FB Financial Corp Q1 FY2022 Earnings Call

Good morning, and welcome to the FB Financial Corporation First Quarter 2022 Earnings Conference Call. Hosting the call today from FB Financial is Chris Holmes, President and Chief Executive Officer. He is joined by Michael Mettee, Chief Financial Officer, Wade Peery, Chief Administrative Officer, and Wib Evans, President of FB Ventures, who will also be available during the question-and-answer session. Please note that FB Financial's earnings release, supplemental financial information, and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website, approximately two hours after the conclusion of the call. With that, I would like to turn the call over to Robert Hoehn, Director of Corporate Finance. Please go ahead.

During this presentation, FB Financial may make comments which constitute forward-looking statements under the Federal Securities Laws. All forward-looking statements are subject to risks and uncertainties and other facts that may cause actual results and performance or achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of 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.

Thank you, Robert. Good morning, everyone, and thank you for joining us today. We appreciate your interest in FB Financial. In this quarter, we reported earnings per share of $0.74, a return on average assets exceeding 1.3%, and a return on tangible common equity of 12.4%. We’ve raised our tangible book value per share, excluding the impact of AOCI, achieving a compound annual growth rate of 15.8% since our IPO. Overall, it was a solid quarter with a few caveats, as the bank achieved substantial growth in both our balance sheet and profitability, while our mortgage segment faced some difficulties as it adapted to lower volumes and margins. I want to point out several important highlights for this quarter. Our loan growth was robust at an annualized 21.3%. Excluding PPP, we've seen linked quarter annualized growth of over 14% in three of the last four quarters. Year-over-year, our loan growth stands at 16%, driven by strong teams in economically active markets. Non-interest bearing deposits showed good activity; excluding mortgage escrow-related deposits, we had a linked quarter annualized growth of 6.8%, and in three of the past five quarters, we exceeded 15% annualized growth. Year-over-year, excluding mortgage escrow deposits, non-interest bearing deposits grew by 17.5%. Thus, we have a core year-over-year loan growth of 16% and non-interest bearing deposit growth of 17.5%. Our asset quality remains robust. This quarter, we experienced net recoveries of three basis points and decreased our non-performing assets as a percentage of assets to 44 basis points, which is a decline of six basis points from the fourth quarter. Additionally, our non-performing loans as a percentage of loans held for investment decreased by 11 basis points to 0.51%. We assess our banking segment's pre-tax, pre-provision run rate profitability at $44.2 million, which is an increase from $43.4 million in the fourth quarter of 2021 and $39.3 million in the first quarter of 2021, indicating year-over-year growth of 12.3%. While there are several factors influencing that $44.2 million figure, which we do not solely attribute to our adjusted EPS, we believe this reflects the current performance level of our banking segment, and we continually seek ways to enhance it. Michael will cover some of the elements contributing to the $44.2 million shortly. I also want to address one factor affecting our PTPP run rate this quarter. Our net interest income was impacted by $2.2 million in accelerated purchase accounting premium due to early payoffs of two purchased credit deteriorated loans, associated with a seven basis point impact on our net interest margin, which was further affected by a shift in balance sheet mix since our average mortgage loans held for sale were $230 million lower in the first quarter compared to the fourth quarter. This resulted in an approximate six basis point effect on our net interest margin. Together, these factors accounted for nearly the entire decline in our net interest margin from 3.19% in the prior quarter to 3.04% in this quarter, with the remaining basis points primarily due to excess liquidity. Looking ahead, based on our portfolio's remaining loans with significant purchase accounting premiums, we do not anticipate a substantial negative effect on our net interest income due to accelerated amortization recurring. We foresee that the average balance of our mortgage loans held for sale will remain lower in the short term. Our $281,000 loss in the mortgage segment was disappointing, and any losses from this area are not acceptable. The mortgage industry is currently navigating a tough operating climate, with our direct-to-consumer channel, mainly focused on refinancing, particularly affected. Furthermore, our common equity to tangible book value per share was influenced by a $100 million unrealized loss in our securities portfolio, all of which is related to interest rates. This unrealized loss is reflected on the balance sheet as a $71.5 million accumulated other loss in the equity account this quarter, equating to $1.50 per share in tangible book value. We believe we've maintained an appropriately-sized portfolio for our balance sheet and refrained from adding longer-duration securities in the past two years to protect our net interest income in the short term. While we haven’t adjusted our portfolio to mitigate maturity risk, we do not plan to liquidate our securities portfolio to realize that loss. We anticipate the generalized resolution of the unrealized loss as the securities mature, with no long-term effect on equity. In the short term, though our stated tangible book value per share and our tangible common equity to tangible assets appear lower, we perceive this as a temporary situation and do not expect it to hinder our growth. As we approach the second quarter and the rest of the year, we expect continued loan growth in 2022. Our loan pipeline is very strong, and our markets are benefiting from ongoing corporate expansions and relocations that drive significant fundamental growth. However, we proceed with caution, recognizing some larger known payoffs in the upcoming quarters, and continue to monitor the broader economic landscape closely. We are optimistic about surpassing our goal of 10 to 12% annual loan growth. Conversely, we expect challenging conditions for the mortgage business and are reducing our mortgage origination capacity along with related operational functions in response to the forecasted downturn in the mortgage sector. We are exploring technology solutions that could significantly increase efficiencies in mortgage production and delivery, which is an exciting prospect for the long-term viability of our mortgage division, although we are not disclosing specific financial impacts at this moment. With our substantial cash reserves and the composition of our loan portfolio, we remain highly asset-sensitive and look forward to benefiting from anticipated rate hikes as the year progresses. Our recent analysis indicated that a 100 basis point rate shock could lead to an 11% rise in net interest income, or about $39 million pre-tax; a 200 basis point increase could result in a 21% increase, or roughly $76 million. We believe this update paints a positive outlook for the remainder of 2022, underscored by strong organic growth from our talented team, reflected in a year-over-year loan growth of 16% and non-interest bearing deposit growth of 17.5%. In addition to our current team and successful organic growth, we see a significant opportunity to attract new talent and customers amid the recent market disruptions. With a banking model that emphasizes local authority, our balance sheet is larger than most of our community banking competitors, coupled with a strong corporate culture. We are well-positioned to become the community bank of choice in every market we serve while contributing meaningfully to our local communities and promoting economic development. We believe this message resonates with experienced banking professionals and customers affected by recent disruptions. Furthermore, we continue to assess traditional banking mergers and acquisitions. There are several strong community banks in desirable markets within our reach, and we see their robust management and core deposit bases as excellent fits for FirstBank. While our primary focus remains on organic growth and nothing is imminent, the potential for a transaction exists. As always, we prioritize tangible book value dilution alongside EPS accretion, and our stance has remained consistent. While we haven't historically taken on tangible book value dilution, we would consider limited dilution for the right opportunity. Beyond traditional banking, our technology initiatives are progressing as we formalize our strategy for our innovations unit. Our goals include enhancing the customer experience for our traditional banking clients, reducing costs through tech-driven process improvements, and exploring how emerging technologies can help us convert our areas of expertise into profitable national brands. Our approach involves developing a wide network of technologists and nurturing new and existing partnerships with firms to collaborate with quality founders and development teams to bring viable business cases to life, allowing us to benefit as customers, minority investors, or both. We have committed ourselves as a valuable member of the USDF Consortium by being flexible and open-minded to new ideas. Our initial efforts in blockchain are centered on payments, as this foundation must be established before we can expand further. We will continue to provide updates on our progress as we have more details to share. For now, we are enthusiastic about the opportunities available to us and look forward to how developments will unfold. I will now hand it over to Michael for a more detailed discussion of our financial results.

