Earnings Call Transcript - SMBK Q1 2021

Operator, Operator

Good morning, and welcome to the SmartFinancial First Quarter 2021 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Miller Welborn, please go ahead.

Miller Welborn, CEO

Thanks, Garrett. Good morning, and thanks to everyone for joining us this morning for our Q1 earnings call. We always love being with this group each quarter, talking about our progress in our company. Joining me this morning on the call are Billy Carroll, our President and CEO; Ron Gorczynski, our CFO; Rhett Jordan, our Chief Credit Officer; and Nate Strall, our Corporate Strategist. Before we get started, I'd like to ask everyone 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. Well, 2021 has certainly started off at a mighty fast pace for our company. The bank has grown rapidly over the past couple of years, and in particular, the past 12 months. We've grown our assets by more than $1 billion, and only about $400 million of them were acquisition related. Our organic pace of growth has been impressive, and we see nothing slowing us down over the months ahead. Four major points of focus for our team this year to date have been strong tangible book value growth, ROA growth, ROE growth, and EPS growth, and we feel very confident and very proud of the progress we've made in all four of these areas to date. We talk often about how excited we are in the company, and we can't stress enough how we feel this company is positioned for the quarters ahead. With that, I'm going to hand it off to Billy to talk about a few of the points.

William Carroll, President & CEO

Thanks, Miller. We did kick off the year in a great way, as Miller said, with a very solid first 3 months. Our company continues to take the steps necessary to become a key player in the Southeastern Bank landscape and build great value for our shareholders. I'm going to hit on a couple of highlights, and I'm going to turn it over to Ron to dive into the financials a little bit, and then on to Rhett to touch on credit. But first, we do believe the pandemic is clearly in our rearview mirror, although we are still operating cautiously and safely in our markets, our markets and our teams are primarily in the moment. Our sales teams are back playing offense, and we are seeing great opportunities in all of our zones. We've had a couple of newsworthy items of late, so I wanted to start by highlighting those. Last week, we announced the signing of a definitive agreement to acquire Sevier County Bancshares and their subsidiary, Sevier County Bank, a deal we are very excited about in our legacy market where we can achieve some great synergies with the combination. SCB is a $460 million bank with a very complementary book of business. We anticipate our cost savings to be over 60% on this deal, and it is a huge win for us. We've included some additional details on the deal on Pages 5 and 6 of our deck, but it presents an excellent density play that will add nicely to our metrics. Next, detailed on Page 7 of the deck, you'll see some information on some great additions to our SmartBank team. Over the last few weeks, we've completed a lift-out in our Gulf Coast region to add some muscle in South Alabama and the Florida Panhandle, another huge win for our bank with this team coming from a solid regional player. This move will be adding one office in Mobile, Alabama, along with our new Regional President, Nate Sommer, with the other members of the team expanding our existing presence in Fairhope, Alabama; Pensacola, Florida; and Destin, Florida. While a lot of the quarter was spent on those two initiatives, it has not impacted our continued improvement on the financial front, a few of those highlights. Earnings were very solid at $8.9 million from both a GAAP and an operating standpoint, coming in at $0.65 per share, noting another non-interest income record quarter. We had strong loan and deposit growth for the quarter. We organically grew core loans over $60 million or 10% annualized. And deposits grew over $240 million, representing 34% annualized. Outstanding results on both fronts. We're continuing to see clients hold larger-than-normal amounts of liquidity, which is creating some NIM headwind. However, we are taking the approach to watch these positions through the PPP pay-off cycle to gauge how sticky that excess will be. This quarter also includes participation in the most recent round of the Paycheck Protection Program, with strong demand and we were very glad to be able to offer clients and prospects this service, originating over 1,200 loans in this most recent round, totaling over $119 million in loans, generating over $5 million in projected revenue. Rhett will provide additional details on this in a moment. I've got some other comments regarding what I expect as we move forward in 2021, but again, nice results for our company this quarter. Let me turn it over to Ron now for financials, and then Rhett will touch on portfolio and credit, and then I'll close with those comments. Ron?

