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Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-Q
______________________________________________________________
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-37875
______________________________________________________________
FB FINANCIAL CORPORATION
(Exact name of Registrant as specified in its Charter)
______________________________________________________________
Tennessee
62-1216058
( State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
211 Commerce Street, Suite 300
Nashville, Tennessee
37201
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (615) 564-1212
____________________________________________________________
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ý NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
Non-accelerated filer
 
¨ 
  
Small reporting company
 
¨
Emerging growth company
 
ý
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ý
The number of shares of Registrant’s Common Stock outstanding as of August 6, 2019 was 30,905,046.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
  
Name of exchange on which registered
 
Common Stock, Par Value $1.00 Per Share
 
FBK
  
New York Stock Exchange
 
 

1


Table of Contents

 
 
Page
PART I.
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
 
Item1.
Item 1A.
Item 2.
Item 6.
 




2

PART I—FINANCIAL INFORMATION
ITEM 1—CONSOLIDATED FINANCIAL STATEMENTS

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



 
 
June 30,

 
December 31,

 
 
2019 (Unaudited)

 
2018

ASSETS
 
 
 
 
Cash and due from banks
 
$
64,458

 
$
38,381

Federal funds sold
 
9,781

 
31,364

Interest-bearing deposits in financial institutions
 
90,097

 
55,611

Cash and cash equivalents
 
164,336

 
125,356

Investments:
 
 
 
 
Available-for-sale debt securities, at fair value
 
675,215

 
655,698

Equity securities, at fair value
 
3,242

 
3,107

Federal Home Loan Bank stock, at cost
 
15,976

 
13,432

Loans held for sale, at fair value
 
294,699

 
278,815

Loans
 
4,289,516

 
3,667,511

Less: allowance for loan losses
 
30,138

 
28,932

Net loans
 
4,259,378

 
3,638,579

Premises and equipment, net
 
92,407

 
86,882

Other real estate owned, net
 
15,521

 
12,643

Operating lease right-of-use assets
 
35,872

 

Interest receivable
 
17,952

 
14,503

Mortgage servicing rights, at fair value
 
66,380

 
88,829

Goodwill
 
168,486

 
137,190

Core deposit and other intangibles, net
 
19,945

 
11,628

Other assets
 
110,993

 
70,102

Total assets
 
$
5,940,402

 
$
5,136,764

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Noninterest-bearing
 
$
1,111,921

 
$
949,135

Interest-bearing checking
 
984,847

 
863,706

Money market and savings
 
1,468,867

 
1,239,131

Customer time deposits
 
1,247,327

 
1,016,638

Brokered and internet time deposits
 
29,864

 
103,107

Total deposits
 
4,842,826

 
4,171,717

Borrowings
 
257,299

 
227,776

Operating lease liabilities
 
38,722

 

Accrued expenses and other liabilities
 
82,796

 
65,414

Total liabilities
 
5,221,643

 
4,464,907

SHAREHOLDERS' EQUITY
 
 
 
 
Common stock, $1 par value per share; 75,000,000 shares authorized;
30,865,636 and 30,724,532 shares issued and outstanding at
June 30, 2019 and December 31, 2018, respectively
 
30,866

 
30,725

Additional paid-in capital
 
425,644

 
424,146

Retained earnings
 
253,080

 
221,213

Accumulated other comprehensive income (loss), net
 
9,169

 
(4,227
)
Total shareholders' equity
 
718,759

 
671,857

Total liabilities and shareholders' equity
 
$
5,940,402

 
$
5,136,764

See accompanying notes to consolidated financial statements (unaudited).

3


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


 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019

 
2018

 
2019

 
2018

Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
66,276

 
$
54,529

 
$
126,724

 
$
105,222

Interest on securities
 
 
 
 
 
 
 
 
Taxable
 
3,548

 
3,134

 
7,117

 
5,986

Tax-exempt
 
1,160

 
981

 
2,304

 
1,906

Other
 
735

 
399

 
1,507

 
777

Total interest income
 
71,719

 
59,043

 
137,652

 
113,891

 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
13,488

 
5,898

 
25,343

 
10,969

Borrowings
 
1,208

 
1,628

 
2,270

 
2,976

Total interest expense
 
14,696

 
7,526

 
27,613

 
13,945

Net interest income
 
57,023

 
51,517

 
110,039

 
99,946

Provision for loan losses
 
881

 
1,063

 
2,272

 
1,380

Net interest income after provision for loan losses
 
56,142

 
50,454

 
107,767

 
98,566

 
 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 
 
 
 
Mortgage banking income
 
24,526

 
28,544

 
45,547

 
55,015

Service charges on deposit accounts
 
2,327

 
2,049

 
4,406

 
4,008

ATM and interchange fees
 
3,002

 
2,581

 
5,658

 
4,942

Investment services and trust income
 
1,287

 
1,180

 
2,582

 
2,386

Gain (loss) from securities, net
 
52

 
(42
)
 
95

 
(89
)
Gain (loss) on sales or write-downs of other real estate owned
 
277

 
23

 
238

 
(163
)
(Loss) gain from other assets
 
(183
)
 
(155
)
 
8

 
(87
)
Other income
 
1,691

 
1,583

 
3,484

 
3,026

Total noninterest income
 
32,979

 
35,763

 
62,018

 
69,038

 
 
 
 
 
 
 
 
 
Noninterest expenses:
 
 
 
 
 
 
 