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. Pointing to the segment core efficiency ratio reconciliations, we had $88.9 million in segment tax-equivalent net interest income this quarter, and included in that $88.9 million was $2.2 million of accelerated amortization related to the prepayment to 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 believe $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 non-interest income. The $12.6 million core non-interest income included segment non-interest income of $12 million and adjustments due to a quarterly mark-to-market on our commercial loans held for sale portfolio, which has also added back core adjusted earnings figures to $12.6 million. This also adds back a $152,000 loss from securities and $312,000 loss from other sources, which are not added back to our adjusted earnings figures. Finally, we had $59.6 million in banking segment non-interest expense. And together, that brings our $44.2 million in run-rate segment PTPP, which is growing 12% over the comparable $39.3 million that we delivered in the first quarter of 2021. Moving to our net interest margin, our steady margin of 3.04% was down significantly from the 3.18% to 3.2% range that we had experienced for each of the prior four quarters. The largest driver of that decline was the $2.2 million accelerated amortization of purchase accounting premium, which created a seven basis point drag on the reported margin. The other primary cause of the decline of our stated margin was a balance sheet makeshift for mortgage loans held for sale, which had a yield of 3.08% this quarter. We're down to a total of about $230 million compared to the $320 million in interest-bearing deposits with financial institutions, which had a yield of 16 basis points and increased from the fourth quarter. Looking forward for our margin, we had $4.7 million of net purchase accounting discount remaining on our loans held for investment. However, due to the interest rate environment occurring and the new accounting treatment for 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 larger payoffs in our older acquired portfolios. Within that $2.3 million net premium, we have approximately 25 loans with remaining premiums over $100,000, with three loans over $500,000 and no remaining individual premiums over $1 million dollars. Further, for commercial lines, which contain larger purchase accounting discounts and premiums, 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 the impact to be immaterial in any given quarter. We would expect the decline 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 in the decline in the portfolio provides security yields that, while volatile, have become more attractive and we expect to deploy a portion of that excess liquidity into 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 shocks indicated $39 million of additional net interest income and 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, and 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. 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 non-interest income, we would anticipate that we continue to be in the $12 million to $13 million range next quarter, with swap fee income being the primary line item that can move us out of that range one way or the other. Beginning on July 1, we will begin to feel the impact of the Durban amendment; we anticipate that lost income to be about $1.5 to $2 million per quarter. We expect continued growth in our banking segment non-interest expenses. As Chris mentioned, we have tremendous opportunities for talent, both in 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 those opportunities. Moving to the mortgage segment, which is detailed on Slide 6, mortgage experienced a difficult operating environment due to the 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 margins, 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 performed 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 number was far below our expectations last quarter when we had anticipated margins to stabilize around 2.2% on a go-forward basis. As Chris mentioned, we're not pleased with our results this quarter in the mortgage segment, and we're working to optimize our operations to ensure that segment is profitable across all market cycles. As we finalize our plans for that optimization, we will not provide 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 in the near-term, I would point to our mortgage servicing rights portfolio as a bright spot during the rising rate cycle. We will be able to enjoy a positive contribution from servicing as rates continue to drop. I'll close my section with our allowance for credit losses. We experienced another 15 basis point reduction in our ACO to loans held for investment this quarter. Economic forecasts for the first quarter showed continued improvement compared to those that we utilized in the fourth quarter. As we move forward, I feel there are qualitative releases to be made. However, our optimism about our local economies is being tempered by the uncertainty due to inflation that we're experiencing, as well as the conflict in Ukraine and related economic fallout. If conditions do not change, we would anticipate maintaining similar levels of ACO to loans held for investment over the near-term. And with that, I'll turn it back over to Chris.

