FB Financial Corporation (FBK) Q1 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the FB Financial Corporation First 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, Wade Peery, Chief Administrative Officer, and Wib Evans, President of FB Ventures will also 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 two hours after the conclusion of the call. [Operator Instructions]. With that, I would like to turn the call over to Robert Hoehn, Director of Corporate Finance. Please go ahead.

During this presentation, FB Financial may make comments which constitute forward-looking statements under the Federal Securities Laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such for Forward-looking statements. Many of such factors are beyond FB Financial and ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements. More detailed description of these and other risks is contained in FB Financials periodic and current reports filed with the SEC, including FB Financial 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 earnings release, supplemental financial information n this morning's presentation, which are available on the Investor Relations page of the Company's website at www. firstbankonline.com. And on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holmes, President and CEO.

Thank you, Robert. Good morning, everyone. And thanks for joining us this morning. We appreciate as always, your interest in FB Financial. For the quarter, we delivered EPS of $0.74 return on average assets over 1.3% and a return on tangible common equity of 12.4%. We've grown our tangible book value per share, excluding the impact of AOCI and got a compound annual growth rate of 15.8% since our IPO. It was a good quarter with some qualifications as the bank delivered strong fundamental balance sheet growth and profitability growth while mortgage had a challenging quarter as they re-positioned to manage the recycle of low -- lower volumes and margins. There are few key high -- a few key items I want to highlight for the quarter. At 21.3% annualized, loan growth was very strong. Excluding PPP, we had linked quarter annualized growth over 14% in three of the past four quarters. And our year-over-year loan growth is 16%. This growth is a result of strong teammates positioned in economically fiber markets. We continue to see good activity in our non-interest bearing deposits, excluding our mortgage escrow-related deposits, we grew 6.8% linked quarter annualized. And in three of the past five quarters, we had annualized growth over 15%. Year-over-year, excluding mortgage escrow deposits, we've grown our non-interest bearing deposits by 17.5%. So that's year-over-year core loan growth of 16% in non-interest bearing deposit growth of 17.5% Asset quality continued to be very strong for us. We experienced net recoveries of three basis points this quarter. We also reduced our NPAs to assets to 44 basis points. A six basis points decline from the fourth quarter, and our NPLs to loans held for investment declined by 11 basis points to 0.51%. We view our banking segment pre -tax, pre -provision run rate profitability as being $44.2 million compared to $43.4 million in the fourth quarter of 2021 and 39. 3 million in the first quarter of 2021 which would be year-over-year growth at 12.3%. There are a number of moving parts of that 44.2 million and we don't give ourselves full credit for that performance in our adjusted EPS, but we feel that's around the level that our banking segment is currently producing. And we constantly look for ways to improve -- to move that higher. Michael will walk you through some of the moving parts of that 44.2 million in his comments. I'd also like to discuss one piece that impacted our PTPP run rate this quarter. Our net interest income was impacted by 2.2 million in accelerated purchase accounting premium due to two purchase credit deteriorated loans, paying off early of the $2.2 million ahead of seven basis point impact on our net interest margin are also impacting our margin for the balance sheet mix shift as our average mortgage loans held for sale were $230 million lower in the first quarter than in the fourth quarter. We calculate that that had a roughly six basis point impact on our net interest margin. Those two pieces combined to account for nearly the entire drop in our net interest margin of 3 -- from 3.19% in the prior quarter to 3.04% in the current quarter. The remaining couple of basis points, mainly being a result of excess liquidity. Based on with remaining -- I'm sorry. Based on loans with the largest remaining purchase accounting premiums in our portfolio, a significant hit to our net interest income due to accelerated amortization is unlikely to repeat itself. We do forecast that the average balance of our mortgage loans held for sale will remain lower in the near-term. A $281,000 loss mortgage was disappointing this quarter. We view losses from that segment in any quarter is unacceptable. A confluence of events has created a challenging operating environment in the mortgage industry. And our online direct-to-consumer channel is primarily refinance driven and has been particularly impacted. And finally, our common equity to tangible book value per share -- intangible book value per share were impacted by $100 million unrealized loss in our securities portfolio, which is entirely interest rate related. The unrealized losses reflected on the balance sheet as a $71.5 million accumulated other loss in the equity account this quarter, or $1.50 of tangible book value