SmartFinancial Inc (SMBK) 2021 Q2 法說會逐字稿

Good day, and welcome to the SmartFinancial Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Miller Welborn. Please go ahead.

Thanks, Tom, and good morning, and thanks for joining us this morning for our Q2 '21 earnings call. We always love visiting with this group each quarter to talk about our progress in our company. Joining me on the call today are: Billy Carroll, our President and CEO; Ron Gorczynski, our CFO; Rhett Jordan, our CCO; and Nate Strall, our Corporate Strategy Director.

Before we get started, I'd like to ask each of you to please refer to Page 2 of our deck that we filed this morning for the normal and customary disclaimers and forward-looking statements comments. Please take a minute to review these.

Folks, it's another great quarter by our team here at the bank. The passion and the energy and execution by all our team this year has been phenomenal. We've always touted the strength and energy of the SmartBank team. And hopefully, folks are beginning to recognize we are serious. Our organic pace of growth has been impressive, and we see nothing slowing that down in the months ahead. Between very strong markets and the addition of several new sales team members and a new market lift-out, we feel we're positioned perfectly to continue on our current pace. We talk often about how excited we are, where we are as a company. But I can't stress enough about how we feel this company is positioned today.

With that, I'm going to turn it over to Billy.

Thanks, Miller, and good morning, everyone. Great group on the call today. As Miller said, another extremely solid quarter for our company. The first half of 2021 has been very exciting. And we demonstrated again this quarter just how our company is becoming one of the Southeast's best banks while building value for our shareholders. I'm going to hit on a couple of highlights and then turn it over to Ron to dive into financials and Rhett to touch on credit.

We did have some great highlights for the quarter, starting with earnings and tangible book value, a very nice income quarter with operating earnings coming in at $9.1 million or $0.60 a share. And TBV has increased to $18.69, a 10% increase year-over-year. We also had outstanding growth, which is to me one of our strongest highlights.

Net organic growth on the loan side, excluding PPP numbers, was over $87 million or 16% annualized. Our lending teams continue to do a great job, and we're seeing that growth balanced throughout all of our markets. Deposit growth continued to be solid as well as we continued to pick up great core clients with deposits increasing over $90 million during Q2.

Looking at the slide deck that Miller referred to. I'll note on Page 4, we received a fifth consecutive regional Top Workplace award this quarter. We talk a lot about our numbers, which are very important. But it's also important to recognize the culture we are building in this company. We're a great place to work, and I really believe that separates us from the pack.

Moving to Slide 5. This is a great slide to show just where some of our efforts have been focusing this year. If you'll note, first, on the left side of this page, we are very excited to announce today the addition of -- in our Alabama market with an expansion into Auburn. We've lifted out a great group of commercial bankers from a lower regional bank there and are very thrilled to be in one of Alabama's fastest-growing communities and another great Southeastern college town.

On the right side of the slide, you'll see some of our initiatives. The Sevier County Bank acquisition is moving along nicely and on track for closing this quarter, along with an October systems conversion and rebrand. The bank has continued to perform well, ahead of budget numbers through the first half. And we're excited to get them integrated soon.

Our Fountain Equipment Finance acquisition closed in early May and was integrated in Q2. This company is a great addition to our franchise and specializes primarily in the financing of heavy equipment, tractors and trailers. All the company's principles are staying with us and look forward to leveraging our larger balance sheet to scale an already very successful business. Ron is going to speak to Fountain's financial impacts in a moment. The lift-out of the banking team in our Gulf Coast region during Q1 has seen early success. We expect them to be accretive faster than we had originally planned. And I'll speak more of the lift-outs in my closing comments.

But before I hand it to Ron, let me touch on finally on Slide 6. Our revenue diversification efforts are continuing to gain strength as seen on this slide. These business lines and subsidiaries are already contributing nicely to our revenue line and will play an even more important role as we scale. As you can tell, we've got some great things going on, some great things happening in our company right now.

So let me hand it over to Ron to dive into financials in greater detail. Ron?

Thanks, Billy, and good morning, everyone. I'll be starting on Slide 8, quarterly highlights. These are some of the high-level metrics for the last few quarters. We have had solid performance with continuing net interest income growth. Our operating pretax pre-provision earnings for the quarter totaled $11.6 million. We also reported diluted operating earnings of $0.60 per share, an increase of 25% when compared to the prior year quarter.

