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 that constitute forward-looking statements under the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other factors 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 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 is 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'd 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 this return to normal was 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's 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 and 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 that are going to make 10% hard to achieve.
On the liabilities 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 in our cost of deposits. We'll continue to press our team to find areas 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 the 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 won't happen to us. On M&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 we'll 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 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 into the third 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 million-$4 million of contribution for the third quarter, and I'm going to let Michael give additional color on the current mortgage backdrop in his section.
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. 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'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. 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 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 first-quarter call, we did have a pickup in 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 these 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. Lastly, charge-offs were minimal this quarter at 2 basis points. As highlighted in Chris's 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. Speaking 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's 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 repricing is slowing as we've made it through the majority of the higher-cost deposits from our 2018 campaign. We do have approximately $330 million repricing 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 the 3.8%-3.9% range, and that pricing has continued through the first few weeks of the third quarter. We would 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 reprice immediately.
We have traditionally 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 first quarter. After $265 million of security purchases, runoff from paydowns, and market value changes, our securities portfolio increased by $179 million in the second 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 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 and our allowance, we saw a release of $13.8 million this quarter as economic forecasts continued to improve. As we have mentioned previously, the improving economic forecast from the first 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 a 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 a buyer hits our bid, we expect continued paydowns and small gains or losses as the portfolio is marked to market each quarter. Speaking of our expenses, our bank expenses were higher than we had anticipated as we implemented systems and took advantage of hiring opportunities, each of which supports our growth. We don't expect our bank 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. Operator, at this point, we'd like to open the line for questions.
Thank you, sir. We will now begin the question and answer session. The first question will be from Stephen Scouten with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning.
Good morning, Stephen.
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 they'll be anywhere near that level. 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. Can you talk to that? Was that maybe just holding more on the balance sheet, or what are the dynamics there?
Yeah, we can certainly speak to it, and I'll go first. Really, Stephen, it came across the board. It's a net growth number, so it came across the board. If we look at our fundings, surprisingly balanced. You couldn't balance it anymore across C&I, CRE, both owner-occupied, non-owner-occupied, multifamily. Multifamily is probably the biggest area, or was the biggest area of growth for us. We had good originations, but we just frankly had fewer paydowns. Well, I appreciate you calling it an impressive growth number. We turned in good performance. Actually, what's probably even more remarkable for us was the level of paydowns as well.
We had great originations and continued to get some paydowns, and we didn't get many in multifamily, and that's what led to higher growth in that particular segment. Residential as well, we had some growth in that area. It was really balanced across the board. Yes. Anything to add to that?
Chris, I'd also add, that balance point is key, and I saw it in the loan dollar size as well. There are a lot of $2, $3, $4 million deals that represented it across the footprint.
Yeah. We thought once things opened back up, we'd see a lot of activity. Certainly, if you could walk down Broadway in Nashville, even at 8:00 in the morning on a Tuesday, you'd be surprised. We see a lot of activity. It's not only Nashville, it's across the mortgage industry.
Yeah. Stephen, I'd add to your point about putting more residential on the balance sheet that one of the benefits of the mortgage division is that if we choose to do that, we have the ability to choose portfolio mortgage loans. Sometimes we do deploy that option. That is out there.
Okay. I guess, is that a strategy shift in general or just something you took advantage of this quarter? 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. Very little production. We're still selling 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 if the shoe fits. Good customers in footprint type of business, but it's not a big piece of our business at this point.
Okay.
Yeah. Net of payoffs, it was a contributor, but I'd say it was not a huge contributor.
Got it. Yep, makes sense. Okay. 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. You mentioned maybe a handful of M&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 potential asset sizes would be that you might look at? 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 the position that 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 pursuing M&A, partly for a couple of reasons. One, I've referenced quite often some of our internal initiatives that we feel enhance the quality of everything we do, including our associate experience and our customer experience. 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. We've had a lot of focus on that.
