FB Financial Corporation
Q2 2022 Earnings Call Transcript
Published:
- Operator:
- Good morning everyone and welcome to FB Financial Corporationâs second quarter 2022 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. Please note FB Financialâs earnings release, supplemental financial information, and this morningâs presentation are available on the Investor Relations page of the companyâs website at www.firstbankonline.com and on the Securities and Exchange Commissionâs website at www.sec.gov. Todayâs call is being recorded and will be available for replay on FB Financialâs website approximately an hour after the conclusion of the call. At this time, all participants are in a listen-only mode. The call will open for questions after the presentation. With that, I would like to turn the call over to Robert Hoehn, Director of Corporate Finance.
- Robert Hoehn:
- Thanks Jamie. 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 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 of such factors are beyond FB Financialâs 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 Financialâs periodic and current reports filed with the SEC, including FB Financialâs 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 Financialâs earnings release, supplemental financial information, and this morningâs presentation, which are available on the Investor Relations page of the companyâs website at www.firstbankonline.com and on the SECâs website at www.sec.gov. I would say we have heard that the presentation up the Chorus Call app is the prior quarterâs presentation. The current presentation is available on EDGAR as well as our Investor Relations website. At this point, Iâd now like to turn the presentation over to Chris Holmes, FB Financialâs President and CEO.
- Chris Holmes:
- All right, thank you Robert. Good morning everybody. Thank you for joining us this morning. As always, we do appreciate your interest in FB Financial. For the quarter, we reported EPS of $0.41, an ROAA of 0.62%, and an RO--return on average tangible common equity of 7.1%. Adjusted for $12.5 million of mortgage restructuring charges and $2 million of negative mark-to-market adjustment on our commercial loan help yourself portfolio, we delivered adjusted EPS of $0.64 a share, adjusted ROAA of 0.975, and adjusted return on average tangible common equity of 11.0%. Those returns are a little below our standard but with some good reason, and the quarter signaled some momentum that has us cautiously optimistic. Weâve grown our tangible book value per share, an important measure for us, excluding the impact of AOCI at a compound annual growth rate of 15.2% since our IPO in 2016. The bank had a very strong quarter of balance sheet and core profitability growth while mortgage had a challenging quarter as they continue to adjust for expected future market conditions. A few items that I want to highlight for the quarter
- Michael Mettee:
- Thank you Chris and good morning everyone. Iâll speak first to this quarterâs results in our banking segment. Our baseline run rate pre-tax pre-provision income for the banking segment was $53.9 million in the second quarter. Pointing to the segment core efficiency ratio reconciliations, which are on Page 19 of the slide deck and Page 19 of the financial supplement, we had $102.9 million in segment tax-equivalent net interest income this quarter. Along with that $102.9 million in net interest income, we had $12.8 million in core banking segment non-interest income. Finally, we had $59.3 million in banking segment non-interest expense. This quarter, due to our lower level of taxable income, we had a geography shift of $1.4 million as tax credits were moved from a reduction in our tax expense to instead be a reduction in non-interest expense. We also had a true-up that resulted in a $1.1 million reduction in reported non-interest expense this quarter. Adjusting for those shifts, core banking segment non-interest expense would have been $61.8 million. Together, that comes to our $53.9 million in run rate segment PTPP which has grown 30.5% over the comparable $41.3 million that we delivered in the second quarter of 2021. Moving onto our net interest margin with summary detail on Page 5 of the slide deck, our net interest margin of 3.52% showed significant improvement from the 3.04% that we reported in the first quarter. Part of that improvement was due to our accretion in non-accrual collection interest returning to a de minimis impact of positive 2 basis points in the quarter compared to negative 7 basis points in the first quarter. Another driver was our balance sheet mix as declining deposit balances and strong loan volume led interest-bearing cash to be a smaller percentage of our balance sheet. We estimate that excess liquidity had only a 14 basis point negative impact on our margin in the second quarter compared to 29 basis points in the first quarter. The remaining 20 or so basis points of expansion was due to assets re-pricing faster than our liabilities as our cost of total deposits increased by only 5 basis points while our yield on loans, excluding non-accrual and purchase accounting, increased by 25 basis points. Our securities portfolio increased by 12 basis points and our interest-bearing cash increased by 42 basis points. Looking forward for our margin, we had a run rate margin excluding the impact of liquidity for the month of June in the 3.7% range. We have only $239 million of our approximately $4 billion in variable rate loans above their floors as of June 30, and that $239 million should be roughly cut in half after the next rate hike later this month. We get a pretty sizeable bump in the yield on our variable rate loans on the day of a rate hike and then get a lingering benefit as loans hit their various contractual re-pricing base. As an example, for the last 75 basis point increase, we saw roughly a 30 basis point increase immediately, and from June 16 to July 7, we saw another roughly 20 basis point increase in yields on our variable rate loans. Weâve also intentionally kept our securities portfolio smaller as a percentage of our overall balance sheet and have kept our duration fairly short. We have around $200 million of cash flows coming off the portfolio and available for