Good morning, and welcome to FB Financial Corporation 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 Mati, 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 FP 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 Hohen, Director of Corporate Finance. Please go ahead.
Thanks, Chad. During this presentation, SB 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 ks.
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 and this morning's presentation, which are available on the Investor Relations page of the company's website at www.firstbakeonline.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 percent adjusted return on tangible common equity of 15.8 percent and grew our tangible book value per share to 20.43 dollars or a 16.4 percent 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 this returned to normal, which coming through in our numbers last quarter as we had a 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 $152,000,000 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 $240,000,000 We saw a 26 basis point release in our adjusted allowance.
Our deferrals are down to $74,000,000 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 $40,000,000 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 $90,000,000 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 First Bank 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, but we have some expected payoffs coming that was going to make 10% hard to achieve.
On the liability side of the balance sheet, 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 $7,000,000,000 in assets to 12,000,000,000 dollars 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 and A, but we're determined that it won't happen to us. On M and A, the universe of traditional banks continues 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 and A, which I define as banks that aren't necessarily on our radar at the moment, but that would be additive to our footprint or funding profile or add 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 3rd quarter, our forecast has moved around significantly over the past 60 days. And with the market movement yesterday, we were reforecasting again. Our best estimate right now is $2,000,000 to $4,000,000 of contribution for the Q3 and I'm 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 phase is 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 prospect 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've 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 $74,000,000 outstanding. Of those, as we've highlighted in the past, the bulk $49,000,000 are actually on an interest only payment schedule with the remainder $25,000,000 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 the 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 Q1 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 portfolios. 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' comments, I too am 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. Sticking first to mortgage and illustrated on Slide 6, mortgage performed as we expected for the quarter achieving a contribution of approximately $550,000 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. 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 2nd quarter compared to 3.19% in the Q1. 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 repricing is slowing as we made a bit of majority of the higher cost deposits from our 2018 campaign, but we do have approximately $330,000,000 repricing in the 3rd 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 2nd quarter from 4.48% in the Q1 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 1st few weeks of the 3rd 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 $2,000,000,000 in variable rate loans that should reprice immediately. We traditionally have kept our fixed rate loans 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 our securities portfolio opportunistically after the benchmark 10 year U. S. Treasury yield increased by approximately 83 basis points in the Q1.
After $265,000,000 of security purchases, runoff from paydowns and market value changes, our securities portfolio increased by $179,000,000 in the 2nd quarter. The average yield on purchased securities during the quarter is an 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 continually declining earnings 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 terms of earning asset growth, both loans and securities and maintain the longer term upside of our asset sensitive balance sheet. Moving to CECL and our allowance. We saw a release of $13,800,000 this quarter as economic forecast continued to improve. As we have mentioned previously, the improving economic forecast from the 1st and second quarter has caused us to begin to increase our qualitative factors in order to maintain what we feel is a prudent level of reserve. Going forward, we will continue to weigh the improving forecast versus Q factors that are necessary to pinpoint any risks that still exist that are not reasonably picked up in the model.
We would currently expect further releases over the next few quarters assuming outlets continue to improve. As an update on our non core commercial held for sale portfolio, we saw our exposure decline by an additional $50,000,000 during the quarter. With these pay downs and improving economic conditions, we saw a gain of $1,400,000 on our portfolio as compared to an $853,000 loss in the Q1, a $1,400,000 gain in the Q4 of 2020 and a $1,900,000 gain in the Q3 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 bank 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 bank expenses to exceed the current quarter's level over the remaining 2 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. We will now begin the question and answer And the first question will be from Stephen Scouten with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning, Steven. Good
morning. 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 peers shake out, but I don't think there'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?
Yes. We can speak certainly speak to it and I'll go first. But really, Stephen, it came across the board and it's two components to the it's a net growth number. So it came across the board. And if we look at our funded our fundings, surprisingly balanced.
I mean, you couldn't actually you couldn't balance it anymore across C and I, CRE, both owner occupied, non owner occupied, multifamily. Multifamily is probably the biggest area or was the biggest area of growth for us. And we had good originations, but we just frankly had fewer pay downs. It was an impressive well, I appreciate you calling it an impressive growth number. And it we turned in good performance, but actually it's probably even more remarkable for us was the level of pay downs as well.
