FB Financial Corp (FBK) FY 2021 MD&A

ITEM 7 — Management's discussion and analysis of financial condition and results of operations

Overall Objective

The following is a discussion of our financial condition at December 31, 2021 and 2020, and our results of operations for the years ended December 31, 2021 and 2020, and should be read in conjunction with our audited consolidated financial statements included elsewhere herein. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from our consolidated financial statements. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth in the "Cautionary note regarding forward-looking statements" and Risk Factors" sections of this Annual Report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. Discussion and analysis of our financial condition and results of operations for the years ended December 31, 2020 and 2019 are included in the respective sections within "Part II. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of operations" of our Annual Report filed on Form 10-K with the SEC for the year ended December 31, 2020.

Overview

We are a financial holding company headquartered in Nashville, Tennessee. We operate primarily through our wholly-owned bank subsidiary, FirstBank, the third largest bank headquartered in Tennessee, based on total assets. FirstBank provides a comprehensive suite of commercial and consumer banking services to clients in select markets in Tennessee, Alabama, Southern Kentucky, and North Georgia. As of December 31, 2021, our footprint included 82 full-service branches serving the following Tennessee Metropolitan Statistical Areas: Nashville, Chattanooga (including North Georgia), Knoxville, Memphis, and Jackson in addition to Bowling Green, Kentucky and Birmingham, Florence and Huntsville, Alabama. We also provide banking services to 16 community markets throughout Tennessee and North Georgia. FirstBank also provides mortgage banking services utilizing its bank branch network and mortgage banking offices strategically located throughout the southeastern United States in addition to a national internet delivery channel. As of December 31, 2021, we had total assets of $12.60 billion, loans held for investment of $7.60 billion, total deposits of $10.84 billion, and total shareholders’ equity of $1.43 billion.

We operate through two segments, Banking and Mortgage. We generate most of our revenue in our Banking segment from interest on loans and investments, loan-related fees, trust and investment services and deposit-related fees. Our primary source of funding for our loans is customer deposits, and, to a lesser extent, unsecured credit lines, brokered and internet deposits, and other borrowings. We generate most of our revenue in our Mortgage segment from origination fees and gains on sales in the secondary market of mortgage loans that we originate through our retail and online ConsumerDirect channels, as well as from mortgage servicing revenues.

As previously reported, on March 31, 2021, the Company re-evaluated its business segments and revised to align all mortgage activities with the Mortgage segment. Previously, the Company had attributed retail mortgage activities originating from geographical locations within the footprint of the Company's branches to the Banking segment. Previously disclosed results for the years ended December 31, 2020, and 2019 have been revised to reflect this realignment. See Note 20, “Segment reporting” in the notes to our consolidated financial statements for a description of these business segments.

Development in 2021

Pandemic Update

As previously disclosed, the COVID-19 health pandemic has created financial disruptions including rapid decreases in commercial and consumer activity, increases in unemployment, widening of credit spreads, dislocation of bond markets, disruption of global supply chains and changes in consumer spending behavior. During the year ended December 31, 2021, we experienced a slow improvement in commerce through much of our footprint, with many restrictions being lifted and vaccinations becoming more widely available. Despite the pickup in economic activity, commercial and consumer activity has not returned to pre-pandemic levels. Concern remains regarding the potential impact that resurgences and new virus variants may have on the global economy, the efficacy of available vaccines and boosters to protect against widespread infection, persistent supply chain delays and other political and economic variables. As such, there continues

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to be uncertainty regarding the long term effects on the global economy, which could have a material adverse impact on the our business operations, asset valuations, financial condition, and results of operations. In response to this uncertainty, we continues to take deliberate actions to ensure the continued health and strength of our balance sheet, including increases in liquidity and careful managing of assets and liabilities in order to maintain a strong capital position.

Key factors affecting our business

Interest rates

Net interest income is the largest contributor to our net income and is the difference between the interest and fees earned on interest-earning assets (primarily loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (primarily deposits and borrowings). The level of net interest income is primarily a function of the average balance of interest-earning assets, the average balance of interest-bearing liabilities and the spread between the contractual yield on such assets and the contractual cost of such liabilities. These factors are influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the Federal Reserve Board and market interest rates.

The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the Federal Reserve Board’s actions. The yields generated by our loans and securities are typically driven by short-term and long-term interest rates, which are set by the market and are, at times, heavily influenced by the Federal Reserve Board’s actions. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur.

As a result of the COVID-19 pandemic discussed above, interest rates continued to remain at historic lows throughout the year ended December 31, 2021. Low interest rates could have significant adverse effects on the earnings, financial condition and results of operations of the Company.

For additional information regarding our interest rate risks factors and management, see “Business: Risk management: Liquidity and interest rate risk management” and “Risk factors: Risks related to our business.”

Credit trends

We focus on originating quality loans and have established loan approval policies and procedures to assist us in upholding the overall credit quality of our loan portfolio. However, credit trends in the markets in which we operate and in our loan portfolio can materially impact our financial condition and performance and are primarily driven by the economic conditions in our markets.

During 2021, our percentage of total nonperforming loans to loans held for investment decreased to 0.62% as of December 31, 2021, from 0.91% as of December 31, 2020. Our classified loans decreased to 1.66% of loans held for investment as of December 31, 2021, compared to 1.87% as of December 31, 2020. Our nonperforming assets as of December 31, 2021 were $63.0 million, or 0.50% of total assets, decreasing from $84.2 million, or 0.75% of assets as of December 31, 2020.

Our net provisions for credit losses on loans held for investment and unfunded loan commitments resulted in a reversal of $41.0 million for the year ended December 31, 2021 compared to an expense of $108.0 million for the year ended December 31, 2020. For the year ended December 31, 2021, our reversal was comprised of $39.0 million related to provision for credit losses on loans held for investment and $2.0 million related to provision for unfunded commitments. The current period reversal resulted from management’s best estimate of losses over the life of loans in our portfolio in accordance with the CECL approach, given an improvement in economic outlook and forecasts. Although the portfolio benefited from improving economic forecasts during the year ended December 31, 2021, there is uncertainty surrounding the impact of the COVID-19 pandemic and future variants, which may continue to lead to increased volatility in forecasted macroeconomic variables, a key input to our calculated level of allowance for credit losses. These evaluations weighed the impact of the current economic outlook, status of federal government stimulus programs, and geographical and demographic considerations, among other factors. See further discussion under the subheading "Allowance for credit losses."

