Hello, and welcome to the SmartFinancial Third Quarter 2022 Earnings Release Conference Call. My name is Darius, and I'll be the operator for today's call. Before I hand you over to your host, Miller Welborn, I would like to remind you that if you would like to ask a question during the Q&A session, please press star zero one on your telephone keypad. I now have the pleasure of handing you over to your host, Miller Welborn, to begin. Please go ahead, Miller.
Thanks, Darius. Good morning to all of you, and we appreciate you joining us today for our Q3 2022 earnings call. We're excited to be on the call this morning and share an update on our company. We thank you for the interest 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 yesterday evening for the normal and customary disclaimers and forward-looking statements comments. Please take a minute to review.
Q3 was a fantastic quarter for our company, and we're very proud of what we've been able to accomplish to date this year. Our year-over-year increase in earnings for the bank has been strong. Our growth in our Fountain Equipment Finance company has been incredible, and our addition of the Sunbelt Insurance team to our organization is truly exciting. I'm proud of the team for the focus, execution, and continued improvements we've made to date. With that, I'm gonna turn it over to Billy for a few additional comments and details.
Thanks, Miller, and good morning, everyone. We've had another really solid quarter here at SmartFinancial. As you'll see from the results, we continue our focus on growing both revenue and earnings per share. We've discussed our plan for 2022 on prior calls and are executing on transitioning this company into one that is both core earning and core funding. We're also, like others in our industry, watching our economy closely. Given the fact that we're in some of the best markets in the Southeast, we still feel optimistic our loans will perform well, even with some recessionary pressure. That's one of the reasons we've always liked healthy college town-type markets. They have limited peaks and valleys. While not necessarily tightening our standards, as we're always conservative underwriters, we are scrutinizing and watching sectors closely.
The loans we're seeing and adding to our balance sheet are coming from seasoned clients, and we feel very good about the businesses we are moving to the bank. That said, we're watching this market and continually getting real-time anecdotal feedback from our regional credit teams. Our team is also doing a nice job at executing our individual market strategies, as evidenced in the recently released FDIC market share report. We continue to gain share and/or move up in market position in almost all markets where we're operating. I've always felt this is an important barometer, and one of the key objectives we have is gaining market share. We are executing well on that goal as we had really nice share gains this last year. As we look into the quarter, here are some highlights. We did $11.6 million in operating earnings or $0.69 per share.
We had record revenue for the quarter and strong EPS growth. PPNR, our operating revenue, was approximately $43 million. That's a 6.5% increase quarter-over-quarter, and EPS grew 13% for that same period. We also had nice organic growth. For the quarter, we saw 15% annualized on loans. We also had nice growth in non-maturity deposits of 4% annualized. Overall deposits were flat as we let some time roll off, but we continued to improve our mix. Our loan-to-deposit ratio was 72%, given our great work on growing core funding. Competitive pressures caused us to push deposit rates up a little quicker than we wanted, but we're still positioned well, given our liquidity. We continue to gain operating leverage from our recent expansions as our efficiency ratio ticked down to 63%.
We are still maintaining our focus on expenses, while investing for our future. Our credit quality remains strong with no movement in our NPA ratio, actually dropping down to 10 basis points. I also wanted to welcome, as Miller said, our newest team members from Sunbelt Insurance. We acquired this Chattanooga-based insurance agency during the quarter and are very excited to merge it into our existing platform. This agency has a great business line, focused on the trucking and transportation insurance business. As many of y'all know, we have some great ties into that industry, particularly with Miller's background and experience. We're very excited to create some synergies to grow this fee-generating business line. Before I turn it over, just a couple of other notes. Both new markets and legacy markets are all performing very well.
We just opened our Birmingham, Alabama office, and our Brentwood, Franklin office in the Nashville MSA is slated to open in Q4. Our team from Fountain Equipment Finance is having an outstanding year. We have almost doubled the size of that balance sheet since acquiring this equipment finance group a couple of years ago, and we have some great momentum there. We have a number of things going very well in our company, so let me go ahead and turn it over to Rhett to walk through the balance sheet and credit, and Ron will then provide some additional details on the income and expense side. Rhett?
