SmartFinancial - Q2 2024

Transcript

Operator (participant)

Hello, everyone, and welcome to SmartFinancial's second quarter 2024 earnings release and conference call. My name is Ezra, and I will be coordinating your call today. If you would like to ask a question, please press Star followed by 1 on your telephone keypad now. If you change your mind, please press Star followed by 2. I will now hand over to your host, Nate Stroud, Director of Investor Relations, to begin. Nate, please go ahead.

Nate Strall (Director of Investor Relations)

Thanks, and good morning, everyone, and thank you for joining us for SmartFinancial's second quarter 2024 earnings call. During today's call, we will reference the slides and press release that are available within the Investor Relations section on our website, smartbank.com. Billy Carroll, our President and Chief Executive Officer, will begin our call, followed by Ron Gorchinski, our Chief Financial Officer, who will provide some additional commentary. We will be available to answer your questions at the end of the call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We will list the factors that might cause these results to differ materially in our press release and in our SEC filings, which are available on our website.

We do not assume any obligation to update any forward-looking statements because of new information, early developments, or otherwise, except as may be required by law. During the call, we will reference Non-GAAP financial measures related to the company's performance. You may see the reconciliation of these measures in the appendices of the earnings release and the investor presentation filed on July twenty-second, two thousand and twenty-four, with the SEC. Now I'll turn it over to Billy Carroll to open our call.

Billy Carroll (President and CEO)

Thanks, Nate, and good morning, everyone. Great to be with you, and thank you for joining us today and for your interest in SMBK. I'll open our call today with some commentary, then hand it over to Ron to walk through the numbers in greater detail. After our prepared comments, we'll open it up with Ron, Nate, Rhett, Miller, and myself available for Q&A. So let's jump right in. A pretty good quarter for us, where we saw more of the inflection we've anticipated. We posted net income of $8 million for the quarter, or $0.48 per diluted share. On an operating basis, we came in at $7.8 million, or $0.46 per diluted share, the delta being a small gain on the sale of a piece of bank property.

Jumping into the highlights, we'll be referring to the first few pages in our deck, pages 3, 4, and 5. First, and in my opinion, one of the most important metrics, we continue to increase the tangible book value of our company, moving up from $21.66 per share, including the impacts of AOCI, and $23.18, excluding that impact. That's a 10% annualized quarter-over-quarter increase. Looking at the graph on the lower right on page 5, you'll see the value growth we continued to deliver for our shares. We had a very solid loan growth quarter, over 11% annualized, as we saw continued growth and new relationships and an increase in funding on lines. There was some contraction in deposits that was expected after experiencing a fairly robust growth in the first quarter.

While the balance sheet remained relatively flat, we, we've remixed it and continue to bring in some outstanding new client relationships. Our history of strong credit continues, with the metric holding very low at 20 basis points in NPAs. As you know, we operate with a low risk profile in terms of credit. Our CRE ratios continue to hold flat, giving us the ability to add in those buckets when the right opportunities present. The only movement we've really seen on credit has been a few lingering small trucking company credits we've worked through in our Fountain Equipment portfolio. We've continued to be very pleased with the production of that team, just focusing a little more on the heavy equipment sector. Total revenue came in at $40.4 million, and net interest income continued to expand with the inflection point we've discussed.

Non-interest expenses were relatively steady at $29.2 million for the quarter. The operating leverage that we've talked about on prior calls is starting to happen as we continue to grow the revenue line with minimal investments on the expense side. Looking at the charts on page 5, highlighting the operating PPNR chart, the movement up has started after a couple of flattish quarters. We're looking forward to and expecting to continue to see that trend to happen. Before Ron jumps into the details, just a couple of additional high-level comments from me on growth. We were pleased with the results. On the loan side, we were up $96 million, again, about 11% annualized for the quarter and 7.5% annualized year to date. Our regional sales teams are doing a nice job growing new clients.

