Q1 2022 FB Financial Corp Earnings Call
[music].
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 Mckenney, Chief Financial Officer, Wade Perry Chief administrative officer, and wet 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 Dot first think online dot com and on the Securities and exchange Commission's website at Www.
Dot FCC thought G O V.
This call is being recorded and will be available for replay on FB Financial's website, approximately two hours after the conclusion of the call.
At this time all participants have been placed in a listen only mode. The call will be opened for questions. After the presentation.
With that I would like to turn the call over to Robert Helen as director of corporate Finance. Please go ahead.
Thank you.
During this presentation.
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 performance or achievements of FB financial to differ materially from any results expressed or implied by such forward looking statements.
Any such factors are beyond the financials 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 measure.
<unk> and our reconciliation of the non-GAAP measures to comparable GAAP measures is available in <unk> 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 Dot first bank online dot com and on the SEC's website at Www Dot SEC Dot Gov.
I would now like to turn the presentation over to Chris Holmes, President and CEO .
Alright, 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 <unk>, 74% return on average assets of 113% and our return on tangible common equity of 12, 4%.
We have grown our tangible book value per share excluding the impact of OCI.
They had a compound annual growth rate of 15, 8% since our IPO.
It was a good quarter with some qualifications 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 a few key hires.
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% and three of the past four quarters and our year over year loan growth of 16%. This growth as a result of strong teammates positioned in economically vibrant markets.
We continue to see good activity in our non interest bearing deposits, excluding our mortgage escrow related deposits, we grew six 8% linked quarter annualized.
And then three of the past five quarters, we've 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% and noninterest 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.
Also reduced our NPA to assets to 44 basis points six basis points decline from the fourth quarter and our npls to loans.
Held for investment declined by 11 basis points to five 1%.
We view, our banking segment pre tax pre provision run rate profitability is 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.
Don't give ourselves full credit for that performance at our adjusted EPS, but we feel that is around the level that our banking segment is currently.
Currently producing.
And we constantly look for ways to improve and to move that higher.
Michael will walk you through some of the moving parts are there.
$4 2 million in his in his comments.
I'd also like to discuss one piece that impacted our PTP.
TPP run rate this quarter, our net income was impacted by $2 2 million in accelerated purchase.
Counting premium due to to purchased credit deteriorated loans paying off early of the $2 $2 million had a seven basis point impact on our net interest margin also impacting our margin with a balance sheet mix shift as our average mortgage loans held for sale were $230 million lower than the <unk>.
First quarter.
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 three four from three 9% in the prior quarter to 344% in the current quarter.
The remaining couple of basis points.
Mainly as a result of excess liquidity.
Based on loans with remaining I'm, sorry, based on world 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.
Okay.
At a.
$281000 loss mortgage was disappointing this quarter.
We view losses from that segment in any order is unacceptable.
Lewis of events has created a challenging operating environment in the mortgage industry and our online direct to consumer channel is primarily refinanced.
It is primarily refinance driven has been particularly impacted.
And finally.
Our common equity to tangible book value per share.
And tangible book value per share were impacted by a $100 million unrealized loss on our securities portable portfolio.
Which is entirely interest rate related the unrealized loss is reflected on the balance sheet as of 71 and a half million dollars accumulated other loss in the equity account this quarter or $1 50.
Tangible book value per share.
We felt we feel we've maintained an appropriately sized portfolio for our balance sheet and we didn't add longer duration securities over the past two years to do just that 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 turnover the securities portfolio and lock in that loss, we view most likely resolution of the unrealized loss to be the majority of the securities at a loss position, but there are over time with no long term impact to equity.
And the meat 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.
Okay.
So as we look to the second quarter and the remainder of the year viewpoints.
We expect continued loan growth in 2022.
We have a very strong existing oil pipeline our markets continue to have a strong and ever expanding queue of corporate expansions and relocations that are driving strong fundamental growth.
