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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 September 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 November 5, 2019 was 30,932,152.
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)
 



 
 
September 30,

 
December 31,

 
 
2019 (Unaudited)

 
2018

ASSETS
 
 
 
 
Cash and due from banks
 
$
31,594

 
$
38,381

Federal funds sold
 
50,532

 
31,364

Interest-bearing deposits in financial institutions
 
160,871

 
55,611

Cash and cash equivalents
 
242,997

 
125,356

Investments:
 
 
 
 
Available-for-sale debt securities, at fair value
 
668,531

 
655,698

Equity securities, at fair value
 
3,250

 
3,107

Federal Home Loan Bank stock, at cost
 
15,976

 
13,432

Loans held for sale, at fair value
 
305,493

 
278,815

Loans
 
4,345,344

 
3,667,511

Less: allowance for loan losses
 
31,464

 
28,932

Net loans
 
4,313,880

 
3,638,579

Premises and equipment, net
 
91,815

 
86,882

Other real estate owned, net
 
16,076

 
12,643

Operating lease right-of-use assets
 
34,812

 

Interest receivable
 
17,729

 
14,503

Mortgage servicing rights, at fair value
 
66,156

 
88,829

Goodwill
 
168,486

 
137,190

Core deposit and other intangibles, net
 
18,748

 
11,628

Other assets
 
124,946

 
70,102

Total assets
 
$
6,088,895

 
$
5,136,764

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Noninterest-bearing
 
$
1,214,373

 
$
949,135

Interest-bearing checking
 
1,029,430

 
863,706

Money market and savings
 
1,481,697

 
1,239,131

Customer time deposits
 
1,170,827

 
1,016,638

Brokered and internet time deposits
 
25,436

 
103,107

Total deposits
 
4,921,763

 
4,171,717

Borrowings
 
307,129

 
227,776

Operating lease liabilities
 
37,760

 

Accrued expenses and other liabilities
 
77,408

 
65,414

Total liabilities
 
5,344,060

 
4,464,907

SHAREHOLDERS' EQUITY
 
 
 
 
Common stock, $1 par value per share; 75,000,000 shares authorized;
30,927,664 and 30,724,532 shares issued and outstanding at
September 30, 2019 and December 31, 2018, respectively
 
30,928

 
30,725

Additional paid-in capital
 
426,816

 
424,146

Retained earnings
 
274,491

 
221,213

Accumulated other comprehensive income (loss), net
 
12,600

 
(4,227
)
Total shareholders' equity
 
744,835

 
671,857

Total liabilities and shareholders' equity
 
$
6,088,895

 
$
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 September 30,
 
 
Nine Months Ended September 30,
 
 
 
2019

 
2018

 
2019

 
2018

Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
67,639

 
$
57,904

 
$
194,363

 
$
163,126

Interest on securities
 
 
 
 
 
 
 
 
Taxable
 
3,137

 
3,151

 
10,254

 
9,137

Tax-exempt
 
1,174

 
1,031

 
3,478

 
2,937

Other
 
1,292

 
526

 
2,799

 
1,303

Total interest income
 
73,242

 
62,612

 
210,894

 
176,503

 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
13,522

 
7,864

 
38,865

 
18,833

Borrowings
 
1,415

 
1,993

 
3,685

 
4,969

Total interest expense
 
14,937

 
9,857

 
42,550

 
23,802

Net interest income
 
58,305

 
52,755

 
168,344

 
152,701

Provision for loan losses
 
1,831

 
1,818

 
4,103

 
3,198

Net interest income after provision for loan losses
 
56,474

 
50,937

 
164,241

 
149,503

 
 
 
 
 
 
 
 
 
Noninterest income:
 
 
 
 
 
 
 
 
Mortgage banking income
 
29,193

 
26,649

 
74,740

 
81,664

Service charges on deposit accounts
 
2,416

 
2,208

 
6,822

 
6,216

ATM and interchange fees
 
3,188

 
2,411

 
8,846

 
7,353

Investment services and trust income
 
1,336

 
1,411

 
3,918

 
3,797

(Loss) gain from securities, net
 
(20
)
 