Yields on the loan side continue to expand, with the full portfolio's average loan yield up 9 basis points to 5.8%. Our mix was almost identical the first quarter. On the deposit side, we contracted a little, as I mentioned, after a higher than expected growth in Q1. The contraction was primarily some seasonality coupled with tax payments, plus the quarter we rolled off $15 million in wholesale funding that was not replaced. The leveraging of deposits was by design, bringing our loan-to-deposit ratio to 83%. I'm pleased with the work on the deposit cost as well, as average total costs were up only 4 basis points in the quarter to 2.56%. We also continue to hold our non-interest-bearing mix at over 20%, which is not an easy feat in this environment.

I think, Ron, I think that is it on mine. I'm going to pass it over to you.

Ron Gorczynski (CFO)

Thanks, Billy. Good morning, everyone.

... We are very pleased with our balance sheet's performance over the last several quarters. Billy touched base on our deposits, which I'll provide more commentary on in a minute, but I want to start with the positive trend we saw in our securities portfolio. For the quarter, the weighted average yield rose 66 basis points to 3.60%. As highlighted during previous calls, we had $150 million of low-yielding treasuries mature in the first half of the year, and we redeployed $118 million of those proceeds into new securities with a weighted average yield of 5.73%. The remaining principal balance of these maturities have been mostly earmarked to fund new loan production. As a result, funding for new security purchases will only be allocated to the most advantageous opportunities and for general balance sheet management.

To add a little more color on our deposit portfolio, during Q2, interest-bearing deposit costs increased 7 basis points to 3.23% and were 3.23% for the month of June. The weighted average cost of new deposit production for the quarter was 3.16%, and our overall deposit composition remained consistent, with non-interest bearing to total deposits remaining above 20%. Looking ahead, we expect deposit balances to rebound as our client liquidity builds and our relationship managers continue to win net new deposit business relationships. As mentioned last quarter, we have passed the inflection point in our net interest margin, which expanded by 12 basis points to 2.97%.

The margin enhancement was a result of several factors, including the previously mentioned yield enhancement on the securities portfolio and a favorable 7.84% weighted average yield on new loan originations. Additionally, total deposit costs increased only four basis points linked quarter, signaling further funding cost stabilization. While the variables influencing margin are difficult to forecast, we do expect continued margin expansion during the second half of 2024, primarily driven by new loan production, fixed and adjustable-rate loan maturities, and our liability-sensitive interest rate position. Currently, $150 million of fixed and adjustable-rate loans with a weighted average yield of 5.83% will mature or reprice ratably over the remainder of 2024. We also have $150 million in time deposits repricing during the third quarter.

While our modeling doesn't include a change in the Fed funds rate during the third quarter, we have $949 million of variable-rate loans and $1.2 billion of interest rate deposits that will, that will reprice immediately upon Fed funds rate movement. As a result of these factors, this quarter, we anticipate surpassing a $42 million+ quarterly operating revenue run rate and are targeting a margin in the range of 3.05%. Operating non-interest income was $7.3 million, adjusting for a $283,000 gain from the sale of a bank-owned property, and operating expenses were lower than forecasted at $29.2 million, largely as a result of ongoing cost management efforts.

Looking ahead to the third quarter, we are forecasting non-interest income in the mid-$7 million range and non-interest expense in approximately $30.5 million range, with salary and benefit expenses comprising $18 million. I'll conclude with capital. For much of the quarter, our stock price was trading well below its intrinsic value, not fairly reflecting the value of our company. As such, we took advantage of this opportunity and repurchased over 136,000 shares at a weighted average price of $21.57. Despite the repurchases, our consolidated TC ratio grew 23 basis points to 7.7%. Our total risk-based capital ratio did decrease slightly by 17 basis points. However, this was largely due to our strong loan growth being funded with zero risk-weighted cash.

Overall, we continue to be in a well-capitalized position with a very strong future credit and earnings outlook. With that said, I'll turn it back over to Billy.

