Pinnacle Financial Partners, Inc. (PNFP) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Pinnacle Financial Partners Second Quarter 2022 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer. Please note Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of our website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. [Operator Instructions] During this presentation, we will make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond Pinnacle Financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's annual report on Form 10-K for the year ended December 31, 2021, and its subsequently filed quarterly reports. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined in the SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com. With that, I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Thank you, Latania, and thank all of you for joining us this morning for the second quarter earnings call. I'm confident you've already seen, 2Q was a fabulous quarter for us in terms of financial performance. Over the years, when the stock appears undervalued, analysts will sometimes ask me, "Terry, what do you think the market is missing." So as I walk through my opening comments, and as Harold reviews our second quarter performance in greater detail, we hope to draw attention to these 5 things, where I believe there may be a disconnect between the financial performance, the value that's being created, and the valuation. Number one, I believe management's drive and incentive to alter outcomes is significantly underestimated. As an example, a scan of 10-K disclosed asset sensitivity model projections assumes management won't alter its main current sensitivity. And I get it because we've all seen some management teams just wait for an up-rate cycle for years, consistently underperforming. Instead, as an example, we got our clients to agree to $7.7 million in floors, altering the outcome that would have been predicted going into the last Fed easing cycle. I expect it to be much the same in this Fed tightening cycle. So we'll try to help investors understand the meaningful incentives this management team has to alter outcomes as situations change, which partially accounts for the success we've enjoyed over the last 3 years, 5 years, 10 years, and honestly, since our inception 22 years ago. Number two, I think many underestimate the power of our culture. I think most everybody would recognize that we put a lot of emphases on culture and likely so that's nice. So I may think it's happy to all, but many don't understand that we did that because we believe it really has enabled Pinnacle to outperform peers cycle in and cycle out. People less familiar with the firm underestimate the fact that our outsized shareholder returns over the last 22 years, whether you're talking about the last 3 years, the last 5 years, the last 10 years, or the last 20, have largely occurred as a result of that culture. And I'm personally betting it can be relied upon to produce outsized shareholder value over the next 3 years, 5 years, and so forth. Number three, I believe many don't understand what we view is the overwhelming, almost unstoppable balance sheet and P&L momentum has been built by our relentless effort to attract and retain the best revenue producers both in our existing markets as well as the other Southeastern attractive markets to which we've recently extended. Of course, you can easily see it looking at the history, but I'm hopeful we can illustrate its power and reliability going forward. We believe there is incredible balance sheet and P&L momentum already built in as the revenue producers we've hired over the last few years continue to consolidate their books of business to Pinnacle. Number four, similarly, I believe, we don't thoroughly understand the power that our hiring model has on asset quality. In truth, hiring bankers who have been handling a book of business for decades is the single best mechanism with which I'm familiar to ensure better client selection, and better client selection is how loan quality is produced. And finally, I believe many underestimated the value of BHG is unique funding model and what that means to the shareholders of Pinnacle, not only in terms of the very significant hidden equity on our balance sheet as a result of the difference between what we carry that at and what it's worth, but the power and flexibility provided by its growing earnings stream, particularly as many of the fintech asset generators are faltering. Access to funding is quickly becoming a key to success for these asset generators, and BHG has demonstrated over its long history and as recently as in the second quarter, that it has the ability to access funding in ways that many of its competitors cannot. Now, as we always do, we'll begin with the shareholder value dashboard, GAAP measures first, followed by the non-GAAP measures. As the second quarter results specifically, I don't know what else can be said regarding asset quality. Net charge-offs, classified assets and nonperformers are all at either historic or near historic loans. I'm sure someone will say, well, okay, that's backward looking. We're more concerned about what's in front of us, which I get, but I don't want anyone to miss this. It would be hard to produce those metrics even in good times were we not proactive managers of our loan book. And at the risk of digressing, let me also add that over the last 90 days or so, we've been actively tightening underwriting in an effort to better position the bank for a more difficult credit environment, which honestly, I believe is likely. But I think most are beginning to believe that while we're likely in for a more difficult credit environment, bank loan portfolios are likely to hold up significantly better than they did in 2008, 2009. We'll talk more about some of the marginal tightening we're doing a little bit later. But it suffices to say our asset quality is in the best shape it's probably ever been, which is exactly where you want to be if you believe you're heading into a more difficult credit environment. As I remind you each quarter, I primarily focus on this dashboard because it's our belief that these specific metrics provide the best insight into how successful we'll be in producing long-term shareholder value, that over a long period of time they've been some of the most highly correlated to shareholder returns. There are a lot of things that are interesting to measure in the banking business, and my suspicion is we're measuring virtually every single one of them. But certainly, we measure things like asset sensitivity and shock and ramped environments, deposit cost betas, noninterest expense growth rates, et cetera. But you have to be careful. The goal is not asset sensitivity, it's net interest income growth. The goal is not low deposit cost beta, it's net interest income growth. The goal is not containing noninterest expenses, it's growing EPS. In fact, I don't believe any of those things I just mentioned, asset sensitivity, deposit cost betas and noninterest expense growth rates would be highly correlated to long-term shareholder value creation if at all. In fact, I'm not even sure how predictive they are of more short-term results, which I'll talk more on in a minute. At any rate, we remain confident as we have been since the early days of this firm, that revenue growth, EPS growth, tangible book value accretion, and ROTCE along with asset quality are the items most highly correlated to share price performance over time. That's why we relentlessly focus on these items, and that's why I believe we've had one of the highest total shareholder returns of all the publicly-traded banks in the country since our inception in 2000. Sure, we track asset sensitivity and deposit cost betas, but we really focus more on growing net interest income because that's how you grow revenue and EPS. My guess is that there are likely banks with assumption-based models calculating greater asset sensitivity than we disclose and banks with lower deposit cost betas than those that are forecast for us, that will screen really well, but unlikely to come close to our net interest income growth rate, and therefore, to our revenue and EPS growth rates through the cycle. Certainly, no one knows the future, including me, but my experience as a meaningful investor in this firm for more than 2 decades, is that targeting top quartile performance on specific metrics like EPS and revenue growth, and not only targeting top quartile performance, but tying our incentives to them year in, year out is how shareholders have been awarded. So with that as a backdrop, looking at the revenue growth in Q2 and over time. Obviously, the annualized growth in 2Q is pretty special, but don't miss the CAGR since January 2018 and relatively stable quarterly growth. In addition to rapidly growing loan volumes and rapidly expanding margins, 2Q was also aided by BHG's outperformance in the quarter. BHG pulled some of their second half 2022 earnings forwarded into the second quarter, and Harold will talk a little about that in a minute. But it's my belief that BHG is really showcasing why their model, particularly their ability to fund loans at an attractive rate is different, better, and more valuable than classic fintech asset generators, many of whom don't produce any earnings at all, and many of them are struggling to solve the funding riddle. While funding for these kinds of assets during the period of Fed tightening and potential recession, that likely a bit more difficult or expensive for all asset generators, but I expect BHG's funding to be much more resilient than