We had great originations and continue to get some pay downs and 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 that balance point is key and I saw it in the loan dollar size as well. I mean, there are a lot of $2,000,000 $3,000,000 $4,000,000 deals that could represent it across the footprint.
Yes. 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 and Nashville even at 8 o'clock in the morning on a Tuesday, you'd be surprised. We see a lot of activity. And it's not only Nashville, it's across the markets.
Yes. Stephen, it's Mike. I'd add to 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 choose portfolio 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? Yes. It's not really a strategy shift. I mean very little production. We're still selling 97% of our mortgages the secondary market on a go forward basis.
We do see some jumbo customer stuff that we'll put on if the sheet fits, but yes, good customers in footprint type of business, but it's not a big piece of our business at this point.
Yes. Okay. And net of payoffs, it was a contributor, but I'd say it was not a huge contributor. Got it.
Yes, makes sense. Okay. And then maybe thinking about capital deployment, it felt 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 and A targets that you guys would be active in 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 and 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 and 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. We always have a plan and have that in mind. We've not been aggressively out pursuing M and A, partly 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. And 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 we've I mentioned scarcity. When it comes to really high quality franchise men, there are some out there that are fantastic, but there's just not that many of them. And so and some of them may reach out sometime soon, some of them may not reach out for another 3 or 4 or 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 that are opportunistic for us and it's not one of those names and we'll consider those 2. We just consider those a little less aggressively. And we would go down to $400,000,000 $500,000,000 in terms of size. And then on the upside, we go up to $2,000,000 or $3,000,000,000 maybe even $4,000,000,000 would be I'd say $5,000,000,000 and under.
We wouldn't do anything bigger than that. 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. Yes, that's really helpful. And then maybe just following up on the share repurchase thoughts down to 1.5 percent a 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?
Yes. I'm sorry, Stephen, you did reference that. And it's a thought and you're exactly right on all counts. 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. I appreciate you, Steven.
And our next question will come from Brett Rabatin with Hovde Group. Please go ahead.
Hey, good morning, everyone.
Good morning, Brett.
I wanted to first ask on
the mortgage, the guidance for the $2,000,000 to $4,000,000 in contribution for 3Q. Can we talk maybe about the assumptions for that? Is that does that assume, 1, that the current rate down draft 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?
Yes, Brad, it's Michael.
So really as we look through the quarter, it doesn't include some of those recent rate rally I said last couple of days, the 2% to 4% really frame before that. Obviously, 10 years have 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 6, if you look at kind of that 2.40 range, which is where our pipeline is, that's really where margins have been coming in on 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 I've seen 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. 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?
Yes. 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 of 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 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. 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, revenue, what could be happening going forward, would it be reasonable to assume that that fair value hit of about $17,600,000 this quarter is going to you're assuming that's going to come lower, but there'll also be some additional pressure on the gain and fees from originations line. Is that a fair assumption?
Hey, Kevin. Good morning. Yes, that's fair. You see 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, we hope we see a little bit of growth 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, I appreciate the outlook for further reserve releases and you're still at a very strong level here and you referenced the day 1 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 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 2 year window, more of a 1 year window? And what would that level roughly be?
Yes. Probably the least probably the least you don't want me I can comment, but it's probably better to come from
Mike. Yes. Kevin, it was around $140,000,000 to $150,000,000 originally, but I don't really think about it like that because the business has changed so much as Chris referenced going from $7,000,000,000 to $12,000,000,000 It's a combination, changed environment. So So it's tough to think about day 1. 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 it to move down over the next couple of quarters.
I wouldn't expect it to all happen in the 3rd Q4. It likely pushes into 2022 as we get a grasp on our and 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 1 that that's kind
of. Yes.
Yes. 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.
Perfect. Exactly. And I think that's a good summary. And I don't know, it's been a frustrating year with CECL and because we put a lot in and now we've got it slowly coming back out, a lot in the allowance and that's slowly coming back out. And I suppose that's the way it's supposed to function.
And but it does make it hard to just zero in on core earnings from quarter to quarter. That's what I know you try to do. It's 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 bit I get frustrated because we can't answer the questions as probably as cleanly as we'd like to be able to answer them, Kevin. But we try to be as transparent on it as we can. Yes. That's all very fair, Chris.