Thank you, Billy. As Billy mentioned earlier, solid loan growth continued through third quarter, with period-over-period net organic loans and leases growing at a 15% annualized pace, excluding PPP loans. As you can see on slide six, loan and lease balances outstanding grew over $105 million for the quarter, putting the portfolio total just over $3 billion.
Quarterly production was very evenly spread across our footprint markets, well diversified toward our target portfolio segments, and evenly split between fixed and variable rate products. Deposits were flat quarter-over-quarter, with net balances of just over $4 billion and average deposit costs of 45 basis points. Combination of these factors resulted in a 70% loan to deposit ratio. The loan portfolio mix has continued to be very stable, as shown on slide seven. While most economic outlooks and market guidance continue to indicate a higher probability of recession driven by inflationary pressure and corresponding interest rate increases over the next several quarters, our market areas continue to show some solid economic results, and our business clients are continuing to relay positive outlooks to our lending teams for their near-term guidance.
Interest rates on loan production and renewals are beginning to see some gradual increases, as Billy mentioned earlier, with market-based rates continuing to move upward due to Fed funds direction and corresponding term rates responding accordingly. Given that near-term directional expectation, we're still cautiously optimistic for continued growth opportunities in the loan portfolio over the next couple of quarters. As the next slide indicates, our portfolio credit quality continues to be extremely strong as it has been all year. Given challenging economic outlooks, we've taken some additional steps over the last few months to refresh our lending teams on those key conservative underwriting factors that have allowed us to maintain these extremely strong portfolio performance results for such an extended time frame.
Aggressive interest rate stress analysis, strong cash equity requirements, and limited exposure growth to industry segments with weaker economic outlooks have always been core essential components of our lending approach, and they're essential in this challenging time to protect our historically top-tier credit quality performance. As I noted previously, looking at slide eight, it shows third quarter reflecting continued strong and stable performance across our core asset quality metrics. Non-performing assets to total assets, past due loans to total loans, and classified loans to total loans are all improved quarter-over-quarter. Our CRE ratios were stable prior to quarter end as well, with total CRE holding at 303% of capital. We did have a slight 9% increase in the CRE construction ratio that ended the quarter right at the regulatory guidance target, due predominantly to continued funding on active construction projects.
As noted in prior calls, we've historically managed our CRE portfolio in the upper end of the ratio guidance and continue to feel very comfortable doing so, given the credit profiles of our CRE book and our historically conservative underwriting in that space. Our loan pipeline continues to be solid and evenly distributed across all our market areas, with a significant portion of these opportunities being non-CRE in nature. Overall, our 2022 year to date loan production and credit quality have been strong results, and we are still cautiously optimistic in our outlook as we close out the year. Now I'll turn it over to Ron to walk you through our allowance positioning. Ron?
Thanks, Rhett, and good morning, everyone. Let's move forward to slide nine, our loan loss reserve. As Rhett covered much of our credit stats, I would like to add that during the quarter, we recorded $974,000 provision related to strong loan growth with minimal credit related provisioning. At quarter end, our allowance to originated loans and leases was at 75 basis points, and our total reserves to total loans and leases was at 1.2%. On to slide 10. We utilized over $100 million of excess cash to fund our new loan production. As previously mentioned, our loan to deposit ratio increased to 72%, and our overall liquidity position, which includes cash and securities, represented approximately 28% of total assets, giving us much flexibility to fund future loan growth.
Our third quarter net interest margin was 3.29%, a 21 basis point quarter-over-quarter expansion, despite having a reduction of $580,000 related to PPP and acquired loan accretion. During the period, our interest earning asset yield increased by 40 basis points, outpacing the 28 basis point increase in our funding costs. While rising rates have eased pressure on our margin, we still experienced approximately 12 basis points of compression as a result of our strong liquidity position. For the quarter, our yield on our loan portfolio, less loan accretion and PPP fees, increased 28 basis points to 4.55%, with a September loan portfolio yield of 4.66%. Our interest-bearing deposit costs for the quarter increased 29 basis points to 0.62%, with September deposit cost of 0.76%.