Ronald Gorczynski, CFO

Thanks, Billy, and good morning, everyone. I'll be starting on Slide 11. Focusing on the top graph, we continue to improve our ROA metrics, which is driven by the continued and consistent steady ramp in profitability. Moving on to the lower portion of the slide, our operating return on average tangible common equity of 14.5% continues to be a bright spot for us. We have done an excellent job of managing capital levels throughout the pandemic and haven't rushed to raise capital. Turning to Slide 12, as Miller indicated, we have continued our consistent trends of increasing our tangible book value with a 10.5% increase on a linked-quarter annualized basis. And year-over-year, we had increases of over 12%. On the lower portion of the graph, our operating efficiency ratio, represented by the green line, has been steadily improving. We are proud of our SMBK team for their continuous efforts on improving our efficiency levels. For the current quarter, we are still hovering around that 60% level. Turning to Slide 13, net interest income. We reported net interest margin of 3.48%, a decline of 9 basis points from the prior quarter. Our net interest income FTE was $26.4 million for the quarter, very consistent with the prior quarter's $26.7 million. We did very well considering the headwinds of 2 fewer days of interest, lower loan rates, and continued repricing of the balance sheet, all being partially offset by our continued benefit from our decreasing deposit costs. During the quarter, our loan yields, excluding loan discount accretion and PPP fees, have declined by 23 basis points from the prior quarter, but the prior quarter did include 7 to 8 basis points of escalation from an elevated amount of loan prepayment fees as well as our participation in the 2021 PPP program, which negatively impacted our loan yields by approximately 6 to 7 basis points. Overall, the decrease in loan yields was offset by 27 basis points or $1.6 million of loan discount accretion and 40 basis points, or $2.4 million of PPP accretion. For our interest-bearing deposits, we had a decrease in funding costs of 6 basis points to 0.44%, with our cost of total deposits for the quarter at 0.33%. For the second quarter of 2021, we will have almost 19% of our time deposits maturing and repricing, so we still have an opportunity to further reduce our deposit costs, potentially taking another 2 to 3 basis points. Overall, removing loan discount accretion and PPP fee accretion, we believe our NIM has bottomed. Our expectations for our NIM is to hold steady and slowly rise during the latter part of 2021 and beyond. Over the past several quarters, we've been maintaining elevated cash balances. Our average cash balance has increased almost $68 million for the quarter, with a quarterly average balance of $417 million. This elevated position of excess liquidity has negatively impacted our margin by well over 20 basis points. As we have mentioned previously, we've taken a conservative approach and have been patient in deploying our excess cash since we don't know how permanent our liquidity position will be moving forward. We anticipate utilizing some of our excess funds to finance projected loan growth, and we expect to layer in more bond purchases over the next several quarters to get our securities asset ratio closer to the 10% level. Looking forward, we are forecasting a second-quarter margin around 3.20%. We estimate to have loan acception of 9 basis points or approximately $546,000 along with estimated PPP loan fee accretion of 31 basis points, approximately $1.9 million. Moving on to Slide 14, operating non-interest income. We had a great quarter for operating non-interest income as we continued our momentum in growing this category. For the quarter, we reported $5.7 million of operating non-interest income, an increase of almost $1.2 million from the prior linked quarter. Our service charge and interchange fee income remained stable. We had a $124,000 increase from investment services due to continued growth in our assets under management. For our mortgage banking team, we had another great quarter. As expected, our Q1 income was a little softer than the previous quarter, but still resulted in revenues reaching over $1.1 million. As our pipeline remains strong entering Q2, we are facing some headwinds with increased building prices, delaying some projects, decreased inventory, as well as an uptick in interest rates. With that said, we are still expecting some good performance from our mortgage team for 2021 as we continue to grow this division. We also had an outstanding product from our insurance division. Looking forward into the second quarter, we expect to gain some traction with additional fee income from our newly hired Director of Capital Markets. In addition, we have recently executed a branding agreement, which will provide increased interchange fee income during the second half of the year. Our forecast for the second quarter is to achieve non-interest income of $5.1 million. Continuing on to Slide 15. Again, we want to take the opportunity to reintroduce our family of revenue generators. During the quarter, we started to see some positive traction from our new internal referral system that is providing many pathways directly to our revenue generators. We are highly optimistic that our continued focus will drive increases in our non-interest income category moving forward. Turning to Slide 16, you'll find our operating non-interest expenses. As you can see on the slide, we are maintaining a level of expenses and are continuing to remain focused on expense control. During the quarter, our non-interest expenses have increased slightly. Some of the variances included a slight decrease in our salary and employee benefit expense for the quarter, primarily relating to salary cost deferrals for the PPP loan originations. Our data processing and technology expenses increased due to peer pricing adjustments from our core processor and other technology-related expenditures. Our other expense category had an increase of $578,000, with the majority of this increase related to our strategic investment in a start-up fintech company focusing on technology and the digital saving app space. Offsetting these increases were decreases in both our professional fees and amortization of intangibles, where the previous quarter had a higher level of expenditures. Looking forward, our forecast for the second quarter is to have non-interest expenses around the $20 million mark, with salary and benefit expenses approximately in the $12 million range. The reason for the increase from the prior quarter guidance is primarily attributable to the salary and expense run rate for the 8-person Gulf Coast lift-out team and additional expenses related to the company's health insurance premiums and technology-related expenditures. Before we move to the next slide, let's touch base on taxes. Our income taxes for the current quarter reported an effective tax rate of 21.5%, which includes tax benefits derived from our continued involvement with the State of Tennessee Community Investment Loan program and, to a lesser extent, the benefit from additional BOLI income. We are forecasting our effective tax rate to remain at 21.5% for the second quarter of 2021. Moving on to Slide 17, we will look at our deposits. As previously indicated, we have seen significant growth in our deposits. The overall composition of our deposits has continued to evolve, with time deposits currently making up 17% of our deposits. When compared to the same quarter last year, we had our time deposits making up over 30%. Now to deposit earnings. We had another fantastic deposit quarter with total deposits continuing to accelerate during the first quarter, increasing by almost $243 million, ending the quarter over $3 billion, up over 30% from the same prior-year quarter. For the current quarter, our non-interest-bearing deposits ended at $778 million, up over $92 million and represented almost 26% of total deposits compared to 18% for the same period last year. Additionally, our money market savings deposits were up over $154 million, while our time deposits decreased by $38 million. At quarter-end, our brokered deposits to total deposits dropped below the 2% level. With that said, I'm now handing over the slide to Rhett Jordan, our Chief Credit Officer, to go over loan and credit-related information. Rhett?

