Smartfinancial Inc. Q2 FY2022 Earnings Call

Good morning and welcome to the SmartFinancial Second Quarter 2022 Earnings Call. My name is Breeka and I'll be your event specialist for today's call. I will now hand the call over to Miller Welborn. Miller, please go ahead when you're ready.

Thanks Breeka. Good morning to all of you and we appreciate you joining us today for our Q2 2022 earnings call. We're excited to be on the call this morning and share an update on our company. We thank you for the interest all of you have in our progress, and it's important for us to hear your questions, comments and feedback. Joining me on the call today are Billy Carroll, our President and CEO, Ron Gorczynski, our CFO, Rhett Jordan, our Chief Credit Officer, and Nate Strall, our Director of Corporate Strategy. Before we get started, I'd like to ask each of you to please refer to page 2 of our deck that we filed this morning for the normal and customary disclaimers and forward-looking statements, comments, please take a minute to review these. Q2 was a great quarter for our company and we're very proud of what we've been able to accomplish in the first half of the year. Despite what the news media outlets will lead you to believe, our economy in the Southeast US and in particular our Tennessee, Alabama, Florida markets have been very busy and exceptionally strong. I'm proud of the team for the focus, execution and continued improvements we have made to date. With that I'm going to turn it over to Billy.

Thanks Miller and good morning, everyone. I'll jump right into some highlights to what we believe was an outstanding quarter. As we've communicated on prior calls, this year our main goal has been the integration of our new teams, executing our organic growth strategy and gaining operating leverage. And we're pretty much right where we thought we'd be, if not a little ahead of schedule. Again, it was a nice quarter. We reported $10.3 million in operating earnings or $0.61 per share, strong organic growth on both sides of the balance sheet for the quarter 30% annualized growth on loans and 9% annualized on deposits, highlighted by a 14% annualized number on our non-maturity deposits. This was a result of great momentum from our recent lift outs, as well as solid performance from our legacy markets. We had nice growth in our noninterest income lines as well, even with secondary market mortgage fees facing headwinds it was still a great quarter on that front. We also started gaining operating leverage from our recent expansions as the efficiency ratio ticked down to 64%. And credit quality remained strong with no movement in our NPA ratio holding at 11 basis points. These highlights show how we are executing our plan. I'm going to let Rhett and Ron provide some details in a moment. But as I mentioned, the expansion of the bank through our recent lift outs have been a strong catalyst for growth. The new markets in Alabama and our expansion in Nashville are working as planned. But it's important to note that our legacy markets have performed very well too. There's a great energy throughout our company right now. And it's not just the loan and deposit growth, the continued refinement of some of our ancillary business lines are leading to enhanced profitability. Our wealth and insurance platforms are both having very nice years and our Fountain Equipment Finance team had an outstanding quarter. We've grown balances in that group over 40% year-to-date, while holding yields relatively well. We really like that line of business and are looking for ways to continue to expand it. Expense controls have been a continued focus as we gain leverage and we believe this trend will continue as our expectations for the second half include fairly modest expense growth. So let me go ahead and hand it over to Rhett to walk through the balance sheet and credit, and then Ron will provide some more detail on the income and expense side. Rhett?

