Earnings Call Transcript - PNFP Q2 2022

Operator, Operator

Good morning, everyone, and welcome to the Pinnacle Financial Partners Second Quarter 2022 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer. Please note Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of our website at pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed in a listen-only mode before we'll be open for your questions following the presentation. Analysts will be given preference during the Q&A. We ask that you please pick up your handset to allow optimal sound quality. During this presentation, we will make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause actual results performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond Pinnacle 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 Pinnacle Financial's annual report on Form 10-K for the year ended December 31, 2021, and its subsequently filed quarterly reports. Pinnacle 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 in the SEC regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com. With that, I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Terry Turner, CEO

Thank you, Latania, and thank you all for joining us this morning for the second quarter earnings call. I'm confident you've already seen that the second quarter was an outstanding period for us in terms of financial performance. Over the years, when the stock appears undervalued, analysts often ask me what I think the market is overlooking. As I present my opening comments and Harold delves deeper into our second quarter performance, we aim to highlight five areas where I believe there might be a disconnect between our financial performance, the value we've created, and our valuation. First, I think management's motivation and ability to drive results are significantly underestimated. For example, a standard 10-K asset sensitivity model may imply that management won’t change its primary sensitivity indicators. However, we have consistently taken proactive steps to improve outcomes, as evidenced by our successful price adjustments and revenue increases. I expect this trend to continue as we navigate the current tightening cycle. We want investors to understand the substantial incentives our management team has to adapt to changing circumstances, which have contributed to our success over the past 3, 5, 10 years, and indeed, since our founding 22 years ago. Second, I believe many overlook the strength of our culture. While it's common to acknowledge our cultural emphasis, not everyone realizes that it's been crucial in enabling Pinnacle to excel year after year. Our exceptional shareholder returns over the past 22 years stem significantly from this culture, and I'm confident it will continue to generate shareholder value in the coming years. Third, I think many do not fully grasp the tremendous momentum behind our balance sheet and P&L that we've built through our dedication to attracting and retaining top revenue producers, not only in our existing markets but also in new, attractive Southeastern markets. This is something that can be observed in our history, and we aim to illustrate its significance moving forward. Fourth, I believe the impact of our hiring model on asset quality is not thoroughly understood. Hiring experienced bankers who have managed their client relationships for years is the best strategy I know to ensure quality client selection, which in turn mitigates low-quality outcomes. Finally, many do not appreciate the value of BHG's unique funding model and its significance for Pinnacle’s shareholders. This includes not only the considerable hidden equity on our balance sheet but also the growing earnings stream that provides power and flexibility, especially as many fintech companies are struggling. Access to funding is increasingly crucial for these asset generators, and BHG has demonstrated its ability to access funding that many of its competitors cannot. As we always do, we'll start with the shareholder value dashboard, beginning with GAAP measures followed by non-GAAP measures. Regarding the second quarter results, asset quality metrics such as net charge-offs and classified assets are at historic or near-historic lows. While some may argue this data is retrospective, I believe it is essential to remember that reliance on these metrics is critical even in favorable conditions, as we manage our loan book proactively. In the last 90 days, we've been enhancing our underwriting to better position ourselves for a potentially more challenging credit environment, which I believe is likely. As we've discussed, while the prospects may seem daunting, I think most agree that our loan portfolios are likely to perform significantly better than they did in 2008 and 2009, which we'll delve into later. Our asset quality is currently in exceptional shape, positioning us well for any future credit challenges. I focus on these specific metrics because they provide the best insight into our potential to deliver long-term shareholder value. Historically, they correlate strongly with shareholder returns over time. While there are many metrics to consider in the banking sector, our primary focus remains on net interest income growth rather than merely asset sensitivity, low deposit costs, or controlling noninterest expenses. We have consistently pursued revenue growth and EPS growth, ensuring our incentives are aligned with these objectives year after year. This approach has enabled us to achieve significant total shareholder returns, ranking among the top traded banks in the country since our inception in 2000. We continue to monitor these metrics closely while prioritizing net interest income growth to drive our overall revenue. My experience tells me that banks with higher asset sensitivity might appear more favorable, yet they often don’t achieve the robust net interest income growth we do. In light of the current industry climate, I believe our focus on growing our revenue, EPS, tangible book value, and ROTC is what will materially influence our share price performance. As I mentioned earlier, our revenue growth in Q2 is noteworthy, showcasing strong annualized growth and a stable trajectory since January 2018, bolstered by rapidly increasing loan volumes and margins. BHG's performance has also contributed positively this quarter, demonstrating a unique model that allows it to secure funding effectively, unlike many traditional fintech competitors facing pressures in the current environment. In addition to BHG, during Q2 we witnessed significant asset growth, further positioning ourselves for success. In terms of loan growth, while some may perceive it as high-risk given economic uncertainties, we believe it reflects the strength of our strategic execution and organic growth model. Harold will provide more details on our loan growth later in the call, including insights into deposit patterns, which have stabilized in the latter half of the quarter. I want to emphasize our commitment to focusing on net interest income growth rather than just benchmarks. Factors like loan rate betas and overall balance sheet expansion play a crucial role in helping us outperform our peers, particularly during challenging economic times. Looking ahead, I believe we will continue to grow margins and maintain loan volume to support our net interest income growth. I reference Jim Collins' flywheel concept to illustrate the momentum we've built, likening it to a heavy flywheel that gradually gains speed and eventually propels itself forward. We have been capturing market share from more traditional banks since 2008 by hiring the best talent and serving top clients, which remains our driving strategy. In Q2 alone, we achieved almost $2 billion in loan growth and expanded total assets to $340 billion, proving our growth strategy is effective. Our hiring practices have led to a record number of experienced bankers joining our ranks, which enhances our capability to serve clients and increase revenue. Since 2019, we have added 334 revenue producers, and our momentum continues to build as we expand in key markets across the Southeast. To translate this into strong shareholder returns, we're committed to granting our associates a positive work environment that fosters client engagement. Data shows that a dedicated workforce leads to higher revenue production and greater shareholder returns. We are focused on enhancing our employee experience, which translates into a superior client experience. As we continue to differentiate ourselves in the market, we aim to create rapid, reliable revenue growth and EPS generation over the long term. Now, I will turn it over to Harold to provide a deeper look into our second quarter performance.