Billy Carroll (President and CEO)

Thanks, Ron. I want to reiterate again the value proposition for our company, drawing your attention back to page seven of our deck, reminding our stakeholders of what we've accomplished over the last few years with the best still to come. As we've discussed, the major investments we made in 7 de novo markets a couple of years back was comparable to an acquisition without issuing stock. We diluted our return a little to accomplish this, but now that we're through absorbing the 500 basis point rate increase, we can feel the operating leverage starting to kick in. We've made it through the tough part and are getting over the hump of moving our ROA and ROE back to over 1% and 12% respectively, as we had prior to the market expansions and rate increases.

The operating foundation we've built, coupled now with the sales organization we're creating, have me very optimistic about our company's future. We're now more fully leveraging the functionality of our nCino platform. We're utilizing the Salesforce front end to consistently create a stronger prospecting process for our sales teams, and we're leaning into their pricing and profitability systems to coach our teams on the value of full relationships. The regional president structure we have and the accountability we're putting into these zones is really starting to bear fruit. Our operating platform, combined with a reinvigorated sales emphasis, operating in some of the best markets in the country, is a pretty good formula. We're continuing to look to add sales talent that fits our culture. We've added over 10 new sales team members so far this year and have several in our talent pipeline currently.

I believe we continue to be the one of the region's banks of choice for great bankers. I also think we're positioned well for whatever materializes in the way of rates. We're continually running several scenarios of forecasting to make sure we can accomplish our return targets... and those objectives on a variety of paths. So to summarize, I like where we're sitting. We are executing and have started gaining the operating leverage that we anticipated, with a solid path back to our return targets. Margin is starting to expand back, credit continues to be very sound, and we're seeing great new client growth and sales energy in our company. All said, a very solid first half for our company. I appreciate the work of the SmartFinancial and SmartBank team and the efforts of over the near 600 associates we have.

This team is continuing to perform well and building a great culture. We're gonna stop there and then open it up for questions.

Operator (participant)

Thank you very much. If you would like to ask a question, please press Star, followed by One on your telephone keypad now. When prepping to ask your question, please ensure your device is unmuted locally. If you change your mind, please press Star followed by Two. We've got our first question from Will Jones with KBW. Will, your line is now open. Please go ahead.

Will Jones (Associate VP of Equity Research)

Yeah, hey, thanks. Good morning.

Billy Carroll (President and CEO)

Morning, Will.

Ron Gorczynski (CFO)

Hey, Will.

Will Jones (Associate VP of Equity Research)

Hey, so great work on the margin this quarter. You know, I think it may have been a little underappreciated some of the reinvestment opportunities you guys were having. Just, Ron, you called out some of the significant bond maturities you saw over the first half of the year. I just curious, just wanted to start there. So, the bond yields of 3.60% that we saw this quarter, does that kind of fully reflect, you know, the full benefit of some of the reinvestment you've done? Or I'm just trying to gauge, you know, what, where there may be a little more upside to securities yields as we move into the third quarter. So Ron, what's a good jumping off point, do you think, for that securities yield percentage?

Ron Gorczynski (CFO)

Yeah, for the next couple of quarters, we're probably in the 360, 365 range. We managed to get pretty close to full benefit for Q2, so it'll be like kind yields going forward.

Will Jones (Associate VP of Equity Research)

Yeah. Okay. That's great. And then, I mean, the commentary around deposit costs, you know, it feels very favorable. I mean, you know, I think I recall last quarter that, you know, we talked about March deposit costs of 3.23, and that's kind of where we landed this quarter, and then new deposits are even coming on lower. So, you know, I know it still could be too early to call victory on deposit costs, but do you think we could see, you know, an inflection next quarter or maybe as we exit 2024?

Billy Carroll (President and CEO)

Well, I'll start, and then Ron, you chime in. Well, yeah, I mean, we-- I think we a nice job on that front. Like, to your point, it's not easy, and I don't know if we would say we've declared victory yet. Obviously, we feel like rates, you know, I think next move, we market into down. But the team's done a good job of holding that. As we talked about, we leveraged a little bit of that liquidity, so we're not, you know, we're not in a position where we, like, we have to push on the deposit rates. So we-- That-- I think that played to our benefit this quarter. You know, we very well. And we're gonna kind of wait and watch.