Thank you Billy. Our first quarter strong loan growth continued into the second quarter with net organic loans and leases growing just over $206 million excluding a reduction of approximately $19 million in forgiven PPP loan balances. This equates to a 30% increase in annualized quarter-over-quarter loan growth ending the halfway mark for the year with just under $3 billion in loans and leases outstanding, while the loan portfolio average yield held steady to Q1 levels. Quarterly production was very evenly spread across each of our regional footprint markets, well-diversified toward our target portfolio segments and evenly split between fixed and variable rate products. We continue to see solid growth in the deposit portfolio with net balances growing $91 million over Q1, with only a four basis point increase in deposit costs during the period. Loan portfolio mix continues to maintain consistency through the balance growth mentioned previously and deposit composition saw a continued increase in core deposits outpacing a slight reduction in time deposit balances to affect the net deposit balance growth I mentioned earlier. While we recognize our loan-to-deposit ratio continues to track below historic levels, we are excited to continue to have excess liquidity to fund what is proving to be a significant year of production across all of our markets. While most economic outlook and market guidance continues to indicate a higher probability of recessionary pressure in the next several quarters, our market areas continue to see strong personal and business relocations into our footprint. This continued market growth and resulting above average business economic stability coupled with our bank's historically strong and conservative credit underwriting approach is a great recipe for continuing to drive both growth and solid performance metrics in the loan portfolio through the balance of 2022. Second quarter saw each of our core asset quality metrics hold steady or improved compared to the prior two quarters. Non-performing assets of 11 basis points, a net recovery of charged-off loan balances and past due and classified loans to total loans ratio relatively unchanged from Q1 performance and better than Q4 2021 results. Our CRE ratios were consistent to prior quarter as well, total CRE holding at 304% of capital with a slight 9% increase in the CRE construction ratio that still ended the quarter below the regulatory guidance target. As noted in prior calls, we have historically managed our CRE portfolio in the upper end of the ratio guidance and continue to feel very comfortable doing so, given the diversification of the product mix and credit profiles of our CRE book. Our loan pipeline continues to be strong in volume and evenly distributed across all of our market areas with a significant portion of the opportunities being non-CRE in nature. Overall, we saw a very strong first half of 2022 in our loan and deposit portfolio results and are optimistic in our outlook for the second half of the year. Now, I'll turn it over to Ron to walk you through our allowance position.

Thanks, Rhett. Good morning, everyone. Let's move forward to Slide 9, our loan loss reserve. During the quarter, we recorded a $1.25 million provision related to our strong loan growth with minimal credit related provisioning. At quarter end, our allowance to originated loans and leases was at 74 basis points and our total reserves to total loans and leases was at 1.22%. We expect to continue our growth related provisioning to support our loan production, while closely monitoring allowance adequacy as economic and credit conditions evolve. On to Slide 10. For the quarter, we were able to deploy our $90 million of deposit growth and $110 million of excess cash to fund over $188 million in loans and retire $25 million of FHLB borrowings. At June 30, our liquidity position, which includes cash and securities, represented approximately 31% of our total assets and with a loan-to-deposit ratio of 70%, we are in excellent liquidity position to support our future growth as we execute on our strategic initiatives. Our net interest margin experienced a 17 basis point quarter-over-quarter increase despite having a reduction of over $560,000 related to PPP and acquired loan accretion. While excess liquidity continues to pressure our overall margin, we expect to continue the positive shift in earning asset mix that was realized during the second quarter to further expand our margin in this rate-up environment. While we monitor our margin closely, operating revenue expansion remains one of the primary metrics used to measure our efforts. During the second quarter, we had operating revenue increasing over $3 million for an annualized quarter-over-quarter increase of almost 33%. This is particularly impressive when you consider the revenue headwinds based during the second quarter related to reduced acquired loan, PPP fee, and mortgage banking income, which in aggregate was $1.4 million for the current quarter compared to $4 million for the same prior year quarter. Additionally, while we experienced strong second quarter loan growth, a large majority of the growth was booked during the month of June. Looking ahead, we believe our operating revenue growth prospects remain extremely strong as we experience a full quarter's worth of interest income on those loans booked late in the quarter. For the third quarter, we are forecasting a margin in the 3.35% range. The margin also includes an estimated loan accretion of four basis points or $320,000 and estimated PPP loan fee accretion of four basis points again $320,000. On Slide 11, you'll find some interest rate sensitivity information. As discussed last quarter, our balance sheet continues to be asset-sensitive and well positioned, as any further increases in short-term rates would have a positive impact on our net interest margin and net income. At quarter end, our static interest rate shock analysis shows a net interest income increase of over 4% in up 100 basis point rate scenario. Our interest rate sensitivity modeling uses historical betas as this provides us the most conservative picture of our sensitivity. However, as we've already seen, our $655 million in cash affords us some ability to continue to lag the market and delay deposit rate increases which has partially insulated us from the full effect of the recent market rate increases. Going forward, we will continue to use the strategy, but certainly not at the cost of losing core business or jeopardizing good client relationships. On Slide 12 we had another consistent quarter of noninterest income, generating over $7.2 million. We continue to build momentum in our core fee income categories, but consistent with our peers, our mortgage banking department experienced headwinds as a result of higher interest rates. However, we were fortunate to realize strong second quarter activity out of our capital markets team which generated almost $900,000 of revenue. We will continue our focus on expanding, diversifying and deepening our opportunities for growth in degeneration. Since we are not anticipating the same level of capital markets revenue, our noninterest income forecast for the third quarter is in the $6.7 million to $6.9 million range. On to Slide 13. We are now seeing efficiency improvements as we begin to fully leverage our teams and continue to optimize our platform. We expect our operating efficiency ratio to steadily decline to the near term to the low 60s range as we further build momentum and experience the rewards of our strategic initiatives. For the quarter, our operating expenses were in line with our expectations and guidance. Moving forward, we anticipate ebbs and flows in various expense categories as we invest in our people and platform. However, we fully expect revenue generation as a result of these investments to vastly outpace expense growth. For the third quarter, we are forecasting an expense run rate of $26.5 million range with salary and benefit expense of approximately $16.1 million which is slightly higher from the previous quarter due to additional incentive accruals based on our current production levels. On to Slide 14, capital. Even with the continued asset growth our capital ratios remained stable as a result of strong profitability. Management closely monitors the bank's capital position as it relates to projected forecast lending opportunities and other potential initiatives. At quarter end, the company and bank both exceeded well-capitalized regulatory standards and are in an excellent liquidity and credit quality positions to continue executing throughout 2022. At quarter end, our tangible book value was at $18.69 per share. However, excluding the temporary impact of our unrealized losses in our AOCI our tangible book value per share was $20.15, representing a year-to-date annualized growth rate of over 10%. Our tangible book value growth has been and remains an important priority of our management team. With that said I'll turn it back over to Billy.