(27
)
 
75

 
(116
)
(Loss) gain on sales or write-downs of other real estate owned
 
(126
)
 
120

 
112

 
(43
)
Gain from other assets
 
44

 
326

 
52

 
239

Other income
 
2,114

 
1,257

 
5,598

 
4,283

Total noninterest income
 
38,145

 
34,355

 
100,163

 
103,393

 
 
 
 
 
 
 
 
 
Noninterest expenses:
 
 
 
 
 
 
 
 
Salaries, commissions and employee benefits
 
40,880

 
35,213

 
112,495

 
103,606

Occupancy and equipment expense
 
4,058

 
3,514

 
12,107

 
10,483

Legal and professional fees
 
1,993

 
1,917

 
5,412

 
5,925

Data processing
 
2,816

 
2,562

 
7,843

 
6,735

Merger costs
 
295

 

 
4,699

 
1,193

Amortization of core deposit and other intangibles
 
1,197

 
777

 
3,180

 
2,432

Advertising
 
1,895

 
3,810

 
7,066

 
10,500

Other expense
 
9,801

 
9,420

 
29,353

 
28,848

Total noninterest expense
 
62,935

 
57,213

 
182,155

 
169,722

 
 
 
 
 
 
 
 
 
Income before income taxes
 
31,684

 
28,079

 
82,249

 
83,174

Income tax expense
 
7,718

 
6,702

 
20,007

 
19,978

Net income
 
$
23,966

 
$
21,377

 
$
62,242

 
$
63,196

Earnings per common share
 
 
 
 
 
 
 
 
Basic
 
$
0.77

 
$
0.69

 
$
2.01

 
$
2.05

Fully diluted
 
0.76

 
0.68

 
1.97

 
2.01

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 September 30,
 
 
Nine Months Ended September 30,
 
 
 
2019

 
2018

 
2019

 
2018

Net income
 
$
23,966

 
$
21,377

 
$
62,242

 
$
63,196

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Net change in unrealized gain (loss) in available-for-sale
securities, net of taxes of $1,296, ($1,348), $6,430 and ($4,667)
 
3,762

 
(3,749
)
 
18,265

 
(12,845
)
Reclassification adjustment for (gain) loss on sale of securities
included in net income, net of taxes of $20, $0, $20 and $2
 
55

 

 
56

 
7

Net change in unrealized (loss) gain in hedging activities, net of
taxes of ($90), $59, ($407) and $577
 
(256
)
 
169

 
(1,151
)
 
1,638

Reclassification adjustment for (gain) loss on hedging activities,
net of taxes of ($46), $23, ($121) and $22
 
(130
)
 
(69
)
 
(343
)
 
(62
)
Total other comprehensive income (loss), net of tax
 
3,431

 
(3,649
)
 
16,827

 
(11,262
)
Comprehensive income
 
$
27,397

 
$
17,728

 
$
79,069

 
$
51,934

 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 June 30, 2019
 
$
30,866

 
$
425,644

 
$
253,080

 
$
9,169

 
$
718,759

Net income
 

 

 
23,966

 

 
23,966

Other comprehensive income, net of taxes
 

 

 

 
3,431

 
3,431

Stock based compensation expense
 
3

 
1,833

 

 

 
1,836

Restricted stock units vested and distributed,
net of shares withheld
 
47

 
(1,089
)
 

 

 
(1,042
)
Shares issued under employee stock
purchase program
 
12

 
428

 

 

 
440

Dividends declared ($0.08 per share)
 

 

 
(2,555
)
 

 
(2,555
)
Balance at September 30, 2019
 
$
30,928

 
$
426,816

 
$
274,491

 
$
12,600

 
$
744,835

 
 
 
 
 
 
 
 
 
 
 
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
 

 

 
62,242

 

 
62,242

Other comprehensive income, net of taxes
 

 

 

 
16,827

 
16,827

Stock based compensation expense
 
9

 
5,612

 

