships remaining within this portfolio.
Subsequent to December 31, 2022, one of the remaining relationships in the commercial loans held for sale portfolio of $20.6 million was paid-off.
Mortgage loans held for sale
Mortgage loans held for sale consisted of $82.8 million of residential real estate mortgage loans in the process of being sold to third parties and $26.2 million of GNMA optional repurchase loans. This compares to $672.9 million of residential mortgage loans in the process of being sold as of December 31, 2021. There were no GNMA optional repurchase loans recorded on our consolidated balance sheet as of December 31, 2021. For additional information regarding GNMA optional repurchase loans, please refer to the nonperforming assets table and discussion included under the section captioned 'Asset Quality' within this MD&A.
Generally, mortgage volume decreases in rising interest rate environments and slower housing markets and increases in lower interest rate environments and robust housing markets. Interest rate lock volume for the years ended December 31, 2022 and 2021 totaled $2.70 billion and $7.16 billion, respectively. The decrease in interest rate lock volume during the year ended December 31, 2022 reflects the slow down experienced across the industry compared with the year ended December 31, 2021, which benefited from historically low interest rates pre-empted by the COVID-19 Pandemic. The decrease also reflects the exit from our direct-to-consumer internet delivery channel completed during 2022. Interest rate lock volume within our direct-to-consumer internet delivery channel for the years ended December 31, 2022 and 2021 totaled $0.66 billion and $3.75 billion, respectively. Additional details related to the Mortgage restructuring are included under the subheadings 'Noninterest income' and 'Noninterest expense', respectively, included within this management's discussion and analysis and at Note 20, "Segment reporting" in the notes to the consolidated financial statements. Interest rate lock commitments in the pipeline were $118.3 million as of December 31, 2022 compared with $487.4 million as of December 31, 2021. The decrease in our pipeline year-over-year was partially due to our exit from our direct-to-consumer channel, which was completed during the third quarter of 2022. Looking ahead to 2023, we expect our interest rate lock commitment volume in the remaining retail channel to be similar to what was experienced in the retail channel for the year ended December 31, 2022.
Mortgage loans to be sold are sold either on a “best efforts” basis or under a mandatory delivery sales agreement. Under a “best efforts” sales agreement, residential real estate originations are locked in at a contractual rate with third party private investors or directly with government sponsored agencies, and we are obligated to sell the mortgages to such investors only if the mortgages are closed and funded. The risk we assume is conditioned upon loan underwriting and market conditions in the national mortgage market. Under a mandatory delivery sales agreement, we commit to deliver a
certain principal amount of mortgage loans to an investor at a specified price and delivery date. Penalties are paid to the investor if we fail to satisfy the contract. Gains and losses are realized at the time consideration is received and all other criteria for sales treatment have been met. These loans are typically sold within fifteen to twenty-five days after the loan is funded, depending on the economic environment and competition in the market. Although loan fees and some interest income are derived from mortgage loans held for sale, the main source of income is gains from the sale of these loans in the secondary market.
Deposits
Deposits represent the Bank’s primary source of funds. We continue to focus on growing core customer deposits through our relationship driven banking philosophy, community-focused marketing programs, and initiatives such as the development of our treasury management services.
Total deposits were $10.86 billion and $10.84 billion as of December 31, 2022 and 2021, respectively. Noninterest-bearing deposits at December 31, 2022 and 2021 were $2.68 billion and $2.74 billion, respectively, while interest-bearing deposits were $8.18 billion and $8.10 billion at December 31, 2022 and 2021, respectively. Included in noninterest-bearing deposits are certain mortgage escrow deposits from our third-party mortgage servicing provider amounting to $75.6 million and $127.6 million at December 31, 2022 and 2021, respectively.
Money market and customer time deposits increased by $159.8 million and $316.5 million during the year ended December 31, 2022, respectively. These increases were largely offset by decreases in non-interest bearing deposits and interest-bearing checking deposits of $63.6 million and $358.7 million during the same period. The shift in deposit composition mix impacted the banking industry as banks were competing for customers who were searching for higher yields. Further, during the year ended December 31, 2022, we exited certain high-cost deposits from municipal and governmental entities (i.e. "public deposits"). As such, our public deposits decreased from $2.29 billion at December 31, 2021 to $2.08 billion at December 31, 2022.
As a result of the rising interest rate environment, our total cost of deposits increased during the year ended December 31, 2022 from the year ended December 31, 2021 by 24 basis points to 0.54%, and the cost of interest-bearing deposits increased to 0.74% from 0.40% in the same period for the prior year.
During the year ended December 31, 2022, we entered into two designated fair value hedges to mitigate interest rate exposure associated with certain fixed-rate money market deposits. The aggregate fair value of these hedges included in the carrying amount of total money market deposits as of December 31, 2022 was $9.8 million.
Our deposit base also includes certain commercial and high net worth individuals that periodically place deposits with the Bank for short periods of time and can cause fluctuations from period to period in the overall level of customer deposits outstanding. These fluctuations may include certain deposits from related parties as disclosed within Note 24, "Related party transactions" in the notes to our consolidated financial statements included in this Report.
Average deposit balances by type, together with the average rates per period are reflected in the average balance sheet amounts, interest paid and rate analysis tables included in this management's discussion and analysis under the subheading "Results of operations" discussion.
The following table sets forth the distribution by type of our deposit accounts as of the dates indicated:
As of December 31,
2022 2021 2020
(dollars in thousands) Amount % of total deposits Average rate Amount % of total deposits Average rate Amount % of total
deposits Average rate
Deposit Type
Noninterest-bearing
demand $ 2,676,631 25 % - % $ 2,740,214 26 % - % $ 2,274,103 24 % - %
Interest-bearing demand 3,059,984 28 % 0.70 % 3,418,666 32 % 0.35 % 2,491,765 26 % 0.61 %
Money market 3,226,102 30 % 0.80 % 3,066,347 28 % 0.36 % 2,902,230 30 % 0.76 %
Savings deposits 471,143 4 % 0.05 % 480,589 4 % 0.06 % 352,685 4 % 0.08 %
Customer time deposits 1,420,131 13 % 0.99 % 1,103,594 10 % 0.67 % 1,375,695 15 % 1.52 %
Brokered and internet time
deposits 1,843 - % 1.36 % 27,487 - % 1.69 % 61,559 1 % 0.90 %
Total deposits $ 10,855,834 100 % 0.54 % $ 10,836,897 100 % 0.30 % $ 9,458,037 100 % 0.62 %
Total Uninsured Deposits $ 5,661,186 52 % $ 4,877,819 45 % $ 4,957,766 52 %
Customer Time Deposits
0.00-0.50% $ 296,143 21 % $ 792,020 72 % $ 454,429 34 %
0.51-1.00% 91,596 6 % 97,644 9 % 253,883 18 %
1.01-1.50% 79,924 6 % 78,539 7 % 155,755 11 %
1.51-2.00% 261,797 18 % 36,090 3 % 169,414 12 %
2.01-2.50% 44,901 3 % 44,653 4 % 159,699 12 %
Above 2.50% 645,770 46 % 54,648 5 % 182,515 13 %
Total customer time
deposits $ 1,420,131 100 % $ 1,103,594 100 % $ 1,375,695 100 %
Brokered and Internet
Time Deposits
0.00-0.50% $ 99 5 % $ 99 - % $ - - %
0.51-1.00% - - % - - % - - %
1.01-1.50% 247 14 % 595 2 % 5,660 9 %
1.51-2.00% 500 27 % 16,358 60 % 42,311 69 %
2.01-2.50% 498 27 % 4,464 16 % 5,312 9 %
Above 2.50% 499 27 % 5,971 22 % 8,276 13 %
Total brokered and internet time deposits $ 1,843 100 % $ 27,487 100 % $ 61,559 100 %
Total time deposits $ 1,421,974 $ 1,131,081 $ 1,437,254
At December 31, 2022, we held an estimated $5.66 billion in uninsured deposits. As of December 31, 2022, time deposits in excess of the FDIC insurance limit and the estimated portion of time deposits outstanding that are otherwise uninsured by maturity were as follows:
(dollars in thousands) Individual
Instruments in
Denominations that
Meet or Exceed the
FDIC Insurance
Limit Estimated Aggregate
Time Deposits that Exceed the
FDIC Insurance
Limit and Otherwise
Uninsured Time
Deposits
Months to maturity:
Three or less $ 49,851 $ 51,068
Over Three to Six 217,258 218,724
Over Six to Twelve 128,030 114,471
Over Twelve 161,398 144,624
Total $ 556,537 $ 528,887
Other earning assets
Securities purchased under agreements to resell ("reverse repurchase agreements")
We enter into agreements with certain customers to purchase investment securities under agreements to resell at specific dates in the future. This investment deploys some of our liquidity position into an instrument that improves the return on those funds in low interest rate environments. Additionally, we believe it positions us more favorably for a rising interest rate environment. Securities purchased under agreements to resell totaled $75.4 million and $74.2 million at December 31, 2022 and 2021, respectively.
Investment portfolio
Our investment portfolio objectives include maximizing total return after other primary objectives are achieved such as, but not limited to, providing liquidity, capital preservation, and pledging collateral for various lines of credit and other borrowings. The investment objectives guide the portfolio allocation among securities types, maturities, and other attributes.
The fair value of our available-for-sale debt securities portfolio was $1.47 billion and $1.68 billion as of December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, we had $3.0 million and $3.4 million, respectively, in marketable equity securities recorded at fair value that primarily consisted of mutual funds.
During the years ended December 31, 2022 and 2021, we purchased $242.9 million and $847.2 million in investment securities, respectively. The trade value of available-for-sale securities sold was $1.2 million during the year ended December 31, 2022 compared to $8.9 million during the year ended December 31, 2021. During the years ended December 31, 2022 and 2021, maturities and calls of securities totaled $204.7 million and $296.3 million, respectively.
Included in the fair value of available-for-sale debt securities were net unrealized losses of $234.4 million at December 31, 2022 compared to net unrealized gains of $4.7 million at December 31, 2021. Our available-for-sale debt securities portfolio incurred unrealized losses during the period due to a rising interest rate environment, but we believe we are well positioned to mitigate the impact of future rate increases due to the shorter duration of our portfolio. During the year ended December 31, 2022, the change in the fair value of equity securities resulted in a net loss of $377 thousand. During the year ended December 31, 2021, the change in the fair value of equity securities and gain on sale resulted in a net gain of $198 thousand.
The following table sets forth the fair value, scheduled maturities and weighted average yields for our available-for-sale debt securities portfolio as of the dates indicated below:
As of December 31,
2022 2021
(dollars in thousands) Fair value % of total investment securities Weighted average yield (1)
Fair value % of total investment securities Weighted average yield (1)
Treasury securities:
Maturing within one year $ 729 - % 2.40 % $ - - % - %
Maturing in one to five years 106,951 7.3 % 2.10 % 14,908 0.9 % 1.24 %
Maturing in five to ten years - - % - % - - % - %
Maturing after ten years - - % - % - - % - %
Total Treasury securities 107,680 7.3 % 2.10 % 14,908 0.9 % 1.24 %
Government agency securities:
Maturing within one year - - % - % - - % - %
Maturing in one to five years 27,082 1.8 % 1.50 % 20,141 1.2 % 1.33 %
Maturing in five to ten years 12,011 0.8 % 1.70 % 13,729 0.8 % 1.40 %
Maturing after ten years 969 0.1 % 3.32 % - - % - %
Total government agency securities 40,062 2.7 % 1.60 % 33,870 2.0 % 1.36 %
Municipal securities:
Maturing within one year 3,496 0.2 % 2.18 % 21,884 1.3 % 1.26 %
Maturing in one to five years 17,775 1.2 % 2.38 % 19,903 1.2 % 2.05 %
Maturing in five to ten years 39,034 2.7 % 3.12 % 27,086 1.6 % 3.38 %
Maturing after ten years 204,115 13.9 % 3.18 % 269,737 16.1 % 3.14 %
Total obligations of state and municipal subdivisions 264,420 18.0 % 3.10 % 338,610 20.2 % 2.97 %
Residential and commercial mortgage backed securities guaranteed by FNMA, GNMA and FHLMC:
Maturing within one year - - % - % - - % - %
Maturing in one to five years 3,834 0.3 % 2.73 % 4,041 0.2 % 2.55 %
Maturing in five to ten years 23,683 1.6 % 2.65 % 17,368 1.0 % 2.28 %
Maturing after ten years 1,024,320 69.6 % 1.84 % 1,263,213 75.3 % 1.51 %
Total residential and commercial mortgage backed securities guaranteed by FNMA, GNMA and FHLMC 1,051,837 71.5 % 1.86 % 1,284,622 76.5 % 1.53 %
Corporate securities:
Maturing within one year - - % - % - - % - %
Maturing in one to five years 373 - % 5.00 % 355 - % 5.06 %
Maturing in five to ten years 6,814 0.5 % 3.87 % 6,160 0.4 % 4.05 %
Maturing after ten years - - % - % - - % - %
Total Corporate securities 7,187 0.5 % 3.94 % 6,515 0.4 % 4.13 %
Total available-for-sale debt securities $ 1,471,186 100.0 % 2.10 % $ 1,678,525 100.0 % 1.83 %
(1)Yields on a tax-equivalent basis.
Borrowed funds
Deposits and investment securities available-for-sale are the primary source of funds for our lending activities and general business purposes. However, we may also obtain advances from the FHLB, purchase federal funds and engage in overnight borrowing from the Federal Reserve, correspondent banks, or enter into client repurchase agreements. We also use these sources of funds as part of our asset liability management process to control our long-term interest rate risk exposure, even if it may increase our short-term cost of funds.
Our level of short-term borrowing can fluctuate on a daily basis depending on funding needs and the source of funds to satisfy those needs, in addition to the overall interest rate environment and cost of public funds. Borrowings can include securities sold under agreements to repurchase, lines of credit, advances from the FHLB, federal funds purchased, and subordinated debt.
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 as a short-term return for their excess funds. Securities sold under agreements to repurchase totaled $21.9 million and $40.7 million at December 31, 2022 and 2021, respectively.
We maintain lines with certain correspondent banks that provide borrowing capacity in the form of federal funds purchased. Federal funds purchased are short-term borrowings that typically mature within one to ninety days. Borrowings against these lines (i.e. federal funds purchased) totaled $65.0 million as of December 31, 2022. Subsequent to December 31, 2022, these were paid off in full. There were no such borrowings as of December 31, 2021.
FHLB short-term borrowings
As a member of the FHLB Cincinnati, we may utilize advances from the FHLB in order to provide additional liquidity and funding. Under these short-term agreements, we maintain a line of credit that as of December 31, 2022 and 2021 had total borrowing capacity of $1.27 billion and $1.23 billion, respectively. As of December 31, 2022 and 2021, we had qualifying loans pledged as collateral securing these lines amounting to $2.67 billion and $2.72 billion, respectively. Overnight cash advances against this line totaled $175.0 million as of December 31, 2022. Subsequent to December 31, 2022, these advances were paid off in full. There were no FHLB advances outstanding as of December 31, 2021.
Subordinated debt
During the year-ended December 31, 2003, we formed two separate trusts which issued $9.0 million (“Trust I”) and $21.0 million (“Trust II”) of floating rate trust preferred securities as part of a pooled offering of such securities. We issued junior subordinated debentures of $9.3 million, which included proceeds of common securities which we purchased for $0.3 million, and junior subordinated debentures of $21.7 million which included proceeds of common securities of $0.7 million. 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 us. Both issuances were to the trusts in exchange for the proceeds of the securities offerings, which represent the sole asset of the trusts.
Additionally, during the year ended December 31, 2020, we placed $100.0 million of ten year fixed-to-floating rate subordinated notes, maturing September 1, 2030. During the year ended December 31, 2022, we began mitigating interest rate exposure associated with these notes through the use of fair value hedging instruments. See Note 17, "Derivatives" in the notes to the consolidated financial statements for additional details related to these instruments.
Further information related to the our subordinated debt as of December 31, 2022 is detailed below:
Name Year Established Maturity Call Date Total Debt Outstanding ( in thousands) Interest Rate Coupon Structure
Subordinated Debt issued by Trust Preferred Securities
FBK Trust I (1)
2003 06/09/2033 6/09/2008(2)
$ 9,280 8.00% 3-month LIBOR plus 3.25%
FBK Trust II (1)
2003 06/26/2033 6/26/2008(3)
21,650 7.87% 3-month LIBOR plus 3.15%
Additional Subordinated Debt
FBK Subordinated Debt I(4)
2020 09/01/2030 9/1/2025 (5)
100,000 4.50% Semi-annual Fixed (6)
Unamortized debt issuance costs (999)
Fair Value Hedge (See Note 17, "Derivatives" )
(3,830)
Total Subordinated Debt, net $ 126,101
(1)The Company classifies $30.0 million of the Trusts' subordinated debt as Tier 1 capital.
(2)The Company may also 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 and must be redeemed no later than 2033.
(3)The Company may also redeem the second junior subordinated debentures listed, in whole or in part on any distribution payment date, at the redemption price and must
be redeemed no later than 2033.
(4)The Company classified the issuance, net of unamortized issuance costs and the associated fair value hedge as Tier 2 capital, which will be phased out 20% per year in
the final five years before maturity.
(5)The Company may redeem the notes in whole or in part on any interest payment date on or after September 1, 2025.
(6)Beginning on September 1, 2025 the coupon structure migrates to the 3-month Secured Overnight Financing Rate plus a spread of 439 basis points through the end of
the term of the debenture.
Other borrowings
Other borrowings on our consolidated balance sheets includes our finance lease liability totaling $1.4 million and $1.5 million as of December 31, 2022 and 2021, respectively. In addition, other borrowings on our consolidated balance sheets includes guaranteed GNMA loans eligible for repurchase totaling $26.2 million as of December 31, 2022. There were no such borrowings meeting the criteria for repurchase as of December 31, 2021 as there was deemed not to be a more-than-trivial benefit associated with repurchase based on our internal analysis. See Note 9, "Leases" and Note 18, "Fair value of financial instruments" within the Notes to our consolidated financial statements for additional information regarding our finance lease and guaranteed GNMA loans eligible for repurchase, respectively.
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 Policy is intended to cause the Bank to maintain adequate liquidity and, therefore, enhance our ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements and otherwise sustain our operations. We accomplish this through management of the maturities of our interest-earning assets and interest-bearing liabilities. We believe that our present position is adequate to meet our current and future liquidity needs.
We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of clients, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.
As part of our liquidity management strategy, we also focus on minimizing our costs of liquidity and attempt to decrease these costs by growing our noninterest-bearing and other low-cost deposits, while replacing higher cost funding sources including borrowed funds. While we do not control the types of deposit instruments our clients choose, we do influence those choices with the rates and the deposit specials we offer.
Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available markets that offer conversions to cash as needed. Securities within our investment portfolio are also used to secure certain deposit types and short-term borrowings. As of December 31, 2022 and 2021, securities with a carrying value of $1.19 billion and $1.23 billion, respectively, were pledged to secure government, public, trust and other deposits and as collateral for short-term borrowings, letters of credit and derivative instruments.
Additional sources of liquidity include federal funds purchased, repurchase agreements, FHLB borrowings, and lines of credit. Interest is charged at the prevailing market rate on federal funds purchased, reverse repurchase agreements 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. As of December 31, 2022, we had outstanding overnight cash advances from the FHLB totaling $175.0 million. There were no such advances with the FHLB as of December 31, 2021. There was $1.27 billion and $1.23 billion as of December 31, 2022 and 2021, respectively, available to borrow against.
We also maintain lines of credit with other commercial banks totaling $350.0 million and $325.0 as of December 31, 2022 and 2021, respectively. These are unsecured, uncommitted lines of credit typically maturing at various times within the next twelve months. Borrowings against these lines (i.e. federal funds purchased) totaled $65.0 million as of December 31, 2022. There were no such borrowings as of December 31, 2021. As of both December 31, 2022 and 2021, we also had an additional $50.0 million available through the IntraFi network, which allows us to offer banking customers access to FDIC insurance protection on deposits through our Bank which exceed FDIC insurance limits.
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 this 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. Based upon this regulation, as of December 31, 2022 and 2021, $161.3 million and $170.8 million of the Bank’s retained earnings were available for the payment of dividends without such prior approval. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. During the year ended December 31, 2022, there were $49.0 million in cash dividends approved by the board for payment from the Bank to the holding company. During the year ended December 31, 2021, there were $122.5 million in cash dividends approved by the board for payment from the Bank to the holding company. None of these required approval from the TDFI. Subsequent to December 31, 2022, the board approved a dividend from the Bank to the holding company to be paid in the first quarter of 2023 for $8.5 million that also did not require approval from the TDFI.
During the year ended December 31, 2022, the Company declared and paid shareholder dividends of $0.52 per share, or $24.7 million, respectively. During the year ended December 31, 2021, the Company declared and paid dividends of $0.44 per share, or $21.2 million, respectively. Subsequent to December 31, 2022, the Company declared a quarterly dividend in the amount of $0.15 per share, payable on February 21, 2023, to stockholders of record as of February 7, 2023.
Shareholders’ equity and capital management
Our total shareholders’ equity was $1.33 billion at December 31, 2022 and $1.43 billion at December 31, 2021. Book value per share was $28.36 at December 31, 2022 and $30.13 at December 31, 2021, respectively. The decrease in shareholders’ equity was primarily attributable to a decrease in accumulated other comprehensive income related to unrealized losses on our available-for-sale securities portfolio. Additionally, our capital was impacted by retained net income, dividends paid, and $40.0 million in common stock repurchases during the year ended December 31, 2022.
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. The Federal Reserve and the FDIC have issued guidelines governing the levels of capital that banks must maintain. As of December 31, 2022 and 2021, we met all capital adequacy requirements for which we are subject. See additional discussion regarding our capital adequacy and ratios at within Note 21, "Minimum capital requirements" in the notes to our consolidated financial statements contained herein.
Critical accounting estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles and general practices within the banking industry. A summary of our accounting policies is included in "Part II- Item 8. Financial Statements and Supplementary Data - Note 1, "Basis of presentation" of this Report. Certain of these policies require management to apply significant judgement and estimates, which can have a material impact on the carrying value of certain assets and liabilities, and we consider the below policies to be our critical accounting policies.
Allowance for credit losses
Description of policy and management's estimates:
The allowance for credit losses represents the portion of the loan's amortized cost basis that we do not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses is based on the loan's amortized cost basis, excluding accrued interest receivable, as we promptly charge off uncollectible accrued interest receivable. Management’s determination of the appropriateness of the allowance is based on periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. In future quarters, we may update information and forecasts that may cause significant changes in the estimate in those future quarters.