Thanks Ron. We are really starting to hit a nice stride in this company. The recent hires have added great energy and our momentum is really strong right now. As far as an outlook for the second half of the year, Ron mentioned some of our guidance, but we anticipate it being more of the same. We will continue to support our lift-out teams as they move clients over to the bank. And we've been spending a fair amount of time in these new markets meeting prospects and with their advisory board teams to communicate our story. Both our story and our operating model are being very well received. Our nCino lending workflow integration is progressing well and ready to go live this quarter. We're very excited about this and look forward to seeing this new platform help our efficiency as we grow the lending side of the house. This quarter did run a little stronger than projected from a growth standpoint and our pipelines continue to look good. But that said, I do think we will moderate a bit as rates continue to push higher. I still like a low double-digit trajectory in the near term from a loan growth standpoint. The growth in asset mix change this quarter kept our capital levels relatively flat. But with the increase in earnings and our anticipated go-forward growth levels, I'm confident we can accrete capital at a level that will fund our needed organic growth. There is a really nice level of excitement in our company right now as I've said with the new hires, the growth in our existing markets and ancillary business lines, our corporate initiatives around leveraging tech and growth of our capital markets team and Ron had mentioned, it is great to be around our company right now. To close, I know we have a number of associates that listen in on this call. And I wanted to take a moment to tell them, thank you for the work they do to grow this company and to grow value for our shareholders. We recently celebrated another regional Top Workplace award, the sixth consecutive year we've received this recognition. So congratulations to our associates. I appreciate all you do in building this great culture. It is a great time to be involved with SmartFinancial. So we'll stop there, and we'll open it up for questions.

Thank you. The first question on the phone lines comes from Stephen Scouten of Piper Sandler. Please proceed when you're ready, Stephen.