Rhett Jordan, Chief Credit Officer

Thank you, Ron. Beginning on Slide 18, our loan portfolio continues to show stability and diversification, with outstanding balances up approximately $105 million quarter-to-quarter, and the overall loan mix remaining similar to previous quarters. As mentioned, our portfolio grew by just over $100 million, with approximately $60 million of that being organic growth across our footprint. Our CRE portfolio saw a slight uptick as new projects were initiated, coupled with continued strong housing demand in our markets. Open marketplaces across our three-state area have consistently reduced COVID restrictions, and our client base is reaping the benefits of a robust start to 2021. Overall, it was a solid quarter with continued strong performance in the book. Moving to Slide 19, our overall credit quality metrics continued to perform very well. Our NPA ratio saw a mild improvement to 0.29% from 0.31% at year-end 2020. Net charge-offs for the quarter were 0.01%. Our over 30-day past dues trended similarly to our fourth quarter 2020 results. Classified loans were 0.39% of total loans, down from 0.44% at year-end 2020. Overall, another strong quarter in credit quality metrics. We're also excited to report that our overall portfolio has returned back to near full normalcy from COVID-related modifications, and we ended the quarter with only 0.07% of our loan portfolio still in a COVID-modified status, which consists of just a few unique cases, with 100% of our hospitality and restaurant portfolio back to a non-modified status. From a peak of nearly 25% of the portfolio in the second quarter of 2020, this is an accomplishment we are very proud of, thanks to the tremendous effort, innovation, dedication, and teamwork of our clients and associates in navigating the unprecedented challenges of the 2020 operating year. Overall, our asset quality continues to demonstrate strong metrics, remaining in line with best-in-class levels. Our outlook is positive, and we expect our historically consistent performance to continue in upcoming periods. As for our PPP loan portfolio, we continue to see expansion of our forgiveness applications during the first quarter while also realizing strong volumes in new applications for round 2 of PPP stimulus. As noted on Slide 20, by quarter-end, we successfully processed and posted forgiveness payoffs of approximately 478 applications for just over $82 million in balances. We ended the quarter with about $218 million in balances remaining from round 1 advances, or roughly 73% of our originated total and expect the forgiveness trend to continue at a reasonable pace into the remainder of 2021, especially as funding for round 2 reaches capacity. In addition, as Billy mentioned, we have seen strong volume of round 2 PPP production thus far, having originated 1,231 loans for just over $119 million and approximately $5.5 million in fee generation. This round has been slightly more oriented toward existing client applications compared to round 1, but still maintains a reasonable mix with approximately 79% of fundings to SmartBank clients and 21% to prospective relationships. About 70% of borrowers in round 2 were repeat borrowers, having also received funds in the initial PPP issuance. Although not as high a volume as in round 1, round 2 PPP remains a very strong endeavor in providing continued support to our client base through the pandemic while generating a solid revenue production effort for the bank. Now I'll turn it back over to Ron to walk you through our allowance positioning for the quarter.