I would temper that optimism a little by saying we have some known larger pay offs come in in the second and third quarters are and we've also continued to keep a close eye on the broader economy. However.
We're bullish I'm 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 a corresponding SaaS 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.
<unk> just bullish on the long term value of our mortgage division, but.
But we're not ready to put 10 lives or dollar impact 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 a $39 million pre tax our latest 200 basis points rate shock analysis showed a 21% increase or $76 million.
Hopefully you can tell by the update that were mostly we expect most of the good things for the remainder of 2022.
We're excited about the organic growth that our teammates continue to deliver restating.
16% loan growth in 17, and a half noninterest bearing deposit growth year over year.
In addition to our current team and successful organic growth there's also.
I'd 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 message resonates well with experienced banking talent and customers that are impacted by the disruption.
Uh huh.
We also continue to evaluate traditional bank M&A are there strong community banks in attractive markets in our footprint are these banks have good management teams and strong core deposit base as it would be great fits with first bank.
While we're focused on our organic growth opportunities and nothing is eminent it's possible that a transaction that could come to us.
As you know, we pay close attention tangible book value dilution.
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.
Add back for the right partner.
Past traditional banking our technology efforts continue to advance us as we build and formalize our direction or our innovations unit.
Our goals as we invest more seriously in the fintech and blockchain space or 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 but I'm, sorry to partner with quality founders and development teams within that network.
Bring business cases, and expertise to those partnerships in order to help those developers create profitable business.
<unk> ventures that we can benefit from its customers minority investors or both.
We have made ourselves an asset to the U S. D F consortium by being flexible and responsive to new ideas are initial blockchain undertakings focus on payments is groundwork is that ground work needs to be laid to be able to move on to everything else.
We will continue to provide updates on our efforts and progress as we have more specifics for now we're excited about the opportunities that were 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.
Yeah.
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 pre tax pre provision income for the banking segment was $44 2 million in the first quarter.
Turning to the segment core efficiency ratio reconciliation, we had $88 9 million in segment tax equivalent net interest income this quarter.
And that $88 9 million was $2 $2 million.
Accelerated amortization related to the prepayment prepayment of two purchase credit deteriorated loans from the Franklin combination each of which individually had remaining premiums larger than $1 1 billion when they paid off.
As a result, we'd be $91, one 1 million and net 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 take the stated segment noninterest income of $12 million and adds back 174000 quarterly mark to market on a commercial loans held for sale portfolio.
Which is also added back our adjusted earnings figures.
The $12 6 million also adds back a 152000 of loss on sale of Securities and 312000 of law firm.
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 or $44 $2 million and run rate segment, PTC, 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 stated margin of three 4% was down significantly from the $3 one 8% to three 2% range that we had experienced for each of the prior four quarters.
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 causes of the decline in our stated margin was a balance sheet mix shift for mortgage loans held for sale, which had a yield of 3.08% this quarter and were down by $230 million from the fourth quarter, the interest bearing deposits with financial institutions, which had a yield of 16 basis points and were up $320 million from the fourth.
Order.
Looking forward for our margin.
$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 your payoffs in our older acquired portfolios.
Within that $2 3 million net premium we have approximately 25 loans with the remaining premiums over 100000 with three lines over 500000 and no remaining individual premiums every $1 million.
Further for commercial loans, which tend to contain the larger larger purchase accounting discounts and premiums and consumer products.
The Franklin portfolio has pinpoint 8 million premium remaining and $9 9 million in discount for net premium of approximately $900000 given that data, we expect impact to be immaterial in any given quarter.
We would expect the decline that we saw on average mortgage loans held for sale to continue for the foreseeable future as mortgage mortgage origination volumes are expected to remain weak.
We do not anticipate deploying the entirety of that excess liquidity.
The decline in the portfolio provides us.
<unk> 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 Josh indicated $39 million of additional net interest income and 100 basis point rate shock and $76 million in the 200 basis points shot we ended the quarter with $1 5 billion of interest bearing cash we have $3 9 billion in variable rate.