most of the players and fintechs and truly differentiate the power of their model over those both because of their proprietary online auction platforms that has been utilized by over 25% of the banks in this country and their standing with rating agencies for asset securitizations. Harold will review this more in a minute, but in addition to running $505 million through their auction platform in 2Q, BHG completed a $300 million securitization in the second quarter even as it's rumored that a number of classic fintechs didn't get their securitizations done. Again, BHG is in no way your classic fintech, in addition to the substantial earnings, I believe it offers much greater sustainability than those peers. And it's really the same story for EPS, generally up and to the right. Of course, you get the big dip in 1Q '20 as we built reserves during COVID and then a slight dip as we've had to outrun the benefits of PPP as those loans burned off. The truth is most thought going into 2022 that we'd have a difficult time growing earnings at all due to the impact of losing PPP income as the consensus for us in early January, just before we released 4Q '21 results, was that we could experience a decrease in EPS of 5% to 8% in 2022. And while we don't disclose our incentive targets, including for EPS, you can be sure that our internal targets in order to earn incentives at target did not contemplate a reduction in EPS in 2022. During the second quarter, you can see our widening margin along with our unusual ability to attract clients and grow loans is really the key to our revenues and earnings growth. And that's why we also included the balance sheet growth metrics because at Pinnacle, they generally provide the best insight into the sustainability of the net interest revenue growth. We had loan growth of 32% annualized. I recognize that some of you may be like me and subscribe to the old adage that, "if it's growing like a weed, it is one." And if you do, you might say, wow, that loan growth is frightening, particularly if you believe we're heading into a recession. And so later in the call, Harold will dissect the loan growth in a way that I believe illustrates why it's not a weed, but just a high-quality outcome derived from our strategic advantage, our relentless focus on the execution of a highly successful organic growth model and our endless building efforts since the Great Recession, which I'll touch on more in a minute. Deposit growth slowed in the second quarter, which is not unusual given the tax payment outflows. We believe IRS payments were measuredly elevated this year, but we were encouraged that the growth rebounded in the second half of the quarter, particularly in the DDA category, Harold will provide more on that as well. Before I move on to why it works that way, I will take just a second to illustrate what I'm talking about in terms of why I think we all should focus on net interest income growth as opposed to simple proxies like deposit betas. During the last up-rate cycle, the Fed made their first move in 4Q15, so that's the start point for this slide. The 2 dashed lines represent the cumulative betas through the Fed tightening cycle, the blue for Pinnacle and green for peers. As you can see, the people that simply bet on cumulative betas would have overlooked PNFP for sure, given its substantially higher cumulative beta through the cycle. Investors that were able to look through the net interest income growth were highly rewarded with very rapid net interest income growth per share through the cycle, roughly 61% higher than peers at substantial outperformance. And that's because there are other critical variables like loan rate betas, balance sheet growth volume, growth rates, and other management tactics that alter asset sensitivity that have the potential to substantially outrun the potential impacts of deposit cost betas. Now, set aside the need to focus on a lot more than simple deposit cost betas, I will say this for all the deposit cost beta devotees, it would shock me if Pinnacle's betas were anywhere near as high as in this cycle as they were in the last cycle for a few reasons. Number one, we begin the cycle with a substantially lower dependence on noncore funding, which reduces the immediate bidding pressure on core funding. Number two, competitors are also awash in liquidity, which should dampen the competitive thirst for deposits. To that point, I heard a number of banks bragging on earnings calls here in the second quarter about their betas being lower than anticipated. Number three, last cycle, Pinnacle integrated 3 banks during the cycle, which required a heightened focus on holding their clients for which we had just paid a premium, and therefore, we had an increased urgency to raise rates. And number four, the magnitude and speed the Fed moves this cycle affords banks like ours more opportunity to compress the beta or retain more of an increase. So it's my expectation given those 4 factors that we will be able to expand margins and grow loans in support of our net interest income growth. So now I want to move to why I think it works that way. Why the momentum continues to build so much more rapidly than peers and competitors. Jim Collins developed this concept in his famous study of how good companies became great companies and referred to it as the flywheel concept. If you'll indulge me here just 1 minute, he described it this way, and I quote, "Picture a huge, heavy flywheel, a massive metal disk mounted horizontally on an axle, about 30 feet in diameter, 2 feet thick, and weighing 5,000 pounds. Now, imagine that your task is to get the flywheel rotating on the axle as fast and as long as possible. Pushing with great effort, you get the flywheel to inch forward, moving almost imperceptibly at first. You keep pushing and after 2 or 3 hours of persistent effort, you get the flywheel to complete 1 entire turn. If you keep pushing, then the flywheel begins to move a bit faster, and with continued great effort, you move it around the second rotation. You keep pushing in a consistent direction, 3 turns, 4 turns, 5, it builds momentum turning faster with each turn. Then, at some point breakthrough. The momentum on the thing kicks in, in your favor, hurling the flywheel forward, turn after turn, its own heavyweight working for you. You're pushing no harder than during the first rotation, but the flywheel goes faster and faster. Each turn of the flywheel builds upon work done earlier, compounding your investment and effort. The huge, heavy disk flies forward with almost unstoppable momentum. That's where we are. Back in 2000, we aimed this firm at taking market share from larger, more bureaucratic banks by taking their best bankers and having them move the best clients from their previous employers to us. To steal another Jim Collins phrase, that's our hedgehog strategy, the simple one we revert to over and over and over. No doubt it was harder back then. I still remember hiring Larry Morrow before we ever opened our doors in 2000. And then on the first day of business, him opening accounts for Don Kennedy, who owns Kennedy Roofing and supply, his long-time client at our previous employer. They were our very first client. They're still our clients to this day. But now the thing is rolling forward with astounding momentum. In 2Q alone, we grew loan almost $2 billion and pushed total assets through $40 billion, an incredible growth story by anybody's measure. Our ability to hire the best bankers only improves as we go, and our ability to assist them in moving their clients only improves as we go. In the last 3 years, we've extended on a de novo basis to Atlanta, Huntsville, Birmingham, and Washington, D.C., some of the largest, fastest growing markets in the Southeast. We're hiring record numbers of bankers and wealth managers, both in the new and existing markets. We've hired 334 revenue producers since 2019. That's a 60% increase, a huge lift in market share moving capacity. 218 of those revenue producers are bankers, traditional relationship managers. We hired 71 in 2019, 82 in 2020, and 116 in 2021. Year-to-date through June of this year, we've hired 65 with 37 of those in Q2. So you can see the momentum continues to build. We're not just hiring any bankers and wealth managers, we're hiring some of the most experienced and most highly regarded bankers in the market. Of the 37 we hired in Q2, the average experience is 20 years. And literally, the majority of them were hired from the larger more bureaucratic banks, like Wells Fargo and Truist to name the 2 most fertile recruiting grounds as examples, which is a pretty good proxy for their level of training and sophistication. As we've seen year after year, they're now successfully moving their clients, which I believe means balance sheet volumes have extraordinary momentum, which means core revenues have extraordinary momentum and happily that momentum requires a little or no assistance from a strong economy. As Jim Collins described it, a flywheel like that produces almost unstoppable momentum. And those of you who are well familiar with the Pinnacle growth model and watched it through the years are likely comfortable with growth due to the idea of hiring long experienced relationship managers, who've been handling a book of clients for decades and having them move those clients to Pinnacle will result in strong loan quality based on the unusual approach to client selection. So essentially the very experienced bankers seek to move only their best clients and leave problem assets behind. All right. I promise to spare you the detailed explanation of the linkage