Ronald Gorczynski, CFO

Thanks, Rhett. Let's move forward to Slide 21, our loan loss reserve. As Rhett has indicated, we have continued to achieve great statistics for our credit quality. For the current quarter, we did not require a provision and had our allowance at adequate levels. We utilized allowance to accommodate organic loan growth, but that was offset by both the improving economic environment within our footprint and other qualitative factors, including most of our COVID loans returning to regular payment schedules. At quarter-end, our allowance to originated loans, less PPP loans, was at 0.93%, and our total reserves to total loans less PPP loans was at 1.46%. Going forward, we will adjust our allowance as needed to accommodate the current economic and credit conditions. Moving on to Slide 22, our capital position. Our capital ratios remain strong, consistent with the prior quarter, and keeping pace with our significant asset growth. During the quarter, we paid $900,000 in cash dividends and repurchased almost 60,000 shares of common stock for a total of $1.2 million. We have recently suspended our share repurchase program due to our recent merger announcement. At our current levels, we are well positioned. Related to our merger announcement, our pro forma capital ratios remain strong and above well-capitalized levels, and we do not anticipate the need for additional capital at this time. With that said, I'll turn it back over to Billy.

William Carroll, President & CEO

Thanks, Ron. Thanks, Rhett. I really appreciate those comments. As you've heard, just a great quarter for our company. As Rhett alluded to, our markets are performing extremely well. Growth in pipelines is very evenly distributed across our markets. We feel very bullish on growth over the coming quarters. I'd add that our growth trajectory is strong, up from previous quarter guidance, with our markets benefiting from strong population influx that we believe will continue for some time to come. Regarding the new team members that we've added, I think we can see high single digits on loan growth for the coming quarters and the remainder of the year. While there are some headwinds with payoffs and pay downs as clients are holding again higher levels of liquidity, our sales team is doing a fantastic job of maintaining deal flow. Ron mentioned a few headwinds with some continued margin pressure, but we have purposely held these higher levels of liquidity and cash. We believe this is the correct approach for our company, even if it does slightly drag net interest income for a couple of quarters. Our confidence in our ability to grow loans is strong, and we think the margins will stabilize in the upcoming months, allowing us to evaluate these liquidity levels and formulate the correct utilization strategy moving forward. The Sevier County Bank deal, when executed properly, is going to be a significant opportunity for our company. The synergy case, coupled with a strong expansion marketing team in Richmond, Virginia, presents outstanding upside. This transaction is anticipated to close in the third quarter with a Q4 conversion. A lot of what I discussed earlier represents our desire to do more. Our size, scale, and earnings streams now allow us to engage in these types of needle-moving activities. While we continue to explore strategic M&A, you will notice our company now pivoting to an even more focused approach on organic growth. We've always been able to generate substantial organic growth, but moving forward, we will look to take a more deliberate approach to this strategy. It's an exciting time to be part of our company as an associate and as an investor, and we are positioned extremely well to be opportunistic moving forward. So I'll stop there and open it up for questions.