After the next 50 basis points of rate increases will have approximately $500 million.
$180 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.
Our swap fee income being the primary line item that can move us out of that range, one way or the other.
Beginning on July 1st we will begin to feel the pain of the Durbin Amendment, we anticipate that lost income to be about one $5 million to $2 million per.
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 to help us execute on that opportunity.
Moving to mortgage and illustrated on slide six mortgage experience a difficult operating environment.
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 are.
Our direct to consumer business, which typically makes up 50% of our originations was particularly impacted by the decline in refinance volume.
Channel's total interest rate lock volume was down 30% quarter over quarter.
The retail channel.
Comparatively better as it saw an increase in rate lock volume of seven 7% quarter over quarter.
However, retail profitability was also affected by a decline in margin.
Cloud and margin as demonstrated by the mark to market value decreasing from $1, 96% to 166%.
That compared to our expectations last quarter, when we had anticipated market has stabilized around two 2% on a go forward basis.
As Chris mentioned, we are not pleased with our results this quarter in the mortgage segment, 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 a rising rate cycle.
We will be able to enjoy a positive contribution from servicing and our MSR as rates continue 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 everyday that we utilized in the fourth quarter and as we move further away from our local economy is being impacted by Covid. There are qualitative releases to be made.
However, our optimism about our optimism about our local economy as being temporary 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 ICL to loans held for investment over the near term.
With that I'll turn it back over to Chris.
Thank you Michael for that color and.
We're pleased with our results for the quarter were particularly proud of the team for the loan growth in the quarter.
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 answer session.
To ask a question you May press.
And then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the key.
The restaurant a question. Please press Star then two.
At this time.
Materially to assemble our roster.
Oh.
Yeah.
And our first question will come from Stephen Scouten of Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning, Steven.
So I know you said no second quarter guidance on mortgage growth for the rest of the year, but I'm wondering if I could ask the question maybe longer term.
Just holistically as you think about that business.
Maybe from an efficiency ratio perspective, as you think about these right sizing efforts and whatnot is it.
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 mic 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.
Okay.
Yeah, Stephen will probably group group answer there, but typically we targeted so low 80 to 80.
5% or so in terms of our efficiency ratio in that business and so that's still that's still a long term target.
Anytime you get anytime you get markets like this.
It makes news.
Unpredictable and when we say.
Michael said, we're not.
We're not giving guidance on that because we don't want to just right now, it's particularly hard because we've got some.
We've got some.
Right sizing it.
For the current environment, 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 the.
Uh huh.
They spent coming quarter wont be much materially different from the previous quarter on an operating basis.
But we also do have.
You know the mortgage servicing rights and factor in there so you get things moving.
Both direction.
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.
<unk> got a hit that segment.
Quicker than it hits some of the other banking segments, England. So.
That has hit it and we'll continue to.
And where we are 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 benefits through higher earnings.
And actually really liked how you guys showed the adjusted tangible book value per share and maybe.
In a different camp than some but I really appreciate that showing the kind of true growth in tangible book, but how do you think about all of 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 into additional securities investments.
Yeah, it's a constant conversation and it's a.
One I appreciate your comment on tangible book, we track it.
<unk> closely and that's an important metric for us we talk about it.
Whether we're talking 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 diligence and it's a constant.
Constant topic for us and so as we think about and then as we think about.
And we think about the losses.
We're loads to take dilution on tangible book value that.
As we think about the investments, we just don't want to get.
Uh huh.
I characterize this as you know we think about it like like owners.
<unk>.
And we think about it long term and so we didn't want to move to held to maturity.
We are thinking about surgical the additional 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.
Is theres a lot of liquidity currently.
We think it could dry up faster I think than most of what.
What I hear in the marketplace.
If I just from what I think.
There's a prevailing opinion.
So where 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 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.
And because we also think that our.
Liquidity could become more valuable faster than probably most think also notice we typically when we look at.
