Good morning, and welcome to the SmartFinancial Second Quarter 2022 Earnings Call. My name is Brika, and I'll be your event specialist operating today's call. During the presentation, you'll have the opportunity to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star two. For operator assistance, please press star zero. I now have the pleasure of handing the call over to Miller Welborn. Miller, please go ahead when you're ready.
Thanks, Brika. 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 to 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 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.
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 U.S., 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 gonna turn it over to Billy.
Thanks, Miller. 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. 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 non-interest income lines as well. Even with secondary market mortgage fee 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%. 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 gonna 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. It's important to note that our legacy markets have performed very well, too. There's a great energy throughout our company right now.
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. 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 continued to see solid growth in the deposit portfolio, with net balances growing $91 million over Q1, with only a 4 basis points 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're 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 outlooks and market guidance continue to indicate a higher probability of recessionary pressure 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 improve compared to the prior two quarters. Non-performing assets of 11 basis points, a net recovery of charge-off loan balances and past due and classified loans to total loan ratios relatively unchanged from Q1 performance and better than Q4 2021 results. Our CRE ratios were consistent with prior quarter as well. Total CRE holding at 304% of capital and a slight 9% increase in CRE construction ratio that's still in 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, 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.
Hey, thanks, Rhett. Good morning, everyone. Let's move forward to slide nine, 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 originate 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 macro-economic and credit conditions evolve. On to slide ten. 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 retiring $25 million of FHLB borrowings.
At June 30th, our liquidity position, which includes cash and securities, represented approximately 31% of our total assets, and with a loan 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 faced during the second quarter related to reduced acquired loan, PPP, 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 4 basis points or $320,000, an estimated PPP loan fee accretion of 4 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% and 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 this 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 non-interest 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 fee, which generated almost $900,000 of revenue.
We will continue our focus on expanding, diversifying, and deepening our opportunities for growth in fee generation. Since we are not anticipating the same level of capital markets revenue, our non-interest income forecast for the third quarter is in the $6.7 million-$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 continue our operating efficiency ratio. We expect our operating efficiency ratio to suddenly 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 approvals based on our current production levels. On to slide 14, capital. Even with the continued asset growth, our capital ratios remain stable as a result of strong profitability. Management closely monitors the bank's capital position as it relates to projected forecasts, lending opportunities, and other potential initiatives. At quarter end, the company and bank both exceeded well-capitalized regulatory standards and are in excellent liquidity and credit quality positions to continue executing throughout 2022. At quarter end, our tangible book value is at $18.69 per share.
However, excluding the temporary impact of our unrealized losses and 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 the same. We will continue to support our lift-out teams as they move clients over to the bank. We've been spending a fair amount of time in these new markets, meeting prospects and with our advisory board teams to communicate our story. Both our story and our operating model are being very well received. 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. 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. 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 that 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 Workplaces Award, the sixth consecutive year we've received this recognition. Congratulations to our associates. I appreciate all you do in building this great culture. It is a great time to be involved with SmartFinancial. We'll stop there, and we'll open it up for questions.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star two. Please stand by while we order today's roster. The first question on the phone lines comes from Stephen Scouten of Piper Sandler. Please go ahead when you're ready, Stephen.
Thanks. Good morning, everyone. I guess my first question would be kind of what you guys are thinking around the continued deposit growth. I mean, I know it's hard to project in this environment, but it seems like it's really continued to go on a much stronger pace maybe than the industry as a whole. Just kind of curious what you're seeing from a deposit perspective and what you are expecting for the remainder of the year.
Yeah, it is tougher to call that one, Stephen. You know, the pipelines, you know, give us some confidence around our loan growth guidance. Deposits have been tough. I do think we can continue to grow the deposit side again, you know, as we're really starting to bring in new clients in some of these new markets. You know, we're bringing on folks that both have lending relationships as well as depository relationships. I'm optimistic. You know, I would. You know, if you're asking me to guess, I would say we're probably kind of at that same pace, probably at about maybe around, you know, half, maybe a little below half of what we're doing on the loan side here in the near term. I do think we'll continue to grow deposits, but probably not at the clip that we grew this quarter.
Okay, that makes sense. With the pace of loan growth, Billy, I know you said it would, you know, be a little slower, obviously still nice if it's in that low double-digit range. I'm curious, do you guys have any sort of, I guess, concerns or trepidation around growing loans into what the market is telling us is a more recessionary environment? I know you guys still remain pretty bullish on your market trends. Just kind of wondering how you're thinking about that growth in the face of maybe some worsening economic trends.