reinvestment annually. Offsetting some of that sensitivity going forward will be higher deposit costs. In the month of June, we had a cost of interest-bearing deposits of 41 basis points compared to 33 basis points for the quarter, and weâve done a good job so far of keeping our beta low; however, we expect costs to accelerate over the second half of the year as competition for deposits increases. For banking segment non-interest income, with the Durbin cap on interchange beginning to impact us as of July 1, we expect for our banking non-interest income to be in the $10 million to $11 million range from quarter to quarter over the foreseeable future. As I mentioned earlier, we view our run rate core banking segment non-interest expenses being $61.8 million versus a reported $59.3 million due to the $1.1 million of true-up and $1.4 million of state tax credits that were shifted above the line and reduced non-interest expense this quarter. We expect continued growth in our banking segment non-interest expenses. As Chris mentioned, we have tremendous opportunity to add talent in both customer-facing and back office roles, and we are continuing to build the infrastructure that will allow us to capitalize on these opportunities in front of us and achieve strong organic growth. Those opportunities that have us planning to add approximately $2 million to $2.5 million in expense in each of the next two quarters. In addition to expected growth from the $61.8 million over the remainder of the year, we also expect our segment non-interest expense to be elevated in either the third or fourth quarter as we create enough taxable income to move the state tax credit back to the tax line. Once we hit that threshold, we would reverse the $1.4 million benefit we saw in non-interest expense this quarter. As you would expect, that $1.4 million in movement of the tax credit was also the culprit for our higher tax rate this quarter. For the year, we expect our effective tax rate to be in the 22% to 23% area. When the tax credit reverses out of non-interest expense and makes that line item higher, it will reduce our tax rate below normalized levels in the same quarter. Moving to mortgage, the environment continues to be exceptionally difficult as retail channel lock volumes were down 18% in the second quarter compared to the first quarter and is expected to be down an additional 20% to 25% in the third quarter compared to the second quarter. We have made structural changes to our remaining mortgage operations to account for lower volumes, but with the continued declines, we will need to make further changes to reposition ourselves. We do not expect a positive pre-tax contribution from mortgage in the second half of the year. Moving to our allowance for credit losses, we saw our ACL to loans decline by one 4 basis points this quarter after sizeable releases previously. Economic forecasts for the second quarter did not move materially from those that we utilized in the first quarter; however, they did get more negative in the July release and our optimism about our local economies is being tempered by uncertainty due to the inflation that we are experiencing the general national narrative that we will soon enter into a recession, if weâre not already in one. If conditions do not change, we would anticipate maintaining a similar level of ACL to loans held for investment over the near term. Iâll close my section by speaking about our manufactured housing portfolio. For those that are unfamiliar with our manufactured housing portfolio, we acquired that business line with our Clayton Banks merger in 2017. If you recall, Clayton Bank & Trust, which was named for its owner, Jim Clayton, was considered by many to be the father of manufactured housing and the founder of Clayton Homes, which was acquired by Berkshire Hathaway for $1.7 billion in 2003. That background to say our manufacturing housing team has a long history in the industry and learned the business from the best. Today, our MH business has three revenue streams and at quarter end, it had roughly $520 million in total loans or 6% of the overall portfolio. The first line is our communities portfolio, which has $265 million of the $520 million in loans. The communities business is a strong portfolio of sophisticated operators who sometimes we refer to as multi-family investors, but with a horizontal apartment design. These are loans with significant cash equity positions, long-term seasoned operators who have been and continue to be the beneficiaries of an upward trend in affordable housing across the country. The second piece of our MH business is our portfolio of loans to the owners of the manufactured homes themselves, which we call our MH retail portfolio. We have approximately $245 million in MH retail, or just less than 3% of our total loans. Typically these are classified as chattel loans, and the majority of those balances sit in our consumer and other category. The average FICO for these portfolios is 663 and the average note size is about $50,000, but the size of new originations has been increasing as manufactured homes assume the same material cost increases as site-built homes. As you might expect, past dues and charge-offs are higher in this segment than the rest of our portfolio with delinquencies ranging anywhere from 4% to 8% in a given month. In a normal credit environment, weâre accustomed to seeing annual charge-offs in the 50 basis point area. In bad markets, that can move to around 1%; however, during the pandemic we put a qualitative reserve of 5% on this portfolio, so we feel well protected, and with yields in excess of 8%, this is a very profitable portfolio for us and we are excited for it to grow. Our third revenue stream for MH is our serving book, where we service the retail loan portfolios of some of our MH community customers. This is strictly a fee-based business - no balance sheet risk, no credit risk, just serving portfolios. With that, I will turn the call back over to Chris.
- Chris Holmes:
- All right, thanks Michael for that color. Weâre pleased with our results for the quarter and particularly proud of the team for the loan growth, and that will conclude our prepared remarks. Operator, at this point weâd like to take questions.