 
Salaries, commissions and employee benefits
 
37,918

 
34,366

 
71,615

 
68,393

Occupancy and equipment expense
 
4,319

 
3,545

 
8,049

 
6,969

Legal and professional fees
 
1,694

 
1,965

 
3,419

 
4,008

Data processing
 
2,643

 
2,138

 
5,027

 
4,173

Merger costs
 
3,783

 

 
4,404

 
1,193

Amortization of core deposit and other intangibles
 
1,254

 
802

 
1,983

 
1,655

Regulatory fees and deposit insurance assessments
 
634

 
730

 
1,226

 
1,292

Software license and maintenance fees
 
622

 
603

 
1,094

 
1,260

Advertising
 
2,434

 
3,408

 
5,171

 
6,690

Other expense
 
8,818

 
8,801

 
17,232

 
16,876

Total noninterest expense
 
64,119

 
56,358

 
119,220

 
112,509

 
 
 
 
 
 
 
 
 
Income before income taxes
 
25,002

 
29,859

 
50,565

 
55,095

Income tax expense (Note 9)
 
6,314

 
7,794

 
12,289

 
13,276

Net income
 
$
18,688

 
$
22,065

 
$
38,276

 
$
41,819

Earnings per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.60

 
$
0.72

 
$
1.24

 
$
1.36

Fully diluted
 
0.59

 
0.70

 
1.21

 
1.33

See accompanying notes to consolidated financial statements (unaudited).

4


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


 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019

 
2018

 
2019

 
2018

Net income
 
$
18,688

 
$
22,065

 
$
38,276

 
$
41,819

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss) in available-for-sale
securities, net of taxes of $2,382, ($749), $5,134 and ($3,319)
 
6,725

 
(2,057
)
 
14,503

 
(9,096
)
Reclassification adjustment for (gain) loss on sale of securities
included in net income, net of taxes of ($2), $0, $0 and $2
 
(3
)
 

 
1

 
7

Net change in unrealized (loss) gain in hedging activities, net of
taxes of ($201), $72, ($317) and $518
 
(564
)
 
198

 
(895
)
 
1,469

Reclassification adjustment for (gain) loss on hedging activities,
net of taxes of ($42), $1, ($75) and $2
 
(119
)
 
4

 
(213
)
 
7

Total other comprehensive income (loss), net of tax
 
6,039

 
(1,855
)
 
13,396

 
(7,613
)
Comprehensive income
 
$
24,727

 
$
20,210

 
$
51,672

 
$
34,206

 See accompanying notes to consolidated financial statements (unaudited).

5


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


 
 
Common
stock

 
Additional
paid-in
capital

 
Retained
earnings

 
Accumulated
other
comprehensive
income, net

 
Total
shareholders' equity

Balance at March 31, 2019
 
$
30,853

 
$
423,647

 
$
236,947

 
$
3,130

 
$
694,577

Net income
 

 

 
18,688

 

 
18,688

Other comprehensive income, net of taxes
 

 

 

 
6,039

 
6,039

Stock based compensation expense
 
3

 
2,144

 

 

 
2,147

Restricted stock units vested and distributed,
net of shares withheld
 
10

 
(147
)
 

 

 
(137
)
Dividends declared ($0.08 per share)
 

 

 
(2,555
)
 

 
(2,555
)
Balance at June 30, 2019
 
$
30,866

 
$
425,644

 
$
253,080

 
$
9,169

 
$
718,759

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
$
30,725

 
$
424,146

 
$
221,213

 
$
(4,227
)
 
$
671,857

Initial adoption of ASU 2016-02 (See Note 1)
 

 

 
(1,309
)
 

 
(1,309
)
Net income
 

 

 
38,276

 

 
38,276

Other comprehensive income, net of taxes
 

 

 

 
13,396

 
13,396

Stock based compensation expense
 
6

 
3,779

 

 

 
3,785

Restricted stock units vested and distributed,
net of shares withheld
 
124

 
(2,634
)
 

 

 
(2,510
)
Shares issued under employee stock
purchase program
 
11

 
353

 

 

 
364

Dividends declared ($0.16 per share)
 

 

 
(5,100
)
 

 
(5,100
)
Balance at June 30, 2019
 
$
30,866

 
$
425,644

 
$
253,080

 
$
9,169

 
$
718,759

 
 
Common
stock

 
Additional
paid-in
capital

 
Retained
earnings

 
Accumulated
other
comprehensive
income, net

 
Total
shareholders' equity

Balance at March 31, 2018
 
$
30,672

 
$
418,810

 
$
167,094

 
$
(5,501
)
 
$
611,075

Net income
 

 

 
22,065

 

 
22,065

Other comprehensive loss, net of taxes
 

 

 

 
(1,855
)
 
(1,855
)
Stock based compensation expense
 
2

 
1,859

 

 

 
1,861

Restricted stock units vested and distributed,
net of shares withheld
 
9

 
(287
)
 

 

 
(278
)
Dividends declared ($0.06 per share)
 

 

 
(1,909
)
 

 
(1,909
)
Balance at June 30, 2018
 
$
30,683

 
$
420,382

 
$
187,250

 
$
(7,356
)
 
$
630,959

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
30,536

 
$
418,596

 
$
147,449

 
$
148

 
$
596,729

Initial adoption of ASU 2016-01 (See Note 1)
 

 

 
(109
)
 
109

 

Net income
 

 

 
41,819

 

 
41,819

Other comprehensive loss, net of taxes
 

 

 

 
(7,613
)
 
(7,613
)
Stock based compensation expense
 
6

 
3,813

 

 

 
3,819

Restricted stock units vested and distributed,
net of shares withheld
 
124

 
(2,679
)
 

 

 
(2,555
)
Shares issued under employee stock
purchase program
 
17

 
652

 

 

 
669

Dividends declared ($0.06 per share)
 

 

 
(1,909
)
 

 
(1,909
)
Balance at June 30, 2018
 
$
30,683

 
$
420,382

 
$
187,250

 
$
(7,356
)
 
$
630,959

 See accompanying notes to consolidated financial statements (unaudited).