Yeah. We're really not changing much, Stephen. You know, you know, we've always been conservative underwriters. We're not changing the way we're looking, you know, at loans. You know, the thing about it, too, we're also, as we look to move, we're moving a lot of seasoned business. The business that is coming over to our balance sheet are businesses that have been around a long time in these markets. You know, they've got great track records, great history. Obviously we're watching the economy. Right now, you know, we feel good about continuing to grow the loans, as Miller alluded to in his opening comments, and Rhett mentioned them.
You know, the markets that we're in, we're still seeing the population inflow, the growth. I get the headlines. You know, we're watching it, but we still feel very strong about the markets that we're operating in and continuing to move on. I do think it will slow a little bit. You know, we've had two really strong organic quarters, which we'd anticipated. You know, this one was a little, probably a little more so than we had forecasted. You know, I do think we can grow, not you know probably not at this pace, but still at a very strong pace over the next, at least near term.
Got it. Maybe last thing for me. I'm just curious, within the NIM guidance you gave for the 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, you know, 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. I know you guys note the $645 million loans that are immediately adjustable. Just kind of wondering what you're seeing there and what you're assuming in those expectations.
Yeah. Yeah, good question. The deposit beta is, you know, year to date, we're about a little slightly over 8%. For third quarter, you know, we do expect our you know to move our rates upward probably late in the quarter. We're probably looking at a 19%-20% beta for Q2. The fourth quarter we're looking to be pretty much closer to historical at 30%. That's kind of what we're modeling at this point. It seems to be coming through. Again, we benefited from the lag, but we're starting to see that we will have to give back. As far as the loans, pretty much, you know, the loans are a little bit slower to react than deposits. We do have timing differences.
By the time the term sheets are out and we commit, by the time it closes, you know, we're starting to see the reaction on the loans for June and, you know, for the second quarter rate impacts really starting to charge up the third quarter results. As far as for the loan yields, to give you an indication, we're probably looking, you know, we were at 4.40%. For the quarter, we're probably estimating to be in that 4.60%-4.65%-ish range all in. I apologize, I do not have the loan betas directly for that.
No, that's extremely helpful, Ron. Thanks so much, and congrats everyone on the continued progress. Great to see.
Thanks, Stephen.
Thanks.
Thank you, Stephen. The next question comes from Catherine Mealor of KBW. Your line is open, Catherine.
Thanks. Good morning.
Morning.
Good morning, Catherine.
Just one more on the margin. Just as we think about 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, so the bond book stays relatively stable? Or anything that you're planning to do there?
No. At this point, we, you know, we intend to use our cash first. At this point, the bond book will be relatively stable. You know, we are experiencing about $3 million a month coming back in. No, we're not expecting anything at this point of time. Again, unless our, you know, deposits start outpacing again, then we'll have a different story. That's kind of what we're expecting at this point, Catherine.
Okay. Great. Helpful. The efficiency target that you gave of 60%, what's your timing for when you think you can hit that number?
We're probably looking. We're hopeful that we will hit that, the 60 mark by the third quarter, but between the third and fourth quarter. Low 60s definitely is what we're looking at for third quarter. We'll be in that range for fourth quarter. We are very optimistic sooner than later, but we'll see how it plays out. We'll be down in the low 60s either way.
Great. Okay. Then as we think about, like, expense growth rate into next year, I mean, this year we've seen such big expense growth the past couple of years. I would imagine next year you're gonna really start to see some nice operating leverage. What, what's a fair expense growth rate to think about next year with hiring plans and, you know, inflationary pressures, but, you know, probably less build than we've had historically?
Yeah. Of course, as I mentioned, we did have a jump. You know, Q3 expectations are pretty much a good guide 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 with, you know, merit increases and some of the more initiatives blended in. Trying to hold that $28 million range on average for 2023.
Yeah. I'll just add, 'cause you know, as we look ahead, obviously you get a little bit. We'll get a little bit of, you know, tick up in probably all areas, but there shouldn't be a lot. Like I said, Ron said, you know, most of it's probably gonna be continued just, you know, wage, you know, obviously wage pressure is part of it. We'll have a little bit of occupancy as we move into some offices with these new teams over the course of the next 12 months. To Ron's point, and yours, you know, we're hitting this stride now where this operating leverage is real, and it's great to see. There'll be a little bit of an uptick, but we think it'll be fairly moderate.
