SmartFinancial, Inc. (NASDAQ:SMBK) Q2 2022 Earnings Conference Call July 26, 2022 10:00 AM ET
Company Participants
Miller Welborn – Chairman
Billy Carroll – President & Chief Executive Officer
Rhett Jordan – Chief Credit Officer
Ron Gorczynski – Chief Financial Officer
Nate Strall – Director of Corporate Strategy
Conference Call Participants
Stephen Scouten – Piper Sandler
Catherine Mealor – KBW
Matt Olney – Stephens
Feddie Strickland – Janney
Kevin Fitzsimmons – D.A. Davidson
Taylor Brodarick – Hovde Group
Operator
Good morning and welcome to the SmartFinancial Second Quarter 2022 Earnings Call. My name is Breeka and I’ll be your event specialist operating today’s call. [Operator Instructions]
I’ll now have the pleasure of handing the call over to Miller Welborn. So Miller, please go ahead when you’re ready.
Miller Welborn
Thanks Breeka. Good morning to all of you and we appreciate you joining us today for our Q2 2022 earnings call. We’re excited to be on the call this morning and share an update on our company. We thank you for the interest all of you have in our progress, and it’s important for us to hear your questions, comments and feedback.
Joining me on the call today are Billy Carroll, our President and CEO, Ron Gorczynski, our CFO, Rhett Jordan, our Chief Credit Officer, and Nate Strall, our Director of Corporate Strategy.
Before we get started, I’d like to ask each of you to please refer to page 2 of our deck that we filed this morning for the normal and customary disclaimers and forward-looking statements, comments, please take a minute to review these.
Q2 was a great quarter for our company and we’re very proud of what we’ve been able to accomplish in the first half of the year. Despite what the news media outlets will lead you to believe our economy in the Southeast US and in particular our Tennessee, Alabama, Florida markets have been very busy and exceptionally strong. I’m proud of the team for the focus, execution and continued improvements we have made to date.
With that I’m going to turn it over to Billy.
Billy Carroll
Thanks Miller and good morning, everyone. I’ll jump right into some highlights to what we believe was an outstanding quarter. As we’ve communicated on prior calls, this year our main goal has been the integration of our new teams, executing our organic growth strategy and gaining operating leverage. And we’re pretty much right where we thought we’d be if not a little ahead of schedule.
Again it was a nice quarter. We reported $10.3 million in operating earnings or $0.61 per share, strong organic growth on both sides of the balance sheet for the quarter 30% annualized growth on loans and 9% annualized on deposits, highlighted by a 14% annualized number on our non-maturity deposits. This was a result of great momentum from our recent lift outs, as well as solid performance from our legacy markets. We had nice growth in our noninterest income lines as well, even with secondary market mortgage 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%. And credit quality remained strong with no movement in our NPA ratio holding at 11 basis points.
These highlights show how we are executing our plan. I’m going to let Rhett and Ron provide some details in a moment. But as I mentioned the expansion of the bank through our recent lift outs have been a strong catalyst for growth. The new markets in Alabama and our expansion in Nashville are working as planned. But it’s important to note that our legacy markets have performed very well too. There’s a great energy throughout our company right now.
And it’s not just the loan and deposit growth the continued refinement of some of our ancillary business lines are leading to enhanced profitability. Our wealth and insurance platforms are both having very nice years and our Fountain Equipment Finance team had an outstanding quarter. We’ve grown balances in that group over 40% year-to-date, while holding yields relatively well. We really like that line of business and are looking for ways to continue to expand it. Expense controls have been a continued focus as we gain leverage and we believe this trend will continue as our expectations for the second half include fairly modest expense growth.
So let me go ahead and hand it over to Rhett to walk through the balance sheet and credit, and then Ron will provide some more detail on the income and expense side. Rhett?
Rhett Jordan
Thank you Billy. Our first quarter strong loan growth continued into the second quarter with net organic loans and leases growing just over $206 million excluding a reduction of approximately $19 million in forgiven PPP loan balances. This equates to a 30% increase in annualized quarter-over-quarter loan growth ending the halfway mark for the year with just under $3 billion in loans and leases outstanding, while the loan portfolio average yield held steady to Q1 levels.
Quarterly production was very evenly spread across each of our regional footprint markets, well-diversified toward our target portfolio segments and evenly split between fixed and variable rate products. We continue to see solid growth in the deposit portfolio with net balances growing $91 million over Q1, with only a four basis point increase in deposit costs during the period.
Loan portfolio mix continues to maintain consistency through the balance growth mentioned previously and deposit composition saw a continued increase in core deposits outpacing a slight reduction in time deposit balances to affect the net deposit balance growth I mentioned earlier. While we recognize our loan-to-deposit ratio continues to track below historic levels, we are excited to continue to have excess liquidity to fund what is proving to be a significant year of production across all of our markets.
While most economic outlook and market guidance continues to indicate a higher probability of recessionary pressure in the next several quarters, our market areas continue to see strong personal and business relocations into our footprint. This continued market growth and resulting above average business economic stability coupled with our bank’s historically strong and conservative credit underwriting approach is a great recipe for continuing to drive both growth and solid performance metrics in the loan portfolio through the balance of 2022.
Second quarter saw each of our core asset quality metrics hold steady or improved compared to the prior two quarters. Non-performing assets of 11 basis points, a net recovery of charged-off loan balances and past due and classified loans to total loans ratio relatively unchanged from Q1 performance and better than Q4 2021 results. Our CRE ratios were consistent to prior quarter as well, total CRE holding at 304% of capital and a slight 9% increase in the CRE construction ratio that still ended the quarter below the regulatory guidance target.
As noted in prior calls, we have historically managed our CRE portfolio in the upper end of the ratio guidance and continue to feel very comfortable doing so, given the diversification of the product mix and credit profiles of our CRE book. Our loan pipeline continues to be strong in volume and evenly distributed across all of our market areas with a significant portion of the opportunities being non-CRE in nature. Overall, we saw a very strong first half of 2022 in our loan and deposit portfolio results and are optimistic in our outlook for the second half of the year.
Now, I’ll turn it over to Ron to walk you through our allowance position.
Ron Gorczynski
Thanks, Rhett. Good morning, everyone. Let’s move forward to Slide 9, our loan loss reserve. During the quarter, we recorded a $1.25 million provision related to our strong loan growth with minimal credit related provisioning. At quarter end, our allowance to originated loans and leases was at 74 basis points and our total reserves to total loans and leases was at 1.22%. We expect to continue our growth related provisioning to support our loan production, while closely monitoring allowance adequacy as economic and credit conditions evolve.
On to Slide 10. For the quarter, we were able to deploy our $90 million of deposit growth and $110 million of excess cash to fund over $188 million in loans and retiring $25 million of FHLB borrowings. At June 30, our liquidity position which includes cash and securities represented approximately 31% of our total assets and with a loan-to-deposit ratio of 70%, we are in excellent liquidity position to support our future growth as we execute on our strategic initiatives.
Our net interest margin experienced a 17 basis point quarter-over-quarter increase despite having a reduction of over 560,000 related to PPP and acquired loan accretion. While excess liquidity continues to pressure our overall margin, we expect to continue the positive shift in earning asset mix that was realized during the second quarter to further expand our margin in this rate-up environment.
While we monitor our margin closely, operating revenue expansion remains one of the primary metrics used to measure our efforts. During the second quarter, we had operating revenue increasing over $3 million for an annualized quarter-over-quarter increase of almost 33%. This is particularly impressive when you consider the revenue headwinds based during the second quarter related to reduced acquired loan, PPP fee and mortgage banking income, which in aggregate was $1.4 million for the current quarter compared to $4 million for the same prior year quarter.
Additionally, while we experienced strong second quarter loan growth, a large majority of the growth was booked during the month of June. Looking ahead, we believe our operating revenue growth prospects remain extremely strong as we experience a full quarter’s worth of interest income on those loans booked late in the quarter. For the third quarter, we are forecasting a margin in the 3.35% range. The margin also includes an estimated loan accretion of four basis points or $320,000 and estimated PPP loan fee accretion of four basis points again $320,000.
On Slide 11, you’ll find some interest rate sensitivity information. As discussed last quarter, our balance sheet continues to be asset-sensitive and well positioned, as any further increases in short-term rates would have a positive impact on our net interest margin and net income. At quarter end, our static interest rate shock analysis shows a net interest income increase of over 4% 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 the strategy, but certainly not at the cost of losing core business or jeopardizing good client relationships.
On Slide 12 we had another consistent quarter of noninterest income, generating over $7.2 million. We continue to build momentum in our core fee income categories, but consistent with our peers, our mortgage banking department experienced headwinds as a result of higher interest rates. However, we were fortunate to realize strong second quarter activity out of our capital markets team which generated almost $900,000 of revenue.
We will continue our focus on expanding, diversifying and deepening our opportunities for growth in degeneration. Since we are not anticipating same level of capital markets revenue, our noninterest income forecast for the third quarter is in the $6.7 million to $6.9 million range.
On to Slide 13. We are now seeing efficiency improvements as we begin to fully leverage our teams and continue to optimize our platform. We continue our operating efficiency ratio. We expect our operating efficiency ratio to steadily decline to the near term to the low 60s range as we further build momentum and experience the rewards of our strategic initiatives. For the quarter, our operating expenses were in line with our expectations and guidance.
Moving forward, we anticipate ebbs and flows in various expense categories as we invest in our people and platform. However, we fully expect revenue generation as a result of these investments to vastly outpace expense growth. For the third quarter, we are forecasting an expense run rate of $26.5 million range with salary and benefit expense of approximately $16.1 million which is slightly higher from the previous quarter due to additional incentive accruals based on our current production levels.
On to Slide 14, capital. Even with the continued asset growth our capital ratios remained stable as a result of strong profitability. Management closely monitors the bank’s capital position as it relates to projected forecast lending opportunities and other potential initiatives. At quarter end, the company and bank both exceeded well-capitalized regulatory standards and are an excellent liquidity and credit quality positions to continue executing throughout 2022.
At quarter end our tangible book value was at $18.69 per share. However, excluding the temporary impact of our unrealized losses in our AOCI our tangible book value per share was $20.15, representing a year-to-date annualized growth rate of over 10%. Our tangible book value growth has been and remains an important priority of our management team.
With that said I’ll turn it back over to Billy.
Billy Carroll
Thanks Ron. We are really starting to hit a nice stride in this company. The recent hires have added great energy and our momentum is really strong right now. As far as an outlook for the second half of the year, Ron mentioned some of our guidance, but we anticipate it being more of the same. We will continue to support our lift-out teams as they move clients over to the bank. And we’ve been spending a fair amount of time in these new markets meeting prospects and with their advisory board teams to communicate our story.
Both our story and our operating model are being very well received. Our nCino lending workflow integration is progressing well and ready to go live this quarter. We’re very excited about this and look forward to seeing this new platform help our efficiency as we grow the lending side of the house. This quarter did run a little stronger than projected from a growth standpoint and our pipelines continue to look good.
But that said I do think we will moderate a bit as rates continue to push higher. I still like a low double-digit trajectory in the near term from a loan growth standpoint. The growth in asset mix change this quarter kept our capital levels relatively flat. But with the increase in earnings and our anticipated go-forward growth levels, I’m confident we can accrete capital at a level that will fund our needed organic growth.
There is a really nice level of excitement in our company right now as I’ve said with the new hires, the growth in our existing markets and ancillary business lines, our corporate initiatives around leveraging tech and growth of our capital markets team and Ron had mentioned, it is great to be around our company right now.
To close, I know we have a number of associates that listen in on this call. And I wanted to take a moment to tell them, thank you for the work they do to grow this company and to grow value for our shareholders. We recently celebrated another regional Top Workplace award, the sixth consecutive year, we’ve received this recognition. So congratulations, to our associates. I appreciate all you do in building this great culture. It is a great time to be involved with SmartFinancial.
So we’ll stop there. and we’ll open it up for questions.
Question-and-Answer Session
Operator
Thank you [Operator Instructions] The first question on the phone lines comes from Stephen Scouten of Piper Sandler. Please go ahead when you’re ready, Stephen.
Stephen Scouten
Thanks. Good morning, everyone. I guess, my first question would be kind of what you guys are thinking – good morning — 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. So just kind of curious, what you’re seeing from a deposit perspective. And what you are expecting for the remainder of the year?
Billy Carroll
Yes. It is tougher to call that one. Stephen, the pipelines 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, as we’re really starting to bring in new clients in some of these new markets, we’re bringing on folks that both have lending relationships, as well as depository relationships. So, I’m optimistic. I would — if you’re asking me to guess, I would say, we’re probably kind of at that same pace, probably at about maybe around half maybe a little below half of what we’re doing on the loan side here in the near-term. But I do think we’ll continue to grow deposits, but probably not at the clip that we grew this quarter.
Stephen Scouten
Okay. That makes sense. And with the pace of loan growth Bill, I know you said it would be a little slower, obviously, still nice if it’s in that low double-digit range. But I’m curious, do you guys have any sort of I guess, concerns or trepidation around growing loans into to what the market is telling us, is a more recessionary environment. But I know, you guys still remain pretty bullish on your market trends. But just kind of wondering, how you’re thinking about that growth in the face of, maybe some worsening economic trends.
Billy Carroll
Yes. We’re really not — we’re not changing much, Stephen. We’ve always been conservative underwriters. We don’t — we’re not changing, the way we’re looking at loans. The thing about it too, we’re also — as we look to move, we’re moving a lot of seasoned business. And so the business that is coming over to our balance sheet is — are businesses that have been around a long time in these markets. They’ve got a great track record great history. Obviously, we’re watching we’re watching the economy.
But right now, we feel good about continuing to grow the loans as Miller alluded to in his opening comments, and Rhett mentioned and the markets that we’re in we’re still seeing the population inflow the growth. I get the headlines, but 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. We’ve had two really strong organic quarters, which we had anticipated. This one was a little — probably a little more, so than we had forecasted. But I do think, we can grow not — probably not at this pace, but still at a very strong pace over the next — at least near-term.
Stephen Scouten
Got it. Got it. Maybe last thing for me. I’m just curious, within the NIM guidance you gave for third quarter and then maybe the asset sensitivity information that’s laid out in the slide deck, do you have any details about what you guys are assuming within that for, future deposit betas and even loan betas? It seems, like if I try to back into the loan beta, it was maybe around 12% in the current quarter. But I know, you guys noted the $645 million in loans that are immediately adjustable. So just kind of wondering, what you’re seeing there. And what you’re assuming in those expectations?
Ron Gorczynski
Yes. Yes, good question. The deposit betas, year-to-date we’re about a little slightly over 8%. For third quarter, we do expect our — to move our rates upward probably late in the quarter. So we’re probably looking at around 19%, 20% beta for Q2.
And then 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. And 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 the loans are a little bit slower to react in deposits. We do have timing differences by the time term seats are out and we commit by the time it closes, we’re starting to see the reaction on the loans for June and for the first quarter — excuse me, from the second quarter rate impacts really starting to charge up the third quarter results.
As far as for the loan yields, to give you any indication, we’re probably looking — we were at 440 for the quarter. We’re probably estimating to be in that 460, 465-ish range all in. And I apologize, I do not have the loan betas directly for that.
Stephen Scouten
That’s extremely helpful, Ron. Thanks so much. And congrats to everyone on the continued progress. Great to see.
Billy Carroll
Thank you, Stephen.
Ron Gorczynski
Okay. Thanks.
Operator
Thank you, Stephen. The next question comes from Catherine Mealor of KBW. Your line is open, Catherine.
Catherine Mealor
Okay. Good morning.
Billy Carroll
Good morning, Catherine.
Ron Gorczynski
Good morning, Catherine.
Catherine Mealor
Just one more on the margin. Just, how do we think about just the size of the bond book? Is it fair to assume that most of the deployment of excess liquidity will just, kind of, come from cash coming down and going into loans, but the bond book stays relatively stable, or anything that you’re planning to do there?
Ron Gorczynski
No, at this point, we intend to use our cash first. So at this point, the bond book will be relatively stable. We are experiencing about $3 million a month coming back in, but, no, we’re not expecting anything at this point of time. Again, unless our deposits start outpacing again, then we’ll have a different story. But that’s kind of what we’re expecting at this point, Catherine.
Catherine Mealor
Okay. Great. Helpful. And then, the efficiency target that you gave us, 60, what’s your timing for when you think you can hit that number?
Ron Gorczynski
We’re 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, the way we’re looking at for third quarter, but we’ll be in that range for fourth quarter. We’re very optimistic, sooner than later, but we’ll see how it plays out, but we’ll be down in the low 60s either way.
Catherine Mealor
Great. Okay. And then, as we think about the expense growth rate into next year, I mean, this year we’ve seen such big expense growth the past couple of years. And I would imagine next year you’re going to really start to see some nice operating leverage. But what’s the senior expense growth rate as we think about next year with hiring plans and inflationary pressures that probably less build than we’ve had historically.
Ron Gorczynski
Yes. Of course, as I mentioned, we did have a jump. Q3 expectations are pretty much good for Q4. As we move into 2023, we’re probably holding flat to around the $27 million, $28 million range, quarter-over-quarter.
Again, that’s what we know today and what we’re seeing today. That’s what merit increases and some of our initiatives are blended in. But trying to hold that $28 million range on average for 2023.
Billy Carroll
And I’ll just add, Cathy. As we look ahead, obviously, you get a little bit — you’ll get — we think, we’ll probably — yes, we’ll get a little bit of tick up in probably all areas, but there shouldn’t be a lot. Like I said, Ron said, most of it is probably going to be continued just wage — 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. But to Ron’s point and to yours, we’re hitting this stride now where this operating leverage is real and it’s great to see. So there’ll be a little bit of an uptick, but we think it will be fairly moderate.
Ron Gorczynski
But it’s more incentive than headcount. We’re not —
Billy Carroll
Yes, yes. We’re not adding.
Ron Gorczynski
And overall, infrastructure growth. I mean, we’re — yes.
Catherine Mealor
Great. All right. Very helpful. Thanks. Congrats on the great quarter.
Billy Carroll
Thanks, Catherine.
Ron Gorczynski
Thanks, Catherine.
Operator
Thank you. We now have Matt Olney of Stephens. Please go ahead when you’re ready.
Matt Olney
Hi. Thanks. Good morning everybody.
Billy Carroll
Hey, Matt.
Ron Gorczynski
Hey, Matt.
Matt Olney
I want to go back to discussion around funding and deposit growth. And within that margin guidance of the $335 million for the third quarter, what does that assume for the excess liquidity position?
Ron Gorczynski
Yes, that’s a good question. We are looking to draw — our excess liquidity today is pretty much cost — the impact is about 15 basis points at this point. We started up at 35 basis points, 40 basis points probably earlier this year. We’re not — I think, our excess liquidity will be probably more to a normalized range by quarter end. So, 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.
Matt Olney
And just to clarify that. So it sounds like the liquidity levels come down in the third quarter. And by the end going into the fourth quarter were close to normalized levels, did I get that right?
Ron Gorczynski
Yes. Yes sir.
Billy Carroll
Yes. I think, Matt, I think, the way we’re looking at it is the way, we’re looking at it as I commented a second ago. I think I still think we can grow deposits. We’re probably — right now we think we can grow the loan side near term a little bit faster than the deposit side. So it’s just inherently going to push that excess liquidity a little bit tighter, but that’s fine. And 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.
Matt Olney
Okay. And as far as what a normalized liquidity position would look like for the bank at this point. Curious kind of what the dollar math would be. I guess, if we go back to 2019 it was around 5% of earning assets, which would be around $200 million at this point. Is that the right way to think about a more normalized balance for average liquidity?
Ron Gorczynski
Yes. What we’re thinking about we’ve — I don’t think we’re going to go back in time to 2019, because our bank was so different and we’ve changed so much and our deposit gathering abilities have really escalated. Our target — our goal is to keep our cash around 7% to 8% level and our security portfolio per around 13%, 14%. That’s kind of our ideal mix at this point and that’s what we’re trending towards. So as we wean down, we have the ability to make that happen 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.
Matt Olney
Okay. That’s very helpful. And then, I guess, switching gears just in terms of the new production hires. I know last year in 2021 was a big year for that. Just maybe an update on where we are as far as the number of new hires this year. And how that compares to where we were last year? Thanks.
Billy Carroll
I don’t have the 2022 stat, but really a lot of it — our hiring this year, Matt, has been relatively minimal. We had such a huge year last year with bringing folks on board that our plan this year has been to really kind of get those teams integrated. We’ve added probably, 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. So we kind of mesh it all together.
But right now we’re starting to get back out 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 in really all of our zones right now, but we’re really just continuing to work kind of slowly on that process as we get the income statement where we want it to be and that should happen pretty quickly.
Matt Olney
Okay. Thank you guys. Congrats on the quarter.
Billy Carroll
Thank you, Matt.
Ron Gorczynski
Thanks, Matt. Thanks.
Operator
Thank you, Matt. We now have Feddie Strickland of Janney. Please go ahead, when you’re ready.
Feddie Strickland
Hey, good morning, everybody.
Billy Carroll
Good morning, Feddie.
Ron Gorczynski
Good morning, Feddie.
Feddie Strickland
I just – I wanted to ask I was glad to see non-interest income up overall despite the lower mortgage. And it sounds like you guys are pretty bullish on the Fountain Equipment leasing business. Can you talk a little bit more about what the puts and takes are across the different non-interest income lines kind of beyond your prepared remarks?
Billy Carroll
Ron, I guess you want to – I guess, the question Feddie that was to drill into the non-interest income line a little bit more? Is that what the question was?
Feddie Strickland
Yeah. Just what your expectations are going forward? I think we had some seasonality on the insurance line and I know mortgage was down but down at most places. But we’re just curious on the other lines wealth management, et cetera, what you guys are seeing going forward?
Ron Gorczynski
Going forward from where we were at Q2, I think wealth management has picked up. It’s been a bright spot for us from our – we had a good base and from our lift-out that we did late last year. We’re looking for what – our Q2 revenues probably are very consistent for the remainder of the year and then uptick going into 2023.
Insurance we will expect a little bit stronger Q3 seasonality where we get some more timing – more time and a couple of hundred thousand more of revenue. But then Q2 is really a base rate that we will apply back to Q4. Again the insurance industry as we grow and with the contingency fees coming in once a year it’s kind of – they do bounce around but it will – Q2 is the low point for us looking forward.
Our capital markets that’s not – I’m not going to say, it’s hit or miss. We do have a small pipeline of those, but that’s really rate environment specific. And we are we probably, we will have some Q3, but not nearly as much as what we have been blessed to have during Q2.
Mortgage income we are not expecting much at all for Q3. The pipelines have been steady and most – slower, but steady and we’ve been taking those more in-house. I think as we get through I think Q3 – excuse me, in 2023 for Q1, we expect that to change and flip back over pretty much to be closer to Q1 of 2022 levels as we get going next year. But – and customer service fees is just going to be ongoing efforts. So that will be a slow upward tick going forward. Probably a little bit too much more information than what you wanted a little bit too much detail.
Feddie Strickland
No, that’s great. I mean, I think that’s a big part of something you guys have built over the years. So I think it’s something worth to get into. And just to switch gears a little bit. I was wondering, if you can talk through a little bit some of the technology initiatives you’ve accomplished, and what you have upcoming on slide 15. Where do you see the most opportunity out of those upcoming initiatives in the near-term?
Billy Carroll
Yeah. Looking at – and I’ll jump on that and then the rest of the team can chime in a little bit. Feddie from our standpoint obviously the one that we’ve highlighted, the most recently and I think probably the biggest piece that we spent time on is this nCino integration. We really do think that whole reengineering of our loan workflow is – we believe is going to pay some great dividends for us. We’re excited to see that thing go live this quarter.
We’re also putting in the profitability model with that and excited to start. I guess, just really being able to win. We’ve had kind of a rudimentary system the way we price, but this is really going to give our team some nice ability to price loans appropriately and appropriately measure for the fee side and the deposit side.
So that’s been the biggest piece. We just pushed a huge initiative on a new ATM rollout, 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 had acquired through previous acquisitions. I really like that. And it’s one of the things that we’re doing from an internal standpoint, Feddie is really start trying to figure out how we can push more transactions into other channels, be it mobile — be it Zelle, be it our smart ATMs.
And so we’re really putting some initiatives behind some of those technologies right now to help drive — just drive maybe some branch transactions that could be handled other ways through more efficient channels. And so that’s been a big push. But I would say those are probably the biggest ones I’m thinking out, Nate anything that I’m missing outside of nCino and the ATMs have been the biggest ones that we focused on right.
Billy Carroll
Its for Nate.
Nate Strall
Yes. The impact would have been on all areas.
Rhett Jordan
That’s about 50% of the ATM fleet.
Billy Carroll
Yes. Have been upgraded into these new models, but hopefully that helps Feddie.
Feddie Strickland
No that definitely — and that’s already included in the expense run rate, right?
Billy Carroll
That is correct.
Rhett Jordan
Yes.
Feddie Strickland
Got it. Perfect. And, I guess, one last question for me. Just as you look across your footprint is there any way you want to infill or expand, or are you more focused on just, kind of, growing and integrating your existing markets?
Billy Carroll
Not really. Yes, I love our footprint. I mean when you look at kind of where we are now in Tennessee, we’re in every growth MSA in Alabama, in every growth MSA in the Panhandle. And so when you look at our zones and our markets I think a lot of it now is just kind of just leveraging those zones by adding more talent.
Rhett Jordan
Density, density — density.
Billy Carroll
Yes. And so there’s really not I would say from a market standpoint. We’d love to continue to expand Nashville. Nashville is just such a big market now one where we’ve been in the zone. We’ve added some strength there last year. That’s a zone we could obviously do more in. That’s such a large market. But for us right now. It’s just more Nashville probably more Birmingham…
Rhett Jordan
Lot of Birmingham.
Billy Carroll
Tons of opportunity there. So really probably going into those larger MSAs with maybe a little more from a resource standpoint is probably where we’ll focus near-term and just continue to support the new markets where we’ve already got folks.
Feddie Strickland
Makes sense to me. Thanks for answering my question guys. Congrats on a great quarter.
Rhett Jordan
Thank you, Feddie.
Billy Carroll
Thank you.
Operator
Thank you, Feddie. We now have Kevin Fitzsimmons of D.A. Davidson. Your line is now open, Kevin.
Kevin Fitzsimmons
Hey, good morning, everyone. How are you?
Billy Carroll
Hi, Kevin.
Rhett Jordan
Hi, Kevin.
Kevin Fitzsimmons
Just — I apologize if you covered this on the outset I got on the call a little late. But on credit I know we’re kind of about an interesting point right now where there’s all the projections and 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 then 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.
Billy Carroll
Rhett, do you want to…
Rhett Jordan
I’ll take it first and then Ron you can add any other you like. No, Kevin, I think that we feel pretty good about where we are with both our historical model. Of course, we are transitioning to CECL in the not-too-distant future. So clearly modeling for that expectation.
But our methodology our approach to credit has always been conservative. Clearly, as you pointed out it is a challenging time as you try to estimate or expect what’s sort of coming around the bend.
But the best way we know to address that is what we have always done and that is when you look at a transaction to stress the results to stress the interest rate expense to stress all the factors that could weaken in the profile and just make sure that you feel comfortable that that particular project or that particular business operation can sustain some downward adjustment and still be able to perform adequately. And so that’s the approach we’ve always taken and that’s the approach we continue to take. And I think from an allowance standpoint, we certainly look to affect our qualitative factors when we can as much as needed based on the parameters that we use in that model and we feel really good about where we’re positioned at this point. Ron I don’t know if there’s anything to add.
Ron Gorczynski
No you hit all the high points. I don’t think whether we were CECL or not, our expectations would be the same. I think we’re in a good spot today, seeing, looking forward in our footprint, we’re not seeing any credit or economic issues directly that would cause us to add anymore provision. I mean it’s kind of where we’re at.
Rhett Jordan
That’s what we’ve been doing there.
Ron Gorczynski
Yes.
Kevin Fitzsimmons
Okay. Great. Thank you. And maybe just hitting the – this has been brought up a couple of times already but it seems like the 2021 was a very busy year of adding new bankers, new hires and now the focus is on leveraging that, and showing increased revenue and profitability and loan growth from that.
On the other hand, there’s still some pretty busy merger activity going on in the Southeast, generally the biggest one being TD and FHA and we’ve had some banks announce some selected lift-outs in new markets. And it sounds like Bill, you’re not looking really for new markets but you have certain markets where you’d want to add talent.
Are you – how are you balancing that? Like if you’re getting inbounds in terms of new hires that want to join or interested in joining but yet you want to show, you want to demonstrate that profitability, or are you having to kind of tap the brakes on new hires you would normally get or no. If they come in and you want them you’re going to go full steam ahead.
Billy Carroll
Yes. We’re not tapping the brakes. From our standpoint, you said the word it’s a balance. We kind of had this first wave. We’re getting this first wave on board. And as you can see and we believe as we perform here in the second half, we will continue to have opportunities to bring folks on when we’re ready and they’re ready.
As I said, we continue to – we’ve got some folks that we’ve – when we stay close to in our zones, we continue to watch those opportunities. I had a good friend to say, he never had a budget for production hires. And I think that’s a pretty good rule of thumb. Obviously, we do want to balance it. We need to show and demonstrate our ability to start leveraging this expense base and grow revenue.
We’re doing it. We’re going to continue to do it. And then I think we’ll be in a really nice spot to add into these markets, where we are with additional talent here in the nea-term. So we’re going to continue to keep per foot lightly on the gas as we navigate the next quarter or so but continue to look to add folks when they’re ready.
Miller Welborn
I’ll say we spend a ton of time on the recruiting a bunch of time talking to folks in different markets but we are pretty darn in particular about how they fit culturally and what the projections and their book of business and what we’re looking at. So, it’s got to be the right fit, but we’re always looking for great [indiscernible].
Billy Carroll
As Miller alluded to yes, I think for us Kevin, kind of what we did is we — I think we did take our foot — we took our foot off the gas at the beginning of the year. We integrated so much that we needed to digest that. And so 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. So, we’re continuing to look for those opportunities. You mentioned there are several deals in the Southeast that we think could open up some doors for us. So, we’re constantly watching and chatting and not looking to tap any brakes anytime soon.
Kevin Fitzsimmons
And one last one for me Bill. The outlook for more moderate pace of loan growth, is that just more coming off a very, very strong quarter, or is it more of a proactive stance to not be growing as quickly going into a potential downturn or what you’re seeing from customers or a little of all the above.
Billy Carroll
It’s really more the first. It’s really more just — we grew the 30% annualized clip on the loan side in Q2. I mean — and so, moderating it down to a low double-digit trajectory is pretty dang good. So pretty good.
Miller Welborn
No, it’s better than pretty good. Right.
Billy Carroll
So, we still feel — we feel like we can be a grower here in the near term. Obviously, rates continue to spike up. Who knows kind of where — what might slow down looking ahead. But we’re really 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 going to be more of what we feel like we’re going to consistently see from this team going forward.
Kevin Fitzsimmons
Okay. I can’t argue with any of that. Thank you very much.
Billy Carroll
All right. Thanks, Kevin.
Miller Welborn
Thanks, Kevin.
Operator
Thank you, Kevin. [Operator Instructions] We now have another question from Taylor Brodarick of Hovde Group. Please go ahead when you’re ready, Taylor.
Taylor Brodarick
Hey, I’m on for Brett subbing in today. Deposit betas, how does that compare to sort of the last cycle? Just thinking about that, in the context of just improved service charges in the quarter and just thinking of how that compares from previous.
Ron Gorczynski
Yes. Historical, we’re at 30%. I think, we were up 30% pretty quickly. We’ve managed to lag almost quarter and a half, almost two quarters of that. So we are doing extremely better than what we’ve had in the last cycle. So we definitely cut probably the betas in half. But again, we’ll see what the next quarter brings, but that’s kind of what we’re looking at today.
Taylor Brodarick
And outside of tech, on the efficiency initiatives, I would assume that — is there anything else that sort of low-hanging fruit to think about there? I know a lot of that sometimes ebbs and flows with comp, but I don’t know if there was anything else besides the digital work that you could do or think about?
Billy Carroll
Not really Taylor. From our standpoint, I think a lot of the efficiency work’s been done. And as Ron said, 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. And we’re it’s a penny here and nickel there 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 of that. We think that expense line is going to 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.
Ron Gorczynski
Yeah. Additionally 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 to $7 billion mark. What do we need to do different, what software can assist us. So we’re always exploring and always trying to make the next day better. So that’s something that’s always ongoing with our management teams going forward — today and going forward.
Taylor Brodarick
Great. And one more for me. We’ve talked a lot about lift-outs and adding people. But given the attractiveness of the footprint, how do you think about playing defense on that? And anything you have to do to — I don’t know if there’s irrational activity and trying to acquire producers. And how you think about that?
Billy Carroll
Yeah. It’s — Taylor, that’s a great point. It’s — when you got a good team of folks, you do have to play some defense occasionally. So I think we do that. Again, I alluded to creating a great place to work. That’s something we really focus on. We focus on the culture of this organization. I think we continue to make sure that we’re putting the right resources of — giving the right resources available to their leadership to make sure that they can continue to recruit and retain. So — but defense is part of it. It is part of it today and it’s something that I think all banks deal with. And I think your better companies, your better cultures typically went out in those scenarios.
Taylor Brodarick
Great. Thanks a lot for commentary.
Billy Carroll
Thank you, Taylor.
Ron Gorczynski
Thanks Taylor.
Operator
Thank you, Taylor. We have no further questions registered. So I’d like to hand it back to Miller Welborn for some closing remarks.
Miller Welborn
Thanks Breeka. Thanks again to each of you for joining us today. As always, please reach out to any of us directly if you have any additional questions. And I hope each of you have a great week. Thanks.
Operator
Thank you all. That does conclude today’s call. Thank you for joining. You may now disconnect your lines.
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