Operator, Operator

The first question comes from Stephen Scouten with Piper Sandler.

Stephen Scouten, Analyst

I appreciate all the color on the new team lift-out and the slides therein. That was great detail. Billy, you mentioned potentially increasing loan growth guidance to the high single digits. But I'm wondering about that team in particular—what was the size of their overall book, where they came from, and what you could expect from that team over maybe the next 3 years or so as they ramp up?

William Carroll, President & CEO

Yes. Stephen, as you know, our projections for these people are really bullish. I think the book they managed was somewhere in the $400 million to $500 million range. They had also been slightly constrained by areas they could focus on with their previous employer. We really feel like we can kickstart their contributions over the next couple of quarters. Our pipelines have already generated approximately $40 million with them in just a few weeks, and we are extremely optimistic about where we can take this group. Regarding our expectations for them over the next couple of years, it's still to be determined, but we are confident it will be positive. I'm quite excited to have this team in our company as they fit our business model perfectly and diversify us into more C&I work. They also have the capability to do some substantial real estate activities. We did Murfreesboro about 18 months ago, and I think it was overshadowed somewhat by COVID, but that has proven to be extremely beneficial for us. Those folks were added shortly before COVID ramped up, so their impact was muted in 2020. However, we're already experiencing growth resulting from that team along with others in our footprint. I think we can start seeing them becoming accretive to income within just a few quarters, and I'm very optimistic about where we can take it from there.

Stephen Scouten, Analyst

That's helpful. I have two questions regarding the NIM. First, what drove the decline in loan yields ex PPP plus accretion? I noticed that it was down about 23 basis points—where are new loan yields coming in for new production? And secondly, where do you expect the incremental securities investments to come from in terms of yield?

Ronald Gorczynski, CFO

Yes, this is Ron. I appreciate that question. The 23 basis point decline was somewhat distorted due to an elevated amount in Q4. Our new loan production is typically around the 375-ish area. A bigger driver here is the PPP participation skewing our loan yields. It's hard to simply pull that out and indicate what they could be without considering the many variables involved. Regarding bond repurchases, we haven't finalized what area they'll target, but that will be determined as we progress in that area.

Stephen Scouten, Analyst

Great. And just one follow-up for clarity: on the insurance revenue, is that more of a run rate item or a one-time deal within the insurance line item?

Ronald Gorczynski, CFO

It's more of a one-time item. Although we are looking to do more in that space, the current level is likely not sustainable.

Operator, Operator

The next question comes from Brett Rabatin with Hovde Group.

Benjamin Gerlinger, Analyst

This is Ben Gerlinger, on for Brett. I just wanted to do a quick follow-up. The high single-digit guidance that is inclusive of Gulf Coast, but excludes PPP and Sevier County, right?

William Carroll, President & CEO

That is correct.

Benjamin Gerlinger, Analyst

Great. Looking at the loan growth itself, if we drill in a little bit more—are there any specific loan categories that you feel more comfortable with today or that we should expect going forward? I know construction costs were referenced, which might slow things later in the year. I'm just trying to evaluate how your loan portfolio could shake out by the end of the year.

William Carroll, President & CEO

Rhett, do you want to touch on that? I think we’re still fairly evenly distributed across sectors and not looking to favor one over the others right now.

Rhett Jordan, Chief Credit Officer

Yes, I don't anticipate the overall mix changing too much as we progress through the year. Yes, construction costs are elevated, but there remains strong demand for housing. We're seeing solid demand for residential housing, multifamily development across our footprint. Additionally, between the Gulf Coast lift-out and our efforts in the Murfreesboro and Southeast Tennessee markets, we’re also observing good activity in C&I. We expect that to build as companies regain their footing and look to redeploy capital.

Benjamin Gerlinger, Analyst

That's really helpful. Just looking at the PPP balances, there's a wide variety across the banking spectrum regarding how many have been forgiven. How do you view the forgiveness of 2020 versus 2021? Do you expect to see some of that come off the books in the second half of this year? I know it's more client-driven than just the SBA.

