Earnings Call Transcript
Smartfinancial Inc. (SMBK)
Earnings Call Transcript - SMBK Q3 2021
Operator, Operator
Hello all and welcome to the SmartFinancial Third Quarter twenty twenty one Earnings Call. My name is Lydia, and I'll be your operator today. It's my pleasure to now hand you over to our host Miller Welborn to begin. Please go ahead, Miller.
Miller Welborn, President
Thank you, Lydia. Good morning, and thanks for joining us this morning for our Q3 twenty twenty one earnings call. We always love this group each quarter to talk about our progress in our company. Joining me today on the call 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 two 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. What a fantastic quarter by our team here at the bank. I’d challenge anyone in the bank with more energy, drive and commitment than our team here at SmartBank. We demonstrated again our ability to outperform competition and execute our strategic plan. Our organic pace of growth has been impressive, and we see nothing slowing that down in the months ahead. Between very strong markets and the addition of several new sales team members that Billy will talk about shortly, we feel we are well positioned to continue on our current pace as we march toward the end of twenty twenty one. We're excited about what we have accomplished this year-to-date. With that, I'm going to turn it over to Billy.
Billy Carroll, CEO
Thanks, Miller and good morning, everyone. This was another extremely solid quarter for our company. This year has been a very busy one from this final round of PPP to an acquisition, to the lift-outs to several new expansion markets. Twenty twenty one has been a transformative year. I'll provide some high-level thoughts on our recent accomplishments and then turn it over to Ron for financials and then to Rhett for credit. First, we have some great highlights for the quarter. Referring to page three of our slide deck, starting with earnings and tangible book value, a very nice income quarter with operating earnings coming in at nine point nine million dollars or zero point sixty three dollars per share. Tangible book value has increased to nineteen and zero three dollars or a seven percent quarter-over-quarter increase. Returns were solid as well, with a thirteen percent return on tangible common and credit remains pristine with non-performing assets of zero point one four percent. In addition to our financial performance, you'll see we’ve eclipsed four billion dollars in assets, continuing to add size in a relatively small peer set. Getting into this four billion to six billion dollar range has been a focus where we now have the size and the earnings momentum to better leverage opportunities. We also had outstanding growth this quarter. Net organic loan growth excluding PPP was over fifty two million dollars or approximately nine percent annualized. Our lending teams continue to do a great job, and we're seeing growth balanced throughout all of our markets. If we weren’t surprised by anything, it continues to be the growth on the deposit side of the balance sheet. We've not been surprised that our bankers continue to do a great job in growing our core client base with that volume coupled with existing clients continuing to hold and grow their balances, leading to an extremely large liquidity position. Deposit balances grew twenty nine percent annualized during the quarter, and we are currently in a cash position of approximately one billion dollars. Ron will go into greater detail on this, but it does have an impact on our returns in the near term, but I really believe it puts us in a position of strength strategically over the long term. We completed our acquisition with Sevier County Bank in September and we'll be converting and rebranding this coming weekend. We also made the decision to sell the Richmond piece of this deal. This was simply a play to keep our focus in the Southeast. With this expansion opportunity that was presented to us over the last couple of quarters to build density in our current zones, it made a lot of sense to sell this piece out. That's now done. We're excited to get this one integrated. The process has gone very well, and we are on target, if not ahead of target with our sixty-plus percent cost save estimates. Seguing into some of our recent opportunities, the next couple of slides highlight some of the things we've been working on over the last few months. Looking at the map on slide four, you'll visually see the recent expansions for our company. We take advantage of this unusual opportunity to bring on a number of outstanding bankers in some great Southeastern markets. Building on the lift-out of the banking team and our Gulf Coast region earlier in the year, we now added teams in Montgomery, Dothan, Auburn, Alabama, as well as Tallahassee, Florida during the last few months. Probably we've always had solid organic growth, this recent lift-out focus represents a pivot for us in our company as we move more strongly to an organic model with a stronger focus on density-building in zones where we operate. Flipping to slides five and six, you will see some detail on these new markets that we've entered, as well as some of our other twenty twenty one achievements. I've spoken previously about the Fountain Equipment Finance acquisition and that team is performing well. We've also started to leverage our footprint to expand their prospecting efforts with that group. We're very pleased so far with this new line of business and very bullish on the outlook. Also of note, we have a new dealer floor plan group through a lift-out that would be based in Birmingham. I’m going to let Rhett speak to this a little more in a moment, but it's a nice mix lending area that will yield some great opportunities. These are all big investments for us and while we know we have some modest EPS drag over the next few quarters, we feel this is the right investment to make for shareholder value. So let me hand it over to Ron now to jump into the financials.