Harold Carpenter, CFO

Thanks, Terry. Good morning, everybody. Obviously, the second quarter was one of the strongest loan growth quarters for us after following a very strong first quarter and what we believe will be a strong year for loan growth overall as we now target our 2023 loan growth percentage to be in the low 20s for this year. Loan yields were up in the second quarter due to the rate hikes. Thus far, our loan data is growing about twice on what our deposit beta has been since the tightening began in March. We anticipate further escalation in loan yields as rate increases happen during the rest of the year. PPP is largely in the rearview mirror. One of the headwinds we had going into 2022 was overcoming the significant revenues that PPP provided us over the last two plus years. It was a key component of why earlier in the year street earnings estimates for 2022 anticipated decreases in EPS for us this year. In 2021, we reported $81 million in revenue from PPP compared to $15 million thus far this year. Our relationship managers have done a phenomenal job in securing loans from other banks, and as a result, we've seen revenue estimates steadily decline in 2022. We responded to a lot of questions about loan floors over the past year or so, and their impact on our yield in a rising rate environment. As the bottom left chart on the slide indicates, we have only $110 million of our floating rate loans left. The loan floors essentially are in the rearview mirror for now. Our rough estimate is that loan floors contributed some $50 million in revenues over the last year or so. Lastly, as Terry mentioned, our new markets, including Atlanta and our specialty living units provided approximately $530 million in loan growth, while our newer relationship managers contributed $430 million this quarter. We believe the execution of our strategy is in full effect and look forward to when we can get a more positive economic backdrop than what exists today. As we started reviewing our second quarter loan growth, we decided that it might be helpful to better understand the source of the growth. So hopefully, this slide is that helpful. We characterize our growth into four broader segments: one, our pure asset generation play with BHG, Advocate, JV; and then two, our strategic market expansions, validating Atlanta, Huntsville, Birmingham, but also expansion of the specialty loan group like franchise and equipment lending; and then three, what sort of growth that we achieved from our recruiting. So this is the growth of our newer RMs that have been with us for only 2.5 years and then filing for the legacy markets contribution. So all of this is net growth, thus far, through the first six months, we experienced 25% of our loan growth annualized in December 31 and June 30, which is inclusive of PPP pay downs, which has been noted and ran on this slide. Almost 50% of our loan growth is from our latency markets, while the rest is primarily from new ideas and new people. We felt like this was helpful as we try to understand where all of this fantastic growth has originated. Now on the deposits for the first time in a few years, our deposit growth slowed, we are encouraged about what happened during the quarter once the month of April was lower, mainly on giving us some reason to be optimistic. We're also optimistic about noninterest-bearing deposits growing during the quarter. As we all know, these accounts become increasingly valuable as rates increase. Since the pipeline cycle began, our deposit rates were up almost 34 basis points. So we are obviously pleased with the effort of our relationship managers thus far. We've never abandoned our view that core deposit growth is a key long-term objective, and as a result, it all pans on deck currently. For the first 20-plus years of our existence, our number one objective is developing strategies and tactics around funding our growth. We continue to lock in our chances given the significant investments we've made both on the relationship managers and new markets over the last few years. We continue to believe an aggregate 40% deposit betas through the end of 2022 is likely. We also keep an eye on what our competitors are doing, as they are advertising much lower betas, which we believe gives us some breaking at least term. Now to liquidity: our liquid assets decreased is corresponding with strong loan growth, modest deposit growth, and a $400 million increase in securities, all of which were floating rate. With our outlook for loan growth, we likely will not see an increased deployment of liquidity into loans over the next several quarters. As the top-left chart replaced, with the piping our GAAP net increased 28 basis points this quarter. The impact of PPP and liquidity has a meaningfully less impact on our man this quarter, and we anticipate further reductions in the impact of the two items over the next several quarters. Furthermore, we have confidence that we should see margin expansion along with increased net interest income in the 3Q and 4Q. Concurrently, we are increasing our guidance to high teens growth for the full year 2022 over the last year. As