 

 
5,621

Restricted stock units vested and distributed,
net of shares withheld
 
171

 
(3,723
)
 

 

 
(3,552
)
Shares issued under employee stock
purchase program
 
23

 
781

 

 

 
804

Dividends declared ($0.24 per share)
 

 

 
(7,655
)
 

 
(7,655
)
Balance at September 30, 2019
 
$
30,928

 
$
426,816

 
$
274,491

 
$
12,600

 
$
744,835


6


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 June 30, 2018
 
$
30,683

 
$
420,382

 
$
187,250

 
$
(7,356
)
 
$
630,959

Net income
 

 

 
21,377

 

 
21,377

Other comprehensive loss, net of taxes
 

 

 

 
(3,649
)
 
(3,649
)
Stock based compensation expense
 
3

 
1,505

 

 

 
1,508

Restricted stock units vested and distributed,
net of shares withheld
 
18

 
(100
)
 

 

 
(82
)
Shares issued under employee stock
purchase program
 
12

 
515

 

 

 
527

Dividends declared ($0.06 per share)
 

 

 
(1,909
)
 

 
(1,909
)
Balance at September 30, 2018
 
$
30,716

 
$
422,302

 
$
206,718

 
$
(11,005
)
 
$
648,731

 
 
 
 
 
 
 
 
 
 
 
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
 

 

 
63,196

 

 
63,196

Other comprehensive loss, net of taxes
 

 

 

 
(11,262
)
 
(11,262
)
Stock based compensation expense
 
9

 
5,318

 

 

 
5,327

Restricted stock units vested and distributed,
net of shares withheld
 
142

 
(2,779
)
 

 

 
(2,637
)
Shares issued under employee stock
purchase program
 
29

 
1,167

 

 

 
1,196

Dividends declared ($0.12 per share)
 

 

 
(3,818
)
 

 
(3,818
)
Balance at September 30, 2018
 
$
30,716

 
$
422,302

 
$
206,718

 
$
(11,005
)
 
$
648,731

 See accompanying notes to consolidated financial statements (unaudited).

7

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

 
 
Nine Months Ended September 30,
 
 
 
2019

 
2018

Cash flows from operating activities:
 
 
 
 
Net income
 
$
62,242

 
$
63,196

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation expense
 
3,830

 
3,251

Amortization of core deposit and other intangibles
 
3,180

 
2,432

Capitalization of mortgage servicing rights
 
(30,319
)
 
(41,555
)
Net change in fair value of mortgage servicing rights
 
23,832

 
(1,656
)
Stock-based compensation expense
 
5,621

 
5,327

Provision for loan losses
 
4,103

 
3,198

Provision for mortgage loan repurchases
 
255

 
598

Accretion of yield on purchased loans
 
(6,030
)
 
(5,745
)
Accretion of discounts and amortization of premiums on securities, net
 
2,113

 
2,108

(Gain) loss from securities, net
 
(75
)
 
116

Originations of loans held for sale
 
(3,477,658
)
 
(4,777,814
)
Repurchases of loans held for sale
 
(9,919
)
 
(7,892
)
Proceeds from sale of loans held for sale
 
3,527,632

 
5,003,669

Gain on sale and change in fair value of loans held for sale
 
(72,749
)
 
(71,883
)
Net (gain) loss or write-downs of other real estate owned
 
(112
)
 
43

Gain on other assets
 
(52
)
 
(239
)
Impairment of goodwill
 
100

 

Provision for deferred income taxes
 
(5,900
)
 
4,416

Changes in:
 
 
 
 
Other assets and interest receivable
 
(50,509
)
 
(28,473
)
Accrued expenses and other liabilities
 
4,243

 
(12,350
)
Net cash (used in) provided by operating activities
 
(16,172
)
 
140,747

Cash flows from investing activities:
 
 
 
 
Activity in available-for-sale securities:
 
 
 
 
Sales
 
24,498

 
221

Maturities, prepayments and calls
 
78,861

 
54,576

Purchases
 
(92,059
)
 
