FB Financial Corp (FBK) 2022 Q1 法說會逐字稿

Good morning, and welcome to the FB Financial Corporation's 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 2 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.

Thank you.

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 such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information and 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.

All right. 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 of 1.13% and a return on tangible common equity of 12.4%. We've grown our tangible book value per share, excluding the impact of AOCI at 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 repositioned to manage through a cycle of lower volumes and margins.

There are 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 3 of the past 4 quarters, and our year-over-year loan growth is 16%. This growth is a result of strong teammates positioned in economically vibrant markets.

We continue to see good activity in our noninterest-bearing deposits. Excluding our mortgage escrow-related deposits, we grew 6.8% linked quarter annualized. And in 3 of the past 5 quarters, we've had annualized growth over 15%. Year-over-year, excluding mortgage escrow deposits, we've grown our noninterest-bearing deposits by 17.5%. So that's year-over-year core loan growth of 16% and noninterest-bearing deposit growth of 17.5%.

Asset quality continues to be very strong for us. We experienced net recoveries of 3 basis points this quarter. We also reduced our NPAs to assets to 44 basis points, a 6 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 pretax 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 of 12.3%. There are a number of moving parts to 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 move that higher. Michael will walk you through some of the moving parts on 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 the $2.2 million in accelerated purchase accounting premium due to 2 purchase credit deteriorated loans paying off early. Of the $2.2 million had a 7 basis point impact on our net interest margin, also impacting our margin, with 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 6 basis point impact on our net interest margin. Those key pieces combined to account for nearly the entire drop in our net interest margin 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 loans 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.

At 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 refinanced -- is primarily refinance-driven and has been particularly impacted.

And finally, our common equity to tangible book value per share and tangible book value per share were impacted by $100 million unrealized loss in our securities portfolio, which is entirely interest rate-related. The unrealized loss is 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've maintained an appropriately sized portfolio for our balance sheet, and we didn't add longer-duration securities over the past 2 years to reduce the net interest income in the short term.

While we haven't moved our portfolio to held to maturity, we do intend to turn -- we don't intend to turn over the securities portfolio and lock in that loss. We view most likely resolution of the unrealized loss to be the majority of the securities in a loss position mature at par 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 don't view it as a permanent dilution 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, a few 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. We'll temper that optimism a little by saying we have some known larger payoffs coming in the second and 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% annual loan growth guidance.

We do expect continued tough sledding for mortgage. We're reducing our mortgage origination capacity and the corresponding size of our operational functions to operate through the current forecasted down environment for the mortgage industry. We're exploring technology that would create material efficiencies in mortgage production and 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 timelines or 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 analysis shows an 11% increase in net interest income or $39 million pretax. Our latest 200 basis point rate shock analysis shows 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're excited about the organic growth our teammates continue to deliver, restating 16% loan growth and 17.5% noninterest-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, a balance sheet larger than most of our community banking competitors and 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 give 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, 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 a few strong community banks and attractive markets in our footprint. These banks have good management teams and strong core deposit bases and will be great fits with FirstBank. While we're focused on our organic growth opportunities and nothing is imminent, it's possible that a transaction could come to us. As you know, we pay close attention to tangible book value dilution in addition to the EPS accretion. And our message has been consistent that while we haven't historically taken tangible book value dilution, we would take limited dilution and earn 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 cost 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, a 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 create 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 undertaking is focused on payments as a groundwork, 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 evolve.

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 of 2 purchase credit deteriorated 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 view $91.1 million in net interest income is 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 noninterest income. The $12.6 million core noninterest income takes the stated segment noninterest income of $12 million and adds back $174,000 quarterly mark-to-market on our commercial loans held for sale portfolio, which is also added back to our adjusted earnings figures. The $12.6 million also adds back $152,000 of loss from sale of securities and $312,000 of loss from OREO, which are not added back to our adjusted earnings figures.

Finally, we have $59.6 million in banking segment noninterest expense. And together, that comes our $44.2 million in run rate segment PTPP, which has grown 12% over the comparable $39.3 million that we delivered in the first quarter of 2021.

Moving to our net interest margin. Our stated margin of 3.04% was down significantly from the 3.18% to 3.2% range that we had experienced for each of the prior 4 quarters. The largest driver of that decline was the $2.2 million accelerated amortization of purchase accounting premium, which created a 7 basis point drag on the reported margin. The other primary cause of the decline in our stated margin was a balance sheet mix shift from mortgage loans held for sale, which had a yield of 3.08% this quarter, and were down about $230 million from 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 have $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 [check year payoffs] in our older acquired portfolios.