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

We will now start the question and answer session. At this time, we will take a short pause to gather our participants. Our first question will come from Stephens Scouten of Piper Sandler. Please go ahead.

Hey, good morning, everyone.

Good morning, Stephen.

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

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

Okay. Great. And then, Chris, I know you noted that you guys haven't taken any extended duration in favor of 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 true growth in tangible book. But how do you think about all the excess liquidity you guys have today? There's still a significant amount. And now that rates have moved higher, do you think more aggressively about deploying some of that excess liquidity into additional securities investments?

It's an ongoing discussion, and I appreciate your remarks about tangible book value. We monitor it closely, as it's a critical metric for us. We've consistently addressed it in our results and considered it when discussing potential balance sheet actions. It remains a frequent topic for us. Regarding accumulated other comprehensive income, we are mindful of the losses and the potential dilution on tangible book value. In terms of investments, we approach it from an ownership perspective with a long-term view in mind. We want to avoid making hasty decisions. We're focused on strategic additions to our portfolio when the right opportunities arise. Additionally, while there is considerable liquidity in the market right now, we believe that could change more rapidly than many anticipate. Thus, we are cautious about liquidity and ensuring we can fund all our initiatives. We're in a strong position today, but we are being more prudent regarding liquidity. Our aim is to avoid being tied up in low-yield, long-term assets, which we view unfavorably for both us and our shareholders. We also consider that liquidity might become more valuable sooner than expected. It's worth noting that our discussions around deposits typically involve non-interest-bearing deposits, which grow at a slower pace compared to other liquidity types. In summary, while we could make some targeted increases to our portfolio, we probably wouldn't exceed 13% of assets, as Michael mentioned.

We're starting with our loan growth. It's driven by a better deployment of liquidity, and while we may not maintain 21%, we prefer to deploy there.

Sorry, can you hear me? Yeah, it did very well. I have one last clarifying question. Could you provide the current CSL Moody's modeling assumptions? Were there any changes in how you weighted that model this quarter or how you approach the seasonal modeling given concerns about the inverted yield curve and the current economic climate? I'm curious about how CSL migrations could affect reserves and provisioning throughout the year if we experience some negative movements in those projections.

Stephen, that's a really good question. I put a lot of thought into the scenarios this quarter, with 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 net route kind of 90 diminished estimated 10%. Back questions just to think about from a qualitative perspective. We think that that risk is out there. 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. We took that into consideration on a qualitative basis this quarter.