For additional information regarding credit quality risk factors for our Company, see “Business: Risk management: Credit risk management” and “Risk factors: Credit Risks.”

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Competition

Our profitability and growth are affected by the highly competitive nature of the financial services industry. We compete with commercial banks, savings banks, credit unions, non-bank financial services companies, online mortgage providers, internet banks and other financial institutions operating within the areas we serve, particularly with national and regional banks that often have more resources than we do to invest in growth and technology and community banks with strong local ties, all of which target the same clients we do. Recently, we have seen increased competitive pressures on loan rates. Continued loan pricing pressure may continue to affect our financial results in the future.

For additional information, see “Business: Our markets,” “Business: Competition” and “Risk factors: Risks related to our business.”

Regulatory trends and changes in laws

We are subject to extensive regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment also has heightened supervisory expectations in areas such as consumer compliance, the Bank Secrecy Act and anti-money laundering compliance, risk management and internal audit. As a result of our increase in asset size above $10 billion and these heightened expectations, we expect to incur additional costs for additional compliance, risk management and audit personnel or professional fees associated with advisors and consultants.

As described further under “Business: Supervision and regulation,” we are subject to a variety of laws and regulations, including the Dodd-Frank Act.

See also “Risk factors: Legal, regulatory and compliance risk”.

Financial highlights

The following table presents certain selected historical consolidated income statement data and key indicators as of the dates or for the years indicated. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

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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 47,549,241, 47,220,743 and 31,034,315 as of December 31, 2021, 2020 and 2019, respectively.

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

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

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

(5) Excludes reserve for credit losses on unfunded commitments of $14.4 million and $16.4 million recorded in accrued expenses and other liabilities as of December 31, 2021 and 2020, respectively.

GAAP reconciliation and management explanation of non-GAAP financial measures

We identify certain financial measures discussed in this Report as being "non-GAAP financial measures." The non-GAAP financial measures presented in this Report are adjusted efficiency ratio (tax equivalent basis), tangible book value per common share, tangible common equity to tangible assets and return on average tangible common equity.

In accordance with the SEC's rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in our selected historical consolidated financial data may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in our selected historical consolidated financial data when comparing such non-GAAP financial measures. The following reconciliation tables provide a more detailed analysis of these, and reconciliation for, each of non-GAAP financial measures.

Adjusted efficiency ratio (tax equivalent basis)

The adjusted efficiency ratio (tax equivalent basis) is a non-GAAP measure that excludes certain gains (losses), merger and offering-related expenses and other selected items. Our management uses this measure in its analysis of our performance. Our management believes this measure provides a greater understanding of ongoing operations and enhances comparability of results with prior periods, as well as demonstrates the effects of significant gains and charges.  The most directly comparable financial measure calculated in accordance with GAAP is the efficiency ratio.

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The following table presents, as of the dates set forth below, a reconciliation of our adjusted efficiency ratio (tax-equivalent basis) to our efficiency ratio:

Tangible book value per common share and tangible common equity to tangible assets

Tangible book value per common share and tangible common equity to tangible assets are non-GAAP measures that exclude the impact of goodwill and other intangibles used by the Company’s management to evaluate capital adequacy.  Because intangible assets such as goodwill and other intangibles vary extensively from company to company, we believe that the presentation of this information allows investors to more easily compare the Company’s capital position to other companies.  The most directly comparable financial measure calculated in accordance with GAAP is book value per common share and our total shareholders’ equity to total assets.

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The following table presents, as of the dates set forth below, tangible common equity compared with total shareholders’ equity, tangible book value per common share compared with our book value per common share and common equity to tangible assets compared to total shareholders’ equity to total assets:

Return on average tangible common equity

Return on average tangible common equity is a non-GAAP measure that uses average shareholders' equity and excludes the impact of goodwill and other intangibles. This measurement is also used by the Company's management to evaluate capital adequacy. The following table presents, as of the dates set forth below, reconciliations of total average tangible common equity to average shareholders' equity and return on average tangible common equity to return on average

shareholders' equity:

Overview of recent financial performance

Year ended December 31, 2021 compared to the year ended December 31, 2020

Our net income increased during the year ended December 31, 2021 to $190.3 million from $63.6 million for the year ended December 31, 2020. Diluted earnings per common share was $3.97 and $1.67 for the years ended December 31, 2021 and 2020, respectively. Our net income represented a ROAA of 1.61% and 0.75% for the years ended December 31, 2021 and 2020, respectively, and a ROAE of 14.0% and 6.58% for the same periods. Our ratio of ROATCE for the years ended December 31, 2021 and 2020 was 17.3% and 8.54%, respectively.

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These results were significantly impacted by the economic forecasts incorporated in our current expected credit loss rate model, leading to a reversal in our provisions for credit losses on loans held for investment and unfunded loan commitments of $41.0 million for the year ended December 31, 2021 compared with provision expense of $108.0 million for the year ended December 31, 2020. Our results were also impacted by merger expenses of $34.9 million for the year ended December 31, 2020 related to our acquisitions of FNB Financial Corp. and its wholly-owned subsidiary, Farmers National Bank of Scottsville (collectively, "Farmers National") in February 2020 and Franklin Financial Network, Inc. and its wholly-owned subsidiaries, including its primary banking subsidiary, Franklin Synergy Bank, (collectively "Franklin") in August 2020. There were no such business combinations during the year ended December 31, 2021.

During the year ended December 31, 2021, net interest income before provision for credit losses increased to $347.4 million compared with $265.7 million in the year ended December 31, 2020.

Our net interest margin, on a tax-equivalent basis, decreased to 3.19% for the year ended December 31, 2021 as compared to 3.46% for the year ended December 31, 2020, influenced by a sustained low interest rate environment.