per share. We feel we maintained an appropriately-sized portfolio for our balance sheet and we didn't add longer-duration securities over the past two years due to net interest income in the short-term. While we haven't moved our portfolio to help the maturity we do intend to turn -- we don't intend to turn over the securities portfolio and lock in that loss. We view both likely resolution of the unrealized loss to be the majority of the Securities and loss position mature part over time with no long-term impact to equity. In the immediate term our stated tangible book value per share and our tangible common equity to tangible assets look a little lower, but we'll view it as permanent solution to our tangible book and we should experience no growth constraints as a result. So as we look to the second quarter and the remainder of the year, key points, we expect continued loan growth in 2022. We have a very strong existing loan pipeline. Our markets continue to have a strong and ever-expanding queue of Corporate expansions and relocations that are driving strong fundamental growth will look temper that optimism a little lessening. We have some known larger payoffs coming in the second, third quarters. And we also continue to keep a close eye on the broader economy. However, we're bullish and very comfortable about exceeding our 10 to 12% annually for loan growth guidance. We do expect continued tough sledding for mortgage. We're reducing our mortgage origination capacity in a corresponding size of our operational functions to operate through the current and forecasted down environment for the mortgage industry. We're exploring technology that would create material efficiencies in mortgage production in delivery, and that excites us and keeps us bullish on the long-term value of our mortgage division. But we're not ready to put down our dollar impacts on that right now. Between our large cash balances and loan portfolio mix, we remain highly asset sensitive and expect the bank's profitability to benefit from the rate hikes that are expected over the remainder of the year. Our latest 100 basis point rate shock announced it shows an 11% increase in net interest income or $39 million pre -tax. Our latest 200 basis point rate shock analysis showed a 21% increase or $76 million. Hopefully, you can tell by the update that we're mostly -- that we expect mostly good things for the remainder of 2022. We are excited about organic growth our teammates continued to deliver, restating 16% loan growth and 17.5 non-interest bearing deposit growth year-over-year. In addition to our current team and successful organic growth, there's also an ever-growing opportunity to hire additional talent and attract new customers from the recent disruptions in our markets. With a banking model built on local authority of balance sheet larger than most of our community and banking competitors in a strong corporate culture, we're perfectly positioned as a destination for those that would like to change in their current circumstances. We also have a real desire to become the community bank of choice in every market in which we compete to get back to our local communities in a meaningful way while fostering economic development across our footprint. And we think we have the business model and the runway to do so. We believe that message resonates well with experienced banking talent and customers that are impacted by the disruption. We also continue to evaluate traditional bank M&A. There are few strong community banks in attractive markets in our footprint. These banks have good management teams, a strong core deposit basis and will be great fits with FirstBank. While we're focused on our organic growth opportunities and nothing is eminent, it's possible that a transaction could come to us. As you know, we pay close attention, tangible book value dilution in addition to the EPS accretion, and our message has been consistent. And while we haven't historically taken tangible book value dilution, we would take limited dilution in our back for the right form. Past traditional banking, our technology efforts continue to advance as we build and formalize our direction for our innovations unit, Our goals, as we invest more seriously in the Fintech and blockchain space, are to improve the customer experience for our traditional banking customers, to remove costs through tech-enabled process improvement, and to explore how emerging technologies can help us turn our areas of expertise into profitable national brands. Our process to achieve those goals is develop a broad network of technologists and leveraging new and existing relationships like Jack Henry and figure technologies, to perform -- I'm sorry, to partner with quality founders and development teams within that network, to bring business cases and expertise to those partnerships in order to help those developers grief profitable business ventures that we can benefit from as customers, minority investors or both. We've made ourselves an asset to the USDF Consortium by being flexible and responsive to new ideas. Our initial blockchain undertakings focus on payments as that groundwork needs to be laid to be able to move on to everything else. We'll continue to provide updates on our efforts and progress as we have more specifics. For now, we're excited about the opportunities that we're being invited to participate in. And we look forward to seeing how these things fall. I'm now going to turn it over to Michael to discuss the financial results in a little more detail. Michael.