We could leverage it a little bit more in Q3. You know, so I think, I don't know if we're ready for an inflection yet without a rate cut, but, I think we can hold our own for a little while. Ron, any additional color?

Ron Gorczynski (CFO)

Yeah, you know, we wanna—we can't be aggressive on our rate assumptions. We're thinking, you know, the amount of increasing has stalled, so we're looking at 3-4 basis points, I think, of cost incrementally going quarter-over-quarter. Still underpacing the amount of our loan yields, our asset yields increasing much more than that.

Will Jones (Associate VP of Equity Research)

Okay. So that's super helpful. And then just last for me, Ron, just housekeeping, the $150 million of time deposits at reprice, where are those going to? And where are they coming from in terms of rate?

Ron Gorczynski (CFO)

Yeah. For Q1, you know, we had about 78%, 80% retainage, and they're going anywhere from street rate, so anywhere from 2.75 to low fours. Again, it all depends on the customer, the amount, and such. So it's... there's really not one answer for that. It's—we're seeing a variety of outcomes, but we are retaining about 80% of the time deposits.

Will Jones (Associate VP of Equity Research)

Yeah. Okay, that's helpful. Well, great quarter, guys. That's it for me.

Billy Carroll (President and CEO)

Thanks, Will. Thanks, Will.

Operator (participant)

Thank you, and our next question is from Stephen Scouten, with Piper Sandler. Stephen, your line is now open. Please go ahead.

Stephen Scouten (Managing Director and Senior Research Analyst)

Yeah, thanks, guys. Good morning. So appreciate all the commentary-

Billy Carroll (President and CEO)

Good morning, Stephen.

Stephen Scouten (Managing Director and Senior Research Analyst)

- and the forward guidance there. I think you said 3.05 NIM expected for the third quarter. If I look back at my notes, I think we were talking like a 2.90 for this quarter. So I guess my question is: What came in better than you would have expected at this point last quarter, and do you think some of those trends can continue versus that relative improvement?

Ron Gorczynski (CFO)

Well, yeah, I'll start, and Billy can add to it. You know, first, this is the third consecutive quarter where our growth in interest income exceeded the growth in interest expense, a trend we expect to continue. You know, I think our loan yields, our loan production came in heavier than expected. Our loan yields, you know, we expected, well, we are expected to increase 79 basis points, and I think we're a little bit less than that for our expectations last quarter. And I think our and our deposit costs have slowed. We're probably a little bit heavier, but we came in, you know, at 4 basis points. So really a combination of things, and also our loan and deposit mix has changed.

So, you know, kind of a variety of good things that are happening for us at this point.

Stephen Scouten (Managing Director and Senior Research Analyst)

Yeah, that's helpful. That makes sense. And then as you think about the prospect, I know you said you don't have any rate cuts, I guess, in the third quarter in kind of your model, but when you think about the prospect of rate cuts, have you guys quantified what maybe each 25 basis point cut looks like for you guys from a NIM perspective or an NII perspective? I mean, obviously, I can see the asset sensitivity that's in the presentation, but just curious how you think about it on each, maybe 25 basis point move.

Ron Gorczynski (CFO)

Yeah, at this point, we're slightly liability sensitive. You know, the—these 25 basis points cuts are really not. It helps us. It's not hurting us. So I think incrementally, we're probably putting on $400,000 of income annually, or two basis points we pick up for that for the next quarter, if it happened early in the quarter. So let's just say two basis points.

Stephen Scouten (Managing Director and Senior Research Analyst)

Okay, great. And then as we think about, and I apologize if I missed it, kind of that logic behind the $50 million in operating revenue for 3Q 2025, I think was kind of where you guys were targeting. Do we still think that's a viable path? And if so, how much balance sheet growth do we need to see to get there, or where does the NIM need to go? Like, how can we think about the path to that number and the progress we would need to see to get there?