(137,891
)
Purchases of FHLB stock
 
(2,544
)
 
(2,020
)
Net increase in loans
 
(295,791
)
 
(352,776
)
Proceeds from sale of mortgage servicing rights
 
29,160

 
39,428

Purchases of premises and equipment
 
(4,052
)
 
(8,608
)
Proceeds from the sale of premises and equipment
 
1,275

 
341

Proceeds from the sale of other real estate owned
 
2,718

 
3,666

Proceeds from the sale of other assets
 

 
869

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

 

Net cash used in investing activities
 
(86,902
)
 
(402,194
)
Cash flows from financing activities:
 
 
 
 
Net increase in demand deposits
 
231,763

 
100,724

Net (decrease) increase in time deposits
 
(70,594
)
 
364,354

Net increase in securities sold under agreements to repurchase and federal funds purchased
 
1,546

 
35,824

Net increase (decrease) in FHLB advances
 
68,235

 
(172,451
)
Share based compensation witholding payment
 
(3,552
)
 
(2,637
)
Net proceeds from sale of common stock
 
804

 
1,196

Dividends paid
 
(7,487
)
 
(3,684
)
Net cash provided by financing activities
 
220,715

 
323,326

Net change in cash and cash equivalents
 
117,641

 
61,879

Cash and cash equivalents at beginning of the period
 
125,356

 
119,751

Cash and cash equivalents at end of the period
 
$
242,997

 
$
181,630

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
41,463

 
$
21,690

Taxes paid
 
21,377

 
19,137

Supplemental noncash disclosures:
 
 
 
 
Transfers from loans to other real estate owned
 
$
3,565

 
$
1,490

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

 

Loans provided for sales of other real estate owned
 
166

 
636

Transfers from loans to loans held for sale
 
5,460

 

Transfers from loans held for sale to loans
 
11,476

 
13,584

Derecognition of rebooked GNMA delinquent loans
 

 
43,035

Trade date payable - securities
 
3,671

 
7,253

Dividends declared not paid on restricted stock units
 
168

 
134

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
 
39,011

 

See accompanying notes to consolidated financial statements (unaudited).

8

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 68 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 September 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 October 17, 2019, the Company declared a regular quarterly dividend of $0.08 per share to be paid on November 15, 2019 to shareholders of record as of November 1, 2019, totaling approximately $2,556.
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.
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

9

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

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 September 30,
 
 
Nine Months Ended September 30,
 
 
 
2019

 
2018

 
2019

 
2018

Basic earnings per common share calculation:
 
 
 
 
 
 
 
 
Net income
 
$
23,966

 
$
21,377

 
$
62,242

 
$
63,196

Dividends paid on and undistributed earnings allocated to
participating securities
 
(128
)
 
(114
)
 
(333
)
 
(337
)
Earnings attributable to common shareholders
 
$
23,838

 
$
21,263

 
$
61,909

 
$
62,859

Weighted-average basic shares outstanding
 
30,899,583

 
30,692,668

 
30,849,035

 
30,661,852

Basic earnings per common share
 
$
0.77

 
$
0.69

 
$
2.01

 
$
2.05

Diluted earnings per common share:
 


 


 
 
 
 
Earnings attributable to common shareholders
 
23,838

 
21,263

 
61,909

 
62,859

Weighted-average basic shares outstanding
 
30,899,583

 
30,692,668

 
30,849,035

 
30,661,852

Weighted-average diluted shares contingently issuable
 
525,990

 
646,960

 
529,751

 
636,802

Weighted-average diluted shares outstanding
 
31,425,573

 
31,339,628

 
31,378,786

 
31,298,654

Diluted earnings per common share
 
$
0.76

 
$
0.68

 
$
1.97

 
$
2.01

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 September 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.