6

FB Financial Corporation and subsidiaries
Consolidated statements of cash flows
(Unaudited)
(Amounts are in thousands)

 
 
Six Months Ended June 30,
 
 
 
2019

 
2018

Cash flows from operating activities:
 
 
 
 
Net income
 
$
38,276

 
$
41,819

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
2,450

 
2,238

Amortization of core deposit and other intangibles
 
1,983

 
1,655

Capitalization of mortgage servicing rights
 
(19,932
)
 
(29,814
)
Net change in fair value of mortgage servicing rights
 
13,221

 
(3,528
)
Stock-based compensation expense
 
3,785

 
3,819

Provision for loan losses
 
2,272

 
1,380

Provision for mortgage loan repurchases
 
148

 
392

Accretion of yield on purchased loans
 
(3,928
)
 
(3,615
)
Accretion of discounts and amortization of premiums on securities, net
 
1,296

 
1,378

(Gain) loss from securities, net
 
(95
)
 
89

Originations of loans held for sale
 
(2,240,059
)
 
(3,287,255
)
Repurchases of loans held for sale
 
(9,670
)
 
(3,222
)
Proceeds from sale of loans held for sale
 
2,269,654

 
3,441,316

Gain on sale and change in fair value of loans held for sale
 
(42,425
)
 
(48,109
)
Net (gain) loss or write-downs of other real estate owned
 
(238
)
 
163

(Gain) loss on other assets
 
(8
)
 
87

Impairment of goodwill
 
100

 

Provision for deferred income taxes
 
(4,451
)
 
11,081

Changes in:
 
 
 
 
Other assets and interest receivable
 
(39,331
)
 
(8,435
)
Accrued expenses and other liabilities
 
13,803

 
(42,630
)
Net cash (used in) provided by operating activities
 
(13,149
)
 
78,809

Cash flows from investing activities:
 
 
 
 
Activity in available-for-sale securities:
 
 
 
 
Sales
 
1,758

 
221

Maturities, prepayments and calls
 
50,167

 
34,508

Purchases
 
(54,218
)
 
(121,108
)
Purchases of FHLB stock
 
(2,544
)
 
(1,229
)
Net increase in loans
 
(239,425
)
 
(239,188
)
Proceeds from sale of mortgage servicing rights
 
29,160

 

Purchases of premises and equipment
 
(1,011
)
 
(6,597
)
Proceeds from the sale of premises and equipment
 
290

 

Proceeds from the sale of other real estate owned
 
1,864

 
2,209

Net cash received in business combination (See Note 2)
 
171,032

 

Net cash used in investing activities
 
(42,927
)
 
(331,184
)
Cash flows from financing activities:
 
 
 
 
Net increase in demand deposits
 
71,898

 
203,688

Net increase in time deposits
 
10,334

 
41,780

Net increase in securities sold under agreements to repurchase and federal funds purchased
 
16,716

 
4,225

Net increase (decrease) in FHLB advances
 
3,235

 
(8,927
)
Share based compensation witholding obligation
 
(2,510
)
 
(2,555
)
Net proceeds from sale of common stock
 
364

 
669

Dividends paid
 
(4,981
)
 
(1,839
)
Net cash provided by financing activities
 
95,056

 
237,041

Net change in cash and cash equivalents
 
38,980

 
(15,334
)
Cash and cash equivalents at beginning of the period
 
125,356

 
119,751

Cash and cash equivalents at end of the period
 
$
164,336

 
$
104,417

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
23,869

 
$
13,269

Taxes paid
 
12,823

 
19,112

Supplemental noncash disclosures:
 
 
 
 
Transfers from loans to other real estate owned
 
$
2,030

 
$
1,014

Transfers from premises and equipment to other real estate owned
 
2,640

 

Loans provided for sales of other real estate owned
 
166

 
445

Transfers from loans to loans held for sale
 
116

 
5,504

Transfers from loans held for sale to loans
 
6,732

 

Derecognition of rebooked GNMA delinquent loans
 

 
43,035

Trade date payable - securities
 
1,089

 

Trade date receivable - securities
 
86

 

Dividends declared not paid on restricted stock units
 
119

 
70

Decrease to retained earnings for adoption of new accounting standards (See Note 1)
 
1,309

 
109

Right-of-use assets obtained in exchange for operating lease liabilities
 
38,249

 

See accompanying notes to consolidated financial statements (unaudited).