to credit, we are again presenting our traditional credit metrics. Pinnacle's loan portfolio continues to perform very well. And again, due to some of the best credit metric ratios we have experienced ever. I'm not sure everyone here would like to hear about this anymore, but our cases may rise up to the Section 4013, and Pinnacle continued to decrease and was down $646 million at June 30 down from $827 million earlier this year. Importantly, 97% of our 4013 credits are on some form of principal and interest monthly pay with only 1% in a classified risk category. Given the penalty, we believe we will see further declines in our allowance for credit losses to total loan ratio over the next several quarters, albeit at a slower pace than we would have otherwise projected a couple of quarters ago. Our current ACL was 1.03%, which compares to a preset pre-COVID reserve of 0.48 at December 31, 2019. So as we start this tightening cycle, we feel like we're in pretty good shape given the quality of our portfolio and our focus on credit quality as well. I wrestled this chart out of our credit officers, and the information here I think is maybe obvious, but I do believe it is helpful in detailing our appetite for the various sub-segments in construction and investment property. As the left chart indicates, we have little appetite for the asset classes shown in the red portion and remain receptive to those asset classes in the main areas. More importantly is the information on the right side of the chart. I don't know if any of this information blue box is all that moved, but it signals to our RMs in the fields that we expect more diligence, more questions, and more analysis, which we all believe is the right thing to do right now. I won't spend too much time on these expenses. We've had more information on the slides to help the builders. As always, I will speak to BHG in a few minutes, which obviously, we announced last quarter. You can further see evidence of our influx by increased brokerage income of 46%, trust income is up 20% and interest commissions are up 6%. Second quarter fees were benefited by increased interchange, particularly in local credit cards. We believe this will subside somewhat volume in the second half. We booked about $5 million in non-title-related gains in the second quarter based on recent valuation adjustments as companies continue to issue Capital markets, had about $2 million in gains this quarter. Their pipeline of bids alone some we just had best right now. As for expenses, we are maintaining our overall total expense run rate of approximately mid-teen percentage growth in 2022 in comparison to 2021. This is primarily attributable to headcount growth in the new markets, market disruption across our markets, which will lead to strong creating opportunities, and the addition of JB&B. In addition, we now believe that we should anticipate hitting our maximum payout of 125% of target for our annual cash incentive plan. We do believe the second quarter total expense as a decent run rate for the remainder of the year, and we have some reasonable assumptions that we could see costs back up somewhat in 2Q, but the inflation backdrop could wreck that thought. We also think we have a good expense number forecasted for headcount growth in the second half of this year. We will just have to see how our recruiting pipeline remains exceptionally strong. As for capital, tangible book value did increase to $42.08 from $41.65 last quarter. Our decision to move approximately $1.5 billion of BHG helped our tangible book value per share increase by approximately $0.50 per share at June 30. We do not anticipate any other significant capital actions at this time. Quickly, here's an update on our outlook for 2022. For loans, we've increased our outlook to high teens to low 20s. We are adjusting our rate forecast to project a 3.25% best up rate by year-end. We will continue to monitor and modify as necessary. Given that, we believe we should see continued improvement in net interest income this year, which should result in net interest income growth in the high pages. We still believe our expense outlook for increased tariffs and other factors is in the teens percentage growth rates, but given where we are today, it will not likely be less than that. We are very optimistic about hiring and we are thinking we'll have a modestly strong recruiting year. So as to PPNR and third quarter run rate, we anticipate strong growth in net interest income, while the run rate for fees - excluding BHG and basis income could be slightly higher but probably flattish and expenses should be applied for us. For the provision, the key driver, we believe, will be on growth for the third quarter. Obviously, inflation in the macro environment will potentially determine how all of this turns out. For our group, we will work with an intense focus and do what we need to do to grow the franchise value in this part. Now I'll keep comments on to BHG. BHG had another record quarter of originations. We anticipate that CHG would increase sales under their bank network as the capital markets have been volatile while their