FB Financial Corp
NYSE:FBK
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FB Financial Corp
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Good morning, and welcome to FB Financial Corporation's Second Quarter 2021 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Chief Financial Officer, Greg Bowers, Chief Credit Officer, and Wib Evans, President of FB Ventures, who will be available during the question-and-answer session.
Please note FB Financial's earnings release, supplemental financial information and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov.
Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation.
With that, I would like to turn the call over to Robert Hoehn, Director of Corporate Finance. Please go ahead.
Thank you, Chad. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements.
Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.
In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information in this morning's presentation, which are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov.
I would now like to turn the presentation over to Chris Holmes, FB Financial's President and CEO.
Thank you, Robert. Good morning, everybody. And thank you for joining us. We always appreciate your interest in FB Financial.
We had a great quarter as we delivered annualized loan growth of 13.9% when you exclude PPP. Adjusted EPS of $0.88, adjusted return on average assets of 1.43%, adjusted return on tangible common equity of 15.8% and grew our tangible book value per share to $20.43 or a 16.4% annualized pace.
Back in April, when we had our last call, economic activity in our markets had started picking back up and folks across our footprint were returning or had already returned to their normal schedules. We felt that the - we felt that this return to normal, which coming through in our numbers last quarter as we had loan growth of 1.8% annualized, most of which came in March.
We also had a 19 basis point release in our adjusted allowance deferrals declining to $152 million and net charge-offs of 5 basis points. In this quarter, our markets have really been buzzing. People have almost universally returned to work and our customers are transacting business again.
This quarter's results reflect our footprint rebound, as loan growth ex-PPP was a stellar $240 million. We saw a 26 basis point release in our adjusted allowance. Our deferrals are down to $74 million, and net charge-offs were only 2 basis points.
Our loan growth this quarter is a sign of the strength of our markets, as well as the quality and capacity of our relationship managers. Our growth came from across the board. Middle Tennessee continues to show very strong economic activity. Our teams in Knoxville, North Alabama had some nice wins this quarter. We're also seeing strong performance out of Birmingham, which delivered $40 million of loan growth. We just recently received FDIC approval for a full branch location in Birmingham. So we look forward to continued momentum from that team.
Our Memphis team has given us approximately $90 million of loan growth since we added several new relationship managers in that market last year and has a strong pipeline of relationships that they're converting to FirstBank customers.
Our relationship managers in the field are excited about the opportunities they have in front of them, and the pipeline remains strong. We feel good about our loan growth for 2021. And at this point, we're changing our guidance to high single digit growth for 2021 and we could potentially reach double-digit growth, though we have some expected payoffs coming in that was going to make 10% hard to achieve.
On the liability side of the balance sheet, we brought our - we brought down our cost of interest-bearing deposits by 12 basis points this quarter. I believe we still have some room for improvement on our cost of deposits. We'll continue to press our team to find pockets where it's appropriate for us to lower our rates.
We also continue to tackle operational technology and customer experience initiatives that create scalability and position us for the future. We're committed to executing our customer focused organic growth strategy in a way that creates the highest performing bank in the Southeast.
Following our Franklin combination and our growth over the last few quarters from $7 billion in assets to $12 billion, we focused on integrating teams, associate retention and satisfaction, building out scalable credit and risk management platforms and client retention and satisfaction.
These initiatives ensure that we have the people and the infrastructure in place to execute on organic growth and acquisition opportunities in front of us without sacrificing our customer focused, local authority based community banking model that we believe will be a key differentiator for us over the coming years.
We believe that if you're not currently executing at a high level, then you're wasting shareholder resources by adding scale to a less than optimal organization. We see this frequently in bank M&A, but we're determined that it will happen to us.
On M&A, the universe of traditional banks continue to shrink. Scarcity value is real, given the relatively few quality banks that provide scale and geographies that are attractive to us. We keep a list of those banks and will be a factor if they choose to seek a merger partner.
At the right time, we'll also pursue opportunistic M&A, which I define as banks that aren't necessarily on our radar at the moment, but it would be additive to our footprint or funding profile or at a complementary business line. Until then, we operate with great teams and great markets and can produce organic growth as this quarter shows.