10

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 incremental borrowing rates the Company could obtain for similar loans as of the date of commencement or renewal.
Recently adopted accounting standards:
Except as set forth below, the Company did not adopt any new accounting standards 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 Accounting Standards Codification ("ASC") Topic 842 and provides additional and optional transition method to adopt the new lease standard. ASU No. 2018-11 allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-11 also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The amendments in these updates became effective for the Company on January 1, 2019.
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.
In July 2019, the FASB issued ASU No. 2019-07, “Codification Updates to SEC Sections-Amendments to SEC Paragraphs Pursuant to SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates.”  These amendments modify FASB Codification to reflect previously issued SEC rules for disclosure updates and simplification and investment company reporting modernization. The SEC adopted these rules to improve its regulations on financial reporting and disclosure. Other miscellaneous updates were made to agree to the electronic Code of Federal Regulations.  The amendments in this update became effective upon issuance on July 26, 2019.  There were no material impacts on the consolidated financial statements.


11

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

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").
The new current expected credit loss standard ("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 has worked to validate 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 the remainder of 2019, the Company will refine modeling segments and assumptions in addition to finalizing and documenting internal controls and accounting and credit policy elections, drafting disclosures, and completing model validation. Parallel processing of the existing allowance for loan losses model with the CECL model will occur during the fourth quarter of 2019. 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. The total increase in the allowance for loan losses will be partly offset by the existing credit discount on purchased credit impaired loans upon adoption. Management plans to disclose the total impact in Form 10-K for the year ended December 31, 2019.
In December 2018, the Office of the Comptroller of the Currency ("OCC"), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation ("FDIC") approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The Company plans to adopt the transitional guidance to reduce the impact of the initial adoption to our capital.

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.

12

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

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.  This update will not have an impact on the Company's consolidated financial statements or disclosures.
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. 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.

13

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

Note (2)—Mergers and acquisitions:
FNB Financial Corp. merger
On September 17, 2019, the Company entered into a definitive agreement to acquire FNB Financial Corp. and its wholly owned subsidiary, Farmers National Bank of Scottsville (collectively, "Farmers National"). Farmers National has five branches and reported total assets of $251,216, loans of $174,850 and deposits of $201,909 as of September 30, 2019. The Company expects to issue 954,827 shares of FBK common stock as consideration in connection with the merger, in addition to approximately $15,000 in cash consideration. The market value of the stock consideration will fluctuate with the market price of the Company's common stock and will not be known until the merger is consummated. Based on the closing price of the Company's common stock on the New York Stock Exchange of $38.26 on September 17, 2019, the merger consideration represented approximately $51,900 in aggregate consideration. The acquisition is expected to close in the first quarter of 2020 and is subject to regulatory approvals, approval by FNB Financial Corp. shareholders and other customary closing conditions.
Upon consummation, Farmers National will be merged with and into FB Financial. The Farmers National merger will be accounted for under FASB ASC Topic 805, "Business Combinations."
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 into new locations. Upon consummation, the Branches were merged with and into FirstBank, consolidating three of the purchased branches across the existing bank footprint. Under the terms of the agreement, the Bank assumed $588,877 in deposits for a premium of 6.25% and acquired $374,966 in loans at 99.32% of principal outstanding.
The acquisition of the Branches was accounted for in accordance with ASC Topic "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 from the ongoing business contribution of the Branches.
The Company incurred $199 and $4,614 in merger expenses during the three and nine months ended September 30, 2019, respectively, in connection with this transaction. These expenses are primarily comprised of professional services and employee-related costs in addition to branch closings and conversion and integration costs.

14

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 paid 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 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



15

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

 
2018

 
2019

 
2018

Net interest income
 
$
58,305

 
$
56,522

 
$
171,915

 
$
165,209

Total revenues
 
$
96,450

 
$
91,688

 
$
272,868

 
$
271,099

Net income
 
$
23,966

 
$
20,283

 
$
59,745

 
$
60,680

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 September 30, 2019 and December 31, 2018 are shown below: 
 
 
September 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

 
$

 
$
(1
)
 
$
999

Mortgage-backed securities - residential
 
481,580

 
5,784

 
(2,064
)
 
485,300

Municipals, tax exempt
 
165,100

 
8,754

 
(69
)
 