Noteworthy this quarter was a significant increase in deposit competition across our footprint, which also contributed to our deposit beta acceleration. As of September 30, our deposit beta was roughly 15% since March, and we are estimating our deposit beta to be around 25% for the fourth quarter. As mentioned during our last earnings call, we will be judicious in our approach to raising deposit pricing, however, not at the expense of losing good relationships. For the fourth quarter, we are forecasting our margin to be in the 3.40% range. Included in our margin forecast is estimated loan accretion of 4 basis points or approximately $320,000.
Further, our operating revenue increased $2.7 million for an annualized quarter-over-quarter increase of over 26%, in spite of the revenue headwinds faced related to reduced acquired loan, PPP fee, and mortgage banking income, which in aggregate total $481,000 compared to $5.6 million for the same prior year period. We are extremely proud of our SmartBank associates to not only offset these differences, but grow our quarterly revenue to a company record of approximately $43 million. On slide 11, you'll find some of our interest rate sensitivity information.
With the sharp rise in interest rates and the deployment of some of our cash liquidity during the quarter, our balance sheet has shifted from a modestly asset sensitive to slightly asset sensitive position. We are expecting further increases in short-term rates to have a positive impact in our net interest margin and net income, but will be more muted as we approach a more neutral asset sensitivity position. Currently, we have $1.2 billion of variable rate loans with $668 million resetting almost immediately. The remainder of the floating rate loans would reset over a specified time period, with $77 million resetting ratably over 2023. On slide 12, non-interest income was $6.3 million, a decrease from the $7.2 million reported from the prior quarter. We continued focusing on our stated goals of building core recurring fee income streams.
To that end, service charges increased over $165,000, primarily as a result of an enhanced treasury management fee structure, which was implemented during the quarter. We also saw positive momentum in our wealth, insurance, and equipment leasing divisions, which collectively generated almost $2.2 million in non-interest income for the quarter. We will further enhance our non-interest income generation going forward with our Sunbelt acquisition. We did face expected challenges during the quarter, recording $800,000 less revenue from our capital markets team and weaker gain on sale income from our mortgage banking department. While our mortgage banking production has remained relatively consistent over the past several quarters, our production of secondary market loans has significantly declined. For the quarter, we had only 9% of our volume sold into the secondary market, compared to 66% for the same prior year period.
As rates continue to rise and adjustable rate products become more attractive, we expect this trend to persist as we journey through this rate environment. Our non-interest income forecast for the fourth quarter is in the $6.7 million range. On to slide 13. Currently, our operating efficiency ratio is at 63%, representing our continued efforts in creating operating efficiencies while focused on expense management. We expect our efficiency ratio to continue its steady decline as we further leverage our platform and further scale our business. Our operating non-interest expenses were $27.1 million, an increase of $1.3 million from the prior quarter. The majority of this increase was related to higher incentive accruals as our production team members continued to outpace expectations and to a lesser extent, the additional salary expense related to the acquisition of Sunbelt Insurance.
We also experienced an increase in occupancy and equipment driven by higher utility expense and new market branch expansion initiatives. We will continue to experience ebbs and flows in various expense categories as we invest in our people and platform. For the fourth quarter, we are forecasting an expense run rate of $27.3 million range with salary and benefit expense of approximately $16.5 million. On to slide 14, capital. Although our capital benefited from our strong earnings and we're able to accommodate a majority of our current loan growth, we did experience a slight downward movement in our capital ratios, primarily attributable to our Sunbelt Insurance purchase and the associated goodwill created from the transaction. Moving forward, given our loan pipeline and earnings momentum, we anticipate building capital at a rate sufficient to fund future growth and build capital ratios.
At quarter end, our tangible book value was $18.02 per share. However, excluding the temporary impact of our unrealized security losses, our tangible book value was $20.42 per share, representing a quarter-over-quarter increase of 5.6% and a five-year compound annualized growth rate of almost 9%. With that said, I'll turn it back over to Billy.