On mortgage, our results were in line with guidance that we provided last quarter, but at $500,000 were less than we would like. As we look in the third quarter, our forecast has moved around significantly over the past 60 days. And with the market movement yesterday, we were re-forecasting again.
Our best estimate right now is $2 million to $4 million of contribution for the third quarter, and I am going to let Michael give additional color on the current mortgage backdrop in his section.
So to summarize, we had a very strong quarter of loan growth that we believe reflects the strength of our markets, the quality of our team and our focus on execution. We expect that growth to continue over the remainder of 2021.
Mortgage faces a challenging environment, but should provide an improved contribution. We continue to improve our funding costs, and we think that we have some more room there. And most importantly, we have the people, the systems and the processes to capitalize on the strong growth prospects that we have in front of us.
I'll now turn the call over to Greg to discuss credit.
Thanks, Chris. And good morning, everyone. As you can see, we have scaled back our credit disclosures this quarter as our local economies continue to improve. We are keeping an eye on COVID case counts with the Delta variant picking up some steam across the country.
But in the absence of further widespread outbreaks and related shutdowns, we feel positive overall about how the portfolio has performed over the past 15 months. While we have not issued an all clear memo yet, we are cautiously optimistic about how things have unfolded.
On slide 11, you can see that our overall deferrals are down to less than 30 loans with roughly $74 million outstanding. Of those, as we've highlighted in the past, the bulk $49 million are actually on an interest-only payment schedule with the remainder $25 million on a full principal and interest deferral.
Hotels continue to be the largest component, but most of our operators are reporting improving trends, especially those more seasoned managers who benefit from newer properties and better flags. We actually had one of our smaller hotel loans that we had circled as a concern pay-off this quarter, so that helps our outlook as well.
Also on slide 11, you can see an update for the industries that we had viewed as most at risk at the onset of pandemic. We continue to monitor these industries, but feel fairly comfortable with the current operating environment for each of them at this point.
No one specific segment stands out in our list, but as noted in our first quarter call, we did have a pickup in healthcare. The healthcare segment's classified loans last quarter with a couple of assisted living properties having challenges due to a COVID outbreak. We continue to monitor those closely and saw improvements in performance during the quarter.
I will close with slide 12, which displays our overall credit metrics. Across the board, our numbers improved this quarter, and we feel pretty comfortable with the health of our loan portfolio.
Classified loans, non-performing loans and NPAs each moved down 11 basis points quarter-over-quarter. And lastly, charge-offs were minimal this quarter at 2 basis points.
As highlighted in Chris's comments, too, I'm pleased to see the pickup in our loan book as our teams continue to compete aggressively across the markets. Our associates are identifying good opportunities and our people continue to be diligent in balancing growth and asset quality to achieve long-term profitability, which is the core of our company's historic success.
I'll now turn the call over to Mike.
Thank you, Greg. And good morning, everyone. Speaking first to mortgage and illustrated on slide six. Mortgage performed as we expected for the quarter, achieving a contribution of approximately $550,000. We continue to see margin impression and reduced volumes due to excess capacity in the industry, refinance fatigue and a shortage of housing in our markets. We expect the housing shortage to be a continued headwind and margin compression will be a concern until we see capacity exit the mortgage industry.
However, margins have stabilized over the last couple of weeks. Additional guidance from Chris' comments is somewhat challenging given the recency of changes in the rate environment and the removal of the adverse market fee by FHFA on refinancing both of which could lead to more refinance activity, but it's too early to tell.
Moving on to net interest margin. We saw our headline number remain essentially flat at 3.18% in the second quarter compared to 3.19% in the first quarter. We were able to bring down our cost of total deposits by 10 basis points this quarter. We continue to focus on lowering our funding costs, and we see room for continued improvement.
Our CD re-pricing is slowing as we made it through the majority of the higher cost deposits from our 2018 campaign, but we do have approximately $330 million re-pricing in the third quarter at a weighted average cost of around 85 basis points.
Our contractual yield on loans, excluding PPP dropped by 11 basis points to 4.37% in the second quarter from 4.48% in the first quarter, as pricing competition remains fierce.
Yield on new originations during the quarter came in at 3. 8% to 3.9% range and that pricing has continued through the first few weeks of the third quarter. So we would expect to see - expect to continue to see contractual yields compress until we see rates begin to rise. When rates do rise, we have approximately $2 billion in variable rate loans that should re-price immediately.