Ron Gorczynski, CFO
Thanks, Billy. Good morning, everyone. Let's start with slide seven, balance sheet. Since twenty seventeen, we’ve continued to realize consistent balance sheet expansion. As Billy indicated for the current quarter, we’ve launched excluding PPP and loans from our SCB acquisition over fifty two million dollars or eight point six percent annualized and had year-to-date loan growth of twelve point two percent annualized. In addition, we had over ninety-nine percent of PPP forgiven and acquired two hundred and nineteen million dollars of loans from SCB, net of the Montgomery loan sale. Our average loan yield for the current quarter was twelve point nine five percent, an increase of forty-two basis points from the prior quarter, which is attributable to an addition of one point seven million dollars of accretion income. On the right side of the slide, you can see that our deposits continue to positively trend upward. During the current quarter, excluding four hundred and thirty-six million from the SCB acquisition, our core deposits increased over two hundred and twenty-five million, almost twenty-nine percent annualized. Between this growth and our focus on controlling funding costs, we've lowered our total cost of deposits to twenty-five basis points, a third basis point decline from the previous quarter, and had a loan-to-deposit ratio of seventy percent. Moving onto slide ten, liquidity utilization. We ended the quarter with our cash position over one billion dollars. Deposit growth, PPP forgiveness and excess cash from SCB acquisition all contributed to an increase of over four hundred million in cash and cash equivalents from the prior quarter. Previously, we've been patient with the deployment of excess cash, however, as we move into Q4 and then Q1 of twenty twenty two, we will be taking a prudent and systematic approach to deploying approximately four hundred million into our bond portfolio, which will generate a significantly higher yield versus our current cash yield. Our investment strategy will consist of an added approach, where a good portion of the cash flows will come back within a two-year to five-year period, thus limiting excess duration risk. As shown on the right-hand side of the slide, our margin for the current quarter is three point three five percent, which includes one point seven million dollars of discount loan accretion and two point nine million of PPP accretion. We also benefited from a five basis point decrease in interest-bearing deposits. Offsetting these positive impacts was our excess liquidity position, which has negatively impacted our margin by twenty-eight basis points. We are forecasting our fourth quarter margin around three percent, where we’re estimating to have loan accretion of ten basis points plus six hundred forty four thousand and estimated PPP loan fee accretion of thirty-two basis points, approximately two point one million. Before we leave this slide, let’s touch base on operating revenue. Operating revenue continued its upward trajectory to thirty-six point six million dollars, an increase of over fourteen percent compared to the prior linked quarter. We had another strong quarter of non-interest income, which contributed six point three million or approximately seventy percent of total operating revenue. Diving deeper into non-interest income, let’s move on to slide eleven. We are encouraged by the positive momentum across all of our non-interest categories, particularly service charges, and interchange income, which totaled approximately two point three million dollars for the quarter. Additionally, other income was elevated as we were fully operational with our capital markets initiative, having almost four hundred and seventy thousand in swap fee income. We also remained very optimistic regarding the strong opportunities for fee generation within our family of revenue generators. In comparison with the prior quarter, our non-interest increased almost twenty-two percent and more impressively, increased over fifty percent from the prior year quarter. Our forecast for the fourth quarter is having non-interest income of six point four million. Moving onto slide twelve, operating expenses. As we continue to execute in our current opportunities, we will see some short-term expense headwinds that will bring us long-term value over the next eighteen months. During the current quarter, operating expense increases were from full three months of expenses from the Fountain acquisition; non-related expenses from the SCB acquisition; and expenses associated with our lift-out strategy. For the fourth quarter, we expect expenses to be slightly elevated with total expenses around twenty-five point three million and salary benefits around fifteen point five million. This elevation is primarily from the SCB acquisition; however, we will realize a partial reduction to those expenses as we finish executing our cost saving measures during the quarter. Looking forward into twenty twenty-two, we believe our expense run rate will be lower than the fourth quarter, more in the twenty-four point five million to twenty-five million dollar range and the salary benefits around fourteen to fourteen point five million dollar range. Built into this twenty twenty-two run rate are some technology initiatives that Billy will touch base on page thirteen. Billy?
Billy Carroll, CEO
Yeah. Thanks, Ron. We felt that it’s important to share with this group some of the information that we've been working on related to technology. We've talked around it on previous calls, but we've been doing some real work and moving our company forward in tech. On slide thirteen, you'll see some of those initiatives that advance how we built in our expense guidance. I believe banks that don't put significant focus in this area are going to be behind, and we will not be in that position. Of note, one of our biggest initiatives was moving to the nCino platform. This will begin next quarter, and I'm confident it will be a game changer in the way that we handle our entire commercial process from prospecting to closing deals. We're very excited about this work and know it's going to be critical to our future success. So with that, Rhett, I’m flipping over to you and let you talk about lending and credit.