Billy Carroll (President and CEO)

Hey, Stephen, it's Billy. Yeah, we're still feel very good about our ability to get there. Obviously, you know, it's a function of growth, and it's a function of growth and margin. You know, expense controls are kind of a given. You know, we believe we can continue to hold our expense line. You know, we just reasonable growth over the next several quarters. And I think you see us, as Ron said, he had kind of given our guidance of getting up, hopefully north of 42, is what we think for next quarter. I think you can see that trend continue to move up into the high 40s. And so for us, you know, it's a function of getting some growth.

It's a function of getting the growth on the balance sheet. I think, you know, for us, if we can get, you know, ideally get $200 million of growth on the balance sheet over the next year, I think that's doable. I think if we do that with a NIM in the 3.35%-3.40% range, coupled with the balance sheet growth, I think it gets us there by the end of next year, and that's our goal.

You know, like, as we've talked about with you and others on this call, you know, the growth that we had, coupled with you know with a little bit of this, this rate increase, squeezed us a little bit, but that's, that was fine. We're coming out of it now, and we're have a really good, I think, a path. We obviously got to execute. We gotta grow the balance sheet, but sales teams are teed up to do that. And I think if we can get this couple of hundred million of growth on the balance sheet, coupled with that margin expansion into that 3.35 range, it gets us where we want to be from a return target standpoint.

Stephen Scouten (Managing Director and Senior Research Analyst)

Absolutely. That's extremely helpful color. Thanks, Billy. Appreciate all the time, guys.

Ron Gorczynski (CFO)

Thanks, Steven.

Billy Carroll (President and CEO)

Thanks, Steven.

Operator (participant)

Thanks. Thank you. Our next question is from Steve Moss with Raymond James. Steve, your line is now open. Please go ahead.

Thomas Reid (Senior Equity Research Associate)

Hey, good morning, guys. This is Thomas filling in for Steve.

Billy Carroll (President and CEO)

Hey, Tom.

Ron Gorczynski (CFO)

Hey, good morning.

Thomas Reid (Senior Equity Research Associate)

Hey, so, loan growth was really strong on the quarter. You know, what are some of the kind of notable underlying trends you're seeing there, maybe, you know, geographically or in a product segment? And then, maybe how is the overall pipeline looking today?

Billy Carroll (President and CEO)

Yeah, I'll start with pipeline, then I'll let Rhett jump in and talk a little bit about kind of what we're seeing, what the mix is, what the trends look like. Overall pipeline's are still really good. You know, we've got, we continue to have, as we saw this quarter in Q2, I think we're gonna see a little bit more in Q3, continued growth on some of the lines that we have out there, some of the construction deals that are still funding. So that's a plus. But I still feel pretty good about our guidance that we've given in the past. I feel pretty good about that, that kind of that mid to high single digits guidance on the loan growth side.

We're feeling good about our ability to grow the deposit side, too. A little of it's gonna be how we wanna handle the rate fluctuation. As I said, we may look to leverage a little bit more in Q3 because we've got the ability to do it. It's just gonna be a function of how we wanna manage that. But pipelines are good, and we continue to feel optimistic on our ability to grow the loan book. Rhett, you might talk a little bit about what we've seen, the types of loans that we've been putting on lately and kind of what we expect for Q3.

Rhett Jordan (Chief Credit Officer)

Sure. Yeah, Thomas, it's if you look at the portfolio itself, just our balance growth has really come predominantly in-

... our C&I lending space, our commercial real estate, both owner-occupied and non-owner occupied, a good mix there. And then we've had good continued balance growth in our 1-4 family term debt. So, construction, as you can see in our ratios, we've continued to see our CRE construction ratios decline. That's been kind of a combination. We did have a couple of larger 1-4 construction projects that paid off, units were sold in the beginning half of the year. But we do have a number of good projects underway now that we believe will see some of those balances recover.