We traditionally have kept our fixed rate loan shorter dated as we know that longer term fixed rate paper at low rates can become a credit risk in addition to an interest rate risk. As a result, our balance sheet remains fairly asset sensitive.
Despite our strong loan growth for the quarter, we continue to have a tremendous amount of excess liquidity. We've begun deploying a portion of that liquidity into securities portfolio opportunistically after the benchmark 10 year U.S. treasury yield increased by approximately 83 basis points in the first quarter.
After $265 million of security purchases, run-off from paydowns and market value changes, our securities portfolio increased by $179 million in the second quarter. The average yield on purchase [ph] securities during the quarter is in the estimated 1.46%. We continue to be conservative with duration risk with new security purchases as we add to the portfolio.
In the absence of rate increases, we would expect the margin to stay in the same relative band that we've been in for the past couple of quarters, with positive changes in the balance sheet mix being relatively offset by a continually declining earning asset yields.
Our cost of funds should also continue to have small declines. We will focus on continuing to grow net interest income in the near term through earning asset growth, both loans and securities and maintain the longer term upside of our asset-sensitive balance sheet.
Moving to CECL in our allowance. We saw a release of $13.8 million this quarter as economic forecast continued to improve. As we have mentioned previously, the improving economic forecast from the first and second quarter have caused us to begin to increase our qualitative factors in order to maintain what we build as a prudent level of reserve.
Going forward, we will continue to weigh the improving forecast for Q [ph] factors that are necessary to pinpoint any risk at [indiscernible] that are not reasonably picked up in the model. We would currently expect further releases over the next few quarters, assuming outlooks continue to improve.
As an update on our non-core commercial held for sale portfolio, we saw our exposure decline by an additional $50 million during the quarter. With these paydowns and improving economic conditions, we saw a gain of $1.4 million on our portfolio, as compared to an $853,000 loss in the first quarter, a $1.4 million gain in the fourth quarter of 2020 and a $1. 9 million gain in the third quarter of 2020.
We continue to market the portfolio, while maintaining our hurdle price, and we feel that the portfolio is appropriately and adequately marked for the remaining risk. Until the buyer hits our bid, we expect continued paydowns and small gains or losses as the portfolio is mark-to-market each quarter.
Speaking to our expenses. Our banking expenses were higher than we had anticipated, as we implemented systems and took advantage of hiring opportunities each of which support our growth. We don't expect our banking expenses to exceed the current quarter's level over the remaining two quarters of the year, and we expect next year's expense growth to be in the low to mid single digit range.
With that, I'll turn the call back over to Chris to close.
Thanks, Greg and Michael, for the color. Certainly, we believe that we delivered strong financial performance this quarter, and we're pleased with the team's results, particularly our loan growth.
That concludes our prepared remarks. Thank you, everybody for your interest in FB Financial. And operator, at this point, we'd like to open the line for questions.
Thank you, sir. [Operator Instructions] And the first question will be from Stephen Scouten with Piper Sandler. Please go ahead.
Hey. Good morning, everyone.
Good morning, Stephen.
So just maybe start with loan growth here a little bit. Obviously, I think the 14% level was a very impressive number. We'll see how other peer shake out, but I don't think they'll be anywhere near that level.
So wondering, other than just the strength of the markets you spoke to, were there any other nuances that led to that growth. It seemed like maybe there was more residential real estate growth. So can you talk to that? Was that maybe just holding more on balance sheet or what are the dynamics there?
Yeah. We can speak - certainly speak to it, and I'll go first. But really, Stephen, it came across the board, and two components to the - it's a net growth number. So it came across the board, if we look at our funded – our fundings surprisingly balanced. I mean, you can actually - you couldn't balance it anymore across C&I, CRE, both owner occupied, non-owner copied, multifamily.
Multifamily is probably the biggest area - was the biggest area of growth for us. And we had good originations, but we just frankly had fewer paydowns. It was an impressive - well, I appreciate you calling an impressive growth number. And it - we turned in good performance, but actually, there's probably even more remarkable for us was the level of paydowns as well. We had great originations and continue to get some paydowns. And we didn't get many in multifamily, and that's what led to higher growth in that particular segment. But residential as well, we had some growth in that area. So it was really balanced across the board. Yes, anything to add?