That's part of it; we don't want to disrupt a lot of momentum. I think in quarters like this, you can see that because it shows through. We do keep a small list of names in and around our footprint. It would not hit double digits for us because, as I mentioned, scarcity. When it comes to really high-quality franchises, man, there are some out there that are fantastic, but there are just not that many of them. Some of them may reach out sometime soon. Some of them may not reach out for another three, four, or five years, which is completely fine for us. That's a matter of timing. We don't anticipate anything in the immediate future from those names.
As you know, we'll be reached out to or called on by investment bankers with opportunities that sometimes are pretty good and 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. We would go down to $400 million, $500 million in terms of size. On the upside, we go up to $2 billion or $3 billion, maybe even $4 billion, I'd say $5 billion and under. We wouldn't do anything bigger than that. We really wouldn't even get to that level. 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. Maybe just following up on the share repurchase thoughts, down to 1.5 at tangible book, obviously the math gets a little more attractive, and you guys mentioned you have a lot more excess capital now. How do you think about that today?
Yeah. I'm sorry, Stephen, you did reference 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 two quarters. We certainly, at 1.5 times tangible, are sort of scratching our head, and so that makes the buyback look more attractive, and so it's a consideration for us.
Okay, great. Well, thanks for the color and congrats on a great quarter.
All right. Appreciate it, Stephen.
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 about the mortgage, the guidance for the $2 million-$4 million in contribution for Q3. Can we talk maybe about the assumptions for that? Does that assume, first, that the current rate downdraft we've had here sticks, or is that your assumption? Then, just maybe talk about how you're assuming gain-on-sale margins trend from here.
Yeah, Brett, it's Michael. Really, as we look through the quarter, it doesn't include some of this recent rate rally, I'd say, in the last couple of days. The $2 million-$4 million really framed before that. Obviously, the 10-year has been pretty volatile here, so we think that maybe there are some tailwinds behind this lower rate environment, and so we would not include that, but it's really just too early to tell how long that sticks and really if mortgages follow. From a margin perspective, on slide 6, if you look at kind of that 240 range, which is where our pipeline is, that's really where margins have been coming in on a kind of a weighted average, if you look at the mix in our consumer direct and retail businesses.
Been pretty consistent over the last couple of weeks, which is a nice thing, as we've seen them contracting quarter-over-quarter here. Seeing some stabilization. We'll see how that plays out among the competition here in the next couple of weeks. For now, we're pretty comfortable in that space.
Okay. I appreciate the color there. The other thing was, 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. Have you accomplished what you wanted to in terms of adding talent for the near term? What other opportunities might you look at, and in what markets might those be, if any?
Recruiting is a 7-day-a-week, 365-day opportunity for us. We could always opportunistically add either teams or individual revenue producers as we get opportunities to do so. That'll be something we'll continue to pursue. There are always things falling out of the expense side and things getting added to the expense side, and so it's a constant roll forward. 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, that's where that statement comes from. We don't see anything that's going to cause us to be significantly higher. We know of a few expenses that actually get reduced in the quarter. We're also allowing for some personnel additions.
We continue to look for talent, not only on the revenue-producing side of the business, but we've made some really key additions in the financial area. We've made some key additions in the risk area. When we have the chance to upgrade our talent, to continue to add to our talent, we're going to continue to do that.
Okay, great. Appreciate the color.
Within our existing expense structure. Yeah. Thanks, Brett. We think we can do that within our existing expense structure for the next couple of quarters.
Okay.
All right.
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 mortgages. If I'm just looking at the components of mortgage banking income on page 12 of the supplement, when I think about revenue, what could be happening going forward? Would it be reasonable to assume that the fair value hit of about $17.6 million this quarter, 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. Yeah, that's fair. You're seeing the pipeline has come down, call it 30% quarter-over-quarter. That really drives, and the rate lock volume drives that fair value mark. We've seen some stabilization there. Back to that earlier question, we hope we see a little bit of growth out of some of 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. Your assumption's correct. Gain on sale. Obviously, our volume that we would sell will go down because it follows that smaller pipeline. Our opportunity to pick up some pennies there shrinks with lower volume.
Great. Thank you. Just more of a housekeeping thing on the loan growth guidance, taking it up to a high single digit. 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. 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 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?
Yeah. You don't want me.
Yeah.
I can comment, but it's probably fair to come from Mike.