Within that $2.3 million net premium, we have approximately 25 loans with the remaining premiums over $100,000, with 3 loans over $500,000 and no remaining individual premiums over $1 million. Further, for commercial loans which tend to contain the larger purchase accounting discounts and premiums in consumer products, the Franklin portfolio has $10.8 million in premium remaining and $9.9 million in discount for a net premium of approximately $900,000. Given that data, we expect impact to be immaterial in any given quarter.

We would expect the decline that we saw in average mortgage loans held for sale to continue for the foreseeable future, as mortgage origination volumes are expected to remain weak. While we do not anticipate deploying the entirety of that excess liquidity and the decline in the portfolio provides us security yields while volatile have become more attractive, and we expect to deploy a portion of that excess liquidity in the shorter-duration investments. We do not anticipate the securities portfolio increasing much over 13% of our total assets.

Overall, our balance sheet remains highly rate-sensitive. As Chris mentioned, our latest rate shock indicated $39 million of additional net interest income in a 100 basis point rate shock and $76 million in a 200 basis point shock. 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 at 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 rate environment.

For banking segment noninterest 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 could move us out of that range one way or the other. Beginning on July 1, we will begin to feel the pain of the Durbin Amendment. We anticipate that lost income to be about $1.5 million to $2 million per quarter.

We expect continued growth in our banking segment noninterest expenses. As Chris mentioned, we have tremendous opportunities to add talent both 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 opportunity.

Moving to mortgage and illustrated on Slide 6. Mortgage experienced a difficult operating environment due to a 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 makes up 50% of our originations, was particularly impacted by the decline in refinance volumes, as the channel's total interest rate lock volume was down 30% quarter-over-quarter.

The retail channel 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 compares to our expectations last quarter when we had anticipated margins to stabilize around 2.2% on a go-forward basis.

As Chris mentioned, we are not pleased with our results this quarter in the mortgage segment, and we're working to optimize our operations so that the segment is profitable in all market cycles. As we work through 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 over the near term, I would point our mortgage servicing rights portfolio is a bright spot during the rising rate cycle. We will be able to enjoy a positive contribution from servicing and our MSR, as rates continues to rise.

I'll close my section with our allowance for credit losses. We experienced another 15 basis point reduction in our ACL to loans held for investment this quarter. Economic forecast for the first quarter showed a continued improvement over those that we utilized in the fourth quarter. And as we move further away from our local economies being impacted by COVID, there are qualitative releases to be made. However, our optimism about our local economy 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 ACL 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, 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.

(Operator Instructions) And our first question will come from Stephen Scouten of Piper Sandler.

So I know you said no second quarter guidance on mortgage or for the rest of the year. But I'm wondering if I could ask a 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 kind of 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, just given all the migrations around refinancing or otherwise? Or just kind of how can we think about what that business looks like from a profitability basis maybe longer term, if that's at all possible?

Yes. Stephen, we'll probably group answer there, but typically, we've targeted so low 80% to 85% or so in terms of our efficiency ratio in that business, and so that's still a long-term target. Anytime you get markets like this, it makes news unpredictable. And when we say -- when Michael said we're not giving guidance, it's not because we don't want to. It's just right now, it's particularly hard because we've got some rightsizing in that for the current environment that's ongoing. And so as we have more information, we will relate it.

I do think it's fair to say we don't think that the, 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 to factor in there. So you got things moving in both directions. And then 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's probably going to hit that segment quicker than it hits some of the other banking segments even. So that has hit it and will continue to hit it. And we're participating in a lot of those conversations.

Okay. Great. And then, Chris, I know you noted that you guys hadn't taken any extended duration kind of 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 than some, but I really appreciate that showing the kind of true growth of tangible book. But how do you think about all the excess liquidity you guys have today? Is there 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?

Yes. It's a constant conversation. And it's -- one, I appreciate your comment on tangible book. We track it obviously closely, and that's an important metric for us. We talk about it whether -- we talk about it all the time in our results. We also talk about it if we're ever thinking about doing anything on our balance sheet that dilutes it. It's a constant concept topic for us.