Chris, I'd also add you know, that balance point is key. And I saw it in the loan dollars side as well. I mean, there are a lot of $2 million, $3 million, $4 million deals that could you know, representative across the footprint.
Yeah. And we talked - we thought once really things open back up, we'd see a lot of activity and certainly if you could walk down Broadway in Nashville even at 8 o'clock in the morning on a Tuesday, you'd be surprised that we see a lot of activity. And it's not only Nashville, it's across the markets [ph]
Stephen, it's Mike. I'd add, you know, and your point about putting more residential on balance sheet, that is one of the benefits of the mortgage division. If we choose to do that, we have the ability to – to portfolio and mortgage loans and sometimes we do deploy that option. So that is out there.
Okay. And I guess, is that a strategy shift in general or just something you took advantage of this quarter? And what kind of the production are you keeping on balance sheet? Is it arms or shorter term or...
Yeah, it's not really a strategy shift. I mean, very little production. We're still selling at 97% of our mortgages in the secondary market on a go-forward basis. We do see some jumbo customer stuff that we'll put on at the sheet bits [ph], but good customers in footprint type of business, but it's not a big piece of our business at this point.
And net of payoffs, it was a contributor, but I'd say it was not a huge contributor.
Got it. Yeah, makes sense. Okay. And then maybe thinking about capital deployment, it feels like you were maybe a little more, I don't know, aggressive about your commentary in terms of the ability to deploy capital and you mentioned maybe a handful of M&A targets that you guys would be active and if they came to market.
Can you give us a feel for how many of those targets might be out there? And what kind of the potential asset sizes would be that you might look at? And then if M&A doesn't come about, maybe how aggressive could you be on the share repurchase, especially with the stock having pulled back somewhat?
Yes. On the M&A front, we've taken a position of - we always think about that. I don't think you can do what we do and not at least have a plan and have that in mind, and we always have a plan to have that in mind. We've not been aggressively out pursuing M&A for a couple of reasons.
One, I've referenced quite often some of our internal initiatives that we feel like in - that we've been focused on that really just enhance the quality of everything we do, including our associate experience and our customer experience. And so we've had a really significant focus on them.
The company has grown significantly over the last 18 months and doubled in size over the last 18 months, and so we've had a lot of focus on that. That's part of it is we don't want to disrupt a lot of momentum. And I think quarters like this you can see that because it shows through.
And so - but we do keep a small list of names in and around our footprint. It would not hit the double-digit kind of - double-digit for us because that's - you know, we - I mentioned scarcity when it comes to really high quality franchise, I mean, there are some out there that are fantastic, but there are just not that many of them.
And so - and some of them may reach out sometime soon, some of them, but may not reach out for another 3 or 4, 5 years, which is all - which is completely fine for us. And so that's a matter of timing. We don't anticipate anything in the immediate future from those names.
But on the - as you know, we'll get reached out to or we'll get called on by investment bankers with opportunities that sometimes are pretty good opportunities. That's not - that are not you know, on - that are opportunistic for us, and it's not one of those names and we'll consider those too, we just consider those a little less aggressively.
And we would go down to $400 million, $500 million in terms of size. And then on the upside, we go up to $2 billion to $3 billion, maybe even $4 billion would be - I'd say, $5 billion and under, we wouldn't do anything bigger than that.
We - and we really wouldn't even get to that level, but somewhere in that range is where our targets would be as we think about how to grow the franchise. We wouldn't get any bigger than that in terms of an acquisition because it just gets to be too much at that point.
Okay. Yeah, that's really helpful. And then maybe just following up on the share repurchase thoughts, down to 1.5 [ph] in tangible book, obviously, would be - the math gets a little more attractive, and you guys mentioned you have a lot more excess capital now. So how do you think about that today?
Yeah. I'm sorry, Stephen, you referenced that. And it's a thought, and you're exactly right on all accounts. We're accumulating a lot of capital, we expect that to continue. Buyback of shares is a possibility as we move forward over the next couple of quarters.
We certainly - at 1.5 times tangible, we're sort of scratching our head. And so that makes the buyback look more attractive. And so we're - it's a consideration for us.
