FB Financial Corp - Annual Report: 2019 (Form 10-K)

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•	business and economic conditions nationally, regionally and in our target markets, particularly in Tennessee and the geographic areas in which we operate;

•	the concentration of our loan portfolio in real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate;

•	the concentration of our business within our geographic areas of operation in Tennessee and neighboring markets;

•	credit and lending risks associated with our commercial real estate, commercial and industrial, and construction portfolios;

•	increased competition in the banking and mortgage banking industry, nationally, regionally and locally;

•	our ability to execute our business strategy to achieve profitable growth;

•	the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets;

•	risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits;

•	our ability to increase our operating efficiency;

•	failure to keep pace with technological change or difficulties when implementing new technologies;

•	risks related to our recently completed and pending acquisitions and other strategic opportunities and initiaitves;

•	the timing, anticipated benefits and financial impact of the proposed acquisition of Franklin Financial Network, Inc. ("Franklin");

•	the anticipated timing of the closing of the proposed acquisition, acceptance by the customers of Franklin of the Company and Bank's products and services;

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negative impact on our mortgage banking services, including declines in our mortgage originations or profitability due to future rises in interest rates and increased competition and regulation, increased prepayments of mortgage loans serviced for others due to future declining interest rates, the Bank’s or third party’s failure to satisfy mortgage servicing obligations, and the possibility of the Bank being required to repurchase mortgage loans or indemnify buyers;

•	failure to timely and accurately implement changes to mortgage laws and regulations into our compliance processes;

•	our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;

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•	our ability to attract sufficient loans that meet prudent credit standards;

•	failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations;

•	inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic risk, information security risk, cyber security risk, and reputational risk;

•	failure to develop new, and grow our existing, streams of noninterest income;

•	our ability to oversee the performance of third party service providers that provide material services to our business;

•	our ability to maintain expenses in line with our current projections;

•	our dependence on our management team and our ability to motivate and retain our management team;

•	risks related to any future acquisitions, including failure to realize anticipated benefits from future acquisitions;

•	inability to find acquisition candidates that will be accretive to our financial condition and results of operations;

•	system failures, data security breaches (including as a result of cyber-attacks), or failures to prevent breaches of our network security;

•	data processing system failures and errors;

•	fraudulent and negligent acts by individuals and entities that are beyond our control;

•	fluctuations in the market value, and its impact, of the securities held in our securities portfolio;

•	the adequacy of our reserves (including allowance for loan losses) and the appropriateness of our methodology for calculating such reserves;

•	the makeup of our asset mix and investments;

•	our focus on small and mid-sized businesses;

•	an inability to raise necessary capital to fund our growth strategy or operations, or to meet increased minimum regulatory capital levels;

•	the sufficiency of our capital, including sources of such capital and the extent to which capital may be used or required;

•	interest rate shifts and its impact on our financial condition and results of operation;

•	the expenses that we will incur to operate as a public company and our complying with the requirements of being a public company;

•	the institution and outcome of litigation and other legal proceeding against us or to which we become subject;

•	changes in accounting standards, particularly ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” on our financial conditions or results of operations;

•	the impact of recent and future legislative and regulatory changes;

•	governmental monetary and fiscal policies;

•	changes in the scope and cost of Federal Deposit Insurance Corporation ("FDIC") insurance assessments and other coverage; and

•	future equity issuances under our 2016 Incentive Plan and our Employee Stock Purchase Plan and future sales of our common stock by us, our principal shareholder or our executive officers or directors.

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•	A relationship with our clients that provides us with a thorough understanding of their financial condition and ability to repay the loan;

•	verification that the primary and secondary sources of repayment are adequate in relation to the amount of the loan;

•	adherence to appropriate loan to value guidelines for real estate secured loans;

•	targeted levels of diversification for the loan portfolio, both as to type of borrower and type of collateral; and

•	proper documentation of loans, including perfected liens on collateral.

•	analysis of the borrower's and/or guarantor's financial condition, cash flow, liquidity, and leverage;

•	assessment of the project's operating history, operating projections, location and condition;

•	review of appraisals, title commitment and environmental reports;

•	consideration of the management's experience and financial strength of the principals of the borrower; and

•	understanding economic trends and industry conditions.