Our methodology to determine the overall appropriateness of the allowance for credit losses includes the use of lifetime loss rate models. The quantitative models require tailored loan data and macroeconomic variables based on the inherent
credit risks in each portfolio to more accurately measure the credit risks associated with each. Each of the quantitative models pools loans with similar risk characteristics and collectively assesses the lifetime loss rate for each pool to estimate its expected credit loss. When a loan no longer shares similar risk characteristics with other loans in any given pool, the loan is individually assessed.
We utilize probability-weighted forecasts, which consider multiple macroeconomic variables from a third-party vendor that are applicable to the type of loan. The choice and weighting of the economic forecast scenarios, macroeconomic variables, and the reasonable and supportable period at the macroeconomic variable-level are reviewed and approved by the forecast governance committee based on expectations of future economic conditions.
We consider the need to qualitatively adjust our modeled quantitative expected credit loss estimate for information not already captured in the model loss estimation process. These qualitative factor adjustments may increase or decrease our estimate of expected credit losses. We review the qualitative adjustments so as to validate that information that has already been considered and included in the modeled quantitative loss estimation process is not also included in the qualitative adjustment. We consider the qualitative factors that are relevant to the institution as of the reporting date, which may include, but are not limited to: levels of and trends in delinquencies and performance of loans; levels of and trends in write-offs and recoveries collected; trends in volume and terms of loans; effects of any changes in reasonable and supportable economic forecasts; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; available relevant information sources that contradict our own forecast; effects of changes in prepayment expectations or other factors affecting assessments of loan contractual term; industry conditions; and effects of changes in credit concentrations.
Sensitivity of estimates:
Evaluations of the portfolio and individual credits are inherently subjective, as they require estimates, assumptions and judgments as to the facts and circumstances associated with particular situations. Determining the ACL is complex and requires judgement by management about the effect of matters that are inherently uncertain. While management utilizes its best judgment and information available, the ultimate adequacy of the our ACL is dependent on a variety of factors beyond its control. Management leverages a variety predetermined economic forecasts provided by a third party. Management selects a combination of macroeconomic forecasts that is most reflective of expectations as of the evaluation date and determines the weighted structure that most appropriately fits the Company’s expectation of future economic conditions. The weighting decision of these economic scenarios has the largest effect on our ACL. This weighting is approved by the ALCO Forecasting Subcommittee. Once the weighted economic scenario has been approved, management further assesses the ACL within the following pool classifications: Commercial and Industrial, Retail, and Commercial Real Estate (see Note 5, "Loans and allowance for credit losses" within our notes to our consolidated financial statements for additional information related to our ACL pools). At each pool classification management assess for individual factors such as prepayment speeds, inflation, unemployment, average FICO scores, delinquency composition, and other economic variables. Based on management's assessment of these variables, the level of the ACL could significantly increase or decrease.
It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Given the nature of the many factors, forecasts and assumptions in the ACL methodology, it is not possible to provide meaningful estimates of the impact of any such potential change.
Additional discussion can be found under the subheading "Asset quality" contained within management's discussion and analysis and within the notes to our consolidated financial statements contained herein, including Note 1, "Basis of presentation" and Note 5, "Loans and allowance for credit losses".
Fair Value Measurements
Description of policy and management's estimates:
Investment securities
Debt securities are classified as held to maturity and carried at amortized cost, excluding accrued interest, when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Available-for-sale debt securities are carried at fair value, with unrealized holding
gains and losses reported in other comprehensive income, net of applicable taxes. Unrealized losses resulting from credit losses for available-for-sale debt securities are recognized in earnings as a provision for credit losses. Unrealized losses that do not result from credit losses are excluded from earnings and reported as accumulated other comprehensive income, net of applicable taxes, which is included in equity. Accrued interest receivable is separated from other components of amortized cost and presented separately on the consolidated balance sheets.
Equity securities with readily determinable market values are carried at fair value on the balance sheet with any periodic changes in value made through adjustments to the statement of income. Equity securities without readily determinable market values are carried at cost less impairment and included in other assets on the consolidated balance sheets.
Interest income includes the amortization and accretion of purchase premium and discount. Premiums and discounts on securities are amortized on the level-yield method anticipating prepayments based upon the prior three month average monthly prepayments when available. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
We evaluate available-for-sale securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. For securities in an unrealized loss position, consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
When credit losses are expected to occur, the amount of the expected credit loss recognized in earnings depends on our intention to sell the security or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, the expected credit loss recognized in earnings is equal to the entire difference between its amortized cost basis and its fair value at the date it was determined to be impaired due to credit losses or other factors. The previous amortized cost basis less the impairment recognized in earnings becomes the new amortized cost basis of the investment.
However, if we do not intend to sell the security and it is not more likely than not to be required to sell the security before recovery of its amortized cost basis, the difference between the amortized cost and the fair value is separated into the amount representing the credit loss and the amount related to all other factors. If we determine a decline in fair value below the amortized cost basis of an available-for-sale investment security has resulted from credit related factors, we record a credit loss through an allowance for credit losses. The allowance for credit losses is limited by the amount that the fair value is less than amortized cost. The amount of the allowance for credit losses is determined based on the present value of cash flows expected to be collected and is recognized as a charge to earnings. The amount of the impairment related to other, non-credit related, factors is recognized in other comprehensive income, net of applicable taxes.
Loans held for sale
Loans originated and intended for sale in the secondary market, primarily mortgage loans, are carried at fair value as permitted under the guidance in ASC 825, “Financial Instruments” (“ASC 825”). Net gains (losses) resulting from fair value changes of these mortgage loans are recorded in income. The amount does not reflect changes in fair values of related derivative instruments used to hedge exposure to market-related risks associated with these mortgage loans. The change in fair value of both mortgage loans held for sale and the related derivative instruments are recorded in “Mortgage banking income” in the Consolidated Statements of Income. Gains and losses on sale are recognized at the time the loan is closed. Pass through origination costs and related loan fees are also included in “Mortgage banking income”. Other expenses are classified in the appropriate noninterest expense accounts. Periodically, we will transfer mortgage loans originated for sale in the secondary markets into the loan portfolio based on current market conditions, the overall secondary marketability of the loan and the status of the loan. The loans are transferred into the portfolio at fair value at the date of transfer.
Government National Mortgage Association 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. These loans are held for investment until certain performance criteria is met and they meet held for sale criteria.
Under FASB ASC Topic 860, “Transfers and Servicing,” this buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When we are deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet as loans held for investment, regardless of whether we intend to exercise the buy-back option if the buyback options provides the transferor a more-than-trivial benefit. During the year ended December 31, 2022, the Company identified a more-than-trivial benefit associated with these loans and rebooked them onto the consolidated balance sheets, which also aligns with developing industry best practice. The fair value option election does not apply to the GNMA optional repurchase loans which do not meet the requirements under FASB ASC Topic 825. These loans are reported at current unpaid principal balance in HFS on the consolidated balance sheets with the offsetting liability being reported in borrowings. These are considered nonperforming assets as we do not earn any interest on the unexercised option to repurchase these loans.
We acquired a portfolio of commercial loans, including shared national credits and institutional healthcare loans, as part of the Franklin transaction that we account for as held for sale. We elect the fair value option for recording commercial loans held for sale and the fair value is determined using current secondary market prices for loans with similar characteristics. The fair value is determined using an income approach with various assumptions including expected cash flows, market discount rates, credit metrics and collateral value when appropriate. Changes in fair value from the merger date fair value is booked through the mark-to-market using a third party fair value model and included in 'other noninterest income' on the consolidated statement of income.
Mortgage servicing rights
We account for our mortgage servicing rights under the fair value option as permitted under ASC 860-50-35, "Transfers and Servicing". We retain the right to service certain mortgage loans that we sell to secondary market investors. The retained mortgage servicing right is initially recorded at the fair value of future net cash flows expected to be realized for performing servicing activities. Fair value is determined using an income approach with various assumptions including expected cash flows, prepayment speeds, market discount rates, servicing costs, and other factors. These mortgage servicing rights are recognized as a separate asset on the date the corresponding mortgage loan is sold.
Derivative financial instruments
We utilize fair value hedge relationships to mitigate the effect of changing interest rates on the fair values of fixed rate securities and loans. The gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item.
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. We enter 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, we enter 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, we are obligated to sell the mortgage loan to the investor only if the loan is closed and funded. Thus, we will not incur any liability to an investor if the mortgage loan commitment in the pipeline fails to close. We also utilize “mandatory delivery” sales agreements. 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 should we fail to satisfy the contract. Mandatory commitments are recorded at fair value in our 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.
A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial instruments at fair value. See Note. 18, "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.
Sensitivity of estimates:
Management applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for those items. Quoted market prices are referred to when estimating fair values for certain assets, including most investment securities, while secondary market pricing is referred to in estimating the fair value of mortgage loans held for sale. For those items which an observable liquid market does not exist, management utilizes significant estimates and assumption to value such items. These valuations require the use of various assumptions, including, among others, estimating prepayment speeds, discount rates, cash flows, default rates, cost of servicing, and liquidation values, which are also subject to economic variables. In addition to valuation, we must assess whether there are any declines in value below the carrying value of assets that require recognition of a loss in the consolidated statement of income. The use of different assumptions could produce significantly different results, which could have a significant impact on the our results of operations, financial condition or disclosures. Due to the number of estimates and judgments management applies, it is not possible to provide meaningful estimates of all those assets and liabilities measured at fair value. A sensitivity analysis on changes to key assumptions in determination of fair value of our mortgage servicing rights is included within Note 10, "Mortgage servicing rights" in the notes to the consolidated financial statements contained herein.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 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 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. Economic Value of Equity 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. For purposes of calculating EVE, a zero percent floor is assumed on discount factors.
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:
Percentage change in:
Net interest income (1)
Year 1 Year 2
Change in interest rates December 31, December 31,
(in basis points) 2022 2021 2022 2021
+400 20.6 % 40.9 % 30.7 % 54.8 %
+300 15.1 % 30.2 % 22.5 % 40.8 %
+200 10.8 % 20.9 % 15.7 % 28.3 %
+100 5.98 % 10.8 % 8.33 % 14.7 %
-100 (6.32) % (6.32) % (8.87) % (10.2) %
-200 (13.2) % (8.73) % (18.4) % (13.5) %
Percentage change in:
Economic value of equity (2)
Change in interest rates December 31,
(in basis points) 2022 2021
+400 (9.90) % 5.30 %
+300 (7.00) % 5.67 %
+200 (4.00) % 5.72 %
+100 (1.66) % 3.90 %
-100 0.99 % (8.13) %
-200 1.07 % (21.4) %
(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 projected net interest 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, 2022 and 2021 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. While our variable rate loan portfolio is indexed to market rates, deposits typically adjust at a percentage of the overall movement in market rates.
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. 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 may 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.
For more information about our derivative financial instruments, see Note 17, “Derivatives” in the notes to our consolidated financial statements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Glossary of abbreviations and acronyms
Management’s Assessment of Internal Controls Over Financial Statements
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 173)
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
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 over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 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, 2022. In making the assessment, management used the “Internal Control - Integrated Framework” promulgated by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment management has determined that, as of December 31, 2022, the Company's internal control over financial reporting is effective based on the COSO 2013 framework. Additionally, based upon management's assessment, the Company determined that there were no material weaknesses in its internal control over financial reporting as of December 31, 2022.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2022, has been audited by Crowe LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of FB Financial Corporation
Nashville, Tennessee
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of FB Financial Corporation (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses on Loans - Reasonable and Supportable Forecasts and Qualitative Adjustments
As described in Note 1 - Basis of presentation and Note 5 - Loans and allowance for credit losses, the Company estimates expected credit losses for its financial assets carried at amortized cost utilizing the current expected credit loss ("CECL") methodology. The allowance for credit losses (“ACL”) on loans held for investment on December 31, 2022 was $134.2 million. The provision for credit losses on loans held for investment for the year ended December 31, 2022, was $10.4 million.
The Company calculated an expected credit loss using a lifetime loss rate methodology. The Company utilizes probability-weighted forecasts that are developed by a third-party vendor, which consider multiple macroeconomic variables that are applicable to the type of loan. Each of the Company's loss rate models incorporate forward-looking macroeconomic projections throughout the reasonable and supportable forecast period and the subsequent historical reversion at the macroeconomic variable input level. The Company's loss rate models then estimate the lifetime loss rate for pools of loans by combining the calculated loss rate based on each variable within the model (including the macroeconomic variables). The lifetime loss rate for the pool is then multiplied by the loan balances to determine the expected credit losses on the pool. The Company then considers the need to qualitatively adjust its modeled quantitative expected credit loss estimate for information not already captured in the model loss estimation process.
The audit procedures over the determination of forecast scenarios involved a high degree of auditor judgment and required significant audit effort, including the use of more experienced audit personnel and our valuation specialists due to its complexity. Additionally, the audit procedures over the qualitative adjustments utilized in management’s methodology involved challenging and subjective auditor judgment. Therefore, we identified the following as a critical audit matter: a) auditing the forecasted macroeconomic scenario and b) auditing the identification and application of qualitative adjustments to the ACL model.
The primary audit procedures we performed to address this critical audit matter included the following:
•Tested the operating effectiveness of controls specific to:
◦Determining the reasonableness of the forecasted macroeconomic scenario used in the model,
◦The identification and application of qualitative adjustments to the ACL model,
◦The mathematical accuracy of the qualitative adjustments to the ACL model,
◦The relevance and reliability of data used by the Company’s third-party vendor to develop forecast scenarios.
◦The Company’s allowance committee’s oversight and review of the overall ACL.
•Evaluated management’s judgments in the selection and application of the forecasted macroeconomic scenarios.
•Used the work of specialists to assist in evaluating the relevance and reliability of data used by the Company’s third-party vendor to develop forecast scenarios.
•Evaluated management’s judgments in the identification and application of qualitative adjustments to the ACL model.
•Tested the completeness and accuracy of the data used in qualitative adjustments to the ACL model.
/s/ Crowe LLP
We have served as the Company's auditor since 2018.
Franklin, Tennessee
February 28, 2023
FB Financial Corporation and subsidiaries
Consolidated balance sheets
(Amounts are in thousands except share and per share amounts)
December 31,
2022 2021
ASSETS
Cash and due from banks $ 259,872 $ 91,333
Federal funds sold and reverse repurchase agreements
210,536 128,087
Interest-bearing deposits in financial institutions 556,644 1,578,320
Cash and cash equivalents 1,027,052 1,797,740
Investments:
Available-for-sale debt securities, at fair value 1,471,186 1,678,525
Equity securities, at fair value 2,990 3,367
Federal Home Loan Bank stock, at cost 58,641 32,217
Loans held for sale (includes $113,240 and $752,223 at fair value, respectively)
139,451 752,223
Loans held for investment 9,298,212 7,604,662
Less: allowance for credit losses 134,192 125,559
Net loans held for investment 9,164,020 7,479,103
Premises and equipment, net 146,316 143,739
Other real estate owned, net 5,794 9,777
Operating lease right-of-use assets 60,043 41,686
Interest receivable 45,684 38,528
Mortgage servicing rights, at fair value 168,365 115,512
Goodwill 242,561 242,561
Core deposit and other intangibles, net 12,368 16,953
Bank-owned life insurance 75,329 73,519
Other assets 227,956 172,236
Total assets $ 12,847,756 $ 12,597,686
LIABILITIES
Deposits
Noninterest-bearing $ 2,676,631 $ 2,740,214
Interest-bearing checking 3,059,984 3,418,666
Money market and savings 3,697,245 3,546,936
Customer time deposits 1,420,131 1,103,594
Brokered and internet time deposits 1,843 27,487
Total deposits 10,855,834 10,836,897
Borrowings 415,677 171,778
Operating lease liabilities 69,754 46,367
Accrued expenses and other liabilities 180,973 109,949
Total liabilities 11,522,238 11,164,991
Commitments and contingencies (Note 16)
SHAREHOLDERS' EQUITY
Common stock, $1 par value per share; 75,000,000 shares authorized;
46,737,912 and 47,549,241 shares issued and outstanding, respectively
46,738 47,549
Additional paid-in capital 861,588 892,529
Retained earnings 586,532 486,666
Accumulated other comprehensive (loss) income, net (169,433) 5,858
Total FB Financial Corporation common shareholders' equity 1,325,425 1,432,602
Noncontrolling interest 93 93
Total equity 1,325,518 1,432,695
Total liabilities and shareholders' equity $ 12,847,756 $ 12,597,686
See the accompanying notes to the consolidated financial statements.
FB Financial Corporation and subsidiaries
Consolidated statements of income)
(Amounts are in thousands, except per share amounts)
Years Ended December 31,
2022 2021 2020
Interest income:
Interest and fees on loans $ 436,363 $ 359,262 $ 294,596
Interest on securities
Taxable 25,469 15,186 10,267
Tax-exempt 7,332 7,657 7,076
Other 12,258 2,893 2,705
Total interest income 481,422 384,998 314,644
Interest expense:
Deposits 56,642 30,189 42,859
Borrowings 12,545 7,439 6,127
Total interest expense 69,187 37,628 48,986
Net interest income 412,235 347,370 265,658
Provision for credit losses 10,393 (38,995) 94,606
Provision for credit losses on unfunded commitments 8,589 (1,998) 13,361
Net interest income after provisions for credit losses 393,253 388,363 157,691
Noninterest income:
Mortgage banking income 73,580 167,565 255,328
Service charges on deposit accounts 12,049 10,034 9,160
ATM and interchange fees 15,600 19,900 14,915
Investment services and trust income 8,866 8,558 7,080
(Loss) gain from securities, net (376) 324 1,631
(Loss) gain on sales or write-downs of other real estate owned (114) 2,504 (1,491)
(Loss) gain from other assets (151) 323 (90)
Other income 5,213 19,047 15,322
Total noninterest income 114,667 228,255 301,855
Noninterest expenses:
Salaries, commissions and employee benefits 211,491 248,318 233,768
Occupancy and equipment expense 23,562 22,733 18,979
Legal and professional fees 15,028 9,161 7,654
Data processing 9,315 9,987 11,390
Merger costs - - 34,879
Amortization of core deposit and other intangibles 4,585 5,473 5,323
Advertising 11,208 13,921 10,062
Mortgage restructuring expense 12,458 - -
Other expense 60,699 63,974 55,030
Total noninterest expense 348,346 373,567 377,085
Income before income taxes 159,574 243,051 82,461
Income tax expense 35,003 52,750 18,832
Net income applicable to FB Financial Corporation
and noncontrolling interest 124,571 190,301 63,629
Net income applicable to noncontrolling interest 16 16 8
Net income applicable to FB Financial Corporation $ 124,555 $ 190,285 $ 63,621
Earnings per common share
Basic $ 2.64 $ 4.01 $ 1.69
Diluted 2.64 3.97 1.67
See the accompanying notes to the consolidated financial statements.
FB Financial Corporation and subsidiaries
Consolidated statements of comprehensive (loss) income
(Amounts are in thousands)
Years Ended December 31,
2022 2021 2020
Net income $ 124,571 $ 190,301 $ 63,629
Other comprehensive (loss) income, net of tax:
Net change in unrealized (loss) gain in available-for-sale
securities, net of tax (benefits) expenses of $(62,316), $(7,224), and $5,781
(176,798) (22,475) 18,430
Reclassification adjustment for gain on sale of securities
included in net income, net of tax expenses of $-, $33 and $348
(1) (93) (987)
Net change in unrealized gain (loss) in hedging activities, net of tax
expenses (benefits) of $532, $293 and $(363)
1,508 831 (1,031)
Reclassification adjustment for gain on hedging activities,
net of tax expenses of $-, $- and $337
- - (955)
Total other comprehensive (loss) income, net of tax (175,291) (21,737) 15,457
Comprehensive (loss) income applicable to FB Financial Corporation
and noncontrolling interest (50,720) 168,564 79,086
Comprehensive income applicable to noncontrolling interest 16 16 8
Comprehensive (loss) income applicable to FB Financial Corporation $ (50,736) $ 168,548 $ 79,078
See the accompanying notes to the consolidated financial statements.
FB Financial Corporation and subsidiaries
Consolidated statements of changes in shareholders’ equity
(Amounts are in thousands except per share amounts)
Common
stock Additional
paid-in
capital Retained
earnings Accumulated
other
comprehensive
income (loss), net Total common
shareholders' equity Noncontrolling interest Total shareholders' equity
Balance at December 31, 2019 $ 31,034 $ 425,633 $ 293,524 $ 12,138 $ 762,329 $ - $ 762,329
Cumulative effect of change in
accounting principle - - (25,018) - (25,018) - (25,018)
Balance at January 1, 2020 $ 31,034 $ 425,633 $ 268,506 $ 12,138 $ 737,311 $ - $ 737,311
Net income attributable to FB Financial
Corporation and noncontrolling
interest - - 63,621 - 63,621 8 63,629
Other comprehensive income, net of
taxes - - - 15,457 15,457 - 15,457
Common stock issued in connection
with acquisition of FNB Financial
Corp., net of registration costs (See
Note 2) 955 33,892 - - 34,847 - 34,847
Common stock issued in connection
with merger with Franklin Financial
Network, Inc., net of registration
costs (See Note 2) 15,058 429,815 - - 444,873 93 444,966
Stock based compensation expense 22 10,192 - - 10,214 - 10,214
Restricted stock units vested and
distributed, net of shares withheld 123 (1,633) - - (1,510) - (1,510)
Shares issued under employee stock
purchase program 30 948 - - 978 - 978
Dividends declared ($0.36 per share)
- - (14,502) - (14,502) - (14,502)
Noncontrolling interest distribution - - - - - (8) (8)
Balance at December 31, 2020 $ 47,222 $ 898,847 $ 317,625 $ 27,595 $ 1,291,289 $ 93 $ 1,291,382
Net income attributable to FB Financial
Corporation and noncontrolling
interest - - 190,285 - 190,285 16 190,301
Other comprehensive loss, net of
taxes - - - (21,737) (21,737) - (21,737)
Repurchase of common stock (179) (7,416) - - (7,595) - (7,595)
Stock based compensation expense 7 10,275 - - 10,282 - 10,282
Restricted stock units vested and
distributed, net of shares withheld 462 (10,620) - - (10,158) - (10,158)
Shares issued under employee stock
purchase program 37 1,443 - - 1,480 - 1,480
Dividends declared ($0.44 per share)
- - (21,244) - (21,244) - (21,244)
Noncontrolling interest distribution - - - - - (16) (16)
Balance at December 31, 2021 $ 47,549 $ 892,529 $ 486,666 $ 5,858 $ 1,432,602 $ 93 $ 1,432,695
Net income attributable to FB Financial
Corporation and noncontrolling interest - - 124,555 - 124,555 16 124,571
Other comprehensive loss, net of
taxes - - - (175,291) (175,291) - (175,291)
Repurchase of common stock (997) (38,982) - - (39,979) - (39,979)
Stock based compensation expense 3 9,854 - - 9,857 - 9,857
Restricted stock units vested and
distributed, net of shares withheld 156 (2,998) - - (2,842) - (2,842)
Shares issued under employee stock
purchase program 27 1,185 - - 1,212 - 1,212
Dividends declared ($0.52 per share)
- - (24,689) - (24,689) - (24,689)
Noncontrolling interest distribution - - - - - (16) (16)
Balance at December 31, 2022 $ 46,738 $ 861,588 $ 586,532 $ (169,433) $ 1,325,425 $ 93 $ 1,325,518
See the accompanying notes to the consolidated financial statements.