- Operator:
- Our first question today comes from Matt Olney from Stephens. Please go ahead with your question.
- Matt Olney:
- Hey, good morning guys.
- Chris Holmes:
- Good morning Matt.
- Michael Mettee:
- Hey Matt.
- Matt Olney:
- I want to ask more about the construction portfolio - I think itâs now around 18% of the loan mix, which would put the bank at the higher end of the range in terms of just the mix. I think you also said you passed on quite a few construction loans this quarter, so just trying to appreciate if youâre trying to manage this down from the 18% or trying to prevent this from moving higher, and then I guess within that segment, would love to hear any commentary you have about which construction segment youâre keeping an eye on in this environment. Thanks.
- Chris Holmes:
- Yes Matt, good morning. Itâs Chris, Iâll go first. First on just managing the overall concentration, we do look at the guideline, or we certainly pay attention to the guideline of 100% of risk-based capital, and today weâre over that. Weâve been signalling that we would go over that because, as you know most of these construction loans, you will make and you might not have draws on them for quite some time, and so youâre always trying to project where that balance is going to be. You donât know exactly when the projects will complete either and you get a certificate of occupancy, which is when they roll out of construction, so itâs a constant monitoring process and so we have been looking at that, actually for several quarters. If you look at our availability of undistributed funds, our commitments that are not drawn on at this point, itâs actually moved down for us each of the last couple of quarters, and so weâve been monitoring what goes into that, so yes, we monitor that. Just as a general, itâs kind of difficult, and I alluded to that in my comments, weâre seeing good projects but we just have to manage the concentration down because we see, given our geography and given the attractiveness of whatâs going on in the growth and in migration in our geography, we continue to see some good projects but weâre just managing that down to limit the concentration, is really whatâs happening there. Then on other, you guys have comments on anything? Then you did ask what are we particularly keeping an eye on. If there was anything that Iâve probably got the closest eye on, Iâd say itâs office. Just in the geography, I think itâs still not quite known how the office segment handles COVID. We did just have an announcement - it was a national announcement, but it was--we were one of the markets that had an impact on the Amazon announcement, where they said they were halting construction. I think it was on six buildings, six office buildings where they were reconsidering the layout of the office buildings, and one of those is here where theyâve said, hey, weâre continuing to bring on the people, we just want to take a breath and look at how weâre going to reconfigure that for the new work-from-home work environment. Thatâs one that we have been watching closely. Iâd say the other is--you know, the others actually have been pretty good for us. Weâve seen good projects in pretty much all the segments. You guys, anything further there? Okay. Does that help?
- Matt Olney:
- Yes, thatâs great, Chris. I appreciate that. Good color. Then I guess switching gears, also going to ask more about deposit balances. I think you mentioned part of that deposit balance contraction in 2Q, there were some seasonal pressures there; but I guess beyond seasonal pressures, would love to hear more about what youâre seeing with deposit balances. It sounds like we should anticipate additional public funds coming down again in the third quarter - I think you mentioned that. Would love to get your take on expectations for total deposit balances in the back half of the year, if those should contract incrementally or do you expect those to turn positive.
- Chris Holmes:
- Yes, sure. On public funds, thereâs been a lot of public funds out there and itâs been really cheap over the last couple of years as municipalities, as states, as all the government entities have just been flooded with money from our federal government, then those deposits have hit bank balance sheets and theyâve been cheap for banks, so they basically have sat on the balance sheet. Sometimes, frankly, they had a loss by the time you collateralize it. Weâve let them sit on the balance sheet. You saw where our margin was last quarter compared to this quarter, but frankly we--and we knew that once rates moved up that we werenât going to be keeping a lot of those because we werenât interested, frankly, in keeping a lot of those. We also had a couple of larger public funds relationships that came to us via acquisition that we were--that were not very profitable for us, and so those were also ones that we said, you know, when the time was right, we would let those go, so weâve been filtering through that. There was also the comment that I made in my prepared remarks about the composition of our deposit book being improved, and so thatâs where that comes from. Weâve still got a little bit of money sitting on the balance sheet - I say a little bit, I mean, itâs close to $300 million or $400 million that we think will probably exit, again as a result of rate, but historically if you look at our deposit balances, we place almost no reliance on wholesale funds, and then when we do have public funds, itâs usually operating relationships that weâve got reasonably priced, and so just some remix there is what it boils down to. Also, as noted, it does come at a time thatâs pretty good for us in terms of where we are from loan to deposit ratio, but you also heard me say youâre going to see slower loan growth. Luckily for us, slower loan growth means 10% or 12%, you know, and so that will allow us to continue to remix and re-price on the deposit side.
- Matt Olney:
- Chris, thatâs helpful, and I guess another part of that would be just the overnight or liquidity position has come down a little bit over the last few quarters. Would love to hear more commentary about how you expect to fund loan growth the back half of the year, whether itâs deposit growth or just liquidity, and then longer term, where do you see that overnight liquidity position going? Thanks.