And so as we think about -- and as we think about AOCI and we think about the losses, we're loathe to take dilution on tangible book value. That -- and as we think about the investments, we just don't want to get -- and I characterize this as, look, we think about it like owners, and we think about it long term. And so we didn't want to move to held to maturity. We are thinking about surgically -- 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, if I -- just from what I think of as a prevailing opinion. And so we're careful on liquidity, and we want to 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 than most because one, we don't want to get tied up in a bunch of 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 -- if we're talking about deposits, generally, we're just talking about noninterest-bearing deposits, no different than our comments today. So we're focused on growing noninterest-bearing deposits, and those don't grow as fast as some other forms of liquidity. So that was a long answer to say we could make some surgical increases in the portfolio. As Michael said, we probably wouldn't go with 13% of assets. So Michael?

Yes, just to add off of our loan growth profile is better deployment of liquidity. Not that we'll maintain 21%, but we'd rather deploy it here.

Does that answer your question, Stephen?

Sorry, can you hear me guys? Sorry about that. Yes, it did very well.

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

Yes, Stephen, a really good question and a lot of thought into the scenario. This quarter, a lot of different discussions. 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 number having kind of [90-10-ish] S2 to 10% stagflation. Just to think about it from a qualitative perspective, I do think that, that risk is out there, and inflation continues to be a concern.

So 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. It's encouraging.

The next question comes from Brett Rabatin of Hovde Group.

Wanted to first start off on the margin and the expectations. And the asset sensitivity didn't really change linked quarter, 21% for 200 and 11% for 100. And you mentioned the $1.5 billion of cash and the $3.1 billion that are variable rate 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 LIBOR-tied and just kind of give us a little more color on how your loan portfolio is going to reprice as rates move higher?

Yes. So just kind of -- I'll start first with a little bit more on the NIM outlook. We kind of walked through the pieces down to the 3.04% and margin around that. If you normalize -- and just even just isolate March, we would be back to, call it, a 3.16% to 3.17% net interest margin, even with the balance sheet shift, meaning moving from mortgage held for sale to cash. So we've seen that shift come back already, and that's with, what, 2 weeks of a quarter rate hike on the portfolio. So we had anticipated further improvement there as we see the next 25, 50 or 75 basis point increase.

So the shift up in yields has really just took into account the last couple of weeks. So you didn't see a material increase in our asset sensitivity yet in our reported numbers. The kind of mix there is 50-50 LIBOR to prime, and the repricing dates don't all happen at the same time as soon as rates move up, right? Some were -- they're all day-driven, I guess, as to when they're contractual. So that's kind of the delay that you're seeing there. We did see variable rates increase 15 basis points after the first rate hike, kind of overall in the entire portfolio. And so we would expect to continue to see that as rates rise. Does that answer your question?

Yes, that's helpful. Just trying to get an idea of the tenor of what happened -- what might happen with the margin and the pieces that go into it. So that's helpful.

And then wanted to circle back around mortgage banking. I understand taking away the guidance around that business for the near term. I guess the question I have on mortgage banking is 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 to continue to compress for the business, which could offset what you're doing to improve the profitability of the platform.

So I guess, just thinking about those 2 things, is it kind of 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'll 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, like, thinking about the inputs on it and how you're focused on improving that.

Well, starting with the gain on sale question, right? So remember, we've already experienced a decrease. It's in our mark-to-market value, right? So we went from the 1.96% to 1.66%. And so that flows to the income statement and naturally would bring that 2.29% down on gain on sale down, that would be more reflective of where margins were in the first quarter. So I would look at gain on sale next quarter, and I will say, yes, that number will come down. But generally, the revenue impact plays to the mark-to-market. And your gain also is typically a little bit higher than mark-to-market value just through execution.

I would say, longer term, the business will be profitable throughout cycles. I mean, that's always the goal or the point. And so we'll make the adjustments necessary to be a profitable one and a positive return on capital to our shareholders. And so, yes, longer term, and I think, also, with the benefit of servicing and our mortgage servicing rights, you see an improvement there that you haven't experienced there or haven't seen -- we haven't experienced over the last couple of quarters. We'll 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 expect that, that, too, cash flow is kind of loans on 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 -- if you look at the mortgage business and you look over the remainder of the year and you look into next year, you don't see a spike in volumes. I mean, volumes are going to be down for some time unless we're missing our projections. And so we're making the adjustments for that time period to do exactly what you talked about to be profitable through that. And so it's never a fun process. It's a delicate process, and it's not -- we didn't start that this week. That's been -- it's an ongoing process for us. And so -- but we expect in -- we refer to that as one of our nonbanking segments. It's banking, but we refer to that -- we separate that out as a segment. It's one of our nonbanking businesses. At the end of the day, we got to achieve a 20% return on capital in those businesses. And so that's what we expect, and that's what we're working forward to now.