It's more incentive than headcount. We're not [crosstalk] Just probably adding o verall, it's a structured growth. I mean, yeah.
Great. All right. Very helpful. Thanks. Congrats on a great quarter.
Thanks, Catherine.
Thank you. We now have Matt Olney of Stephens. Please go ahead when you're ready.
Hey, thanks. Good morning, everybody.
Hey, Matt.
I want to go back to discussion around funding and deposit growth. Within that margin guidance of 3.35% for third quarter, what does that assume for the excess liquidity position?
Yeah, that's a good question. We are looking to draw. You know, our excess liquidity today is pretty much cost, you know, the impact is about 15 basis points at this point. You know, we started off at 35-40 basis points probably earlier this year. I think our excess liquidity will be probably more to a normalized range by quarter end. We're not expecting to have that much excess liquidity and are really just having our deposits now funding some of our growth after the excess liquidity, so pretty much neutral on that front.
Just to clarify that, it sounds like the liquidity levels come down in the third quarter, and by the end going into the fourth quarter, we're close to normalized levels. Did I get that right?
Yes. Yes, sir.
Yeah, I think, Matt, the way we're looking at it is, I commented a second ago. I think, you know, I still think we can grow deposits. Right now, we think we can grow the loan side here near term, a little bit faster than the deposit side. It's just inherently gonna push that excess liquidity a little bit tighter, but that's fine. We still feel like we'll be in a really good spot from a liquidity standpoint as the year goes on, but probably just a little lighter than we are today.
Okay. As far as what a normalized liquidity position would look like for the bank at this point, curious kind of what the dollar amount 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?
Yeah. What we're thinking about, you know, we've I don't think we're gonna go back in time to 2019 because our bank was so different and we've changed so much, you know, and our deposit gathering abilities have really escalated. Our target, our goal is to keep our cash around 7%-8% level and our security portfolio around 13%-14%. That's kind of our ideal mix at this point, and that's what we're trending towards. As we wean down, you know, we have the ability to make that happen as, you know, as long as our deposits and everything kind of comes together. That's kind of what we're looking at, that cash at the 8% level.
Okay. That's very helpful. 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 stat. Really a lot of it, our hiring this year, Matt, has been relatively minimal. You know, we had such a huge year last year with bringing folks on board, that our plan this year has been to really just kind of get those teams integrated. We've added probably, I'm looking at Nate over here, maybe around, I guess four or so production folks this year, but most of it came in late last year. We kind of mesh it all together. Right now, you know, we're starting to get back out and start thinking about kind of that next wave as we start to get our facilities in.
We're continuing to have good conversations. We think there is continued opportunity to add team members to our platform and really all of our zones right now. We're really just continuing to work kinda slowly on that process as we get the income statement where we want it to be, and that should happen pretty quickly.
Okay. Thank you guys. Congrats on the quarter.
Thank you, Matt.
Thanks, Matt.
Thank you, Matt. We now have Feddie Strickland of Janney. Please go ahead when you're ready.
Hey, good morning, everybody.
Good morning.
Wanted to ask, was glad to see non-interest income up overall despite the lower mortgage. It sounds like you guys are pretty bullish on the Fountain equipment leasing business. Can you talk a little bit more about what the lifts and takes are across the different non-interest income lines kind of beyond your prepared remarks?
Ron, you wanna take it? I guess the question, Feddie, 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 have some seasonality on the insurance line, and I know, you know, mortgage was down, but down at most places. We're just curious on the other lines, wealth management, et cetera, what you guys are seeing going forward.
Yeah, going forward, you know, from where we're at Q2, I think wealth management has, you know, picked up. That's been a bright spot for us from our, you know, we've had a good base, and from our lift out that we did late last year. We're looking for, you know, our Q2 revenues probably are very consistent for the remainder of the year, and then, you know, uptick going into 2023. Insurance, we will expect a little bit stronger Q3 seasonality, where we get some more timing, you know, more timing, $200,000 more of revenue. Then, you know, 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, you know, once a year, it's kind of. They do bounce around, but it will, you know, Q2 is the low point for us looking forward. Our capital markets, you know, that's not. I'm not gonna say it's hit or miss. We do have a small pipeline of those, but that's really rate environment specific, and we probably will have some Q3, but not nearly as much as what we've been blessed to have during Q2. Mortgage income, you know, we're not expecting much at all for Q3. The pipelines have been steady and mostly, you know, slower but steady, and we've been taking those more in-house.