- Michael Mettee:
- Hey Matt, itâs Michael, good morning. Yes, we did see a large drop in excess liquidity due to the funding of the loan growth, $619 million, and then also the deposit runoff that Chris just mentioned. I think youâll see a little bit more pressure on liquidity, and Chris just mentioned some public funds going back out, but I would say that would normalize relative to the last couple years. Weâve been running excess for a good two, three years here, and so kind of back to limits that we would have expected back in the 2019 range. You will see a focus on deposit generation - Chris mentioned 10% to 12%. Loan growth, we expect to fund via relationship deposits, so thatâs--you know, if you think about that, weâve talked about our deposit costs being relatively low increase quarter over quarter, and so Iâd expect to see that accelerate - you know, our betas will be a bit higher or possibly materially higher to kind of catch up. Weâve been very fortunate and it was our plan to let some of these deposits run down to keep our costs low and take advantage of some of that excess liquidity, so in the back half of the year I think youâll see us move a bit more in line with interest rate increases to not only maintain our current deposits on interest bearing but grow some as well.
- Chris Holmes:
- Iâll add one thing to that, Matt, and that is that our traditional public funds that we have had on the balance sheet for a long time bottom out generally in the second quarter, and then they begin to build back in the third and fourth, and so we expect those to build back some over the third quarter as well. We feel like when we go out with--now Iâm talking not about crazy above-market rates, but when we go out with a premium deposit proposition, our customers and our relationship managers respond very well.
- Matt Olney:
- Okay guys, thanks for the commentary. Appreciate it.
- Chris Holmes:
- Thanks Matt.
- Operator:
- Our next question comes from Brett Rabatin from Hovde Group. Please go ahead with your question.
- Brett Rabatin:
- Hey guys, good morning.
- Chris Holmes:
- Good morning Brett.
- Brett Rabatin:
- Wanted to first just talk about the loan growth, the $620 million - obviously extremely impressive. Wanted to hear any color you could give on how much of that was new versus existing clients, and then how much of that would have been fixed versus floating production?
- Chris Holmes:
- Yes, good questions. A strong majority of that would be existing clients, so Iâm not sure exactly the percentage that would be existing versus new but a strong percentage of it would be relationships with existing--would be existing relationships, a strong majority of that. Then fixed versus variable is close to--itâs right at 50/50. Weâre right at 50/50 in the loan portfolio, and what came on in the quarter was right at 50/50 also.
- Brett Rabatin:
- Okay, and just given, Chris, that a lot of that production was existing customers, Iâm curious to hear your thoughts on the perception or ability to possibly grow through a recession. Thereâs been some talk with that on larger banks about using a recession as an opportunity to move market share, continue to grow through a recession. I think Michael mentioned are we in a recession or not. Assuming we are in a recession next year, what happens to that high single digit, low double digit number? How would you change, if anything, how youâre doing loan underwriting?
- Chris Holmes:
- Yes, so if anything, when changing on the loan underwriting, and already Iâd say itâs actually already gotten a little more stringent in terms of--I donât want to send the wrong message there. Itâs not like weâre battening down the hatches or anything like that. Weâre absolutely open for business and we are continuing to do business, but weâre certainly also paying attention to the economy, and so you ask a good--I liked your first question a lot, how much of that was to customers and how much of that was not. In times of this, you make sure that you can take care of your customers and you can allow them to grow when theyâve got opportunities to grow, and so thatâs top of mind for us. Because of that, that makes you be a little more focused on that part of your business, so we think we can continue to grow but, frankly, itâs as much--Iâm going to go back to Mattâs question, itâs as much about growing the deposit side as it is the loan side at the same time, so weâve got to be able to grow both at the same time. What we donât want to do, and as I--I didnât say this expressly but I talked about use of wholesale funds and I talked about getting over-reliant on public funds, what we donât want to do is become over-leveraged at a time when we--our economies are actually, as you know as well as any of us because youâre right here, our economies are as good as any in the country, and so we can sometimes get blinded to the bigger picture nationally and internationally, so weâre keeping an eye on all that. But we donât--weâre not feeling it from a business standpoint. Our customers are optimistic, our credit continues to look really good, particularly our commercial book continues to look really good, and so weâre not feeling that, so weâre looking at balanced growth right now. Weâre looking at keeping strong levels of capital, which we have, and weâre looking at making sure that we can continue to allow our customers to grow in this environment, so those are the things that weâre focused on.
- Michael Mettee:
- Yes, and Brett, loan growth through a recession or through the cycle, keep in mind Chris mentioned weâve added 32 revenue producers, weâve entered into central Alabama last year, so that teamâs taken off. Our north Alabama team has really started to hit its stride, and we have to--the Memphis team that came onboard in the last year and a half, two years or so as well, it has market share opportunity, and the disruption that we talked about for bank acquisitions, mergers across our footprint provides us opportunity to kind of grow through a recession as well, if one comes.