Okay, great. Well, thanks for the color. And congrats on a great quarter.
All right. Appreciate it, Stephen.
And our next question will come from Brett Rabatin with Hovde Group. Please go ahead.
Hi. Good morning, everyone.
Good morning, Brett.
I wanted to first ask on the mortgage, the guidance for the $2 million to $4 million in contribution for 3Q, can we talk maybe about the assumptions for that. Is that - does that assume, one, that the current rate down drop we've got here, does that mean that it sticks or that's your assumption. And then just maybe talk about how you're assuming gain on sale margins trend from here?
Yeah, Brad, it's Michael. So really, as we look through the quarter, it doesn't include some of the recent rate rally, I'd say the last couple of days. The 2 to 4 really framed before that. Obviously, tenure has been pretty volatile here.
So we think that maybe there's some tailwinds behind this lower rate environment. And so would not include that, but it's really just too early to tell how long that sticks and really if mortgages follow.
And then from a margin perspective, on slide six, if you look at kind of that 2.40 [ph] range, which is where our pipeline is, that's really where margins have been coming in on kind of a weighted average, if you look at the mix in our consumer direct and retail businesses.
And so it's been pretty consistent over the last couple of weeks, which is a nice thing as we've seen them contracting for quarter-over-quarter here. So seeing some stabilization. We'll see how that plays out amongst competition here in the next couple of weeks. But for now, we're pretty comfortable in that space.
Okay. I appreciate the color there. And then the other thing was just you highlighted the hires and expansion and talked about Birmingham, but you also mentioned that you wouldn't expect the core bank expenses to grow from here. Are you sort of accomplished what you wanted to in terms of adding talent for the near term? And what other opportunities you might look at? And what markets might those be in, if any?
Yeah. And so we never - recruiting is a 7 day a week, 365 opportunity for us. And so we could always opportunistically add either teams or individual revenue producers as we get opportunities to do that. And so with that, that will be something we'll continue to pursue.
When we - there's always things falling out of the expense side and things getting added to the expense side, and so it's a constant roll forward. And as we look at it and we think about big expenses in terms of, say, new systems or big personnel moves or things like that, we think that's where that statement comes from.
And so we don't see anything that's going to cause us to be significantly higher. We know of a few expenses that go - that get actually reduced in the quarter, but we're allowing also for some adds to personnel.
We continue to look for talent not only on the revenue producing side of the business, but we've made some really key adds in the financial area. We've made some key adds in the risk area. And so when we have the chance to upgrade our talent, we're going to continue to add to our talent. We're going to continue to do that.
Okay. Great...
But we think we can do that within our existing expense structure. Yeah, but - and thank you, Brett, we think we can do that within our existing expense structure for the next couple of quarters.
Okay.
All right.
And our next question will come from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.
Hey. Good morning, everyone.
Good morning, Kevin.
Just another follow-on question on mortgage, so if I'm looking at - I'm just looking at the components of mortgage banking income on page 12 of the supplement. And so when I think about it, you know, revenue, what could be happening going forward, would it be reasonable to assume that, that fair value hit of about $17.6 million this quarter is going to - you're assuming that's going to come lower, but there will also be some additional pressure on the gain and fees from originations line. Is that a fair assumption?
Hi, Kevin. Good morning. Yeah, that's fair. You see that the pipeline has come down, call it, 30% quarter-over-quarter. And so that really drives, and the new rate lock volume drives that fair value mark. And so we've seen some stabilization there. Back to the earlier question would hope we see a little bit of growth out of - from this rate move and refinance activity.
Purchase activity continues to be under pressure within the housing. So don't expect a whole lot out of it, unfortunately. But your assumption is correct. Gain on sale, obviously, our volume that we would sell will go down because it follows that smaller pipeline. And so our opportunity to pick up some pennies there shrinks with lower volume.
Great, great. Thank you. And just want to - just more of a housekeeping thing on the loan growth guidance, taking it up to a high single digit. Is it - it previously was a mid to high single digit. Is that correct?
That's correct. It was previously mid to high. And we're saying should be high at this point.
Okay. And then if you could just remind us - you know, I appreciate the outlook for further reserve releases and you're still at a very strong level here, and you referenced the day one CECL level.