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•	quarterly testing of interest rate risk exposure;

•	proactive risk identification and measurement;

•	quarterly risk presentations by senior management; and

•	independent review of the risk management process.

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The Dodd-Frank Act created the Consumer Financial Protection Bureau, or CFPB, a new federal regulatory body with broad authority to regulate the offering and provision of consumer financial products and services. The authority to examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remain largely with the Bank's primary federal regulator, the FDIC. However, the CFPB may participate in examinations of smaller institutions on a "sampling basis" and may refer potential enforcement actions against such institutions to their primary regulators. While the CFPB does not have direct supervisory authority over us or the Bank, it nevertheless has important rulemaking, examination and enforcement authority with regard to consumer financial products and services.

•	The Dodd-Frank Act imposed new duties on mortgage lenders, including a duty to determine the borrower's ability to repay the loan, and imposed a requirement on mortgage securitizers to retain a minimum level of economic interest in securitized pools of certain mortgage types.

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•	The Dodd-Frank Act's Volcker Rule substantially restricted proprietary trading and investments in hedge funds or private equity funds and requires banking entities to implement compliance programs, as desribed further under "Other Dodd-Frank Act reforms: Volcker Rule" below.

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The Dodd-Frank Act contained other provisions, including but not limited to: new limitations on federal preemption; application of new regulatory capital requirements, including changes to leverage and risk-based capital standards and changes to the components of permissible tiered capital; changes to the assessment base for deposit insurance premiums; permanently raising the FDIC's standard maximum deposit insurance amount to $250,000 limit for federal deposit insurance; repeal of the prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; a prohibition on incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses; requirement that sponsors of asset-backed securities retain a percentage of the credit risk of the assets underlying the securities; requirement that banking regulators remove references to and requirements of reliance upon credit ratings from their regulations and replace them with appropriate alternatives for evaluating credit worthiness.

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•	banking or managing or controlling banks:

•	furnishing services to or performing services for our subsidiaries:

•	any activity that the Federal Reserve determines by regulation or order to be so closely related to banking as to be a proper incident to the business of banking, including:

▪	factoring accounts receivable;

▪	making, acquiring, brokering or servicing loans and related activities;

▪	leasing personal or real property;

▪	operating a nonbank depository instititution, such as a savings association;

▪	performing trust company functions;

▪	conducting financial and investment advisory activities;

▪	underwriting and dealing in government obligations and money market instruments;

▪	providing specified management consulting and counseling activities;

▪	performing selected data processing services and support services;

▪	acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions;

▪	performing selected insurance underwriting activities;

▪	providing certain community development activities (such as making investments in projects designed primarily to promote community welfare); and

▪	issuing and selling money orders and similar consumer-type payment instruments.

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•	its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

•	its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or

•	it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.

•	a common equity Tier 1 risk-based capital ratio of 4.5%;

•	a Tier 1 risk-based capital ratio of 6%;

•	a total risk-based capital ratio of 8%;

•	a leverage ratio of 4%; and

•	a supplementary leverage ratio of 3%, resulting in a leverage ratio requirement of 7% for such institutions.

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•	internal policies, procedures and controls designed to implement and maintain the bank's compliance with all of the requirements of the USE PATRIOT Act, the BSA and related laws and regulations;

•	systems and procedures for monitoring and reporting of suspicious transactions and activities;

•	designated compliance officer;

•	employee training;

•	an independent audit function to test the anti-money laundering program;

•	procedures to verify the identity of each client upon the opening of accounts; and

•	heightened due diligence policies, procedures and controls applicable to certain foreign accounts and relationships.

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•	Increased regulation of our industry, and resulting increased costs associated with regulatory compliance and potential limits on our ability to pursue business opportunities;

•	Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future performance;

•	The process we use to estimate losses inherent in our loan portfolio requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, and process may no longer be capable of accurate estimation and may, in turn, impact its reliability;

•	Downward pressure on our stock price.