Noninterest income for the year ended December 31, 2021 decreased by $73.6 million to $228.3 million, down from $301.9 million for prior year period. The decrease in noninterest income was primarily driven by a decrease in mortgage banking income of $87.8 million to $167.6 million for the year ended December 31, 2021, compared to $255.3 million for the prior year period.

Noninterest expense decreased to $373.6 million for the year ended December 31, 2021, compared with $377.1 million for the year ended December 31, 2020. The decrease in noninterest expense is reflective of a decrease in merger expenses as there were no business combinations during the year ended December 31, 2021 compared with $34.9 million in merger and conversion expenses during the year ended December 31, 2020 related to our acquisitions of Farmers National and Franklin. The decrease in merger expenses was partially offset by increases in salaries, commissions and personnel-related costs from the incremental head count increase associated with our growth and volume of transactions, including the impact of our business combinations during the year ended December 31, 2020.

Year ended December 31, 2020 compared to year ended December 31, 2019

Our net income decreased during the year ended December 31, 2020 to $63.6 million from $83.8 million for the year ended December 31, 2019. Diluted earnings per common share was $1.67 and $2.65 for the years ended December 31, 2020 and 2019, respectively. Our net income represented a ROAA, of 0.75% and 1.45% for the years ended December 31, 2020 and 2019, respectively, and a ROAE, of 6.58% and 11.6% for the same periods. Our ratio of ROATCE for the years ended December 31, 2020 and 2019 was 8.54% and 15.4%, respectively.

These results were significantly impacted by the declining economic forecasts resulting from the impact of COVID-19 incorporated in our CECL loss rate model and the impact of our acquisitions, leading our provisions for credit losses on loans held for investment and unfunded loan commitments to increase to $108.0 million for the year ended December 31, 2020 compared with $7.1 million for the year ended December 31, 2019. We adopted the CECL methodology effective January 1, 2020 using a modified retrospective approach with no adjustments to prior period comparative financial statements. Our results were also impacted by an increase in merger expenses that total $34.9 million related to our acquisitions of Franklin and Farmers National during the year ended December 31, 2020 compared with merger expenses for $5.4 million for the year ended December 31, 2019 related to our branch acquisition from Atlantic Capital Bank, N.A. ("the Branches").

During the year ended December 31, 2020, net interest income before provision for loan losses increased to $265.7 million compared to $226.0 million in the year ended December 31, 2019.

Our net interest margin, on a tax-equivalent basis, decreased to 3.46% for the year ended December 31, 2020 as compared to 4.34% for the year ended December 31, 2019, influenced by declining interest rates during the year ended December 31, 2020.

Noninterest income for the year ended December 31, 2020 increased by $166.5 million to $301.9 million, up from $135.4 million for the prior year. The increase in noninterest income was primarily driven by an increase in interest rate lock volume and refinance activity influenced by declining interest rates. As a result, mortgage banking income increased $154.4 million to $255.3 million for the year ended December 31, 2020 .

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Noninterest expense increased to $377.1 million for the year ended December 31, 2020 compared to $244.8 million for the year ended December 31, 2019. The increase in noninterest expense is reflective of the increase in mortgage commissions stemming from elevated business activity, as well as the impact of our acquisitions and integration activities, including increases in salaries, commissions and personnel-related costs from the incremental head count.

Business segment highlights

Year ended December 31, 2021 compared to year ended December 31, 2020

We operate our business in two business segments: Banking and Mortgage. As previously reported, on March 31, 2021, the Company re-evaluated its business segments and revised to align all mortgage activities with the Mortgage segment. Previously, the Company had attributed retail mortgage activities originating from geographical locations within the footprint of the Company's branches to the Banking segment. Previously disclosed results for the year ended December 31, 2020 and 2019 have been revised to reflect this realignment. See Note 20, “Segment reporting” in the notes to our consolidated financial statements for a description of these business segments.

Banking

Income before taxes from the Banking segment increased in the year ended December 31, 2021 to $216.6 million, compared to a loss of $20.5 million for the year ended December 31, 2020. These results were primarily driven by a net reversal in provisions for credit losses on loans held for investment and unfunded loan commitments totaling $41.0 million during the year ended December 31, 2021 compared to expense of $108.0 million in the previous year. Net interest income increased $81.8 million to $347.3 million during the year ended December 31, 2021 from $265.6 million in the same period in the prior year. Noninterest income increased to $61.1 million in the year ended December 31, 2021 as compared to $46.5 million in the year ended December 31, 2020. Noninterest expense increased to $232.8 million during the year ended December 31, 2021 compared with $224.6 million for the year ended December 31, 2020, primarily due to increased salaries, commissions and employee benefits expenses associated with incremental headcount following our acquisitions in addition to other increases due to our growth and volume of transactions.

Mortgage

Income before taxes from the Mortgage segment decreased to $26.5 million for the year ended December 31, 2021 as compared to $103.0 million for the year ended December 31, 2020 primarily due to lower interest rate lock volumes and refinancing activity coupled with compressing sales margins. Additionally, the housing market continues to face supply shortages which affected overall purchasing volume. Noninterest income decreased $88.1 million to $167.2 million during the year ended December 31, 2021 compared to $255.3 million for the year ended December 31, 2020.

Noninterest expense for the years ended December 31, 2021 and 2020 was $140.8 million and $152.4 million, respectively. This decrease during the year ended December 31, 2021 is mainly attributable to a decrease in related mortgage commissions and incentives expenses as a result of lower volume during the year.

Results of operations

Throughout the following discussion of our operating results, we present our net interest income, net interest margin and efficiency ratio on a fully tax-equivalent basis. The fully tax-equivalent basis adjusts for the tax-favored status of net interest income from certain loans and investments. We believe this measure to be the preferred industry measurement of net interest income, which enhances comparability of net interest income arising from taxable and tax-exempt sources.

The adjustment to convert certain income to a tax-equivalent basis consists of dividing tax exempt income by one minus the combined federal and blended state statutory income tax rate of 26.06% for the years ended December 31, 2021 and 2020.