Thank you, Chris. And good morning, everyone. I'll speak first to the quarter's results in our banking segment. As Chris mentioned, our baseline run rate pretax, pre -provision income for the banking segment was $44.2 million in the first quarter. Pointing to the segment core efficiency ratio reconciliations, we had $88.9 million in segment tax equivalent net interest income this quarter, including in that $88.9 million was $2.2 million of the accelerated amortization related to the prepayment. Prepayment to purchase credit deteriorate loans from the Franklin combination, each of which individually had remaining premiums larger than $1.1 million when they paid off. As a result, we'd be $91.1 million in net interest income, more reflective of our performance during the quarter. Along with that $91.1 million in net interest income, we had $12.6 million in core banking segment. Non-interest income. The $12.6 million core non-interest income, [Indiscernible] stated segment non-interest income of $12 million and ask back a $174,000 quarterly mark-to-market on our commercial loans held for sale portfolio, which has also added back car adjusted earnings figures to $12.6 million also adds back a $152,000 of loss from self-securities and $312,000 of loss from [Indiscernible], which are not added back to our adjusted earnings figures. Finally, we have $59.6 million in banking segment non-interest expense. And together, that comes our $44.2 million in run rate segment, PTPP, which is growing 12% over the comparable $39.3 million that we delivered in the first quarter of 2021. Moving to our net interest margin, our steady margin of 3.04% was down significantly from the 3.18% to 3.2% range that we had experienced for each of the prior four quarters. The largest driver of that decline was the $2.2 million accelerated amortization of purchase accounting premium, which created a seven basis point drag on the reported margin. The other primary cause of the decline of our stated margin was a balance sheet makeshift for mortgage loans held for sale, which had a yield of 3.08% this quarter. And we're down to about at 230 million for the fourth quarter to interest-bearing deposits with financial institutions which had a yield of 16 basis points and were up 320 million from the fourth quarter. Looking forward for our margin, we had 4.7 million of net purchase accounting discount remaining on our loans held for investment. However, due to the interest rate environment at close and the new accounting treatment of purchase credit deteriorated loans, we have 2.3 million of net premium remaining on our FSB and Farmers National Bank of Scottsville acquired portfolios which closed more recently and are still experiencing chunkier payoffs in our older acquired portfolios. Within that 2.3 million net premium, we have approximately 25 loans with remaining premiums over a 100 thousand with three lines ever 500 thousand and no remaining individual premiums ever million dollars further for commercial lines, which tend to contain the large, larger purchase accounting discounts and premiums and consumer products the Franklin portfolio has $10.8 million in premium remaining and $9.9 million in discount for net premium of approximately $900 thousand given that data, we expect impact to be immaterial in any given quarter. We would expect the decline that we saw an average mortgage loans held-for-sale to continue for the foreseeable future is mortgage origination volumes are expected to remain weak. While we do not anticipate deploying the entirety of that excess liquidity in the decline in the portfolio provides security yields while volatile have become more attractive and we expect to deploy a portion of that excess liquidity in the shorter duration we do not anticipate the securities portfolio increasing much ever 13% of our total assets. Overall, our balance sheet remains highly rate-sensitive. As Chris mentioned, our latest rate shocks indicated $39 million of additional net interest income and a 100 basis point rate shock and 76 million in the 200 basis point shot. We ended the quarter with $1.5 billion of interest-bearing cash, we have $3.9 billion in variable rate loans, after the next 50 basis points of rate increases, we'll have approximately $580 million of those loans remaining a floors. And that number decreases to around $310 million after another 50 basis point hike. We are poised to be strong beneficiaries from the expected right environment. For banking segment non-interest income, we would anticipate that we continue to be in the $12 million to $13 million range next quarter with swap fee income being the primary line item that can move us out of that range one way or the other. Beginning on July 1, we will begin to fill the payment, the Durban amendment, we anticipate that loss income to be about $1.5 to $2 million per quarter. We expect continued growth in our banking segment non-interest expenses. As Chris mentioned, we have tremendous opportunities at talent, but customer-facing and back-office roles. We have a very promising runway ahead of us, and we're building that team that will help us execute on that opportunities. Moving to mortgage and illustrated on Slide 6, mortgage experienced a difficult upward operating environment due to rapid rise in mortgage interest rates, typical first quarter seasonality and excess capacity in the industry. During the quarter, the industry saw a rapid decrease in refinances with material declines in margin and our mortgage division was not immune to those challenges. Our direct-to-consumer business, which typically mixed up 50% of our originations, was particularly impacted by the decline in refinance volumes as the channels total interest rate lock volume was down 30% quarter-after-quarter. The retail channel felt fared comparatively better as it saw an increase in rate lock volume of 7.7% quarter-over-quarter. However, retail profitability was also affected by a decline in margins. The decline in margin is demonstrated by the mark-to-market value decreasing from 1.96% to 1.66%. That compared to our expectations last quarter when we had anticipated margins to stabilize around 2.2% on a go-forward basis. As Chris mentioned, we're not pleased with our results this quarter in the mortgage segment, and we're working to optimize our operations for [Indiscernible] segment as profitable in all market cycles. As we worked our final plans for that optimization, we will not give guidance for mortgage contribution in the second quarter or the remainder of the year at this time. While the operating environment is expected to remain difficult as the near-term, I would point our mortgage servicing rights portfolio as a bright spot during the rising rate cycle. We will be able to enjoy a positive contribution from servicing and our MSR as rave continues to drop. I'll close my section with our allowance for credit losses. We experienced another 15 basis point reduction in our ACO to loans held for investment this quarter. Economic forecast for the first quarter showed a continued improvement over there that we utilized in the fourth quarter. And as we move further away from our local economies being impacted, I feel that there are qualitative releases to be made. However, our optimism about our local economies is being tempered by the uncertainty due to inflation that we're experiencing, as well as the conflict in Ukraine and related economic fallout. If conditions do not change, we would anticipate maintaining a similar level of ACO to loans held for investment over the near-term. And with that, I'll turn it back over to Chris.