And I will say, there are a couple of things that I alluded to. Just like 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. And so we're a participant in some of those, and so that also is something that -- we're not -- the reason we're not putting any numbers on it is we're not banking on it, but it is something that is real and I do think does begin to change the cost structure on the business. So...

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

Yes. So the outlook on the expenses -- and Brett, if 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'll tell you, it's a really tough expense environment. We do expect -- we said mid- to high single digits for the year. And so as we, again, figure out what that looks like with a little more detail, it's probably going to be high single digits in our banking segment and going to be expense decrease in our mortgage segment. And so it's -- that's -- that gives you a little better guidance because we are certainly seeing cost increase on all fronts.

The next question comes from Jennifer Demba of Truist Securities.

This is Brandon King on for Jenny. I wanted to touch on some of your prepared remarks and the commentary around being appropriately positioned for hiring, for being the bank of choice in your markets. And I wanted to know if you could quantify the potential merger disruption opportunities now in (inaudible) with the big FHN, TD Bank transaction.

Yes. It's really difficult to quantify because it's -- you never know when it's going to come and what exactly the form it is going to take because some of it is customer and some of it is people. And so 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 is the focus of the company. We're more -- we focus on organic growth. I'd say we're doubling down on both of those, and I think it's a long-term proposition. I think that over the next -- I think over the next, frankly, a couple of years, that we're going to be -- have a very specific focus on people and customers that are going to be subject to the disruption because I think in a lot of cases, it's not going to -- 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 2 years from now as a result of some of those -- the disruption among -- particularly among some of the larger banks in our market that has already occurred but I think will continue to occur. So that's -- that will be a more focused effort and a 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. And then my next question is regarding loan growth, 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 kind of in 2Q, 3Q and being kind of pick up in 4Q just based off the current environment.

Yes. Yes, I think you heard all that right. And when we think about where we're at a rate of growth, 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're totally at it, but we're not that far from it. And so it's going to continue to, we think, be strong. I would say we're not expecting 21% every quarter for the rest of the year, but I think -- we think we'll still have strong loan growth each quarter the rest of the year.

And so annually, we say 10% to 12%. We said, given the strength of the first quarter and the fact that the first quarter is the first quarter, so that's good. We get -- that means you get -- 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, that 10% to 12%.

Okay. Got it. And lastly, regarding deposit growth, you still had some deposit growth this quarter. What are your expectations of how that would trend as we get throughout the year? I know there's a lot of debate as far as how deposits where we had to defer reducing their balance sheet. I just want to know where you're seeing in your markets and what your assumptions are for the year.

So we continue to put a focus on noninterest-bearing, and so 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 you -- while that may go down some -- while that may not be a growth area for us, actually, we want to manage the cost because there continues to be avenues of liquidity at similar costs to that interest-bearing bucket.

Is that fair, Michael? You got anything?

Well, yes, we do have a -- [segue] deposits, public funds that typically flow out second and third quarter and then build back and forth. So yes, again, that actually could ride back your comments on managing the cost, and the balance -- those balances are still inflated from COVID. And so we'll be managing that as well, which could impact, kind of to your question, what those balances look like and the growth associated.

So I would look for reasonably consistent growth in noninterest-bearing and flattish loan growth on the interest-bearing.

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

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 -- like does this change, would you say, your longer-term commitment to the business? Because I just recall every discussion previously being that there was this real ability to, within a reasonable period of time, to rightsize 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 that -- 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 the commentary before.

Yes. I think it's a good and fair question, Kevin. And it does not impact our commitment to the business. And so we've got -- we've made a significant investment in it over time. It's all -- it's homegrown business, and so it's got a strong culture in it. We continue to attract really strong originators from across the Southeast in our retail business. And so we're committed to it.

Remember, we're just 2 years for move from making over $100 million in the segment. And so -- 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 so 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 so our commitment is to -- our job is to allocate that and make sure we get a great return. And so we're doing that.