Thanks. Good morning, everyone. My first question is about your thoughts on the continued deposit growth. I understand it's challenging to make projections in the current environment, but it seems like your growth is occurring at a stronger pace compared to the industry overall. I'm curious about what you're observing from a deposit perspective and what you expect for the rest of the year.

Yes, it's challenging to make that prediction. The pipelines provide us with some assurance regarding our loan growth expectations. Deposits have been difficult, but I believe we can keep growing our deposit base. As we start to attract new clients in various markets, we are acquiring individuals with both lending and deposit relationships. Therefore, I feel positive about it. If I had to estimate, I'd say we're likely maintaining a similar pace, possibly around half or slightly below half of what we are achieving in loan growth in the near term. However, I do expect our deposits to continue to grow, albeit not at the same rate as we did this past quarter.

Okay. That makes sense. And with the pace of loan growth Bill, I know you said it would be a little slower, obviously, still nice if it's in that low double-digit range. But I'm curious, do you guys have any sort of I guess, concerns or trepidation around growing loans into to what the market is telling us, is a more recessionary environment. But I know, you guys still remain pretty bullish on your market trends. But just kind of wondering, how you're thinking about that growth in the face of maybe some worsening economic trends.

We're not making significant changes. We've always practiced conservative underwriting and we're maintaining our approach to loans. We're bringing on seasoned businesses that have established a strong presence and good track record in their markets. While we're monitoring the economy closely, we feel confident about continuing our loan growth, as mentioned by Miller and Rhett, especially since we're still observing population growth in our regions. Although we understand the concerning headlines, we believe strongly in the markets where we operate. Growth may slow somewhat, as we've experienced two strong quarters that exceeded our expectations. However, we are still optimistic about maintaining a robust growth rate in the near term, even if it is not at the current rapid pace.

Got it. Got it. Maybe last thing for me. I'm just curious, within the NIM guidance you gave for third quarter and then maybe the asset sensitivity information that's laid out in the slide deck, do you have any details about what you guys are assuming within that for future deposit betas and even loan betas? It seems, like if I try to back into the loan beta, it was maybe around 12% in the current quarter. But I know, you guys noted the $645 million in loans that are immediately adjustable. So just kind of wondering, what you're seeing there. And what you're assuming in those expectations?

Yes, that's a good question. Year-to-date, the deposit betas are slightly over 8%. In the third quarter, we expect to increase our rates, likely late in the quarter, estimating a beta around 19% to 20% for Q2. For the fourth quarter, we anticipate a return to historical levels at about 30%, which is what we're currently modeling. We have benefited from some lag but are beginning to see that we will need to adjust. Regarding loans, they tend to react more slowly compared to deposits. There are timing differences between when term sheets are released, when commitments are made, and when they close, which is why we're starting to see the impact of rates on loans from Q2 become evident in the third quarter results. For loan yields, we were at 440 for the quarter and expect to be in the 460 to 465 range overall. Unfortunately, I do not have the specific loan betas at this time.

That's extremely helpful, Ron. Thanks so much. And congrats to everyone on the continued progress. Great to see.

Thank you, Stephen.

Okay. Thanks.

Thank you, Stephen. The next question comes from Catherine Mealor of KBW. Your line is open, Catherine.

Okay. Good morning.

Good morning, Catherine.

Good morning, Catherine.

Just one more on the margin. Just, how do we think about just the size of the bond book? Is it fair to assume that most of the deployment of excess liquidity will just, kind of, come from cash coming down and going into loans, but the bond book stays relatively stable, or anything that you're planning to do there?

No, at this point, we intend to use our cash first. So at this point, the bond book will be relatively stable. We are experiencing about $3 million a month coming back in, but, no, we're not expecting anything at this point of time. Again, unless our deposits start outpacing again, then we'll have a different story. But that's kind of what we're expecting at this point, Catherine.

Okay. Great. Helpful. And then, the efficiency target that you gave us, yeah what's your timing for when you think you can hit that number?