All right. Thank you, Michael for that color. And we're pleased with our results for the quarter. We're particularly proud of the team for the loan growth in the quarter. And that concludes our prepared remarks. Thank you once again, everybody for your interest in FB Financial and Operator, at this point, I'd like to open the line for questions.

We will now begin the question and answer session. [Operator Instructions]. At this time, we will pause momentarily to assemble our roster. And our first question will come from Stephens Scouten of Piper Sandler. Please go ahead.

Hey, good morning, everyone.

Good morning, Stephen.

I know you said no second-quarter guidance on mortgage or for the rest of the year, but I am wondering if I could ask question maybe longer-term, just holistically as you think about that business maybe from an efficiency ratio perspective, as you think about these rightsizing efforts and whatnot. Is it similar to what you guys have said in recent quarters of that kind of expense, efficiency ratio guidance or does that need to be appreciably lower than it has been, given all the migrations around refinancing or otherwise? Or how can we think about what that business looks like from a profitability basis, maybe longer-term if that's at all possible?

Stephen will probably group answer that one. Typically, we've targeted so low 85% or so in terms of our efficiency ratio in that business. So that's still a long term target. Anytime you get markets like this, it makes those unpredictable. And when Michael said we're not giving guidance, not because we don't want to, it's just right now it's particularly hard because we got some rightsizing in that for the current environment that it's ongoing. And so as we have more information, we will relate it. I think it's fair to say we don't think that at least the coming quarter will be much materially different from the previous quarter on an operating basis. But we also do have the mortgage servicing rights in factor in there. So you've got things moving in both directions. And in long-term, as I mentioned, we do -- we continue to see value in that segment, particularly because of some of the potential technology and innovation that it's probably going to hit that segment quicker than it hit some of the other banking segments even. So, that has hit and it will continue to hit. And then we're participating in a lot of those conversations.

Okay. Great. And then, Chris, I know you noted that you guys haven't taken any extended duration counted for the short-term benefit for higher earnings. And I actually really liked how you guys showed the adjusted tangible book value per share, maybe in a different camp and some but I really appreciate that showing the true growth to tangible book. But how do you think about all the excess liquidity you guys have today? There's still a significant amount. And now that rates have moved higher, do you think more aggressively about deploying some of that excess liquidity into additional securities investments?

Yeah, it's constant conversation, and it's a -- one, I appreciate your comment on tangible book. We track it obviously closely and that's an important metric for us. We talked about it whether -- we talked about it all the time in our results. We also talked about it if we're ever thinking about doing anything on our balance sheet. It's a constant topic for us. And so as we think about AOCI, we think about the losses, we're loads to take dilution on tangible book value. And that -- and as we think about the investments, we just don't want to get -- and I characterize this as we think about it like owners and we think about it long term. And so we didn't want to move to help a maturity. We are thinking about surgical additions to our portfolio when we think we get the right opportunities to deploy some of that. But also, remember, we've been in the camp for an extended period on deposit. While the liquidity is -- there's a lot of liquidity currently. We think it could dry up faster, I think than most of what I hear in the marketplace. Just from what I think others are prevailing opinion. And so we're careful on liquidity and we'll make sure we can fund everything that we want to do. We certainly can more than do that today but we're probably a little more cautious on the liquidity side and those because one, we don't want to get tied up in a much low yielding long-term assets because we think that's bad for us and shareholders. We think it's bad for all of us. And then because we also think that liquidity could become more valuable faster than probably most think. Also notice, we typically -- when we were talking about deposits, generally we're just talking about non-interest bearing deposits. It's no different than our comments today, so we're focused on growing non-interest bearing deposits, and those don't grow as fast as some other forms of liquidity. So as that was a long answer to say, since we could make some surgical increases in the portfolio, as Michael said, we probably wouldn't go with 13% of assets. So Michael?