bank platform continues to be super reliable, which is obviously one of their competitive benefits that BHG competes within the bank network and the securitization network during times such as these. Spread in the loans sold through the auction platform did contract slightly in the second quarter from the last few quarters, which had some of the widest spreads in their history with rates driving spread will likely head back to historical lows of around 9% or so. The bottom right chart details the 1400 plus banks in BHG’s networking and just over 600 unique buyers in the last 12 months. As you know, we consider the funding platform one of our strongest, if not the group's strongest platform in the Company for companies that execute a broad-based revenue platform. As we know, the resource obligation is a reserve for potential loss absorption for the soft loan portfolio. At the end of the second quarter, BHG increased their resources to $247 million, up $27 million from the first quarter and the ratio of the recourse obligation to some loans decreased modestly to 4.98%. As the blue bars in the bottom right show, credit loss portions of resource losses for the second quarter remained at somewhat lowest levels in the past 10 years. Additionally, showing the supplemental information and build macro environment, BHG also increased its reserve for on-balance sheet loans by about $18 million to approximately $75 million as of June 24. That reserve is now at 3% from 2.5% last quarter. These reserves increased through credit net losses persisted and in some cases improved. BHG, based on their opinion of the macro environment, increased these reserve positions with a view for caution. We obviously commented on the thought process here. That said, we are really pleased with BHG's second quarter, especially at the same struggles that other more well-known fintech lenders appear to be going through right now. The quality of BHG for made in our opinion remain solid, and we believe it's one of our strong factories. BHG reactors as credit for muscle are always looking for weaknesses in its Florida base. Past dues and pre-due are at consistent levels with previous quarters, so their borrowers have remained resilient throughout this credit cycle thus far. Maxim reasonable unemployment forecasts confidence that their borrowers should be able to withstand forecasted inflationary increases in the way that allows BHG to better weather this environment than other lenders in inter space. In comparison to other lenders, we believe BHG borrowers are well paid with average earnings being approximately $287,000 annually. They believe in their credit models and their experience gives them the reason to do so. Lastly, BHG had a record operating quarter in the second quarter. As I mentioned earlier, with the volatility in rates in our other part of this year, BHG has consistently earning in the earlier quarters of 2022 would likely be stronger as they sell more loans to the bank auction platform rather than hold onto the balance sheet to better understand how the securitization markets will behave. As you know, the bank auction platform delivers immediate annual sales recognition file through securitization network where there's interest income over the life of the loan. As we were able to accomplish in a $300 million securitization at an acceptable rate of 5.5% when other peers appear to us to reevaluate their business models given the operating challenges. BHG has very pleased to be able to get the securities accomplished and anticipate potentially one to two more securitizations this year. BHG has also increased their loan production assumption for 2022, estimating that loan production will drive 40% growth in originations this year in comparison to last year. As 2022 earnings, BHG believes that 2022 earnings should now represent about 15% growth over 2021, which Pinnacle required reductions in the quarter run rates in comparison to the second quarter. Three key points I'd like to emphasize or reemphasize that gives us a whole earnings growth is now 15% to 2022. Credit remains consistent from previous quarters with BHG and will likely be increasing reserves based on the macro environment at least over the next quarter or so. Spread trends are likely moving in line with more historical levels as we get into the second half. Spreads remain historically high currently, but with increased rate forecast shrinkage and earnings could occur. Production volumes are very strong, and we believe that we'll continue to have strong production going into the second half of the year, but BHG will aim to send more to the securitization platform, which reduces current period profits accordingly. Of note that BHG anticipates at least two funding alternatives to open up in the near term as they speak to broader already strong orbit platform, which we also believe is one of our strongest attributes. As you all know, we are strong leaders in the BHG franchise. So we think a 15% growth with a more conservative outlook is the right thing to do for now. With that, operator, I will stop and ask for you to look for or ask for questions.