So it's been a pretty good mix across the portfolio, and you see that in the slide deck with the fact that, you know, our categories within the portfolio are continuing to just trend relatively steady period to period. Well, we're just not seeing big swings in any specific segment.

Miller Welborn (Chairman of the Board)

And it's been very geographically diverse, too.

Rhett Jordan (Chief Credit Officer)

Yeah, absolutely.

Miller Welborn (Chairman of the Board)

Yeah.

We, you know, we typically will see some of our larger segment markets are all contributing at a pretty comparable rate. And then, but also our de novo markets are some of our newer footprint markets are beginning to gradually increase their production as well. So it's really coming from across the footprint.

Billy Carroll (President and CEO)

Well, and Thomas, I'll add, too, you know, and I touched on a little bit in my prepared comments about our regional president structure and how we're really getting those teams engaged on the sales side. I think we've always sold well, but right now, I mean, we've got a really good group of leadership in these regional spots. And the growth that we're seeing, the sales energy that we have, it's as good as we've ever had in this company, in a market where it's not easy to sell. And so I think that's the reason you hear some optimism in our tone. Obviously, we've got work to do.

We've got targets that we need to hit, that we've stated publicly that we're going to go get after, and I know we can get there. But it's a good energy, and as Miller and Rhett alluded to, it's spread throughout all of our geography, so very evenly balanced. And we feel really good about the prospects of growing that side.

Thomas Reid (Senior Equity Research Associate)

Okay, great. Thanks for all the colors, guys. That's, that'll cover it for me, so I'll step back. Thank you.

Billy Carroll (President and CEO)

Thank you.

Miller Welborn (Chairman of the Board)

Thanks, Dave.

Rhett Jordan (Chief Credit Officer)

Thanks.

Billy Carroll (President and CEO)

Thomas.

Rhett Jordan (Chief Credit Officer)

Thomas.

Billy Carroll (President and CEO)

Thomas.

Miller Welborn (Chairman of the Board)

Oh, Thomas, that's right.

Billy Carroll (President and CEO)

He said it.

Miller Welborn (Chairman of the Board)

Yeah.

Billy Carroll (President and CEO)

He said it.

Miller Welborn (Chairman of the Board)

That's right.

Operator (participant)

Our next question is from Russell Gunther with Stephens. Russell, your line is now open. Please go ahead.

Russell Gunther (Managing Director and Equity Research Analyst)

Hey, good morning, guys.

Miller Welborn (Chairman of the Board)

Hey, Russell.

Russell Gunther (Managing Director and Equity Research Analyst)

I wanted to... Yeah, morning. Just to circle back to the loan growth discussion. So I think the mid to high single digits implies kind of closer to the mid single digits for the back half of the year. Obviously, 2Q is quite strong, but one, would just be helpful if you could set the table more specifically for the next couple of quarters on loan growth. And I'd also be curious to learn if there were any notable commercial lender hires in 2Q.

Billy Carroll (President and CEO)

Yeah, second half growth, you know, and that's the reason I alluded to, kind of—we balanced it out. A little bit lighter Q1, a little stronger Q2, came in at 7.5 year to date. You know, I think we're still, I think we're right there, you know, give or take. You know, I think that, again, that 5%-8% number still feels pretty good. Again, it's just going to be a function of, you know, can we, you know, a couple of deals. Our pipelines are good. It's just a function of getting them all closed and on the balance sheet. You know, some deals may fall out.

But we're still very optimistic that we can continue our growth, similar to what we saw the first half of the year. So, again, that, I feel like that could be fairly, it may not be, it may not be as lumpy as we saw, first half, but, but, you know, 5%-8% is still, I think, a pretty good range. As far as new hires, you know, we picked up a couple of really good commercial bankers, in the first half. As I talked about, we've added 10 total, new sales team members. And some of that's recalibrated.