We're talking about deposits generally we're just talking about noninterest bearing deposits no different than our comments today, so were focused on growing noninterest bearing deposits.
And those don't grow as fast as some other forms of liquidity.
So so that was a long answer to say so we could make some surgical increases in the portfolio as Michael said, we probably wouldn't go with 13% of assets.
So.
Yeah.
Yeah, that's that off with our loan growth profile.
Better deployment of <unk>.
Liquidity not maintained 21% but.
We'd rather deploy there.
Okay.
Does that answer your question or statement.
I'm sorry can you hear me guys, sorry about that yes, it did very well.
One last clarifying question for me if I could.
Just on the you guys lay out the door.
The current seasonal Moody's modeling assumptions that are in there were there any changes to kind of how you weigh.
Weighted 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 the economy I'm just kind of wondering how seasonal the migrations could kind of impact reserves and provisioning throughout the year. If we see some some negative movement in those projections.
Yes, David.
Really good question and a lot of thought into.
The scenario this quarter a lot of different discussion we went.
<unk>, two which is where we've been in the last couple of quarters, which is good.
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.
Weighted number either kind of 90 10 ish.
2% to 10% that question too.
Do you think about it from a qualitative perspective.
Do you 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 Theres definitely some downside risk there and what 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 the strong prospects in the future it's encouraging.
Thanks, David Thanks, Dave.
The next question comes from Brett Robertson of Husky Group. Please go ahead.
Hey, guys good morning.
Right.
Wanted to first start off on the margin and the expectations and the asset sensitivity doesn't really change linked corner.
21% or 211 for <unk>.
100, and you mentioned, the 1 billion of cash and a $3 1 billion that.
But our variable rate loan portfolio can you can you talk a little bit more about the loan portfolio repricing in terms of.
What re prices in the first 90 days following.
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.
Yeah, Good morning, Brett.
So just kind of I'll start first with a little bit more on the NIM outlook.
Right.
We kind of walk through the pieces down to the three or four years.
Martin 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 shifts.
Yeah.
Maybe for mortgage held for sale to cash.
<unk>.
So we've seen that just come back already.
And that's with what two weeks of the 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.
Yes.
So the shift up in yield.
Okay.
Really just took in to account the last couple of weeks that you didn't see a material increase in our in our FX sensitivity yet.
Reported numbers.
Kind of a mixed there is 50 50 LIBOR to prime and the repricing dates don't all happened.
At the same time to figure as rates move up right summer.
They are all data driven and I guess as to when they are contractual.
Kind of a delay.
But you are seeing there.
We did see variable rates increase.
At 15 basis points after the first rate hike and a kind of a.
Overall in the entire portfolio and so we would expect to continue to see that is right for us.
Answer your question.
Yes, that's helpful and just trying to get.
An idea of the tenor of what happen what might happen with the margin.
The pieces that go into it so that's that's helpful.
And then wanted to circle back around mortgage banking I understand.
Taking away the guidance around around that business for the near term.
I guess the question I have on on mortgage banking as it would seem like.
There is the potential for you're obviously going to try and work on the expense side of the equation.
But it would seem like there is potential for gain on sale margins continue to compress for the business, which could offset.
What youre doing to improve the profitability of the.
The platform so you know.
I guess just thinking about those two things as it is it kind of possible from your perspective, if that happens.
Might not make any money this year or are you guys optimistic side.
Over time, you'll be able to fix the expense side of the equation enough to make it profitable I know youre 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 are focused on improving that.
Well.
Starting with the gain on sale question, Brian If I remember.
We've already experienced the decrease in our mark to market value right. So we went from the 196 to $1 66, and so that flows through 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.
Yes.
I would look at gain on sale next quarter and I would say, yes that number will come down but.
Generally the revenue impact flow through the mark to market.
And in your gain on sale is typically a little bit higher than mark to market value to their execution.
I would say longer term.
The business will be profitable throughout cycles.