We're hopeful to reach the $60 mark by the third quarter, and we expect to be in the low 60s between the third and fourth quarters. We're very optimistic about this happening sooner rather than later, but we'll see how it plays out; either way, we anticipate being in the low 60s.

Great. Okay. And then, as we think about the expense growth rate into next year, I mean, this year we've seen such big expense growth the past couple of years. And I would imagine next year you're going to really start to see some nice operating leverage. But what's the senior expense growth rate as we think about next year with hiring plans and inflationary pressures that probably less build than we've had historically?

Yes. Of course, as I mentioned, we did have a jump. Q3 expectations are pretty much good for Q4. As we move into 2023, we're probably holding flat to around the $27 million, $28 million range, quarter-over-quarter. Again, that's what we know today and what we're seeing today. That's what merit increases and some of our initiatives are blended in. But trying to hold that $28 million range on average for 2023.

As we look ahead, we anticipate a slight increase across most areas, but it shouldn't be significant. As Ron mentioned, wage pressure will continue to be a factor. We expect some occupancy changes as we bring new teams into different offices over the next year. We're currently experiencing real operating leverage, which is encouraging to see. Therefore, while there will be a mild uptick, we believe it will be quite moderate.

But it's more about incentive than headcount. We're not

Yes, yes. We're not adding.

And overall, infrastructure growth. I mean, we're yes.

Great. All right. Very helpful. Thanks. Congrats on the great quarter.

Thanks, Catherine.

Thanks, Catherine.

Thank you. We now have Matt Olney of Stephens. Please go ahead when you’re ready.

Hi. Thanks. Good morning, everybody.

Hey, Matt.

Hey, Matt.

I want to go back to discussion around funding and deposit growth. And within that margin guidance of the $335 million for the third quarter, what does that assume for the excess liquidity position?

Yes, that's a good question. Our current excess liquidity is costing us about 15 basis points, which has decreased from 35 to 40 basis points earlier this year. By the end of the quarter, we expect our excess liquidity to normalize. We don't anticipate maintaining a large amount of excess liquidity moving forward, as our deposits are now primarily supporting our growth after addressing the excess liquidity. So, we're essentially neutral on that matter.

And just to clarify that. So it sounds like the liquidity levels come down in the third quarter. And by the end going into the fourth quarter were close to normalized levels, did I get that right?

Yes. Yes sir.

Yes, Matt, we're viewing the situation as I mentioned earlier. I still believe we can grow deposits. Currently, we anticipate that loan growth will occur slightly faster than deposit growth in the near term. This will naturally reduce our excess liquidity somewhat, but that's acceptable. We still expect to maintain a solid liquidity position as the year progresses, although it may be slightly lower than it is today.

Okay. And as far as what a normalized liquidity position would look like for the bank at this point. Curious kind of what the dollar math would be. I guess, if we go back to 2019 it was around 5% of earning assets, which would be around $200 million at this point. Is that the right way to think about a more normalized balance for average liquidity?

We don't plan to return to the conditions of 2019 as our bank has evolved significantly since then, and our ability to gather deposits has greatly improved. Our objective is to maintain our cash levels around 7% to 8% and our securities portfolio around 13% to 14%. This is the mix we are aiming for, and we are on track to achieve it as long as our deposits align with our expectations. Therefore, we are focusing on having cash at the 8% level.

Okay. That's very helpful. And then, I guess, switching gears just in terms of the new production hires. I know last year in 2021 was a big year for that. Just maybe an update on where we are as far as the number of new hires this year. And how that compares to where we were last year? Thanks.

I don't have the 2022 statistic, but our hiring this year has been relatively minimal. We had a large increase in staff last year, so this year our focus has been on integrating those teams. We have added about four production staff members this year, but most of the additions occurred late last year. We're starting to look at the next phase as we prepare our facilities. We're having good discussions and see ongoing opportunities to expand our team across all areas, but we're approaching this process cautiously as we work on getting our income statement to where we want it, which should happen fairly soon.