Thank you, Ron. As you can hear, we're really starting to hit a nice stride in this company. Ron had mentioned some of our guidance, and we continue to feel that we're positioned very well. Even with some possible slowing due to rate increases, we can continue to grow by capitalizing on the investment we've made recently in new markets, new business lines, and technology. I feel our loan growth outlook is still solid. Our Q4 pipeline is good. I do feel, even though loan growth will ease a little moving forward, we should still be able to grow at a nice pace. You know, we grew at a 15% pace this quarter.
You know, probably look into somewhere in the higher single digits, maybe a little better than that over the next couple of quarters. We're continuing conversations to add talent to our team, adding several folks in recent weeks, and we're in discussions with several others. The hiring momentum that we picked up last year, we see that continuing as we look ahead into the coming quarters. We also wanna just say a quick thank you as we close out today to our SMBK, our whole SMBK team. Many of those folks listen to these calls. We always talk about the numbers on these calls, and I don't wanna overlook the phenomenal culture that we are building.
I do think we will continue to differentiate with that culture in our markets, and it's our team members that make that happen, so thank you. It continues to be a great time to be involved in this company, and we will stop there and open it up for questions.
Darius, you there? Can you queue up the questions? Darius, are you on there? Hello, operator.
Miller, I can hear you. I'm still here. This is Ron.
All right, we'll just wait a minute, and maybe this operator will come up and queue up the questions for us. Folks listening, just bear with us. Thomas Reid, it looks like you're first in the queue, but I don't.
Yeah, that's correct.
Can you hear me?
Is that Thomas Reid?
Is that Thomas Reid?
Yeah, this is Reid. Can you hear me?
Yes, go ahead. Thank you.
Okay. I wasn't sure if they cued me up or not. How are you guys doing this morning?
We're good. Thank you.
Was just curious, you know, we talked a little bit about the opportunities in Nashville. I know you guys have an LPO there. Was just wondering if you could speak to how much opportunity you think you have in Nashville and whether there's any plans to expand your presence in that market?
Yeah. You know, Thomas Reid, it is. As I said, we are opening our Brentwood Franklin office here this quarter. Excited about what we've seen with the team that we have on the ground that we added over this last year, really just to start to get some momentum going. We think there's obviously one of the best markets in the country. I don't think there's any doubt about that. You know, obviously competitive, as all good markets are.
We do feel like, again, kind of going back to my commentary on culture, you know, we have demonstrated our ability to add some really good revenue producers to our company over the last little bit. We think we can do that. Again, we wanted this year to really digest what we bit off at the end of last year, first part of this year. As we are doing that now, we're really starting to look a little harder, excited about the opportunities to expand that market and think that's something that we can do over the next year.
We played around with it for the last couple of years in Murfreesboro, and that's been an incredibly strong market for us, great people there, and we think we can lean in on it a little bit further.
Got it. That makes sense. Just, I think I already know the answer to this, but I'll ask anyway. As we look towards future growth, that's gonna primarily come from building out market share to existing markets, right? You're not really looking at expanding beyond your current footprint right now.
That's correct, Reid. You know, we're not looking to go to any other markets outside of the kind of the regions that we're in. You know, you always look for, and we're always opportunistic, but really there's nothing strategically that we're looking at now, kind of outside the zones where we are. We think there's between Nashville's, Birmingham's, and other markets, then these great new Alabama MSAs that we entered as well last year, there's a ton of opportunity there. That's probably where focus area is gonna be. You know, always opportunistic if something comes up, but that's our focus is gonna be existing zones.
Yeah, we always look upstream and downstream. I will say it's interesting, we've talked a little bit about this potential AOCI impact on these banks that are a billion and lower. I do think that's a potential negative impact to capital, and some of these guys been deploying that liquidity into those securities portfolios. If that comes to haunt them here, hopefully not, but if could be some negative impact and certainly some M&A opportunity.
Gotcha. Just one last one from me, and I'll step back in the queue. It sounds like, you know, margin, given your guidance margins have come up in the fourth quarter, does it seem like there can be some incremental margin growth going into early 2023 if we get a couple additional rate hikes? It seems like that's what Ron was alluding to earlier.