FB Financial Corporation and subsidiaries
Consolidated statements of cash flows
(Amounts are in thousands)
Years Ended December 31,
2022 2021 2020
Cash flows from operating activities:
Net income applicable to FB Financial Corporation and noncontrolling interest $ 124,571 $ 190,301 $ 63,629
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets and software 8,017 8,416 7,536
Amortization of core deposit and other intangibles 4,585 5,473 5,323
Capitalization of mortgage servicing rights (20,809) (39,018) (47,025)
Net change in fair value of mortgage servicing rights (32,044) 3,503 47,660
Stock-based compensation expense 9,857 10,282 10,214
Provision for credit losses 10,393 (38,995) 94,606
Provision for credit losses on unfunded commitments 8,589 (1,998) 13,361
Provision for mortgage loan repurchases (2,989) (766) 2,607
Amortization of premiums and accretion of discounts on acquired loans, net 1,020 853 (3,788)
Amortization of premiums and accretion of discounts on securities, net 6,589 8,777 7,382
Loss (gain) from securities, net 376 (324) (1,631)
Originations of loans held for sale (2,403,476) (6,300,892) (6,650,258)
Repurchases of loans held for sale (194) (487) -
Proceeds from sale of loans held for sale 3,067,204 6,387,110 6,487,809
Gain on sale and change in fair value of loans held for sale (47,783) (161,964) (270,802)
Net loss (gain) or write-downs of other real estate owned 114 (2,504) 1,491
Loss (gain) on other assets 151 (323) 90
Provision for deferred income taxes 12,552 30,770 (25,530)
Earnings on bank-owned life insurance (1,452) (1,542) (1,556)
Changes in:
Operating leases 5,030 (969) 2,664
Other assets and interest receivable (17,222) 59,283 (57,316)
Accrued expenses and other liabilities 56,247 (100,108) 43,532
Net cash provided by (used in) operating activities 789,326 54,878 (270,002)
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales 1,218 8,855 146,494
Maturities, prepayments and calls 204,748 296,256 220,549
Purchases (242,889) (847,212) (424,971)
Net change in loans (1,719,652) (457,042) 4,383
Net change in commercial loans held for sale 43,676 147,276 114,031
Sales of FHLB stock - 4,294 -
Purchases of FHLB stock (26,424) (5,279) (515)
Purchases of premises and equipment (10,629) (6,102) (5,934)
Proceeds from the sale of premises and equipment 875 - -
Proceeds from the sale of other real estate owned and other assets 4,959 9,396 6,937
Proceeds from bank-owned life insurance - - 715
Net cash acquired in business combinations - - 248,447
Net cash (used in) provided by investing activities (1,744,118) (849,558) 310,136
Cash flows from financing activities:
Net (decrease) increase in demand deposits (262,109) 1,685,033 1,519,868
Net increase (decrease) in time deposits 290,893 (306,173) (328,035)
Net increase in securities sold under agreements to repurchase and federal funds purchased 46,229 8,517 5,262
Payments on FHLB advances - - (250,000)
Net increase in short-term FHLB advances 175,000 - -
Issuance of subordinated debt, net of issuance costs - - 98,189
Payments on subordinated debt - (60,000) -
Amortization of issuance costs and (accretion) of subordinated debt fair value premium, net 387 17 (397)
(Payments on) proceeds from other borrowings - (15,000) 15,000
Share based compensation withholding payments (2,842) (10,158) (1,510)
Net proceeds from sale of common stock under employee stock purchase program 1,212 1,480 978
Repurchase of common stock (39,979) (7,595) -
Dividends paid on common stock (24,503) (20,866) (14,177)
Dividend equivalent payments made upon vesting of equity compensation (168) (717) (87)
Noncontrolling interest distribution (16) (16) (8)
Net cash provided by financing activities 184,104 1,274,522 1,045,083
Net change in cash and cash equivalents (770,688) 479,842 1,085,217
Cash and cash equivalents at beginning of the period 1,797,740 1,317,898 232,681
Cash and cash equivalents at end of the period $ 1,027,052 $ 1,797,740 $ 1,317,898
Supplemental cash flow information:
Interest paid $ 63,701 $ 41,238 $ 48,679
Taxes paid 906 61,693 20,419
Supplemental noncash disclosures:
Transfers from loans to other real estate owned $ 1,437 $ 5,262 $ 2,746
Transfers from other real estate owned to premises and equipment 351 - 841
Loans provided for sales of other real estate owned - 704 305
Transfers from loans to loans held for sale 46,364 10,408 11,483
Transfers from loans held for sale to loans 24,479 86,315 55,766
Rebooked GNMA loans under optional repurchase program 26,211 - -
Stock consideration paid in business combination - - 480,867
Dividends declared not paid on restricted stock units 222 400 238
Decrease to retained earnings for adoption of ASU 2016-13 - - 25,018
Right-of-use assets obtained in exchange for operating lease liabilities 25,399 970 2,393
See the accompanying notes to the consolidated financial statements.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Unaudited)
(Dollar amounts are in thousands, except share and per share amounts)
Note (1)-Basis of presentation:
(A) Organization and Company overview:
FB Financial Corporation is a financial holding company headquartered in Nashville, Tennessee. The consolidated financial statements include the Company and its wholly-owned subsidiaries, FirstBank (the "Bank") and FirstBank Risk Management, Inc. The Bank operates through 82 full-service branches throughout Tennessee, Kentucky, Alabama and North Georgia, and a national mortgage business with office locations across the Southeast, which primarily originates mortgage loans to be sold in the secondary market.
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 I, Item 1, for more details regarding regulatory oversight.
(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. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for credit losses and the determination of any impairment of goodwill or intangible assets.
The consolidated financial statements include the accounts of the Company, FBRM, the Bank, and its’ wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation without any impact on the reported amounts of net income or shareholders’ equity.
Certain accounting policies identified below were modified during the year ended December 31, 2022. Please refer to the Company's audited financial statements on Form 10-K filed on February 25, 2022 for accounting policies in place as of December 31, 2021.
(C) Cash flows:
For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest earning deposits in other financial institutions with maturities of less than 90 days at the date of purchase. These amounts are reported in the consolidated balance sheets caption “Cash and cash equivalents.” Net cash flows are reported for loans held for investment, deposits and short-term borrowings.
(D) Cash and cash equivalents:
The Company considers all highly liquid unrestricted investments with a maturity of three months or less when purchased to be cash equivalents. This includes cash, federal funds sold, reverse repurchase agreements and interest-bearing deposits in other financial institutions.
(E) Investment securities:
Debt securities are classified as held to maturity and carried at amortized cost, excluding accrued interest, when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Available-for-sale debt securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of applicable taxes. Unrealized losses resulting from credit losses for available-for-sale debt securities are recognized in earnings as a provision for credit losses. Unrealized losses that do not result from credit losses are excluded from earnings and reported in equity as accumulated other comprehensive income, net of applicable taxes. Accrued interest receivable is separated from other components of amortized cost and presented separately on the consolidated balance sheets.
Equity securities with readily determinable market values are carried at fair value on the balance sheet with any periodic changes in value made through adjustments to the statement of income. Equity securities without readily determinable market values are carried at cost less impairment and included in other assets on the consolidated balance sheets.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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. The sale and purchase of investment securities are recognized on a trade date basis with gains and losses on sales being determined using the specific identification method.
The Company evaluates available-for-sale securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. For securities in an unrealized loss position, consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
When credit losses are expected to occur, the amount of the expected credit loss recognized in earnings depends on the Company's intention to sell the security or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the expected credit loss recognized in earnings is equal to the entire difference between its amortized cost basis and its fair value at the date it was determined to be impaired due to credit losses or other factors. The previous amortized cost basis less the impairment recognized in earnings becomes the new amortized cost basis of the investment.
However, if the Company does not intend to sell the security and it is not more likely than not to be required to sell the security before recovery of its amortized cost basis, the difference between the amortized cost and the fair value is separated into the amount representing the credit loss and the amount related to all other factors. If the Company determines a decline in fair value below the amortized cost basis of an available-for-sale investment security has resulted from credit related factors, the Company records a credit loss through an allowance for credit losses. The allowance for credit losses is limited by the amount that the fair value is less than amortized cost. The amount of the allowance for credit losses is determined based on the present value of cash flows expected to be collected and is recognized as a charge to earnings. The amount of the impairment related to other, non-credit related, factors is recognized in other comprehensive income, net of applicable taxes.
The Company did not record any provision for credit losses for its available-for-sale debt securities during the years ended December 31, 2022 or 2021, as the majority of the investment portfolio is government guaranteed and declines in fair value below amortized cost were determined to be non-credit related.
(F) Federal Home Loan Bank 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 does 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:
Mortgage loans held for sale
Mortgage loans originated and intended for sale in the secondary market are carried at fair value as permitted under the guidance in ASC 825, “Financial Instruments” (“ASC 825”). 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 on sale are recognized at the time the loan is closed. Pass through origination costs and related loan fees are also included in “Mortgage banking income”.
Periodically, the Company transfers mortgage loans originated for sale in the secondary markets into the loan HFI portfolio based on current market conditions, the overall secondary marketability and status of the loan. During the years ended December 31, 2022, 2021 and 2020, the Company transferred $24,479, $86,315 and $55,766, respectively, of residential mortgage loans into its loans held for investment portfolio. The loans are transferred into the portfolio at fair value at the date of transfer. Additionally, occasionally the Company will transfer loans from the held for investment portfolio into loans held for sale. At the time of the transfer, loans are marked to fair value through the allowance for credit losses and reclassified to loans held for sale. During the years ended December 31, 2021 and 2020, the Company transferred $1,188 and $2,116, respectively, from the portfolio to loans held for sale, excluding GNMA repurchases discussed below. There were no such transfers during the year ended December 31, 2022.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company sells mortgage loans originated for sale on the secondary market to GNMA and retains servicing rights after sale. Under the GNMA optional repurchase program, financial institutions are permitted to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing. 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. These loans are held for investment until certain performance criteria is met and they meet held for sale criteria. During the years ended December 31, 2022, 2021, and 2020, the Company repurchased GNMA loans of $20,593, $40,417, and $10,586, respectively, into loans held for investment. The Company transferred $46,364, $9,220 and $9,367 during the years ended December 31, 2022, 2021, and 2020, respectively, of these repurchased loans from loans held for investment to loans held for sale.
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 recorded on the balance sheet, regardless of whether the Company intends to exercise the buy-back option if the buyback options provides the transferor a more-than-trivial benefit. During the year ended December 31, 2022, the Company identified a more-than-trivial benefit associated with these loans and rebooked them onto the consolidated balance sheets, which also aligns with developing industry best practice. As of December 31, 2022, the Company had $26,211 in these optional rights to repurchase delinquent GNMA loans. There were no such loans identified with a more-than-trivial benefit as of December 31, 2021. The fair value option election does not apply to the GNMA optional repurchase loans which do not meet the requirements under FASB ASC Topic 825. These loans are reported at current unpaid principal balance in HFS on the consolidated balance sheets with the offsetting liability being reported in borrowings. These are considered nonperforming assets as the Company does not earn any interest on the unexercised option to repurchase these loans.
Commercial loan held for sale
During the year ended December 31, 2020, the Company acquired a portfolio of commercial loans, including shared national credits and institutional healthcare loans, as part of the its merger with Franklin Financial Network, Inc. and its wholly-owned subsidiaries (collectively, "Franklin") that the Company accounts for as HFS under the fair value option. As of December 31, 2022 and 2021, the fair value of these loans included in loans held for sale at fair value on the consolidated balances sheets amounted to $30,490 and $79,299, respectively. During the years ended December 31, 2022, 2021, and 2020, net (losses) gains of $(5,133), $11,172, and $3,228, respectively, from changes in fair value of these loans was included in other noninterest income on the consolidated statements of income.
(H) Loans (excluding purchased credit deteriorated loans):
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at amortized cost. Amortized cost is equal to the principal amount outstanding less any purchase accounting discount or premium net of any accretion or amortization 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 or amortization 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. The Company monitors the level of accrued interest receivable on nonperforming loans, however an allowance for credit losses was not required as of December 31, 2022 and 2021.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(I) Allowance for credit losses:
The allowance for credit losses represents the portion of the loan's amortized cost basis that the Company does not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses is based on the loan's amortized cost basis, excluding accrued interest receivable, as the Company promptly charges off uncollectible accrued interest receivable. Management’s determination of the appropriateness of the allowance is based on periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. In future quarters, the Company may update information and forecasts that may cause significant changes in the estimate in those future quarters. See Note 5, "Loans and allowance for credit losses" for additional details related to the Company's specific calculation methodology.
The allowance for credit losses is the Company’s best estimate. Actual losses may differ from the December 31, 2022 allowance for credit loss as the CECL estimate is sensitive to economic forecasts and management judgment.
The following portfolio segments have been identified:
Commercial and industrial loans. The Company provides a mix of variable and fixed rate commercial and industrial loans. Commercial and industrial loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital and operating needs and business expansions, including the purchase of capital equipment and loans made to farmers relating to their operations. This category also includes loans secured by manufactured housing receivables. Commercial and industrial loans generally include lines of credit and loans with maturities of five years or less. 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.
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 the Company's assessment of the value of the property on an as-completed basis. 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 if the market experiences a deterioration in the value of 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, including manufactured homes with real estate, which are both owner-occupied and investor owned. The Company's future origination volume could be impacted by any deterioration of housing values in the Company's markets and increased unemployment 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 residential line of credit loans if housing values in the Company's markets do not deteriorate from current prevailing levels and we are able to make such loans consistent with the Company's current credit and underwriting standards. Residential line of credit loans may also 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. The value of these loans and growth in this area of our portfolio may be affected by unemployment or underemployment and deteriorating market values of real estate.
Commercial real estate owner-occupied 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
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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.
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. None of these categories of loans represent a significant portion of the Company's loan portfolio.
(J) Business combinations, accounting for acquired loans with credit deterioration and off-balance sheet financial instruments:
Business combinations are accounted for by applying the acquisition method in accordance with Accounting Standards Codification 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 more-than-insignificant credit deterioration since origination are considered to be Purchased Credit Deteriorated. The Company developed multiple criteria to assess the presence of more-than-insignificant credit deterioration in acquired loans, mainly focused on changes in credit quality and payment status. While general criteria have been established, each acquisition will vary in its specific facts and circumstances and the Company will apply judgment around PCD identification for each individual acquisition based on their unique portfolio mix and risks identified.
The Company adopted ASC 326 on January 1, 2020 using the prospective transition approach for loans previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption and all PCI loans were transitioned to PCD loans upon adoption. Under PCD accounting, the amount of expected credit losses as of the acquisition date is added to the purchase price of the PCD loan. This establishes the amortized cost basis of the PCD loan. The difference between the unpaid principal balance of the PCD loan and the amortized cost basis of the PCD loan as of the acquisition date is the non-credit discount. Interest income for a PCD loan is recognized by accreting the amortized cost basis of the PCD loan to its contractual cash flows. The discount related to estimated credit losses on acquisition recorded as an allowance for credit losses will not be accreted into interest income. Only the noncredit-related discount will be accreted into interest income and subsequent adjustments to expected credit losses will flow through the provision for credit losses on the income statement.
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded, unless considered derivatives.
For loan commitments that are not accounted for as derivatives and when the obligation is not unconditionally cancellable by the Company, the Company applies the CECL methodology to estimate the expected credit loss on off-balance-sheet commitments. The estimate of expected credit losses for off-balance-sheet credit commitments is recognized as a liability. When the loan is funded, an allowance for expected credit losses is estimated for that loan using the CECL methodology, and the liability for off-balance-sheet commitments is reduced. When applying the CECL methodology to estimate the expected credit loss, the Company considers the likelihood that funding will occur, the contractual period of exposure to credit loss, the risk of loss, historical loss experience, and current conditions along with expectations of future economic conditions.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(K) Premises and equipment:
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Provisions for depreciation are computed principally on the straight-line method and are charged to occupancy expense over the estimated useful lives of the assets. Maintenance agreements are amortized to expense over the period of time covered by the agreement. Costs of major additions, replacements or improvements are capitalized while expenditures for maintenance and repairs are charged to expense as incurred.
For financial statement purposes, the estimated useful life for premises is the lesser of the remaining useful life per third party appraisal or forty years, for furniture, fixtures and equipment the estimated useful life is three to ten years, and for leasehold improvements the estimated useful life is the lesser of ten years or the term of the lease.
(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, "Other real estate owned". 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. 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. The Company considers a lease to be a finance lease if future minimum lease payments amount to greater than 90% of the asset's fair value or if the lease term is equal to or greater than 75% of the asset's estimated economic useful life. 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 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. The Company recognizes a right-of-use asset and a finance lease liability at the lease commencement dated on the estimated present value of lease payments over the lease term for finance leases. The amortization of the right-of-use asset is expensed through occupancy and equipment expense and the interest on the lease liability is expensed through interest expense on borrowings on the Company's consolidated statements of income.
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.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(N) Mortgage servicing rights:
The Company accounts for its mortgage servicing rights under the fair value option as permitted under ASC 860-50-35, "Transfers and Servicing". The Company retains the right to service certain mortgage loans that it sells to secondary market investors. The retained mortgage servicing right is initially recorded at the fair value of future net cash flows expected to be realized for performing servicing activities. Fair value is determined using an income approach with various assumptions including expected cash flows, prepayment speeds, market discount rates, servicing costs, and other factors. These mortgage servicing rights are recognized as a separate asset on the date the corresponding mortgage loan is sold.
Subsequent changes in fair value, including the write downs due to pay offs and paydowns, are recorded in earnings in Mortgage banking income.
(O) Transfers of financial assets:
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
(P) Goodwill and other intangibles:
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment. Goodwill is assigned to the Company’s reporting units, Banking or Mortgage as applicable. Goodwill is evaluated for impairment by first performing a qualitative evaluation to determine whether it is necessary to perform the quantitative goodwill impairment test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If an entity does a qualitative assessment and determines that it is not more likely than not the fair value of a reporting unit is less than its carrying amount, then goodwill of the reporting unit is not considered impaired, and it is not necessary to continue to the quantitative goodwill impairment test. If the estimated implied fair value of goodwill is less than the carrying amount, an impairment loss would be recognized in noninterest expense to reduce the carrying amount to the estimated implied fair value, which could be material to the Company's operating results for any particular reporting period. The Company performed a qualitative assessment during the years ended December 31, 2022 and 2021 and determined it was more likely than not that the fair value of the reporting units exceeded its carrying value, including goodwill. No impairment was identified through the annual assessments for impairment performed during the years ended December 31, 2022 and 2021.
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,"Goodwill and intangible assets" for additional information on other intangibles.
(Q) Income taxes:
Income tax expense is the total of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company’s policy is to recognize interest and penalties on uncertain tax positions in “Income tax expense” in the Consolidated Statements of Income. There were no amounts related to uncertain tax positions recognized for the years ended December 31, 2022, 2021 or 2020.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(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, 2022 or 2021.
(S) Derivative financial instruments and hedging activities:
All derivative financial instruments are recorded at their fair values in other assets or other liabilities in the consolidated balance sheets in accordance with ASC 815, “Derivatives and Hedging.” If derivative financial instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. If derivative financial instruments are not designated as hedges, only the change in the fair value of the derivative instrument is included in current earnings.
The Company enters into fair value hedge relationships to mitigate the effect of changing interest rates on the fair values of fixed rate securities and loans. The gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item.
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 and fixed/floating interest rate swap agreements with its customers and then enters into offsetting derivative contracts 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 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
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
the Company’s Consolidated Balance Sheets. Gains and losses arising from changes in the valuation of these commitments are recognized currently in earnings and are reflected under the line item “Mortgage banking income” on the Consolidated Statements of Income.
(T) Lender risk account:
The Company sells qualified mortgage loans to FHLB-Cincinnati via the Mortgage Purchase Program. 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 credit enhancement. The LRA protects the FHLB against possible credit losses by setting aside a portion of the initial purchase price into a performance based escrow account that can be used to offset possible loan losses. The LRA amount is established as a percentage applied to the sum of the initial unpaid principal balance of each mortgage in the aggregated pool at the time of the purchase of the mortgage as determined by the FHLB-Cincinnati and is funded by the deduction from the proceeds of sale of each mortgage in the aggregated pool to the FHLB-Cincinnati. As of December 31, 2022 and 2021, the Company had on deposit with the FHLB-Cincinnati $19,737 and $17,130, respectively, in these LRA’s. Additionally, as of December 31, 2022 and 2021, the Company estimated the guaranty account to be $9,558 and $8,372, respectively. The Company bears the risk of receiving less than 100% of its LRA contribution in the event of losses, either by the Company or other members selling mortgages in the aggregated pool. Any losses will be deducted first from the individual LRA contribution of the institution that sold the mortgage of which the loss was incurred. If losses incurred in the aggregated pool are greater than the member’s LRA contribution, such losses will be deducted from the LRA contribution of other members selling mortgages in that aggregated pool. Any portion of the LRA not used to pay losses will be released over a thirty year period and will not start until the end of five years after the initial fill-up period.
(U) Comprehensive income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale securities and derivatives designated as cash flow hedges, net of taxes.
(V) Loss contingencies:
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
(W) Securities sold under agreements to repurchase:
The Company routinely sells securities to certain customers and then repurchases the securities the next business day. Securities sold under agreements to repurchase are recorded on the consolidated balance sheets at the amount of cash received in connection with each transaction in the line item "Borrowings". These are secured liabilities and are not covered by the FDIC. See Note 13, "Borrowings" in the Notes to the consolidated financial statements for additional details regarding securities sold under agreements to repurchase.
(X) Advertising expense:
Advertising costs, including costs related to internet mortgage marketing, lead generation, and related costs, are expensed as incurred.
(Y) Earnings per common share:
Basic 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
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
dividend equivalents and are considered participating securities. Calculations of EPS under the two-class method (i) exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities and (ii) exclude from the denominator the dilutive impact of the participating securities.