[Indiscernible] off with our loan growth first all. Driven on better deployment of liquidity, not that will maintain 21%, but we'd rather deploy there.

Did that answer your questions, Steven?

Sorry, can you hear me, guys? Sorry about that. Yeah, it did very well. One last clarifying question for me, if I could, it's just on the -- you guys lay out the current CSL Moody's modeling assumptions that are in there. Were there any changes to how you waited that model this quarter or any changes to how you think about the seasonal modeling given fears of inverted yield curve and everything else going on in the economy? I'm just wondering how CSL, the migrations could impact reserves and provisioning throughout the year if we see some negative movement in those projections.

Stephen, that's a really good question. And lot of thought into -- the scenario is this quarter, a lot of different discussion. We went S2, which is where we've been in the last couple of quarters, which is very consistent, but I will tell you we have been considering stagflation as part of our qualitative factors. We did layer in a stagflation scenario at a weighted net route kind of, 90 diminish, estimated 10%. Back question just to think about it from a qualitative perspective. We think that that risk is out there. And inflation continues to be a concern. So we -- every quarter we're going through the process of evaluating the different scenarios and there's definitely some downside risk there. And we kind of took that into consideration on a qualitative basis this quarter.

Got it. Super helpful, Michael. And congrats guys on a great quarter, strong growth and strong prospects in the future. Encouraging.

Thanks, David.

Thanks David.

Our next question comes from Brett Rabatin of Hovde Group. Please go ahead.

Hi, guys. Good morning.

Morning, Brett.

Wanted to first start off on the margin, and the expectations, and the asset-sensitivity didn't really changed linked-quarter, 21% for 200 and 11% for 100. And you mentioned the $1 billion of cash the $3.1 billion that are variable right in the loan portfolio. Can you talk a little bit more about the loan portfolio repricing in terms of what reprices in the first 90 days following a Fed rate hike, and how much might be locked or tied, and just kind of give us a little more color on how your loan portfolio is going to reprice as rates move higher?

Good morning, Brett. I'll start first with a little bit more on the NIM outlook. We kind of walked through the pieces down to the 304 and margin around that. If you normalize -- and even just isolate March, we would be back to at 316 to 317 net interest margin even with the balance sheet shift meaning, maybe for mortgage upper sale to cash. So we've seen that shift come back already and that's what two weeks of the quarter rate hike on the portfolio. So we had anticipated further improvement there as we see the next 25 to 50 or 75 basis point increase. Does the shift up in yields has really just took into account the last couple of weeks that you didn't see a material increase in our asset sensitivity yet in our reported numbers. The mix there is 50-50 LIBOR to prime and their pricing days don't all happen at the same time to finish rights, move up rights on our, [Indiscernible] all day driven, I guess, as to when they are contractual. So that's a delay that you are seeing there. We did see variable rates increase 15 basis points, after the first rate hike in our kind of overall in the entire portfolio. And so we would expect to continue to see that as right for that. Brett, that answers your question?

Yeah. That's helpful. Just trying to get an idea of the tenor of what might happen with the margin and the thesis that go into it. So that's helpful. And then wanted to circle back around mortgage banking. I understand [Indiscernible], taking away the guidance around that business for the near-term. I guess the question I have on mortgage banking is as it would seem like there's the potential for -- you're obviously going to try and work on the expense side of the equation, but it would seem like there's potential for gain on sale margins that continue to compress for the business, which could offset what you're doing to improve the profitability of the platform. I guess just thinking about those two things, is it possible from your perspective, if that happens, that mortgage might not make any money this year or are you guys optimistic that over time you will be able to fix the expense side of the equation enough to make it profitable? I know you're not giving guidance on it for the year or the quarter, but I guess I'm just trying to figure out, thinking about the influence on it and how you're focused on improving that.

Starting with the gain on sale question, Brett, if I remember, we've already experienced a decrease. It's in our mark-to-market value, so we went from $0.96 to $1.66. And so that applies to the income segment, and naturally would bring that key 29 down, on gain on sale down. That will be more reflective of where margins were in the first quarter. So I would look again on sale next quarter, and I would say yes, that number will come down. But generally, the revenue impact applies to the mark-to-market. And in your gain on us, typically a little bit higher than mark-to-market value through execution. I would say longer term, the business will be profitable throughout cycles. That's always the goal or the point. So we'll make the adjustments necessary to be profitable and positive return on capital to our shareholders. So yes, longer-term. And I think also, with the benefit of servicing and our mortgage servicing rights should see an improvement there that you haven't experienced, or haven't seen, we haven't experienced over the last couple of quarter, or say that that was a positive in the first quarter of '22 for the first time in a couple of years. And so I'd expected that to cash flow was loans down the books longer as well. Chris, anything you'd add to that?