Operator, Operator

Our first question comes from Jared Shaw of Wells Fargo. Your line is open.

Jared Shaw, Analyst

I'm having a hard time hearing you. It seems like your microphone might be obstructed, making it difficult to follow the call. Regarding the first question about deposit growth, when examining Slide 15 and the breakdown of loan growth by categories, do we see a similar pattern on the deposit side? Do you anticipate potential for expansion or acceleration of growth given the recent increase in deposits?

Terry Turner, CEO

Yes. I think we're optimistic about what our deposit growth could look like for the second half of the year. Traditionally, our deposit growth does come in, in the back half of the year. So we're thinking we might see that occur. We think our newer recruits in our newer markets will be able to deliver more consistent deposit growth here as they gain experience with the firm. So yes, I think we do anticipate more growth in deposits from our new people and new markets.

Jared Shaw, Analyst

And then as we look at that through the year, how should we think about your comfort level with where the loan-to-deposit ratio can grow to? And also with how low cash can go as a percentage of assets?

Terry Turner, CEO

Yes, we believe we have sufficient cash available to support loan growth, aiming to reach the levels reflected in the chart from our slide deck that details our cash balances prior to COVID in relation to the loan-to-deposit ratio. Historically, we have maintained this firm at around 95% to 98%. While I'm uncertain if we will return to that exact level, we certainly have the capacity for further growth.

Jared Shaw, Analyst

Okay. Finally, regarding BHG, did you notice any changes at the end of the quarter and into July, particularly concerning the fear of a recession or higher rates affecting the demand for bank paper? Is this indicative of a potential slowdown in growth during the second half?

Terry Turner, CEO

No. I think the bank network remains active and receptive. I think what will happen in the second half of the year is, it will get more competitive, to be honest. And they will work hard to try to get a couple of securitizations done, which will take money away from the bank network. So as a result, the auction platform becomes a little more competitive.

Operator, Operator

And our next question comes from Steven Alexopoulos of JPMorgan. Your line is open.

Steven Alexopoulos, Analyst

I wanted to follow up on the loan side. Assuming you meet the 2022 loan growth guidance you mentioned, how should we consider 2023? Should we expect it to be a more typical year for you, like low double-digit growth? Or could the momentum you've indicated lead to another period of outsized growth?

Terry Turner, CEO

My impression is that this is a positive development. The key point I want to emphasize is that our hiring momentum is robust. As you know, the benefits from hiring accumulate over a four- or five-year period. Therefore, the number of hires we made in 2019 contributes significantly to growth. However, it’s important to note that we are still actively hiring, and the hiring momentum this year exceeds that of last year. Additionally, the momentum in the second quarter is greater than in the first quarter. Harold mentioned that our hiring pipelines are substantial, which should contribute to both balance sheet growth and loan growth.

Steven Alexopoulos, Analyst

Got it. Okay. That's helpful. And I want to drill down further into your response to Jared's question. If we assume deposit growth becomes more of a challenge for the entire rights I think we're seeing some banks wanting to get ahead of that, bringing more deposits now. Harold, was your response to Jared's question implying that you guys plan to in your excess liquidity, go back to where the deposit ratio was historically, call it, 95%, 98%? And then you'll start fully funding loan growth with deposits, is that your plan?

Harold Carpenter, CFO

Yes. I don't think that would be exactly where our plan is. I think they'll run concurrently. But yes, we do intend to try to bring liquidity down over the next call it, six to nine months. But that in and of itself, we don't think is the right thing. We will focus our troops on core deposit growth. And like I said, it will be all hands on deck to get that done. We've got several deposit tactics in play right now, and we'll try to add resources to that to make sure that we can continue to fund the growth that we anticipate.

Steven Alexopoulos, Analyst

Okay. Okay. That's helpful. And then on the deposit betas, Terry, you made the point that you thought betas would be lower than the prior cycle. You called out a couple of reasons. So maybe, Harold, what are we thinking now? What is the assumed total deposit beta would be assuming through the cycle?