I think as we get through, 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. Customer service fees is just gonna be ongoing efforts, so that'll 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, you know, I think that's a big part of something you guys have built over the years. I think it's something worth digging into. Just to switch gears for 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. You know, where do you see the most opportunity out of those upcoming initiatives in the near term?
Yeah, I'll jump on that, and then the rest of the team can chime in a little bit. You know, Feddie, from our standpoint, obviously, the one that we've highlighted the most recently, and I think probably the biggest piece that we've spent time on is this nCino integration. You know, we really do think that whole reengineering of our loan workflow we believe is gonna pay some great dividends for us. We're excited to see that thing go live this quarter. You know, we're also putting in the profitability model with that, and excited to start. You know, I guess just really being able to lend.
We've had a kind of a rudimentary system the way we price, but this is really gonna give our team some nice ability to price loans appropriately and, you know, and appropriately measure for the fee side and the deposit side. So that's been the biggest piece. You know, we've just pushed a huge initiative on a new ATM rollouts. I believe, team, I think we just had a number of them go live just here recently with deposit automation, updating a lot of older machines, that we've had, that we'd acquired through previous acquisitions. I really like that.
That's one of the things that we're doing from an internal standpoint, Feddie, we're really starting to try to figure out how we can push more transactions into other channels, be it mobile, be it Zelle, be it our smart ATMs. We're really putting some initiatives behind some of those technologies right now to help drive just drive maybe some branch transactions that can be handled other ways through more efficient channels. That's been a big push. But I would say those are probably the biggest ones. I'm thinking out loud, Nate, anything that I'm missing outside of nCino and the ATMs have been the biggest ones that we've focused on of late.
I think those are.
Yeah.
Pretty good c ontinued progress with it and happens to have been on all areas. That's about 50% of the ATM fleet.
Yeah. Have been upgraded into these new models. Hopefully, that helps, Feddie.
No, that definitely. That's already included in the expense run rate, right?
That is correct.
Sure. Yeah.
Got it. Perfect. I guess one last question from me, just as you look across your footprint, is there anywhere you wanna infill or expand, or are you more focused on just kind of growing and integrating your existing markets?
Not really. Yeah, I love our footprint. I mean, when you look at kind of where we are now in Tennessee, you know, we're in every growth MSA in Alabama and in every growth MSA in the Panhandle. When you look at our zones and our markets, you know, I think a lot of it now is just kind of, you know, just leveraging those zones by adding more talent.
That's it. Density.
I would say from a market standpoint, you know, we'd love to continue to expand Nashville. Nashville is just such a big market now, one where, you know, 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. For us right now, it's just, you know, more Nashville, probably more Birmingham.
More Birmingham.
Tons of opportunity there. 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 open, Kevin.
Hey, good morning, everyone. How are you?
Hey, Kevin.
I apologize if you covered this from the outset. I got on the call a little late. On credit, you know, I know we're kind of at an interesting point right now where there's all this, the fear of a looming recession, but yet most banks aren't seeing any direct evidence of it or warning signs. You guys are not under CECL yet, so I'm just wondering, when you look at your allowance, are you under any? Are you kind of limited? In other words, would you want to be taking that reserve up more than you have it, but you're unable to because you really don't have any historical losses to point to under the historical model? I'm just curious how you're thinking about that reserve going forward. Thanks.
Rhett, you wanna?
Yep. 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, you know, we are transitioning to CECL in the not too distant future, so clearly modeling for that expectation. You know, our methodology, our approach to credit has always been conservative. You know, 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.
You know, the best way we know to address that is what we have always done, and that is when you look at a transaction, you know, 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. That's the approach we've always taken. That's the approach we continue to take.
I think from an allowance standpoint, you know, 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. We feel really good about where we're positioned at this point. Ron, I don't know if there's anything else you want 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. You know, looking forward in our footprint, we're not seeing any credit or economic issues directly that would cause us to add any more provision. That's kind of where we're at.
That's what we've been doing.
Yeah.
Okay, great. Thank you. This has been brought up a couple times already, but it seems like the you know 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 you know busy merger activity going on in the Southeast generally, the biggest one being TD and FHN, and we've had some banks announce some selected lift outs in new markets. It sounds like, Billy, you're not looking really for new markets, but you have certain markets where you'd want to add talent. How are you balancing that?
Like, if you're getting inbounds in terms of new hires that wanna join or interested in joining, but yet you wanna demonstrate that profitability, 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 gonna go full steam ahead.