Yeah. Let me add a little color and then Ron, you jump in. I do think, Reid, that's probably been a little bit of a gap maybe between some of the analyst numbers and some of ours. I do think our loan yields are coming along really well. I do think, you know, the first couple of rate hikes, you know, we still had loans in the pipeline that were at rates slightly below where the market was at the time that had to get on the books. I think our loan yields were lagging a little bit for a few months, but you're really starting to see those catch up now.
As we reset, Ron alluded to our variable rate loans, you know, we'll have more of those as those reset at different quarters. We do think that the loan yields will continue to show positive momentum over the next little bit. I think that's a really important piece of our equation right now and something I've obviously you've picked up on it. I think it's something important to note.
Yeah. To further that, as long as we can, you know, deposit competition, as we alluded to, has been pretty significant. As long as we keep our deposit betas down in that higher 20 range, 30 range, yeah, we'll, we definitely will have a margin expansion going into 2023.
Got it. Thanks so much for taking my questions. Just to the other analyst, it didn't say anything. Just see if it works.
Well, we're seeing it queue up. Who do we have next?
Kevin Fitzsimmons.
Is Kevin, are you on the phone?
Kevin is on the line. I will open his line now.
All right.
Hey, guys. Good morning.
Good morning, Kevin.
Hey. Okay, great. Good morning. Thanks. Good. Deposit levels is, you know, that's obviously something that's changing here in the environment for banks and we've seen deposit levels come down for the banks, somewhat. Some of it deliberately and some but not so much. Just, maybe if you can give your outlook, looking over the next several quarters of what you think that loan-to-deposit ratio will do. I mean, it seems like you still have a lot of flexibility with it being at 72%. As we look, you know, I don't know what kind of timeframe you wanna look at, but if you look at over the course of the next, call it four or five quarters, where can you see that going? Does that assume you keep...
Manage to keep deposits flattish like you did this quarter? Should we expect deposit levels to bleed lower going forward? Thanks.
Yeah, I'll start, and then, guys, y'all feel free to chime in. Yeah, I think I feel like that you'll see that deposit ratio edge up a little bit. And really just because given the flexibility that we do have with the liquidity, you know, we're gonna continue to, you know, as Ron alluded to, stay aggressive enough in our markets that we're keeping core business. But if we need to let a little bit of non-core run out because it's the right thing to do from a margin standpoint, we'll be open to that.
Kevin, I think you'll see that number probably continue to creep maybe slowly over the next little bit. I think that's the right approach for us. The great thing about it, Ron, we were talking about this yesterday, is we're diving into the numbers. You know, the new teams that we've added over the course of the last year, the growth that they've had on the deposit side has been outstanding. Loan side's been really good, but deposits have been probably better than we had anticipated. I think you can see that continuing. You know, we've put a lot of efforts into our treasury program.
You know, so our recruitment of more deposit-based, especially checking business is something that's really important to us. I think you're gonna see our deposit generation work continue. You know, but we'll also probably, while that's adding, we'll probably let some higher rate stuff roll. I think at the end of the day, we probably still kinda have a flattish forecast for deposits, but continuing to try to, you know, hold that number down as far as rate increases. Ron, any color? Nate, you guys, y'all have anything?
Yeah. We will incrementally go higher. You know, as Billy had said, you know, right from the beginning with the lift outs, we knew they were deposit gatherers and they did shine in the third quarter for us, showing that, yes, indeed, they can gather deposits.
Good deposits.
Good deposits. You know, we expect that we have modeled a little slight decrease in our deposits, you know, one or two, you know, 2-3%. I'm not sure we'll have that, but we did model it. Again, yeah, that loan deposit ratio will incrementally creep up as we go.
Okay. Thank you. And maybe this is more kind of a top-level question. I believe in the last quarter or two, Billy, you've talked about that you guys have been very active in adding talent, and so obviously that has expenses attached to it immediately, and then the revenues come later. That the near-term priority was really gonna be about demonstrating improved profitability. That, you know, so it had the kind of implication that you guys, while always being opportunistic, you were not in so much the investing mode, but the delivering bottom-line profitability mode. Where do you say you are on that front today?