Rhett Jordan, Chief Credit Officer
Thank you, Billy. As noted earlier in the deck on slide eight, our loan portfolio continues to show good diversification across the loan segments with twelve percent annualized loan growth quarter-to-quarter of approximately two hundred and seventy-eight million dollars. This is inclusive of the Sevier County Bank loan acquisition, but excluding PPP loans. Net organic loan growth for the quarter was fifty-two million dollars, an annualized increase of eight point six percent over the prior quarter. The SCB acquisition did not impact our overall portfolio mix significantly, with the post-close profile being very similar to the previous quarters and same period prior year. As mentioned, our portfolio is seeing consistent growth this year spread across all geographic areas of our footprint. Our CRE portfolio has seen the most growth year-to-date moving to approximately forty percent of portfolio outstandings as compared to thirty-five percent at year end twenty twenty, primarily due to the impact of the Sevier County acquisition. But as Ron noted earlier, we’ve also seen good year-to-date growth in our owner-occupied commercial real estate segments as well. We continue to see strong housing demand in our market areas, with core markets still seeing historically low supply levels and strong price performance due to this demand. Our overall loan portfolio yield continues to reflect solid positioning at four point two one percent, including the SCB portfolio, but excluding accretion and PPP loan impacts, which is above both quarter one and quarter two levels. All in all, a very solid quarter, the strong organic loan growth in the portfolio and a positive outlook for the remainder of the year. Slide fourteen shows our overall asset quality metrics, which continued to trend very positively and generate consistent excellent results. Our NPA ratio continued to improve throughout twenty twenty-one, dropping consistently each quarter to a low of zero point one four percent in the third quarter. Net charge-offs for the quarter were zero point zero three percent, and our over thirty day past due ratio was consistent with the second quarter at zero point two nine percent. Classified loans were at zero point three six percent, up slightly from the second quarter due to the SCB portfolio acquisition but still well below legacy SmartBank ratio positions at the first quarter twenty twenty-one and year-end twenty twenty. Overall, our asset quality continues to demonstrate solid metrics resulting from continued strong economic performance in our marketplaces and staying in line with best-in-class levels. Our outlook is positive for the balance of the year, and we expect these strong portfolio metrics to continue in the upcoming periods. As for the PPP loan book, we've seen considerable forgiveness activity through the third quarter of our round one loan. As noted on slide fifteen, we received forgiveness payoffs on two thousand nine hundred and forty-two applications, or roughly ninety-nine percent of the round one originations, just over two hundred ninety-nine million dollars in balances. We ended the quarter with about six million in balances remaining from the first round, including roughly twenty-five loans totaling over two million dollars in balances that Sevier County originated, but we're not yet forgiven prior to the acquisition date. For these remaining few loans, we're actively working with borrowers to complete the forgiveness phases and or final repayment structures on any forgiven residual balances. We're also proactively reaching out to clients to continue to process those forgiveness applications as soon as covered periods are expiring and clients are ready to submit. By the third quarter period end, we already processed seven hundred and fifteen round two PPP forgiveness applications for fifty-five million dollars in balances, or roughly forty percent of the generated loans in round two. Overall, the PPP project proved to be a very successful venture for our company, generating seventeen million dollars in fees for the bank while creating considerable prospect opportunities for our teams. We anticipate PPP balance positions to continue to decline hopefully through the fourth quarter and early twenty twenty-two. As Billy mentioned, we're very excited about the addition of our dealer financed specialist team to help expand our lending platform into the floor plan component of the segment. These team members bring a combined sixty-plus years of experience in the industry and have worked together as a team for nearly twenty years in the space. They provide administrative underwriting of relationship management support to a nearly two billion dollar platform that has strong performance with solid credit quality measures and strong long sustained relationships with their clientele. The dealer floor plan is a multi-billion dollar segment of the banking industry, which SmartBank has historically had very little exposure but has tremendous opportunities within our core footprint to take advantage of existing business relationships and client familiarity. Furthermore, the long-time relationships that our new team has in the marketplace also bring new strategic growth opportunities for SmartBank consumers as well. The chance to bring this admired and highly recommended team to SmartBank provides us the needed bridge to support the floor plan component of these valued relationships. Clearly, we are very excited about this addition and the opportunity it creates for us to continue to grow and diversify our lending portfolio. Now, I'll turn it back over to Ron to walk you through our allowance position for the quarter.