Net interest income

Year ended December 31, 2021 compared to year ended December 31, 2020

Net interest income is the most significant component of our earnings, generally comprising over 50% of our total revenues in a given period. Net interest income and margin are shaped by many factors, primarily the volume, term structure and mix of earning assets, funding mechanisms, and interest rate fluctuations. Other factors include accretion or amortization of discounts or premiums on purchased loans, prepayment risk on mortgage and investment–related assets, and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from client deposits generally costs less than wholesale funding sources. Factors such as general economic activity, Federal Reserve monetary policy, and price volatility of

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competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding, net interest income, and margin.

In response to economic uncertainty related to the COVID-19 pandemic, short term interest rates have been at historic lows. The Federal Funds Target Rate range was 0% - 0.25% as of December 31, 2020 and maintained this rate as of December 31, 2021. According to the Chair of the Board of Governors of the Federal Reserve, the Federal Funds Target Rate is not likely to drop below this range. However, the Federal Reserve does have other tools available that it can employ and has expressed an intention to do so in order to maintain a targeted level of liquidity. At its most recent meeting, the Federal Reserve decided to keep the target range for the federal funds rate at 0% to 0.25% and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment. Additionally, the Federal Reserve maintained their commitment to continue purchases of Treasury securities and agency mortgage-backed securities, but noted that as the economy makes progress towards its maximum employment and price stability goals, adjustments to the pace of purchases will continue in coming meetings. During the year ended December 31, 2021, the US Treasury yield curve steepened as long-term rates rose and short-term rates remained constant. This compares to the year ended December 31, 2020, as the US Treasury curve flattened as long-term and short-term decreased significantly.

On a tax-equivalent basis, net interest income increased $82.0 million to $350.5 million for the year ended December 31, 2021 as compared to $268.5 million for the year ended December 31, 2020. The increase in tax-equivalent net interest income for the year ended December 31, 2021 was primarily driven by an increase in average volume of loans HFI outstanding, coupled with a decrease in overall cost of deposits, which declined to 0.30% for the year ended December 31, 2021, a 32 basis point reduction from the year ended December 31, 2020.

Interest income, on a tax-equivalent basis, was $388.1 million for the year ended December 31, 2021, compared to $317.5 million for the year ended December 31, 2020, an increase of $70.6 million. Interest income on loans held for investment, on a tax-equivalent basis, increased $56.8 million to $334.9 million for the year ended December 31, 2021 from $278.1 million for the year ended December 31, 2020. This is primarily due to increased loan volume driven by growth in average loan held for investment balances of $1.58 billion, or 28.0%, to $7.20 billion for the year ended December 31, 2021, as compared to $5.62 billion for the year ended December 31, 2020, which was attributable both to our organic growth and the acquisition of $182.2 million in loans HFI from the Farmers National acquisition and $2.43 billion in loans HFI from the Franklin merger in the third quarter of 2020.

The tax-equivalent yield on loans held for investment was 4.65%, down 30 basis points from the year ended December 31, 2020. The decrease in yield was primarily due to the addition of new loans which were originated in a lower interest rate environment while higher yielding loans were paid off and refinanced at lower rates. Contractual loan interest rates yielded 4.27% in the year ended December 31, 2021 compared with 4.57% in the year ended December 31, 2020. Excluding PPP loans, which have a 1% contractual loan yield, our contractual loan yield would have been 4 basis points higher for the year ended December 31, 2021 compared to 14 points higher for the same period in the prior year. Also, PPP loan fee income increased our yield on origination and other loan fee income by 4 basis points for the year ended December 31, 2021 compared to 6 basis points for the same period in the prior year. Our yield on interest-earning assets decreased to 3.53% for the year ended December 31, 2021 from 4.09% for the year ended December 31, 2020.

Interest expense was $37.6 million for the year ended December 31, 2021, a decrease of $11.4 million as compared to the year ended December 31, 2020. The decrease was largely attributed to a reduction of interest rates on customer time deposits and money market deposits offset by an increases in volume in interest-bearing checking and subordinated debt. Interest expense on customer time deposits decreased to $8.4 million for the year ended December 31, 2021 from $19.7 million for the year ended December 31, 2020 and interest expense on money market deposits decreased $2.9 million for the year ended December 31, 2021 from $13.7 million for the year ended December 31, 2020. The average rate on customer time deposits decreased 85 basis points from 1.52% for the year ended December 31, 2020 to 0.67% for the year ended December 31, 2021 and the average rate on money market deposits decreased 40 basis points from 0.76% for the year ended December 31, 2020 to 0.36% for the year ended December 31, 2021. The decrease in interest expense from customer time deposits and money market deposits was partially offset by an increase in interest expense on interest-bearing checking of $1.3 million and subordinated debt of $3.0 million associated with the increase in volume from our $100.0 million subordinated note offering and additional subordinated notes acquired from Franklin in 2020.

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Overall, our NIM, on a tax-equivalent basis, decreased to 3.19% for the year ended December 31, 2021 from 3.46% for the year ended December 31, 2020, driven by the sustained low interest rate environment and change in balance sheet mix, partially attributable to our acquisition of Franklin completed in the last half of 2020 and impact of excess liquidity carried on our balance sheet. The components of our loan yield, a key driver to our net interest margin for the years ended December 31, 2021, 2020 and 2019 were as follows:

(1)Includes tax equivalent adjustment using combined marginal tax rate of 26.06%.

(2)Includes $0.8 million and $2.1 million of loan contractual interest and $3.3 million and $3.9 million of loan fees related to PPP loans for the years ended December 31, 2021 and 2020, respectively.

Net amortization on purchased loans lowered the NIM by 1 basis point for the year ended December 31, 2021 while net accretion contributed 5 basis points to the NIM for the year ended December 31, 2020. The decrease in accretion is due to the continued impact of purchase accounting resulting from our mergers, which can fluctuate based on volume of early pay-offs. The decrease is also due in part to the adoption of CECL which resulted in a net premium on our acquired Franklin portfolio. The $11.3 million premium recorded on August 15, 2020, is being amortized as a reduction to loan interest income. As of December 31, 2021 and December 31, 2020, the remaining net discount on all acquired loans amounted to $2.3 million and $1.5 million, respectively. Excluding PPP loans, our NIM would have been 4 and 8 basis points higher for the years ended December 31, 2021 and 2020, respectively.