Ronald Gorczynski, CFO

Yes, that’s a good question. The forgiveness process has been challenging for modeling. For the 2020 vintage, we anticipate about $218 million remaining. We expect about 55% of that to be forgiven in Q2 and another 35% in Q3. The remaining $10 million to $15 million will likely remain until the end of the program, which is a 2-year cycle. For the 2021 vintage, we expect it to be much more expedient. Having originated approximately $119 million, we project 10% forgiveness in Q2, 16% in Q3, and then about 29% in Q4 with the remainder extending into 2022. We believe the majority will be forgiven throughout the year.

Benjamin Gerlinger, Analyst

Got it. Lastly, how are you approaching your loan-to-deposit ratio amidst the Gulf Coast and Sevier County coming on board? I know liquidity is important, but with the influx in deposits across the banking industry, what internal guideposts do you use?

William Carroll, President & CEO

We've traditionally managed to a loan-to-deposit ratio in the 90% range. We've successfully grown our loan portfolio and our funding to keep it around that level. Obviously, with the current liquidity in the market, there's uncertainty regarding how sticky that will be. We're monitoring the PPP forgiveness cycle—when clients get those loans forgiven, we’re curious about where the liquidity will flow next. For now, we're comfortable holding an extra cash position while we wait to see how the next couple of quarters unfold, and we hope to achieve a more normal loan-to-deposit ratio within the next year or so.

Benjamin Gerlinger, Analyst

Sounds good. Congrats on a great start to the year.

Operator, Operator

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

Kevin Fitzsimmons, Analyst

I’m curious about the emphasis on organic growth, Billy. Is this simply a recognition of the pending deal requiring your attention? Is it possible to remain open to further M&A while this one's still ongoing, or is it an acknowledgment that this was a specialized situation while expectations are high right now?

Wesley Welborn, Chief Operating Officer

We're not concerned about the valuation price. We can't control that. We continue to perform, and the valuation will take care of itself. We have solid regulatory relationships and have not faced any challenges there, so it's not a concern. At our size now, with roughly $4 billion post-SCB, we don't have to do another deal. We have plenty to focus on internally. We've worked hard on PPP, our ROA, ROE, and EPS metrics. If we maintain our focus on these, we'll be just fine. I will say lift-outs are a big priority. The SCB deal has provided significant cost savings. If another opportunity similar to this one presents itself, we're open to it, but we want to focus internally.

Ronald Gorczynski, CFO

To add to that, while we could successfully integrate another deal if we chose to, our team is highly capable. In recent quarters, we've moved to a disciplined focus on our financial metrics. We've built a robust platform, and now it's time to leverage that. While the market may not reflect our story, we won't overpay for acquisitions. Our priority now is to focus on driving profits and growing EPS, and we anticipate that will be evident over the next few quarters.

William Carroll, President & CEO

Sooner or later, analysts will recognize our story and buy into it.

Kevin Fitzsimmons, Analyst

I believe in it.

William Carroll, President & CEO

We appreciate that, Kevin.

Kevin Fitzsimmons, Analyst

I understand that previously the focus was on scaling and growth rather than profitability. Now that you've reached a point of scale, it's essential to improve core profitability. It seems reasonable to assume that as you enhance profitability, everything else will align as well. Is that a fair interpretation?

William Carroll, President & CEO

You're exactly right. We've established a platform, and now we must deliver results. Recent changes over the last 12 months have allowed us to enhance our finance and technology talent, making us much stronger than we were 24 months ago. We can make investments in teams that might have minimal drag for a few quarters, but doing so is preferable to pursuing a larger dilutive deal. While we remain open to strategic opportunities, the focus will be on execution moving forward.

Kevin Fitzsimmons, Analyst

I'm curious about the team lift-outs. Was it a scenario where they approached you, or were you actively looking to place a team in that market? Looking ahead, do you see similar opportunities cropping up in other markets?

William Carroll, President & CEO

Definitely, we're actively searching for opportunities. This team in particular was a mix of both—they reached out to us at a fortunate time for both sides. I think we’ll find opportunities as we witness more consolidation in the space above us. This situation is advantageous for a bank like ours that is nimble, flexible, and now able to engage in larger deals. As Miller mentioned, we’re approaching $4 billion post-SCB, which positions us well to provide a great work environment for talented teams.