7

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:
(Amounts are in thousands)
Overview and presentation
FB Financial Corporation (the “Company”) is a bank holding company headquartered in Nashville, Tennessee. The Company operates through its wholly-owned subsidiary, FirstBank (the "Bank"), with 65 full-service branches throughout Tennessee, north Alabama, and north Georgia, and a national mortgage business with office locations across the Southeast, which primarily originates loans to be sold in the secondary market.
The unaudited consolidated financial statements, including the notes thereto of the Company, have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) interim reporting requirements and general banking industry guidelines, and therefore, do not include all information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K.
The unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.
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 periods then ended. Actual results could differ significantly from those estimates.
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.
Prior to May 31, 2018, the Company was considered a "controlled company" and was controlled by the Company's Executive Chairman and former majority shareholder, James W. Ayers. During the second quarter of 2018, the Company completed a secondary offering of 3,680,000 shares of common stock pursuant to the Company's effective registration statement on Form S-3 whereby James W. Ayers was the seller. As a result of this transaction, the Company ceased to qualify as a "controlled company" as the selling shareholder's ownership was reduced below 50% of the voting power of the Company's issued and outstanding shares of common stock. The Company continues to qualify as an emerging growth company as defined by the "Jumpstart Our Business Startups Act" ("JOBS Act").
Subsequent events
The Company has evaluated, for consideration of recognition or disclosure, subsequent events that occurred through the date of issuance of these financial statements. The Company has determined that there were no other subsequent events other than described below that occurred after June 30, 2019, but prior to the issuance of these financial statements that would have a material impact on the Company’s consolidated financial statements.
On August 1, 2019, the Company completed its previously-announced sale of its correspondent mortgage delivery channel. The unrelated third party assumed substantially all of the assets and personnel related to the channel upon execution of the agreement. Along with the sale of the third party origination ("TPO") channel, which closed on June 7, 2019, this completes the mortgage restructuring.
On July 19, 2019, the Company declared a regular quarterly dividend of $0.08 per share to be paid on August 16, 2019 to shareholders of record as of August 1, 2019, totaling approximately $2,555.
Earnings per share
Basic earnings per common share ("EPS") excludes dilution and is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of additional potential common shares issuable under the restricted stock units granted but not yet vested and distributable. Diluted EPS is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period, plus an incremental number of common-equivalent shares computed using the treasury stock method.

8

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

Unvested share-based payment awards, which include the right to receive non-forfeitable dividends or dividend equivalents, are considered to participate with common shareholders in undistributed earnings for purposes of computing EPS. Companies that have such participating securities, including the Company, are required to calculate basic and diluted EPS using the two-class method. Certain restricted stock awards granted by the Company include non-forfeitable dividend equivalents and are considered participating securities. Calculations of EPS under the two-class method (i) exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities and (ii) exclude from the denominator the dilutive impact of the participating securities.
The following is a summary of the basic and diluted earnings per common share calculation for each of the periods presented:
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019

 
2018

 
2019

 
2018

Basic earnings per common share calculation:
 
 
 
 
 
 
 
 
Net income
 
$
18,688

 
$
22,065

 
$
38,276

 
$
41,819

Dividends paid on and undistributed earnings allocated to
participating securities
 
(100
)
 
(117
)
 
(205
)
 
(223
)
Earnings attributable to common shareholders
 
$
18,588

 
$
21,948

 
$
38,071

 
$
41,596

Weighted-average basic shares outstanding
 
30,859,596

 
30,678,732

 
30,823,341

 
30,646,189

Basic earnings per common share
 
$
0.60

 
$
0.72

 
$
1.24

 
$
1.36

Diluted earnings per common share:
 


 


 
 
 
 
Earnings attributable to common shareholders
 
18,588

 
21,948

 
38,071

 
41,596

Weighted-average basic shares outstanding
 
30,859,596

 
30,678,732

 
30,823,341

 
30,646,189

Weighted-average diluted shares contingently issuable
 
518,422

 
615,312

 
525,625

 
629,657

Weighted-average diluted shares outstanding
 
31,378,018

 
31,294,044

 
31,348,966

 
31,275,846

Diluted earnings per common share
 
$
0.59

 
$
0.70

 
$
1.21

 
$
1.33

Recently adopted accounting policies:
Except as set forth below, the Company did not adopt any new accounting policies that were not disclosed in the Company's 2018 audited consolidated financial statements included on Form 10-K.
Leases
The Company leases certain banking, mortgage and operations locations. Effective January 1, 2019, the Company records leases on the balance sheet in the form of a lease liability for the present value of future minimum payments under the lease terms and a right-of-use asset equal to the lease liability adjusted for items such as deferred or prepaid rent, incentive liabilities, leasehold intangibles and any impairment of the right-of-use asset. In determining whether a contract contains a lease, management conducts an analysis at lease inception to ensure an asset was specifically identified and the Company has control of use of the asset. For contracts determined to be leases entered into after January 1, 2019, the Company performs additional analysis to determine whether the lease should be classified as a finance or operating lease. The Company considers a lease to be a finance lease if future minimum lease payments amount to greater than 90% of the asset's fair value or if the lease term is equal to or greater than 75% of the asset's estimated economic useful life. As of June 30, 2019, the Company did not have any leases that were determined to be finance leases. The Company does not record leases on the consolidated balance sheets that are classified as short term (less than one year). Additionally, the Company has not recorded equipment leases or leases in which the Company is the lessor on the consolidated balance sheets as these are not material to the Company.
At lease inception, the Company determines the lease term by adding together the minimum lease term and all optional renewal periods that it is reasonably certain to renew. This determination is at management's full discretion and is made through consideration of the asset, market conditions, competition and entity based economic conditions, among other factors. The lease term is used in the economic life test and also to calculate straight-line rent expense. The depreciable life of leasehold improvements is limited by the estimated lease term, including renewals.
Operating leases are expensed on a straight-line basis over the life of the lease beginning when the lease commences. Rent expense and variable lease expense are included in occupancy and equipment expense on the Company's Consolidated statements of income. The Company's variable lease expense include rent escalators that are based on the Consumer Price Index or market conditions and include items such as common area maintenance, utilities, parking, property taxes, insurance and other costs associated with the lease.