Ron Gorczynski, CFO
Thanks, Rhett for the detail. Let's move forward to slide sixteen, our loan loss reserve. As we continue to have great starts to our credit quality, we did require one point one million dollars provision to the quarter, which is needed for the reallocation of loan discounts associated with the SCB loan sale and to a lesser extent facilitate loan growth. At quarter end, our allowance originated loans less PPP loans was at zero point seventy-five percent and our total reserves to total loans and leases less PPP loans was at one point two six percent. On to slide seventeen, capital. Our capital ratio remains strong with a slight uptick from the prior linked quarter. The current quarter’s acquisition of SCB had many effects on our capital. Our tangible common equity to tangible assets was down slightly due to the record volume of our excess liquidity position and our acquisition. Excuse me, our current levels are well positioned at this time. And to wrap up the slide, our entire SMBK team is focused on consistently building shareholder value. At quarter end, our tangible book value per share was over nineteen dollars, an increase of seven point three percent linked quarter annualized and over ten percent increase year-over-year. With that said, I’ll turn it back over to Billy.
Billy Carroll, CEO
Thanks, Ron. And to close, our markets are all performing extremely well. The Southeast is poised for great continued growth, and it's one of the reasons you're seeing us pivot a bit as we look at more commercial banking lift-out opportunities. Our loan pipelines continue to be robust and are equally distributed across all of our markets. With the excess liquidity in the system, like most others, we’re battling some headwinds and some low line utilization and paydowns. But that said, we're very bullish on where we stand. And once these new teams get up and going, we anticipate our loan growth will kick off in the mid-teens on an annualized basis. We're seeing this company transform and operate on a different level, continuing to drive revenue and moving toward being a top-tier performer, all while focusing on how we get there. I'm very excited to be part of this company right now. It's very exciting to be an associate and an investor. I think we're very well positioned to be opportunistic moving forward. So I'll stop there and we'll open it up for questions.
Operator, Operator
Thank you. Our first question today comes from Brett Rabatin of Hovde Group. Brett, your line is open. Please go ahead.
Ben Gerlinger, Analyst
Hi. Good morning, everyone. This is Ben Gerlinger filling in for Brett. Congratulations on surpassing four. It's great to see. I'm curious about the growth trajectory. I understand this past year has been quite busy for you. The guidance indicated a low double-digit growth rate, if I heard that correctly, on a linked quarter annualized basis as a core rate. I'm interested in your thoughts on the opportunities for growth with a larger balance sheet. There will likely be some fluctuations as you add more lenders, but when considering your growth strategy, are there specific areas or regions of lending that you see as the easiest targets for expansion? Additionally, regarding the expense guidance of around twenty-four million, does that figure account for any extra lift-outs planned for next year or is it based on a steady rate of operations?
Billy Carroll, CEO
Ben, I'll start with that, and I'll take the last part of that question first. Ron, I think I'm saying this correctly the expense guidance you're getting is kind of what we've got today. We're not looking to adjust that if we came up with any more lift-out opportunities.
Ron Gorczynski, CFO
Yes. That is correct.
Billy Carroll, CEO
And so, yes, expenses is that just what we've got going today, Ben. The first part of the question, I do think that, obviously, the growth on the loan side, the deposit side is something that we're really focused on again, this organic pivot. As we talked about earlier in previous calls this year, I think we've been targeting even though we've been above that. I think for the year, we're running about twelve percent growth, which has been a little higher than we thought. And we're not in this quarter with the lift-out, as we look into twenty twenty-two, we do think that number is going to edge up from what we’ve discussed as mid to high singles now into mid-teens, and we feel pretty confident about that. Again, the expense guidance that we built in incorporates not only the lift-out compensation, occupancy expense, but also the technology that Ron talked about. So we're trying to lay out what we believe is a fairly well-structured expense line. And I feel like these teams get up and going and then, as you know, it might take a quarter or two to get these folks running, but once they do, we're very, very excited about the growth trajectory the bank can achieve.
Ben Gerlinger, Analyst
Got it. That's very helpful. And I guess that the kind of the internal lift or bolt-on lift-out is that the new focus. It makes sense could you have more control over the growth and the credits that you're adding, but it also frees up capital to some degree, if you're not looking to do major acquisitions. So it's curious how you now approach any excess capital and how you feel the deploying, like if you could do the rank order of the priorities?
Billy Carroll, CEO
I'll give my thoughts on that. We've always believed in the proper use of capital. We never thought we had too much of it, and when we did add, we did so thoughtfully. Currently, our perspective on excess capital revolves around growth, and share buybacks might be a consideration if we find that to be suitable at the right moment. That would be a good use of that capital. We're also considering dividend increases among other aspects. Right now, we feel positive about our capital position. We don't have much excess, but we're comfortable with where we are.