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•	The rate of inflation;

•	Economic conditions;

•	Federal monetary policies; and

•	Stability of domestic and foreign markets

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•	maintain and enhance our reputation;

•	attract and retain experienced and talented bankers in each of our markets;

•	maintain adequate funding sources, including by continuing to attract stable, ow-cost deposits;

•	enhance our market penetration in our metropolitan markets and maintain our leadership position in our community markets;

•	improve our operating efficiency;

•	implement new technologies to enhance the client experience and keep pace with our competitors;

•	identify attractive acquisition targets, close on such acquisitions on favorable terms and successfully integrate acquired businesses;

•	attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;

•	attract sufficient loans that meet prudent credit standards;

•	originate conforming residential mortgage loans for resale into secondary markets to provide mortgage banking income;

•	maintain adequate liquidity and regulatory capital and comply with applicable federal and state banking laws and regulations;

•	manage our credit, interest rate and liquidity risk;

•	develop new, and grow our existing streams of noninterest income;

•	oversee the performance of third-party vendors that provide material services to our business; and

•	control expenses in line with their current projections.

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•	finding suitable candidates for acquisition;

•	attracting funding to support additional growth within acceptable risk tolerances;

•	maintaining asset quality;

•	retaining customers and key personnel, including bankers;

•	obtaining necessary regulatory approvals, which we may have difficulty obtaining or be unable to obtain;

•	conducting adequate due diligence and managing known and unknown risks and uncertainties;

•	integrating acquired businesses; and

•	maintaining adequate regulatory capital

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•	incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operating of our existing business;

•	using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target company or the assets and liabilities that we seek to acquire;

•	exposure to potential asset quality issues of the target company;

•	changes to interest rates and/or economic conditions generally may cause significant changes in the fair value of the assets and liabilities that we acquire;

•	intense competition from other banking organizations and other potential acquirers, many of which have substantially greater resources than we do;

•	potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including, without limitation, liabilities for regulatory and compliance issues;

•	inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, an other projected benefits of the acquisition;

•	incurring time and expense required to integrate the operations and personnel of the combined businesses;

•	inconsistencies in standards, procedures, and policies that would adversely affect our ability to maintain relationships with customers and employees;

•	experiencing higher operating expenses relative to operating income from the new operations;

•	creating an adverse short-term effect on our results of operations;

•	losing key employees and customers;

•	significant problems related to the conversion of the financial and customer data of the entity;

•	integration of acquired customers into our financial and customer product systems;

•	potential changes in banking or tax laws or regulations that may affect the target company; or

•	risks of impairment to goodwill.

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•	finding suitable markets for expansion;

•	finding suitable candidates for acquisition;

•	finding suitable financing sources to fund acquisitions;

•	attracting and retaining qualified management;

•	maintaining adequate regulatory approvals; and

•	closing on suitable acquisitions on terms that are favorable to us.

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•	Increased capital requirements and changes to the quality of capital required to be held by banking organizations;

•	Changes to deposit insurance assessments;

•	Regulation of proprietary trading;

•	Repeal of the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;

•	Establishment of the Consumer Financial Protection Bureau (the "CFPB") with broad authority to implement new consumer protection regulations and, for banks with $10 billion or more in assets, to examine and enforce compliance with federal consumer laws;

•	Implementation of risk retention rules for loans (excluding qualified residential mortgages) that are sold by a bank;

•	Regulation of debit-card interchange fees; and

•	Regulation of lending and the requirements for "qualified mortgages", "qualified residential mortgages" and the assessment of "ability to repay" requirements.

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(1)	Book value per share equals our total shareholders’ equity as of the date presented divided by the number of shares of our common stock outstanding as of the date presented. The number of shares of our common stock outstanding was 31,034,315, 30,724,532, 30,535,517, 24,107,660, and 17,180,000 as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.

(2)

We have calculated our return on average assets and return on average equity for a period by dividing net income for that period by our average assets and average equity, as the case may be, for that period. We have calculated our pro forma return on average assets and pro forma return on average equity for a period by calculating our pro forma net income for that period as described in footnote 4 below and dividing that by our average assets and average equity, as the case be, for that period. We calculate our average assets and average equity for a period by dividing the sum of our total asset balance or total stockholder’s equity balance, as the case may be, as of the close of business on each day in the relevant period and dividing by the number of days in the period.

(3)	We calculate our risk-weighted assets using the standardized method of the Basel III Framework.

(4)

We have calculated our pro forma net income, pro forma net income per share, pro forma returns on average assets and pro forma return on average equity for each period shown by calculating a pro forma provision for federal income tax using a combined effective income tax rate of 36.75% and 35.08% for the years ended December 31, 2016 and 2015, respectively, and adjusting our historical net income for each period to give effect to the pro forma provision for U.S. federal income tax for such period.