9

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

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 borrowing rates for what would be obtained by the Company for similar loans as an incremental rate as of the date of commencement or renewal.
Recently adopted accounting principles:
Except as set forth below, the Company did not adopt any new accounting principles that were not disclosed in the Company's 2018 audited consolidated financial statements included on Form 10-K.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The update requires lessees to recognize right-of-use assets and lease liabilities for all leases not considered short term leases. The provisions of the update also include (a) defining direct costs to only include those incremental costs that would not have been incurred if the lease had not been entered into, (b) circumstances under which the transfer contract in a sale-leaseback transaction should be accounted for as the sale of an asset by the seller-lessee and the purchase of an asset by the buyer-lessor, and (c) additional disclosure requirements. The provisions of this update became effective for the Company on January 1, 2019.
In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases” and 2018-11, “Leases (Topic 842): Targeted Improvements”. ASU No. 2018-10 provides improvements related to ASU No. 2016-02 to provide corrections or improvements to a number of areas within FASB ASC Topic 842 and provides additional and optional transition method to adopt the new lease standard. ASU No. 2018-11 allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-11 also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The amendments in these updates became effective for the Company on January 1, 2019.
FB Financial Corporation elected the optional transition method permitted by ASU 2018-11. Under this method, an entity shall recognize and measure leases that exist at the application date and prior comparative periods are not adjusted. Additionally, the Company elected to adopt the practical expedients allowed under the updates and therefore did not reassess 1) whether any expired or existing contract contain leases, 2) the lease classification for any expired or existing leases, or 3) initial direct costs for any existing leases.
On January 1, 2019, the Company adopted these updates and recognized a right of use asset ("ROU") and lease liability of $32,545 and $34,876, respectively, and recorded a cumulative effect adjustment to retained earnings of $1,309, net of deferred taxes of $461, in addition to adjustments to leasehold improvements of $1,022 and a reclassification from a previously-recognized lease intangible asset for $460. The difference between the asset and liability amounts represents lease incentive liabilities, deferred rent and a lease intangible asset that was reclassified to the ROU asset upon adoption. This adoption did not have a significant impact on the Company's consolidated statements of income and did not have an impact on the Company's cash flows. Disclosures required by the update are presented in Note 7, "Leases" in the notes to the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which continue to be amortized to maturity. Public business entities were required to prospectively apply the amendments in this ASU to annual periods beginning after December 15, 2018, including interim periods. The adoption of this update did not have an impact on the Company's consolidated financial statements.
Newly issued not yet effective accounting standards:
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. The new model will require institutions to calculate all probable and estimable losses that are expected to be incurred through the financial asset's entire life through a provision for credit losses, including loans obtained as a result of any acquisition not deemed to be purchased credit deteriorated (PCD).

10

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

CECL also requires the allowance for credit losses for PCD loans to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance will be added to the purchase price rather than recorded as provision expense. The disclosure of credit quality indicators related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage). Institutions are to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period in which the standard is effective.
ASU 2016-13 will become effective for interim and annual periods beginning after December 15, 2019.  Management established a CECL implementation working group, which includes the appropriate members of management to evaluate the impact the adoption of this ASU will have on the Company's financial statements and disclosures and determine the most appropriate method of implementing the amendments in this ASU. The working group selected a software vendor and is working on validating the accuracy and completeness of data being used as inputs into the model based on the methodology selected for the Company's identified loan segments. During remainder of 2019, the Company is focused on refining modeling segments and assumptions in addition to finalizing and documenting internal controls and accounting and credit policy elections, building disclosures, and model validation. Parallel processing of our existing allowance for loan losses model with the CECL model will occur during the second half of 2019, depending on how model completion and validation progresses. The Company is currently evaluating the impact of this adoption on its financial statements and disclosures and currently expects to record a one-time adjustment to retained earnings to increase the allowance for loan losses, however the magnitude of this adjustment cannot currently be reasonably quantified. Management will disclose the impact on Form 10-K for the year ended December 31, 2019.
In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates step two from the goodwill impairment test. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. ASU 2017-04 will become effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted, including in an interim period, for impairment tests performed after January 1, 2017. Management does not expect adoption of this standard to have any impact on the Company's consolidated financial statements or disclosures.
In June 2018, FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting", which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Consistent with the accounting for employee share-based payment awards, nonemployee share-based payment awards will be measured at grant-date fair value of the equity instruments obligated to be issued when the good has been delivered or the service rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. This ASU is effective for all entities for fiscal years beginnings after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company does not expect adoption of this standard to have a significant impact on the consolidated financial statements or disclosures.
In August 2018, the FASB issued "Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements." This update is part of the disclosure framework project and eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. The new disclosure guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact this change will have on its consolidated financial statements and disclosures.
In March 2019, FASB issued ASU 2019-01, "Leases (Topic 842): Codification Improvements", which align the guidance for fair value of the underlying assets by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply.