Miller Welborn, President
We address the allocation and best use of capital frequently, whether it's weekly, daily, or even hourly. Regarding our expansion rate, we believe there will be additional opportunities for team additions that could provide some upside protection if we face challenges on the run rate. When it comes to mergers and acquisitions, we are actively seeking opportunities that come our way. Our primary focus remains on organic growth and team additions, and while we haven't committed to any deals, if we do decide to move forward with one, it will be a highly strategic and valuable choice. This reflects our approach to capital management—we continually assess and prioritize our options while considering every opportunity.
Ben Gerlinger, Analyst
Okay. That's great. I really appreciate the color. Thanks, guys and congrats on crossing four.
Miller Welborn, President
Thanks, Ben.
Operator, Operator
Thank you. Our next question today comes from Stephen Scouten of Piper Sandler. Stephen, your line is open.
Stephen Scouten, Analyst
Great. Thanks. Good morning, everyone.
Miller Welborn, President
Good morning.
Stephen Scouten, Analyst
Good morning. I just wanted to think about operating leverage for a second into twenty-two, just given the puts and takes of when these new hires will be able to contribute. Do you think you can see positive operating leverage year-over-year? Is this more like a twenty twenty-three event given the need to kind of earn back those initial upfront costs?
Ron Gorczynski, CFO
Yes. This is Ron. Yes, we are seeing the positive effects going into twenty twenty-three. Twenty twenty-two, we will again, as we grow the portfolios and build our asset base, twenty twenty-three will be the year that will be positive for us.
Stephen Scouten, Analyst
Okay, that's helpful. And as we think about just trying to circle back on the loan growth commentary, I know Billy, you said kind of mid-teens once these guys are up and running, but is this more mid-single digit for the next couple of quarters until that time or am I misconstruing that?
Billy Carroll, CEO
No, I don't think so. I believe we will reach that point quite quickly. The pipelines we are observing, including both new and existing teams, look promising. It usually takes about a quarter for some of these individuals to acclimate. There may be fluctuations, but I anticipate that we will see double-digit growth soon. It might take us a quarter or two to reach that full pace, but we should be approaching double digits within the next quarter. We have been in the mid-single digits for a while, and while we are experiencing a slight dip at nine percent this quarter, I expect to see that double-digit growth increase to the mid-teens over the next few quarters.
Stephen Scouten, Analyst
Okay, great. And maybe just one last thing for me here, and that's the three percent NIM guidance. Is that a core margin excluding the accretion and PPP, or is that relative to the three thirty-five GAAP NIM? Also, could you share what the main factor will be affecting quarter-over-quarter performance? Is it primarily related to some declines in the securities investments?
Billy Carroll, CEO
I believe three percent answers your question. For the third quarter, we will finalize the PPP process and recognize the last tranche of fees in our net interest margin. As we move into 2022, deploying our excess liquidity should help improve our net interest margin and yield better results. We're observing a balanced situation on both sides. We see three percent as a baseline going forward, unless there's loan accretion or unexpected increases in loan activity. Currently, we're consistently seeing solid three percent results in either direction.
Stephen Scouten, Analyst
Okay, great. Thanks everyone for the color. I appreciate.
Miller Welborn, President
Thanks, Stephen.
Operator, Operator
The next question comes from Thomas Wendler of Stephens Inc. Thomas, your line is open.
Thomas Wendler, Analyst
Thank you and good morning, guys. I got a couple of questions here. Give me idea what kind of loan yields you're seeing on new production and then kind of how the new hires are playing into that?
Miller Welborn, President
Rhett, I know you have some of the best data on new production yields. Can you go over some of that?
Rhett Jordan, Chief Credit Officer
Yes. I mean, if you look at, just most recent quarter, we're still averaging around close to four percent owned new yields for productivity for new activity going on the books and overall it's maintained relatively steady.
Miller Welborn, President
I believe some of the new teams are starting to onboard larger commercial and industrial clients, which may initially come in at a lower level. Typically, we expect to see this trend at a lower baseline, possibly around the lower threes for some of this new production, although it can vary. The right product can also generate some attractive fee income. We still believe we are achieving reasonable pricing, even though overall pricing is quite low in the current environment. Comparatively, we are still seeing decent pricing on new production.
Thomas Wendler, Analyst
No, that's great color. Thank you. And then one final one for me. With your new teams, are they focused on gathering deposits at all since you guys have so much excess liquidity? And then once they do kind of shift over to gathering deposits, can you give any idea of what kind of impact that's going to have?