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

Thanks, Stephen.

Thanks, Stephen.

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

Hi, guys. Good morning.

Morning, Brett.

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

Good morning, Brett. I'll begin by discussing the outlook for net interest margin. We have analyzed the components leading to the 304 and the margin associated with it. If we normalize and focus solely on March, we would see the net interest margin returning to around 316 to 317, even considering the balance sheet shifts, such as the move from mortgage upper sales to cash. We have already observed this shift return, which reflects two weeks of the quarter's rate hike on the portfolio. We expect further improvement as we anticipate additional increases of 25 to 50 or 75 basis points. The recent rise in yields has been factored into our performance over the past few weeks, but we haven't yet seen a significant uptick in our asset sensitivity in the reported figures. The composition of our portfolio is evenly split between LIBOR and prime, and the pricing adjustments do not all occur simultaneously due to contractual timings. This explains the observed delay. After the initial rate hike, we noticed a 15 basis point increase in variable rates across our overall portfolio, and we expect this trend to continue.

That's helpful. I'm trying to understand the potential changes in margins and the reasoning behind them. I wanted to return to mortgage banking. I see why you're no longer providing guidance for that segment in the short term. My question about mortgage banking is whether there might be a possibility for further compression in gain on sale margins, which could counteract your efforts to enhance the platform's profitability by managing expenses. I'm considering if, from your viewpoint, it's feasible that the mortgage segment might not see any profit this year. Or do you believe that over time, you'll be able to sufficiently address the expense management to turn it profitable? I realize you're not offering guidance for the year or the quarter, but I'm trying to grasp the impact and your focus on improvement.

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

As we assess the mortgage business for the rest of the year and into next year, we do not anticipate a surge in volumes. Instead, we expect volumes to decline for a while unless we are miscalculating our forecasts. We are making the necessary adjustments during this period to remain profitable. This process is challenging and has been ongoing for us. We consider our mortgage operations as part of our non-banking segments, and we aim to achieve a 20% return on capital in these areas. We're focused on this goal now. I also mentioned that innovation and technology might positively impact this segment sooner than traditional banking areas. We are involved in some of these innovations, and while we are not providing specific numbers or making bets on them, we recognize that they could genuinely alter the cost structure of our business.

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

Yes. The outlook on expenses is challenging, and while Brett is here in Nashville, we are experiencing growth in all our markets along with rising costs. It's a difficult expense environment. We expect expenses to increase in the mid-to-high single digits for the year. As we refine our projections, we will also announce figures in our banking segment and expect decreases in our mortgage segment. This gives you a clearer picture, though we are facing cost increases across the board.

Okay. Great. I appreciate the color.

All right. Thanks, Brett.

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

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

Hey, Brandon. Good to talk to.

Yeah. I'm sorry.

We missed you. But glad to have you.

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

Yeah. It's really difficult to quantify because you never know what is going to come and what exactly the form it's going to take because some of it is customer and some of it is people. 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 focused on organic growth. I'd say we're doubling down on both of those, and I think it's a long-term proposition. Over the next, frankly, a couple of years, that we're going to 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, there are some cases that show up immediately and already have shown up. But I think a lot of them will present themselves a year from now or even two years from now.

Okay. Thanks for the color.

Great.

And then my next question is regarding loan growth. It was very strong in the first quarter. It was mentioned that you're expecting some paydowns in the second quarter and third quarter. So I just want to confirm that you're expecting loan growth to be slower over Q2, Q3, and then picking up in Q4, just based off the current environment.

Yes, you heard that correctly. A 20% growth rate in a quarter is significant. At some point, you might wonder about our capacity. While I wouldn't say we're at full capacity yet, we're not far off. We're likely to continue experiencing strong growth, but I wouldn't anticipate a consistent 21% every quarter for the rest of the year. However, we still expect solid loan growth for each quarter remaining this year, aiming for an annual growth rate of 10% to 12%. Considering the strength of the first quarter, it sets a positive tone for the rest of the year. We don't foresee maintaining that same level, but we do expect to meet or exceed our usual targets of 10% to 12% for the remainder of the year.

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

We are continuing to focus on non-interest bearing deposits and aim to grow that segment. For interest-bearing deposits, our priority is to manage costs rather than balances, as this area may not see growth. We want to keep costs in check because there are still options for liquidity that offer similar costs to those in the interest-bearing category. Is that reasonable, Michael? Do you have anything to add?

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

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

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

All right. Thanks, Brandon.

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

Hey, good morning, everyone.