Terry Turner, CEO

Yes. I think we're still leaning in on a 40% beta by the end of the year. So we still are not willing to come off that. We're hopeful that we will deliver less than that, obviously. And so far, so good on that front, but we also think that 75 basis points here in July and on down through the rest of the year as we get to that 3.25% kind of Fed fund rate that we're targeting that we'll see increased deposit rates.

Steven Alexopoulos, Analyst

Okay. And I just want to understand, sorry, to put another question here, but you're also assuming that your loan beta is above your deposit beta. And that's what's driving NIM expansion that's just not yielding cash into loans, right? You're assuming loan beta continues to stay ahead of the deposit beta, is that right?

Terry Turner, CEO

Yes, we are very pleased with how loan yields have responded in the early part of this cycle. Our test rate is likely running at 100% so far. We are obtaining a rate increase for every loan that is eligible.

Operator, Operator

And our next question comes from Stephen Scouten. Your line is open.

Stephen Scouten, Analyst

Following up on Steven's previous question about the loan side, I noticed the information on Slide 34 depicting weighted average yields alongside your new yields. There appears to be a significant increase in fixed-rate yields from one quarter to the next. Is this related to what you mentioned, Harold, about needing to reprice, and are you seeing a high success rate with that? What do you attribute this success to, considering I haven't observed similar results from other banks this earnings season? It's quite impressive to see the 67 basis points increase in fixed-rate loan yield.

Terry Turner, CEO

Yes. I appreciate the question, Stephen, because we've been talking about fixed-rate loan yields and making sure the new credit continues to rise for a long time. And so I appreciate the comment. I hope none of my other relationship managers heard the comment, but I appreciate it because we're going to keep beating on making sure the fixed-rate loans continue to go up. I hope that we can see what we've been attempting to achieve, we've been a little disappointed in where fixed-rate loan yields have been thus far in the cycle. So we're hopeful that we can still see some more escalation in those yields.

Stephen Scouten, Analyst

Got it. Okay. That's helpful. And then on the share repurchase, I think the comment was somewhere in the presentation. Maybe you're in the release that no anticipation of using any of that $125 million. But obviously, Terry, you highlighted what you think is another great opportunity for the stock for investors. So is there a level here where that becomes a viability for you guys? Or is it just with all the growth you want to continue to hold the capital for growth, not the repurchase?

Harold Carpenter, CFO

Yes, that's the key point. As we examine our recruiting pipeline, business development pipeline, and loan deposit fees, we see significant opportunities ahead. I don’t expect the loan growth numbers for the third quarter to match those of the second quarter, but we are experiencing a lot of momentum. Therefore, we plan to reserve capital to support growth.

Stephen Scouten, Analyst

I have one last question regarding BHG. I'm interested in any updates you might have on the CECL impact numbers moving forward. If I recall correctly, I thought some securitizations would lead to a higher CECL impact, especially with us selling through the bank platform. So, I’m curious about the numbers you have and how that might affect BHG in 2023.

Harold Carpenter, CFO

It's a great question regarding the seasonal impact for ESG in the fourth quarter of next year. The adoption will start on October 1. They are currently assessing various credit models and funding platforms that apply to sleep but not to CECL. As it stands, the existing securitization network must comply with CECL. We expect to provide more information on this at the end of the third quarter. They are reworking their models to better prepare them. The impact for 2023 is likely to be minimal, while 2024 will require a full seasonal model. Additionally, they are planning to develop different funding mechanisms within the capital markets to more effectively manage CECL.

Operator, Operator

Our next question comes from M. Olney of Stephens. Your line is open.

Matt Olney, Analyst

This is Matt. One more about loan growth, really improved the loan growth numbers in 2Q. You guys gave us some good details on kind of the drivers. The guidance implies a slowdown in the back half of the year. And I think a lot of your peers are also talking about a slowdown in the back half of the year, but I would love to hear more about your outlook for loan growth in the back half of the year are pipelines slowing? Just trying to get a sense of how much conservatism is baked in here.

Terry Turner, CEO

Matt, my sense is $1.1 billion a quarter is probably not the best ongoing associate. That's the way of the quarter. I'm not saying we won't have that down a time, but I don't think that's a sustainable expected run rate. We think we really did have a fabulous quarter. I don't look for a huge slowdown. In other words, I don't think it's really slowing economic activity or slowing market share movement as much as it is just a little more normalization in the second half than what you saw there in the second quarter, which was a really extraordinary number.