Yes always.
The goal or the point and so we'll make it.
That's necessary to be.
It's a profitable one.
Positive return of capital to our shareholders.
Okay, yeah longer term and I think also.
With the benefit of servicing in our mortgage servicing rights you would see it.
An improvement there that you had an experience there I haven't seen we haven't experienced over the last couple of quarters, you'll say that that was a positive.
In the first quarter of 'twenty two for the first time in a couple of years.
And so I would expect that to cash flow kind of loans that are on the books longer as well.
The only thing I would add is.
As we as we look at.
We're looking out as 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, you say you know.
Volume is going to be down for for some time, but nonetheless, we're missing are unless we're missing.
Our projections.
And so where we.
We're making the adjustments for that time period to do exactly what you talk about to be profitable.
Through that and so that's a that's a that's a that's never a fun process. It's a delicate process and it's not we didn't we didn't start that this week with that's been that's been a its an ongoing process for us.
So but can we expect in <unk>.
We refer to that as one of our non banking segments.
Banking, but we referred to that we separate that out as a segment is one of our nonbanking businesses.
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 towards now.
Well.
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.
Faster than it hits some of the more traditional banking areas and so.
We are a participant in some of those and so that that also is something that.
We don't we're not reason, we're not putting any numbers on it but we're not banking on it but it is something that is real or not.
Does begin to change the cost structure of the business. So.
Okay.
And then just lastly speaking of cost structure, you guys have done a good job with expenses.
I realize mortgage.
<unk> as a part in that but.
Was curious on your thoughts on the inflationary pressures.
Sure.
And maybe any outlook for expense growth that you might be willing to provide.
Yes, so the.
<unk>.
The outlook on the expenses.
<unk>.
And Brett.
I know you happened 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 is that it's really tough expense environment, we do expect.
We said mid to high single digits for the for the year.
And so when we.
You can figure out what that looks like with a little more detail probably going to be in a single digits in our banking segment and I'm going to be.
<unk> expense decrease at our mortgage segment and so that's it.
That gives you a little better guidance.
Because we are certainly seeing cost increase on all fronts.
Okay, Great appreciate all the color.
Alright, Thanks, Brett.
Our next question comes from Jonathan <unk> of <unk>.
Securities. Please go ahead.
Hey, This is Brandon King go on for Jeremy How're you doing.
Hey, Brad.
Good to talk to you.
Yeah, I'm, sorry, I missed that.
But glad to have you.
Of course of course.
I wanted to touch on some of your prepared remarks, and the commentary around being perfectly positioned for hiring.
The bank of choice in the market.
Wanted to know if you could quantify the potential merger opportunities.
Now in your backyard.
Okay.
TD Bank transaction.
Okay.
Yeah.
It's really difficult to quantify because it's you never know you never know when it's going to come in and what exactly what form is that gonna take because some of its customer.
And some of it is as people.
And so.
The short answer is we really can't quantify it for you, but I would I would say this.
We've always.
Said.
Said.
We need to be recruiting all the time you know organic growth is the focus of the company. We're more when 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 a frankly a couple of years.
That we're going to be.
<unk> 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, it's not going to I think there are some cases that show up immediately and already have shown up but.
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 the disruption alone protect them 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'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 was very strong in the first quarter.
And it was mentioned that you're expecting some pay downs.
In the second quarter and third quarters I, just want to confirm that you are expecting loan growth to be slower hunting into Q3, Q2 being kind of picked up in <unk> just based off the current environment.
Yeah.
Yeah, I think you heard all that right and and.
When we think about where we were.
And our rate of growth.
And 20%.
And orders a lot and so forth.
At some point you go Wow.
What's your capacity and so we're probably a I wouldn't say, we're totally get it but we're not that far from it and so.
You know, 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 it will still have strong loan growth each quarter. The rest of the year and so you know annually.
We say, 10% to 12% we said.