between the associate experience, the client experience and shareholder return other than to remind you how it relates to why our momentum is so strong. There's overwhelmingly compelling data developed by Gallup, the Best Place to Work Institute and any number of others that demonstrate this idea of beginning with an exciting associate experience and translating that into a client experience that yields ravings fans, does indeed fuel outsized shareholder returns, literally 3.33x the Russell 3000 since 1998. While some banks are hoping to catch whatever the next wave might be, rising rates, falling rates, whatever, we've been diligently building an infrastructure that I believe has and can continue to produce outsized shareholder returns over the long term, cycle in and cycle out. Our associate engagement is literally among the best employers in the country. It's longstanding. It's across virtually every associate group like women, millennials, parents, and across our entire footprint in virtually every major market. Building on that foundation, these excited associates are hiring [ welded ] clients. Our net promoter score is market-leading in both our Tennessee and North Carolina footprint, an extremely high rating in every metropolitan market in which we have large enough share to produce a statistically valid sample. And on the far right, you can see that we have successfully translated all that focus on our associates and clients into shareholder value. The longer-term shareholder returns have been outsized from beginning and over 10 years, 5 years and 3-year time horizons. Though our returns this year have not been immune from the broader pressures on the sector, I still expect over the longer term, Pinnacle's culture should continue to produce outsized returns. And then finally, 1 more reason as to why the flywheel is spinning so fast. I want to just touch briefly on how I get paid, and frankly, how the top 140 leaders in this firm earn their short and long-term incentives. I've already spent a little time on the variables that we believe the most correlated to shareholder value. Now, here you see the variables that determine our short-term incentives on top and our long-term decisions on bottom, which is intended to help you see how the leadership of this firm is aligned to shareholders, and therefore, why they tend to outrun the peers. In the case of the short-term incentives, the variables are asset quality, EPS growth, and PPNR growth. For most of our existence instead of PPNR the third variable has been revenue growth, but in periods like these, where PPNR growth becomes really critical we substituted it for revenue growth. I will say this right now, it's my intent to ask our compensation committees to return to revenue growth probably next year. So these are the metrics, asset quality is the threshold measure. In other words, if we missed the classified asset ratio cap, which we believe is most predictive of the potential asset quality metrics in terms of future loan losses, nobody gets paid their annual cash incentive, nobody. So the entire leadership of this firm and frankly the entire associate base of this firm cannot afford a meaningful slip on credit. It shapes our behavior in good times and the bad. How's that for shareholder alignment? Assuming we clear the asset quality threshold, actual incentive payouts determined by EPS growth and ordinary revenue growth, but as I just mentioned for the last few years we substitute PPNR for revenue. With those metrics, of course, the next question should be, so how are the actual performance targets set to these metrics? In general, we utilized consensus estimates for our peers' EPS growth and ensure that our target would be at least the top quartile. And then we peg the revenue growth required to hit the EPS target. So in quarters like this one, where you get a meaningful increase in EPS, you get an increase in incentive expense. Had there been a reduction in EPS this quarter, you'd most likely have gotten a reduction in incentive expense, which then serves to bolster the reported EPS. Again, how's that for shareholder alignment. So for short-term incentives to be earned by anyone at Pinnacle, historically, we've had to clear an asset quality metric, and then actual payouts are a function of hitting earnings and revenue targets that were established with the intent of being the top quartile bank. That's distinctive. But it's one of the most important reasons in my judgment why the earnings growth of this firm and the share price performance of this firm have so consistently and substantially outperformed peers over the long term, as you just saw on the previous slide. And you can see the measure for long-term incentives on the bottom of the slide. There is plenty of disclosure in the proxy about how the equity-based long-term incentives work, and slight modifications made from year-to-year. But you can see in general tangible book value accretion is one of the most important metrics in recent years. And all these measures, we have to outrun the peers. So it's not just getting lucky, we have to outrun the peers. That may explain why if you run a scan on tangible book value dilution in the first quarter virtually all of the peers experienced substantially more tangible book value dilution than we did. My guess is you'll see more of that in this quarter. And so understanding this, you not only begin to understand that our caution on deploying any large amount of excess liquidity, and anything other than loans, just to pick up a few basis points of margin, we need to accrete tangible book value and at a rate better than our peers. But you also begin to see why using superficial screens for things like asset sensitivity and deposit cost betas may be misleading since they assume that there are no management actions to alter forecast outcome. This management team has literally every incentive to alter outcomes as situations change, and I believe we've got a long track record of doing that specifically. So where to from here? Right now is obviously a difficult time for bank stocks, in general, I think, rapid growers in particular. In terms of owning PNFP, it kind of reminds me of the conversation I had over a good number of years with what is today one of our larger shareholders. For years, she came to every conference and met with us every time but never bought the shares. She'd always say, "Terry, I love the story, but the stock is just too expensive." I actually said to her one time, "You always say it's too expensive, but every time we meet it's more expensive than the last time. You'd better go ahead and jump in, otherwise, you might not get the opportunity to own PNFP." Well, following one of the previous downturns for banks stocks, she called me up and said, "Terry, do you remember telling me I might never get the chance to own PNFP? Well, today I'm one of your largest shareholders." This seems like much the same opportunity to me now. The average PE for the BKX has collapsed to shockingly near Great Recession lows. And not only that, but the traditionally wide premium to peer multiples that Pinnacle's enjoyed is almost nonexistent. And so it would appear to me that this might be a buying opportunity, not dissimilar to the one I just described. The one thing I know is I'm not in charge of PE multiples. I'm responsible for creating long-term shareholder value irrespective of the cycle. And so my approach to delivering on that is, number one, to focus intently on asset quality, and we have to. Not only are the leaders of this firm relatively large shareholders, but all our annual cash incentives literally evaporate without it. That's different than peers. Number two, to continue to steward and refine the remarkable culture, that I believe is specifically linked to outsized shareholder returns, is a competitive advantage in both good times and bad. Number three, to continue to emphasize being the best place to work. We've become a magnet for talent and are successfully recruiting some of the best talent in Southeast and in large quantities. I've used the phrase before, this is a once-in-a-generation opportunity to amass talent that Pinnacle is uniquely suited to seize. Number four, to continue building the market share momentum of this firm. Honestly, it would be difficult to constrain. You can see why Collins referred to as almost unstoppable. We've added 334 revenue producers just since 2019. That's a 60% increase in revenue producers, aka market share taking capacity. We expect these revenue producers to continue to consolidate their clients to Pinnacle, while they seem to leave their problem credits behind. And with that approach, you get a rapid growth and strong asset quality. And number five, to double down on wowing our clients. Irrespective of the cycles over the long term, great places to work, produce greater than 3x the returns of companies that are not on that list because they can leverage the associate excitement to create raving fans, which is probably the most important ingredient in long-term shareholder value creation. In fact, we're actually increasing the emphasis there believing that as so many competitors wrestle how to deal with COVID, work from home, labor shortages, supply chain issues and any number of other excuses. We can seize this time to further differentiate an already differentiated brand by continuing to enrich our associates and blow our clients away. And all of that is aimed at rapid reliable growth in revenue and EPS cycle in and cycle out. So with all that as context, I'll turn it over to Harold to review the second quarter in greater detail.