Yeah. Yeah, we're not tapping the brakes. You know, from our standpoint, you said the word, it's a balance. You know, we've kinda had this first wave. We're getting this first wave on board. As you can see, 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've got some folks that we stay close to in our zones. We continue to watch those opportunities.
I had a good friend say he never had a budget for production hires. You know, I think that's a pretty good rule of thumb. You know, obviously, we do wanna balance it. We need to show and demonstrate, you know, our ability to start leveraging this expense base and grow revenue. We're doing it. We're gonna continue to do it. 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. We're gonna continue to keep our 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 from different markets. 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. It's got to be the right fit, but we're always looking for good talent.
As Miller was alluding to, yeah, I think for us, you know, Kevin, kind of what we did is, you know, we took our foot off the gas at the beginning of the year. You know, we integrated so much that we needed to digest that. We've done that during the first half, and now we're starting to see that kind of flow through into the balance sheet and the income statement. You know, we're continuing to look for those opportunities. You know, you mentioned there's several deals in the southeast that we think could open up some doors for us. We're constantly watching and chatting, and not looking to tap the brakes anytime soon.
One last one for me, Billy. The outlook for more moderate pace of loan growth, is that just more coming off a 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?
No, it's really more first. It's really more just, you know, we grew at a 30% annualized clip on the loan side in Q2. I mean, you know, moderating it down to a low double-digit trajectory is pretty dang good.
No, you bet it's pretty good. It's great.
You know, we still feel like we can be a grower, you know, here in the near term. Obviously, you have rates, you know, continue to spike up. You know, who knows kind of where, you know, what might slow down, looking ahead. It's really just a function of having phenomenal growth in the first half of the year, probably ahead of what we had projected a little bit. Second half is probably gonna be more of what we feel like we're gonna consistently see from this team going forward.
Okay. I can't argue with any of that. Thank you very much.
All right.
Thanks, Kevin.
Thank you, Kevin. If you would like to ask any more questions, please remember that is star followed by one on your telephone keypad. We now have another question from Taylor Broderick 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, you know, just improved service charges in the quarter and, you know, just thinking, you know, how that compares from previous.
Yeah, historical we're at 30%. I think we were up 30% pretty quickly. We've managed to lag, you know, almost a quarter and a half, almost two quarters of that. We are doing extremely better than what we've had the last cycle. We definitely, you know, cut probably the betas in half. Again, you know, we'll see what the next quarter brings, but that's kind of what we're looking at today.
Outside of tech on the efficiency initiatives, I would assume that's. Is there anything else that, you know, sort of low-hanging fruit that's to think about there? I know a lot of that sometimes ebbs and flows with comp, but I didn't know if there was anything else besides the digital work that you could do or think about.
Not really, Taylor. You know, from our standpoint, I think a lot of the efficiency work's been done, you know. As Ron said, you know, we really don't have. There's probably not a lot of low-hanging fruit to thin out. I think it's just continued refinement. You know, it's a penny here and nickel there, you know, renegotiating contracts, things like that. So there's an ongoing scrub, I would say, of the expense line. But there's not any big pieces.
It's more that we think that expense line is gonna moderate fairly well, with just a little inflation in a couple of areas, and then we just grow the revenue, and I think that should take care of the numbers by themselves.
Yeah. Additionally, you know, our internal initiatives that are not really expense-driven, it could be expense savings later on, but just kind of always looking at the processes as we grow, as we get to that $5 billion-$7 billion mark. You know, what do we need to do different? What software can assist us? We're always exploring and always trying to make the next day better. That's something that's always ongoing with our management teams going forward. Today and going forward.
Well, great. One more for me. You know, we've talked a lot about lift outs and adding people. Given the attractiveness of the footprint, how do you think about sort of playing defense on that? Anything you have to do to, you know, I don't know if there's irrational activity in trying to acquire producers and how you think about that.
Yeah. Taylor, that's a great point. It's, you know, when you've got a good team of folks, you do have to play some defense occasionally. I think we do that. Again, you know, I alluded to creating a great place to work. That's something we really focus on. We focus on the culture of this organization. You know, I think we continue to make sure that we're putting the right resources and giving the right resources available to our leadership to make sure that they can continue to recruit and retain. Defense is part of it. It is part of it today, and it's something that I think all banks deal with. I think, you know, your better companies, your better cultures, typically win out in those scenarios.
Great. Thanks for all the 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, Operator. 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 line.