Matt Olney, Analyst

Okay. And then on the expense side, the 2Q expenses were a little elevated this quarter, but the guidance was unchanged. Anything that was had a higher accrual in 2Q. And I'm interpreting that guidance correctly, implies that the 2Q expense levels could be the peak, and we could be flattish from here, if nothing about that right?

Terry Turner, CEO

Yes, I think so. I think that's what we believe today is that expenses will be pretty flat for the rest of the year. 2Q was elevated primarily based on incentives and call it, the increased earnings that we experienced here in the second quarter dictated a higher kind of allocation of incentives from the back half of the year towards the front half of the year. So that's primarily what drove it.

Matt Olney, Analyst

Okay, great. Lastly regarding BHG, I want to ensure I understand the updated guidance. Does this now assume that the 9% spread you mentioned earlier is considered a more normalized level? Additionally, what percentage of your originations is expected to be placed on the bank for the second half of the year? I believe it was around two-thirds at that level in the second quarter. I'm just curious if you plan to maintain that.

Terry Turner, CEO

Yes. I think the numbers that I looked at, and we didn't disclose them, but the numbers I looked at would say that the bank network is probably going to be cut more or less in half; maybe down to 2/3 of what they got in the second quarter.

Matt Olney, Analyst

And the spreads, Harold.

Harold Carpenter, CFO

The spread comments, you're absolutely right. We think this is going to probably approach 9% here over the last half of the year. I'm sorry I forgot you asked that question.

Operator, Operator

Our next question comes from Michael Rose of Raymond James. Your line is open.

Michael Rose, Analyst

I appreciate all the commentary regarding the guidance for the latter half of the year related to BHG. With the spreads compressing and potentially more allocated to recourse reserve in 2023, does BHG believe it can grow pretax earnings next year under these conditions? I know they are working on developing new verticals and expanding existing ones, but I wanted to get a sense of whether it is realistic to expect pretax earnings at BHG to grow next year.

Terry Turner, CEO

Yes, Michael, that's the question. Our belief is it's not going to BHG as they have no intent to throttle back of earnings growth in any kind of meaningful way. Now like we talked about here on the call, we're looking at 15% growth in 2022. So using that as a benchmark, I don't think they're looking at any material kind of change there. That said, this is the time of the year when they begin to look at 2023 and the impacts of some of the, like you said, new verticals, how that's going. They're going to be looking at their bank network performs, and are reduced spreads going back to the higher spreads in a more, call it, a better backdrop as far as the economy is concerned. But I'm not hearing anything then that says they're going to kind of take their foot off the accelerator.

Michael Rose, Analyst

So if I heard you right, and I'm not trying to pin you down here, but 15-percentage-ish range for next year is in the realm of possibilities? Is that what you're trying to convey?

Terry Turner, CEO

Yes, I think so. I've not gotten any word from them. There will be any less than that. But again, they'll be going through all of those processes here in the third and into the fourth quarter. So I'll have a better idea for you in the third quarter.

Michael Rose, Analyst

Got it. I appreciate it. And then just going back to the deposit costs and betas. If I look at the spot rate at the end of the quarter, it was 67 basis points. And I appreciate the commentary that you expect loan betas will be higher than deposit betas, but it does, in theory with a couple more rate hikes, a pretty high magnitude implied pretty healthy growth in deposit costs. Do you think after this gap up that we get in the third quarter that we're kind of nearing at least a near-term peak? And that you can still see margin expansion a few quarters beyond when the fed stops raising, again, just trying to kind of deconstruct the betas on both sides of the balance sheet?

Terry Turner, CEO

Yes, I think that's correct. We believe that our deposit beta is around 22% as of yesterday. With the expected rate increases in the latter part of the year, we anticipate an increase in deposit rates to reach approximately 40% for the whole year. We are allowing ourselves some flexibility in this area. On the loan side, we are not currently experiencing any resistance regarding loans linked to any probes, SOFR, LIBOR, or others. The increased loan yields are being passed on to our clients, and we are successfully capturing those yields so far.

Operator, Operator

And our next question comes from the Atlanta expansion obviously impacted by COVID. Can we just get an update there? And then can you give us more of an update on D.C. and maybe what the expectations could be for growth contribution as we move into next year really for both those new expansions on a combined basis?