Good morning, Kevin.

Hey, Chris, considering your comments on the mortgage sector and the outlook, it's clear that it's difficult to determine when or how profitability will be achieved. I get that. Has this affected your long-term commitment to the mortgage business? I remember our previous discussions suggested there was a real opportunity to adjust and reduce variable expenses within a reasonable timeframe. Is this situation primarily due to the sudden challenges and various headwinds impacting revenue, which makes it hard to adapt quickly on the expense side? Or are there more enduring changes that might influence your earlier projection of achieving a 20% return on the business? I’m interested in the long-term outlook for that business, given my inquiries.

I appreciate your question, Kevin. It doesn't change our dedication to the business, and we've invested significantly in it over time. This is a homegrown operation with a strong coal trade, and we continue to attract top-notch originators in our retail business from across the Southeast. We're committed to this area, especially considering we've only been two years out from generating $100 million in this segment. Additionally, keep in mind the technology aspects and how I anticipate they will be influenced. We have a substantial presence in the industry, ensuring our relevance, and our commitment remains firm. It's also important for us to maintain profitability and generate an appropriate return on capital. Ultimately, management oversees shareholders' capital, and our responsibility is to allocate that wisely to ensure great returns, which we are focused on achieving. On the expense side, it's worth noting that our direct-to-consumer business adds complexity in this segment. In our mortgage operations, we utilize two origination channels: retail, akin to traditional bank branches, and direct-to-consumer, which is entirely online. The online channel heavily relies on refinancing and purchasing leads. In the current climate, we've seen both of these facets dry up simultaneously, a situation we haven't encountered before. This has made it more challenging to navigate compared to previous experiences. Looking back to 2020, that same segment was the primary driver of the $100 million profitability. We are ensuring that we are careful and consider the long-term impacts and investments needed to achieve the best returns on our capital.

Okay, that's very fair. I think you mentioned earlier that the long-term efficiency target you were considering was, if I recall correctly, a net contribution as a percentage of PPR being around 10%. Is that correct? Does that still apply in the long term, would you say?

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

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

Good analysis. You may have addressed some of the question. When I made that comment in my prepared remarks, I noted that there are a few strong community banks in our footprint's attractive markets. I chose the word 'few' intentionally. There are some opportunities, but for the reasons you mentioned, we're not actively pursuing them right now. The organic opportunities we have are very strong. If you look at what we're doing organically, it's really impressive. We continue to focus on improving our operations and customer experience, which is already good, but we aim to make it great. Those are key priorities for us. When a good opportunity arises, we plan to take advantage of it, and some long-term opportunities have already been identified for us. We cannot control when these opportunities materialize, so we aim to be prepared. That's why we refer to 'a few' and say 'it could happen,' but nothing is urgent. While we haven't typically taken tangible book dilution, we could consider slight dilutive options very carefully, ensuring we pay attention to tangible dilution earn-back. There are a few candidates we're interested in.

Okay. Great, thank you, Chris, very much.

All right, thanks Kevin.

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

Thanks. Good morning.

Good morning.

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

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

Just to add one thing. Late in the quarter, we did notice that some larger banks have adjusted their pricing upward. This has been encouraging because we are also seeing some of our problem banks, which are closer to our size, moving up from what we consider unreasonably low rates. We've noticed similar trends in some smaller community banks as well. While we didn’t see significant movement during the quarter, there have been some signs of an increase in rates.

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

Retail margins have generally been in the range of 250 to 300 basis points, while direct-to-consumer margins have been between 150 to 200 basis points. We experienced a decline in the first quarter, with direct-to-consumer margins dropping below 150, around 140 to 150. However, those margins have since risen. This increase, however, has negatively impacted some of the volume that Chris mentioned earlier. Retail margins have also seen some stabilization and there has been an increase since the first quarter, but it hasn't been significantly higher.

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

Thanks, Catherine.

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

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

Yes, it's present in all our markets. In fact, Jordan, it's not limited to just one specific market; we see it everywhere. I can't identify a market where we don't see this or engage in discussions about it. Essentially, every market is involved. Regarding the lending sectors, we're primarily focusing on mortgage and manufactured housing as those are the areas where we see current opportunities. I should mention that we are addressing some necessary adjustments in the mortgage side, which might sound contradictory when I mention opportunities in lending. However, my focus is more on potential technology improvements, particularly in the back-office and origination processes. Additionally, we have strong expertise in the manufactured housing sector, which we can leverage as we progress. This area is part of our strategic plan moving forward.

Perfect. Thank you.

Thanks, Jordan.

All right. Thanks, Jordan.

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

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

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