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Average balance sheet amounts, interest earned and yield analysis

The table below shows the average balances, income and expense and yield and rates of each of our interest-earning assets and interest-bearing liabilities on a tax equivalent basis, if applicable, for the periods indicated.

(1)Calculated using daily averages.

(2)Average balances of nonaccrual loans and overdrafts (before deduction of ACL) are included in average loan balances. Loan fees of $26.0 million, $16.0 million, and $13.0 million, net (amortization) accretion of $(0.9) million, $3.8 million, and $8.6 million, nonaccrual interest collections of $2.3 million, $1.4 million and $0.9 million and syndicated loan fees of $0, $0 and $0.2 million are included in interest income for the years ended December 31, 2021, 2020 and 2019, respectively.

(3)Includes investments in premises and equipment, OREO, interest receivable, mortgage servicing rights, core deposit and other intangibles, goodwill and other miscellaneous assets.

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(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 were $3.1 million, $2.8 million and $1.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

(6)Includes $0.4 million and $0.4 million of accretion on subordinated debt fair value premium for the years ended December 31, 2021 and 2020, respectively.

(7)Includes $3.7 million, $0.9 million and $0 of interest rate premium accretion on money market deposits, $2.2 million, $2.0 million and $0 on customer time deposits and $0.5 million, $0.4 million and $0.1 million on brokered and internet time deposits for the years ended December 31, 2021, 2020 and 2019, respectively.

(8)Excludes the average balance for unrealized gains (losses) for mortgage loans held for sale and investments carried at fair value.

Rate/volume analysis

The tables below present the components of the changes in net interest income for the years ended December 31, 2021 and 2020. For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

Year ended December 31, 2021 compared to year ended December 31, 2020

(1) Average loans are gross, including nonaccrual loans and overdrafts (before deduction of ACL). Loan fees of $26.0 million and $16.0 million, net (amortization) accretion of $(0.9) million and $3.8 million, and nonaccrual interest collections of $2.3 million and $1.4 million, are included in interest income for the years ended December 31, 2021 and 2020, respectively.

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

(3) Includes $0.4 million and $0.4 million of accretion on subordinated debt fair value premium for the years ended December 31, 2021 and 2020, respectively.

(4) Includes $3.7 million and $0.9 million of interest rate premium accretion on money market deposits, $2.2 million and $2.0 million on customer time deposits and $0.5 million and $0.4 million on brokered and internet time deposits for the years ended December 31, 2021 and 2020, respectively.

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Year ended December 31, 2020 compared to year ended December 31, 2019

(1)Average loans are gross, including nonaccrual loans and overdrafts (before deduction of allowance for credit losses). Loan fees of $16.0 million and $13.0 million, accretion of $3.8 million and $8.6 million, nonaccrual interest collections of $1.4 million and $0.9 million, and syndicated loan fee income of $0 and $0.2 million are included in interest income for the years ended December 31, 2020 and 2019, respectively.

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

(3)Includes $1.0 million and $0.5 million of gain accretion from other comprehensive income from a previously cancelled cash flow hedge for the years ended December 31, 2020 and 2019, respectively.

(4)Includes $0.4 million accretion on subordinated debt premium for the year ended December 31, 2020.

(5)Includes $0.9 million and $0 of interest rate premium accretion on money market deposits, $2.0 million and $0 on customer time deposits and $0.4 million and $0.1 million on brokered and internet deposits for the years ended December 31, 2020 and 2019, respectively.

Provision for credit losses

The provision for credit losses charged to operating expense is an amount which, in the judgment of management, is necessary to maintain the allowance for credit losses at an appropriate level under the current expected credit loss model. The determination of the amount of the allowance is complex and involves a high degree of judgment and subjectivity. Refer to Note 1, "Basis of presentation" in the notes to our consolidated financial statements for a detailed discussion regarding ACL methodology.

Year ended December 31, 2021 compared to year ended December 31, 2020

We recognized a reversal of provision for credit losses on loans held for investment for the year ended December 31, 2021 of $39.0 million as compared to a expense of $94.6 million for the year ended December 31, 2020. The current period reversal resulted from management’s best estimate of losses over the life of loans in our portfolio in accordance with the CECL approach, given an improvement in economic outlook and forecasts. Although the portfolio benefited from improving economic forecasts during the year ended December 31, 2021, there is much uncertainty surrounding the impact of the COVID-19 pandemic and possible future variants, which may continue to lead to increased volatility in forecasted macroeconomic variables, a key input to our calculated level of allowance for credit losses. These evaluations weighed the impact of the current economic outlook, status of federal government stimulus programs, and geographical and demographic considerations, among other factors. In addition, the decrease in the current period when compared with

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the year ended December 31, 2020 is partially attributable to our acquisition activity, namely Farmers National and Franklin, and the impact of applying CECL on the acquired loan portfolios on their respective acquisition dates. The provision for credit losses on loans held for investment recognized in expense in conjunction with the Farmers National acquisition on February 14, 2020 amounted to $2.9 million while the provision for credit losses on loans held for investment recognized in expense in conjunction with the Franklin merger on August 15, 2020 amounted to $52.8 million.

The Company estimates expected credit losses on off-balance sheet loan commitments that are not accounted for as derivatives. When applying the CECL methodology to estimate expected credit loss, the Company considers the likelihood that funding will occur, the contractual period of exposure to credit loss, the risk of loss, historical loss experience, and current conditions along with expectations of future economic conditions. For the year ended December 31, 2021, the Company recorded a release to the provision for credit losses on unfunded commitments of $2.0 million compared to a provision of $13.4 million for the year ended December 31, 2020. This decrease is partially attributable to $10.5 million in provision expense recorded for unfunded commitments upon closing of our Franklin acquisition during 2020.

As of December 31, 2021 and 2020, we determined that all available-for-sale debt securities that experienced a decline in fair value below amortized cost basis were due to noncredit-related factors. Therefore, there was no provision for credit losses recognized on available-for-sale debt securities during the years ended December 31, 2021 or 2020.

Noninterest income

Our noninterest income includes gains on sales of mortgage loans, unrealized change in fair value of loans held for sale and derivatives, fees on mortgage loan originations, loan servicing fees, hedging results, fees generated from deposit services, investment services and trust income, gains and losses on securities, other real estate owned and other assets and other miscellaneous noninterest income.