Miller Welborn, President
Yes, they are. The bankers we are bringing on board are strong relationship bankers. We are not just focused on chasing individual loan transactions, even though Ron mentioned we have a billion dollars in cash. We are also aiming to establish core deposit relationships with treasury, and this strategy has been working well so far. Additionally, the loan pipelines should lead to more deposits, particularly in corporate checking accounts, which we are accepting even at lower interest rates, despite holding a significant amount of cash. We believe this will provide great long-term benefits for us.
Thomas Wendler, Analyst
All right. Sounds good. Thanks for answering my questions and great quarter, guys.
Miller Welborn, President
Thank you, Tom.
Operator, Operator
The next questionnaire in the queue is Catherine Mealor of KBC. Catherine, please proceed with your question.
Catherine Mealor, Analyst
Hey. Good morning. I just wanted to follow-up on the balance sheet size conversation and thinking about that four hundred million dollars of security deployment. What's the timing that you plan on for that four hundred million dollars?
Ron Gorczynski, CFO
Yeah, Catherine. This is Ron. Yes, we've already started our deployment and we’re probably looking at seventy-five to eighty million dollars a month. The amount of drives into the first quarter of twenty twenty-two, so we've really right after the continue bumped up is when we started doing our purchases, timing was in our favor at this point, so we've already started.
Catherine Mealor, Analyst
Great. I understand this will vary based on rate changes, but what are the average new yields for those investments today?
Ron Gorczynski, CFO
Yeah. Right now, we're looking at what we purchased so far, around one forty-five, one fifty range.
Catherine Mealor, Analyst
Okay. Great. And then my second question is about the margin for next quarter. You mentioned a three percent reported margin, which suggests further compression in the core net interest margin. If we exclude PPP and the accretive yield, are there any significant changes to liquidity or the balance sheet size for next quarter? I understand some of this liquidity will go into securities. So even with that in mind, we are still anticipating more net interest margin compression, even though part of these securities will be converted from cash into securities next quarter. Is there a way to consider this as we purchase them next quarter and then gradually see improvement as we progress through twenty twenty-two?
Ron Gorczynski, CFO
Yes, exactly. It's not just about core net interest margin, but it's fully loaded for the fourth quarter at three percent due to the recognition of excess PPP fees. We will transition during the first quarter to deploying into the loan portfolio, which will help reduce negative carry. We are gradually returning to that three percent range. This includes a slight decrease in loan production, which is not significant, but there is some compression. Still, we anticipate maintaining that three percent level fairly consistently over the next four quarters despite fluctuations in our balances and activity.
Catherine Mealor, Analyst
Okay. Great. And then one thing on expenses and this is a challenging question. I know with all the moving parts within the margin as well, but I'll just throw it out there to see how you're thinking about it. But is there an efficiency ratio target that we should think about maybe longer term as we kind of feel the full impact of the cost savings from the deal and then the benefit from all these recent hires?
Billy Carroll, CEO
Yeah. Catherine, this is Billy. I'll take that and Ron can join in. Our long-term goal is to be below sixty, which is where we aim to be. Currently, we've drifted into the low sixties, and I expect that we'll see it increase by a couple of percentage points in the near term due to the expense load from the new group. However, we anticipate that this number will start to decline again in twenty twenty-three. We believe we can bring it back down toward our long-term target, which isn’t far off. I view this as a marathon, not a sprint, but I think in a reasonable timeframe we should be able to reduce it back into the lower sixties, with our ultimate goal being under sixty as a company.
Catherine Mealor, Analyst
Great. That makes perfect sense. All right. Thank you so much.
Ron Gorczynski, CFO
Thanks.
Billy Carroll, CEO
Thank you.
Operator, Operator
The next question comes from Feddie Strickland of Janney Montgomery Scott. Your line is now open.
Feddie Strickland, Analyst
Thanks. Good morning, guys.
Miller Welborn, President
Good morning, Feddie.
Feddie Strickland, Analyst
I saw you guys had some really strong net income overall, but I saw mortgage came in a little lower than I was expecting. Is it safe to say mortgages kind of starting to pull off at this point? And I guess the growth in the other fee income lines offsets that going forward?
Billy Carroll, CEO
Yes, that's probably accurate. I believe our mortgage sector has become more stable, although it is not entirely stable. Our main concern, based on discussions with our mortgage teams across different markets, is that we remain optimistic about our position. We're witnessing a decline in home inventories, which is a key factor contributing to the challenges we're facing. However, we are still very positive about our prospects and are looking to incorporate new team members into our mortgage provision. We are focused on expanding that team and increasing our growth in that area. Overall, I would say it has stabilized, which is likely the best way to describe it.
Ron Gorczynski, CFO
No. We were excited to see that some of our non-interest categories are starting to take over. The mortgage category has been number one for us for a long time. Even with relatively stable income going forward, there are other categories that will become the leaders in that group, which is part of our focus moving forward.