Can you remind us what that is, on a combined basis, what you consider that level and when you might approach it? Or is it something you're looking - assuming the outlook and the indicators you're looking at stay - continue to be where they are or even improve from here? Are we looking at more of a two year window, more of a one year window? And what would that level roughly be?
Yes. Probably the least. Probably the - you don't want me - yeah, I can comment, but it's probably better to come from Michael.
Yeah. Kevin, it was around 140 to 150 on originally, but I don't really think about it like that because the business has changed so much, as Chris referenced, going from $7 billion to $12 billion. The combination changed environment.
So that's tough to think about day one. And so we kind of look forward and obviously, we'll move if things continue down the path that they're moving down, we would expect to move down over the next couple of quarters.
I wouldn't expect it to all happen in the third and fourth quarter. As it likely pushes into 2022 as we're going to grab on our economies in the Delta variant and all that stuff. So I don't think it's an immediate move down. But we're such a different look than day one, that's kind of...
Yeah. Of the asset, it...
Yeah. And that's exactly why I asked about it because I didn't want to place too much weight on that number when it was - you guys were a much different bank at that point.
Exactly. I think that's a good - it's a good summary. And I don't know, it's been a frustrating year with CECL because we put a lot in and now we've got it slowly coming back out. A lot in the allowance, and that's started to come back out.
And I suppose that's the way it's - it functions and - but it does make it hard to zero in on core earnings from quarter-to-quarter. That's what - I know you try to do is what we try to do too. And so - and we're trying to be as transparent as we can, when we say, look, we expect future releases based on if things continue as we expect them to, we would expect future releases, but we don't have any kind of time frame on that.
And we don't have any goal in mind that we're trying to get to. And so it's a little - I get frustrated because we can't answer the questions as probably as cleanly as we'd like to be able to answer, Kevin. But we try to be as transparent on it as we can.
Yeah. That's all very fair, Chris, it is. Just one last one for me, so on M&A, I appreciate the kind of differentiating between the targets that are in and around your markets that you would have on this list versus some more strategic opportunistic targets in.
I'm assuming that maybe some of those are not - maybe those are outside of the current footprint. If that includes those kind of scenarios, are there certain markets where you would be more open to looking at such as maybe the Carolinas or Northern Georgia. I would assume Birmingham is a market you'd be interested in if targets came up given the de novo. But just anything you're comfortable sharing on that front? Thanks.
Yeah. And you got the - you read it pretty well. With one thing I would say is that list is all in and around our geography, okay. It's not taking us into - significantly into new geographies. It's all in and around our geography. And we would call Northern Georgia in our geography today. We call anything Birmingham and North in our geography today.
We don't have any physical presence in the Western part of the Carolinas, but that wouldn't be a reach for us. If you would - just as the crow flies, as we say down here in the Southeast, we're really close to North Carolina at this point anyway, just got a few mountains that are a barrier to travel. But we're really close to that Western part of the Carolinas.
And so we don't really consider that to be out of the geography. That's kind of in our targeted zone. And those are the types of areas. But outside - all of our targets would be within those types of areas, would be within those areas than it would be outside of those. Is that helpful, Kevin?
That's perfect. That's perfect. Thanks very much.
Okay.
The next question will be from Catherine Mealor with KBW. Please go ahead.
Thanks. Good morning.
Good morning, Catherine.
Wanted to just follow up on bank level expenses and see if - I just want to make sure that your guidance is - we're hearing it right, so you're saying that you think core expenses will grow from here. And so what kind of - I remember last quarter, you had kind of taken fourth quarter run rate and annualized that, and that was about $212 million and have guided for that to be kind of a low to mid single digit growth rate this year. It seems like that guidance is coming up a little bit this quarter.
Can you just kind of talk about what's changed within that? And then is that a growth rate that you think is specific to just 2021, and we should see that growth rate maybe pull back and normalize a little bit as we get into next year? Thanks.
Yeah. Hi, Catherine, good morning. It's Michael.
Morning.
So rest of the year, we don't think the third and fourth quarter will be as high as the second quarter was, right. So we actually expect that number to normalize or stabilize, maybe some slight downward pressure on expenses.