Moving on to Slide 9, performance trends. As both Billy and Miller have indicated, not only did we have a great quarter but also a great first 6 months of 2021. As shown in the slide, we have created much momentum over the last 8 quarters, continuing our strong growth trends with assets reaching almost $3.7 billion at quarter-end. Our loan growth continues to be a bright spot for us with having over $87 million of net organic loan growth for the quarter and over $53 million of acquired leases from our Fountain acquisition.

Additionally, we had almost $160 million of our PPP loans forgiven during the quarter, which Rhett will go over in a few more slides. Looking forward, our loan pipelines continue to remain strong, and we are starting to see the PPP forgiveness process ramp up for the 2021 vintage. In addition, our deposits continue to grow and ended the quarter at over $3.1 billion.

Moving on to Slide 10. This slide represents 5 quarters of net activity with escalated loan provisions, high amounts of excess liquidity and PPP fee accretion. Focusing on the ROA metrics on the top graph, we have started to get back to a more normalized run rate. Moving on to the lower portion of the slide, our assets continue to grow. We believe a more consistent gauge of performance in this current environment is our operating return on average tangible common equity, which is up 12.9% for the second quarter, representing some stabilization to what we've been reporting in the prior periods.

Turning to Slide 11. As Billy indicated, our tangible book value per share was $18.69, an increase of 6.5% on a linked quarter annualized basis. As the graph reflects, we're persistently growing tangible book value. On the lower portion of the graph, our operating efficiency ratio, represented by the green line, continues to hover at the lower 60s level. The current quarter was slightly elevated due to the additional costs associated with the Gulf Coast team lift-out and from our acquisition of Fountain.

Turning now to Slide 12, balance sheet and our margin. Starting with loans on the upper left, current loan outstandings compared to the prior year did not change dramatically due largely from our PPP loan activity, but our loan portfolio composition continues to evolve. Rhett will provide more information shortly. For our deposits, we had increases over $90 million when compared to the prior linked quarter and increases over $600 million when compared to the same prior year quarter.

Currently, our time deposits represent 16% of our deposits, down from 26% from the prior year, with the shift going into money market and savings accounts. At quarter end, we had over $800 million in noninterest-bearing deposits, which represented 26% of our deposit portfolio. Our current loan-to-deposit ratio was up 78.6%, a big change from the 94.8% for the same prior year quarter.

Moving on to the right side of the slide. Our net interest income, FTE, was over $27 million, slightly higher than the prior year quarter's $26.4 million. And our average earning assets totaled $3.3 billion, an increase of $218 million. We reported an interest margin of 3.29%, a decline of 19 basis points from the prior quarter. This decline is primarily related to: one, the reduced amount of discount loan and PPP fee accretion reported for the current quarter; and two, our elevated liquidity position.

During the quarter, our loan and lease yields decreased by 15 basis points to 4.52%, primarily from $1.1 million less in discount loan and PPP fee accretion, as previously mentioned. Offsetting this decrease was the partial quarter addition of lease income from Fountain, which was 11 basis points accretive to our loan and lease yields. For interest-bearing deposits, we had a decrease in funding costs of 5 basis points to 0.39% with our cost of total deposits for the quarter at 0.29%. For our time deposits, during the third quarter of 2021, we will have over $100 million or 20% of our time deposits maturing and repricing at a weighted average cost of 82 basis points. At this point, the majority of our higher-cost time deposits have been repriced.

As mentioned in our last earnings call, we believe our core NIM has bottomed. But we are still experiencing elevated cash balances, which increased over $114 million for the quarter, totaling an average quarterly balance of $531 million. This elevated position of excess liquidity has negatively impacted our margin well over 30 basis points. With continued rate uncertainty, we still are being patient with our cash position and deployment.

Currently, with our abundant liquidity and favorable funding mix, we were able to strategically move forward with opportunities. Looking forward, we are forecasting a third quarter margin of around 3.35%. We're estimating to have loan accretion of 12 basis points or approximately $758,000 and estimated PPP loan fee accretion of 30 basis points, approximately $1.9 million.

Moving on to Slide 13, operating noninterest income. We had another solid quarter of noninterest revenue. As you can see from the quarters presented, we continue to build consistent quarter-over-quarter favorable growth trends. Our associates continue to place much emphasis in building our noninterest revenue with us having revenue increase of almost 50% from the prior year quarter. Some of our current activity includes: increases in our service charge and interchange fee income, continued increases from investment services with continued growth in assets under management.