Thanks, Terry. Good morning, everybody. Obviously, the second quarter was one of the strongest loan growth quarter for us after following a very strong first quarter, and what we believe will be a strong year for loan growth overall as we now target a 2022 loan growth percentage of high teens to low 20s for this year. Loan yields were up in the second quarter due obviously to rate hikes. Thus far, our loan beta is growing about 2x what our deposit beta has been since the tightening cycle began in March. We anticipate further escalation on loan yields as rate increases occur during the rest of the year. PPP is largely in the rearview mirror. One of the headwinds we had going into 2022 was overcoming the significant revenues that PPP provided us over the last 2-plus years. It was a key component to why, earlier in the year Street earnings estimates for 2022, we're anticipating decreases in EPS for us for this year. In 2021, we reported $81 million on revenue of PPPs compared with $15 million thus far this year. Our relationship managers have done a phenomenal job in pulling clients and loans from other banks. And as a result, we've seen revenue estimate steadily climb in 2022. We've responded to a lot of questions about loan floors over the past year or so and their impact on our yields in a rising rate environment. As the bottom left chart on the slide indicates, we have only $110 million of our floating rate loans left. So loan floors -- like PPP, loan floors are essentially in the rearview mirror for now. Our rough, rough estimate is that loan floors contributed some $50 million in revenues over the last year or so. Lastly, as Terry mentioned, our new markets including Atlanta and our new special lending units provided approximately $530 million in loan growth while our newer relationship managers contributed $430 million this quarter. We believe execution of our strategy is in full effect and look forward to when we can get a more positive economic backdrop than what exists today. As we started reviewing our second quarter loan growth, we decided that it might be helpful to better understand the source of the growth. So hopefully, this slide is that helpful. We characterize our growth into 4 broader segments: one, our pure asset generation plays with BHG, Advocate, JB&B; and then two, our strategic market expansions, not only into geographies like Atlanta, DC, Birmingham, but also expansion into specialty lending groups like franchise and equipment lending; and then three, what sort of growth did we achieve from our recruiting. So this is the growth of our newer RMs that have been with us for only 2.5 years or less. And then finally the fourth, the legacy markets contribution. So all of this is net growth. Thus far, through the first 6 months, we experienced 25% of our loan growth annualized between December 31 and June 30, '22, which is inclusive of PPP paydowns, which are denoted in red on this slide. Almost 50% of our loan growth is from our legacy markets, while the rest is primarily from new ideas and new people. We felt like this was helpful as we tried to understand where all of this fantastic loan growth has originated. Now onto deposits. For the first time in a few years, our deposit growth stalled. We were encouraged about what happened during the quarter once the month of April was over. May and June gave us some reason to be optimistic. We're also optimistic about noninterest-bearing deposits growing during the quarter. As we all know, these accounts become increasingly valuable as rates increase. Since the tightening cycle began, our deposit rates were up almost 34 basis points. So we're obviously pleased with the effort of our relationship managers thus far. We've never abandoned our view that core deposit growth is a key long-term strategic objective, and as a result, it's all hands on deck currently. For the first 20-plus years of our existence, our number one objective was developing strategies and tactics around funding our growth. We continue to like our chances given the significant investment we've made in both the relationship managers and new markets over the last few years. We continue to believe an aggregate 40% beta on deposit rates through the end of 2022 is likely. We will also keep an eye on what our competitors are doing given they are advertising much lower betas, which we believe gives us some breathing room at least currently. Now to liquidity. Our liquid assets decreased this quarter corresponding with strong loan growth, modest deposit growth and a $400 million increase in securities, all of which were floating rate. With our outlook for loan growth, we likely will not see any increased deployment of liquidity into bonds over the next several quarters. As the top left chart reflects, with the tightening cycle, our GAAP NIM increased 28 basis points this quarter. The impact of PPP and liquidity has a meaningfully less impact on our NIM this quarter, and we anticipate further reductions in the impact of these 2 items over the next several quarters. Presently, we have confidence that we should see margin expansion along with increased net interest income in 3Q and 4Q. Concurrently, we are upping our guidance for net interest income to high teens growth for the full year 2022 over the last year. As to credit, we are again presenting our traditional credit metrics. Pinnacle's loan portfolio continues to perform very well. And again, these are some of the best credit metric ratios we have experienced ever. Not sure if anyone cares to hear about this anymore, but modifications made pursuant to Section 4013 of the CARES Act continued to decrease and were down to $626 million at June 30, down from $827 million earlier this year. Importantly, 97% of our 4013 credits are on some form of principal and interest monthly pay, with only 1% in a classified risk category. Importantly, given the current outlook, we believe we will see further declines in our allowance for credit losses to total loan ratio over the next several quarters, albeit at a slower pace than we would have otherwise projected a couple of quarters ago. Our current ACL was 1.03%, which compares to a pre-CECL, pre-COVID reserve of 0.48 at December 31, 2019. So as we start this tightening cycle, we feel like we're in pretty good shape given the quality of our portfolio currently. I wrestled this chart out of our credit officers and the information here, I think, is maybe obvious, but I do believe it's helpful in detailing our appetite for the various subsegments in construction and investment property. As the left chart indicates, we had little appetite on the asset classes in the red portion and remain receptive to those asset classes in the green areas. More importantly is the information on the right side of the chart. I don't know if any of this information in the blue box is all that new, but it does signal to our RMs in the field to expect more diligence, more questions, more analysis, which we all believe is the right thing to do right now. I won't spend a lot of time on fees and expenses. We've added more information on the slides to help the model builders. As always, I will speak to BHG in a few minutes, which obviously had an outsized quarter. You can further see evidence of our flywheel spinning with year-over-year increases in brokerage income of 46%, trust fees of 20% and insurance commissions of 6%. Second quarter fees were benefited by increased interchange, particularly in commercial credit cards. We believe this will subside somewhat going into the second half of 2022. We booked about $5 million in joint venture-related gains in the second quarter based on recent valuation adjustments as companies in which these funds are invested continue to issue equity. Capital markets had about $2 million in gains this quarter. Their pipeline is good, but the outlook for deals seems muted at best right now. As to expenses, we are maintaining our overall total expense run rate of