Well, yeah. Kevin, it was around 140-150 originally. I don't really think about it like that because the business has changed so much, what Chris referenced, going from $7 billion to $12 billion. It's a combination, a changed environment. It's tough to think about day one. 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 quarters. I wouldn't expect it to all happen in the third and fourth quarter. It likely pushes into 2022 as we get a grasp on our economy and the Delta variant and all that stuff. I don't think it's an immediate move down. We're such a different look than day one, that's kind of it.
Yeah. On the asset.
Yeah, that's exactly why I asked about it, because I didn't want to place too much weight on that number when you guys were a much different bank at that point.
Exactly. I think that's a good summary. 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, it's slowly coming back out. I suppose that's the way it's supposed to function. It does make it hard to 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. 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. We don't have any kind of timeframe on that. We don't have any goal in mind that we're trying to get to.
I get frustrated because we can't answer the questions as cleanly as we'd like to be able to answer them, Kevin. We try to be as transparent on it as we can.
Yeah. That's all very fair, Chris. It is. Just one last one from me. On M&A, I appreciate the kind of differentiating between the targets that are in or around your markets that you'd have on this list versus some more strategic opportunistic targets. I'm assuming that maybe some of those are outside of the current footprint. If that includes those kinds 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. Just anything you're comfortable sharing on that front.
Yeah, 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 significantly into new geographies. It's all in and around our geography. We would call Northern Georgia in our geography today. We'd 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. We're really close to that western part of the Carolinas. We don't really consider that to be out of the geography. That's kind of in our targeted zone.
Those are the types of areas. All of our targets would be within those types of areas, wouldn't be within those areas, they wouldn't be outside of those. Is that 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 just want to make sure that your guidance is, we're hearing it right. You're saying that you think core expenses will grow from here. I remember last quarter, you had kind of taken fourth quarter, you've run rate and annualized that, and that was about $212 million, and had 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? 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. Hey, Catherine. Good morning. It's Michael.
Morning.
For the rest of the year, we don't think the third and fourth quarters will be as high as the second quarter was, right? We actually expect that number to normalize or stabilize, perhaps with some slight downward pressure on expenses. The guidance around low single-digits was for 2022. 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. Your core expenses come down from this quarter. The low single digit growth rate is expected for next year off of that base.
That's right.
Perfect. Okay, great. Just wanted to clarify that. Then what's the difference between the gain-on-sale margin in 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-$190 range. On the retail front, you're looking probably $320-$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.
Morning.
Morning.
Circling back to loan growth, I think you're pretty clear as far as the paydowns and how those eased quite a bit in Q2, but could potentially return in the second half of the year. What about utilization rates? How do the Q2 levels compare to the trough levels, and how do these compare to what we saw pre-pandemic? Thanks.
A couple of things, Matt. We did actually have significant paydowns in the quarter, and I may not have been clear, but we did have significant paydowns in the second quarter and still were able to produce 14% loan growth. Our originations were really significant in the second quarter—our new originations. Moving to fundings, we got a little bit of help, particularly in our... we didn't get much help, to be honest with you, in the fundings on our lines. It was just in the, let's call it, $20 million-ish, I'd say, on our C&I lines in terms of existing lines that were funded this quarter above where they were last quarter. We did get some help in utilization there. It wasn't a huge contributor for us.
Yeah. We're still below pre-pandemic for sure. Specifically in the 2019.
Probably just around 5%, a round number. If you go back to early first quarter, second quarter, fourth quarter 2019, actually, if you go all the way back into 2019, we're still probably 7% or 8% below utilization rates.
Okay, that's helpful. 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 if that's a shorter-term problem that we need a few more months and some more reasonable commodity prices to get beyond, or is that 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 short-term. We're not going to talk about it for a few more months. We'll talk about it longer than that. I don't know if we'll be talking about it five years from now, but we'll be talking about it for at least several quarters.
Right. You hit on it before, Chris, in your conversations about all the jobs that we've seen, 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.