The following table sets forth the components of noninterest income for the periods indicated:

Year ended December 31, 2021 compared to year ended December 31, 2020

Noninterest income amounted to $228.3 million for the year ended December 31, 2021, a decrease of $73.6 million, or 24.4%, as compared to $301.9 million for the year ended December 31, 2020. Changes in selected components of noninterest income in the above table are discussed below.

Mortgage banking income primarily includes origination fees and realized gains and losses on the sale of mortgage loans, unrealized change in fair value of mortgage loans and derivatives, and mortgage servicing fees, which includes net change in fair value of MSRs and related derivatives. Mortgage banking income is initially driven by the recognition of interest rate lock commitments at fair value at inception of the IRLCs. This is subsequently adjusted for changes in the overall interest rate environment offset by derivative contracts entered into to mitigate the interest rate exposure. Upon sale of the loan, the net fair value gain is reclassified as a realized gain on sale. Mortgage banking income was $167.6 million and $255.3 million for the years ended December 31, 2021 and 2020, respectively, representing a $87.8 million, or 34.4% decrease year-over-year.

During the year ended December 31, 2021, our mortgage operations had sales of $6.20 billion which generated a gain on sales margin of 2.97%. This compares to $6.24 billion and 3.79% for the year ended December 31, 2020. The decrease in gain on sales margin is a result of over-capacity in the industry and compressing margins. The industry benefited greatly from declining interest rates in 2020, causing a sharp increase in interest rate lock commitment volume. Sales slowed in 2021 with decline in activity as housing inventory remained low in many of our markets. Mortgage banking income from

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gains on sale and related fair value changes decreased to $150.8 million during the year ended December 31, 2021 compared to $267.6 million for the year ended December 31, 2020. Total interest rate lock volume decreased $1.78 billion, or 19.9%, during the year ended December 31, 2021 compared to the previous year. The volume mix of refinances and purchases also shifted during the year ended December 31, 2021 to 62.4% refinance volume compared with 77.6% during the same period in the previous year.

We continue to see margin compression and reduced volumes due to excess capacity in the industry, refinance fatigue and a shortage of housing in our markets. Our interest rate lock volume is expected to be materially and adversely impacted by rising interest rates and housing shortage, and we expect to see further declines in refinance activity within the mortgage industry when rates rise.

Income from mortgage servicing of $28.9 million and $22.1 million for years ended December 31, 2021 and 2020, respectively, was offset by declines in fair value of MSRs and related hedging activity of $12.1 million and $34.4 million for the years ended December 31, 2021 and 2020, respectively.

The components of mortgage banking income for the years ended December 31, 2021, 2020, and 2019 were as follows:

ATM and interchange fees increased $5.0 million to $19.9 million during the year ended December 31, 2021 as compared to $14.9 million for the year ended December 31, 2020. This increase is attributable to our growth in deposits and increased volume of transactions, which is partially attributed to our acquisitions completed in 2020. Though we have not yet experienced a decline, our interchange fee income is expected to decline beginning the second half of 2022 as a result of the Durbin amendment, which limits interchange fees banking institutions with asset sizes greater than $10 billion are permitted to charge.

Net gains from sales or write-downs of other real estate owned during the year ended December 31, 2021 amounted to $2.5 million compared with a loss during the year ended December 31, 2020 amounting to $1.5 million. This change was a result of specific sales and valuation transactions of other real estate during the respective periods. The gain in the current period was primarily the result of sale of one of our former branch locations, which had been vacated as a result of consolidating locations following our acquisitions.

Other noninterest income for the year ended December 31, 2021 increased $3.7 million to $19.0 million compared with $15.3 million for the year ended December 31, 2020. This includes gains associated with our commercial loans held for sale portfolio of $11.2 million for the year ended December 31, 2021 compared with $3.2 million for the million for the year ended December 31, 2020. This increase was offset by a decrease in interest rate swap fees of $3.5 million during the year ended December 31, 2021 which included a loss on the cancellation of an interest rate swap amounting to $1.5 million associated with a loan HFI that was resolved during the year.

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Noninterest expense

Our noninterest expense includes primarily salaries and employee benefits expense, occupancy expense, legal and professional fees, data processing expense, regulatory fees and deposit insurance assessments, advertising and promotion and other real estate owned expense, among others. We monitor the ratio of noninterest expense to the sum of net interest income plus noninterest income, which is commonly known as the efficiency ratio.

The following table sets forth the components of noninterest expense for the periods indicated:

Year ended December 31, 2021 compared to year ended December 31, 2020

Noninterest expense decreased by $3.5 million during the year ended December 31, 2021 to $373.6 million as compared to $377.1 million in the year ended December 31, 2020. Changes in selected components of noninterest expense in the above table are discussed below.

Salaries, commissions and employee benefits expense was the largest component of noninterest expenses representing 66.5% and 62.0% of total noninterest expense in the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, salaries and employee benefits expense increased $14.6 million, or 6.2%, to $248.3 million as compared to $233.8 million for the year ended December 31, 2020. This increase was mainly due to an increase of $25.4 million in employee salaries driven by our increase in headcount as a result of our mergers and investment in additional revenue producers in our markets. Our full-time equivalent employees increased to 1,962 as of December 31, 2021 from 1,852 as of December 31, 2020. This increase was partially offset by a $14.6 million decrease in incentive compensation largely driven by the slowdown of mortgage production volume and decreased interest rate lock volume.

Costs resulting from our equity compensation grants during the years ended December 31, 2021 and 2020 amounted to $10.3 million and $10.2 million, respectively. Our one-time IPO RSU grants fully vested during the third quarter of 2021. Costs associated with these IPO grants made up $1.3 million and $2.2 million of equity compensation expense during the year ended December 31, 2021 and December 31, 2020, respectively. During the year ended December 31, 2020, we began granting performance-based stock units, which resulted in $1.4 million and $1.0 million in expense included in our equity compensation expense during the years ended December 31, 2021 and 2020, respectively. For additional discussion regarding our equity compensation grants, see Note 23, "Stock Based Compensation" in the notes to our consolidated financial statements contained herein.