approximately mid-teen percentage growth in 2022 in comparison to 2021. This is primarily attributable to headcount growth in the new markets, market disruption across our markets, which should lead to strong recruiting opportunities and the addition of JB&B. In addition, we now believe that we should anticipate hitting our maximum payouts of 125% of target for our annual cash incentive plan. We do believe the second quarter total expense is a decent run rate for the remainder of the year, and we have some reason to believe that we could see costs back up some from 2Q, but the inflation backdrop could wreck that thought. We also think we have a good expense number forecasted for headcount growth in the second half of this year. We will just have to see how our recruiting pipelines remain exceptionally strong presently. As the capital tangible book value did increase to $42.08 from $41.65 last quarter. Our decision to move approximately $1.5 billion into HTM helped our tangible book value per share by approximately $0.50 per share at June 30. We are not anticipating any other significant capital actions at this time. Quickly, here's an update on our outlook for 2022. For loans, we've increased our outlook to high teens to low 20s. We are adjusting our rate forecast to now consider a 3.25% Fed funds rate by year-end. We, like you, will continue to monitor and modify as necessary. Given that, we believe we should see continued improvement in net interest income this year, which should result in net interest income growth in the high teens. We still believe our expense outlook for increased hires and other factors is in the mid-teens percent of growth range, but given where we are today, it will not likely be less than that. We are very optimistic about hiring, and we are thinking we're going to have another really strong recruiting year. So as to PPNR and third quarter run rate, we anticipate strong growth in net interest income, while run rates for fees taking out BHG and JV income, could be slightly higher, but probably flattish -- and expenses should be flattish for us. For provision, the key driver, we believe, will be loan growth for the third quarter. Obviously, inflation in the macro environment will ultimately determine how all of this turns out. For our group, we will work with an intense focus and do what we need to do to grow the franchise value of this firm. Now a few comments on BHG. BHG had another record quarter of originations. We anticipated that BHG would increase sales under their bank network as the capital markets has been volatile while their bank platform continued to be super reliable, which is obviously one of their competitive benefits as BHG can pivot between the bank network and the securitization network during time such as these. Spreads on loans sold through the auction platform did contract slightly in the second quarter from the last few quarters, which had some of the widest spreads in their history. With rate rising, spreads will likely head back to historical norms of around 9% or so. The bottom right chart details the 1,400-plus banks in BHG's network and just over 600 unique buyers in the last 12 months. As you know, we consider their funding platform to be one of their strongest, if not the strongest platform in the country for companies that execute a broad-based lending platform. As many of you know, the recourse obligation is a reserve for potential loss absorption for the sold loan portfolio. At the end of the second quarter, BHG increased their recourse accrual to $247 million, up $27 million from the first quarter while the ratio of the recourse obligation to sold loans decreased modestly to 4.98%. As the blue bars in the bottom right show, credit loss portion of recourse losses for the second quarter remain at some of the lowest levels in the past 10 years. Additionally, and shown in the supplemental information, and given the macro environment, BHG also increased its reserve for on-balance sheet loans by about $18 million to approximately $75 million at June 30 quarter end. That reserve is now at 3% from 2.5% last quarter. These reserves increased, through credit metrics remain consistent and in some cases are improving. BHG's management, based on their opinion of the macro environment, increased these reserve positions with a view towards caution. We obviously commented their thought process here. That said, we are really pleased with BHG's second quarter, especially after seeing the struggles that other more well-known fintech lenders appear to be going through right now. The quality of BHG's borrowing base in our opinion remains impressive, and we believe one of their strongest attributes. BHG refreshes its credit score monthly, always looking for weakness in its borrowing base. Past dues and credit scores were at consistent levels with previous quarters, so their borrowers have remained resilient through the credit cycle thus far. National and regional unemployment forecasts given them confidence that their borrowers should be able to withstand forecasted inflationary increase in the way that allows BHG to better weather this environment than other lenders in their space. In comparison to other lenders, we believe BHG borrowers are well paid with average earnings being approximately $287,000 annually. They believe in their credit models, and their experience gives them the reason to do so. Lastly, BHG had a record operating quarter in the second quarter. As I mentioned earlier, with the volatility in rates in the earlier part of this year, BHG has consistently believed earnings in the earlier quarters of 2022 would likely be stronger as they sell more loans to the bank's auction platform rather than hold loans on their balance sheet until they could better understand how the securitization markets were behaving. As you know, the bank auction platform delivers immediate gain on sale recognition, while the securitization network delivers interest income over the life of the loan. That said, they were able to accomplish, during June, a $300 million securitization at an acceptable rate of 5.5% when, as it appears to us, other fintech lenders were having to reevaluate their business models given the operating environment. BHG was very pleased to be able to get the securitization accomplished and anticipate potentially 1 to 2 more securitizations this year. BHG has also increased their loan production assumption for 2022 and now believes their business model should deliver 40% growth in originations this year in comparison to last year. As to 2022 earnings, BHG believes that 2022 earnings should now represent about 15% growth from 2021, which basically requires reductions in their quarterly run rates in comparison to the second quarter. Three key points I'd like to emphasize or reemphasize that gives us why earnings growth is now 15% for 2022. Credit remains consistent from previous quarters, but BHG is and will likely be increasing reserves based on macro economic data at least over the next quarter or so. Spread shrinkage is likely going to occur in line with more historical levels as we get into the second half. Spreads remain historically high currently, but with increased rate forecasts, shrinkage in earnings could recur. Production volumes are very strong, and we believe that we'll continue to have strong production going into the second half of the year, but BHG will aim to send more to the securitization platform, which reduces current period profits accordingly. Of note is that BHG anticipates at least 2 new funding alternatives to open up in the near term as they seek to broaden their already strong liquidity platform, which we also believe is one of their strongest attributes. As you all know, we are strong believers in the BHG franchise. So we think a 15% growth with a more conservative outlook is the right thing to do for right now. With that, operator, I will stop and ask for you to look for -- or ask for questions.