- Brett Rabatin:
- Okay, thatâs helpful. One last one, if I could. The only thing Iâve been able to get kind of geography-wise in the footprint is maybe in the Carolinas, some folks that have--I guess itâs adjacent to some markets youâre in, some lower end manufacturing, furniture manufacturing customers, orders really taking a beating here recently or a drop-off in orders. Has there been anything that you guys have seen in any of the markets that suggests a slow-down at this point?
- Michael Mettee:
- Brett, I think what weâre kind of concentrating, we havenât seen it across commercial or small business, but we are worried about the consumer. Ours are healthy if we look at checking account balances prior to the pandemic to today, still elevated in a strong way, so see that. But we do have--we mentioned mortgage people coming off forbearance, weâve seen the end of stimulus checks, and so just keeping a close eye on those consumers and how their spending habits are and what theyâre doing on their loan payments and delinquencies. That would be where I think a lot of our concern would lie, but we havenât seen broad economic slowdown, and like Chris mentioned, really positive from most of our commercial and small business clients.
- Chris Holmes:
- Yes, I agree with all of that in terms of what we see on portfolio. I will say this - in talking to customers, we have heard and seen in some of our markets, youâre now actually seeing for sale signs, residential market for sale signs where you just--frankly, they were selling so fast, they never even got the signs in the yard, so youâre now seeing a few more for sale signs. I donât take that as a sign of distress, I take it as a sign of normalcy. We have heard from some particularly high end builders that they have seen the market slow, that they have seen it again return to more of a sense of normalcy, but weâve heard from some high end builders that theyâve seen markets slow.
- Brett Rabatin:
- Okay, great. Appreciate all the color.
- Chris Holmes:
- Sure.
- Operator:
- Our next question comes from Jennifer Demba from Truist Securities. Please go ahead with your question.
- Jennifer Demba:
- Thank you, good morning. Just curious about provision and what your outlook is over the next couple of quarters. I know credit quality has stayed really, really healthy, but do you have any thoughts about reserve build going forward?
- Michael Mettee:
- Sure. Hi Jennifer, good morning, itâs Michael. Yes, so for the ACL for this quarter and kind of looking out, I kind of mentioned that--or I did mention weâre kind of expecting as loan growth continues, that the ACL to held for investment will stay pretty steady given our current outlook, so I wouldnât expect releases. Now, the economy and outlook moves pretty quickly or has moved pretty quickly, so over the second quarter versus first quarter on the quantitative side, we didnât see a huge change in our Moodyâs scenarios. We did see kind of a slowing GDP growth. We kept the same scenario in the model, but due to loan growth we saw an increase, and on the qualitative side we made a couple of adjustments. We removed our troubled industries from COVID that kind of reduced that number, but we had a bit of a stagflation outlook which was rolled into the quantitative portion. What weâre thinking, and you can kind of--you see it in the deck, slower GDP growth, kind of picks back up on the out years - â23, â24, and some elevated unemployment in â23, but CRE stays pretty stable, so I would expect that that will be pretty consistent as we look forward to the next couple quarters.
- Chris Holmes:
- I donât think that we anticipate our ACL percentage moving a lot, and so I think weâd seen provisioning as we see loan growth. Michael and the rest of the team sitting around the table are better on the inputs of CECL than I am, but I think that thatâs probably going to be--you know, we follow the model, but I nervous about releases right now and frankly think that at least until we can see through what has been described as the hurricane potentially on the horizon. Now, that may have been an old description, but until we can see through that, weâre going to be cautious at least in how we do things on the qualitative side.
- Jennifer Demba:
- With less loan growth in the second half than you experienced in the second quarter, it follows that youâd probably see a lesser amount of provisioning than you did in the second quarter in the third and fourth quarters, assuming the outlook on the economic side doesnât change materially?
- Chris Holmes:
- Yes, I think thatâs fair, Jennifer. I think youâre right on.
- Jennifer Demba:
- Okay. Second question is regarding the mortgage operation. You said youâre not expecting profitability in the second half of the year. Can you just talk about the overall strategy? I know you guys are still making changes on the retail side, but can you just talk about the strategy with mortgage over the long term and when you think it could return to profitability?
- Michael Mettee:
- Yes, so mortgage, retail mortgage in particular, we feel is very important to the core strength of the community bank being well rounded, so weâre interested in continuing to grow the business; but then within our branch footprint, maybe right around the outsides of that as weâve traditionally done, weâve had a little bit broader mortgage footprint than the bank footprint, and so very likely that there is a lot of revenue producers that are available coming through the next six to 12 months as we see some consolidation or wind-down of some other mortgage companies, so weâll be very opportunistic in picking up loan officers that can generate revenue. At the same time, we realize that we need to create scale and weâve been working through that, either via technology, Chris mentioned innovations, but just overall process overhaul. Thereâs a lot of headwinds in the mortgage industry right now - weâre not immune to those higher rates. Chris mentioned home prices broadly normalizing is a good thing, but affordability is still significantly higher than where it was, or significantly more challenging than where it was this time last year, so. We donât have a direct return to profitability number, but we do see further declines the rest of this year. Weâd expect first quarter next year to be challenging as well from a seasonality perspective and have the ship righted and back on our feet.