The guidance around low single digit was for 2022. So I may not have been clear in my comments there. But we do expect to see some stability in expenses and a slight decrease for the remainder of the year.
Great. Okay. So your core expenses come down from this quarter and then the low single digit growth rate is expected for next year off of that base?
Yeah. That's right.
Perfect. Okay. Great. Just wanted to clarify that. And then what's the difference between the gain on sale margin and the consumer direct business versus just the in footprint kind of core mortgage business?
Catherine, this is Wib. You're looking in the consumer direct space, somewhere in the 175 to 190 range. And on the retail front, you're looking probably 320 to 340.
Okay, great. Thanks, that’s all. I appreciate it. Good quarter.
Thank you.
Thanks, Catherine.
The next question is from Matt Olney with Stephens. Please go ahead.
Hi, great. Thanks. Good morning, guys.
Morning.
Just looking back on the loan growth, I think you're pretty clear as far as the paydowns and how those eased quite a bit in 2Q, but could potentially return in the second half of the year. What about utilization rates? How do the 2Q levels compared to the trough levels and how these compare to what we saw pre-pandemic? Thanks.
Yeah. So a couple of things, Matt. We did have actually in the quarter, and I may not have been clear, we did have significant paydowns in the second quarter and still we're able to produce the 14% loan growth. So we - our originations were really significant in the second quarter, our new originations.
And then when we look at funding. And so moving to fundings, we got a little bit of help, particularly in our - I say, particularly, we didn't get much out, to be honest with you, in the fundings on our lines. Just in the, call it, $20 million-ish, I'd say, on our C&I lines in terms of where existing lines that were funded this quarter above where they were last quarter. So we did get some help in utilization there, but it wasn't a huge contributor for us.
Yeah. And we're still below pre-pandemic for sure, specifically in the 2019 in that...
Probably just around 5%, probably a round number. If you go back to early '20 - early first quarter, second quarter, fourth quarter '19, actually, if you go back all the way back into '19, we're still probably 7% or 8% below utilization rates.
Okay. That's helpful. And then circling back to the mortgage discussion, I want to drill down on one of the issues that you mentioned and that is the housing supply shortages in some of your core markets.
I'm trying to appreciate that's a shorter term problem that we need a few more months and some more reasonable commodity prices to get beyond or is it a longer term problem that we're going to be talking about for several more years in your core markets?
Yeah. It's a great question. I don't think it's a short term. It's not - we don't talk about it 50 [ph] more months. We'll talk about it longer than that. I don't know if we'll be talking about it 5 years from now, but we'll be talking about it for at least several quarters.
Right. And you hit on it before, Chris, in your conversations about all the jobs that we've seen, so especially in the Middle Tennessee section of our footprint, I think that's going to be something that, frankly, is a little bit of a good problem with the in-migration and build up in the economy.
Yeah. It's going to be something - it depends on the market, but particularly in the Nashville market, we're going to be - we'll be talking about this for a long time because it's out of balance, and it's going to really be hard to get back in balance for another two, three, four quarters, and even when it does, it's going to be tight.
I mean, I don't see how given the strength of the economy that we will be talking about this for a few years in Nashville in particular. The other markets not quite as robust, but still strong.
The economy of Tennessee as a whole is very good. And it's probably - it's the best of the states that we operate in, at least where we operate, but Huntsville is another one that's quite good. Birmingham is also strong.
And so I think the migration across the Southeast is going to have us talking about this, at least, I'd say it's an intermediate term topic and maybe even longer term in some places.
Okay. Well, we'll keep an eye on that. And then just lastly, a housekeeping question. We saw some strong ATM interchange fees this quarter, any drivers of that in particular? And then as you roll out forecast for 2023, could you remind us of the Durbin impact and when you expect that to be and what you think the amount should be? Thanks.
Yeah. So yeah, just pick up in economic activity, more slides to the car, more transactions drove to that $1 million increase quarter-over-quarter. Yes, too early to tell, I guess, that that's a reoccurring trend. We certainly hope so as we see the economy continue to improve.
Durbin will hit 630 [ph] of next year. We're talking about this another day. As soon as we get this optimized, we'll get that nailed with Durbin, and so the number will be quite sizable.