The following is a summary of the basic and diluted earnings per common share calculation for each of the periods presented:
Years Ended December 31,
2022 2021 2020
Basic earnings per common share calculation:
Net income applicable to FB Financial Corporation $ 124,555 $ 190,285 $ 63,621
Dividends paid on and undistributed earnings allocated to
participating securities - - -
Earnings available to common shareholders $ 124,555 $ 190,285 $ 63,621
Weighted average basic shares outstanding 47,113,470 47,431,102 37,621,720
Basic earnings per common share $ 2.64 $ 4.01 $ 1.69
Diluted earnings per common share:
Earnings available to common shareholders $ 124,555 $ 190,285 $ 63,621
Weighted average basic shares outstanding 47,113,470 47,431,102 37,621,720
Weighted average diluted shares contingently issuable(1)
126,321 524,778 478,024
Weighted average diluted shares outstanding 47,239,791 47,955,880 38,099,744
Diluted earnings per common share $ 2.64 $ 3.97 $ 1.67
(1) Excludes 11,888, 4,400, and 239,813 restricted stock units outstanding considered to be antidilutive as of December 31, 2022, 2021, and 2020 respectively.
(Z) Segment reporting:
The Company’s Mortgage division represents a distinct reportable segment that differs from the Company’s primary business of Banking. During the year ended December 31, 2022, the Company exited the direct-to-consumer delivery channel (referred to herein as "Mortgage restructuring"), which is one of two delivery channels in the Mortgage segment. As a result of exiting this channel, the Company incurred $12,458 of restructuring expenses during the year ended December 31, 2022. The repositioning of the Mortgage segment does not qualify to be reported as discontinued operations. The Company plans to continue originating and selling residential mortgage loans within its Mortgage segment through its traditional mortgage retail channel, retain mortgage servicing rights and continue holding residential 1-4 family mortgage loans in the loan portfolio. A reconciliation of reportable segment revenues, expenses and profit to the Company’s consolidated total has been presented in Note 20, "Segment reporting".
(AA) 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.
The Company awards annual grants of performance-based restricted stock units to executives and other employees. Under the terms of the award, the number of units that will vest and convert to shares of common stock will be based on the extent to which the Company achieves specified performance criteria relative to a predefined peer group during a fixed three-year performance period.
Stock-based compensation expense is recognized in accordance with ASC 718-20, “Compensation - Stock Compensation Awards Classified as Equity”. Expense is recognized based on the fair value of the portion of stock-based payment awards that are ultimately expected to vest, reduced for forfeitures based on grant-date fair value. The restricted stock unit awards and related expense are amortized over the required service period, if any. Compensation expense for PSUs is estimated each period based on the fair value of the stock at the grant date and the most probable outcome of the performance condition, adjusted for the passage of time within the vesting period of the awards. The summary of RSUs, PSUs, and Stock-based compensation expense is presented in Note 23, "Stock-based Compensation".
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(BB) Subsequent Events:
In accordance with ASC Topic 855, "Subsequent Events", the Company has evaluated events and transactions that occurred after December 31, 2022 through the date of the issued financial statements for potential recognition and disclosure.
Recently adopted accounting standards:
In March 2022, the SEC released SAB 121 to add interpretive guidance for entities to consider when they have obligations to safeguard crypto-assets held for clients. The new guidance requires reporting entities who allow clients to transact in crypto-assets and act as a custodian to record a liability with a corresponding asset regardless of whether they control the crypto-asset. The crypto-asset will need to be marked at fair value for each reporting period. The new guidance requires disclosures in the footnotes to address the amount of crypto-assets reported, and the safeguarding and recordkeeping of the assets. The guidance in this update requires that reporting companies implement SAB 121 no later than the financial statements covering the first interim or annual period ending after June 15, 2022, with retrospective application back to the beginning of the fiscal year. During the first quarter of 2022, the Company became a founding member of the USDF Consortium (the "Consortium"), which plans to utilize blockchain and technology to streamline peer-to-peer financial transactions. The USDF Consortium is a membership-based association of insured depository institutions with a mission to build a network of banks to further the adoption and interoperability of a bank-minted tokenized deposit. The Company does not currently hold or facilitate transactions with crypto-assets, however the Company now evaluates any crypto-asset activities and the applicable financial statement and disclosure requirements in accordance with the guidance.
Newly issued not yet effective accounting standards:
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The FASB is issuing this update to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, to amend a related illustrative example, and to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The ASU becomes effective January 1, 2024 and the Company is evaluating the potential impact of this standard on its consolidated financial statements and related disclosures.
In March 2022, the FASB issued ASU 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method", to expand the current single-layer method of electing hedge accounting to allow multiple hedged layers of a single closed portfolio under the method. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted on any date on or after the issuance of ASU No. 2022-01 for any entity that has adopted the amendments in ASU No.2017-12 for the corresponding period. The Company adopted the update effective January 1, 2023. The adoption of this standard did not have an impact on the consolidated financial statements or disclosures.
Additionally, in March 2022, the FASB issued ASU 2022-02, "'Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures" related to troubled debt restructurings and vintage disclosures for financing receivables. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan modifications and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the amendment effective January 1, 2023 and will update its disclosures for the first quarter of 2023. The update did not have a material impact to the Company's results of operation, financial position or liquidity.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 is intended to provide relief for companies preparing for discontinuation of interest rates based on LIBOR. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or other reference rates expected to be discontinued. ASU 2020-04 also provides for a onetime sale and/or transfer to AFS or trading to be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. ASU 2020-04 was effective for all entities as of March 12, 2020 and through December 31, 2022. Companies can apply the ASU as of the beginning of the interim period that includes March 12, 2020 or any date
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
thereafter. The guidance requires companies to apply the guidance prospectively to contract modifications and hedging relationships while the one-time election to sell and/or transfer debt securities classified as HTM may be made any time after March 12, 2020. In December 2022, the FASB issued ASU 2022-06, "Reference rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848" to extend the date to December 31, 2024 for companies to apply the relief in Topic 848.
The Company's LIBOR Transition Committee was established to transition from LIBOR to alternative rates and has continued its efforts consistent with industry timelines. As part of these efforts, during the fourth quarter of 2021, we ceased utilization of LIBOR as an index in newly originated loans or loans that are refinanced. Additionally, we identified existing products that utilize LIBOR and are reviewing contractual language to facilitate the transition to alternative reference rates. ASU 2020-04 and ASU 2021-01 are not expected to have a material impact on the Company's consolidated financial statements.
Note (2)-Mergers and acquisitions:
The following mergers and acquisitions were accounted for pursuant to Accounting Standards Codification 805, "Business Combinations". Accordingly, the purchase price of each acquisition was allocated to the acquired assets and liabilities assumed based on estimated fair values as of the respective acquisition dates. The excess of the purchase price over the net assets acquired was recorded as goodwill.
Franklin Financial Network, Inc. merger
Effective August 15, 2020, the Company completed its merger with Franklin Financial Network, Inc. and its wholly-owned subsidiaries, with FB Financial Corporation continuing as the surviving entity. After consolidating duplicative locations the merger added 10 branches and expanded the Company's footprint in middle Tennessee and the Nashville metropolitan statistical area. Under the terms of the agreement, the Company acquired total assets of $3.63 billion, loans of $2.79 billion and assumed total deposits of $3.12 billion. Total loans acquired includes a non-strategic institutional portfolio with a fair value of $326,206 the Company classified as held for sale. Franklin common shareholders received 15,058,181 shares of the Company's common stock, net of the equivalent value of 44,311 shares withheld on certain Franklin employee equity awards that vested upon change in control, as consideration in connection with the merger, in addition to $31,330 in cash consideration. Also included in the purchase price, the Company issued replacement restricted stock units for awards initially granted by Franklin during 2020 that did not vest upon change in control, with a total fair value of $674 attributed to pre-combination service. Based on the closing price of the Company's common stock on the New York Stock Exchange of $29.52 on August 15, 2020, the merger consideration represented approximately $477,830 in aggregate consideration.
Goodwill of $67,191 was recorded in connection with the transaction resulted from the ongoing business contribution, reputation, operating model and expertise of Franklin. The goodwill is not deductible for income tax purposes. Goodwill is included in the Banking segment as substantially all of the operations resulting from the merger with Franklin are in alignment with the Company's banking business.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The following table presents an allocation of the consideration to net assets acquired:
Purchase Price:
Equity consideration
Franklin shares outstanding(1)
15,588,337
Franklin options converted to net shares 62,906
15,651,243
Exchange ratio to FB Financial shares 0.965
FB Financial shares to be issued as merger consideration(2)
15,102,492
Issuance price as of August 15, 2020 $ 29.52
Value of FB Financial stock to be issued as merger consideration $ 445,826
Less: tax withholding on vested restricted stock awards, units and options(3)
(1,308)
Value of FB Financial stock issued $ 444,518
FB Financial shares issued 15,058,181
Franklin restricted stock units that do not vest on change in control 114,915
Replacement awards issued to Franklin employees 118,776
Fair value of replacement awards $ 3,506
Fair value of replacement awards attributable to pre-combination service $ 674
Cash consideration
Total Franklin shares and net shares outstanding 15,651,243
Cash consideration per share $ 2.00
Total cash to be paid to Franklin(4)
$ 31,330
Total purchase price $ 477,830
Fair value of net assets acquired 410,639
Goodwill resulting from merger $ 67,191
(1)Franklin shares outstanding includes restricted stock awards and restricted stock units that vested upon change in control.
(2)Only factors in whole share issuance. Cash was paid in lieu of fractional shares.
(3)Represents the equivalent value of approximately 44,311 shares of FB Financial Corporation stock on August 15, 2020.
(4)Includes $28 of cash paid in lieu of fractional shares.
FNB Financial Corp. merger
Effective February 14, 2020, the Company completed its acquisition of FNB Financial Corp. and its wholly-owned subsidiary, Farmers National Bank of Scottsville (collectively, "Farmers National"). Following the acquisition, Farmers National was merged into the Company with FB Financial Corporation continuing as the surviving entity. The transaction added four branches and expanded the Company's footprint into Kentucky. Under the terms of the agreement, the Company acquired total assets of $258,218, loans of $182,171 and assumed total deposits of $209,535. Farmers National shareholders received 954,797 shares of the Company's common stock as consideration in connection with the merger, in addition to $15,001 in cash consideration. Based on the closing price of the Company's common stock on the New York Stock Exchange of $36.70 on February 14, 2020, the merger consideration represented approximately $50,042 in aggregate consideration.
Goodwill of $6,319 was recorded in connection with the transaction resulted from the ongoing business contribution of Farmers National and anticipated synergies arising from the combination of certain operational areas of the Company. Goodwill resulting from this transaction is not deductible for income tax purposes and is included in the Banking segment as substantially all of the operations resulting from the acquisition of Farmers National are in alignment with the Company's core banking business.
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 total purchase price, fair value of net assets acquired, and the goodwill as of the acquisition date.
Consideration:
Net shares issued 954,797
Purchase price per share on February 14, 2020 $ 36.70
Value of stock consideration $ 35,041
Cash consideration paid 15,001
Total purchase price $ 50,042
Fair value of net assets acquired 43,723
Goodwill resulting from merger $ 6,319
Net assets acquired
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of the respective acquisition dates:
As of August 15, 2020 As of February 14, 2020
Franklin Financial Network, Inc. FNB Financial Corp.
ASSETS
Cash and cash equivalents $ 284,004 $ 10,774
Investments 373,462 50,594
Mortgage loans held for sale, at fair value 38,740 -
Commercial loans held for sale, at fair value 326,206 -
Loans held for investment, net of fair value adjustments 2,427,527 182,171
Allowance for credit losses on purchased credit
deteriorated loans (24,831) (669)
Premises and equipment 45,471 8,049
Operating lease right-of-use assets 23,958 14
Mortgage servicing rights 5,111 -
Core deposit intangible 7,670 2,490
Other assets 124,571 4,795
Total assets $ 3,631,889 $ 258,218
LIABILITIES
Deposits:
Noninterest-bearing $ 505,374 $ 63,531
Interest-bearing checking 1,783,379 26,451
Money market and savings 342,093 37,002
Customer time deposits 383,433 82,551
Brokered and internet time deposits 107,452 -
Total deposits 3,121,731 209,535
Borrowings 62,435 3,192
Operating lease liabilities 24,330 14
Accrued expenses and other liabilities 12,661 1,754
Total liabilities assumed 3,221,157 214,495
Noncontrolling interests acquired 93 -
Net assets acquired $ 410,639 $ 43,723
Purchased credit-deteriorated loans
Under the CECL methodology, the Company is required to determine whether purchased loans held for investment have experienced more-than-insignificant deterioration in credit quality since origination. Loans that have experienced this level of deterioration in credit quality are subject to special accounting at initial recognition and measurement. The Company initially measures the amortized cost of a PCD loan by adding the acquisition date estimate of expected credit losses to the loan's purchase price (i.e. the "gross up" approach). There is no provision for credit loss recognized upon acquisition of a PCD loan because the initial allowance is established through gross-up of the loans' amortized cost.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company determined that 27.9% of the Franklin loan portfolio had more-than-insignificant deterioration in credit quality since origination as of the merger date. This included deterioration in credit metrics, such as delinquency, nonaccrual status or risk ratings as well as certain loans within designated industries of concern that have been negatively impacted by COVID-19. It was determined that 10.1% of the Farmers National loan portfolio had more-than-insignificant deterioration in credit quality since origination as of the February acquisition date. These were primarily delinquent loans or loans that Farmers National had classified as nonaccrual or troubled debt restructuring prior to the Company's acquisition.
As of August 15, 2020 As of February 14, 2020
Franklin Financial Network, Inc. FNB Financial Corp.
Purchased credit-deteriorated loans
Principal balance $ 693,999 $ 18,964
Allowance for credit losses at acquisition (24,831) (669)
Net premium attributable to other factors 8,810 63
Loans purchased credit-deteriorated fair value $ 677,978 $ 18,358
Loans recognized through acquisition that have not experienced more-than-insignificant credit deterioration since origination are initially recognized at the purchase price. Expected credit losses are measured under CECL through the provision for credit losses. The Company recorded provisions for credit losses in the amounts of $52,822 and $2,885 as of August 15, 2020 and February 14, 2020, respectively, in the statement of income related to estimated credit losses on non-PCD loans from Franklin and Farmers National, respectively. Additionally, the Company estimates expected credit losses on off-balance sheet loan commitments that are not accounted for as derivatives. The Company recorded an increase in provision for credit losses from unfunded commitments of $10,499 as of August 15, 2020 related to the Franklin merger.
Pro forma financial information (unaudited)
The results of operations of the acquisitions have been included in the Company's consolidated financial statements prospectively beginning on the date of each transaction. The acquired entities have been fully integrated with the Company's existing operations. Accordingly, post-acquisition net interest income, total revenues, and net income are not discernible. The following unaudited pro forma condensed consolidated financial information presents the results of operations for the year ended December 31, 2020, as though the Franklin merger and Farmers National acquisition had been completed as of January 1, 2019. The unaudited estimated pro forma information combines the historical results of the mergers with the Company’s historical consolidated results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the periods presented. Merger expenses are reflected in the period they were incurred. The pro forma information is not indicative of what would have occurred had the transactions taken place on January 1, 2019 and does not include the effect of cost-saving or revenue-enhancing strategies.
Year Ended December 31,
Net interest income $ 338,092
Total revenues $ 654,374
Net income applicable to FB Financial Corporation $ 65,135
Note (3)-Cash and cash equivalents concentrations:
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.
Included in cash and cash equivalents, the Bank had cash in the form of Federal funds sold of $135,128 and $53,919 as of December 31, 2022 and 2021, respectively; and the Bank had reverse repurchase agreements of $75,408 and $74,168 as of December 31, 2022 and 2021, respectively.
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 following tables summarize the amortized cost, allowance for credit losses and fair value of the available-for-sale debt securities and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive (loss) income at December 31, 2022 and 2021:
December 31, 2022
Amortized cost Gross unrealized gains Gross unrealized losses Allowance for credit losses for investments Fair Value
Investment Securities
Available-for-sale debt securities
U.S. government agency securities $ 45,167 $ - $ (5,105) $ - $ 40,062
Mortgage-backed securities - residential 1,224,522 - (190,329) - 1,034,193
Mortgage-backed securities - commercial 19,209 - (1,565) - 17,644
Municipal securities 295,375 458 (31,413) - 264,420
U.S. Treasury securities 113,301 - (5,621) - 107,680
Corporate securities 8,000 - (813) - 7,187
Total $ 1,705,574 $ 458 $ (234,846) $ - $ 1,471,186
December 31, 2021
Amortized cost Gross unrealized gains Gross unrealized losses Allowance for credit losses for investments Fair Value
Investment Securities
Available-for-sale debt securities
U.S. government agency securities $ 34,023 $ 18 $ (171) $ - $ 33,870
Mortgage-backed securities - residential 1,281,285 6,072 (17,985) - 1,269,372
Mortgage-backed securities - commercial 15,024 272 (46) - 15,250
Municipal securities 322,052 16,718 (160) - 338,610
U.S. Treasury securities 14,914 - (6) - 14,908
Corporate securities 6,500 40 (25) - 6,515
Total $ 1,673,798 $ 23,120 $ (18,393) $ - $ 1,678,525
The components of amortized cost for debt securities on the consolidated balance sheets excludes accrued interest receivable since the Company elected to present accrued interest receivable separately on the consolidated balance sheets. As of December 31, 2022 and 2021, total accrued interest receivable on debt securities was $5,470 and $5,051, respectively.
As of December 31, 2022 and 2021, the Company had $2,990 and $3,367, in marketable equity securities recorded at fair value, respectively. Additionally, the Company had equity securities without readily determinable market value included in other assets on the consolidated balance sheets with carrying amounts of $22,496 and $8,868 at December 31, 2022 and 2021, respectively.
Securities pledged at December 31, 2022 and 2021 had carrying amounts of $1,191,021 and $1,226,646, 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 U.S. Government sponsored enterprises, in an amount greater than 10% of shareholders' equity during any period presented.
Investment securities transactions are recorded as of the trade date. At December 31, 2022 and 2021, there were no trade date receivables nor payables that related to sales or purchases settled after period end.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2022 and 2021 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 summary.
December 31,
2022 2021
Available-for-sale Available-for-sale
Amortized cost Fair value Amortized cost Fair value
Due in one year or less $ 4,277 $ 4,225 $ 21,851 $ 21,884
Due in one to five years 161,556 152,181 54,847 55,307
Due in five to ten years 61,290 57,859 45,714 46,975
Due in over ten years 234,720 205,084 255,077 269,737
461,843 419,349 377,489 393,903
Mortgage-backed securities - residential 1,224,522 1,034,193 1,281,285 1,269,372
Mortgage-backed securities - commercial 19,209 17,644 15,024 15,250
Total debt securities $ 1,705,574 $ 1,471,186 $ 1,673,798 $ 1,678,525
Sales and other dispositions of available-for-sale securities were as follows:
Years Ended December 31,
2022 2021 2020
Proceeds from sales $ 1,218 $ 8,855 $ 146,494
Proceeds from maturities, prepayments and calls 204,748 296,256 220,549
Gross realized gains 4 127 1,606
Gross realized losses 3 1 271
Additionally, changes in fair value and the sale of equity securities with readily determinable fair values resulted in a net loss of $377 for the year ended December 31, 2022, and a net gain of $198 and $296 for the years ended December 31, 2021 and 2020, respectively.
The following tables show gross unrealized losses for which an allowance for credit losses has not been recorded at December 31, 2022 and 2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
December 31, 2022
Less than 12 months 12 months or more Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
U.S. government agency securities $ 23,791 $ (2,802) $ 16,271 $ (2,303) $ 40,062 $ (5,105)
Mortgage-backed securities - residential 316,656 (32,470) 717,533 (157,859) 1,034,189 (190,329)
Mortgage-backed securities - commercial 11,104 (968) 6,541 (597) 17,645 (1,565)
Municipal securities 196,419 (26,811) 36,726 (4,602) 233,145 (31,413)
U.S. Treasury securities 94,248 (4,122) 13,434 (1,499) 107,682 (5,621)
Corporate securities 4,008 (492) 3,270 (321) 7,278 (813)
Total $ 646,226 $ (67,665) $ 793,775 $ (167,181) $ 1,440,001 $ (234,846)
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
December 31, 2021
Less than 12 months 12 months or more Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized loss
U.S. government agency securities $ 18,360 $ (171) $ - $ - $ 18,360 $ (171)
Mortgage-backed securities - residential 871,368 (14,295) 102,799 (3,690) 974,167 (17,985)
Mortgage-backed securities - commercial 7,946 (46) - - 7,946 (46)
Municipal securities 11,414 (160) - - 11,414 (160)
U.S. Treasury securities 14,908 (6) - - 14,908 (6)
Corporate securities 4,119 (25) - - 4,119 (25)
Total $ 928,115 $ (14,703) $ 102,799 $ (3,690) $ 1,030,914 $ (18,393)
As of December 31, 2022 and 2021, the Company’s securities portfolio consisted of 503 and 511 securities, 454 and 80 of which were in an unrealized loss position, respectively.
During the year ended December 31, 2022, the Company's available-for-sale debt securities portfolio unrealized value declined $239,115 to an unrealized loss position of $234,388 from an unrealized gain position of $4,727 as of December 31, 2021. During the year ended December 31, 2021, the Company's available-for-sale debt securities portfolio unrealized value declined $29,825 to an unrealized gain position of $4,727 from an unrealized gain position of $34,552 as of December 31, 2020.
The majority of the investment portfolio was either government guaranteed or an issuance of a government sponsored entity or highly rated by major credit rating agencies and the Company has historically not recorded any losses associated with these investments. Municipal securities with market values below amortized cost at December 31, 2022 were reviewed for material credit events and/or rating downgrades with individual credit reviews performed. The issuers of these debt securities continue to make timely principal and interest payments under the contractual terms of the securities and the issuers will continue to be observed as a part of the Company’s ongoing credit monitoring. As such, as of December 31, 2022 and 2021, it was determined that all available-for-sale debt securities that experienced a decline in fair value below amortized cost basis were due to noncredit-related factors. Further, the Company does not intend to sell those available-for-sale securities that have an unrealized loss as of December 31, 2022, and it is not likely that the Company will be required to sell the securities before recovery of their amortized cost basis. Therefore, there was no provision for credit losses recognized on available-for-sale debt securities during the year ended December 31, 2022 or 2021.
Note (5)-Loans and allowance for credit losses:
Loans outstanding as of December 31, 2022 and 2021, by class of financing receivable are as follows:
December 31,
2022 2021
Commercial and industrial (1)
$ 1,645,783 $ 1,290,565
Construction 1,657,488 1,327,659
Residential real estate:
1-to-4 family mortgage 1,573,121 1,270,467
Residential line of credit 496,660 383,039
Multi-family mortgage 479,572 326,551
Commercial real estate:
Owner-occupied 1,114,580 951,582
Non-owner occupied 1,964,010 1,730,165
Consumer and other 366,998 324,634
Gross loans 9,298,212 7,604,662
Less: Allowance for credit losses (134,192) (125,559)
Net loans $ 9,164,020 $ 7,479,103
(1)Includes $767 and $3,990 of loans originated as part of the Paycheck Protection Program as of December 31, 2022 and 2021, respectively. PPP loans are federally guaranteed as part of the CARES Act, provided PPP loan recipients receive loan forgiveness under the SBA regulations. As such, there is minimal credit risk associated with these loans.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
As of December 31, 2022 and 2021, $909,734 and $1,136,294, respectively, of qualifying residential mortgage loans (including loans held for sale) and $1,763,730 and $1,581,673, respectively, of qualifying commercial mortgage loans were pledged to the Federal Home Loan Bank of Cincinnati securing advances against the Bank’s line of credit. Additionally, as of December 31, 2022 and 2021, qualifying loans of $3,118,172 and $2,440,097, respectively, were pledged to the Federal Reserve Bank under the Borrower-in-Custody program.