- Chris Holmes:
- Yes, and I think itâs important - when you have revenues that fall as rapidly as they have in mortgage, and if you look at the projections on mortgage originations expected to be less next year than they were this year, that requires some re-evaluation, I think Mike used the word structurally. Weâve already obviously done that with the wind-down of our direct-to-consumer where we got out of the business, and same weâve got to really make sure that on the retail side structurally that it is where it returns to contribution in any market environment, so a little bit more adjustment to go there in the third and fourth.
- Jennifer Demba:
- Thanks so much.
- Chris Holmes:
- All right.
- Operator:
- Our next question comes from Kevin Fitzsimmons from DA Davidson. Please go ahead with your question.
- Kevin Fitzsimmons:
- Hey, good morning everyone.
- Chris Holmes:
- Morning Kevin.
- Kevin Fitzsimmons:
- Just a few remaining questions, most have been asked and answered already. The very strong loan growth this quarter, was one of the sources for that the relative absence of payoffs? We heard from another bank that there were virtually zero payoffs this quarter but they expected those to resume in the second half, and that was part of the reason for their strong loan growth moderating likely in the back half. Just wondering if that applies to you as well.
- Chris Holmes:
- Yes, good observation. We probably should have pointed that out, is we did expect a couple of payoffs to hit right at the end of the quarter - they did not and so they went into the next quarter, and so that would have moved the number down a little bit. Itâs still been an extraordinary quarter no matter how you stack it, but we did expect a couple payoffs, and so we will see those in the second quarter, and there was just an absence of payoffs, frankly, in the quarter even compared to the first quarter, which we also had--you know, we had 21% loan growth in the first quarter but we had pretty normal payoff activity. We just didnât have it in the second quarter. Donât frankly know why that is, but good observation and interesting to me. I didnât know another bank had said that same thing, but we did see that.
- Kevin Fitzsimmons:
- Okay, thatâs great. Thatâs good to know. I just wanted to clarify that when you were discussing the margin and where that stands, I just want to make sure I heard it right, that I think you said about 3.70 for the month of June, and is that a good--so thatâs a good starting point, and then if we have another Fed rate hike, but I definitely got the message also that the ability to lag on deposit pricing has probably gone much quicker than maybe we might have been thinking, and thatâs going to be--that ability is probably going to be less, given what weâve seen on deposit levels.
- Michael Mettee:
- Thatâs right, Kevin. Yes - 3.70 is kind of where we were in June, and so definitely a good starting point. That excludes that excess liquidity number I spoke to, thatâs on Slide 5. Certainly expect margin to continue to expand, just not at the velocity that it has because of deposit pricing pressure, so I think you said that well.
- Kevin Fitzsimmons:
- Okay, great. One last one from me. I definitely get weâre at an interesting point where weâre--you arenât seeing any flashing red signals in terms of credit problems or warning signs, but youâre cognizant of the national trends and expectations out there. Have you seen any changes from bank examiners or regulators in terms of things theyâre looking a lot closer at, whether it be certain capital levels, certain liquidity levels, certain kinds of lending theyâre digging into or concentrations thatâs different than, say, a few quarters ago?
- Chris Holmes:
- From a regulatory standpoint, I donât know that Iâve seen anything different. Iâll say this - being over the $10 billion threshold, weâve seen a lot of things that are different with regulators, and so trying to segment those from above the $10 billion threshold into things maybe caused by the environment, I canât say that I have. I really canât say that I have. Liquidity has not been an issue, and so I donât think, other than of course your normal regulatory rigor there and the same on the loan portfolio, other than your normal regulatory rigor, I havenât seen any significant change. I will say we put our portfolio through a lot of rigor to try to see things before they happen, and the portfolio is holding up really well. Iâd say we have been watching closely, as Michael alluded to both these areas, on just our regular mortgage portfolio, particularly on our higher LTV products, and weâre watching our--Michael described weâve got about $245 million in manufactured housing, what are made on units, and those--you know, if you go back over the last two years on the credit side, the fact of the matter is itâs been hard--thereâs been so much money pumped into peopleâs pockets, itâs been pretty hard to default over the last two years, and so weâre now watching--and so your past dues are artificially low, your non-accruals are artificially low, particularly in this--you know, because we donât have a big consumer segment, but all of those things are artificially low, so they--you know, as they begin to move up some, which we expect because, like I said, weâve got a 14-year history with particularly the MH consumer portfolio, we watch to see how it compares to over that 14-year history, and we saw some past dues tick up in June, but so far itâs staying within our historical bounds. Those are the things that weâre really watching for as weâre watching what happens to the economy over the next months and quarters.