Okay. Thank you guys. Congrats on the quarter.

Thank you, Matt.

Thanks, Matt. Thanks.

Thank you, Matt. We now have Feddie Strickland of Janney. Please go ahead, when you’re ready.

Hey, good morning, everybody.

Good morning, Feddie.

Good morning, Feddie.

I just – I wanted to ask I was glad to see non-interest income up overall despite the lower mortgage. And it sounds like you guys are pretty bullish on the Fountain Equipment leasing business. Can you talk a little bit more about what the puts and takes are across the different non-interest income lines kind of beyond your prepared remarks?

Ron, I guess you want to – I guess, the question Feddie that was to drill into the non-interest income line a little bit more? Is that what the question was?

Yeah. Just what your expectations are going forward? I think we had some seasonality on the insurance line and I know mortgage was down but down at most places. But we're just curious on the other lines wealth management, et cetera, what you guys are seeing going forward?

Going forward from where we were at Q2, I think wealth management has picked up. It's been a bright spot for us from our – we had a good base and from our lift-out that we did late last year. We're looking for what – our Q2 revenues probably are very consistent for the remainder of the year and then uptick going into 2023. Insurance we will expect a little bit stronger Q3 seasonality where we get some more timing – more time and a couple of hundred thousand more of revenue. But then Q2 is really a base rate that we will apply back to Q4. Again the insurance industry as we grow and with the contingency fees coming in once a year it's kind of – they do bounce around but it will – Q2 is the low point for us looking forward. Our capital markets that's not – I'm not going to say, it's hit or miss. We do have a small pipeline of those, but that's really rate environment specific. And we are we probably, we will have some Q3, but not nearly as much as what we have been blessed to have during Q2. Mortgage income we are not expecting much at all for Q3. The pipelines have been steady and most – slower, but steady and we've been taking those more in-house. I think as we get through I think Q3 – excuse me, in 2023 for Q1, we expect that to change and flip back over pretty much to be closer to Q1 of 2022 levels as we get going next year. But – and customer service fees is just going to be ongoing efforts. So that will be a slow upward tick going forward. Probably a little bit too much more information than what you wanted a little bit too much detail.

No, that's great. I mean, I think that's a big part of something you guys have built over the years. So I think it's something worth to get into. And just to switch gears a little bit. I was wondering, if you can talk through a little bit some of the technology initiatives you've accomplished, and what you have upcoming on slide 15. Where do you see the most opportunity out of those upcoming initiatives in the near-term?

Sure. I'll start with the nCino integration, which we've emphasized recently as a significant project. We believe reengineering our loan workflow will bring substantial benefits, and we're looking forward to launching it this quarter. We're also implementing a profitability model alongside it, which will enhance our ability to price loans effectively and assess fees and deposits accurately. In addition, we've recently rolled out an initiative to upgrade ATMs, including new models with deposit automation to replace older machines from previous acquisitions. We aim to push more transactions through various channels like mobile, Zelle, and our advanced ATMs, making operations more efficient and reducing branch transactions. Those are the key projects we've been focusing on. Nate, is there anything I missed apart from the nCino integration and the ATMs?

It's for Nate.

Yes. The impact would have been on all areas.

That's about 50% of the ATM fleet.

Yes. Have been upgraded into these new models, but hopefully that helps Feddie.

No, that's definitely already included in the expense run rate, right?

That is correct.

Yes.

Got it. Perfect. And, I guess, one last question for me. Just as you look across your footprint is there any way you want to infill or expand, or are you more focused on just kind of growing and integrating your existing markets?

Not really. Yes, I love our footprint. I mean when you look at kind of where we are now in Tennessee, we're in every growth MSA in Alabama, in every growth MSA in the Panhandle. And so when you look at our zones and our markets I think a lot of it now is just kind of just leveraging those zones by adding more talent.

Density, density, density.