As we shift on the expense side, one thing to keep in mind there is -- and 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've got 2 channels. We got really 2 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 where both of them just went away at the same time. And so that one has been a little more challenging for us to handle in this environment than what we've experienced before.

And again, that -- 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, we're owners here, making sure that we're thoughtful on the 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 PPNR being like a 10% target. Is that -- am I right on that? Or is that still applied longer term, would you say?

Yes. Yes, that's a good -- yes, you are right on it.

Okay. And one last one for me. On M&A, I heard your commentary on M&A that there were some potential opportunities, maybe nothing imminent. And you guys have -- still have a healthy stock multiple to use. But on the other hand, you've referred to the disruption benefits that can come. Loan growth is very strong. You're very asset-sensitive right now. We're at a relatively -- there's relatively more uncertainty on credit, just given the economy. So it makes it a little more -- I mean, seemingly a little more challenging to take someone else's balance sheet or to review it. Would you -- 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 2 ago?

Good analysis. You kind of -- good analysis. You may have answered some of the questions. One of the things 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 we -- and there are some opportunities, but for all the reasons you mentioned, that we're not out with a really active pursuit there. And the reason -- again, the reason, you said it, the organic opportunities right now are really strong. If you look at our -- at the organic -- what we're doing organically, really, really good. We continue to focus on getting better and better. Remember, we have doubled the size of the company over the last 2 years, and so we continue to get better and better and better operationally. And with customer experience, which is already good, we wanted to be great.

And so those are big focuses for us. When there is a really good opportunity, though, we're 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 imminent. And that's why we say the ones that we're interested in, while we haven't taken -- typically taken tangible book dilution that could be in a position where we take slight, but we pay very careful attention to tangible dilution earn back, but we could have some where we haven't had it in the past. So -- and that's the reason that we couch it like we do. There are a few that we'd be interested in, but there just aren't that many.

The next question comes from Catherine Mealor of KBW.

One 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?

Yes. Catherine, they're still in the new production coming out of high 3s but kind of somewhere in the low 4s, like right at 4-ish late in the quarter. So still seeing loans roll off at higher yields and come back on lower. The competitive environment, still out there in a rising rate environment, but we're starting to see some rates move higher, but we haven't seen a material increase yet.

Yes, I'd just add one thing, Catherine. We have -- late in the quarter, we did -- very late in the quarter and into April, actually, it's probably better to describe. But we did see -- we have seen some banks actually move their pricing up. And in this case, it's the -- it's bigger banks, frankly. It's your much bigger banks that have moved up some. And so that has -- that's been encouraging because we've been moving up to some of our, I'll call them, sort of banks that are closer to our size are the ones that are still down in our mind and some unreasonably low rates. And even in some of the smaller community banks are down at what we think of as unreasonably low rates. And so we didn't see it in the quarter, but we've seen it now move up some in terms of stuff coming on.

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

Yes. So typically, retail, I guess, retail margins have been kind of [2 50 to 3], and the direct-to-consumer has run [1 50 to 2]. We did see a decline in the first quarter specifically in the direct-to-consumer that went below that [1 50] number. And so it was more of the, call it, [1 20 to 1 50] range. Those have moved back higher, but in a way, it's been the detriment of some of the volume, which Chris spoke about earlier. And so retail margins have also stabilized a bit as well. So we've seen an increase over the first quarter but not a really materially higher number.

(Operator Instructions) And our next question will come from Jordan Ghent of Stephens Inc.

I just had a quick follow-up question on the kind of market disruption you guys were 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?

Yes. So it's across our markets actually, Jordan. It's not in any one market. We've seen it across the markets. And as (inaudible), I can't think of one where we're not -- where we don't see that and see -- and hear -- and have conversations and hear of conversations. And so it's pretty much across the markets, every one that we're in.

And so the -- let's see what was the other part?

Lending verticals.

The lending verticals, yes. For us, the 2 that we really, I guess, are focusing on is mortgage and manufactured housing. Those would be verticals where we see opportunity now. And probably we're talking about how mortgage is going to be -- how we're having to do some reductions there. So that probably sounds funny when I say -- we say lending vertical where you're seeing opportunity. But again, we're really thinking about more of the -- when I say that, I'm thinking about more of the potential enhancements and technology on the -- more on the back office side and the origination side there.

And then the manufactured housing is 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, in leveraging that as we move forward. So part of our plan -- part of our strategic plan has that in it.

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.