The components of amortized cost for loans on the consolidated balance sheets exclude accrued interest receivable as the Company presents accrued interest receivable separately on the balance sheet. As of December 31, 2022 and 2021, accrued interest receivable on loans held for investment amounted to $38,507 and $31,676, respectively.
Allowance for Credit Losses
The Company calculates its expected credit loss using a lifetime loss rate methodology. The Company utilizes probability-weighted forecasts, which consider multiple macroeconomic variables from a third-party vendor that are applicable to the type of loan. Each of the Company's loss rate models incorporate forward-looking macroeconomic projections throughout the reasonable and supportable forecast period and the subsequent historical reversion at the macroeconomic variable input level. In order to estimate the life of a loan, the contractual term of the loan is adjusted for estimated prepayments based on market information and the Company’s prepayment history.
The Company's loss rate models estimate the lifetime loss rate for pools of loans by combining the calculated loss rate based on each variable within the model (including the macroeconomic variables). The lifetime loss rate for the pool is then multiplied by the loan balances to determine the expected credit losses on the pool.
The quantitative models require loan data and macroeconomic variables based on the inherent credit risks in each portfolio to more accurately measure the credit risks associated with each. Each of the quantitative models pools loans with similar risk characteristics and collectively assesses the lifetime loss rate for each pool to estimate its expected credit loss.
The Company considers the need to qualitatively adjust its modeled quantitative expected credit loss estimate for information not already captured in the model loss estimation process. These qualitative factor adjustments may increase or decrease the Company’s estimate of expected credit losses. The Company reviews the qualitative adjustments so as to validate that information that has already been considered and included in the modeled quantitative loss estimation process is not also included in the qualitative adjustment. The Company considers the qualitative factors that are relevant to the institution as of the reporting date, which may include, but are not limited to: levels of and trends in delinquencies and performance of loans; levels of and trends in write-offs and recoveries collected; trends in volume and terms of loans; effects of any changes in reasonable and supportable economic forecasts; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and expertise; available relevant information sources that contradict the Company’s own forecast; effects of changes in prepayment expectations or other factors affecting assessments of loan contractual terms; industry conditions; and effects of changes in credit concentrations.
The Company performed qualitative evaluations within the Company's established qualitative framework, assessing the impact of the current economic outlook (including uncertainty due to inflation, negative economic forecasts, predicted Federal Reserve rate increases, status of federal government stimulus programs, and other considerations). The increase in estimated required reserve during the year ended December 31, 2022 was a result of increased loan growth and a tightening monetary policy environment both of which were incorporated into the Company's reasonable and supportable forecasts. These forecasts included weighted projections that the economy may be nearing a recession, reflected through deterioration in asset quality projected over life of the loan portfolio. Loss rates on construction loans incurred the largest increase due to increased economic uncertainty going into 2023. Loss rates on residential loans were qualitatively adjusted downwards, addressing the relative strength of asset values in the Company's predominant markets.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company calculates its expected credit loss using a lifetime loss rate methodology using the following pools:
Pool Source of repayment Quantitative and Qualitative factors considered
Commercial and Industrial Repayment is largely dependent
upon the operation of the borrower's business. Quantitative: Prepayment speeds are modeled in the form of a prepayment benchmarking that directly impacts the ACL output for all C&I loans and lines of credit. Loss rates incorporate a peer scaling factor.
Qualitative: An uncertain economic outlook including the effects of inflation and the interest rate environment are driving a qualitative increase in the ACL.
Retail Repayment is primarily dependent on the personal cash flow of the borrower. Quantitative: Average FICO scores, remaining life of the portfolio, delinquency composition, prepayment speeds leveraging Equifax and Moody's data
Qualitative: High modeled loss rates and the relatively strong housing market within the bank’s footprint are driving a qualitative decrease in the ACL.
Commercial Real Estate Repayment is primarily dependent on lease income generated from the underlying collateral. Quantitative: Prepayment speeds leveraging a reverse-compounding formula. Loss rates incorporate a peer scaling factor.
Qualitative: An uncertain economic outlook including the effects of inflation and the interest rate environment as well as changes in asset quality are driving a qualitative increase in the ACL.
When a loan no longer shares similar risk characteristics with other loans in any given pool, the loan is individually assessed. The Company has determined the following circumstances in which a loan may require an individual evaluation: collateral dependent loans; loans for which foreclosure is probable; and loans with other unique risk characteristics. A loan is deemed collateral dependent when 1) the borrower is experiencing financial difficulty and 2) the repayment is expected to be primarily through sale or operation of the collateral. The allowance for credit losses for collateral dependent loans as well as loans where foreclosure is probable is calculated as the amount for which the loan’s amortized cost basis exceeds fair value. Fair value is determined based on appraisals performed by qualified appraisers and reviewed by qualified personnel. In cases where repayment is to be provided substantially through the sale of collateral, the Company reduces the fair value by the estimated costs to sell. Loans experiencing financial difficulty for which a concession has not yet been provided may be identified as reasonably expected TDRs.
Reasonably expected TDRs and TDRs use the same methodology. In cases where the expected credit loss can only be captured through a discounted cash flow analysis (such as an interest rate modification for a TDR loan), the allowance is measured by the amount which the loan’s amortized cost exceeds the discounted cash flow analysis.
The following tables provide the changes in the allowance for credit losses by class of financing receivable for the years ended December 31, 2022, 2021, and 2020:
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, 2022
Beginning balance -
December 31, 2021
$ 15,751 $ 28,576 $ 19,104 $ 5,903 $ 6,976 $ 12,593 $ 25,768 $ 10,888 $ 125,559
Provision for credit losses (4,563) 11,221 7,060 1,574 (486) (4,883) (3,584) 4,054 10,393
Recoveries of loans
previously charged-off
2,005 11 54 17 - 88 - 766 2,941
Loans charged off (2,087) - (77) - - (15) (268) (2,254) (4,701)
Ending balance -
December 31, 2022
$ 11,106 $ 39,808 $ 26,141 $ 7,494 $ 6,490 $ 7,783 $ 21,916 $ 13,454 $ 134,192
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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, 2021
Beginning balance -
December 31, 2020
$ 14,748 $ 58,477 $ 19,220 $ 10,534 $ 7,174 $ 4,849 $ 44,147 $ 11,240 $ 170,389
Provision for credit losses 4,178 (29,874) (87) (4,728) (197) 7,588 (16,813) 938 (38,995)
Recoveries of loans
previously charged-off
861 3 125 115 - 156 - 773 2,033
Loans charged off (4,036) (30) (154) (18) (1) - (1,566) (2,063) (7,868)
Ending balance -
December 31, 2021 $ 15,751 $ 28,576 $ 19,104 $ 5,903 $ 6,976 $ 12,593 $ 25,768 $ 10,888 $ 125,559
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, 2020
Beginning balance -
December 31, 2019
$ 4,805 $ 10,194 $ 3,112 $ 752 $ 544 $ 4,109 $ 4,621 $ 3,002 $ 31,139
Impact of adopting ASC
326 on non-purchased credit deteriorated loans
5,300 1,533 7,920 3,461 340 1,879 6,822 3,633 30,888
Impact of adopting ASC
326 on purchased credit deteriorated loans
82 150 421 (3) - 162 184 (438) 558
Provision for credit losses 13,830 40,807 6,408 5,649 5,506 (1,739) 17,789 6,356 94,606
Recoveries of loans
previously charged-off
1,712 205 122 125 - 83 - 756 3,003
Loans charged off (11,735) (18) (403) (22) - (304) (711) (2,112) (15,305)
Initial allowance on loans
purchased with deteriorated credit quality
754 5,606 1,640 572 784 659 15,442 43 25,500
Ending balance -
December 31, 2020 $ 14,748 $ 58,477 $ 19,220 $ 10,534 $ 7,174 $ 4,849 $ 44,147 $ 11,240 $ 170,389
Credit Quality - Commercial Type Loans
The Company categorizes commercial loan types 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 that share similar risk characteristics collectively. Loans that do not share similar risk characteristics are evaluated individually.
The Company uses the following definitions for risk ratings:
Pass.
Loans rated Pass include those that are adequately collateralized performing loans which management believes do not have conditions that have occurred or may occur that would result in the loan being downgraded into an inferior category. The Pass category also includes commercial loans rated as Watch, which include those that management believes have conditions that have occurred, or may occur, which could result in the loan being downgraded to an inferior category.
Special Mention.
Loans rated Special Mention are those that have potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Management does not believe there will be a loss of principal or interest. These loans require intensive servicing and may possess more than normal credit risk.
Classified.
Loans included in the Classified category include loans rated as Substandard and Doubtful. 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. Substandard loans 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 classified as Doubtful, which have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weakness or weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes.
During the year ended December 31, 2022, the Company revised the presentation of the below credit quality vintage tables without change to accounting or credit policies. The updated presentation disaggregates between commercial and consumer loan types with consumer loan types reported as either performing or nonperforming based on their delinquency and accrual status. As such, the tables presented below as of December 31, 2021 have been revised to align with current period presentation.
The following tables present the credit quality of the Company's commercial type loan portfolio by year of origination as of December 31, 2022 and 2021. Revolving loans are presented separately. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal constitutes a current period origination. Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for the purposes of the tables below.
As of December 31, 2022
2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total
Commercial and industrial
Pass $ 396,643 $ 204,000 $ 67,231 $ 90,894 $ 39,780 $ 62,816 $ 762,717 $ 1,624,081
Special Mention 125 7 - 160 143 771 2,520 3,726
Classified 65 823 1,916 1,651 273 6,913 6,335 17,976
Total 396,833 204,830 69,147 92,705 40,196 70,500 771,572 1,645,783
Construction
Pass 682,885 495,723 142,233 84,599 17,360 44,326 188,906 1,656,032
Special Mention - - 15 - - 707 - 722
Classified 80 309 - - - 345 - 734
Total 682,965 496,032 142,248 84,599 17,360 45,378 188,906 1,657,488
Residential real estate:
Multi-family mortgage
Pass 142,912 147,168 96,819 33,547 6,971 37,385 13,604 478,406
Special Mention - - - - - - - -
Classified - - - - - 1,166 - 1,166
Total 142,912 147,168 96,819 33,547 6,971 38,551 13,604 479,572
Commercial real estate:
Owner occupied
Pass 237,862 223,883 110,748 148,405 66,101 246,414 57,220 1,090,633
Special Mention 101 683 - 168 2,225 1,258 5,000 9,435
Classified - 1,293 224 4,589 1,276 7,018 112 14,512
Total 237,963 225,859 110,972 153,162 69,602 254,690 62,332 1,114,580
Non-owner occupied
Pass 467,360 440,319 131,497 159,205 210,752 473,607 60,908 1,943,648
Special Mention - - - - 82 2,459 - 2,541
Classified - 2,258 - 146 3,270 12,147 - 17,821
Total 467,360 442,577 131,497 159,351 214,104 488,213 60,908 1,964,010
Total commercial loan types
Pass 1,927,662 1,511,093 548,528 516,650 340,964 864,548 1,083,355 6,792,800
Special Mention 226 690 15 328 2,450 5,195 7,520 16,424
Classified 145 4,683 2,140 6,386 4,819 27,589 6,447 52,209
Total $ 1,928,033 $ 1,516,466 $ 550,683 $ 523,364 $ 348,233 $ 897,332 $ 1,097,322 $ 6,861,433
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
As of December 31, 2021
2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Commercial and industrial
Pass $ 273,232 $ 95,279 $ 140,938 $ 52,162 $ 33,997 $ 57,020 $ 596,667 $ 1,249,295
Special Mention 79 9 949 632 3 1,519 12,367 15,558
Classified 918 2,391 2,376 3,089 3,370 6,425 7,143 25,712
Total 274,229 97,679 144,263 55,883 37,370 64,964 616,177 1,290,565
Construction
Pass 677,258 280,828 135,768 23,916 15,313 67,818 117,176 1,318,077
Special Mention 62 184 - - 1,208 1,384 - 2,838
Classified - - 2,922 2,882 3 737 200 6,744
Total 677,320 281,012 138,690 26,798 16,524 69,939 117,376 1,327,659
Residential real estate:
Multi-family mortgage
Pass 166,576 32,242 64,345 7,124 5,602 38,526 10,891 325,306
Special Mention - - - - - - - -
Classified - - - - - 1,245 - 1,245
Total 166,576 32,242 64,345 7,124 5,602 39,771 10,891 326,551
Commercial real estate:
Owner occupied
Pass 170,773 131,471 174,257 83,698 69,939 236,998 57,123 924,259
Special Mention - - 1,502 3,541 885 2,555 213 8,696
Classified - - 3,102 768 3,295 9,616 1,846 18,627
Total 170,773 131,471 178,861 88,007 74,119 249,169 59,182 951,582
Non-owner occupied
Pass 462,478 154,048 165,917 264,855 170,602 414,859 46,541 1,679,300
Special Mention - - 3,747 3,388 - 969 - 8,104
Classified - - 1,898 23,849 1,506 15,508 - 42,761
Total 462,478 154,048 171,562 292,092 172,108 431,336 46,541 1,730,165
Total commercial loan types
Pass 1,750,317 693,868 681,225 431,755 295,453 815,221 828,398 5,496,237
Special Mention 141 193 6,198 7,561 2,096 6,427 12,580 35,196
Classified 918 2,391 10,298 30,588 8,174 33,531 9,189 95,089
Total $ 1,751,376 $ 696,452 $ 697,721 $ 469,904 $ 305,723 $ 855,179 $ 850,167 $ 5,626,522
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Credit Quality - Consumer Type Loans
For consumer and residential loan classes, the company primarily evaluates credit quality based on delinquency and accrual status of the loan, credit documentation and by payment activity. The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality.
The following tables present the credit quality by classification (performing or nonperforming) of the Company's consumer type loan portfolio by year of origination as of December 31, 2022 and 2021. Revolving loans are presented separately. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal constitutes a current period origination. Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for the purposes of the tables below.
As of December 31, 2022
2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total
Residential real estate:
1-to-4 family mortgage
Performing $ 568,210 $ 448,401 $ 160,715 $ 93,548 $ 68,113 $ 211,019 $ - $ 1,550,006
Nonperforming 1,227 5,163 5,472 1,778 2,044 7,431 - 23,115
Total 569,437 453,564 166,187 95,326 70,157 218,450 - 1,573,121
Residential line of credit
Performing - - - - - - 495,129 495,129
Nonperforming - - - - - - 1,531 1,531
Total - - - - - - 496,660 496,660
Consumer and other
Performing 118,637 56,779 41,008 29,139 26,982 82,318 4,175 359,038
Nonperforming 166 1,396 1,460 906 1,507 2,525 - 7,960
Total 118,803 58,175 42,468 30,045 28,489 84,843 4,175 366,998
Total consumer type loans
Performing 686,847 505,180 201,723 122,687 95,095 293,337 499,304 2,404,173
Nonperforming 1,393 6,559 6,932 2,684 3,551 9,956 1,531 32,606
Total $ 688,240 $ 511,739 $ 208,655 $ 125,371 $ 98,646 $ 303,293 $ 500,835 $ 2,436,779
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
As of December 31, 2021
2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Total
Residential real estate:
1-to-4 family mortgage
Performing $ 521,533 $ 204,690 $ 121,775 $ 100,164 $ 109,087 $ 199,262 $ - $ 1,256,511
Nonperforming 1,232 3,734 977 2,429 1,765 3,819 - 13,956
Total 522,765 208,424 122,752 102,593 110,852 203,081 - 1,270,467
Residential line of credit
Performing - - - - - - 381,303 381,303
Nonperforming - - - - - - 1,736 1,736
Total - - - - - - 383,039 383,039
Consumer and other
Performing 82,910 55,123 38,281 32,893 21,856 74,248 14,478 319,789
Nonperforming 199 345 545 1,352 861 1,496 47 4,845
Total 83,109 55,468 38,826 34,245 22,717 75,744 14,525 324,634
Total consumer type loans
Performing 604,443 259,813 160,056 133,057 130,943 273,510 395,781 1,957,603
Nonperforming 1,431 4,079 1,522 3,781 2,626 5,315 1,783 20,537
Total $ 605,874 $ 263,892 $ 161,578 $ 136,838 $ 133,569 $ 278,825 $ 397,564 $ 1,978,140
Nonaccrual and Past Due Loans
Nonperforming loans include loans that are no longer accruing interest (nonaccrual loans) and loans past due ninety or more days and still accruing interest.
The following tables represent an analysis of the aging by class of financing receivable as of December 31, 2022 and 2021:
December 31, 2022 30-89 days
past due and accruing
interest 90 days or
more and accruing
interest Nonaccrual
loans Loans current
on payments
and accruing
interest Total
Commercial and industrial $ 1,650 $ 136 $ 1,307 $ 1,642,690 $ 1,645,783
Construction 1,246 - 389 1,655,853 1,657,488
Residential real estate:
1-to-4 family mortgage 15,470 16,639 6,476 1,534,536 1,573,121
Residential line of credit 772 131 1,400 494,357 496,660
Multi-family mortgage - - 42 479,530 479,572
Commercial real estate:
Owner occupied 1,948 - 5,410 1,107,222 1,114,580
Non-owner occupied 102 - 5,956 1,957,952 1,964,010
Consumer and other 10,108 1,509 6,451 348,930 366,998
Total $ 31,296 $ 18,415 $ 27,431 $ 9,221,070 $ 9,298,212
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
December 31, 2021 30-89 days
past due and accruing
interest 90 days or
more and accruing
interest Nonaccrual
loans Loans current on payments and accruing interest Total
Commercial and industrial $ 1,030 $ 63 $ 1,520 $ 1,287,952 $ 1,290,565
Construction 4,852 718 3,622 1,318,467 1,327,659
Residential real estate:
1-to-4 family mortgage 11,007 9,363 4,593 1,245,504 1,270,467
Residential line of credit 319 - 1,736 380,984 383,039
Multi-family mortgage - - 49 326,502 326,551
Commercial real estate:
Owner occupied 1,417 - 6,710 943,455 951,582
Non-owner occupied 427 - 14,084 1,715,654 1,730,165
Consumer and other 7,398 1,591 3,254 312,391 324,634
Total $ 26,450 $ 11,735 $ 35,568 $ 7,530,909 $ 7,604,662
The following tables provide the amortized cost basis of loans on nonaccrual status, as well as any related allowance and interest income as of and for the years ended December 31, 2022 and 2021 by class of financing receivable.
December 31, 2022 Nonaccrual
with no
related
allowance Nonaccrual
with
related
allowance Related
allowance Year to date Interest Income
Commercial and industrial $ 790 $ 517 $ 10 $ 181
Construction - 389 7 28
Residential real estate:
1-to-4 family mortgage 2,834 3,642 78 274
Residential line of credit 1,134 266 4 136
Multi-family mortgage 1 41 1 3
Commercial real estate:
Owner occupied 5,200 210 1 232
Non-owner occupied 5,755 201 5 332
Consumer and other - 6,451 327 358
Total $ 15,714 $ 11,717 $ 433 $ 1,544
December 31, 2021 Nonaccrual
with no
related
allowance Nonaccrual
with
related
allowance Related
allowance Year to date Interest Income
Commercial and industrial $ 1,085 $ 435 $ 6 $ 1,371
Construction 2,882 740 99 156
Residential real estate:
1-to-4 family mortgage 378 4,215 60 314
Residential line of credit 797 939 11 289
Multi-family mortgage - 49 2 3
Commercial real estate:
Owner occupied 5,346 1,364 206 536
Non-owner occupied 13,898 186 7 486
Consumer and other - 3,254 164 245
Total $ 24,386 $ 11,182 $ 555 $ 3,400
Accrued interest receivable written off as an adjustment to interest income amounted to $1,089, $804, and $627 for the years ended December 31, 2022, 2021, and 2020, respectively.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Troubled debt restructurings
As of December 31, 2022 and 2021, the Company had a recorded investment in TDRs of $13,854 and $32,435, respectively. The modifications included extensions of the maturity date and/or a stated rate of interest to one lower than the current market rate to borrowers experiencing financial difficulty. Of these loans, $7,321 and $11,084 were classified as nonaccrual loans as of December 31, 2022 and 2021, respectively. The Company has calculated $253 and $1,245 in allowances for credit losses on TDRs as of December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, unfunded loan commitments to extend additional funds on troubled debt restructurings were not meaningful.
The following tables present the financial effect of TDRs recorded during the periods indicated:
Year Ended December 31, 2022 Number of loans Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Charge offs and specific reserves
Commercial and industrial 3 $ 612 $ 522 $ -
Residential real estate:
1-to-4 family mortgage 3 391 707 -
Residential line of credit 1 49 49 -
Consumer and other 2 23 23 -
Total 9 $ 1,075 $ 1,301 $ -
Year Ended December 31, 2021 Number of loans Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Charge offs and specific reserves
Commercial and industrial 8 $ 15,430 $ 15,430 $ 446
Commercial real estate:
Owner occupied 7 5,209 5,209 -
Non-owner occupied 1 11,997 11,997 -
Residential real estate:
1-4 family mortgage 3 945 945 -
Residential line of credit 3 485 485 -
Multi-family Mortgage 1 49 49 -
Total 23 $ 34,115 $ 34,115 $ 446
Year Ended December 31, 2020 Number of loans Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Charge offs and specific reserves
Commercial and industrial 5 $ 2,257 $ 2,257 $ -
Commercial real estate:
Owner occupied 7 2,794 2,794 -
Non-owner occupied 2 3,752 3,752 -
Residential real estate:
1-4 family mortgage 3 618 618 -
Residential line of credit 1 95 95 -
Total 18 $ 9,516 $ 9,516 $ -
Troubled debt restructurings for which there was a payment default within twelve months following the modification totaled $304 and $304 during the years ended December 31, 2022 and 2021, respectively. There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ended December 31, 2020. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
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. The terms of certain other loans were modified during the years ended December 31, 2022, 2021, and 2020 that did not meet the definition of a TDR. The modification of these loans usually involve either a modification of the terms of a loan to borrowers who are not experiencing financial difficulties or an insignificant delay in payments.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Collateral-Dependent Loans
For loans for which the repayment (based on the Company's assessment) is expected to be provided substantially through the operation or sale of collateral and the borrower is experiencing financial difficulty, the following tables present the loans and the corresponding individually assessed allowance for credit losses by class of financing receivable. Significant changes in individually assessed reserves are due to changes in the valuation of the underlying collateral in addition to changes in accrual and past due status.