Given the strength of the first quarter and the fact that the first quarter as the first quarter. So that's that's good we get that means you get you get when you come out of the gate strong that 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.
10% to 12%.
Okay.
Got it.
And lastly.
Regarding deposit growth you still have some deposit growth this quarter what are your expectations on how that would trend as we get throughout the year I know, there's a lot of debate as far as how deposit school.
Got it.
It would be some more balance sheet just wanted to know what markets.
Mark just on what your assumptions are.
Yeah.
So we continue to put a focus on noninterest bearing and so we will continue to grow that that that bucket.
And then on the frankly on the interest bearing we want to manage that cost more than the balances because you.
While that May go down some.
That may.
Not be a growth area for us like I said, 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.
Yes, we do have a.
Okay great.
But that typically flow out second and third quarter, and then build back and forth.
Yeah, again that that actually got right back to your comments on managing.
The cost in.
Those balances are still inflated.
From within.
We'll be managing that as well, which could impact kind of to your question what the balances look like.
The growth associated.
But I wouldn't look for because you know.
The consistent growth in noninterest bearing.
And flattish more growth on the interest bearing.
Alright, that's helpful. Thanks very much.
Alright, thank Brent.
The next question comes from Kevin Fitzsimmons of D. A Davidson. Please go ahead.
Hey, good morning, everyone.
Good morning, Kevin.
Hey, Chris just given the commentary on mortgage and the outlook 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.
Would you say your longer term commitment business because I just recall every discussion previously being that there was this real ability.
Two 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, the multiple headwinds hitting the top line, where it's just you are not able to pivot quickly.
On the expense side or are there more permanent changes that.
No.
That could affect.
You know that.
Your earlier.
Your earlier point about generating a 20%.
Return on the business. So I'm, just just looking at the longer term.
View with that business given that what commentary before.
Yeah, I think that's a good and fair question, Kevin and it does not impact our our commitment to the business and so we've got a we've made a significant difficult investment in it over time, it's all it's homegrown business until it's got a strong culture and we continue.
To continue to attract a really strong originators from across the South east.
In our in our retail business and so.
We're committed to it remember were just two years for move from making over $100 million in the segment.
And so.
And then also remember the comments on the technology side, and what I think I think that's gonna be impacted we'd got a big enough.
Position in the industry to be relevant for all of that and so so so.
We're definitely committed.
I want to be clear on that one.
But we also are.
<unk> committed to.
Two keeping it profitable and earning.
An appropriate return on capital you know at the end of the day.
Management is good as it got shareholders capital until you were and what our commitment is to our job is to allocate that make sure we get a great return and say Ah.
We're doing that.
As we 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 got two channels.
It's 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 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 wed experienced before and again that that in fact that if we just go back to 2020 that same segment drove.
The biggest part of that.
Hundreds of million dollars of profitability so.
Again.
Making sure that we're thoughtful on just like again, where owners where owners here, making sure that we're thoughtful on the long term impact in the long term investments too.
<unk> continued to get the best return on that capital.
Okay got that.
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.
Yeah.
Net contribution as a percent of P. P and are being like a 10% target is that is that is am I right on that or does that still apply 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, but there are some.
Potential opportunities maybe nothing eminent.
And you know you guys have still have it.
Healthy stock multiple to use but on the other hand, we.
You've referred to the disruption benefits that could come.
Loan growth is very strong your 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 little more challenging to take someone else's balance sheet or to to review it.
Would you given all of 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.
Uh Huh good analysis, you're kind of at least [laughter] analysis, you may have answered some of the question.
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 in attractive markets in our footprint and so that was it was a a word that I care about.
Intentionally choose and so.
Uh huh.
And so we and.
There are some opportunities but for all the reasons you mentioned.
We're not out.
We're not we're not out.
With a really active pursuits, there and the reason again the reasons you said the organic opportunities right now are really strong if you look at our at the organic.
Organically really really good.
We continue to focus on and make and getting better and better.