(5)	These measures are not measures recognized under generally accepted accounting principles (United States) (“GAAP”), and are therefore considered to be non-GAAP financial measures. See “GAAP reconciliation and management explanation of non-GAAP financial measures” for a reconciliation of these measures to their most comparable GAAP measures.

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(1)	Includes tax equivalent adjustment

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(1)	Calculated using daily averages.

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(2)

Average balances of nonaccrual loans are included in average loan balances. Loan fees of $13.0 million, $13.1 million, and $7.6 million, accretion of $8.6 million, $7.6 million, and $5.4 million, nonaccrual interest collections of $0.9 million, $1.4 million, and $3.3 million, and syndicated loan fees of $0.2 million, $0.4 million, and $1.0 million are included in interest income in the years ended December 31, 2019, 2018, and 2017 respectively.

(3)	Includes investments in premises and equipment, other real estate owned, interest receivable, MSRs, core deposit and other intangibles, goodwill and other miscellaneous assets.

(4)

Interest income includes the effects of taxable-equivalent adjustments using a U.S. federal income tax rate and, where applicable, state income tax to increase tax-exempt interest income to a tax-equivalent basis. The net taxable-equivalent adjustment amounts included in the above table were $1.9 million, $1.6 million, and $2.8 million for the years ended December 31, 2019, 2018, and 2017 respectively.

(5)	The NIM is calculated by dividing annualized net interest income, on a tax-equivalent basis, by average total earning assets.

(1)

Average loans are gross, including nonaccrual loans and overdrafts (before deduction of allowance for loan losses). Loan fees of $13.0 million and $13.1 million, accretion of $8.6 million and $7.6 million, nonaccrual interest collections of $0.9 million and $1.4 million, and syndicated loan fee income of $0.2 million and $0.4 million are included in interest income for the years ended December 31, 2019 and 2018, respectively.

(2)	Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.

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(1)

Average loans are gross, including nonaccrual loans and overdrafts (before deduction of allowance for loan losses). Loan fees of $13.1 million and $7.6 million, accretion of $7.6 million and $5.4 million, nonaccrual interest collections of $1.4 million and $3.3 million, and syndicated loan fee income of $0.4 million and $1.0 million are included in interest income for the years ended December 31, 2018 and 2017, respectively.

(2)	Interest income includes the effects of the tax-equivalent adjustments to increase tax-exempt interest income to a tax-equivalent basis.

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(1)	Yields on a tax-equivalent basis.

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•	Commercial mortgages: 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.

•	Nonperforming loans: 150% risk weight for loans, other than residential mortgages, that are 90 days past due or on nonaccrual status.

•	Securities pledged to overnight repurchase agreements: 20% risk weight for repurchase agreements secured by mortgage back securities.

•	Unfunded lines of credit: 20% or higher based on risk category of collateral or guarantee for unfunded lines of credit maturing in one year or less.

•	MSRs net of deferred tax in excess of 10% of Tier 1 capital before threshold based deductions must be deducted from common equity at 80%.

•	In addition, the combined balance of MSRs and deferred tax assets is limited to approximately 15% of the Bank's and the Company's common equity Tier 1 capital. These combined assets must be deducted from common equity to the extent that they exceed the 15% threshold.

•	Any portion of the Bank's and the Company's MSRs that are not deducted from the calculation of common equity Tier 1 is subject to a 100% risk weight.

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(1)	The percentage change represents the projected net interest income for 12 months and 24 months on a flat balance sheet in a stable interest rate environment versus the projected net income in the various rate scenarios.

(2)	The percentage change in this column represents our EVE in a stable interest rate environment versus EVE in the various rate scenarios.

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(1)	Included in mortgage banking income.

(2)	Included $5,385 in merger costs in the Banking segment and $1,995 in the Mortgage segment related to mortgage restructuring charges.

(3)	Recognized $100 of goodwill relief related to the sale of the third party origination channel in the Mortgage segment. See Note 8. Goodwill and intangible assets.

(1)	Included in mortgage banking income.

(2)	Included $1,594 in merger costs and $671 in costs related to follow-on secondary offering in the Banking segment.

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(1)	Included in mortgage banking income.

(2)	Included $19,034 in merger and conversion expenses.

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