Terry Turner, CEO

Yes. I think the last COVID, we like everywhere, I think, have seen a spike. In our footprint, we have seen an elevated number of cases in our associate base. But I guess I'm going to say it this way, luckily, there's nothing particularly severe. Some of the people are getting COVID or getting it for the second or even third time, and many of them are vaccinated and so forth. So consequences have not been particularly severe. But clearly, our associate cases have stepped up over the last 30 days or so. I think in terms of D.C., Michael, how that's going to work is you hire the people that get to call on clients, they begin to book commitments, and then it takes a while for commitments to turn into funding. But I would say it this way that based on where they are in the coming cycle where they are in the commitment cycle, meaning monetize legal commitments closed loan agreements yet to fund, I'm really excited about D.C. And my guess is over a 12- to 18- to 24-month period, it will be our fastest-growing unit. We're very excited and encouraged by the book of business that's developing there. As for Atlanta, I think your question was headed that basically their first year in operations was the COVID year. And are we thinking that we're going to back off on our $3 billion five-year notion? As it sits right now, I think Atlanta could have a really strong third quarter this year. And so, I think our leadership there has done a great job pacing through COVID in a way that still we believe that gives us a great shot at being that $3 billion franchise, call it by end of 2024, 2025.

Michael Rose, Analyst

No, it's both combined. I appreciate all the color, good point. Thanks for taking my questions.

Operator, Operator

Our next question comes from Casey Haire of Jefferies. Your line is open.

Casey Haire, Analyst

I wanted to follow up on the team pipeline. Obviously, a pretty strong quarter here in the second quarter with 37 producers hired. How is that shaping up in the back half? Can you guys improve upon that?

Terry Turner, CEO

Well, I think I would be surprised, sitting here today, if we don't do at least that in the second half. But the recruiting pipelines are full, I guess, over the years, they'll learn you don't sell and brain until they get in the seat. And so forth. Yes. I think the simple answer is, yes, I would expect the second half to probably surpass the first.

Casey Haire, Analyst

Okay. Great. And just on the BHG front, Harold, if I heard you correctly, it sounds like originations up 40%. That implies an origination level a little bit higher than what we saw in the 2Q. I just was wondering if you could confirm that. And then any color on where spreads are in the early going here in the third quarter?

Terry Turner, CEO

Yes, Casey. The 40% growth is an increase. I believe we mentioned 30% to 35% at the end of the first quarter. They feel confident that they have gained momentum heading into the second half of the year and expect production to rise during this period. The second part of your question was about spreads.

Casey Haire, Analyst

Yes. Just spreads, any color on spreads in the early going here in the third quarter?

Harold Carpenter, CFO

Yes. I don't have anything on July, but the month of June spreads were consistent with, call it, that 9% number. So they didn't see any significant degradation in spreads during the second quarter. I'll confirm that.

Operator, Operator

And our last question will come from Brian Martin of Janney Montgomery Scott. Your line is open.

Brian Martin, Analyst

Harold, could you elaborate a bit on liquidity? You mentioned it earlier. Where do you expect that to be in the coming quarters? It seems like your intention is to reduce it. Also, considering the loan and deposit data, how do you see liquidity and margin evolving over the next few quarters?

Terry Turner, CEO

Yes, I think in the second quarter we used about half of our liquidity cushion, possibly a bit more. We still have some liquidity available to pursue. Additionally, we have some short-term securities that we plan to cash in to support growth in the third quarter. We'll be utilizing some liquidity as of June 30, and we’ll enhance it a bit to see how deposits develop. The blue bars on Slide 17 in that top right chart will likely decrease, but they won’t reach the levels seen in the first quarter of 2022 during the third quarter.

Brian Martin, Analyst

Got you. Okay. And okay. And then how about just on the reserve, it sounds like the reserve coverage ratio is dropping a little bit further from here given the trends you're seeing in credit quality. Is that kind of what you guys were suggesting earlier, maybe I missed some of the commentary there, but just kind of how that ratio looks in the next quarter or two?

Terry Turner, CEO

As far as our ACL, is that what you're asking about, Brian? Yes, we are only discussing ACL coverage. Regarding loans, we still see opportunities to reduce it based on the models we use for our CECL-related reserve. We are also adding back qualitative factors to maintain the current level. It's important to emphasize that in 2019, the reserve was about half of what it is today. We do not expect to return to that level or to the initial CECL number, but we believe there is still some capacity to continue building reserves, which we have been doing steadily over the past six quarters.

Operator, Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.