11

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

However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value in Topic 820, Fair Value Measurement should be applied. ASU No. 2019-01 also requires lessors within the scope of Topic 942, "Financial Services—Depository and Lending", to present all “principal payments received under leases” within investing activities. The amendments in this update become effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this change on its consolidated financial statements and disclosures, but it is not expected to have a material impact.
In April 2019, the FASB issued ASU No. 2019-04, "Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825): Codification Improvements"  The amendments related to Topic 326 address accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, vintage disclosures, and contractual extensions and renewal options and will become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.  The improvements and clarifications related to Topic 815 address partial-term fair value hedges of interest-rate risk, amortization, and disclosure of fair value hedge basis adjustments and consideration of hedged contractually specified interest rate under the hypothetical method and will become effective for the annual reporting period beginning January 1, 2020.  The amendments related to Topic 825 contain various improvements to ASU 2016-01, including scope; held-to-maturity debt securities fair value disclosures; and remeasurement of equity securities at historical exchange rates and will become effective for fiscal years and interim periods beginning after December 15, 2019.  The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
In May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief."  These amendments provide targeted transition relief allowing entities to irrevocably elect the fair value option, on an instrument-by-instrument basis, for certain financial assets (excluding held-to-maturity debt securities) previously measured at amortized cost.  The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.  The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
Note (2)—Mergers and acquisitions:
Atlantic Capital Bank branch acquisition
On April 5, 2019, the Bank completed its previously-announced branch acquisition to purchase 11 Tennessee and three Georgia branch locations (the "Branches") from Atlantic Capital Bank, N.A., a national banking association and a wholly owned subsidiary of Atlantic Capital Bancshares, Inc. (collectively, “Atlantic Capital”) in a transaction valued at $36,790, further increasing market share in existing markets and expanding the Company's footprint to into new locations. Upon consummation, the Branches were merged with and into FirstBank, consolidating three of the purchased branches across the existing bank footprint. Under the terms of the agreement, the Bank assumed $588,877 in deposits at a premium of 6.25% and acquired $374,966 in loans at 99.32% of principal outstanding.
The acquisition of the Branches was accounted for in accordance with FASB ASC Topic 805 "Business Combinations." Accordingly, the assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The Company is finalizing the fair value of acquired assets and liabilities assumed and as such, purchase accounting is not yet complete.
Goodwill of $31,396 recorded in connection with the transaction resulted primarily from the purchased deposit premium and has been assigned to the Banking segment.
The Company incurred $3,783 and $4,404 in merger expenses during the three and six months ended June 30, 2019, respectively, in connection with this transaction.

12

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

The following tables present the preliminary fair values of assets acquired and liabilities assumed as of the April 5, 2019 acquisition date and an allocation of the consideration to net assets acquired:
 
 
As of April 5, 2019

 
 
As Recorded by FB Financial Corporation (1)

Assets
 
 
Cash and cash equivalents(1)
 
$
207,822

Loans, net of fair value adjustments
 
374,966

Premises and equipment
 
9,650

Operating lease right-of-use assets
 
4,133

Core deposit intangible
 
10,760

Accrued interest and other assets
 
1,271

Total assets
 
$
608,602

Liabilities
 
 
Deposits
 
 
Noninterest-bearing
 
$
118,405

Interest-bearing checking
 
112,225

Money markey and savings
 
211,135

Customer time deposits
 
147,112

Total deposits
 
588,877

Customer repurchase agreements
 
9,572

Operating lease liabilities
 
4,133

Accrued expenses and other liabilities
 
626

Total liabilities
 
603,208

Total net assets acquired
 
$
5,394

(1) Cash and cash equivalents were reduced in settlement by the deposit premium of $36,790 to reflect net cash received of $171,032.
Consideration:
 
 
Deposit premium
 
$
36,790

Preliminary allocation of consideration:
 
 
Fair value of net assets acquired
 
$
5,394

Goodwill (preliminary)
 
31,396

Total consideration
 
$
36,790


The following table presents the fair value of acquired purchased credit impaired loans accounted for in accordance with FASB ASC 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" from the Atlantic Capital branch acquisition as of the acquisition date:
 
 
April 5, 2019

Contractually-required principal and interest
 
$
11,374

Nonaccretable difference
 
1,615

Best estimate of contractual cash flows expected to be collected
 
9,759

Accretable yield
 
1,167

Fair value
 
$
8,592



13

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

The following unaudited pro forma condensed consolidated financial information presents the results of operations for the three and six months ended June 30, 2018 and 2019 as though the merger had been completed as of January 1, 2018. The unaudited estimated pro forma information combines the historical results of the Branches with the Company’s historical consolidated results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the periods presented. Merger expenses are reflected in the periods they were incurred. The pro forma information is not indicative of what would have occurred had the acquisition taken place on January 1, 2018 and does not include the effect of all cost-saving or revenue-enhancing strategies.
 
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
 
2019

 
2018

 
2019

 
2018

Net interest income
 
$
57,023

 
$
55,609

 
$
113,610

 
$
108,687

Total revenues
 
$
90,002

 
$
92,237

 
$
176,413

 
$
179,411

Net income
 
$
18,688

 
$
21,843

 
$
37,191

 
$
41,474

Due to the timing of the data conversion and the integration of operations of the Branches onto the Company's existing operations, historical reporting of the acquired Branches is impracticable, and therefore, disclosure of the amounts of revenue and expenses from the acquired Branches since the acquisition date are not available.

Note (3)—Investment securities:
The amortized cost of securities and their fair values at June 30, 2019 and December 31, 2018 are shown below: 
 
 
June 30, 2019
 
 
 
Amortized cost

 
Gross unrealized gains

 
Gross unrealized losses

 
Fair Value

Investment Securities
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
U.S. government agency securities
 
$
1,000

 
$

 
$
(4
)
 
$
996

Mortgage-backed securities - residential
 
516,458

 
4,786

 
(3,739
)
 
517,505

Municipals, tax exempt
 
143,049

 
6,319

 
(63
)
 
149,305

Treasury securities
 
7,405

 
4

 

 
7,409

Total
 
$
667,912

 
$
11,109

 
$
(3,806
)
 
$
675,215

 
 
December 31, 2018
 
 
 
Amortized cost

 
Gross unrealized gains

 
Gross unrealized losses

 
Fair Value

Investment Securities
 
 
 
 
 
 
 
 
Available-for-sale debt securities
 
 
 
 
 
 
 