We, you know, folks, you know, come and go, but yeah, I think the 10 that we've added have been really, really good, and most of those have been on the commercial side. We've had a couple in a couple of other revenue producing arms, but most of it commercial, a couple of really good private bankers. And so, those folks, we feel very good about their ability to continue to bring in new business. So I think that's the reason we're—we kind of lean to continue to feel like we can hit those loan growth targets. And it's still in a world where loan growth, organic loan growth is not easy.

Russell Gunther (Managing Director and Equity Research Analyst)

Yep, understood. I appreciate it, Billy. And then you guys have touched on, you know, CRE and C&D concentration ratios on the call and maybe pointed them a little bit higher based on back half of the year growth expectations. But just give us a sense for where you plan to target those ratios and whether or not that is any impediment to kind of growth targets for the back half of this year or next.

Billy Carroll (President and CEO)

Yeah, and I'll start, and again, I'll let Rhett kind of chime in with his thoughts on, you know, on fundings. You know, we've always liked commercial real estate. You know, we don't, we don't shy away from it. You know, again, I think when you look at the way we underwrite, the types of deals that we look at, the sponsors that we have, on those deals, we feel good about it. So, you know, I don't think, you know, we're not looking to go lean in heavy to CRE, but we want to continue to prudently use that bucket.

Where we end up, Rhett, I'll let you, I know just kind of based on kind of where you think projections are and fundings, I'll let you kind of chime in on thoughts around kind of growth maybe in the ratios over the next quarter or two.

Rhett Jordan (Chief Credit Officer)

Yeah, as you know, as we mentioned a little bit earlier, we had a handful of projects that were wrapping up near the end of last year that transitioned into the first part of 2024 that have paid off. So we had some balance reduction as a result of that. But as I mentioned, we still continue to have good production in the segment of new loans going on the books that we'll see some advances. So I would envision that we will begin to see those ratios begin to transition back up a little bit, but I don't see it being a significant move, honestly, in balances outstanding between now and year end.

You know, we may see it trend up a little bit from where it sits today. This is really, I think, the lowest quarter we've had in a while. But I don't see it moving significantly, Russell, at the end of the day. I think it's still gonna be somewhere in that—you know, we may see it move up closer to a—you know, 70s type of ratio mark in the construction segment, but doubt it'll get much higher than that.

Russell Gunther (Managing Director and Equity Research Analyst)

Okay, great. Thank you, guys. Last one for me. You quantified the benefit that a rate cut would bring to the table. What type of rate backdrop do you guys assume in that kind of $50 million revenue target we discussed earlier?

Billy Carroll (President and CEO)

Yeah, it's right, right now, we're kind of running this thing kind of in a flat, I mean, flat rate scenario. But obviously, we know what the market's saying, and I think we all feel like the next moves are down, it's just a matter of when. But the assumptions that we built in have been in a rate environment that holds flat.

Russell Gunther (Managing Director and Equity Research Analyst)

Got it. Okay, great, guys. Thank you very much for taking my questions.

Rhett Jordan (Chief Credit Officer)

Thanks, Russell.

Billy Carroll (President and CEO)

Thanks, Russell.

Operator (participant)

Thank you. Just a reminder, to ask a question, please press Star, followed by one on your telephone keypad now. When prepping to ask you a question, please ensure your device is unmuted locally. If you change your mind, please press Star followed by two. We've got our next question from Christopher Marinac with Janney Montgomery Scott. Christopher, your line is now open. Please go ahead.

Christopher Marinac (Director of Research)

Thanks. Good morning. Wanted to go back to the repricing, points that you were making in the, presentation and also this morning. Is there a minimum kind of new loan yield that is going on the books today? Just was curious kind of how to think through that. And do you think that, new yield may go a little bit higher as you get into third and fourth quarter?