You know, Kevin, I'd say we're probably in middle innings.
Yeah.
On that. You know, I think we have. I mean, you look at the results. I mean, we've demonstrated. I mean, you look at the revenue growth. Look at the EPS growth. Efficiency ratio continuing to tick down. Again, our focus is more, again, kind of another baseball analogy since we're in the middle of the playoffs. You know, we're singles and doubles and just continuing to grind this thing higher. I love where we're sitting. I do think we're kind of middle innings. I do think there's you know, upside to the investments that we've made. But we're also gonna continue to invest in talent, if you know, if those opportunities pop up. That's kinda my take.
I don't know if you guys have any other comments? Ron, you need anything from you?
Yeah. You know, one thing that's happened over the last several quarters is that we truly have core revenue. We've lost our PPP, and the accretion has dwindled down. You know, we're really a core revenue shop at this point, and the growth then has been, you know, pretty amazing for us. Yeah, I think some more good things to come as we go forward.
Yeah, Ron, I think that is Kevin, I think that's a great point that our audience needs to know. You know, when you really look at our numbers, you know, we've always figured out a way to make a decent return. A lot, some of that's been various different income items, some of it not as core. This thing's really starting to get.
A really strong core engine going. That's the reason I love where we're going. I think we can continue just to incrementally move better from a metric standpoint from here. I think we've got some great upside.
Lovely. Thank you. We take our next question from Catherine Mealor of KBW. Catherine, your line is now open. Please go ahead.
Thanks. I just had a follow-up question on the margin. When you mentioned the 25% beta for 4Q, you're saying that the quarterly beta, and is that on total deposits, not just interest-bearing deposits?
They would be the non-maturity deposits, not the total deposits. I think the beta itself in total will wind up to 25% throughout. I think the model, you know, what we're expecting through the model is probably closer to 30% for the quarter. The whole, you know, from beginning of March, we should be in that 24%-25% range.
Got it. On more of a cumulative basis.
Yes. Yes.
Okay. That makes sense. Okay, cool. I just wanna make sure that we were aligned on the guidance there. Okay, that's great. Then on the loan yields too, you said your loan yields were 4.66% at the end of September. For me to get to this kind of 4.340 number for the margin, I kinda see an acceleration in your loan yields as early as this quarter more so than kind of a next year thing. Is that a fair assessment?
Yes. We're probably, you know, for the 3.40% margin, we think our loan yields probably should be in the 4.90% range.
Great. Okay.
Again, you know, our pipeline, we have a lot of, you know. Yeah. Yeah. We're on. Yes. You're good.
Okay. That makes sense. Okay, great. I just wanted to be sure I was thinking about that right. As you think about expense growth for next year, how are you kind of thinking about the pace at which we'll see expenses grow, maybe kind of relative to the revenue and potential positive operating levers that we'll see even into next year?
Well, at this point, you know, we haven't. We're still in the middle of our forecasting for next year, and there's a lot of moving pieces, obviously. Probably see a mid-single digit expense growth range and probably an upper single digit revenue, you know, net interest income range. That, again, we're not really giving guidance on that. We're still working through the pieces of that, Catherine.
Great. Okay. Still an environment where you think you can grow total revenue at a faster pace than you can grow expenses?
Oh, yes. Oh, definitely. Yeah.
Great. Okay. That's all I got. Thanks so much.
Thanks, Catherine.
Thank you, Catherine. As a reminder, if you would like to ask a question on today's call, please press star followed by one on your telephone keypad. Our next question is from Stephen Scouten of Piper Sandler. Stephen, your line is now open. Please go ahead.
Yeah, thanks, guys. Hey, I just wanted to dig in on Catherine's last question there a little further. If you talk about positive operating leverage in 2023, is that possible, you think, even after rate hikes are finished? You know, say we get to 2Q 2023 and beyond, so then you can deliver positive operating leverage even without the help of higher rates.