173,785

Treasury securities
 
7,415

 
17

 

 
7,432

Corporate securities
 
1,000

 
15

 

 
1,015

Total
 
$
656,095

 
$
14,570

 
$
(2,134
)
 
$
668,531

 
 
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 September 30, 2019 and December 31, 2018, the Company had $3,250 and $3,107 in marketable equity securities recorded at fair value, respectively.
Securities pledged at September 30, 2019 and December 31, 2018 had carrying amounts of $329,681 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 September 30, 2019 and December 31, 2018, there were $3,671 and $2,120, respectively, in trade date payables that related to purchases settled after period end.
 

16

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 September 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.
 
 
September 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
 
$
5,292

 
$
5,312

 
$
15,883

 
$
16,028

Due in one to five years
 
12,477

 
12,601

 
13,806

 
13,740

Due in five to ten years
 
15,412

 
15,978

 
18,539

 
18,387

Due in over ten years
 
141,334

 
149,340

 
99,151

 
98,963

 
 
174,515

 
183,231

 
147,379

 
147,118

Mortgage-backed securities - residential
 
481,580

 
485,300

 
520,654

 
508,580

Total debt securities
 
$
656,095

 
$
668,531

 
$
668,033

 
$
655,698

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

 
2018

 
2019

 
2018

Proceeds from sales
$
22,740

 
$

 
$
24,498

 
$
221

Proceeds from maturities, prepayments and calls
28,694

 
20,068

 
78,861

 
54,576

Gross realized gains
1

 

 
7

 
1

Gross realized losses
76

 

 
83

 
9

Additionally, net gains on the change in fair value of equity securities of $55 and $151 were recognized during the three and nine months ended September 30, 2019, respectively. Net losses on the change in fair value of equity securities of $27 and $108 were recognized in the three and nine months ended September 30, 2018, respectively.
The following tables show gross unrealized losses at September 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:
 
 
 
September 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
 
$

 
$

 
$
999

 
$
(1
)
 
$
999

 
$
(1
)
Mortgage-backed securities - residential
 
26,610

 
(70
)
 
217,385

 
(1,994
)
 
243,995

 
(2,064
)
Municipals, tax exempt
 
10,553

 
(69
)
 

 

 
10,553

 
(69
)
Treasury securities
 

 

 

 

 

 

Total
 
$
37,163

 
$
(139
)
 
$
218,384

 
$
(1,995
)
 
$
255,547

 
$
(2,134
)
 
 
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
)



17

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

As of September 30, 2019 and December 31, 2018, the Company’s securities portfolio consisted of 359 and 360 securities, 57 and 174 of which were in an unrealized loss position, respectively.
The Company evaluates available-for-sale debt securities with unrealized losses for other-than-temporary impairment ("OTTI") on a quarterly basis and recorded no OTTI for the three and nine months ended September 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 September 30, 2019 and December 31, 2018, by major lending classification are as follows:
 
 
September 30,

 
December 31,

 
 
2019

 
2018

Commercial and industrial
 
$
997,921

 
$
867,083

Construction
 
537,784

 
556,051

Residential real estate:
 
 
 
 
1-to-4 family mortgage
 
710,077

 
555,815

Residential line of credit
 
215,493

 
190,480

Multi-family mortgage
 
80,352

 
75,457

Commercial real estate:
 
 
 
 
Owner occupied
 
620,635

 
493,524

Non-owner occupied
 
914,502

 
700,248

Consumer and other
 
268,580

 
228,853

Gross loans
 
4,345,344

 
3,667,511

Less: Allowance for loan losses
 
(31,464
)
 
(28,932
)
Net loans
 
$
4,313,880

 
$
3,638,579

As of September 30, 2019 and December 31, 2018, $527,351 and $618,976, respectively, of qualifying residential mortgage loans (including loans held for sale) and $521,754 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 September 30, 2019 and December 31, 2018, $1,403,511 and $1,336,092, respectively, of qualifying loans were pledged to the Federal Reserve Bank under the Borrower-in-Custody program.
As of September 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 $63,069 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 September 30,
 