It depends on the market, but particularly in the Nashville market, we'll be talking about this for a long time. It's out of balance, and it's going to be really hard to get back in balance for another two, three, or four quarters, and even when it does, it's going to be tight. I don't see how, given the strength of the economy, we won't be talking about this for a few years, in Nashville in particular. The other markets aren't quite as robust, but still strong. The economy of Tennessee as a whole is very good, and it's the best of the states that we operate in, at least where we operate. Huntsville is another one that's quite good. Birmingham is also good; it's also strong.
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. Just lastly, a housekeeping question. Saw some strong ATM interchange fees this quarter. Any drivers of that in particular? As you roll out forecasts for 2023, remind us of the Durbin impact and when you expect that to be, and what you think the amount should be. Thanks.
Yeah. Just pick up in economic activity, more swipes of the card, more transactions drove to that $1 million increase quarter-over-quarter. Yeah, too early to tell, I guess, if that's a recurring trend. We certainly hope so as we see the economy continue to improve. Durbin will hit 06/30 of next year. We were talking about this the other day, as soon as we get this optimized, we'll get that nailed with Durbin. The number will be quite sizable.
Yeah, actually 7/1, technically.
7/1, yeah.
We lose it on 6/30, so 7/1, and it's basically 40% of the number. Just of what we book today, basically 40% of that number comes out. It's not that difficult of math. 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 continually growing number for us. Unfortunately, starting 7/1 of next year, only 60% of it will be growing. That's what that means to us.
Okay. Thank you.
Thank you.
Thank you.
Once again, if you have a question, please press star then 1. The next question will be from Alex Lau with JPMorgan. Please go ahead.
Hi, good morning.
Good morning, Alex.
Could you provide some color on what you're hearing from customers on the commercial side regarding loan demand? What are your thoughts on the Delta variant, and if it could have any material impact on the confidence of your business customers? Thanks.
Yeah. We're hearing confidence from 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. As we've gotten sort of at the inflection point, we hear a lot of confidence. As things have reopened, as businesses have reopened and are really ramped up to full speed or near full speed, we hear confidence. There are still some challenges with the labor force. There are challenges with the supply chain. We hear both of those as being obstacles. They hope the labor force is a shorter-term obstacle, and the supply chain an intermediate-term obstacle. A lot of optimism. On the Delta variant, of course, we hear the same news reports that everybody hears.
We're watching closely. I don't know if "concerned" is the right word; we're certainly interested in watching and monitoring the impact on our markets, the impact on what's happening with our healthcare system, hospital stays, and how that's going. We have certain internal measures; we have a group that's monitoring across our markets what the level, what the case counts are, and where we are. Like most of the country, we've seen them increase. Today, there's no impact. 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 in case we do face another shutdown or in case it becomes a material impact.
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.
Thank you.
Chris, on the confidence factor, one of the things that Middle Tennessee has really benefited from is the in-migration of Amazon and Oracle, and the spinoffs from that. That's impacting a lot of confidence in the warehouse side of the market and logistics, and it's panning out quite nicely. I'd say there's a lot of confidence in that.
Yeah, I would too. When it comes to raw, I'm a little hesitant to reference, but I will. I don't know if you follow. Going back to confidence, I think it's a reflection. I think we had the largest Fourth of July celebration of any place in the country, with 350,000 people in downtown Nashville. I don't think there was a high degree of concern around that for those people. I didn't participate, but on TV, I didn't see any masks. Again, I think confidence of the general population is high. I think confidence of 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.
We here at FB Financial do not declare it as over. We keep an eye on it every day.
Thank you. On your deposits, on a period-end basis, it was down quarter-over-quarter. Could you touch on the moving pieces of this decline? Anything lumpy going on offsetting growth? Thanks.
Yeah, a little bit. Some of it's public funds. 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. Actually, sometimes they can swell a lot in the first quarter and come down a lot in the second quarter. They have come down some, but not quite as much in the second quarter as they normally would in a normal year, just because so many public entities are so flush with cash. We were effectively flat in deposits for the quarter. Notice we also decreased our cost fairly significantly in the quarter, and those two things, as you know, can operate in an inverse relationship.
Frankly, 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.
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, Chad, and thank you to all of you for joining us this morning. I 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. Everybody have a great rest of your day, and I hope your earnings season is good. Thanks.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.