December 31, 2022
Type of Collateral
Real Estate Financial Assets and Equipment Total Individually assessed allowance for credit loss
Commercial and industrial $ 2,596 $ - $ 2,596 $ -
Residential real estate:
1-to-4 family mortgage 4,467 - 4,467 194
Residential line of credit 1,135 - 1,135 -
Commercial real estate:
Owner occupied 5,424 - 5,424 -
Non-owner occupied 5,755 - 5,755 -
Consumer and other 134 - 134 -
Total $ 19,511 $ - $ 19,511 $ 194
December 31, 2021
Type of Collateral
Real Estate Financial Assets and Equipment Total Individually assessed allowance for credit loss
Commercial and industrial $ 799 $ 1,090 $ 1,889 $ -
Construction 3,580 - 3,580 92
Residential real estate:
1-to-4 family mortgage 338 - 338 -
Residential line of credit 1,400 - 1,400 10
Commercial real estate:
Owner occupied 8,117 71 8,188 200
Non-owner occupied 13,899 - 13,899 -
Consumer and other 25 - 25 1
Total $ 28,158 $ 1,161 $ 29,319 $ 303
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Note (6)-Premises and equipment:
Premises and equipment and related accumulated depreciation as of December 31, 2022 and 2021, are as follows:
2022 2021
Land $ 32,985 $ 33,151
Premises 109,277 109,357
Furniture, fixtures and equipment 49,203 48,392
Leasehold improvements 19,001 18,531
Construction in process 10,230 1,705
Finance lease 1,367 1,487
222,063 212,623
Less: accumulated depreciation and amortization (75,747) (68,884)
Total Premises and Equipment $ 146,316 $ 143,739
Depreciation and amortization expense was $7,554, $7,411, and $7,009 for the years ended December 31, 2022, 2021, and 2020, 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, 2022, 2021, and 2020:
Years Ended December 31,
2022 2021 2020
Balance at beginning of period $ 9,777 $ 12,111 $ 18,939
Transfers from loans 1,437 5,262 2,746
Transfers to premises and equipment (351) - (841)
Proceeds from sale of other real estate owned (4,955) (9,396) (6,937)
Gain on sale of other real estate owned 328 3,248 354
Loans provided for sales of other real estate owned - (704) (305)
Write-downs and partial liquidations (442) (744) (1,845)
Balance at end of period $ 5,794 $ 9,777 $ 12,111
Foreclosed residential real estate properties totaled $840 and $775 as of December 31, 2022 and 2021, respectively. The recorded investment in residential mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process totaled $2,653 at December 31, 2022. As of December 31, 2021, there were no such residential foreclosure proceedings in process.
Excess land and facilities held for sale resulting from branch consolidations totaled $2,116 and $3,348 as of December 31, 2022 and 2021, respectively.
Note (8)-Goodwill and intangible assets:
Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. The carrying amount of goodwill was $242,561 at both December 31, 2022 and 2021.
Goodwill is tested annually, or more often if circumstances warrant, for impairment. Impairment exists when a reporting unit's carrying value exceeds its fair value. During the years ended December 31, 2022 and 2021, the Company performed a qualitative assessment and determined it was more likely than not that the fair value of the reporting units exceeded its carrying value, including goodwill. As such, no impairment was recorded as of December 31, 2022 or 2021.
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, 2022 and 2021 is as follows:
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Core deposit and other intangibles
Gross Carrying Amount Accumulated Amortization Net Carrying Amount
December 31, 2022
Core deposit intangible $ 59,835 $ (48,200) $ 11,635
Customer base trust intangible 1,600 (867) 733
Manufactured housing servicing intangible 1,088 (1,088) -
Total core deposit and other intangibles $ 62,523 $ (50,155) $ 12,368
December 31, 2021
Core deposit intangible $ 59,835 $ (43,902) $ 15,933
Customer base trust intangible 1,600 (707) 893
Manufactured housing servicing intangible 1,088 (961) 127
Total core deposit and other intangibles $ 62,523 $ (45,570) $ 16,953
The estimated aggregate future amortization expense of core deposit and other intangibles is as follows:
2023 $ 3,658
2024 2,946
2025 2,306
2026 1,563
2027 1,080
Thereafter 815
$ 12,368
Note (9)-Leases:
As of December 31, 2022, the Company was the lessee in 58 operating leases and 1 finance lease of certain branch, mortgage and operations locations with original terms greater than one year. Leases with initial terms of less than one year and equipment leases are not included on the consolidated balance sheets as these are insignificant.
Many 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 and fixed rent escalations are included in the right-of-use asset and lease liability.
During the year ended December 31, 2020, the Company entered into an operating lease for a new corporate headquarters office located in downtown Nashville. During the year ended December 31, 2022, construction of the exterior of the building was completed and the Company took possession of the leased space and began the build-out of the interior space. On August 1, 2022, the Company recorded an ROU asset and operating lease liability of $16,095 and $20,037, respectively, in connection with the initial term of this lease.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Information related to the Company's leases is presented below as of December 31, 2022 and 2021:
December 31,
Classification 2022 2021
Right-of-use assets:
Operating leases Operating lease right-of-use assets $ 60,043 $ 41,686
Finance leases Premises and equipment, net 1,367 1,487
Total right-of-use assets $ 61,410 $ 43,173
Lease liabilities:
Operating leases Operating lease liabilities $ 69,754 $ 46,367
Finance leases Borrowings 1,420 1,518
Total lease liabilities $ 71,174 $ 47,885
Weighted average remaining lease term (in years) -
operating 12.1 12.4
Weighted average remaining lease term (in years) -
finance 12.4 13.4
Weighted average discount rate - operating 3.08 % 2.73 %
Weighted average discount rate - finance 1.76 % 1.76 %
The components of total lease expense included in the consolidated statements of income were as follows:
Years Ended December 31,
Classification 2022 2021 2020
Operating lease costs:
Amortization of right-of-use asset Occupancy and equipment $ 8,441 $ 7,636 $ 6,228
Short-term lease cost Occupancy and equipment 526 427 456
Variable lease cost Occupancy and equipment 1,078 1,003 602
Lease impairment (1) 364 - 2,142
Gain on lease modifications and terminations Occupancy and equipment (18) (805) -
Finance lease costs:
Interest on lease liabilities Interest expense on borrowings 28 25 11
Amortization of right-of-use asset Occupancy and equipment 120 101 43
Sub-lease income Occupancy and equipment (993) (573) (346)
Total lease cost $ 9,546 $ 7,814 $ 9,136
(1) Operating lease impairment is included in "Mortgage restructuring expense" and "Merger costs" within the Company's consolidated statements of income for the years ended December 31, 2022 and 2020, respectively.
During the year ended December 31, 2022, the Company recorded $364 of lease impairment related to vacating two locations associated with restructuring the Company's Mortgage segment and recorded gains of $18 related to early lease terminations and modifications on other vacated locations. During the year ended December 31, 2021, the Company recorded $805 in gains on lease modifications and terminations on certain vacated locations that were consolidated as a result of previous business combinations. During the year ended December 31, 2020, the Company recorded $2,142 of lease impairment related to vacating certain locations as a result of its business combination activity and location consolidation. See Note 2, "Mergers and Acquisitions" for additional information on the Company's business combination activity.
The Company does not separate lease and non-lease components and instead elects 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.
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 and finance lease liabilities and a reconciliation of undiscounted cash flows to the total lease liability as of December 31, 2022 is as follows:
Operating Finance
Leases Lease
Lease payments due:
December 31, 2023 $ 8,085 $ 118
December 31, 2024 8,210 120
December 31, 2025 7,909 121
December 31, 2026 7,724 123
December 31, 2027 7,340 125
Thereafter 46,503 977
Total undiscounted future minimum lease payments 85,771 1,584
Less: imputed interest (16,017) (164)
Lease liability $ 69,754 $ 1,420
Note (10)-Mortgage servicing rights:
Changes in the Company’s mortgage servicing rights were as follows for the years ended December 31, 2022, 2021, and 2020:
Years Ended December 31,
2022 2021 2020
Carrying value at beginning of period $ 115,512 $ 79,997 $ 75,521
Capitalization 20,809 39,018 47,025
Mortgage servicing rights acquired from Franklin, at fair
value - - 5,111
Change in fair value:
Due to pay-offs/pay-downs (16,012) (30,583) (27,834)
Due to change in valuation inputs or assumptions 48,056 27,080 (19,826)
Carrying value at end of period $ 168,365 $ 115,512 $ 79,997
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, 2022, 2021, and 2020:
Years Ended December 31,
2022 2021 2020
Servicing income:
Servicing income $ 30,763 $ 28,890 $ 22,128
Change in fair value of mortgage servicing rights 32,044 (3,503) (47,660)
Change in fair value of derivative hedging instruments (42,143) (8,614) 13,286
Servicing income
20,664 16,773 (12,246)
Servicing expenses 10,259 9,862 7,890
Net servicing income (loss)(1)
$ 10,405 $ 6,911 $ (20,136)
(1) Excludes benefit of custodial servicing related noninterest-bearing deposits held by the Bank.
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, 2022 and 2021 are as follows:
December 31,
2022 2021
Unpaid principal balance $ 11,086,582 $ 10,759,286
Weighted-average prepayment speed (CPR) 5.55 % 9.31 %
Estimated impact on fair value of a 10% increase $ (4,886) $ (4,905)
Estimated impact on fair value of a 20% increase $ (9,447) $ (9,429)
Discount rate 9.10 % 9.81 %
Estimated impact on fair value of a 100 bp increase $ (8,087) $ (4,785)
Estimated impact on fair value of a 200 bp increase $ (15,475) $ (9,198)
Weighted-average coupon interest rate 3.31 % 3.23 %
Weighted-average servicing fee (basis points) 27 27
Weighted-average remaining maturity (in months) 332 330
The Company economically 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.
As of December 31, 2022 and 2021, mortgage escrow deposits totaled to $75,612 and $127,617, respectively.
Note (11)-Other assets and other liabilities:
Included in other assets are:
As of December 31,
Other assets 2022 2021
Prepaid expenses $ 9,280 $ 12,371
Software 108 578
Mortgage lending receivable 14,425 16,087
Derivatives (See Note 17) 48,769 27,384
Deferred tax asset (See Note 14) 42,412 -
FHLB lender risk account receivable (See Note 1) 19,737 17,130
Pledged collateral on derivative instruments 23,325 57,868
Equity securities without readily determinable market value 22,496 8,868
Current income tax receivable 7,373 26,698
Other assets 40,031 5,252
Total other assets $ 227,956 $ 172,236
Included in other liabilities are:
As of December 31,
Other liabilities 2022 2021
Deferred compensation $ 2,424 $ 2,487
Accrued payroll 13,592 22,138
Mortgage buyback reserve (See Note 16) 1,621 4,802
Accrued interest payable 8,648 3,162
Derivatives (See Note 17) 63,229 21,000
Deferred tax liability (See Note 14) - 6,820
FHLB lender risk account guaranty 9,558 8,372
Allowance for credit losses on unfunded commitments (See Note 16) 22,969 14,380
Other liabilities 58,932 26,788
Total other liabilities $ 180,973 $ 109,949
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Note (12)-Deposits:
As of December 31, 2022 and 2021, the aggregate amount of time deposits with a minimum denomination greater than $250 was $556,537 and $303,289, respectively.
At December 31, 2022, the scheduled maturities of time deposits are as follows:
Scheduled maturities of time deposits
Due on or before:
December 31, 2023 $ 873,327
December 31, 2024 480,005
December 31, 2025 34,766
December 31, 2026 19,073
December 31, 2027 14,687
Thereafter 116
Total $ 1,421,974
As of December 31, 2022 and 2021, the Company had $5,725 and $2,574, respectively, of deposit accounts in overdraft status and thus have been reclassified to loans on the accompanying consolidated balance sheets.
Note (13)-Borrowings:
The Company has access to various sources of funds that allow for management of interest rate exposure and liquidity. The following table summarizes the Company's outstanding borrowings and weighted average interest rates as of December 31, 2022 and 2021:
Outstanding Balance Weighted Average Interest Rate
December 31, December 31,
2022 2021 2022 2021
Securities sold under agreements to repurchase
and federal funds purchased $ 86,945 $ 40,716 3.78 % 0.21 %
FHLB advances 175,000 - 4.44 % - %
Subordinated debt, net 126,101 129,544 5.31 % 4.24 %
Other borrowings 27,631 1,518 0.09 % 1.76 %
Total $ 415,677 $ 171,778
Securities sold under agreements to repurchase and federal funds purchased
Securities sold under agreements to repurchase are financing arrangements that mature daily. Securities sold under agreements to repurchase totaled $21,945 and $40,716 as of December 31, 2022 and 2021, respectively. The weighted average interest rate of the Company's securities sold under agreements to repurchase was 0.18% and 0.21% as of December 31, 2022 and 2021, respectively. The fair value of securities pledged to secure repurchase agreements may decline. The Company manages this risk by having a policy to pledge securities valued at 100% of the outstanding balance of repurchase agreements.
The Bank maintains lines with certain correspondent banks that provide borrowing capacity in the form of federal funds purchased. Federal funds purchased are short-term borrowings that typically mature within one to ninety days. As of December 31, 2022 and 2021, the aggregate total borrowing capacity under these lines amounted to $350,000 and $325,000, respectively. As of December 31, 2022, borrowings against these lines (i.e. federal funds purchased) totaled $65,000 with a weighted average rate of 5.00%. There were no such borrowings as of December 31, 2021.
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 agreement to repurchase and federal funds purchased is summarized as follows:
December 31, 2022 December 31, 2021
Balance at year end $ 86,945 $ 40,716
Average daily balance during the year 28,497 36,453
Average interest rate during the year 0.23 % 0.27 %
Maximum month-end balance during the year $ 86,945 $ 41,730
Weighted average interest rate at year-end 3.78 % 0.21 %
Federal Home Loan Bank Advances
As a member of the FHLB Cincinnati, the Bank may utilize advances from the FHLB in order to provide additional liquidity and funding. Under these short-term agreements, the Company maintains a line of credit that as of December 31, 2022 and 2021 had total borrowing capacity of $1,270,240 and $1,233,254, respectively. As of December 31, 2022 and 2021, the Company had qualifying loans pledged as collateral securing these lines amounting to $2,673,464 and $2,717,967, respectively. Overnight cash advances against this line totaled $175,000 as of December 31, 2022. There were no FHLB advances outstanding as of December 31, 2021.
Information concerning FHLB advances as of or for the year ended December 31, 2022 is summarized within the table below. There were no FHLB advances outstanding during the year ended December 31, 2021.
December 31, 2022
Balance at year end $ 175,000
Average daily balance during the year 171,142
Average interest rate during the year 3.26 %
Maximum month-end balance during the year $ 540,000
Weighted average interest rate at year-end 4.44 %
Subordinated Debt
During the year-ended December 31, 2003, two separate trusts were formed by the Company, which issued $9,000 (“Trust I”) and $21,000 ("Trust II") of floating rate trust preferred securities 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. 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. Both issuances were to the trusts in exchange for the proceeds of the securities offerings, which represent the sole asset of the trusts.
Additionally, during the year ended December 31, 2020, the Company placed $100,000 of ten year fixed-to-floating rate subordinated notes, maturing September 1, 2030. During the year ended December 31, 2022, the Company began mitigating interest rate exposure associated with these notes through the use of fair value hedging instruments. See Note 17, "Derivatives" for additional details related to these instruments.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Further information related to the Company's subordinated debt as of December 31, 2022 is detailed below:
Name Year Established Maturity Call Date Total Debt Outstanding Interest Rate Coupon Structure
Subordinated Debt issued by Trust Preferred Securities
FBK Trust I (1)
2003 06/09/2033 6/09/2008(2)
$ 9,280 8.00% 3-month LIBOR plus 3.25%
FBK Trust II (1)
2003 06/26/2033 6/26/2008(3)
21,650 7.87% 3-month LIBOR plus 3.15%
Additional Subordinated Debt
FBK Subordinated Debt I(4)
2020 09/01/2030 9/1/2025 (5)
100,000 4.50% Semi-annual Fixed (6)
Unamortized debt issuance costs (999)
Fair Value Hedge (See Note 17, "Derivatives" )
(3,830)
Total Subordinated Debt, net $ 126,101
(1)The Company classifies $30,000 of the Trusts' subordinated debt as Tier 1 capital.
(2)The Company may also 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 and must be redeemed no later than 2033.
(3)The Company may also redeem the second junior subordinated debentures listed, in whole or in part on any distribution payment date, at the
redemption price and must be redeemed no later than 2033.
(4)The Company classified the issuance, net of unamortized issuance costs and the associated fair value hedge as Tier 2 capital, which will be phased
out 20% per year in the final five years before maturity.
(5)The Company may redeem the notes in whole or in part on any interest payment date on or after September 1, 2025.
(6)Beginning on September 1, 2025 the coupon structure migrates to the 3-month Secured Overnight Financing Rate plus a spread of 439 basis points
through the end of the term of the debenture.
Other Borrowings
As of December 31, 2022 and 2021, other borrowings included a finance lease liability amounting to $1,420 and $1,518, respectively. Additionally, as of December 31, 2022, the Company had $26,211 of government guaranteed GNMA loans that were greater than 90 days delinquent under their contractual terms that were eligible for optional repurchase and recorded in both loans HFS and other borrowings.
See Note 9, "Leases" and Note 18, "Fair Value of financial instruments" for additional information regarding the Company's finance lease and guaranteed GNMA loans eligible for repurchase, respectively.
Note (14)-Income taxes:
An allocation of federal and state income taxes between current and deferred portions is presented below:
Years Ended December 31,
2022 2021 2020
Current $ 22,451 $ 21,980 $ 44,362
Deferred 12,552 30,770 (25,530)
Total $ 35,003 $ 52,750 $ 18,832
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 a reconciliation of federal income taxes at the statutory federal rate of 21% to the Company's effective tax rates for the years ended December 31, 2022, 2021, and 2020:
Years Ended December 31,
2022 2021 2020
Federal taxes calculated at statutory rate $ 33,510 21.0 % $ 51,041 21.0 % $ 17,317 21.0 %
Increase (decrease) resulting from:
State taxes, net of federal
benefit 3,845 2.4 % 8,788 3.5 % 3,197 3.8 %
(Benefit) expense from equity based compensation (392) (0.2) % (2,719) (1.1) % 153 0.2 %
Municipal interest income, net of interest disallowance (1,774) (1.1) % (1,818) (0.8) % (1,507) (1.8) %
Bank-owned life insurance (305) (0.2) % (324) (0.1) % (327) (0.4) %
NOL Carryback provision under CARES Act - - % (3,424) (1.4) % - - %
Offering costs - - % 123 0.1 % 289 0.4 %
Section 162(m) limitation 241 0.1 % 1,381 0.6 % - - %
Other (122) (0.1) % (298) (0.1) % (290) (0.4) %
Income tax expense, as reported $ 35,003 21.9 % $ 52,750 21.7 % $ 18,832 22.8 %
The Company is subject to Internal Revenue Code Section 162(m), which limits the deductibility of compensation paid to certain individuals. It is the Company’s policy to apply the Section 162(m) limitations to stock-based compensation first and then followed by cash compensation. As a result of the vesting of these units and cash compensation paid to date, the Company has disallowed a portion of its compensation paid to the applicable individuals.
The components of the net deferred tax assets (liabilities) at December 31, 2022 and 2021, are as follows:
December 31,
2022 2021
Deferred tax assets:
Allowance for credit losses $ 38,646 $ 35,233
Operating lease liabilities 25,882 12,478
Net operating loss 1,088 1,370
Amortization of core deposit intangibles 653 -
Deferred compensation 5,245 5,484
Unrealized loss on debt securities 61,004 -
Unrealized loss on cash flow hedges - 205
Other assets 6,691 8,301
Subtotal 139,209 63,071
Deferred tax liabilities:
FHLB stock dividends $ (484) $ (484)
Operating leases - right of use assets (24,478) (11,287)
Depreciation (7,274) (7,938)
Amortization of core deposit intangibles - (116)
Unrealized gain on equity securities (2,287) (2,407)
Unrealized gain on cash flow hedges (327) -
Unrealized gain on debt securities - (1,324)
Mortgage servicing rights (43,869) (30,098)
Goodwill (15,869) (13,743)
Other liabilities (2,209) (2,494)
Subtotal (96,797) (69,891)
Net deferred tax assets (liabilities) $ 42,412 $ (6,820)
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company had a net operating loss carryforward generated as a result of a previous merger amounting to $5,179 and $6,523 as of December 31, 2022 and 2021, respectively. The net operating loss carryforward can be used to offset taxable income in future periods and reduce income tax liabilities in those future periods. While net operating losses are subject to certain annual utilization limits under Section 382, the Company believes the net operating loss carryforwards will be realized based on the projected annual limitation and the length of the net operating loss carryover period. The Company's determination of the realization of the net deferred tax asset is based on its assessment of all available positive and negative evidence. The net operating loss carryforward will begin to expire in 2029.
Note (15)-Dividend restrictions:
Due to regulations of the Tennessee Department of Financial Institutions, 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, $161,251 and $170,769 was available for payment of dividends without such prior approval as of December 31, 2022 and 2021, 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.
During the years ended December 31, 2022, 2021, and 2020, there were $49,000, $122,500 and $48,750, respectively, in cash dividends declared from the Bank to the Company. Additionally, during the year ended December 31, 2020, the Bank declared a noncash dividend to the Company comprising investment securities amounting to $956. There were no such noncash dividends from the Bank to the Company during the years ended December 31, 2022 or 2021.
Note (16)-Commitments and contingencies:
Commitments to extend credit & letters of credit
Some financial instruments, such as loan commitments, credit lines and letters of credit, 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.
The same credit and underwriting policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. Many commitments expire without being used and are only recorded in the consolidated financial statements when drawn upon. The Company's maximum off-balance sheet exposure to credit loss is represented by the contractual amount of these instruments.
December 31,
2022 2021
Commitments to extend credit, excluding interest rate lock commitments $ 3,563,982 $ 3,106,594
Letters of credit 71,250 77,427
Balance at end of period $ 3,635,232 $ 3,184,021
As of December 31, 2022 and 2021, loan commitments included above with floating interest rates totaled $2.96 billion and $2.26 billion, respectively.