It is. Just one last one for me. So on M and A, I appreciate the kind of differentiating between the targets that are in and around your markets that you'd have on this list versus some more strategic opportunistic targets. And I'm assuming that maybe some of those are not maybe those are outside of the current footprint. And 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.
Yes. And you got the you read it pretty well. 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 went 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 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 and would be outside of those.
That's helpful, Kevin.
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 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 4th quarter, run rate and annualized that and that was about $212,000,000 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.
Yes. Hi, Catherine. Good morning. It's Michael. Good morning.
So rest of the year, we don't think the 3rd Q4 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. So the guidance around low single digit was for 2022. So I may not have been clear in my comments here, 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?
That's right.
Perfect. Okay, great. I 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 Will. You're looking in the consumer direct space somewhere in that 175 to 190 range. And on the retail front, you're looking probably 320 to 340.
Okay, great. Thanks. That's all I got. Appreciate it. Good quarter.
Thank you. Thanks, Catherine.
The next question is from Matt Olney with Stephens. Please go ahead.
Hey, great. Thanks. Good morning, guys.
Good morning.
Looking back on the loan growth, I think you're pretty clear as far as the pay downs and how those ease 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 compare to the trough levels and how these compare to what we saw pre pandemic? Thanks.
Yes. So a couple of things, Matt. We did have actually in the quarter and I may not have been clear, we did have significant pay downs in the 2nd quarter and still were 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 fundings and so moving to fundings, we got a little bit of help particularly in our I say particularly, we didn't get much help to be honest with you in the fundings on our lines just in the just call it $20,000,000 ish, I'd say, on our C and 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. Yes. And we're still below pre pandemic for sure, specifically in 2019. Probably just around 5% probably, round number if you go back to early 20, early 1st quarter, Q2, Q4 2019, actually if you go back all the way back into 2019, 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 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 say a longer term problem that we're going to be talking about for several more years in your core markets?
Yes. It's a great question. I don't think it's a short term. It's not we don't talk about it 50 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.
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 buildup in the economy.
Yes. 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 2, 3, 4 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 have this 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. Saw some strong ATM interchange fees this quarter. Any drivers of that in particular?
And then as you roll out forecast for 2023, remind us of the Durbin impact and when you expect that to be and what you think the amount should be? Thanks.
Yes. So yes, just pickup in economic activity, more swipes of the car, more transactions drove to that $1,000,000 increase quarter over quarter. Yes, so 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 at 6:30 of next year.
We were talking about this the other day. As soon as we get this optimized, we'll get that nailed to Durbin and so the number will be quite sizable.
It's yes, actually 7.1% technically. We lose it to 6.30%. So 7.1% 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 7.1 of next year only 60% of it will be growing. So that's what that means to us.
Okay. Thank you. Thank
The next question will be from Alex Lau with JPMorgan. Please go ahead.
Hi, good morning.
Hi, Alex. 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. Yes. And so we're hearing confidence from our on the commercial side. We're hearing confidence. We're 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's still some challenges with the labor force. There's 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 in supply chain and intermediate term obstacle, but a lot of optimism. On the Delta variant, of course, we hear the same news reports everybody hears. We are watching closely. I don't know if concerned is the right word, but we are 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 that 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 migration of like the Amazons 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.
Yes. I would too.
I would too. There's confidence overall. I'm a
little hesitant to reference, but I will. I don't know if you follow it. I mean we had the so going back to confidence, I think it's a reflection. I think we had the largest 4th 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 that for those people.
I didn't I didn't participate, but on TV, I didn't see any masks. And so again, I think confidence of the general population is high. I think the business community is high. Everybody has got a wait and sort of a watch and see and has 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 here at Epi Financial do not declare it as it's over and we keep an eye on it every day.
Thank you. And 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.
Yes, a little bit. Some of it's public funds and our traditional cycle on public fund deposits is where they tend to swell in the Q1 and then come down a little bit in the Q2. So actually sometimes they can come down they can swell a lot in the Q1 and come down a lot in the Q2. They have not come down quite as they have come down some, but not quite as much in the Q2 as they normally would in a normal year just because so many public entities are so flush with cash. And so we were effectively flat in deposits for the quarter, but notice we also decreased our cost 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 rates for a little less imbalance.
Thanks for taking my question.
Sure, 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. Always appreciate the interaction and the questions. If there's 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.