 
Nine Months Ended September 30,
 
 
 
2019

 
2018

 
2019

 
2018

Balance at the beginning of period
 
$
(14,862
)
 
$
(20,169
)
 
$
(16,587
)
 
$
(17,682
)
Additions through the branch acquisition of Atlantic Capital Bank
 

 

 
(1,167
)
 

Principal reductions and other reclassifications from nonaccretable difference
 
(150
)
 
(84
)
 
100

 
(3,536
)
Accretion
 
1,583

 
2,103

 
5,471

 
6,943

Changes in expected cash flows
 
110

 
6

 
(1,136
)
 
(3,869
)
Balance at end of period
 
$
(13,319
)
 
$
(18,144
)
 
$
(13,319
)
 
$
(18,144
)
Included in the ending balance of the accretable yield on PCI loans at September 30, 2019 and December 31, 2018, is a purchase accounting liquidity discount of $781 and $2,436, respectively. There is also a purchase accounting nonaccretable credit discount of $4,331 and $4,355 related to the PCI loan portfolio at September 30, 2019 and December 31, 2018, respectively, and an accretable credit and liquidity discount on non-PCI loans of $10,075 and $4,483 as of September 30, 2019 and $7,527 and $2,197, respectively, as of December 31, 2018.

18

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 $1,583 and $5,471 during the three and nine months ended September 30, 2019, respectively, and $2,103 and $6,943 during the three and nine months ended September 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 $2,102 and $6,030 for the three and nine months ended September 30, 2019, respectively, and $2,130 and $5,745 for the three and nine months ended September 30, 2018, respectively.
The following provides the changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 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 September 30, 2019
Beginning balance -
June 30, 2019
 
$
4,923

 
$
9,655

 
$
3,288

 
$
755

 
$
617

 
$
3,512

 
$
4,478

 
$
2,910

 
$
30,138

Provision for loan losses
 
234

 
186

 
18

 
67

 
(43
)
 
194

 
461

 
714

 
1,831

Recoveries of loans
previously charged-off
 
16

 
1

 
25

 
75

 

 
3

 

 
92

 
212

Loans charged off
 
(3
)
 

 

 
(170
)
 

 

 
(12
)
 
(532
)
 
(717
)
Ending balance -
September 30, 2019
 
$
5,170

 
$
9,842

 
$
3,331

 
$
727

 
$
574

 
$
3,709

 
$
4,927

 
$
3,184

 
$
31,464

Nine Months Ended September 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
 
17

 
105

 
(77
)
 
100

 
8

 
482

 
790

 
2,678

 
4,103

Recoveries of loans previously charged-off
 
66

 
8

 
62

 
121

 

 
95

 

 
435

 
787

Loans charged off
 
(261
)
 

 
(82
)
 
(305
)
 

 

 
(12
)
 
(1,698
)
 
(2,358
)
Ending balance - September 30, 2019
 
$
5,170

 
$
9,842

 
$
3,331

 
$
727

 
$
574

 
$
3,709

 
$
4,927

 
$
3,184

 
$
31,464

 
 
 
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 September 30, 2018
Beginning balance -
June 30, 2018
 
$
4,747

 
$
9,023

 
$
3,378

 
$
795

 
$
391

 
$
3,290

 
$
3,272

 
$
1,451

 
$
26,347

Provision for loan losses
 
847

 
(754
)
 
47

 
25

 
292

 
236

 
639

 
486

 
1,818

Recoveries of loans
previously charged-off
 
104

 
13

 
99

 
31

 

 
10

 

 
103

 
360

Loans charged off
 
(333
)
 
(14
)
 
(4
)
 
(13
)
 

 
(55
)
 

 
(498
)
 
(917
)
Ending balance -
September 30, 2018
 
$
5,365

 
$
8,268

 
$
3,520

 
$
838

 
$
683

 
$
3,481

 
$
3,911

 
$
1,542

 
$
27,608