- Kevin Fitzsimmons:
- Okay, thanks Chris.
- Chris Holmes:
- All right, thanks Kevin.
- Operator:
- Our next question comes from Catherine Mealor from KBW. Please go ahead with your question.
- Catherine Mealor:
- Thanks, good morning. I just want to dig into the 3.70 June margin that you talked about, and if you look at it on two components, one on loan yield, maybe where youâve seen loan yields move through the quarter, and then also on the deposit side, where you maybe saw those for the month of June. As we think about you increasing your deposit growth in the back half of the year, what categories do you think are going to be growing the most - interest-bearing demand or CDs? Where do you think weâll see most of that deposit growth come from balances? Thanks.
- Michael Mettee:
- Hey Catherine, itâs Michael, good morning.
- Catherine Mealor:
- Good morning.
- Michael Mettee:
- Contractual yields, if I think about kind of April to June, we saw about a 27, 28 basis point increase from around the 4.12 to 4.39 number where we ended June, so saw some pretty decent growth there versus deposits, total deposits. Our total cost of interest-bearing liabilities went from 19 to 30 on total deposits, so about an 11 basis point increase, and if you look at interest bearing, it moved up 15 to 41 from 26, partially offset by that NIB growth, brought down the total cost of deposits, kind of helped balance that out. Does that make sense?
- Catherine Mealor:
- Yes.
- Michael Mettee:
- Thatâs sort of numbers right there.
- Catherine Mealor:
- You said the interest bearing deposit went to 41, you said?
- Michael Mettee:
- Forty-one in June from 21 in April.
- Catherine Mealor:
- Got it, okay. Perfect.
- Michael Mettee:
- And then if I think about where we would likely see growth, I would say itâs going to be in the money market side of the house.
- Chris Holmes:
- Itâs going to be in money market, and it will be in time also. Weâve seen--at this point, weâve seen actually a little more increase in time than we have money market, so I think weâll see money market increase over the next two quarters, and then I think the next biggest part will come in time. Our interest bearing demand is not one that we typically see move up a lot, so we think it will come in those two buckets.
- Catherine Mealor:
- Great, and money market looks like it hasnât moved at all, still at 20 basis points. Where do you think that moves to, just given--?
- Chris Holmes:
- Man, I donât know, Catherine. I was hoping youâd tell us. You know, weâve seen things--and by the way, weâre seeing some aggression not on--a little bit, maybe, a little bit on stated rates, but weâre seeing some real aggression on large balances, large balance customers from some of our key competitors, where theyâre going out at 1% on money markets to keep the balances because if go back to last quarter, just about all the banks and particularly those headquartered in the middle of Tennessee, but the other parts of our geography are strong too. They all had 20%-plus loan growth, and I think weâre the first to report from these banks right in this general geography, but I think youâre going to see really, really--weâre not going to be the only one that has really strong loan growth, I can assure you. So I think that the battleâs probably going to be the toughest in the money market segment and I think it will go--I think it will go--I donât know where it will go during the quarter, but weâre already seeing 75 and 80 basis points pretty regularly out there, approaches to some of our customers, so I think it will--you know, it will go up from there.
- Michael Mettee:
- Yes, and just to--Catherine, a little color there, in June money market was 27 basis points, so Iâve seen that start to inch higher, but as Chris mentioned, we think that that will start to move materially more in the second half.
- Catherine Mealor:
- Great, thank you so much.
- Chris Holmes:
- Sure.
- Operator:
- Once again, if you would like to ask a question, please press star and then one. To withdraw your question, you may press star and two. Our next question comes from Stephen Scouten from Piper Sandler. Please go ahead with your question.
- Stephen Scouten:
- Hey, good morning everyone.
- Michael Mettee:
- Hey Stephen.
- Stephen Scouten:
- I guess my first question, I just wanted to clarify a couple of things. One, the 5% qualitative reserve on the manufactured housing you mentioned at the start of COVID, thatâs still in place, still in existence?
- Chris Holmes:
- Yes, it is.
- Stephen Scouten:
- Perfect, and then on the--just looking at some of the line items within expenses, it looks like there was a little bit of a jump in professional fees, and then advertising expense was down a good bit. Iâm wondering what was driving that, if some of the advertising was mortgage lead generation cost or something with the shutdown on consumer direct, or what the drivers of those movements were.
- Chris Holmes:
- Yes, so a couple things there. First, and just to clarify, when we said 5% reserve on MH, Michael talked about how that portfolio is really two--three revenue lines, but two of them are on the balance sheet, one on just a servicing line. The two from the balance sheet are MH community portfolio, which is roughly $265 million, $270 million, and then the second part of that is the MH retail portfolio. Community, being commercial loans on manufactured home communities, just a commercial loan. The MH retail is actually loans against the manufactured home units - again, thatâs about 240--. Thatâs the one that has the 5% reserve that we include in our PCL calculations. Then on the expense side, Michael knows more than I do, but I do know just a couple things. On the professional fees, part of that comes from as we have continued to ramp up different things that weâre doing, weâve outsourced some things to a couple of our partners, particularly EY has done some things for us on the accounting and audit side, and particularly the internal audit side, and so theyâve been a helpful partner and theyâre really good, but they know it and so thereâs been some expense related to that. Then the other that I know of that Iâll comment on is on advertising, and you are exactly right - with advertising, that was a heavy expense in the direct-to-consumer because youâre paying for leads in that business, and since weâre out of that business, weâre no longer paying for those leads and that led to a significant drop in advertising expense. Michael, any others there?