[Operator Instructions] Our first question comes from Jared Shaw of Wells Fargo.

But I guess, on the first question on the deposit growth. As we look at Slide 15, when we see the breakdown of loan growth by different categories, is it similar on the deposit growth side? And do you think that there's going to be an opportunity to maybe see expansion or acceleration of growth from the more recent expansion on deposits as well?

Yes. I think we're optimistic about what our deposit growth could look like for the second half of the year. Traditionally, our deposit growth does come in, in the back half of the year. So we're thinking we might see that occur. We think our newer recruits in our newer markets are beginning to deliver a more consistent deposit growth here as they gain some more experience with the firm. So yes, I think we do anticipate more growth in deposits from our newer people and newer markets.

And then as we look at that through the year, how should we think about your comfort level with where the loan-to-deposit ratio can grow to? And also with how low cash can go as a percentage of assets?

Yes. We still believe we've got quite a bit of cash to fund loan growth to try to get down to kind of what that -- there's a chart in the slide deck that shows what -- where our cash balances were kind of pre-COVID. As to the loan-to-deposit ratio, we operated this firm for a long time at nearly, call it, 95% to 98%. I don't know if we'll get back to that level but we've definitely got some room to run.

Okay. And then finally for me, just on BHG. Did you see any -- as we looked at the end of the quarter and going into July, has the fear of recession or higher rates had a dramatic change in the appetite for bank -- the appetite for paper from the banks? Is that really reflective of the potential slowdown in the second half of growth there?

No. I think the bank network remains active and receptive. I think what will happen in the second half of the year is it will get more competitive, to be honest. And they will work hard to try to get a couple of securitizations done, which will take money away from the bank network. So as a result, auction platform becomes a little more competitive.

And our next question comes from Steven Alexopoulos of JPMorgan.

I wanted to first follow up on the [indiscernible] slide. So assuming that you guys delivered the 2022 loan growth guidance that you're calling out, how should we start to think about 2023? And I'm not looking at specific guidance, but should we think about that as a more typical year for you guys, like low double-digit growth? Or the momentum that you're -- I mean, Terry called it out quite a few times. Could it be another outsized growth just given all this momentum you're pointing to?

Steven, my sense is that again, the -- I guess the thing I keep trying to make sure people understand is that our hiring momentum is strong. And as you know, those books build over a 4- or 5-year period. So when you look at the number of people that we've hired since 2019, that throws more outsized growth in there. But don't miss that we're continuing to hire, and the hiring momentum this year is higher than last year, and the hiring momentum in the second quarter is higher than the first quarter. And so I think Harold used the phrase that our hiring pipelines are substantial. And so yes, that is what ought to drive both the balance sheet growth and the fee growth.

Got it. Yes. Okay. That's helpful. And I want to drill down further into your response to Jared's question. If we assume deposit growth becomes more of a challenge for the entire [Technical Difficulty], I think we're seeing some banks wanting to get ahead of that, bringing more deposits now. Harold, was your response to Jared's question implying that you guys plan to [Technical Difficulty] your excess liquidity, go back to where the loan-to-deposit ratio was historically, call it, 95%, 98%, and then you'll start fully funding loan growth with deposits, is that your plan?

Yes. I don't think that would be exactly what our plan is. I think they'll run concurrently. But yes, we do plan to try to bring liquidity down over the next, call it, 6 to 9 months. But that in and of itself, we don't think is the right thing. We will focus our troops on core deposit growth. And like I said, it will be all hands on deck to get that done. We've got several deposit kind of tactics in play right now, and we'll try to add resources to that to make sure that we can continue to fund the growth that we anticipate.

Okay. Okay. That's helpful. And then on the deposit betas, Terry, you made the point that you thought betas would be lower than the prior cycle. You called out a couple of reasons. So maybe, Harold, what are we thinking now? What is the assumed total deposit beta we'd be assuming through the cycle?

Yes. I think we're still leaning in there on a 40% beta by the end of the year, so we still are not willing to come off that. We're hopeful that we will deliver less than that obviously. And so far so good on that front. But we also think that 75 basis points here in July and [ only ] down through the rest of the year as we get to that 3.25% kind of Fed funds rate that we're targeting that we'll see increased deposit rates.

Okay. And I just want to understand, sorry to put another question here, but you're also assuming that your loan beta is above your deposit beta. And that's what's driving NIM expansion, that's just not yielding cash into loans, right? You're assuming loan beta continues to stay ahead of the deposit beta, is that right?

Yes. We've been -- yes, for sure. We've been really pleased with how loan yields have responded here early into this cycle. I think our -- kind of our catch rate is probably running 100% so far. So we're -- every loan that's eligible for a loan rate increase, I think, we're getting it.