 
U.S. government agency securities
 
$
1,000

 
$

 
$
(11
)
 
$
989

Mortgage-backed securities - residential
 
520,654

 
1,191

 
(13,265
)
 
508,580

Municipals, tax exempt
 
138,994

 
1,565

 
(1,672
)
 
138,887

Treasury securities
 
7,385

 

 
(143
)
 
7,242

Total
 
$
668,033

 
$
2,756

 
$
(15,091
)
 
$
655,698

As of June 30, 2019 and December 31, 2018, the Company had $3,242 and $3,107 in marketable equity securities recorded at fair value, respectively.
Securities pledged at June 30, 2019 and December 31, 2018 had carrying amounts of $293,876 and $326,215, respectively, and were pledged to secure a Federal Reserve Bank line of credit, public deposits and repurchase agreements.
There were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity during any period presented.
At June 30, 2019 and December 31, 2018, there were $1,089 and $2,120, respectively, in trade date payables and $86 and $0, respectively, in trade date receivables that related to purchases and sales settled after period end.
 

14

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

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2019 and December 31, 2018 are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgage underlying the security may be called or repaid without any penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.
 
 
June 30, 2019
 
 
December 31, 2018
 
 
 
Available-for-sale
 
 
Available-for-sale
 
 
 
Amortized cost

 
Fair value

 
Amortized cost

 
Fair value

Due in one year or less
 
$
6,436

 
$
6,474

 
$
15,883

 
$
16,028

Due in one to five years
 
13,504

 
13,632

 
13,806

 
13,740

Due in five to ten years
 
15,948

 
16,404

 
18,539

 
18,387

Due in over ten years
 
115,566

 
121,200

 
99,151

 
98,963

 
 
151,454

 
157,710

 
147,379

 
147,118

Mortgage-backed securities - residential
 
516,458

 
517,505

 
520,654

 
508,580

Total debt securities
 
$
667,912

 
$
675,215

 
$
668,033

 
$
655,698

Sales and other dispositions of available-for-sale securities were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019

 
2018

 
2019

 
2018

Proceeds from sales
$

 
$

 
$
1,758

 
$
221

Proceeds from maturities, prepayments and calls
29,353

 
18,005

 
50,167

 
34,508

Gross realized gains
5

 
1

 
6

 
1

Gross realized losses

 

 
7

 
9

Additionally, net gains on the change in fair value of equity securities of $47 and $96 were recognized during the three and six months ended June 30, 2019, respectively. Net losses on the change in fair value of equity securities of $43 and $81 were recognized in the three and six months ended June 30, 2018, respectively.
The following tables show gross unrealized losses at June 30, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
 
 
June 30, 2019
 
 
 
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
 
$

 
$

 
$
996

 
$
(4
)
 
$
996

 
$
(4
)
Mortgage-backed securities - residential
 
14,291

 
(30
)
 
267,587

 
(3,709
)
 
281,878

 
(3,739
)
Municipals, tax exempt
 
1,057

 
(1
)
 
7,407

 
(62
)
 
8,464

 
(63
)
Treasury securities
 

 

 

 

 

 

Total
 
$
15,348

 
$
(31
)
 
$
275,990

 
$
(3,775
)
 
$
291,338

 
$
(3,806
)
 
 
December 31, 2018
 
 
 
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
 
$

 
$

 
$
989

 
$
(11
)
 
$
989

 
$
(11
)
Mortgage-backed securities - residential
 
60,347

 
(478
)
 
335,769

 
(12,787
)
 
396,116

 
(13,265
)
Municipals, tax exempt
 
27,511

 
(366
)
 
25,343

 
(1,306
)
 
52,854

 
(1,672
)
Treasury securities
 

 

 
7,242

 
(143
)
 
7,242

 
(143
)
Total
 
$
87,858

 
$
(844
)
 
$
369,343

 
$
(14,247
)
 
$
457,201

 
$
(15,091
)
As of June 30, 2019 and December 31, 2018, the Company’s securities portfolio consisted of 346 and 360 securities, 69 and 174 of which were in an unrealized loss position, respectively.

15

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

The Company evaluates available-for-sale debt securities with unrealized losses for other-than-temporary impairment (OTTI) on a quarterly basis and recorded no OTTI for the three and six months ended June 30, 2019 and 2018. The Company considers an investment security impaired if the fair value of the security is less than its cost or amortized cost basis. For debt securities, the unrealized losses associated with these investment securities are primarily driven by interest rates and are not due to the credit quality of the securities. The Company currently does not intend to sell those investments with unrealized losses, and it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.
Note (4)—Loans and allowance for loan losses:
Loans outstanding at June 30, 2019 and December 31, 2018, by major lending classification are as follows:
 
 
June 30,

 
December 31,

 
 
2019

 
2018

Commercial and industrial
 
$
989,288

 
$
867,083

Construction
 
525,954

 
556,051

Residential real estate:
 
 
 
 
1-to-4 family mortgage
 
688,984

 
555,815

Residential line of credit
 
218,006

 
190,480

Multi-family mortgage
 
82,945

 
75,457

Commercial real estate:
 
 
 
 
Owner occupied
 
602,723

 
493,524

Non-owner occupied
 
922,150

 
700,248

Consumer and other
 
259,466

 
228,853

Gross loans
 
4,289,516

 
3,667,511

Less: Allowance for loan losses
 
(30,138
)
 