- Michael Mettee:
- Well, I would just say part of that advertising and marketing line item is expected to increase in the second half of the year as well. Obviously it wonât make up the $2 million difference quarter over quarter, but thatâs--Stephen, thatâs part of the $2 million to $2.5 million a quarter that I pointed to in the expense growth.
- Stephen Scouten:
- Got it, got it. Then maybe drilling back into loan growth a little bit more, I know your answer to Kevinâs question about slower pay downs, but Iâm wondering if you could kind of frame that up in terms of what youâve seen production-wise, like maybe first quarter to second quarter, if that what relatively flat or if that was also a big increase, and then kind of note some of the movements in the unfunded loan book, how much of the growth may have been from the unfunded book funding and where that is as a total balance today.
- Chris Holmes:
- Yes, I will say we did see a move up in some of our funding, again particularly on construction. We saw some move-up there in terms of the funding. I will say this also on the production - geographically for us, it continues to be really well disbursed. Iâd like to say that we just are great at coordinating that. It just continued to work out, but this quarter we had great growth out of our new central Alabama team - they really contributed. Nashville--sorry, Memphis actually, was also a really nice contributor for us. The team there continues to grow in terms of people, but also continues to grow in terms of production, and then our team in northern Alabama, where weâre in Florence and Huntsville, again having good results, and so those were probably our strongest growth areas for that, and they accounted for about a third of our growth coming out of those areas right there, which are all smaller for us in terms of balances and in terms of presence, in terms of branch presence and just number of people, but they really accounted for a lot.
- Stephen Scouten:
- Got it, and how big is that total unfunded book today? I would kind of imagine a lot of that growth maybe was from the legacy Franklin resi construction home builder type construction, but Iâm just kind of curious whatâs the breakdown there, resi versus more CRE commercial.
- Chris Holmes:
- Yes, so the total unfunded for us is about a $1.5 billion in terms of totals, and letâs see - about 50% of that, itâs really close, about half of that is residential and about half of that is commercial.
- Stephen Scouten:
- Okay.
- Chris Holmes:
- And youâre correct also in that, especially on the resi side, a lot of that is--comes in, Iâll call it Nashville and suburban Nashville, particularly strong in Williamson County and Rutherford County, which brings us quite a bit of comfort. Those are the two fastest growing counties in our entire geography.
- Stephen Scouten:
- Yes, without a doubt. Okay, thatâs great. Then maybe just last thing from me, I appreciate all the color on deposits and where we could see increases there. The deposit beta this quarter looks like it was maybe only about 10% on the interest-bearing deposits given the rate moves, but it looked like the cumulative loan beta was maybe only about 20% as well. Iâm just kind of curious how youâre thinking of loan betas moving forward. I know, Michael, you gave some color kind of throughout the quarter, and if I do that math, it looked like maybe 67% on the variable rate production if I break that out. I guess Iâm just kind of wondering how we can think about a loan beta on the whole 50/50 fixed-floating kind of split, what youâre seeing on fixed rate loan spreads.
- Michael Mettee:
- Yes Steve, thatâs a great question. One of the things that weâve experienced this first half of the year is there was a lag in competitive move-up in loan pricing, and so Chris mentioned in his part of the discussion, we expect to see higher prices on new production going forward. The fixed rate part of our portfolio in new production was relatively flat in the quarter, so I think youâd start to see as the market is now adjusting to higher rates, some of the commitments that were made 30, 60 days ago have been baked, and so the newer commitments are certainly coming on at higher rates. Competitive pressures again are still out there - you know, youâre not getting 100% beta by any means, but we are seeing a little bit more 50 and up kind of betas, is what I would expect on that going forward.
- Stephen Scouten:
- Okay, super. Thatâs very helpful. Thanks for all the color, guys, and congrats on a great quarter.
- Chris Holmes:
- Thanks David.
- Operator:
- Ladies and gentlemen, with that, weâll be ending todayâs question and answer session. Iâd like to turn the floor back over to Chris Holmes for any closing comments.
- Chris Holmes:
- All right. As always, we appreciate your interest, we appreciate the questions, and we appreciate your support. We will--if there are other things, we certainly are available for telephone calls if people have further questions. Everybody have a great rest of your day.
- Operator:
- Ladies and gentlemen, with that weâll end todayâs conference call and presentation. We do thank you for joining. You may now disconnect your lines.
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