The only thing I would add is as we look at -- we're looking out -- as you look at mortgage business and you look over the remainder of the year and you look in the next year, you don't see a spike in volumes. Volumes are going to be down for some time unless we're missing our projections. We're making the adjustments for that time period to do exactly what you talked about to be profitable through that. That's never a fun process. It's delicate process and it's not -- we didn't start that this week. That's been -- it's an ongoing process for us. But we expect in -- we refer to that as one of our non-banking segments. It's banking but we refer to that, we separate that out as a segments, one of our non-banking businesses. Today, we got to achieve a 20% return on capital in those businesses. That's what we expect and that's what we are working for to now. There are a couple of things that I alluded to. I said innovation and technology I think in terms of broader application, may hit that segment faster than it hits some of the more traditional banking areas. We're participant in some of those. That also is something that -- we don't -- we're not -- reason we're not put any numbers on it, we're not banking on it, but it is something that is real and I think does begin to change the cost structure on the business.

Okay. And then just lastly speaking, the cost structure you guys have done a good job with expenses. I realize mortgage has a part in that, but was curious on your thoughts on the inflationary pressures that we're seeing and maybe any outlet for expense growth that you might be willing to provide.

Yes. So the outlook on the expenses -- and Brett, you happen to be here where we're headquartered in Nashville, but we're seeing growth across all of our markets. And we're seeing the cost increase across all of our markets. So I will say it's a really tough expense environment. We do expect, we said mid-to-high-single digits for the year. So as we begin to figure out what that looks like with a little more detailed, probably we're going to be announcing with digits in our banking segment and going to be expense decrease in our mortgage segment. That gives you a little better guidance because we are certainly seeing cost increase on all fronts.

Okay. Great, I appreciate the color.

All right. Thanks, Brett.

Our next question comes from Jennifer Demba of Truist Securities. Please go ahead.

Hey, this is Brandon King on for Jenny. How you doing?

Hey Brandon. Good to talk to.

Yeah. I'm sorry --

We missed you. But glad to have you.

Yeah. Of course, of course. I wanted to touch on some of your prepared remarks on the commentary around being appropriately positioned for hiring, to being the bank of choices on markets. And I wanted to know if you could quantify the potential merger disruption opportunities now in your back job with the TD Bank transaction.

Yeah. It's really difficult to quantify because you never know what is going to come and what exactly the form it's going to take because some of it is customer and some of it is people. And the short answer is, we really can't quantify for you, but I would say this. We've always said we need to be recruiting all the time and organic growth as the focus of the company. We focused on organic growth. I'd say we're doubling down or both of those and I think it's a long-term proposition. I think that over the next frankly, a couple of years that we're going to have us very specific focus on people and customers that are going to be subject to the disruption because I think in a lot of cases, I think there are some cases that show up immediately and already have shown up. But I think a lot of them will show up a year from now or even two years from now. As a result of some of those disruption among particularly on some of the larger banks in our market that has already occurred, but I think we'll continue to occur. So that's that will be a more focused effort and more almost project type effort for us in terms of trying to make sure we capitalize on those. And that's what we mean by that.

Okay. Thanks for the color.

Great.

And then my next question is regarding loan growth was very strong in the first quarter. And it was mentioned that you're expecting some pay downs, in the second quarter and third quarter. So I just want to confirm that you're expecting loan growth to be slower, timing 2Q, 3Q, and being pick up in 4Q just based off the current environment.

Yeah. I think you heard all that right. And when we think about where we -- at a rate of growth in 20% in a quarter is a lot. And so, at some point you go, wow, what's your capacity? And so we're probably, I wouldn't say we are coming at it, but we're not that far from it. And so, it's going to continue to rethink the strong. I would say we're not expecting 21% every quarter for the rest of the year. But I think -- we think it will still have strong loan growth each quarter the rest of the year. And so annually, we say 10% to 12%, we said, given and the strength of the first quarter, and the fact that the first quarter is the first quarter. So that's good, that's good. We get -- that means you get as you when you come out of the gate strong, that bodes well for the rest of your year. We don't expect that same level, but we do expect to be at or above our typical targets for the rest of the year, of 10% to 12%.