Occupancy and equipment expense increased $3.8 million to $22.7 million during the year ended December 31, 2021 as compared to $19.0 million in the year ended December 31, 2020. This increase is mostly related to increased leased property, maintenance, and depreciation costs which increased as a result of our merger activity and additional locations.

Merger costs amounted to $34.9 million for the year ended December 31, 2020 of which $2.3 million related to our acquisition and conversion of Farmers National and $32.4 million related to our acquisition and conversion of Franklin. There was no such merger activity during year ended December 31, 2021.

Advertising expense increased $3.9 million to $13.9 million during the year ended December 31, 2021 compared to $10.1 million during the year ended December 31, 2020. This increase is related to a $2.3 million increase in sponsorships and $1.8 million increase in advertising expense related to our overall growth.

Other noninterest expense primarily includes mortgage servicing expenses, regulatory fees and deposit insurance assessments, software license and maintenance fees and various other miscellaneous expenses. Other noninterest

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expense increased $8.9 million during the year ended December 31, 2021 to $64.0 million compared to $55.0 million during the year ended December 31, 2020. The increase reflects a $7.5 million increase in software licenses and maintenance fees, a $2.0 million increase in mortgage servicing expenses and a $1.3 million increase in regulatory fees and other costs associated with our growth, including the impact of our 2020 acquisitions.

Efficiency ratio

The efficiency ratio is one measure of productivity in the banking industry. This ratio is calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. We calculate this ratio by dividing noninterest expense by the sum of net interest income and noninterest income. For an adjusted efficiency ratio, we exclude certain gains, losses and expenses we do not consider core to our business.

Our efficiency ratio was 64.9% and 66.4% for the years ended December 31, 2021 and 2020, respectively. Our adjusted efficiency ratio, on a tax-equivalent basis, was 65.8% and 59.2% for the years ended December 31, 2021 and 2020, respectively. See “GAAP reconciliation and management explanation of non-GAAP financial measures” in this Report for a discussion of the adjusted efficiency ratio.

Income taxes

Our income tax expense was $52.8 million and $18.8 million for the years ended December 31, 2021 and 2020, respectively. This represents effective tax rates of 21.7% and 22.8% for the years ended December 31, 2021 and 2020, respectively. The primary differences from the enacted rates are applicable state income taxes and certain expenses that are not deductible reduced for non-taxable income and additional deductions for equity-based compensation upon vesting of restricted stock units. State taxes, net of federal benefits, increased our effective tax rate by 3.5% and 3.8% for the years ended December 31, 2021 and 2020, respectively. Additionally, during the year ended December 31, 2021, our income tax expense was reduced by a $1.7 million tax benefit related to a change in the value of the net operating loss tax asset that was acquired from Franklin. This tax benefit decreased our effective tax rate by 1.4% for the year ended December 31, 2021.

The Company is subject to Section 162(m), which limits the deductibility of compensation paid to certain individuals. The restricted stock unit plans that existed prior to the corporation being public vested after the reliance period as defined in the underlying Treasury Regulations. It is the Company’s policy to apply the Section 162(m) limitations to stock-based compensation, including our restricted stock unit plan, first and then followed by cash compensation. As a result of the vesting of these units and cash compensation paid to date, the Company has disallowed a portion of its compensation paid to the applicable individuals.

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Financial condition

The following discussion of our financial condition compares balances as of December 31, 2021 with December 31, 2020.

Loan portfolio

The following table sets forth the balance and associated percentage of each class of financing receivable in our loan portfolio as of the dates indicated:

(1)Includes $4.0 million and $212.6 million of PPP loans outstanding as of December 31, 2021 and 2020, respectively.

Our loans HFI portfolio is our most significant earning asset, comprising 60.4% and 63.2% of our total assets as of December 31, 2021 and 2020, respectively. Our strategy is to grow our loan portfolio by originating quality commercial and consumer loans that comply with our credit policies and that produce revenues consistent with our financial objectives. Our overall lending approach is primarily focused on providing credit to our customers directly in the markets we serve, but we are also party to loan syndications and participations from other banks (collectively, “participated loans”). At December 31, 2021 and 2020, loans held for investment included approximately $263.9 million and $206.8 million, respectively, related to purchased participation loans. All loans, whether or not we act as a participant, are underwritten to the same standards as all other loans we originate. We believe our loan portfolio is well-balanced, which provides us with the opportunity to grow while monitoring our loan concentrations.

Loan concentrations are considered to exist when there are amounts loaned to a number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Our lending activity is heavily concentrated in the geographic market areas we serve, with highest concentration in the state of Tennessee. This geographic concentration subjects our loan portfolio to the general economic conditions within the state. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for credit losses. As of December 31, 2021 and 2020, there were no concentrations of loans exceeding 10% of total loans other than the categories of loans disclosed in the table above. We believe our loan portfolio is diversified relative to industry concentrations across the various loan portfolio categories.

Banking regulators have established thresholds of less than 100% of tier 1 capital plus allowance for credit losses in construction lending and less than 300% of tier 1 capital plus allowance for credit losses in commercial real estate lending that management monitors as part of the risk management process. The construction concentration ratio is a percentage of the outstanding construction and land development loans to total tier 1 capital plus allowance for credit losses. The commercial real estate concentration ratio is a percentage of the outstanding balance of non-owner occupied commercial real estate, multifamily, and construction and land development loans to tier 1 capital plus allowance for credit losses. Management strives to operate within the thresholds set forth above.

When a company's ratios are in excess of one or both of these guidelines, banking regulators generally require an increased level of monitoring in these lending areas by management.

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The table below shows concentration ratios for the Bank and Company as of December 31, 2021 and 2020.

Loan categories

The principal categories of our loans held for investment portfolio are discussed below:

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Loan maturity and sensitivities

The following table presents the contractual maturities of our loan portfolio as of December 31, 2021. Loans with scheduled maturities are reported in the maturity category in which the payment is due. Demand loans with no stated maturity and overdrafts are reported in the “due in 1 year or less” category. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The tables do not include prepayment assumptions or scheduled repayments.