The Company estimates expected credit losses on off-balance sheet loan commitments that are not accounted for as derivatives under the CECL methodology. When applying this methodology, the Company considers the likelihood that funding will occur, the contractual period of exposure to credit loss, the risk of loss, historical loss experience, and current conditions along with expectations of future economic conditions.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The table below presents activity within the allowance for credit losses on unfunded commitments included in accrued expenses and other liabilities on the Company's consolidated balance sheets for the years ended December 31, 2022, 2021, and 2020:
Years Ended December 31,
2022 2021 2020
Balance at beginning of period $ 14,380 $ 16,378 $ -
Impact of CECL adoption on provision for credit losses on unfunded commitments - - 2,947
Increase in provision for credit losses from unfunded commitments acquired in business combination - - 10,499
Provision for credit losses on unfunded commitments 8,589 (1,998) 2,932
Balance at end of period $ 22,969 $ 14,380 $ 16,378
Loan repurchases or indemnifications
In connection with the sale of mortgage loans to third party investors, the Company makes usual and customary representations and warranties as to the propriety of its origination activities. Occasionally, the investors require the Company 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 $7,834, $7,364, and $9,171 for the years ended December 31, 2022, 2021, and 2020, respectively. The Company has established a reserve associated with loan repurchases.
The following table summarizes the activity in the repurchase reserve included in accrued expenses and other liabilities on the Company's consolidated balance sheets:
Years Ended December 31,
2022 2021 2020
Balance at beginning of period $ 4,802 $ 5,928 $ 3,529
Provision for loan repurchases or indemnifications (2,989) (766) 2,607
Losses on loans repurchased or indemnified (192) (360) (208)
Balance at end of period $ 1,621 $ 4,802 $ 5,928
Legal Proceedings
Various legal claims arise from time to time in the normal course of business, which, in the opinion of management, will not have a material effect on the Company’s consolidated financial statements.
Note (17)-Derivatives:
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 items “Other assets” or “Other liabilities” at fair value in accordance with ASC 815, “Derivatives and Hedging.”
Derivatives not designated as hedging instruments
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 between 45 to 90 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.
The Company also enters into forward commitments, futures and options contracts as economic hedges to offset the changes in fair value of mortgage servicing rights. 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 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
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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 following tables provide details on the Company’s non-designated derivative financial instruments as of the dates presented:
December 31, 2022
Notional Amount Asset Liability
Interest rate contracts $ 560,310 $ 45,775 $ 45,762
Forward commitments 207,000 306 -
Interest rate-lock commitments 118,313 1,433 -
Futures contracts 87,700 - 3,790
Total $ 973,323 $ 47,514 $ 49,552
December 31, 2021
Notional Amount Asset Liability
Interest rate contracts $ 600,048 $ 19,265 $ 19,138
Forward commitments 1,180,000 - 1,077
Interest rate-lock commitments 487,396 7,197 -
Futures contracts 429,000 922 -
Total $ 2,696,444 $ 27,384 $ 20,215
Gains (losses) included in the consolidated statements of income related to the Company’s non-designated derivative financial instruments were as follows:
Years Ended December 31,
2022 2021 2020
Included in mortgage banking income:
Interest rate lock commitments $ (5,764) $ (27,194) $ 27,339
Forward commitments 55,804 25,661 (73,033)
Futures contracts (36,381) (7,949) 8,151
Option contracts 36 - -
Total $ 13,695 $ (9,482) $ (37,543)
Derivatives designated as cash flow hedges
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%. Upon the cessation of LIBOR in June 2023, the rate will convert to SOFR plus an adjustment in accordance with market standards. 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.
The following presents a summary of the Company's designated cash flow hedges as of the dates presented:
December 31, 2022 December 31, 2021
Notional Amount Estimated fair value Balance sheet location Estimated fair value Balance sheet location
Interest rate swap agreements-
subordinated debt $ 30,000 $ 1,255 Other assets $ (785) Accrued expenses and other liabilities
The Company's consolidated statements of income included losses of $93, $577, and $353 for the years ended December 31, 2022, 2021, and 2020, respectively, in interest expense on borrowings related to these cash flow hedges. Additionally, during the year ended December 31, 2020, the Company reclassified an unamortized gain related to the previous cancellation of interest rate swap contracts amounting to $955, net of tax expense of $337, from accumulated other comprehensive income into earnings upon maturity of the underlying FHLB advances. There were no reclassifications from accumulated other comprehensive loss into earnings during the years ended December 31, 2022 or 2021.
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 loss (income), net of tax, for derivative instruments designated as cash flow hedges for the periods presented:
Years Ended December 31,
2022 2021 2020
Amount of gain (loss) recognized in other comprehensive
(loss) income, net of tax expense (benefit) of $532, $293 and $(363)
$ 1,508 $ 831 $ (1,031)
Derivatives designated as fair value hedges
During the year ended December 31, 2022, the Company entered into three designated fair value hedges to mitigate the effect of changing rates on the fair value of various fixed rate liabilities, including certain money market deposits and subordinated debt. The hedging strategy converts the fixed interest rates of the hedged items to the daily compounded SOFR in arrears paid monthly. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same income statement line item as the earnings effect of the hedged item. As of December 31, 2022, the fair value hedges were deemed effective.
December 31, 2022
Notional Amount Remaining Maturity (In Years) Receive Fixed Rate Pay Floating Rate Estimated fair value
Derivatives included in other liabilities:
Interest rate swap
agreement- subordinated
debt $ 100,000 1.17 1.46% SOFR $ (3,830)
Interest rate swap
agreement- fixed rate
money market deposits 75,000 1.64 1.50% SOFR (3,693)
Interest rate swap
agreement- fixed rate
money market deposits 125,000 1.64 1.50% SOFR (6,154)
Total $ 300,000 1.48 1.48% $ (13,677)
The following discloses the amount of expense included in interest expense on borrowings and deposits, related to these fair value hedging instruments:
Year Ended December 31,
Designated fair value hedge:
Interest expense on deposits $ (717)
Interest expense on borrowings (395)
Total $ (1,112)
The following amounts were recorded on the balance sheet related to cumulative adjustments of fair value hedges as of December 31, 2022:
Line item on the balance sheet Carrying Amount of the Hedged Item Cumulative Decrease in Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Item
Borrowings $ 95,171 (1)
$ (3,830)
Money market and savings deposits 196,520 (2)
(9,847)
(1) The carrying value also includes unamortized subordinated debt issuance costs of $999.
(2) The carrying value also includes an unaccreted purchase accounting fair value premium of $6,367.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheets when the “right of offset” 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, however the Company has not elected to offset such financial instruments in the consolidated balance sheets. The following table presents the Company's gross derivative positions as recognized in the consolidated balance sheets as well as the net derivative positions, including collateral pledged to the extent the application of such collateral did not reduce the net derivative liability position below zero, had the Company elected to offset those instruments subject to an enforceable master netting agreement:
Offsetting Derivative Assets Offsetting Derivative Liabilities
December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021
Gross amounts recognized $ 44,273 $ 4,990 $ 20,251 $ 15,733
Gross amounts offset in the consolidated balance sheets - - - -
Net amounts presented in the consolidated balance sheets 44,273 4,990 20,251 15,733
Gross amounts not offset in the consolidated balance sheets
Less: financial instruments 14,229 4,297 14,229 4,297
Less: financial collateral pledged - - 6,022 11,436
Net amounts $ 30,044 $ 693 $ - $ -
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. As of December 31, 2022 and 2021, the Company had minimum collateral posting thresholds with certain derivative counterparties and had collateral posted of $23,325 and $57,868, respectively, against its obligations under these agreements. Cash pledged as collateral on derivative contracts is recorded in "Other assets" on the consolidated balance sheets.
Note (18)-Fair value of financial instruments:
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.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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 for the mortgage portfolio, that is, using Level 2 inputs. The fair value of commercial loans held for sale is determined using an income approach with various assumptions including expected cash flows, market discount rates, credit metrics and collateral value when appropriate. As such, these are considered Level 3. The guaranteed GNMA optional repurchase loans are excluded from the fair value option.
Derivatives
The fair value of the Company's interest rate swap agreements to facilitate customer transactions 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. The fair value of interest rate lock commitments associated with the mortgage pipeline 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 fair values of the Company's designated cash flow and fair value hedges are determined by calculating the difference between the discounted fixed rate cash flows and the discounted variable rate cash flows. The fair values of both the Company's hedges, including designated cash flow hedges and designated fair value hedges are based on pricing models that utilize observable market inputs. These financial instruments are classified as Level 2.
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 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, MSRs are considered Level 3.
Collateral dependent loans
Collateral dependent loans are loans for which, based on current information and events, the Company has determined foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral and it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collateral dependent loans are classified as Level 3.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
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.
Fair Value
December 31, 2022 Carrying amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and cash equivalents $ 1,027,052 $ 1,027,052 $ - $ - $ 1,027,052
Investment securities 1,474,176 - 1,474,176 - 1,474,176
Net loans held for investment 9,164,020 - - 9,048,943 9,048,943
Loans held for sale, at fair value 113,240 - 82,750 30,490 113,240
Interest receivable 45,684 126 6,961 38,597 45,684
Mortgage servicing rights 168,365 - - 168,365 168,365
Derivatives 48,769 - 48,769 - 48,769
Financial liabilities:
Deposits:
Without stated maturities $ 9,433,860 $ 9,433,860 $ - $ - $ 9,433,860
With stated maturities 1,421,974 - 1,422,544 - 1,422,544
Securities sold under agreement to
repurchase and federal funds purchased
86,945 86,945 - - 86,945
Federal Home Loan Bank advances 175,000 - 175,000 - 175,000
Subordinated debt, net 126,101 - - 118,817 118,817
Interest payable 8,648 2,571 4,559 1,518 8,648
Derivatives 63,229 - 63,229 - 63,229
Fair Value
December 31, 2021 Carrying amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and cash equivalents $ 1,797,740 $ 1,797,740 $ - $ - $ 1,797,740
Investment securities 1,681,892 - 1,681,892 - 1,681,892
Net loans held for investment 7,479,103 - - 7,566,717 7,566,717
Loans held for sale, at fair value 752,223 - 672,924 79,299 752,223
Interest receivable 38,528 36 6,461 32,031 38,528
Mortgage servicing rights 115,512 - - 115,512 115,512
Derivatives 27,384 - 27,384 - 27,384
Financial liabilities:
Deposits:
Without stated maturities $ 9,705,816 $ 9,705,816 $ - $ - $ 9,705,816
With stated maturities 1,131,081 - 1,137,647 - 1,137,647
Securities sold under agreement to
repurchase and federal funds purchased
40,716 40,716 - - 40,716
Subordinated debt, net 129,544 - - 133,021 133,021
Interest payable 3,162 140 1,510 1,512 3,162
Derivatives 21,000 - 21,000 - 21,000
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 recurring basis at December 31, 2022 are presented in the following table:
At December 31, 2022 Quoted prices
in active
markets for
identical assets
(liabilities)
(level 1) Significant
other
observable
inputs
(level 2) Significant unobservable
inputs
(level 3) Total
Recurring valuations:
Financial assets:
Available-for-sale securities:
U.S. government agency securities $ - $ 40,062 $ - $ 40,062
Mortgage-backed securities - residential - 1,034,193 - 1,034,193
Mortgage-backed securities - commercial - 17,644 - 17,644
Municipal securities - 264,420 - 264,420
U.S. Treasury securities - 107,680 - 107,680
Corporate securities - 7,187 - 7,187
Equity securities, at fair value - 2,990 - 2,990
Total securities $ - $ 1,474,176 $ - $ 1,474,176
Loans held for sale, at fair value $ - $ 56,539 $ 30,490 $ 87,029
Mortgage servicing rights - - 168,365 168,365
Derivatives - 48,769 - 48,769
Financial Liabilities:
Derivatives - 63,229 - 63,229
The balances and levels of the assets measured at fair value on a non-recurring basis at December 31, 2022 are presented in the following table:
At December 31, 2022 Quoted prices
in active
markets for
identical assets
(liabilities
(level 1) Significant
other
observable
inputs
(level 2) Significant unobservable
inputs
(level 3) Total
Non-recurring valuations:
Financial assets:
Other real estate owned $ - $ - $ 2,497 $ 2,497
Collateral dependent net loans held for
investment:
Residential real estate:
1-4 family mortgage $ - $ - $ 366 $ 366
Commercial real estate:
Non-owner occupied - - 2,494 2,494
Total collateral dependent loans $ - $ - $ 2,860 $ 2,860
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 recurring basis at December 31, 2021 are presented in the following table:
At December 31, 2021 Quoted prices
in active
markets for
identical assets
(liabilities)
(level 1) Significant
other
observable
inputs
(level 2) Significant unobservable
inputs
(level 3) Total
Recurring valuations:
Financial assets:
Available-for-sale securities:
U.S. government agency securities $ - $ 33,870 $ - $ 33,870
Mortgage-backed securities - residential - 1,269,372 - 1,269,372
Mortgage-backed securities - commercial - 15,250 - 15,250
Municipal securities - 338,610 - 338,610
U.S. Treasury securities - 14,908 - 14,908
Corporate securities - 6,515 - 6,515
Equity securities, at fair value - 3,367 - 3,367
Total securities $ - $ 1,681,892 $ - $ 1,681,892
Loans held for sale, at fair value $ - $ 672,924 $ 79,299 $ 752,223
Mortgage servicing rights - - 115,512 115,512
Derivatives - 27,384 - 27,384
Financial Liabilities:
Derivatives - 21,000 - 21,000
The balances and levels of the assets measured at fair value on a non-recurring basis at December 31, 2021 are presented in the following table:
At December 31, 2021 Quoted prices
in active
markets for
identical assets
(liabilities)
(level 1) Significant
other
observable
inputs
(level 2) Significant unobservable
inputs
(level 3) Total
Non-recurring valuations:
Financial assets:
Other real estate owned $ - $ - $ 6,308 $ 6,308
Collateral dependent net loans held for
investment:
Construction $ - $ - $ 606 $ 606
Residential real estate:
Residential line of credit - - 592 592
Commercial real estate:
Owner occupied - - 729 729
Non-owner occupied - - 3,526 3,526
Consumer and other - - 24 24
Total collateral dependent loans $ - $ - $ 5,477 $ 5,477
The following tables present information as of December 31, 2022 and 2021 about significant unobservable inputs (Level 3) used in the valuation of assets measured at fair value on a nonrecurring basis:
As of December 31, 2022
Financial instrument Fair Value Valuation technique Significant
unobservable inputs Range of
inputs
Collateral dependent net loans
held for investment $ 2,860 Valuation of collateral Discount for comparable sales 10%-35%
Other real estate owned $ 2,497 Appraised value of property less costs to sell Discount for costs to sell 0%-15%
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
As of December 31, 2021
Financial instrument Fair Value Valuation technique Significant
unobservable inputs Range of
inputs
Collateral dependent loans
held for investment $ 5,477 Valuation of collateral Discount for comparable sales 10%-35%
Other real estate owned $ 6,308 Appraised value of property less costs to sell Discount for costs to sell 0%-15%
For collateral dependent loans, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. Fair value of the loan's collateral is determined by third-party appraisals, which are then adjusted for estimated selling and closing costs related to liquidation of the collateral. Collateral dependent 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 borrower and borrower's business. As of December 31, 2022 and 2021, total amortized cost of collateral dependent loans measured on a non-recurring basis amounted to $3,054 and $5,781, respectively.
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 credit losses. Appraisals for both collateral dependent 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. Collateral dependent loans that are dependent on recovery through sale of equipment, such as farm equipment, automobiles and aircrafts are generally valued based on public source pricing or subscription services while more complex assets are valued through leveraging brokers who have expertise in the collateral involved.
Fair value option
The following table summarizes the Company's loans held for sale as of the dates presented:
December 31,
2022 2021
Loans held for sale under a fair value option:
Commercial loans held for sale $ 30,490 $ 79,299
Mortgage loans held for sale 82,750 672,924
Total loans held for sale, at fair value 113,240 752,223
Loans held for sale not accounted for under a fair value option:
Mortgage loans held for sale - guaranteed GNMA repurchase option 26,211 -
Total loans held for sale $ 139,451 $ 752,223
Mortgage loans held for sale
The Company measures mortgage loans originated for sale at fair value under the fair value option as permitted under ASC 825, "Financial Instruments" ("ASC 825"). Electing to measure these assets at fair value reduces certain timing differences and more accurately 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 $13,677 and $16,976 and a net gain of $24,233 resulting from fair value changes of mortgage loans were recorded in income during the years ended December 31, 2022, 2021, and 2020, 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 net change in fair value of these loans HFS and derivatives resulted in net losses of $17,633 and $33,284 and a net gain of $31,192 for the years ended December 31, 2022, 2021, and 2020, respectively. 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.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
The Company’s valuation of mortgage loans held for sale incorporates an assumption for credit risk; however, given the short-term period that the Company holds these mortgage loans held for sale, valuation adjustments attributable to instrument-specific credit risk is nominal.
During the year ended December 31, 2022, the Company identified a more-than-trivial benefit associated with serviced GNMA loans previously sold that are contractually delinquent greater than 90 days and began recording this guaranteed repurchase option on the balance sheet on a prospective basis without impact to prior periods. See Note 1, "Basis of presentation" within this Report for additional information. Rebooked GNMA optional repurchase loans do not meet the requirements under FASB ASC Topic 825 to be accounted for under the fair value option. As such, these loans are excluded from the below disclosures. As of December 31, 2021, there were $91,924 of delinquent 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.
Commercial loans held for sale
The Company also has a portfolio of shared national credits and institutional healthcare loans that were acquired during 2020 in the merger with Franklin. These commercial loans are also being measured under the fair value option. As such, these loans are excluded from the allowance for credit losses. The following tables sets forth the changes in fair value associated with this portfolio for the years ended December 31, 2022, 2021, and 2020.
Year Ended December 31, 2022
Principal Balance Fair Value Discount Fair Value
Carrying value at beginning of period $ 86,762 $ (7,463) $ 79,299
Change in fair value:
Pay-downs and pay-offs (43,676) - (43,676)
Write-offs to discount (8,729) 8,729 -
Changes in valuation included in other noninterest income - (5,133) (5,133)
Carrying value at end of period $ 34,357 $ (3,867) $ 30,490
Year Ended December 31, 2021
Principal balance Fair Value discount Fair Value
Carrying value at beginning of period $ 239,063 $ (23,660) $ 215,403
Change in fair value:
Pay-downs and pay-offs (141,002) - (141,002)
Write-offs to discount (8,563) 8,563 -
Changes in valuation included in other noninterest income (2,736) 7,634 4,898
Carrying value at end of period $ 86,762 $ (7,463) $ 79,299
In addition to the gain of $4,898 recognized on the change in fair value of the portfolio during the year ended December 31, 2021, the Company recognized an additional gain of $6,274 related to the pay-off of a loan that had been partially charged off prior to acquisition of the portfolio.
Year Ended December 31, 2020
Principal balance Fair Value discount Fair Value
Carrying value at beginning of period $ - $ - $ -
Commercial loans held for sale acquired from Franklin
350,269 (24,063) 326,206
Change in fair value:
Pay-downs and pay-offs (111,206) - (111,206)
Write-offs to discount - (2,825) (2,825)
Changes in valuation included in other noninterest income - 3,228 3,228
Carrying value at end of period $ 239,063 $ (23,660) $ 215,403
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 interest income in the consolidated statements of income.
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 and nonaccrual loans measured at fair value as of December 31, 2022 and 2021:
December 31, 2022 Aggregate
fair value Aggregate Unpaid Principal Balance Difference
Mortgage loans held for sale measured at fair value $ 82,750 $ 81,520 $ 1,230
Commercial loans held for sale measured at fair value 21,201 22,126 (925)
Nonaccrual commercial loans held for sale 9,289 12,231 (2,942)
December 31, 2021 Aggregate
fair value Aggregate Unpaid Principal Balance Difference
Mortgage loans held for sale measured at fair value $ 672,924 $ 658,017 $ 14,907
Commercial loans held for sale measured at fair value 74,082 76,863 (2,781)
Nonaccrual commercial loans held for sale 5,217 9,899 (4,682)
Note (19)-Parent company financial statements:
The following information presents the condensed balance sheets, statements of income, and cash flows of FB Financial Corporation as of December 31, 2022 and 2021 and for each of the years in the three-year period ended December 31, 2022.
As of December 31,
Balance sheets 2022 2021
Assets
Cash and cash equivalents(1)
$ 3,052 $ 21,515
Investment in subsidiaries(1)
1,337,657 1,427,784
Other assets 16,654 14,487
Goodwill 29 29
Total assets $ 1,357,392 $ 1,463,815
Liabilities and shareholders' equity
Liabilities
Borrowings $ 30,930 $ 30,930
Accrued expenses and other liabilities 1,037 283
Total liabilities 31,967 31,213
Shareholders' equity
Common stock 46,738 47,549
Additional paid-in capital 861,588 892,529
Retained earnings 586,532 486,666
Accumulated other comprehensive income (169,433) 5,858
Total shareholders' equity 1,325,425 1,432,602
Total liabilities and shareholders' equity $ 1,357,392 $ 1,463,815
(1) Eliminates in Consolidation
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Years Ended December 31,
Statements of income 2022 2021 2020
Income
Dividend income from bank subsidiary(1)
$ 49,000 $ 122,500 $ 49,706
Dividend income from nonbank subsidiary(1)
- 2,525 -
Gain on investments - 249 217
Other income 89 15 1,732
Total income 49,089 125,289 51,655
Expenses
Interest expense 1,587 2,455 3,122
Salaries, legal and professional fees 1,590 1,445 1,458
Other noninterest expense 771 1,812 283
Total expenses 3,948 5,712 4,863
Income before income tax benefit and equity in undistributed
earnings of subsidiaries 45,141 119,577 46,792
Federal and state income tax benefit (1,002) (2,992) (1,155)
Income before equity in undistributed earnings of subsidiaries 46,143 122,569 47,947
Equity in undistributed earnings from bank subsidiary(1)
76,232 68,351 15,168
Equity in undistributed earnings from nonbank subsidiary(1)
2,180 (635) 506
Net income $ 124,555 $ 190,285 $ 63,621
(1) Eliminates in Consolidation
Years Ended December 31,
Statements of cash flows 2022 2021 2020
Operating Activities
Net income $ 124,555 $ 190,285 $ 63,621
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of bank subsidiary (76,232) (68,351) (15,168)
Equity in undistributed income of nonbank subsidiary (2,180) 635 (506)
Gain on investments - (249) (217)
Stock-based compensation expense 9,857 10,282 10,214
Increase in other assets (802) (3,916) (9,717)
Decrease in other liabilities (7,381) (678) (11,853)
Net cash provided by operating activities 47,817 128,008 36,374
Investing Activities
Net cash paid in business combinations (See Note 2) - - (35,505)
Proceeds from sale of equity securities - 1,422 -
Net cash provided by (used in) investing activities - 1,422 (35,505)
Financing Activities
Payments on subordinated debt - (60,000) -
Accretion of subordinated debt fair value premium - (369) (436)
Payments on other borrowings - (15,000) -
Proceeds from other borrowings - - 15,000
Share based compensation withholding payments (2,842) (10,158) (1,510)
Net proceeds from sale of common stock under employee stock purchase program 1,212 1,480 978
Repurchase of common stock (39,979) (7,595) -
Dividends paid on common stock (24,503) (20,866) (14,177)
Dividend equivalent payments made upon vesting of equity compensation (168) (717) (87)
Net cash used in financing activities (66,280) (113,225) (232)
Net (decrease) increase in cash and cash equivalents (18,463) 16,205 637
Cash and cash equivalents at beginning of year 21,515 5,310 4,673
Cash and cash equivalents at end of year $ 3,052 $ 21,515 $ 5,310
Supplemental noncash disclosures:
Dividends declared not paid on restricted stock units $ 222 $ 400 $ 238
Noncash dividend from bank subsidiary - - 956
Noncash security distribution to bank subsidiary - 2,646 -
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, 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 also originates conforming residential mortgage loans through the Mortgage segment, which activities also include the servicing of residential mortgage loans and the packaging and securitization of loans to governmental agencies. 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. Additionally, the Banking segment includes the results of the Company's specialty lending group, which is concentrated in manufactured housing lending. The Mortgage segment utilizes funding sources from the Banking segment in order to fund mortgage loans that are ultimately sold on the secondary market and uses proceeds from loan sales to repay obligations due to the Banking segment.