And our next question comes from Stephen Scouten.

So maybe just following down on maybe Steven's last question around what you're seeing on the loan side, and obviously, you guys lay out the Slide 34, showing us weighted average yields and then what your new yields are. And it seemed like there was a particularly strong move in the fixed rate yields quarter-over-quarter. Is that just what you said, Harold, when repricing is necessary, like you're getting a high hit rate? Or what's -- what do you think is driving the success there? Because I can't say that so far through the earnings season, I've seen that from other banks. So it's really impressive, the 67 basis points on higher fixed rate loan yield.

Yes. I appreciate the question, Stephen, because we've been talking about fixed rate loan yields and making sure the new credit we keep up for a long time. And so I'm -- I appreciate the comment. I hope that none of my other relationship managers heard the comment, but I appreciate it because we're going to keep beating on making sure that fixed rate loans continue to go up. And I hope that we can see -- what we've been -- to begin, we've been a little disappointed in where fixed rate loan yields have been thus far in the cycle. So we're hopeful that we can still see some more escalation in those yields.

Got it. Okay. That's helpful. And then on the share repurchase, I think the comment was somewhere in the presentation maybe or in the release that no anticipation of using any of that $125 million. But obviously, Terry, you highlighted what you think is another great opportunity for the stock for investors. So is there a level here where that becomes a viability for you guys? Or is it just with all the growth, you want to continue to hold the capital for growth, not the repurchase?

Yes, that's absolutely the point. As we looked at our, not only our recruiting pipelines, but our business development pipelines, loan deposit fees, we think we've got a lot of opportunity in front of us. I don't think the third quarter loan growth number is as high as the second quarter loan growth number, but there's a lot of momentum going. And so we're going to try to reserve capital for loan growth.

Got it. And then just last one for me is around BHG. And I'm curious -- or just wondering if you can give any additional color on numbers around the CECL impact moving forward. If you guys have any updated data there. If I remember correctly, I thought it was some of the securitizations would cause a higher CECL impact, obviously, that's selling us through the bank platform. So just wondering what you have there in terms of numbers and how that might impact maybe '23 on the BHG side of things?

Yes. It's a great question. CECL will impact BHG for the fourth quarter of next year. So they'll adopt on October 1. They're running various credit models. They're looking at various, call it, funding platforms that work -- that are applicable to CECL and not applicable to CECL. Right now, the securitization network, the way it's currently designed, would have to be CECL compliant. So we'll probably be giving out more information on that here at the end of the third quarter. They're reworking their models, trying to get them in shape. So 2023's impact probably won't be that significant. 2024 is when they have to go full CECL model. But again, I think they'll be designing different funding mechanisms with the capital markets to better navigate CECL.

Congrats, guys, on a phenomenal quarter.

Our next question comes from M. Olney of Stephens.

This is Matt. Want to ask more about loan growth. Really impressive loan growth numbers in 2Q. You guys gave us some good details on kind of the drivers. The guidance implies a slowdown in the back half of the year, and I think a lot of your peers are also talking about a slowdown in the back half of the year. But I would love to hear more about your outlook for loan growth in the back half of the year. Are pipelines slowing? Just trying to get a sense of how much conservatism is baked in here.

Matt, my sense is $1.9 billion a quarter is probably not the best ongoing assumption. That's [ the way over ] quarter. I'm not saying we won't have that done in time, but I don't think that's sort of the expected run rate. We think we really did have a fabulous quarter. I don't look for a huge slowdown. In other words, I don't think it's really slowing economic activity or slowing market share movement as much as it is. Just a little more normalization in the second half than what you saw there in the second quarter, which as you say is really sort of an extraordinary number.

Okay. And then on the expense side. The 2Q expenses a little elevated this quarter, but the guidance was unchanged. Anything that was -- had a higher accrual in 2Q? And I'm interpreting that guidance correctly, implies that the 2Q expense levels could be the peak and could be flattish from here. Am I talking about that right?

Yes, I think so. I think that's what we believe today, is that expenses will be pretty flat for the rest of the year. 2Q was elevated primarily based on incentives, and call it, the increased earnings that we experienced here in the second quarter dictated a higher allocation of incentives from the back half of the year towards the front half of the year. So that primarily drove it.

Okay. Great. And then just lastly on BHG. I want to make sure I appreciate the updated guidance. Does this now assume that 9% spread that you mentioned earlier was a more normalized level? And then secondly, what does this assume as far as -- what percent of the originations will be placed on the bank network for the back half of the year? I think it was around 2/3 the level in 2Q. Just curious if you're going to stick with that same numbers in the back half.

Yes. I think the numbers that I looked at -- and we didn't disclose them, but the numbers I looked at would say that the bank network is probably going to be cut more or less in half, maybe down to 2/3 of what they got in the second quarter.

And the spreads, Harold?

Oh, the spread comment, you're absolutely right. We think this is going to probably approach 9% here over the last half of the year. I'm sorry, I forgot you asked that question.

Our next question comes from Michael Rose of Raymond James.

Just another one on BHG. So I appreciate the -- all the commentaries relates to the guidance for the back half of the year. But as we think about 2023 with those spreads compressing, maybe a little bit more allocated to recourse reserve. Does BHG actually think that they can grow pretax earnings next year with those dynamics in place? I know they're building out some different verticals and expanding within some existing verticals. But it may be a little bit early, but just wanted to get a sense if it's in the realm of expectations that pretax earnings at BHG could actually grow next year.

Yes. Michael, that's a great question. Our belief in talking of BHG is they have no intent to throttle back earnings growth in any kind of meaningful way. Now like we talked about here on the call, we're looking at 15% growth in 2022. So using that as kind of a benchmark, I don't think they're looking at any material kind of change there. That said, this is the time of the year when they begin to look at 2023 and the impact of some of these, like you said, new verticals, how that's going. They're going to be looking at how their bank network is performing. Reduced spreads are going back to the higher spreads in a more -- call it, a better backdrop as far as the economy is concerned. But I'm not hearing anything from them that says they're going to kind of take their foot off the accelerator.

So if I heard you right, and I'm not trying to pin you down here, but 15 percentage-ish range for next year is in the realm of possibilities. Is that what you're trying to convey?

Yes, I think so. I've not gotten any word from them that it will be any less than that. But again, they're going through that -- they'll be going through all of those processes here in the third and into the fourth quarter. So I'll have a better idea for you into the third quarter.