I do, Stephen. You know, I think for us, a lot of it's just gonna be a factor of growth. You know, again, that's one thing, you know, Ron said it, Ken, we've talked about it. I mean, we're you know running models. I guess the question is growth. You know, what does growth do with an environment, you know, where you might have a 5% or higher Fed terminal rate. You know, I do think, you know, given where we see rates are today, kind of where the forecast is today, we do think we can see that even when rates settle down a little bit.
Obviously, we need to grow, but that's the reason we're really putting a lot of emphasis on some of these other fee lines, things that are not as rate sensitive. Obviously, if we get a little bit of a slowdown in the top line, I think we can actually slow the expense side down a bit if needed to. I think we're building in some room for some additional hires and some additional team members as we look in the next year to add more revenue producers. Even in an environment where we do think the Fed settles out, we can still gain some leverage.
Okay. That's helpful. You guys gave great color on the deposit betas there. How should we think about, you know, like a loan beta, if you will, relative to the 22% variable rate loan book and just kinda how we should think about the upside there other than the, you know, 4.90 number, Ron, you gave?
Yeah. Going forward, loan betas seem to be a little bit more trickier to figure out than deposit betas. I think we're running the betas around 19%-20%. I would say, you know, then that's to date. I think it would probably. I would probably keep that. I don't know it's gonna accelerate more. But again, we are getting higher rates, so maybe not. Maybe I'm backtracking. We probably should see a little bit higher beta as our new production pipeline, you know, which we're seeing now in the six handles will accelerate that. I would probably go to mid-20s with that.
Okay, great. Just last thing for me, kinda how you're thinking about the loan loss reserve moving forward in a potential recessionary scenario, CECL. You know, kind of what that could do to your reserve and where you think it could be most sensitive to. Is that gonna be like an unemployment factor or where the sensitivity would be to reserve levels moving forward?
Yeah, great question. You know, as you know, we're on the incurred loss model. We will be adopting CECL at 1/1. You know, to date, you know, we completed our third parallel run. Our CECL model has been validated, so we are ready to implement on 1/1. For day one, we're expecting to really have an immaterial day one event. We are carrying a lot of fair value marks that will help with the build of the ACLs. You not knowing what the future brings because it's so uncertain. You know, we think maybe 30% increase in provisioning, going forward with the CECL model going into 2023. Other than that, really, and that's just not guidance, just kind of an update at this point.
There's too many moving pieces, you know, as we implement to kind of get a number in hand of where we think we're gonna be. As we know, every couple of weeks something else changes. That's kind of where we're at this point. Roughly around the 30%-ish area, the provisioning should increase for the new loan growth.
Okay. Again, thanks for all the color. Billy, as far as I'm concerned, the baseball playoffs ended about a week and a half ago, so not sure about that one.
I know.
We agree, too.
That's part of it.
Yeah.
Thank you, Stephen. Our next question comes from Matt Olney of Stephens Inc. Matt, your line is now open. Please go ahead.
Hey, guys. This is actually Jordan on for Matt. All my questions have been answered, except I was wondering if you could give a little bit more color around the securities balances, kind of what are your expectations for 4Q, maybe in 2023 kind of, and maybe what the purchases and the yields are coming on at. Thanks.
Yeah, Billy, I'll get that. Yeah, at this point we're not doing any new security purchases. We're kind of just taking advantage of the cash position. We're getting back $3 million-$4 million of principal a month. You know, we probably wanna wean ourselves back down to target. You know, we wanna be at the cash and security level around 20%. We're currently at 28%, so I think over time we'll wean that back down. You know, the short answer is we're not purchasing any securities at this point in time. New securities to the book.
Perfect. Thank you.
Thanks, Jordan.
Thanks, Jordan.
We have no further questions in the queue, so I'll hand it back to Miller.
Thank you very much. Again, thanks to each of you for joining us today. As always, if you have any additional questions, reach out to us directly. We appreciate your interest in the bank and thanks for joining us today. Have a great day.
This concludes today's conference call. Ladies and gentlemen, thank you for joining us. You may now disconnect your lines.