Remember, we have doubled the size of the company over the last two years until we continue to get better better and better operationally and with customer experience, which is already good and we want them to be good <unk> be.
It'd be great.
So those are big focuses for us.
When there is a really good opportunity though.
We're going to work.
We're going to we're going to take advantage of those and some of these that are out there have been identified for us long term.
And.
Don't really control when those when those opportunities come to pass and so.
And you know when they do we try to be ready and and that's why we say a few.
That's why we say it could happen, but nothing's imminent.
And that's why we say you know the ones that we're interested in.
Hum.
You know, while we haven't taken a tip.
Typically taken tangible book dilution that could be in a position, where we take slight but we pay very careful attention to tangible book dilution earn back, but we could it could have some where we haven't had it in the past so.
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.
Okay, great. Thank you Chris very much.
Alright, Thanks, Kevin.
The next question comes from Catherine Mealor of K B W. Please go ahead.
Thanks, Good morning.
Kathryn good morning.
One follow up on the margin just thinking about loan yields I know, we talk a lot about.
The re pricing opportunity and the impact of floor I can all of that are.
New loan yields coming on.
The production you saw this quarter generally.
Yes.
We're still in the new production coming on in <unk> three.
Right.
Some of them away for like right at four ish.
Late in the quarter, so still seeing loans roll off at higher yield and come back on 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.
Chris yet.
Yeah, I'd just add one thing Catherine we have late in the quarter, we did a very late in the quarter.
The April actually it's probably probably better described but we did see we have seen some banks actually moved their pricing up.
And in this case, it's the it's.
It's bigger banks frankly, it's you're much much bigger banks that have 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, it's a unreasonably low rates and even in some of the smaller community banks are down at what we think others 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.
That's great.
And then on the.
The mortgage gain on sale margin do you sense as to how that how that gain on sale margin difference between the retail mortgage platform and our consumer direct platform.
Yeah.
So it typically.
Retail Argo re.
Retail margins have been kind of $2 50 to three.
And the direct to consumer has run.
150 to two we did see a decline in the first quarter.
Typically in the direct to consumer they went below that $1 50 number.
And so it was more of that call. It 140 to $1 50 range doesn't move back higher.
But in a way that's been at the detriment of some of the volume, which Chris spoke about earlier.
And so.
Retail margins of author stabilize a bit as well.
So we've seen an increase over the first quarter.
But not a not a really material materially higher number.
Okay. That's really helpful. Great. Thank you so much thought that great quarter guys.
Thanks Catherine.
Once again, if you would like to ask a question. Please press Star then one.
Our next question will come from Jordan <unk> 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 were talking about if you guys could maybe briefly talk about what markets you're seeing that in and then also any potential lending vertical that you're seeing the most opportunity in.
Thanks.
Yeah.
Yes.
Interest across our markets actually northern it's not in any one market we've seen it.
You've seen it across the markets.
And out of that Blue I can't think of Baltimore, where we're not.
We don't see that and Zika.
And here in <unk>.
That conversation and hear conversations and so it's pretty much pretty much across our markets.
Every market, we're in and so.
The.
Let's see what was the other important thing Oh, the lending verticals.
For us are the two that we really have I guess your focus at all in as mortgage and manufactured housing.
Those would be protocols, where we where we see.
Opportunity you know probably you were talking about how mortgages gummy.
How we're having to do some reductions there so that probably sounds funny when I say, we can say lending vertical where you're seeing opportunity, but again, it really thinking about more the when I say that I'm thinking about more of the.
Potential enhancements and technology on the moral of the back office side and the origination side there.
And in manufactured housing is an area, where we get.
And expertise in the marketplace that is really good and leverages both for us and so that's one where we continue to.
To be interested in and.
Leveraging that as we go forward so part of our plan and part of our strategic plan as I did it.
Perfect. Thank you.
Alright, 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.
All of your questions. We appreciate.
I appreciate your support and we look forward to.
Pushing forward to the.
The rest of 2022.
Thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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