During the year ended December 31, 2022, the Company exited the direct-to-consumer internet delivery channel, which is one of two delivery channels in the Mortgage segment. As a result of exiting this channel, the Company incurred $12,458 of restructuring expenses during the year ended December 31, 2022. The repositioning of the Mortgage segment does not qualify to be reported as discontinued operations. The Company plans to continue originating and selling residential mortgage loans within its Mortgage segment through its traditional mortgage retail channel, retain mortgage servicing rights and continue holding residential mortgage loans in the loan HFI portfolio.
Interest rate lock commitment volume and sales volume by delivery channel included in the Mortgage segment is as follows for the periods indicated:
Years Ended December 31,
2022 2021 2020
Interest rate lock commitment volume by delivery channel:
Direct-to-consumer $ 663,848 $ 3,745,430 $ 5,539,862
Retail 2,036,658 3,414,638 3,399,174
Total $ 2,700,506 $ 7,160,068 $ 8,939,036
Interest rate lock commitment volume % by delivery channel:
Direct-to-consumer 24.6 % 52.3 % 62.0 %
Retail 75.4 % 47.7 % 38.0 %
Mortgage sales by delivery channel:
Direct-to-consumer $ 1,031,810 $ 3,328,216 $ 3,751,813
Retail 1,958,849 2,873,861 2,483,336
Total $ 2,990,659 $ 6,202,077 $ 6,235,149
Mortgage sales % by delivery channel:
Direct-to-consumer 34.5 % 53.7 % 60.2 %
Retail 65.5 % 46.3 % 39.8 %
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 periods indicated:
Year Ended December 31, 2022 Banking(4)
Mortgage Consolidated
Net interest income $ 412,237 $ (2) $ 412,235
Provisions for credit losses(1)
18,982 - 18,982
Mortgage banking income(2)
- 83,679 83,679
Change in fair value of mortgage servicing rights, net of hedging(2)
- (10,099) (10,099)
Other noninterest income 41,320 (233) 41,087
Depreciation and amortization 7,035 982 8,017
Amortization of intangibles 4,585 - 4,585
Other noninterest expense(3)
240,096 95,648 335,744
Income (loss) before income taxes $ 182,859 $ (23,285) $ 159,574
Income tax expense 35,003
Net income applicable to FB Financial Corporation and noncontrolling
interest
124,571
Net income applicable to noncontrolling interest(4)
Net income applicable to FB Financial Corporation $ 124,555
Total assets $ 12,228,451 $ 619,305 $ 12,847,756
Goodwill 242,561 - 242,561
(1) Includes $8,589 in provision for credit losses on unfunded commitments.
(2) Change in fair value of mortgage servicing rights, net of hedging is included in mortgage banking income in the Company's consolidated statements of income.
(3) Includes $12,458 in Mortgage restructuring expenses in the Mortgage segment related to the exit from the direct-to-consumer delivery channel.
(4) Banking segment includes noncontrolling interest.
Year Ended December 31, 2021 Banking(3)
Mortgage Consolidated
Net interest income $ 347,342 $ 28 $ 347,370
Provisions for credit losses(1)
(40,993) - (40,993)
Mortgage banking income(2)
- 179,682 179,682
Change in fair value of mortgage servicing rights, net of hedging(2)
- (12,117) (12,117)
Other noninterest income 61,073 (383) 60,690
Depreciation and amortization 7,054 1,362 8,416
Amortization of intangibles 5,473 - 5,473
Other noninterest expense 220,283 139,395 359,678
Income before income taxes $ 216,598 $ 26,453 $ 243,051
Income tax expense 52,750
Net income applicable to FB Financial Corporation and noncontrolling
interest
190,301
Net income applicable to noncontrolling interest(3)
Net income applicable to FB Financial Corporation $ 190,285
Total assets $ 11,540,560 $ 1,057,126 $ 12,597,686
Goodwill 242,561 - 242,561
(1)Includes $(1,998) in provision for credit losses on unfunded commitments.
(2)Change in fair value of mortgage servicing rights, net of hedging is included in mortgage banking income in the Company's consolidated statements of income.
(3)Banking segment includes noncontrolling interest.
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, 2020 Banking(1)(5)
Mortgage(1)
Consolidated
Net interest income $ 265,581 $ 77 $ 265,658
Provisions for credit losses(2)
107,967 - 107,967
Mortgage banking income(3)
- 289,702 289,702
Change in fair value of mortgage servicing rights, net of hedging(3)
- (34,374) (34,374)
Other noninterest income 46,527 - 46,527
Depreciation and amortization 6,425 1,111 7,536
Amortization of intangibles 5,323 - 5,323
Other noninterest expense(4)
212,890 151,336 364,226
(Loss) income before income taxes $ (20,497) $ 102,958 $ 82,461
Income tax expense 18,832
Net income applicable to FB Financial Corporation and noncontrolling
interest
63,629
Net income applicable to noncontrolling interest(5)
Net income applicable to FB Financial Corporation $ 63,621
Total assets $ 10,254,324 $ 953,006 $ 11,207,330
Goodwill 242,561 - 242,561
(1)As previously reported on Form 10-K filed with the SEC on February 25, 2022, results have been revised from originally reported to reflect a $26,416 reclassification of mortgage retail footprint total net contribution from the Banking segment to the Mortgage segment.
(2)Includes $13,361 in provision for credit losses on unfunded commitments.
(3)Change in fair value of mortgage servicing rights, net of hedging is included in mortgage banking income in the Company's consolidated statements of income.
(4)Includes $33,824 of merger costs in the Banking segment related to the Farmers National acquisition and the Franklin merger and $1,055 of merger costs in the Mortgage segment related to the Franklin merger.
(5)Banking segment includes noncontrolling interest.
The Banking segment provides the 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, is limited based on interest income earned by the Mortgage segment. The amount of interest paid by the Mortgage segment to the Banking segment under this warehouse line of credit is recorded as interest income to the Company's Banking segment and as interest expense to the Mortgage segment, both of which are included in the calculation of net interest income for each segment. The amount of interest paid by the Mortgage segment to the Banking segment under this warehouse line of credit was $18,906, $23,910, and $14,810 for the years ended December 31, 2022, 2021, and 2020, 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 capital ratios as outlined in the table below. 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, 2022 and 2021, the Bank and Company met all capital adequacy requirements to which they are subject.
In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced a final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The final rule maintained the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company adopted the capital transition relief over the permissible five-year period and delayed the initial impact of CECL adoption plus 25% of the quarterly increases in ACL through December 31, 2021. As of January 1, 2022, the cumulative amount of the transition adjustments became fixed and are being phased out of regulatory capital calculations evenly over a three year period, with 75% of the transition provision’s impact being recognized in 2022, 50% recognized in 2023, and 25% recognized in 2024.
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 included below as of the dates indicated.
As of December 31, 2022
Actual Minimum Capital
adequacy with
capital buffer To be well capitalized
under prompt corrective
action provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets)
FB Financial Corporation $ 1,528,344 13.1 % $ 1,225,161 10.5 % N/A N/A
FirstBank 1,506,543 12.9 % 1,222,922 10.5 % $ 1,164,688 10.0 %
Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation $ 1,315,386 11.3 % $ 991,797 8.5 % N/A N/A
FirstBank 1,293,585 11.1 % 989,985 8.5 % $ 931,750 8.0 %
Tier 1 Capital (to average assets)
FB Financial Corporation $ 1,315,386 10.5 % $ 499,648 4.0 % N/A N/A
FirstBank 1,293,585 10.4 % 499,194 4.0 % $ 623,992 5.0 %
Common Equity Tier 1 Capital
(to risk-weighted assets)
FB Financial Corporation $ 1,285,386 11.0 % $ 816,774 7.0 % N/A N/A
FirstBank 1,293,585 11.1 % 815,281 7.0 % $ 757,047 6.5 %
As of December 31, 2021 Actual Minimum Capital
adequacy with
capital buffer To be well capitalized
under prompt corrective
action provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets)
FB Financial Corporation $ 1,434,581 14.5 % $ 1,039,984 10.5 % N/A N/A
FirstBank 1,396,407 14.1 % 1,038,760 10.5 % $ 989,295 10.0 %
Tier 1 Capital (to risk-weighted assets)
FB Financial Corporation $ 1,251,874 12.6 % $ 841,892 8.5 % N/A N/A
FirstBank 1,213,700 12.3 % 840,901 8.5 % $ 791,436 8.0 %
Tier 1 Capital (to average assets)
FB Financial Corporation $ 1,251,874 10.5 % $ 474,831 4.0 % N/A N/A
FirstBank 1,213,700 10.2 % 474,044 4.0 % $ 592,555 5.0 %
Common Equity Tier 1 Capital
(to risk-weighted assets)
FB Financial Corporation $ 1,221,874 12.3 % $ 693,322 7.0 % N/A N/A
FirstBank 1,213,700 12.3 % 692,507 7.0 % $ 643,042 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. The Bank has an employer match of 50% of participant contributions not to exceed 6% of an employee’s total compensation and the vesting term of profit sharing contributions is a three-year ratable period. For the years ended December 31, 2022, 2021 and 2020, the matching portions provided by the Bank to this Plan were $3,686, $3,923 and $3,198 respectively.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
(B)-Acquired supplemental retirement plans:
The Company has nonqualified supplemental retirement plans for certain former employees that were assumed through previous acquisitions. As of December 31, 2022 and 2021, other liabilities on the consolidated balance sheets included post-retirement benefits payable of $2,424 and $2,487, respectively, related to these plans. For the years ended December 31, 2022, 2021 and 2020, the Company recorded expense of $119, $94 and $29, respectively, related to these plans and payments to the participants were $181, $172 and $131 in 2022, 2021 and 2020, respectively. The Company also acquired single premium life insurance policies on these individuals. At December 31, 2022 and 2021, cash surrender value of bank-owned life insurance was $75,329 and $73,519, respectively. Income related to these policies (net of related insurance premium expense) amounted to $1,452, $1,542 and $1,556 in 2022, 2021 and 2020, respectively.
Note (23)-Stock-Based Compensation:
Restricted Stock Units
The Company grants RSUs under compensation arrangements for the benefit of employees, executive officers, and directors. RSU 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.
The following table summarizes changes in restricted stock units for the year ended December 31, 2022.
Restricted Stock
Units
Outstanding Weighted
Average Grant
Date
Fair Value
Balance at beginning of period (unvested) 492,320 $ 36.06
Granted 145,000 43.67
Vested (221,074) 36.27
Forfeited (51,091) 34.99
Balance at end of period (unvested) 365,155 $ 39.02
The total fair value of restricted stock units vested and released was $8,018, $16,340, and $5,619 for the years ended December 31, 2022, 2021, and 2020, respectively.
The compensation cost related to stock grants and vesting of restricted stock units was $7,372, $8,907, and $9,213 for the years ended December 31, 2022, 2021, and 2020, respectively. This included amounts paid related to director grants and compensation elected to be settled in stock amounting to $663, $635, and $898 during the years ended December 31, 2022, 2021, and 2020, respectively.
As of December 31, 2022, there was $8,891 of total unrecognized compensation cost related to unvested restricted stock units which is expected to be recognized over a weighted-average period of 2.3 years. Additionally, as of December 31, 2022, there were 1,723,860 shares available for issuance under the Company's stock compensation plans. As of December 31, 2022 and 2021, there were $292 and $274, respectively, accrued in other liabilities related to dividend equivalent units declared to be paid upon vesting and distribution of the underlying restricted stock units.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Performance Based Restricted Stock Units
The Company awards performance-based restricted stock units to executives and other officers and employees. Under the terms of the awards, the number of units that will vest and convert to shares of common stock will be based on the Company's performance relative to a predefined peer group over a fixed three-year performance period. The number of shares issued upon vesting will range from 0% to 200% of the PSUs granted. The Company's performance relative to the peer group will be measured based on calculated non-GAAP adjusted return on average tangible common equity, adjusted for unusual gains/losses, merger expenses, and other items as approved by the compensation committee of the Company's board of directors. Compensation expense for PSUs is estimated each period based on the fair value of the Company's stock at the grant date and the most probable outcome of the performance condition, adjusted for the passage of time within the performance period of the awards
The following table summarizes information about the changes in PSUs as of and for the year ended December 31, 2022.
Performance Stock
Units
Outstanding Weighted
Average Grant
Date
Fair Value
Balance at beginning of period (unvested) 115,750 $ 40.13
Granted 69,291 44.44
Vested - -
Forfeited or expired (23,374) 42.65
Balance at end of period (unvested) 161,667 $ 41.73
The following table summarizes data related to the Company's outstanding PSUs as of December 31, 2022:
Grant Year Grant Price Vest Year PSUs Outstanding
2020 (1)
$ 36.21 2023 44,319
2021 (1)
$ 43.20 2024 56,406
2022 (2)
$ 44.44 2025 60,942
(1)Vesting factor will be either at 0%, 25%, 100%, or 200% of PSUs outstanding based on the Company's performance relative to a predefined peer
group over a fixed three-year performance period.
(2)Vesting factor will be interpolated between 0% and 200% of PSUs outstanding based on the Company's performance relative to a predefined peer
group over a fixed three-year performance period.
The Company recorded compensation cost of $2,485, $1,375, and $1,001 for the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, maximum unrecognized compensation cost at 200% payout related to the unvested PSUs was $8,638, and the weighted average remaining performance period over which the cost could be recognized was 1.84 years.
Employee Stock Purchase Plan:
The Company maintains an employee stock purchase plan under which employees, through payroll deductions, are able to purchase shares of Company common stock. The employee 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 worth of common stock in any calendar year). There were 26,950, 37,310, and 30,179 shares of common stock issued under the ESPP with proceeds from employee payroll withholdings of $1,087, $1,190, and $919 during the years ended December 31, 2022, 2021, and 2020, respectively. As of December 31, 2022, there were 2,314,746 shares available for issuance under the ESPP.
FB Financial Corporation and subsidiaries
Notes to consolidated financial statements
(Dollar amounts are in thousands, except share and per share amounts)
Note (24)-Related party transactions:
(A) Loans:
The Bank has made and expects to continue to make loans to the directors, certain management, significant shareholders, and executive officers of the Company and their related interests 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 related interests is presented below:
Loans outstanding at January 1, 2022 $ 29,010
New loans and advances 67,024
Change in related party status (9,939)
Repayments (3,536)
Loans outstanding at December 31, 2022 $ 82,559
Unfunded commitments to certain executive officers, certain management and directors and their related interests totaled $31,564 and $10,994 at December 31, 2022 and 2021, respectively.
(B) Deposits:
The Bank held deposits from related parties totaling $347,660 and $312,956 as of December 31, 2022 and 2021, respectively.
(C) Leases:
The Bank leases various office spaces from entities owned by certain directors of the Company under varying terms. Lease expense for these properties totaled $396, $497, and $510 for the years ended December 31, 2022, 2021, and 2020.
(D) Aviation lease and time sharing agreement:
During the year ended December 31, 2021, the Bank formed a subsidiary, FBK Aviation, LLC and purchased an aircraft under this entity. FBK Aviation, LLC also maintains a non-exclusive aircraft lease agreement with an entity owned by one of the Company's directors. During the years ended December 31, 2022 and 2021, the Company recognized income amounting to $52 and $21, respectively, under this agreement. Additionally, the Company is a participant to an aviation time sharing agreement for an aircraft owned by an entity that is owned by one of the Company's directors and one of the Company's former directors. During the years ended December 31, 2021 and 2020, the Company made payments of $32 and $161 under this agreement, respectively. No such payments were made during the year ended December 31, 2022.
(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 the year ended December 31, 2021, the Company paid $605 under this agreement related to the secondary offering completed during the second quarter of 2021. There were no such expenses during the years ended December 31, 2022 or 2020.
(F) Equity investment in preferred stock:
During the year ended December 31, 2022, the Company invested in preferred stock of a privately held entity of which an executive officer of the Company is on the Board of directors of the investee. This investment is included in other assets on the consolidated balance sheets with a carrying amount of $10,000 as of December 31, 2022 and is being accounted for as an equity security without readily determinable market value. No gains or losses have been recognized to date associated with this investment.

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

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act as of December 31, 2022 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, 2022, 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.
Annual Reports on Internal Control over Financial Reporting
The report of the Company’s management on the Company’s internal control over financial reporting is included under subheading "Report on Management’s Assessment of Internal Control over Financial Reporting" within Item 8, “Financial Statements and Supplementary Data". The report of the Company’s independent registered public accounting firm on the Company’s internal control over financial reporting is included under subheading "Report of Independent Registered Public Accounting Firm" within Item 8, “Financial Statements and Supplementary Data,” within this Annual Report.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2022 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.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2023 annual meeting of shareholders which will be filed with the SEC within 120 days of December 31, 2022.

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ITEM 11. EXECUTIVE COMPENSATION
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 2023 annual meeting of shareholders which will be filed with the SEC within 120 days of December 31, 2022.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s definitive proxy statement for the 2023 annual meeting of shareholders which will be filed with the SEC within 120 days of December 31, 2022.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 2023 annual meeting of shareholders which will be filed with the SEC within 120 days of December 31, 2022.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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 2023 annual meeting of shareholders which will be filed with the SEC within 120 days of December 31, 2022.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as a part of this report.
1. Financial Statements
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 Annual Report.
•Consolidated balance sheets as of December 31, 2022 and 2021
•Consolidated statements of income for the years ended December 31, 2022, 2021, and 2020
•Consolidated statements of comprehensive income for the years ended December 31, 2022, 2021, and 2020
•Consolidated statements of changes in shareholders' equity for the years ended December 31, 2022, 2021, and 2020
•Consolidated statements of cash flows for the years ended December 31, 2022, 2021, and 2020
•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 Corporation 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 INDEX
Exhibit Number Description
3.1 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)
3.2 Amended and Restated Bylaws of FB Financial Corporation (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 001-37875) file on November 14, 2016)
4.1 Registration Rights Agreement by and between FB Financial Corporation and James W. Ayers, dated September 15, 2016 (incorporated by reference as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 001-37875) filed on November 14, 2016)
4.2 Description of Registrant's Securities (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal year ending December 31, 2019 (File No. 001-37875) filed on March 13, 2020
4.8 In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, certain instruments with respect to long-term debt of the Company have been omitted but will be furnished to the Securities and Exchange Commission upon request.
10.1 Employment Agreement, dated July 31, 2021, among FB Financial Corporation, FirstBank, and Christopher T. Holmes (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 (File No. 001-37875) filed on August 6, 2021) †
10.2 FB Financial Corporation 2016 Incentive Plan (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1/A (File No. 333-213210) filed on September 6, 2016) †
10.3 Form of Restricted Stock Unit Award Certificate pursuant to the FB Financial Corporation 2016 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1/A (File No. 333-213210) filed September 6, 2016) †
10.4 Form of Performance-Based Restricted Stock Unit Award Certificate (2022) pursuant to the FB Financial Corporation 2016 Incentive Plan*+
10.6 Form of Restricted Stock Unit Award Certificate (2020) pursuant to the FB Financial Corporation 2016 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (File No. 001-37875) filed on May 11, 2020) †
10.7 Form of Performance-Based Restricted Stock Unit Award Certificate (2020) pursuant to the FB Financial Corporation 2016 Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (File No. 001-37875) filed on May 11, 2020) †
10.8 Amended Form of Performance-Based Restricted Stock Unit Award Certificate (2020) pursuant to the FB Financial Corporation 2016 Incentive Plan *†
10.9 First Amendment to Shareholder's Agreement, dated as of January 21, 2020, by and between FB Financial Corporation and James W. Ayers (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-37875) filed on January 24, 2020)
10.10 Second Amendment to Shareholder's Agreement, dated as of October 29, 2020, by and between FB Financial Corporation and James W. Ayers (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-37875) filed on November 4, 2020)
10.11 Franklin Financial Network, Inc. Amended and Restated 2017 Omnibus Equity Incentive (incorporated by reference to Exhibit 10.1 to Franklin Financial Network, Inc.’s Current Report on Form 8-K (File No. 001-36895) filed on April 13, 2018) †
10.12 Employment Agreement, dated November 27, 2020, among FB Financial Corporation, FirstBank, and Michael M. Mettee (incorporated by reference to Exhibit 10.12 to the Company's Form 10-K for the year ended December 31, 2020 (File No. 001-37875) filed on March 12, 2021) †
10.13 Employment Agreement, dated April 28, 2021, among FB Financial Corporation, FirstBank, and Wilburn J. Evans (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-k for the quarter ended December 31, 2021 (File No. 001-37875) filed on February 25, 2022)†
10.14 Employment Agreement, dated November 29, 2021, among FB Financial Corporation, FirstBank, and Aimee T. Hamilton *†
10.15 Employment Agreement, dated November 27, 2020, among FB Financial Corporation, FirstBank, and Travis K. Edmondson (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (File No. 001-37875) filed on May 10, 2022) †
21 Subsidiaries of FB Financial Corporation*
23.1 Consent of Independent Registered Public Accounting Firm (Crowe LLP)*
24.1 Powers of Attorney contained on the signature pages of this Annual Report on Form 10-K and incorporated herein by reference*
31.1 Rule 13a-14(a) Certification of Chief Executive Officer*
31.2 Rules 13a-14(a) Certification of Chief Financial Officer*
32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer**
101.INS Inline XBRL Instance Document*
101.SCH Inline XBRL Taxonomy Extension Schema Document*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith.
** Furnished herewith.
*** As directed by Item 601(a)(5) of Regulation S-K, certain schedules and exhibits to this exhibit are omitted from this filing. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.
† Represents a management contract or a compensatory plan or arrangement.