Feddie Strickland, Analyst
Got it. Is there any secular line whether it's the wealth management or equipment finance? Is there any particular line that you guys see as kind of being the star going forward?
Billy Carroll, CEO
Ron, do you want to jump in on that?
Ron Gorczynski, CFO
Yes, I think we have the greatest opportunity in our customer service fee line with the lift-outs and Billy had mentioned about the treasury, our treasury service and our platform. We are making some hires to support that group. And we think we have our most opportunity in that line item in the near future. We'll see that growth a decent amount. So we're starting to see that.
Billy Carroll, CEO
Yes. Feddie, I'll just add. We're really focusing on all of them. And Ron has alluded to some of the fee side on swaps we've got. We've got the investment side where we're really putting some real deliberate focus, especially with the teams that we've added and some of the private bankers on there that really do a nice job for the wealth management clients. It really is all playing together. So we've been focusing on all of those zones. Like Ron said, we probably looked at fee sides maybe being in a little bit more shining story in the near term, but we see lift in really all those lines.
Feddie Strickland, Analyst
Got it. And just one more question for me, just given the restaurant closure, it sounds like it's safe to say you guys are going to be focused on the south and the east. Is there any consideration for expansion and this could be longer term too. But into the Carolinas, or is North Georgia probably a more likely next step either without lift-outs or acquisitions?
Billy Carroll, CEO
Density in the markets where we love, the Tennessee, Alabama and Florida Panhandle, we would certainly look at continuous markets of opportunity which is just really nice. So I don't know that I would prioritize the Carolinas over Georgia, Georgia to the Carolinas. It's not going to be in numbers and opportunity game.
Ron Gorczynski, CFO
Yes. And I'll just add to that, Feddie. From us, I mean, there is, I think we definitely look for continued growth in contiguous geographies. So I think all of those will be onboard. But again focusing primary focus is on what we've got.
Feddie Strickland, Analyst
Got it. That makes sense. Thanks for answering all my questions and congrats on a great quarter.
Ron Gorczynski, CFO
Thank you.
Miller Welborn, President
Thank you.
Operator, Operator
Thank you. The next question comes from William Wallace of Raymond James. William, your line is open.
William Wallace, Analyst
Thanks. Good morning, guys.
Billy Carroll, CEO
Good morning.
William Wallace, Analyst
Ron, in your prepared remarks, it sounded like you said that the provision expense had to do with, I think you said like repositioning or something around the pending loan sale of the Richmond assets, did I hear that correctly? And if so, can you explain that a little bit more?
Ron Gorczynski, CFO
Yes. The Richmond loan sales were considered a day two event, which involved various discounts. After removing certain loans from the pools based on call codes, we needed to reassess the valuation of the remaining portfolio and adjust for what was removed during the loan sale. This was merely a timing matter and not an issue from day one. It specifically revolved around adjusting the fair value marks; typically, you would see this on day one and not again, but we had to reevaluate it again at nine thirty.
William Wallace, Analyst
Okay. So that, that didn't run through the net interest income line as an interest adjustment, okay.
Ron Gorczynski, CFO
It did not.
William Wallace, Analyst
Okay. So moving forward, then, how should we be thinking about the provision expense line with the mid-teens anticipated loan growth rate and assuming that we don't get any backup in economic, the current economic situation really the COVID or anything that we're continuing to improve, not get worse?
Ron Gorczynski, CFO
In the third quarter, I believe we are likely to maintain our percentages at this time. We've noticed that the variant cases have revealed some qualitative factors. There's a chance for us to keep things low, but for now, we will stick to the seventy-five basis point model. Each quarter presents a different strategy or calculation, but it will probably remain flat. With our loan growth, we are aiming to stay within that seventy-five basis point range as we manage our book.
William Wallace, Analyst
Okay, all right. Thank you. That's helpful. And then trying to do this, but I'd like to circle back to the NIM commentary. So, the guidance for the fourth quarter is around three percent and that includes about two million dollars. I think you said two point one million dollars of accretion related to PPP loan fees. But then it sounded like you said, moving forward, that you'll still be around three percent even when that'll be the last of the PPP accretion. Is that correct?
Ron Gorczynski, CFO
We still have a bit more than seven million to address in the first quarter. At that stage, the main change will be the removal of liquidity drag, which in the third quarter amounts to twenty-eight basis points. Furthermore, we are not recording certain accounting elements; we still have many one percent loans aside from the recognized PPPs, and we continue to maintain a significant number of one percent SBA loans based on data. There are numerous factors at play, but we anticipate that the three percent margin we discussed will be maintained, even though our current margin is lower.