Billy Carroll (President and CEO)

Chris, and look, you gave the stats on new loan yields going on in Q2 were 7.76%. You know, I think, obviously, a lot of that, again, pressed between fixed and float, you know, it is. But that's probably still a pretty good assumption. You know, it might be a little bit lower than that, just thinking about some of the deals that we've got out there in the pipeline. So it may be a little bit lower than that, but not much, assuming, again, you know, rates stay at the spot where we see them today. But no, I think we can continue to hold in that mid-sevens level.

Christopher Marinac (Director of Research)

Okay. And then if we think through just a modest interest rate cut in the future, is the beta on the way down going to be similar to what we've seen in your experience the last couple of years, or is it too early to tell?

Billy Carroll (President and CEO)

Ron, you want to. Yeah, I'll take that. I think it's too early to tell. The competition, you know, the market competition is really going to justify what we can do. We intend to take advantage of the first couple of rate cuts and then see what the market's bearing and see how our production's handling it. But, you know, so really short answer is, it's too early to tell at this point. Billy, I don't know if you have anything to add. No, no, I think it is. It is gonna be tough. Obviously, we're gonna, you know, given our, Chris, given our position with where we are on liquidity and our loan-to-deposit ratio, we're gonna probably try to push down a little bit, a little bit faster.

To Ron's point, you know, you got it, you still have market competition you got to contend with. So we're gonna try to balance that, but

Rhett Jordan (Chief Credit Officer)

It's a game-time decision, every one of them.

Billy Carroll (President and CEO)

It is a game-time decision. I do want to follow up, Chris, on your first question. You know, Nate nudged me and said, "You know, don't forget about our RAROC model." It's one of the things on loan yields. You know, I mentioned in my prepared comments the work that we've been doing with our pricing profitability model. It's been really impactful. And so, you know, we, you know, when we're using our risk-adjusted return on capital bogeys, you know, with these sales teams. So, you know, even if we're pricing the loan, a little more aggressively, for example, we're still getting our RAROC returns. And a lot of those, that's just a function of, you know, the ancillary business, the deposit business, the treasury business that we are getting from those clients.

You know, I think when we look at loan yield, we try to look at—we look at it very holistic and under the guise of a risk-adjusted return on capital, just to kind of add a little additional color to that comment.

Christopher Marinac (Director of Research)

No, that's great. I appreciate that. And then just one quick follow-up is, you know, Billy, have, have customer attitudes changed at all to the positive? I'm just like thinking through the pipeline comments on the call this morning, and is anything different now than perhaps, you know, earlier this year?

Billy Carroll (President and CEO)

... you know, and we get out, I know, I know we all get out. Miller and I particularly are out a lot in our markets. Right now, we're in several of our markets last week, and visiting with clients and prospects. And there continues to be a very, I guess, cautious, optimistic tone that we see in really the zones where we're operating. So, yeah, Chris, I think overall, there's some optimism. Obviously, the market is changing. You know, inflation is still impactful, although slowing. You know, and we're seeing, you know, you're seeing some slowdown.

Some clients, we're seeing a little bit of slowness here or there or a little bit of a downward trend, but it's a small downward trend off of a record 2023, you know? So, so things are still relatively good and, and that's kind of what we're seeing from clients. And, Miller, I know you're, you're in the markets, too. Any thoughts?

Miller Welborn (Chairman of the Board)

Yeah, I certainly don't want to talk politics, but that's certainly on everybody's mind. And it's just, there's something different every day, and I think that's the way the wind's gonna blow until November.

Christopher Marinac (Director of Research)

Nope, all fair, and thank you all for the comments this morning. It's very helpful.

Billy Carroll (President and CEO)

Thanks, Chris.

Miller Welborn (Chairman of the Board)

Thanks, Chris.

Operator (participant)

Thank you very much. We currently have no further questions, so I will pass back to Miller Welborn to conclude.

Miller Welborn (Chairman of the Board)

Thanks, Ezra, and thank you all for being on the call today and for being interested in what we're doing here at the bank and for being part of our story. We appreciate the support, and have a great day. Thank you.

Operator (participant)

Thank you very much. This concludes today's call. You can now disconnect your line.