Yes. And so there's really not I would say from a market standpoint. We'd love to continue to expand Nashville. Nashville is just such a big market now one where we've been in the zone. We've added some strength there last year. That's a zone we could obviously do more in. That's such a large market. But for us right now, it's just more Nashville probably more Birmingham…

... Tons of opportunity there.

So really probably going into those larger MSAs with maybe a little more from a resource standpoint is probably where we'll focus near-term and just continue to support the new markets where we've already got folks.

Makes sense to me. Thanks for answering my question guys. Congrats on a great quarter.

Thank you, Feddie.

Thank you.

Thank you, Feddie. We now have Kevin Fitzsimmons of D.A. Davidson. Your line is now open, Kevin.

Hey, good morning, everyone. How are you?

Hi, Kevin.

Hi, Kevin.

I apologize if this has already been discussed, as I joined the call a bit late. Regarding credit, we seem to be at an interesting juncture with various projections and concerns about a potential recession, yet many banks aren't observing any clear indications or red flags. Since you're not under CECL yet, I'm curious about your approach to the allowance. Are you facing any constraints? In other words, would you like to increase that reserve more than you currently have, but feel restricted due to a lack of historical losses in the historical model? I'm interested in learning how you're planning to manage that reserve moving forward. Thanks.

Rhett, do you want to...

I'll take it first and then Ron you can add any other you like. No, Kevin, I think that we feel pretty good about where we are with both our historical model. Of course, we are transitioning to CECL in the not-too-distant future. So clearly modeling for that expectation. But our methodology our approach to credit has always been conservative. Clearly, as you pointed out it is a challenging time as you try to estimate or expect what's sort of coming around the bend. But the best way we know to address that is what we have always done and that is when you look at a transaction to stress the results to stress the interest rate expense to stress all the factors that could weaken in the profile and just make sure that you feel comfortable that that particular project or that particular business operation can sustain some downward adjustment and still be able to perform adequately. And so that's the approach we've always taken and that's the approach we continue to take. And I think from an allowance standpoint, we certainly look to affect our qualitative factors when we can as much as needed based on the parameters that we use in that model and we feel really good about where we're positioned at this point. Ron I don't know if there's anything to add.

No you hit all the high points. I don't think whether we were CECL or not, our expectations would be the same. I think we're in a good spot today, seeing, looking forward in our footprint, we're not seeing any credit or economic issues directly that would cause us to add anymore provision. I mean it's kind of where we're at.

Okay. Great. Thank you. And maybe just hitting the – this has been brought up a couple of times already but it seems like the 2021 was a very busy year of adding new bankers, new hires and now the focus is on leveraging that, and showing increased revenue and profitability and loan growth from that. On the other hand, there's still some pretty busy merger activity going on in the Southeast, generally the biggest one being TD and FHA and we've had some banks announce some selected lift-outs in new markets. And it sounds like Bill, you're not looking really for new markets but you have certain markets where you'd want to add talent. Are you – how are you balancing that? Like if you're getting inbounds in terms of new hires that want to join or interested in joining but yet you want to show, you want to demonstrate that profitability, or are you having to kind of tap the brakes on new hires you would normally get or no. If they come in and you want them you're going to go full steam ahead.

Yes. We're not tapping the brakes. From our standpoint, you said the word it's a balance. We kind of had this first wave. We're getting this first wave on board. And as you can see and we believe as we perform here in the second half, we will continue to have opportunities to bring folks on when we're ready and they're ready. As I said, we continue to – we've got some folks that we've – when we stay close to in our zones, we continue to watch those opportunities. I had a good friend to say, he never had a budget for production hires. And I think that's a pretty good rule of thumb. Obviously, we do want to balance it. We need to show and demonstrate our ability to start leveraging this expense base and grow revenue. We're doing it. We're going to continue to do it. And then I think we'll be in a really nice spot to add into these markets, where we are with additional talent here in the near-term. So we're going to continue to keep per foot lightly on the gas as we navigate the next quarter or so but continue to look to add folks when they're ready.