William Wallace, Analyst
Okay. And then so in twenty twenty-two, what is the kind of anticipated run rate on the purchase accounting accretion, excluding what might come if you have loans pay off required loans pay off or anything like that?
Ron Gorczynski, CFO
In the fourth quarter, it was six hundred and forty-four thousand, but I don’t have the exact figure in front of me; it's typically around five hundred thousand per quarter. This acquisition didn't contribute significantly to discount accretion. However, we still maintain a substantial amount of loans in our portfolio that are affected by marks. With the ongoing paydowns and payoffs, we expect to experience unique events quarterly, similar to what we've seen before, which should lead to accelerated accretion from new loan discounts.
William Wallace, Analyst
Okay. Yes. Okay. You have accomplished a lot with team lift-outs and acquisitions. I am not sure if you track this, but if you do, how do your core originators contribute to the portfolio growth? Is the run rate for this business at a high-single-digit rate that could be enhanced by the team lift-outs, or do you believe it might settle at low double digits once we move past the initial boost from the new hires?
Miller Welborn, President
Yes. In the near term, I believe we are performing well, particularly with the new team members joining us. This should elevate our growth into the double digits, reaching the mid-teens. I truly believe that we will see consistent double-digit growth moving forward based on our team structure and the markets we are engaged in. Even after the anticipated initial surge, I think we could maintain an average of double-digit growth.
William Wallace, Analyst
Okay. That's very helpful. I really appreciate the time guys. That's all I had.
Miller Welborn, President
Yes. Thank you.
Operator, Operator
Thank you. And our next question comes from Kevin Fitzsimmons of D.A. Davidson. Kevin, please go ahead.
Kevin Fitzsimmons, Analyst
Hey, guys. Good morning.
Miller Welborn, President
Good morning, Kevin.
Kevin Fitzsimmons, Analyst
Most of my questions have already been asked and answered. I apologize if I seem repetitive, but I want to follow up on your previous answer regarding expansion into other states. With the focus on existing markets as you mentioned earlier, considering the new teams you've hired, can we say you have established a presence in the markets you intend to target? Is the plan now primarily to increase density in those existing markets? Or are there other metropolitan areas in Alabama or the Florida Panhandle where you haven't yet established a presence but would consider entering if the opportunity arises?
Miller Welborn, President
Kevin, I'll begin and then others can chime in. I believe we've planned most of our key areas and as we've mentioned before, we still have a strong interest in the Nashville area. We think there is potential for continued growth there. We're currently present in the Murfreesboro area, and we see the opportunity to expand and make a significant impact in that market, making it a priority for us. While we are already in that area, we would like to grow our presence there. The same goes for Alabama; we are now in most of the key metropolitan areas. A few weeks ago, we announced our intention to expand in Birmingham, which is a focus area for us. Our operational base will be established there, and we are already planning leadership roles in that market, excited for the opportunities it presents. Regarding Florida, we see potential for further expansion, possibly a bit more to the east, where we have gained some presence in Tallahassee. We should consider that along with other potential opportunities as they arise. However, I believe that remains contiguous to where we currently operate. I’m not sure if Billy wants to delve into that further.
Billy Carroll, CEO
Really, get on Birmingham and building out that market, obviously a good city in the state of Alabama. And I’m just success bring success, so good bankers want to be part of a good team and a good bank and as we build out some of these markets, so we've just gone into and expand on some of our more material markets. I think we are able to and have discussions on a regular basis with good bankers that we will be able to bring into our team.
Kevin Fitzsimmons, Analyst
Is the pivot you mentioned earlier more about the loan officers' willingness to adapt, indicating an increased openness, or is it related to not needing to expand as quickly as before? Previously, there seemed to be more urgency to reach a certain size, and now the focus is more on carefully selecting the right people in the right markets.
Billy Carroll, CEO
Even at two billion in assets, your size, your lending limit, your earnings momentum to invest in new teams is just limited. I think that's the reason we've taken the approach of getting the foundation built through acquisitions in organic over last several years. And now with earnings momentum that we have the sophistication that we built around treasury and credit and all of these other ancillary pieces, we can go out and do a much better job of recruiting in these bankers that are looking to move to us from these larger regions; they know we can handle their books of business. That's tougher to do when you're two billion or even thirty. I think for us, we felt like we needed to get to this size. And now I think we're a very attractive alternative for some of these really good regional bankers that are maybe looking to go somewhere that's got a little more levels. And I think that's what's appealing to us now. And I think that's what's attracting a really good team to us.
Kevin Fitzsimmons, Analyst
Okay, great. Thanks, guys. Thank you.
Billy Carroll, CEO
Thank you.
Operator, Operator
Thank you. This concludes today's call. Thank you for joining. You may now disconnect your lines.