(28,932
)
Net loans
 
$
4,259,378

 
$
3,638,579

As of June 30, 2019 and December 31, 2018, $573,213 and $618,976, respectively, of qualifying residential mortgage loans (including loans held for sale) and $474,237 and $608,735, respectively, of qualifying commercial mortgage loans were pledged to the Federal Home Loan Bank of Cincinnati securing advances against the Bank’s line of credit. As of June 30, 2019 and December 31, 2018, $1,423,565 and $1,336,092, respectively, of qualifying loans were pledged to the Federal Reserve Bank under the Borrower-in-Custody program.
As of June 30, 2019 and December 31, 2018, the carrying value of purchased credit impaired loans (“PCI”) loans accounted for under ASC 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality", were $67,450 and $68,999, respectively. The following table presents changes in the value of the accretable yield for PCI loans for the periods indicated.
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2019

 
2018

 
2019

 
2018

Balance at the beginning of period
 
$
(14,814
)
 
$
(16,955
)
 
$
(16,587
)
 
$
(17,682
)
Additions through the branch acquisition of Atlantic Capital Bank
 
(1,167
)
 

 
(1,167
)
 

Principal reductions and other reclassifications from nonaccretable difference
 
30

 
(2,158
)
 
250

 
(3,452
)
Accretion
 
1,705

 
2,639

 
3,888

 
4,840

Changes in expected cash flows
 
(616
)
 
(3,695
)
 
(1,246
)
 
(3,875
)
Balance at end of period
 
$
(14,862
)
 
$
(20,169
)
 
$
(14,862
)
 
$
(20,169
)
Included in the ending balance of the accretable yield on PCI loans at June 30, 2019 and December 31, 2018, is a purchase accounting liquidity discount of $1,605 and $2,436, respectively. There is also a purchase accounting nonaccretable credit discount of $4,596 and $4,355 related to the PCI loan portfolio at June 30, 2019 and December 31,2018, respectively and an accretable credit and liquidity discount on non-PCI loans of $11,064 and $4,740 as of June 30, 2019 and $7,527 and $2,197, respectively, as of December 31, 2018.

16

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

Interest revenue, through accretion of the difference between the recorded investment of the loans and the expected cash flows, is being recognized on all PCI loans. Accretion of interest income on PCI loans amounted to $1,705 and $3,888 during the three and six months ended June 30, 2019, respectively, and $2,639 and $4,840 during the three and six months ended June 30, 2018, respectively. This includes both the contractual interest income recognized and the purchase accounting contribution through accretion of the liquidity discount for changes in estimated cash flows. The total purchase accounting contribution through accretion excluding contractual interest collected for all purchased loans was $2,097 and $3,928 for the three and six months ended June 30, 2019, respectively, and $1,928 and $3,615 for the three and six months ended June 30, 2018, respectively.
The following provides the allowance for loan losses by portfolio segment and the related investment in loans net of unearned interest for the three and six months ended June 30, 2019 and 2018:
 
 
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

Three Months Ended June 30, 2019
Beginning balance -
March 31, 2019
 
$
5,514

 
$
9,758

 
$
3,295

 
$
731

 
$
539

 
$
3,098

 
$
4,583

 
$
2,296

 
$
29,814

Provision for loan losses
 
(550
)
 
(109
)
 
(30
)
 
106

 
78

 
409

 
(105
)
 
1,082

 
881

Recoveries of loans
previously charged-off
 
38

 
6

 
24

 
21

 

 
5

 

 
119

 
213

Loans charged off
 
(79
)
 

 
(1
)
 
(103
)
 

 

 

 
(587
)
 
(770
)
Ending balance -
June 30, 2019
 
$
4,923

 
$
9,655

 
$
3,288

 
$
755

 
$
617

 
$
3,512

 
$
4,478

 
$
2,910

 
$
30,138

Six Months Ended June 30, 2019
Beginning balance - December 31, 2018
 
$
5,348

 
$
9,729

 
$
3,428

 
$
811

 
$
566

 
$
3,132

 
$
4,149

 
$
1,769

 
$
28,932

Provision for loan losses
 
(217
)
 
(81
)
 
(95
)
 
33

 
51

 
288

 
329

 
1,964

 
2,272

Recoveries of loans previously charged-off
 
50

 
7

 
37

 
46

 

 
92

 

 
343

 
575

Loans charged off
 
(258
)
 

 
(82
)
 
(135
)
 

 

 

 
(1,166
)
 
(1,641
)
Ending balance - June 30, 2019
 
$
4,923

 
$
9,655

 
$
3,288

 
$
755

 
$
617

 
$
3,512

 
$
4,478

 
$
2,910

 
$
30,138

 
 
 
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

Three Months Ended June 30, 2018
Beginning balance -
March 31, 2018
 
$
4,578

 
$
7,866

 
$
3,122

 
$
1,165

 
$
449

 
$
3,014

 
$
2,753

 
$
1,459

 
$
24,406

Provision for loan losses
 
39

 
310

 
218

 
(414
)
 
(58
)
 
168

 
519

 
281

 
1,063

Recoveries of loans
previously charged-off
 
135

 
862

 
43

 
44

 

 
108

 

 
107

 
1,299

Loans charged off
 
(5
)
 
(15
)
 
(5
)
 

 

 

 

 
(396
)
 
(421
)
Ending balance -
June 30, 2018
 
$
4,747

 
$
9,023

 
$
3,378

 
$
795

 
$
391

 
$
3,290

 
$
3,272

 
$
1,451

 
$
26,347

Six Months Ended June 30, 2018
 

Beginning balance - December 31, 2017
 
$
4,461

 
$
7,135

 
$
3,197

 
$
944

 
$
434

 
$
3,558

 
$
2,817

 
$
1,495

 
$
24,041

Provision for loan losses
 
241

 
789

 
188