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For loans due after one year or more, the following table presents the interest rate composition for loans outstanding as of December 31, 2021. As of December 31, 2021 and 2020, the Company had $21.5 million and $22.4 million, respectively, in fixed-rate loans in which the Company has entered into variable rate swap contracts.

The following table presents the contractual maturities of our loan portfolio segregated into fixed and floating interest rate loans as of December 31, 2021.

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Of the loans shown above with floating interest rates, many have interest rate floors as follows:

Asset quality

In order to operate with a sound risk profile, we focus on originating loans that we believe to be of high quality. We have established loan approval policies and procedures to assist us in maintaining the overall quality of our loan portfolio. When delinquencies in our loans exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. From time to time, we may modify loans to extend the term or make other concessions, including extensions or interest rate modifications, to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. Furthermore, we are committed to collecting on all of our loans, which can result in us carrying higher nonperforming assets. We believe this practice leads to higher recoveries in the long-term.

Nonperforming assets

Our nonperforming assets consist of nonperforming loans, other real estate owned and other miscellaneous non-earning assets. As of December 31, 2021 and 2020, we had $63.0 million and $84.2 million, respectively, in nonperforming assets. Nonperforming loans are those on which the accrual of interest has stopped, as well as loans that are contractually 90 days past due on which interest continues to accrue. Generally, the accrual of interest is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has been contractually 90 days past due, unless the obligation is both well secured and in the process of collection. In our loan review process, we seek to identify and proactively address nonperforming loans. Accrued interest receivable written off as an adjustment to interest income amounted to $0.8 million and $0.6 million for the years ended December 31, 2021 and 2020, respectively. Additionally, we had net interest recoveries on nonperforming assets previously charged off of $2.3 million and $1.4 million for the years ended December 31, 2021 and 2020, respectively.

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In addition to loans held for investment, nonperforming assets included commercial loans held for sale that were past due 90 days or more or not accruing interest. These nonperforming commercial loans held for sale represent a pool of shared national credits and institutional healthcare loans that were acquired during 2020 in our acquisition of Franklin and amounted to $5.2 million and $6.5 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, other real estate owned included $3.3 million and $5.7 million, respectively, of excess land and facilities held for sale resulting from our acquisitions. Other nonperforming assets also included other repossessed non-real estate amounting to $0.7 million and $1.2 million as of December 31, 2021 and 2020, respectively.

GNMA optional repurchase programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the institution provides servicing and was the original transferor. At the servicer’s option and without GNMA’s prior authorization, the servicer may repurchase such a delinquent loan for an amount equal to 100 percent of the remaining principal balance of the loan. Under FASB ASC Topic 860, “Transfers and Servicing,” this buy-back option is considered a conditional option until the delinquency criteria are met, at which time the option becomes unconditional. When the Company is deemed to have regained effective control over these loans under the unconditional buy-back option, the loans can no longer be reported as sold and must be brought back onto the balance sheet, regardless of whether the Company intends to exercise the buy-back option if the buyback option provides the transferor a more-than-trivial benefit. At December 31, 2021 and 2020, there were $94.6 million and $151.2 million of delinquent GNMA loans that had previously been sold; however, we determined there not to be a more-than-trivial benefit of rebooking based on an analysis of interest rates and an assessment of potential reputational risk associated with these loans. As such, these were not recorded on our balance sheets as of December 31, 2021 or 2020.

The following table provides details of our nonperforming assets, the ratio of such loans and other nonperforming assets to total assets, and certain other related information as of the dates presented:

We have evaluated our nonperforming loans held for investment and believe all nonperforming loans have been adequately reserved for in the allowance for credit losses as of December 31, 2021 and 2020. Management also continually monitors past due loans for potential credit quality deterioration. Loans not considered nonperforming include loans 30-89 days past due amounting to $26.5 million at December 31, 2021 as compared to $27.0 million at December 31, 2020.

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Loan Modifications due to COVID-19

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further stipulated that a qualified loan modification was exempt by law from classification as a troubled debt restructuring, from the period beginning March 1, 2020 until the earlier of December 31, 2020, or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic is terminated. Section 541 of the CAA extended this relief to the earlier of January 1, 2022 or 60 days after the national emergency termination date. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. This legislation expired on January 1, 2022.

We have numerous customers that experienced financial distress as a direct result of COVID-19, and in response we offered financial relief in the form of a payment deferral program. The majority of these modifications were consistent with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" and the CARES Act and did not qualify as TDRs. As of December 31, 2020, recorded balances in total loans in deferral status under this program amounted to $202.5 million. There were no such loans remaining in deferral status as of December 31, 2021. As of December 31, 2021 and 2020, the total amortized cost of loans that had previously been deferred as part of this program that were no longer in deferral status amounted to $1.19 billion and $1.40 billion, respectively.

Allowance for credit losses

Beginning January 1, 2020, with the adoption of CECL, we calculated the allowance for credit losses under the current expected credit losses methodology. Additional details surrounding the adoption in addition to transition disclosures can be found within our consolidated financial statements in Form 10-K filed March 12, 2021.

The allowance for credit losses represents the portion of the loan's amortized cost basis that we do not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions considering macroeconomic forecasts. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for credit losses is based on the loan's amortized cost basis, excluding accrued interest receivable, as we promptly charge off accrued interest receivable determined to be uncollectible. We determine the appropriateness of the allowance through periodic evaluation of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts and historical loss rates. In future quarters, we may update information and forecasts that may cause significant changes in the estimate in those future quarters. See "Critical Accounting Estimates- Allowance for credit losses" for additional information regarding our methodology.

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The following table presents the allocation of the allowance for credit losses by loan category as well as the ratio of loans by loan category compared to the total loan portfolio as of the dates indicated:

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The following table summarizes activity in our allowance for credit losses during the periods indicated:

(a) Excludes reserve for credit losses on unfunded commitments of $14.4 million, $16.4 million recorded in accrued expenses and other liabilities at December 31, 2021 and 2020, respectively.

(b) Prior to adopting CECL on January 1, 2020, we calculated our allowance for loan losses using an incurred loss approach.

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The following table details our provision for credit losses and net charge-offs to average loans outstanding by loan category during the periods indicated: