SmartFinancial, Inc.

Hello all and welcome to the Smart Financial third quarter 2021 earnings call. My name is Lydia and I'll be your operator today. You'll have the opportunity to ask a question at the end of the presentation and you may do so by pressing star followed by one on your telephone keypad. It's my pleasure to now hand you over to our host, Miller Welbin, to begin. Please go ahead, Miller.

Thank you, Lydia. Good morning and thanks for joining us this morning for our Q3 2021 earnings call. We always love visiting with this group each quarter to talk about our progress and our company. Joining me today on the call are Billy Carroll, our president and CEO, Ron Gorczynski, our CFO, Rhett Jordan, our chief credit officer, and Nate Strall, our director of corporate strategy. Before we get started, I'd like each of you to please refer to page two of our deck that we filed this morning for the normal and customary disclaimers and forward-looking statements, comments. Please take a minute to review these. What a fantastic quarter by our team here at the bank. I challenge anyone to find a bank with more energy, drive, and commitment than our team here at SmartBank. We demonstrated, again, our ability to outwork the competition and execute our strategic plan. Our organic pace of growth has been impressive, and we see nothing slowing that down in the months ahead. Between very strong markets and the addition of several new sales team members that Billy will talk about shortly, We feel we're well positioned to continue on our current pace. As we march toward the end of 2021, we're excited about what we have accomplished this year to date. With that, I'm going to turn it over to Doug.

Thanks, Miller, and good morning, everyone. This was another extremely solid quarter for our company. This year has been a very busy one from this final round of PPP to an acquisition to the lift outs to several new expansion markets. 2021 has been a transformative year. I'll provide some high level thoughts on our recent accomplishments and then turn it over to Ron for financials and then Rhett for credit. First, we have some great highlights for our quarter, referring to page three of our slide deck, starting with earnings and tangible book value, a very nice income quarter with operating earnings coming in at 9.9 million or 63 cents per share. Tangible Book Value has increased to $19.03, a 7% quarter-over-quarter increase. Returns were solid as well, with 13% return on Tangible Common, and credit remains pristine with non-performance at 0.14% to assets. In addition to their financial performance, you'll see we've eclipsed the $4 billion in asset mark, continuing to add size in a relatively small peer set. Getting into this $4 to $6 billion range has been a focus where we now have the size and the earnings momentum to better leverage opportunities. We also had outstanding growth this quarter. Net organic loan growth, excluding PPP, was over $52 million, or approximately 9% annualized. Our lending teams continue to do a great job, and we're seeing growth balance throughout all of our markets. If we weren't surprised by anything, it continues to be the growth on the deposit side of the balance sheet. We've not been surprised that our bankers continue to do a great job in growing our core client base, but that volume coupled with the existing clients continuing to hold and grow their balances has us in an extremely large liquidity position. Deposit balances grew 29% annualized during the quarter, and we are currently in a cash position of approximately $1 billion. Ron will go into some greater detail on this, but it does have an impact on them and returns in the near term, but I really believe puts us in a position of strength strategically over the longer term. We completed our acquisition of Sevier County Bank in September and will be converting and rebranding this coming weekend. We also made the decision to sell the Richmond piece of this deal. This was simply a play to keep our focus in the southeast. With the expansion opportunities that were presented to us over the last couple of quarters to build density in our current zones, it made a lot of sense to spend this piece out. That now done, we're excited to get this one integrated. The process has gone very well. We are on target, if not ahead of target, with our 60 plus percent cost savings. Segueing into some of our recent opportunities, the next couple of slides highlight some of the things we've been working on over the last few months. Looking at the map on slide four, you'll visually see the recent expansions for our company. We've taken advantage of this unusual opportunity to bring on a number of outstanding bankers in some great southeastern markets. Building on the lift out of the banking team in our Gulf Coast region earlier in the year, we've now added teams in Montgomery, Dothan, and Auburn, Alabama, as well as Tallahassee, Florida during the last few months. While we've always had solid organic growth, this recent lift out focus represents a pivot for us and our company as we move more strongly to an organic model with a stronger focus on density building and zones where we operate. Flipping to slides five and six, you will see some detail on these new markets that we've entered as well as some of our other 2021 achievements. I've spoken previously about equipment finance acquisition and that team is performing well. We've also started to leverage our footprint to expand our prospecting efforts with that group We're very pleased so far with this new line of business and very bullish on the outlook. Also of note, we have a new dealer floor plan group through a lift out that will be based in Birmingham. I'm going to let Rhett speak to this a little more in a moment, but a nice niche lending area that will yield some great opportunities. These are all big investments for us, and while we know we'll have some modest EPS drag over the next few quarters, we feel this is the right investment to make for long-term shareholder value. So let me hand it over to Ron now to jump into financials.

Thanks, Billy. Good morning, everyone. Let's start with slide seven, balance sheet. Since 2017, we have continued to realize consistent balance sheet expansion. As Billy indicated, For the current quarter, we deal loans, excluding PPP and loans from our SEB acquisition, over $52 million, or 8.6% annualized, and have year-to-date loan growth of 12.4% annualized. In addition, we had over $90 million of PPP loans forgiven and acquired $219 million of loans from SEB, net of the 930 loan sale. Our average loan yield for the current quarter is 4.95%. and increase of 43 base points from the prior quarter, which is attributable to an additional $1.7 million of accretion income. On the right side of the slide, you'll see that our deposits continue the positive trend upward. During the current quarter, excluding $436 million from the SCB acquisition, our core deposits increased over $224 million, or almost 29% annualized. Between this growth and our focus on controlling funding costs, We've lowered our total cost of deposits to 25 basis points, a third basis point decline from the previous quarter, and had a loan-to-deposit ratio of 70%. On slide 8, you'll see trending information on our loan composition, along with our current quarter activity, which Rhett will be going over shortly. On slide 9, our deposit composition remains relatively stable with our current quarter growth and SEB acquisition. We remain focused on managing time deposits downward while growing our non-interest-bearing deposits, which currently make up over 26% of total deposits. Looking ahead, we have not expected significant changes in our deposit costs or composition, although we do expect continued repricing of some of our higher-cost SEB time deposits in the coming months. Moving on to slide 10, liquidity utilization. We did end the quarter with our cash position over $1 billion. Deposit growth, PPP forgiveness, and excess cash from the S&B acquisition all contributed to an increase of over $400 million in cash and cash occurrence from the prior quarter. Previously, we've been patient with the deployment of excess cash. However, as we move into Q4 and into Q1 of 2022, we will be taking a prudent and systematic approach to deploying approximately $400 million into our bond portfolio, which will generate a significantly higher yield versus our current cash yield. Our investment strategy will consist of a laddered approach where a good portion of the cash flows will come back within a three- to five-year period, thus limiting excessive duration risk. As shown on the right-hand side of the slide, our margin for the current quarter is 3.35%, which includes $1.7 million of discount loan accretion and $2.9 million of PPP accretion. We also benefited from a five basis point decrease in interest-bearing deposits. Offsetting these positive impacts was our excess liquidity position, which has negatively impacted our margin by 28 basis points. We are forecasting a fourth quarter margin around 3%, where we're estimated to have loan accretion of 10 basis points, or $644,000, and estimated PPP loan fee accretion of 32 basis points, approximately $2.1 million. Before we leave this slide, let's touch base on operating revenue. Operating revenue continued its upward trajectory to $36.6 million, an increase of over 14% compared to the prior linked quarter. We had another strong quarter of non-interest income, which contributed $6.3 million, or approximately 70% of total operating revenue. Diving deeper into non-interest income, let's move on to slide 11. We are encouraged by the positive momentum across all of our non-interest income categories, particularly service charges and interchange income, which totaled approximately $2.3 million for the quarter. Additionally, other income is elevated as we were fully operational with our capital markets initiative, having almost $470,000 of swap-free income. We also remain very optimistic regarding the strong opportunities for free generation within our family of revenue generators. In comparison to the prior quarter, our manager's income increased almost 22%, and more impressively, increased over 50% from the prior year quarter. Our forecast for the fourth quarter is having non-interest income of $6.4 million. Moving on to slide 12, operating expenses. As we continue to execute on our current opportunities, we will see some short-term expense headwinds that will bring us long-term value over the next 18 months. During the current quarter, Operating expense increases were from, one, three months of expenses from the fountain acquisition, two, one month of expenses from the FCB acquisition, and three, expenses associated with our lift-out strategy. For the fourth quarter, we expect expenses to be slightly elevated, with total expenses around $25.3 million and salary and benefit expense approximately $15.5 million. This elevation is primarily from the FCB acquisition. However, we will realize a partial reduction to those expenses as we finish executing our cost-saving measures during the quarter. Looking forward to the 2022, we believe our expense run rate will be lower than the fourth quarter, more in the $24.5-$25 million range, and with salary and benefits around the $14-$14.5 million range. Built into this 2022 run rate are some technology initiatives that Billy will touch base on on page 13.

Thanks, Ron. We found it important to share with this group some of the information that we've been working on related to technology. We've talked around it on previous calls, but we've been doing some real work and moving our company forward in tech. On slide 13, you'll see some of those initiatives that, as Ron said, are built into our expense guide. I believe banks not putting significant focus in this area are going to be behind, and we will not be in that position. of note, one of our biggest initiatives is moving to the Encino platform. This will begin next quarter, and I am confident it will be a game changer in the way that we handle our entire commercial process from prospecting to closing deals. We're very excited about this work and know it's going to be critical to our future success. So with that, Rhett, I'll flip it over to you and let you talk about lending and credit.

Thank you, Billy. As noted earlier in the deck on slide 8, our loan portfolio continues to show good diversification across the loan segments, with 12% annualized loan growth quarter to quarter of approximately $278 million. This is inclusive of the Sevier County Bank loan acquisition, but excluding PPP loans. Net organic loan growth for the quarter was $52 million, an annualized increase of 8.6% over prior quarters. The SCB acquisition did not impact our overall portfolio most significantly, with the post-close profile being very similar to previous quarters and same period prior year. As mentioned, our portfolio has seen consistent growth this year spread across all geographic areas of our footprint. Our CRE portfolio has seen the most growth year-to-date, moving to approximately 40% of portfolio outstandings as compared to 35% at year-end 2020, primarily due to the impact of the Sevier County acquisition. But as Ron noted earlier, we've also seen good year-to-date growth in our owner-occupied commercial real estate segment as well. We continue to see strong housing demand in our market area, with core markets still seeing historically low supply levels and strong price performance due to this demand. Our overall loan portfolio yield continues to reflect solid positioning at 4.21%, including the SCB portfolio, but excluding accretion and PPP loan impacts, which is above both quarter one and quarter two levels. All in all, a very solid quarter with strong organic loan growth in the portfolio and a positive outlook for the remainder of the year. Slide 14 shows our overall asset quality metrics, which continue to trend very positively and generate consistent, excellent results. Our NPA ratio continued to improve throughout 2021, dropping consistently each quarter to a low of 0.14% in the third quarter. Net charge-offs for the quarter were 0.03%, and our over-30-day pass-throughs ratio was consistent to second quarter at 0.29%. Classified loans were 0.36%. Up slightly from second quarter due to the SCB portfolio acquisition, but we're still well below legacy smart bank ratio positions at first quarter 2021 and year-end 2020. Overall, our asset quality continues to demonstrate solid metrics resulting from continued strong economic performance in our marketplaces and stay in line with best-of-class levels. Our outlook is positive for the balance of the year, and we expect these strong portfolio metrics to continue in upcoming periods. As for the PPP loan book, we've seen considerable forgiveness activity through third quarter in our Round 1 loans. As noted on slide 15, we received forgiveness payoffs on 2,942 applications, or roughly 99% of the Round 1 originations, just over $299 million in balances. We ended the quarter with about 6 million in balances remaining from the first round, including roughly 25 loans totaling over $2 million in balances that Sudbury County originated but were not yet forgiven prior to the acquisition date. For these remaining few loans, we're actively working with borrowers to complete the forgiveness phases and or finalize repayment structures on any unforgiven residual balances. We're also proactively reaching out to Round 2 clients to continue to process those forgiveness applications as soon as covered periods expire and clients are ready to submit. Through third quarter period end, we had already processed 715 Round 2 PPP forgiveness apps for $55 million in balances or roughly 40% of the generated loans in Round 2. The PPP project proved to be a very successful venture for our company, generating $17 million in fees for the bank while creating considerable prospect opportunities for our teams. We anticipate PPP balance decisions to continue to decline swiftly through fourth quarter and early 2022. As Billy mentioned, we're very excited about the addition of our dealer finance specialist team to help expand our lending platform into the floor plan component of the segment. These team members bring a combined 60-plus years of experience in the industry and have worked together as a team for nearly 20 years in this space. They provided administrative, underwriting, and relationship management support to a nearly $2 billion platform that had strong performance with solid credit quality measures and strong, long-sustained relationship with their clientele. The Earth World Plan is a multi-billion dollar segment of the banking industry in which SmartBank has historically held very little exposure but has tremendous opportunities within our core footprint to take advantage of existing business relationships and client familiarity Furthermore, the long-time relationships that our new team has in the marketplace also brings new strategic growth opportunities for SmartBank to pursue as well. The chance to bring this admired and highly recommended team to SmartBank provides us the needed bridge to support the foreplay component of these valued relationships. Clearly, we're very excited about this addition and the opportunity it creates for us to continue to grow and diversify our lending portfolio. Now I'll turn it back over to Ron to walk you through our allowance positioning for the quarter.

Thanks, Rick, for all the detail. Let's move forward to slide 16, our loan loss reserve. As we continue to have great stats for our credit quality, we did require a $1.1 million provision for the quarter, which was needed for the reallocation of loan discounts associated with the SCB loan sale and to a lesser extent facilitate loan growth. At quarter end, our allowance for originated loans, less PPP loans, was at 0.75%. and our total reserves of total loans and leases last PDP loans was at 1.26%. On to slide 17, capital. Our capital ratios remain strong with a slight uptick from the prior linked quarter. The current quarter's acquisition of SCB had minimal effects on our capital. Our tangible common equity tangible assets was down slightly directly relating to our excess liquidity position and our acquisition. Excuse me, our current levels are well positioned at this time. And to wrap up this slide, our entire SMBK team is focused on consistently building shareholder value. At quarter end, our tangible good value per share was over $19, an increase of 7.3% late quarter annualized, and over 10% increase year over year. With that said, I'll turn it back over to Billy.

Thanks, Ron. And to close, our markets are all performing extremely well. The southeast is poised for great continued growth, and it's one of the reasons you're seeing us pivot a bit as we look at more commercial banking lift-out opportunities. Our loan pipelines continue to be robust and are equally distributed across all of our markets. With the excess liquidity in the system, like most others, we're battling some headwinds and some low-line utilization and pay-downs. But that said, We're very bullish on where we stand, and once these new teams get up and going, we anticipate our loan growth will kick up into the mid-teens on an annualized basis. We're seeing this company transform and operate on a different level, continuing to drive revenue, moving toward being a top-tier performer, all while focusing on how we get better. I'm very excited to be part of this company right now. It's very exciting to be an associate and an investor. I think we're very well positioned to be opportunistic moving forward. So I'll stop there and we'll open it up for questions.

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind and withdraw your question, please press star followed by two. And when preparing to ask your question, please ensure that your phone is unmuted locally. Our first question today comes from Brett Rabattin of Hoft Group. Brett, your line is open. Please go ahead.

Hey, good morning, guys. This is actually Ben Gerlinger. I'm for Brett. Good morning. Hey, Ben. Hey, congrats on crossing four. It's good to see. I was curious if we could kind of start with the growth trajectory. I understand that you guys have had a very busy year, to say the least. And then the guidance was for kind of that low double-digit, if I heard that correctly, linked quarter annualized growth as kind of a core rate. I was curious on how you guys think about with the larger balance sheet, the lift-out opportunities, I'm sure that there's gonna be some sort of lumpiness to growth as you add more lenders, but when you think about the strategy for growth, is there an area of lending or geography of lending that you see as the lowest hanging fruit or areas where you might wanna expand? and then kind of juxtaposed against that, the expense guidance for the 24-ish million, does that include any additional lift-outs for next year or is that kind of a core rate as if you're running at a static pace?

I'll start with that. I'll take the last part of that question first. Ron, I think I'm saying this correctly. The expense guidance you're giving is kind of what we've got today. We're not looking We would adjust that if we came up with any more lift-out opportunities.

That is correct.

Expense guidance is what we've got going today, Ben. The first part of the question, I do think that obviously the growth on the loan side and the deposit side is something that we're really focused on, again, this organic pivot. As we talked about earlier in previous calls this year, I think we've been kind of targeting, even though we've been above that, we've been, I think, for the year, I think we're running about 12% growth, which has been a little higher than we thought. And we're at nine this quarter. With the lift-outs, as we look into 2022, we do think that number is going to edge up from what we discussed as mid-to-high singles now into mid-teens. and we feel pretty confident about that. Again, the expense guidance that we've built in incorporates not only the lift-out compensation occupancy expense, but also the technology that Ron talked about. So we're trying to lay out what we believe is a fairly well-baked expense line. and Phil Wack as these teams get up and going. And as you know, it might take a quarter or two to get these folks up and running, but once they do, we're very, very excited about the growth trajectory that the bank can achieve.

Gotcha. That's very helpful. And I get that the The internal or bolt-on with lift-outs is the new focus. It makes sense because you have more control over the growth and the credits that you're adding, but it also frees up capital a bit to some degree if you're not looking to do major acquisitions. I was curious on how you now approach any excess capital and how you feel the deploying, if you could just rank or the priorities.

Well, I'll take a stab at that, and then we're on, you guys, feel free to chime in. Yeah, I think capital, I think, you know, we've always been big believers in appropriate leverage of capital. You know, we've never really felt like we've had an overabundance of that, and when we've had it, I think we've used it in a smart way. I think for us, Right now, I think our thoughts around excess capital is growth. Obviously, share buybacks could come into place if we think that that is appropriate at the right time. That would be a great utilization of that. Dividend increases. We're weighing all of these different pieces today. I think for us, right now, I think we're in a good spot related to capital. We don't have a lot of excess, but I think we're very comfortable with where we sit today.

I think that's something that we address weekly, daily, hourly around here. We talk about it often, allocation of capital, best use of capital. Going back to the expense churn rate, I will say that there are certainly will be additional lift-out opportunities, we believe, additional adding of sales teams. So we'll protect that a little bit on the upside if we have to on the run rate side. You talk about M&A a little bit or lack of. We certainly continue to look at opportunities as they're presented to us. We invest, as we've said before, a ton of time in building relationships. And we've stated over the last quarter or two that our top priority is is organic growth and lift-outs. We're not saying we're not going to do a deal, but I will say that if we do a deal, you can rest assured it'll be a good one. It'll be very, very special if we do one. Does that answer your capital question? I don't know that we prioritized them, but we continue to juggle that and look at that and assess every opportunity.

Okay, that's great. I really appreciate the color. Thanks, guys. And congrats on crossing four. Thanks.

Thank you. Our next question today comes from Stephen Skelton of Piper Sandler. Stephen, your line is open.

Great, thanks. Good morning, everyone. Good morning. I just wanted to think about... Operating Leverage for a second into 22, just given the puts and takes of when these new hires will be able to contribute. Do you think you can see positive operating leverage year over year, or is this more like a 2023 event, given the need to kind of earn back those initial upfront costs?

This is Ron. Yes, we are seeing the positive effects going into 2023. 2022, we will, you know, again, as they build their portfolios and build their asset base, 2023 will be the year that will be positive for us.

Okay, that's helpful. And as we think about just trying to circle back on the loan growth commentary, I know, Billy, you said kind of mid-teens once these guys are up and running. But is this more mid-single digit for the next couple quarters until that time, or am I misconstruing that?

No, I don't think so. I think we can get there fairly quick. I think from the pipelines that we're seeing right now, Stephen, and it's not just the new teams. It's our existing teams, too. Our pipelines feel really good. I think what we've looked at is It takes a quarter or so. Some of these folks have been on a quarter now. It ebbs and flows a little bit, but I think we're looking at double digits here relatively soon. It might take us a quarter or two to get up to that full pace, but we should be rolling into the double digits here within the next quarter. We haven't been missing the digits in a while. Yeah, I mean, we're a little bit softer at 9% this quarter, but I think you'll see that double-digit pace moving up to mid-teens here over the next couple of quarters.

Okay, great. And maybe just one last thing from me here, and that 3% NIM guidance, is that a core margin kind of X the accretion and X the PPP, or is that relative to the 335 gap NIM and I know you gave some of those numbers on expected accretion and PPP accretion, but what would be the big drag quarter over quarter? Is that more some of the securities investments that may be pulling that down either way?

Yeah, I think 3% kind of answers to your question. It's yes to both. For fourth quarter, we will wind down the PPP process and see that last tranche of fees get recognized through the NIMM. as we go into 2022, our deployment, you know, our deployment or excess liquidity, which, you know, really hampers our NIM to get more positive results off of that. So we are seeing, you know, flipping one side to the other, but we do see that 3% as a baseline going forward. So unless we get loan accretion, you know, discount loan accretion, the unusual pops along the way from the loan activity. Other than that, we're seeing, you know, solid 3% one way or the other.

Okay, great. Thanks, everyone, for the color. I appreciate it.

The next question comes from Thomas Wendler of Stevens, Inc. Thomas, your line is open.

Thank you, and good morning, guys. I've got a couple of questions here. Can you give me an idea what kind of loan yields you're seeing on new production and then kind of how the new hires are playing into that?

Yeah, Rhett, I know you've got, I think, some data, probably the best data on new production yields. Do you want to kind of run through some of that?

Yeah, I mean, if you look at, you know, just most recent quarter, we're still, you know, averaging around, you know, close to 4% on new yields for productivity, for new activity going on the books. So, overall, it's maintained relatively steady.

Yeah, and I'll add, Thomas. I think some of the new teams, if we're bringing in some larger C&I type clients, some of that is probably coming on board a little bit lower, but typically you're going to see that kind of on a lower float basis. So you might be looking at somewhere in the lower threes on some of that new production, but it's a variable rate product that comes with some nice fee side as well. So We still think we're getting decent pricing. Everything's too low, obviously, in this environment. But I think, comparatively speaking, we're still getting pretty decent pricing on new production.

No, that's great, Cutler. Thank you. And then one final one from me. With your new teams, are they focused on gathering deposits at all, since you guys have so much excess liquidity there? And then once they do kind of shift over to gathering deposits, can you give any idea of what kind of impact that's going to have?

Yeah, they are. The bankers that we're bringing over have been just really strong, full relationship bankers. And so we're not just going out chasing loan transactions, even though Ron's sitting on a billion dollars in cash. We're still looking to bring in these core deposit relationships with Treasury, and that really has continued to go really well from what we've seen. The pipeline of loans also should lead to more deposits as well. Those should be in corporate checking type balances primarily at low or no interest rate. We'll continue to take those, even though we're in a pretty heavy cash position. We think that's going to be a great long-term benefit for us.

All right. Sounds good. Thanks for answering my questions, and great quarter, guys. Thank you.

The next questioner in the queue is Catherine Mellor of KBW. Catherine, please proceed with your question.

Hey, good morning. I just wanted to follow up on the balance sheet size conversation and thinking about that $400 million of securities deployment. What's the timing that you plan on for that $400 million?

Yeah, Catherine, this is Ron. Yeah, we've already started our deployment. We're probably looking at $75 to $80 million a month. You know, that'll bring us into the first quarter of 2022. So we've... Really, right after the 10-year bumped up is when we started doing our purchases. Timing was in our favor at this point, so we've already started.

Great. And so far, I know this will change depending on how rates move, but today, what are kind of average new yields for those investments?

Yeah, right now, we're looking at, for what we've purchased so far, around 145, 145, 150 range.

Okay, great. And then my second question, just on the margin, thinking about next quarter, you said 3% for the reported margin, which is implying some further compression in the core NIM if we back out PPP and accretable yield. Are there any significant changes to liquidity or the size of the balance sheet for next quarter? Except I guess that does include some of this liquidity will go into securities. So even within that, we're still – I guess I'm trying to think about we're still seeing more NIM compression, even though part of these securities are going to be redeployed from cash into securities next quarter. But maybe is there a way to think about it as we bottom next quarter and then it's a slow grind up as you move through 2022? Yeah, exactly that.

It's not only our core man, but again, it's fully loaded for Q4 to 3% because, again, we still have that excess PPP fee recognition. And then we kind of convert over during Q1 with deploying into the bond portfolio, and then that reduces to negative carry. So we'll kind of get a natural lift back to that 3% range. and that includes, you know, as our loan production, you know, slowly dwindles downward. It's not significant, but a little bit of a compression, but still that 3% is, I mean, we're looking at that pretty much pretty flat throughout the next four quarters with all the bouncing back and forth we have with our activity.

Okay, great. And then one thing on expenses and this is a challenging question. I know with all the moving parts within the margin as well, but I'll just throw it out there to see how you're thinking about it. But is there an efficiency ratio target that we should think about maybe longer term as we kind of feel the full impact of the cost savings from the deal and then the benefit from all these recent hires?

Yeah, Katherine, I'll take that, and Ron, feel free to chime in. For us, I think our long-term goal is to be sub-60s. That's where we want to be. That's where I know we need to be. I think that is the long-term goal. I think right now, we've drifted into the low 60s. I think you'll see that will probably pick up here in the near term, probably up a couple of percentage points as we kind of Realize this expense load from the new group. But we think that will kind of fast forwarding out to 2023. We think we see that number edging back down in our long-term target. And it's really not that long-term, I think. You know, I always kind of look at this as a marathon, not a sprint. But I think in a reasonable term, we should be able to get that back down into the lower 60s. And our goal is to be sub-60 as a company.

Great. That makes perfect sense. All right. Thank you so much.

Thanks, Kathy.

Thank you.

The next question comes from Teddy Stickland of Jannie Montgomery Scott. Your line is now open.

Thanks. Good morning, guys. Good morning, Teddy. I saw you guys had some really strong non-interest income overall. But I saw mortgage came in a little lower than I was expecting. Is it safe to say mortgage is kind of starting to cool off at this point? And I guess the growth in the other fee income lines offsets that going forward?

Yeah, that's probably a fair statement. I think our mortgage has stabilized. I think it's very stable where it is. I think our biggest issue in talking to our mortgage team and our various markets. They're very bullish on the zones and we're seeing the population inflow. A lot of it's supply is where we're running into issues. I mean, home inventories, it just seems to be slowing just kind of with just because of that as the primary driver. We're still very bullish on what we've got and continuing to look to add some mortgage producing We're still recruiting. We're still looking to add to that team and grow that line. But I think stabilized is probably the best word. I mean, Ron, any thoughts? No inventory in any of our markets.

Well, the lead-in was we're excited to see that some of our other non-interest income categories are starting to take over because mortgage has been number one for us for a long time. So even though, again, relatively stable income going forward, but our other categories will overtake that as more of the leaders in that group, which is part of our emphasis going forward.

Got it. Is there any particular line, whether it's the wealth management or equipment finance, is there any particular line that you guys see kind of being the star going forward?

You know, Ron, you want to jump in on that?

Yeah, I think we have the greatest opportunity in our customer service feline. You know, with the lift outs and Billy had mentioned about the treasury, our treasury service and our platform, we are making some hires to support that group. And we think we have our most opportunity in that line item in the near future. We'll see that grow, you know, a decent amount. So we're excited to see that.

I'll just add, we're really focusing on all of them. Ron alluded to some of the fee side on swaps. We've got the investment side where we're really putting some real deliberate focus, especially with the teams that we've added and some of the private bankers on there that are really doing a nice job bringing in wealth management clients. It really is all kind of playing together. So we've been focusing on all those zones. Like Ron said, we're probably looking at the fee side maybe being a little bit more of a shining star here near term. But we see lift in really all those lines.

Got it. And just one more question for me. Just given the Richmond closure, it sounds like it's safe to say you guys are going to be focused on the south and the east. Is there any consideration for expansion, and this can be longer term too, but into the Carolinas or is North Georgia probably a more likely next step either through lift outs or acquisitions?

Density in the markets we're in, we love the Tennessee, Alabama, and We would certainly look at continuous markets if the opportunity was just really, really nice. So I don't know that I would prioritize the Carolinas over Georgia or Georgia over the Carolinas. It's all going to be a numbers and opportunity game.

Yeah, and I'll just add to that, Teddy. You know, from us, I mean, as Newark said it, I think, you know, we would definitely look for continued growth in contiguous geographies. So I think all of those will be on board, but again, primary focus is on what we've got.

Got it. That makes sense. Thanks for answering all my questions, and congrats on a great quarter.

Thank you. Thank you. Have a great day.

Thank you. The next question comes from William Wallace of Raymond James. William, your line is open.

Thanks. Good morning, guys. Ron, in your prepared remarks, it sounded like you said that the provision expense had to do with, I think you said like repositioning or something around the pending loan sale of the Richmond assets. Did I hear that correctly? And if so, can you explain that a little bit more?

Yeah, we, it was, you know, the Richmond loan sale was considered a day two event. and there was a lot of discounts associated with that. So when we took away from the pools of the loans, because we did the pooling based on call codes, we kind of had to reallocate, do another valuation assessment on the remaining portfolio and we had to replace what was taken out from the loan sale. So it was just a timing issue. It was not a day one issue. So it was strictly around the fair value, readjusting the fair value marks, I guess, so to speak. Usually you'd see that on a day one and you'd never see it again, but we had to revalue it once again at 930.

Okay. Okay. So that didn't run through the net interest income line as an interest adjustment? Okay, so moving forward then, how should we be thinking about the provision expense line, you know, with the mid-teens anticipated loan growth rate and assuming that, you know, we don't get any backup in economic, you know, the current economic situation related to COVID or anything that we're continuing to improve, not get worse?

Yeah, you know, fourth quarter, I think we're probably going to maintain our percentages at this point of time. Again, you know, we have seen the cases have, the variant cases have dwindled down in our qualitative factors. So I think there's probably a little bit of opportunity for us to keep lower, but I think we'll keep that 75 basis point level for the time being. Again, every quarter is a different strategy or a different calculation, but probably flat. And with our loan growth, we'll just try to, at this point, the calculation is saying we'll try to still be in that 75 basis point range for the originated book.

Okay. All right. Thank you. That's helpful. And then, sorry to do this, but I'd like to circle back to the NIM commentary. So, the guidance for the fourth quarter is around 3%, and that includes about 2 million, I think you said 2.1 million of accretion related to PPP loan fees. But then it sounded like you said, moving forward, that you'll still be around 3%, even when that That'll be the last of the PPP accretion. Is that correct?

Well, we'll still have a little bit of a sliver, a million plus to do Q1. And at that point, the big mover is we're going to eliminate the liquidity drag, which is the third quarter's 28 basis points. And additionally, which we're not taking into account is We're still carrying a lot of 1% loans other than the PPP fees recognized. We still have that base of 1% SBA loans that were on the books that would be forgiven. So there's a lot of moving pieces, but we're still expecting that 3% to hold going forward from what we're modeling today.

Okay. Okay, and then so in 2022, what is the kind of anticipated I know for fourth quarter we're at $644,000. If I was in a ballpark, I don't have that in front of me. It's probably around $500,000 a quarter.

This acquisition didn't bring a lot of discount accretion to it. As always, we do have a lot of loans in the portfolio still loaded with marks and with paydowns and payoffs and such. We'll probably have one unique event happen quarter over quarter as we've seen just to get accelerated accretion coming through the books, the loan discount accretion.

Okay, yeah. Okay, and then if you just, there's You guys have done a lot, right, with team lift outs and acquisition. I don't know if you track this or not, but if you do, I mean, if you were to look at your core originators and the growth that they're adding to the portfolio, is the run rate of this business, is it really kind of a high single digit run rate that'll be boosted with all the team lift outs, et cetera, or is the Do you think you could settle out low double digits once we get past the initial boost that will come from all the new hires?

Yeah, I think near term, I think your earlier comments, I think we're still running kind of that, I call it mid to highs with the new team members coming on board. I think that pushes it up into the double digits, into the mid-teens. I do think we've settled. I think we're a double-digit grower, Wally, moving forward. I mean, I really do. The way we're structuring this team and kind of what we're looking at, where the markets we're in, the group that we've got, I think we could be kind of on average a double-digit grower even past this initial spike that we anticipate. Okay. Okay.

Okay, that's very helpful. I really appreciate the time, guys. That's all I have.

Yeah, thank you. Thank you.

Thank you. And our next question comes from Kevin Fitzsimmons of DA Davidson. Kevin, please go ahead.

Hey, guys. Good morning. Good morning.

Good morning.

Most of my questions have been asked and answered, so I apologize if I'm being redundant here. But I just want to give in... Your answer is a few questions ago about expanding into other states and the fact that the move you're doing in Richmond, it's fair to say that the focus is on these existing markets, as you pointed out before, Miller. So given the new teams that you've hired, is it safe to say you have a flag planted Kevin, I'll start and then the guys can jump in. I think we've got most of our flag playing. I think, as we've said previously,

We continue to like that Nashville zone. We believe Nashville, we need to continue to go there. We're in the MSA in Murfreesboro, but that's an area where we think we've got the size now and the ability to be impactful in that market. That's a priority. We're in that zone, but we would like to get a little bit bigger in that zone. Same thing to say about Alabama. Now we're in most of the MSAs. We did a release a few weeks back letting folks know that we're looking to grow in Birmingham. That's an area where we want to grow. Our floor plan group is going to be based there. We've already planted some leadership in that market and Very excited about opportunities there. In Florida, I think Florida is an area where I think we could see some expansion, maybe a little bit further east. We added some scale in Tallahassee. I think as you look kind of through that I-10 corridor, there could be some other opportunities there. But I think it's contiguous to really where we are. And I don't know, Miller, you may want to dive into that.

I think Billy hit on it. Birmingham and building out that market, obviously a really good city in the state of Alabama. And I just think success breeds success. Good bankers want to be part of a good team and a good bank. And as we build out some of these markets that we've just I think we are able to and have discussions on a regular basis with good bankers that we will be able to bring on to our team.

Is that focus, that pivot that you talked about before, is that more based on the willingness of these loan officers to move? There's an increased willingness or is it More about, and I think you've discussed this before, about just not having the bulk up in size. That's not as much of an urgency where before, arguably, maybe it was a little more like, hey, let's do a deal and we'll optimize, we'll figure it out later. Not figure it out later, but there was an urgency to getting to a certain size where now it's more of a real rifle shot. Thank you for joining us.

that we have, the sophistication that we've built around treasury and credit and all of these other ancillary pieces, we can go out and do a much better job in recruiting. And these bankers that are looking to move to us from these larger regionals, they know we can handle their books of business. That's tougher to do when you're $2 billion or even $30. I think for us, we felt like we needed to get to this size And now I think we're a very attractive alternative for some of these really good regional bankers that are maybe looking to go to somewhere that's got a little more nimbleness. And I think that's what's appealing to us now, and I think that's what's attracting these really good team members to us.

Okay, great. Thanks, guys. Thank you.

Thank you very much. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now. We currently have no further questions, so I'll hand back over to Mila Welbin for closing remarks.

Thanks, Lydia, and thanks for all y'all for joining us today on the call. We appreciate your support of our company, and we hope you have a great rest of your week. Have a good day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.