Okay. Got it. And lastly, regarding deposit growth is still asked in deposit growth this quarter. What are your expectations on how that would trend as we do throughout the year? I know there's a lot of debate showing how deposits grew, we add to the credit to fairly reducing their balance sheet. Just wanted to know where there's things in your markets and what your assumptions are.

So we continue to put a focus on non-interest bearing. We want to continue to grow that bucket. And then on -- frankly on the interest bearing, we want to manage the cost more than the balances because while that may go down some -- while that may not be a growth area for us, actually, we want to manage the costs because there continues to be avenues of liquidity at similar costs to that interest-bearing bucket. Is that fair, Michael, you got anything?

We do have a segment deposits in public funds that typically flow out second, third quarter, and then go back and forward set. That actually get right back your comments on managing the cost and the balances. Those balances are still inflated from COVID and we'll be managing that as well, which could impact to your question what that balance would look like in the growth associated.

I would look for reasonably consistent growth in non-interest bearing and flattish more growth on the interest-bearing.

All right. That's helpful. Thanks very much.

All right. Thanks, Brandon.

The next question comes from Kevin Fitzsimmons of D.A. Davidson. Please go ahead.

Hey, good morning, everyone.

Good morning, Kevin.

Good morning.

Hey, Chris, just given the commentary on mortgage and the outlook and being unable to really say when or how it's going to be profitable at this point, I understand that. Do you -- does this change, would you say your longer-term commitment to fitness? Because I just recall every discussion previously being that there was this real ability to -- within a reasonable period of time to right-size and to ratchet down the variable related expenses. So was this just more the suddenness and the fact of multiple headwinds hitting the top line where it's just you're not able to pivot that quickly on the expense side, or are there more permanent changes that could affect your earlier point about generating a 20% return on the business? So I'm just looking at the longer-term view of that business, given what I'm interrogating for.

I think it's a fair question, Kevin. And it does not impact our commitment to the business. And we've got -- we've made a significant investment in over time. It's homegrown business and so it's got a strong on coal trade and we continue to attract really strong originators from across the Southeast in our retail business. And we're committed to it. Remember, we're just two years for move from making a $100 million in the segment. And also, remember the comments on the technology side and what I think -- how I think that's going to be impacted. We've got a big enough position in the industry to be relevant for all of that. And we're definitely committed. So I want to be clear on that one. But we also are committed to keeping it profitable and earning an appropriate return on capital. At the end of the day, management has got shareholders' capital and our commitment is to -- our job is to allocate that and make sure we get a great return. And we're doing that. As we shift on the expense side, one thing to keep in mind there is -- one thing that's probably made it more challenging in this particular segment is our direct-to-consumer business. If you remember, our mortgage business, we got two channels, probably really two channels of origination. One is retail, which is I would call that your typical bank branch-type retail channel. The other is direct-to-consumer, which all comes online. That online is a heavy refinance component for us. It's also heavy in terms of buying leads. And in this current environment, both of those dried up at the same time. We haven't experienced that before but l just want to wait at the same time. And so that one has been a little more challenging for us to handle in this environment and what would they experience before. And again, that -- if I could -- if we just go back to 2020, that same segment drove the biggest part of that $100 million of profitability. So again, making sure that we're thoughtful on just like -- again, were owners here making sure that we're thoughtful on long-term impacts and the long-term investments to continue to get the best return on that capital.

Okay. That's very fair and I think you mentioned earlier the long-term efficiency target you guys have looked at was there if I recall correctly, I think you guys used to talk about the net contribution as a percent of PPR being like a 10% target, is that -- am I right on that or is that still apply longer-term would just say?

Yes. That's a good yes. You are right Rile.

Okay. And one last one for me on M&A I heard your commentary on M&A, that there are some potential opportunities, maybe nothing imminent and you guys still have a healthy stock multiple to use. But on the other hand, you've referred to the disruption benefits that can come. Your loan growth is very strong, you're very asset sensitive right now. There's relatively more uncertainty on credit, just given the economy. So maybe makes it seemingly little more challenging to take someone else's balance sheet or to review it. Given all that, would you say M&A is a little less likely over the next year or so versus what you might have said a quarter or two ago?