Got it. I appreciate it. And then just going back to the deposit costs and betas. If I look at the spot rate at the end of the quarter, it was 67 bps. And I appreciate the commentary that you expect loan betas will be higher than deposit betas. But it does, in theory, with a couple more rate hikes of a pretty high magnitude, imply pretty healthy growth in deposit costs. Do you think after this gap-up that we get in the third quarter that we're kind of nearing at least a nearer-term peak and that you can still see margin expansion a few quarters beyond when the Fed stops raising? Again, just trying to kind of deconstruct the betas on both sides of the balance sheet.

Yes, I think that's right. We believe that deposit rates -- thus far, we think our beta on deposits is somewhere around 22% as of yesterday. We think that with rate increases coming in the last part of the year that we'll see an escalation to try -- you got to in order to get to that 40% for the whole year. And so we're trying to give ourselves some room to operate there. On the loan side, thus far, we're not seeing any pushback at all with respect to those loans that are tied to any sort of primes, SOFR, LIBOR and whatever. Those increased loan yields were getting passed to clients. And so far, we're getting those yields.

Got it. Maybe one final one for me, just more broadly, probably for Terry. The Atlanta expansion is obviously impacted by COVID. Can we just get an update there? And then can you give us more of an update on D.C. and maybe what the expectations could be for growth contribution as we move into next year really for both of those new expansions on a combined basis?

Yes. I think as it relates to COVID, we, like everywhere, I think, have seen a spike in our footprint. We have seen an elevated number of cases in our associate base. But I guess I'm going to say it this way, happily, there's nothing particularly severe. Some of the people are getting COVID or getting it for the second or even third time, and many of them were vaccinated and so forth. So consequences have not been particularly severe. But clearly, our associate cases have stepped up over the last 30 days or so. I think in terms of D.C., Michael, you know how that's going to work. You hire the people, they begin to call on clients, they begin to book commitments, and then it takes a while for commitments to turn into funding. But I would say it this way, that based on where they are in the calling cycle, where they are in the commitment cycle, meaning [indiscernible] legal commitments closed, loan agreements yet to fund, I'm really excited about D.C. And my guess is over a 12-, 18- to 24-month period, it will be our fastest-growing unit. We're very excited and encouraged by the book of business that's developing there.

Michael, as for Atlanta, I think your question was headed that -- basically their first year in operations was a COVID year and are we thinking that we're going to back off on our $3 billion bank in 5-year notion? As it sits right now, I think Atlanta could have a really strong third quarter here this year. And so I think our leadership there has done a great job of pacing through COVID in a way that still we believe gives us a great shot at being that $3 billion franchise, call it, by end of 2024/2025.

And I'm sorry, Michael, I thought your question was about D.C., but that's right about Atlanta.

No, it's both combined. I appreciate all the color, and so good points.

Our next question comes from Casey Haire of Jefferies.

I wanted to follow up on the team pipeline. Obviously, a pretty strong quarter here in the second quarter with 37 producers hired. How is that shaping up in the back half? Can you guys improve upon that?

Well, I think -- I would be surprised sitting here today if we don't do at least that in the second half. But the recruiting pipelines are full. I guess over the years, they'll learn you don't sell right until they get in the seat and so forth. But yes, I think the simple answer is, yes, I would expect the second half to probably match the first.

Okay. Great. And just on the BHG front, Harold, if I heard you correctly, it sounds like originations up 40%. That implies an origination level a little bit higher than what we saw in the 2Q. I just was wondering if you could confirm that. And then any color on where spreads are in the early going here in the third quarter?

Yes. Sure, Casey. Yes, the 40% growth is an escalation. I think it was -- I think we talked about 30%, 35% at the end of the first quarter. And so they do believe they've got enough kind of momentum here going into the second half of the year that they think production will go up here in the second half. And the second part of your question was about spreads?

Yes. Just spreads -- any color on spreads in the early going here in the third quarter.

Yes. I don't have anything on July, but the month of June, spreads were consistent with, call it, that 10-ish number. So they didn't see any kind of significant degradation in spreads during the second quarter. How about that?

Yes, that's great. And just last one for me. I know you guys gave the fee guide for '22. Just a question on interchange within the other line, popped up pretty nicely here in the second quarter. Is that a sustainable run rate?

Yes. We think we've got a good shot at that. A lot of that was in our purchasing card that we delivered to commercial clients. We think there could be some inflationary backdrop there as commercial clients build inventories, buy things before they think prices go up again. So I'll just put it to you like that, Casey. That's what we think right now. We'll see that with you...

And our last question will come from Brian Martin of Janney Montgomery Scott.

Harold, can you just talk maybe a little bit about -- you talked about the liquidity or mentioned it earlier. Just kind of where do you expect that to end -- kind of end up here over the next couple of quarters? It sounds like it's -- your intent is to bring it lower and just kind of thinking about -- putting that together with kind of the margin outlook given the loan and deposit beta commentary. But just kind of that liquidity and margin generally maybe just over the next couple of quarters here.

Yes. I think the second quarter, as far as where we ended up, we probably took away about half of our, call it, liquidity cushion, maybe a little more than that. So I think we've got some more liquidity left to go get. And I think we've got some, call it, short-term securities that we're going to call back to help fund loan growth here in the third quarter. So we'll have a little bit of June 30 liquidity getting used. We'll bolster it a little bit, and then we'll see where deposits shake out. So we'll probably -- the blue bars on Slide 17 in that top right chart, I think those blue bars will come down some. But they won't approach, call it, the first quarter 2020 levels here in the third quarter.

Got you. Okay. And then how about just -- on the reserve, it sounds like the reserve coverage ratio drops a little bit further from here given kind of the trends you're seeing in credit quality. Is that kind of what you guys were suggesting earlier? Maybe I missed some of the commentary there, but just kind of how that ratio looks in the next quarter or 2?

As far as our ACL, is that what you're asking about, Brian?

Yes, just the ACL coverage.

In relation to loans. Yes, we still believe we've got opportunities to reduce it based on our models that we use to produce our CECL-related reserve. And we also -- we're still adding back qualitative factors to keep it where it is. The one point that I do want to reemphasize to you is that, call it, 2019, we were about -- the reserve was basically in half of where it was -- where it is today. So we don't anticipate going back to that level nor do we anticipate going back to the day 1 CECL number. But we do think we've got some more room to continue to produce reserves, which we've been steadily doing, call it, for the last 6 quarters.

And this was today's conference call. Thank you for participating. You may now disconnect.