Yeah, actually 71 [ph] technically. We lose at the 630. So 71 and it's basically 40% of the number, just of what we booked today basically 40% of that number comes out. So it's not that difficult of math, and that's for better or for worse, I suppose it's a good thing. That number continues to grow for us.
We do have a pretty good retail presence in a lot of our markets. And so that's a growing - continually growing number for us. Unfortunately, starting 71 of next year, only 60% of it will be growing. So that's what that means to us.
Okay. Thank you.
Thank you.
Thank you, Matt.
[Operator Instructions] The next question will be from Alex Lau with JPMorgan. Please go ahead.
Hi, good morning.
Good morning, Alex.
Could you provide some color and what you're hearing from customers on the commercial side on loan demand? And what are your thoughts on the Delta variant? And if it could have any material impact on confidence of your business customers? Thanks.
Yeah. And so we're hearing confidence from our - on the commercial side, we're hearing confidence. We were hearing it in the first half of the year, a lot of optimism about the last half of the year. And as we've gotten sort of at the inflection point, we hear a lot of confidence.
And as things have reopened, as businesses have reopened and are really ramped up to full speed or near full speed, we hear confidence, there is still some challenges with the labor force. There is challenges with supply chain. We hear both of those as being obstacles. But they hope that certainly - they hope the labor force is a shorter term obstacle and supply chain and the intermediate term obstacle, but a lot of optimism.
On the Delta variant, of course, we hear the same news report everybody hears. We're - I don't know - we're watching closely. I don't know if concern is the right word, but we're certainly interested in watching and monitoring for the impact on our markets, impact on what's happening with our health care system, hospital stays and how that's going.
And so we have certain things internally that are - we have a group that's monitoring across our markets on what that - what the level, what the case counts are and where we are. And like most of the country, we've seen them increase.
And so today, no impact. But when we think about things, for instance, when Michael was talking about our CECL Q factors, it's one of the things we go conservative on is on - in case we do face another shutdown or in case we - it becomes a material impact.
So - but I will say, practically speaking, if you walk down the street in most of our markets, it would be business as usual. And it would be life as normal, and people are out doing both leisure and business activities as normal.
Chris, on the confidence factor, one of the things that we - again, Middle Tennessee has really benefited from the in migration of like the Amazon's and the Oracle announcements, the spin-offs from that. And that's impacting a lot of confidence in the warehouse side of the market, logistics and panning out quite nicely. I'd say there's a lot of confidence in that.
Yeah. I would too. There's constant roll - I'm a little hesitant to reference, but I will. I don't know if you follow, I mean we have - so going back to confidence, I think it's a reflection, I think we had the largest 4th of July celebration of any place in the country with 350,000 people in downtown Nashville. And so I don't think there was a high degree of concern around those people. I didn't participate, but on TV, didn't see any masks.
And so again, I think confidence of the general population is high. I think the confidence of business community is high. Everybody has got a wait and sort of a watch and see, and it's got some concern over the Delta variant and potentially other variants that come to us on COVID. And so we certainly don't declare it as we don't - we hear FB Financial do not declare it as over, and we keep an eye on it every day.
Thank you. And on your deposits, on a period end basis, it was down quarter-over-quarter. Could you touch on the moving pieces on this decline? Anything lumpy going on offsetting growth? Thanks.
Yeah, a little bit. Some of its public funds and our traditional cycle on public fund deposits is where they tend to swell in the first quarter and then come down a little bit in the second quarter. So actually, sometimes they can come down, they can swell a lot in the first quarter and come down a lot in the second quarter.
They have not come down quite as they have come down some, but not quite as much in the second quarter as they normally would. As they would in a normal year just because so many public entities are so flushed with cash. And so we were effectively flat in deposits for the quarter, but notice we also decreased our costs fairly significantly in the quarter. And those two things, as you know, can operate in an inverse relationship.
And so that doesn't - frankly, that's not - when we're sitting on as much cash and liquidity as we have, we're happy right now to trade lower rate for a little less in balance.
Thanks for taking my question.
Yeah, Alex.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks.
All right. Thank you very much and Chad, and thank you for all of you for joining us this morning. I always appreciate the interaction and the questions. If there is anything that we didn't cover, we're glad to do that in follow-up calls. And everybody, have a great rest of your day, and I hope your earnings season is good. Thanks.
And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.