Wesley Welborn, Chief Operating Officer

Success breeds success; it's a common notion. We actively seek to add sales talent and have benefitted from inbound inquiries. It's a good combination.

Kevin Fitzsimmons, Analyst

Regarding the fintech startup, could you provide some background? Will it require additional spending or further details?

Wesley Welborn, Chief Operating Officer

The startup isn't exactly new; it's a couple of years old. We do not anticipate it requiring additional investment from our side—we have a strong banking team operating who understands it. It's a great opportunity with a solid value, and we're learning a lot about that space. Overall, we find it a good investment. The next question comes from Feddie Strickland of Janney.

Feddie Strickland, Analyst

It seems that hospitality and restaurants aren't much of an issue for you. Is that accurate? From our previous discussion, the Panhandle and Smoky Mountain areas appear to be doing well.

William Carroll, President & CEO

Absolutely. Come to the coast or the mountains—you'll see both sectors thriving over the last 6 to 8 months, particularly at the start of the year.

Feddie Strickland, Analyst

That's good to hear. I'm curious about customer sentiment regarding business. Would you describe it as cautiously optimistic? Has optimism increased since last quarter?

William Carroll, President & CEO

I would say we are seeing optimism beyond caution in our markets, but different areas vary widely. Markets like Knoxville, Chattanooga, Murfreesboro, Huntsville, Mobile, and Tucson are all seeing strong sentiment and optimism. Rhett, you're frequently in the markets—would you like to provide additional context?

Rhett Jordan, Chief Credit Officer

Definitely, the outlook appears quite positive. I would note that the pervasive challenge across industries is finding personnel, which seems to be the only obstacle delaying operations.

Operator, Operator

Thank you for a great quarter—let's move on.

Catherine Mealor, Analyst

I have a few detailed follow-up questions. Regarding net interest margin guidance for this quarter, I want to confirm that the projected rate of 3.20% is reported, not excluding PPP and accretable yield?

Ronald Gorczynski, CFO

Yes, the 3.20% is all-inclusive. The primary difference between last quarter and this quarter is that we expect approximately $1.6 million less from combined fee accretion and PPP accretion, which was elevated last quarter. Therefore, it is all-in combined.

Catherine Mealor, Analyst

Great. How should we approach the upcoming guide for accretable yield in terms of run rate expectation? Additionally, could you remind us of the remaining discount and the anticipated pace of that over the next couple of years?

Ronald Gorczynski, CFO

Our run rate should remain fairly stable over the next few years. Currently, we estimate roughly $12 million to $13 million left in that category. We anticipate a consistent range of about $400,000 to $500,000. In Q3, we may see a slight elevation due to some unusual reactions in the loan models, but overall, without external factors like prepayments, we expect that steady rate to continue.

Catherine Mealor, Analyst

Great, last thing, considering the margin, I recognize that many moving parts impact liquidity and loan growth; can you provide a bigger picture outlook on your asset sensitivity position as we enter a better rate environment?

William Carroll, President & CEO

At this point, we’re slightly asset-sensitive with the upcoming acquisition, and we don’t see that changing significantly. We plan to bring it to a more neutral position, so we don’t forecast a substantial change or major alterations right now. We'll continue to assess this quarterly, but expect to maintain our current status.

Operator, Operator

Our next call comes from Jordan Ghent of Stephens.

Jordan Ghent, Analyst

I had a question about delinquency loans, which saw a modest increase last quarter. Can you provide any insights into that?

William Carroll, President & CEO

Yes. Rhett, can you share some insights?

Rhett Jordan, Chief Credit Officer

Certainly, the uptick was due to a specific transaction. It involved a loan tied to private entity tax benefits needing approval from the local municipalities’ tax board. Delays occurred at the municipality level, causing a hold on that loan as it approached its 90-day mark. This situation will be resolved shortly, and there’s no credit risk involved, simply a timing issue with the board meeting.

Operator, Operator

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

Miller Welborn, CEO

Thank you all for joining us. As you can see, we continue to progress. We're happy with where we are this quarter and the results we're delivering. Thanks for joining us, and I hope you all have a great rest of your week. Have a good day.

Operator, Operator

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