Good analysis. Good analysis. You may have answered all -- some of the question. One of the things is that when I was making that comment in my prepared remarks, I did say there are a few strong community banks and attractive markets in our footprint. And so that few was a word that I intentionally chose. And so, there are some opportunities, but for all the reasons you mentioned, we're not out with a really active pursuit there. And the reason, again, the reasons you said, the organic opportunities right now are really strong. If you look at the organic -- what we're doing organically, really, really good. We continue to focus on making -- on getting better and better. Remember, we have doubled the size of the company over the last two years until we continue to get better, and better, and better operationally and with customer experience, which is already good, and we want to be great. And so those are big focuses for us. When there is a really good opportunity, though. We're going to going to take advantage of those and some of these that are out there have been identified for us long term. And we don't really control when those opportunities come to pass. And so when they do, we try to be ready and that's why we say a few, that's why we say it could happen, but nothing is eminent. And that's why we say the ones that we're interested in while we haven't taken -- typically taken tangible book dilution, they could be in a position where we take slight, but we would take very careful attention to tangible dilution earn-back, but we could have some where we haven't had it in the past. And that's the reason that we couch it like we do. There are a few that we'd be interested in with a good [Indiscernible].

Okay. Great thank you, Chris, very much.

Alright thanks Kevin.

Our next question comes from Catherine Mealor of KBW. Please go ahead.

Thanks. Good morning.

Good morning.

I want to follow-up on the margin. Just thinking about loan yields. I know we've talked a lot about the repricing opportunity and the impact of floors and all that but, where are new loan yields coming on from the production you saw this quarter, generally?

Hi Cath. There's still on the new production coming on in high three, some of them the low fours like right at four - ish late in the quarter. So we're still seeing loans roll-off at higher yields and come back on lower the competitive environment. Still out there in the arising rate environment. But we're starting to see some rates move higher. But we haven't seen a material increase yet.

Just to add one thing. We have -- late in the quarter, we did very late in the quarter and in the April actually, it's probably better described. We did see -- we have seen some banks actually moved their pricing up. And in this case, it's bigger banks, frankly. It's your much bigger banks that have moved up some. That has been encouraging because we've been moving up to some of our problem banks that are closer to our size are the ones that are still down in our mind in some unreasonably low rates. And even in some of the smaller community, that banks are down at what we think of is unreasonably low rates. We didn't see it in the quarter, but we've seen it now move up some in terms of stuff coming on.

That's great. And then on the mortgage gain on sale margin, do you sense as to how that gain on sale margin difference between the retail mortgage platform and the consumer direct platform?

Yeah. So typically, all along its retail margins have been 250 to 3 and the direct-to-consumer has run 150 to 2. We did see decline in the first quarter specifically and the direct consumer that went below that 150 number. So it was more of that, call it 140 to 150 range. Those have moved back higher. But in a way, it's been at the detriment of some of the volume which Chris spoke about earlier. So retail margins have also stabilized a bit as well. So we've seen an increase over the first quarter, but not a really material -- materially higher number.

Okay. Great. That's really helpful. Chris, thank you so much is all I got. Great quarter, guys.

Thanks, Catherine.

[Operator Instruction]. And our next question will come from Jordan Ghent of Stephens Inc. Please go ahead.

Hi, good morning. I just had a quick follow-up question on the kind of market disruption you guys are talking about. If you guys could maybe briefly talk about what markets you're seeing that in, and then also, any potential lending verticals you're seeing the most opportunity in. Thanks.

Yes. So it's across our markets. Actually, Jordan, it's not in any one market. We've seen it across the markets. It can [Indiscernible] I can't think of one of them where we're not -- where we don't see that and [Indiscernible] here, and have conversation then hear conversations. So it's pretty much across the markets. Every market [Indiscernible]. And so the -- let's see [Indiscernible]. The lending verticals. For us, the two that we really are, I guess we're focusing on is mortgage and manufactured housing. Those would be verticals where we see opportunity now. Probably, were talking about how mortgage is going to be -- how we're having to do some redemption's there. So that probably sounds funny when I say -- we say lending verticals where you're seeing opportunity. But again, I haven't really thinking about more. When I say that, I think about more of the potential enhancements and technologY more on the back-office side and the origination side there. And then, [Indiscernible] manufactured housing is as an area where we've got an expertise in the marketplace that is really good and leverageable for us and so that's one where we continue to be interested in leveraging that as we move forward. Part of our plan -- part of our strategic plan has that in it.

Perfect. Thank you.

Thanks, Jordan.

All right. Thanks, Jordan.

This concludes our Question-and-Answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks.

Okay. Thanks to all of you for joining us today. Thanks for your questions. We appreciate your support and we look forward to pushing forward to a good rest of 2022. Thank you.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.