I'll say we spend a ton of time on the recruiting a bunch of time talking to folks in different markets but we are pretty darn particular about how they fit culturally and what the projections and their book of business and what we're looking at. So, it's got to be the right fit, but we're always looking for great talent.

As Miller mentioned, I believe we eased our pace at the beginning of the year because we had integrated so much that we needed time to absorb it. We focused on that during the first half, and now we’re beginning to see the impact reflected in our balance sheet and income statement. We're actively seeking opportunities, particularly in the Southeast where there are several potential deals that could benefit us. We are continually observing and discussing options and have no intention of slowing down in the near future.

And one last one for me Bill. The outlook for more moderate pace of loan growth, is that just more coming off a very, very strong quarter, or is it more of a proactive stance to not be growing as quickly going into a potential downturn or what you're seeing from customers or a little of all the above.

It's really more the first. We grew the loan side by 30% annually in Q2, and moderating it down to a low double-digit trajectory is quite impressive. So, overall, it’s pretty good.

No, it's better than pretty good. Right.

We still believe we can achieve growth in the near term. Rates are continuing to rise, and it's uncertain what might cause a slowdown in the future. However, we experienced exceptional growth in the first half of the year, likely surpassing our initial projections. We anticipate that the second half will reflect a more consistent performance from our team moving forward.

Okay. I can’t argue with any of that. Thank you very much.

All right. Thanks, Kevin.

Thanks, Kevin.

Thank you, Kevin. We now have another question from Taylor Brodarick of Hovde Group. Please go ahead when you’re ready, Taylor.

Hey, I'm on for Brett subbing in today. Deposit betas, how does that compare to sort of the last cycle? Just thinking about that, in the context of just improved service charges in the quarter and just thinking of how that compares from previous.

Yes. Historical, we're at 30%. I think we were up 30% pretty quickly. We've managed to lag almost quarter and a half, almost two quarters of that. So we are doing extremely better than what we've had in the last cycle. So we definitely cut probably the betas in half. But again, we'll see what the next quarter brings, but that's kind of what we're looking at today.

And outside of tech, regarding the efficiency initiatives, is there anything else that could be considered as easy wins? I know that these opportunities can sometimes fluctuate with compensation, but I'm not sure if there are any additional options beyond the digital work that you might be thinking about.

Not really, Taylor. From our standpoint, I think a lot of the efficiency work has been completed. As Ron mentioned, there likely isn't much low-hanging fruit left to address. It’s primarily about continued refinement and making small adjustments like renegotiating contracts. There is an ongoing review of the expenses, but there aren't any significant changes expected. We believe that the expense line will stabilize reasonably well with some minor inflation in certain areas, while we focus on growing revenue, which should help improve the numbers on their own.

We are continuously looking at our internal initiatives, which, while not currently focused on expenses, could lead to savings in the future. As we aim for growth from $5 billion to $7 billion, we are assessing what changes we need to make and what software can support us. Our management teams are always striving for improvement, both now and in the future.

Great. I have one more question. We've discussed lift-outs and adding personnel extensively. Considering the appeal of our footprint, how do you view the need to defend against that? Is there anything you feel you need to address regarding potentially irrational activity in acquiring producers? How do you approach that?

It's a great point. When you have a strong team, it's necessary to be cautious at times. We prioritize creating a positive work environment and focus on the culture of our organization. We ensure that we provide the right resources to our leadership so they can effectively recruit and retain talent. Being cautious is part of our strategy, and it's something all banks face. In this context, companies with better cultures usually succeed.

Great. Thanks a lot for commentary.

Thank you, Taylor.

Thanks Taylor.

Thank you, Taylor. We have no further questions registered. So I'd like to hand it back to Miller Welborn for some closing remarks.

Thanks Breeka. Thanks again to each of you for joining us today. As always, please reach out to any of us directly if you have any additional questions. And I hope each of you have a great week. Thanks.

Thank you all. That does conclude today's call. Thank you for joining. You may now disconnect your lines.