For our mortgage banking team, we had another consistent quarter. As expected, our Q2 income was steady with revenues totaling $1.1 million. Our pipeline continues to remain strong, even with the headwinds from increased building prices, decreased inventory and delayed projects. We are still expecting similar production as in the past 2 quarters. Other -- our other income category included additional fee income from our Fountain acquisition. Looking forward into the third quarter, we are up and running with our capital markets initiative and are starting to recognize some interest rate swap fees. Our forecast for the third quarter is having noninterest income of $5.5 million.

Moving on to Slide 14, you'll find our operating noninterest expenses. Through our growth, our team has continued its discipline around expense management. Over the last several quarters, our expenses have remained relatively consistent. For the current quarter, our noninterest expenses have increased slightly, primarily in our salary and employee benefits expenses, and having a full quarter expense from the Gulf Coast team lift-out and 2 months expense from our Fountain acquisition.

All the other increases in the various expense categories were primarily operational items stemming from our lift-out and Fountain acquisition as well as our overall franchise growth. Looking forward, our forecast for the third quarter is having noninterest expenses of around $22 million, with salary and benefit expense around $13.5 million range.

Now to finish off the slide, let's touch base on taxes. Our income taxes for the current (sic) [second] reported an effective tax rate of 22%. We are forecasting our effective tax rate of 21.5% to 22% for the third quarter of 2021.

At this point, I'll be handing over the slides to Rhett Jordan, our Chief Credit Officer, to go over the loan and credit-related info. Rhett?

Thank you, Ron. As Ron noted on Slide 12, our loan portfolio continues to see good diversification across the loan segments with 16% annualized organic loan growth quarter-to-quarter of approximately $87 million, and the overall portfolio mix being similar to previous quarters and same period prior year. As mentioned, the portfolio has seen consistent growth this year spread across all geographic areas of our footprint.

Our CRE portfolio has seen the most growth during the 6-month period year-to-date, moving to approximately 39% of total portfolio outstandings as compared to 35% at Q2 2020. This trend has primarily been the result of various owner-occupied and nonowner-occupied commercial projects restarting that were delayed during 2020 because of COVID. Also, the continued strong housing demand, driven significantly by permanent resident relocations into our core markets as well as corporate relocations into our 3 business-friendly states, has been a tremendous contributor to the bank's loan and deposit growth opportunities. All in all, a very solid quarter with strong organic loan growth in the portfolio.

Slide 15 shows our overall asset quality metrics that continue to trend positively and resulted in one of our stronger quarters historically in key ratios. While we saw our loan outstandings realized solid growth in the first half of the year, our overall credit quality metrics continued to perform very well. Our NPA ratio improved to 0.17%, down from 0.29% at first quarter '21 and down from 0.31% at year-end 2020. Net charge-offs for the quarter were 0.01%. And over 30-day past due ratio was down to 0.27%.

Classified loans at 0.29% of total loans were also down from prior quarter and year-end ratios. Overall, our asset quality continues to demonstrate solid metrics, resulting from continued strong economic recovery in our marketplaces and stays in line with best-of-class levels. Our outlook is positive for the balance of the year. And we expect our historically consistent performance to continue in upcoming periods.

As for our PPP loan book, we've seen considerable forgiveness activity in the first half of 2021. As of quarter end, as noted on Slide 16, we had successfully processed and posted forgiveness payoffs on 2,743 applications or 93% of the round 1 originations for just over $260 million in balances. We ended the quarter with about $40 million in balances remaining from round 1, on which we are actively working with borrowers to complete the forgiveness phases and/or finalize repayment structures on any unforgiven residual balances.

We anticipate the remaining Phase 1 unforgiven loans to cycle within the next 60 days, and we'll be actively reaching out to round 2 clients to begin those forgiveness applications as soon as covered period expired and the clients are ready to submit their applications. Our final round 2 process generated 1,801 loan applications for total outstanding balances of just over $138 million and roughly $7 million in fee generation. Overall, the PPP projects have been -- has proven to be a very successful venture for our company, generating 4,700-plus loans, totaling $439 million in balances and $17 million in fee revenue for the bank, all the while creating considerable prospect opportunities for our teams.

Now I'll turn it back over to Ron to talk to you through our allowance position for the quarter.

Okay. Thanks, Rhett, for all the detail. As Rhett had indicated -- sorry, I'm on Slide 17, loan loss reserve. As Rhett had indicated, we continue to have great stats for our credit quality. For the current quarter, we did not require a provision and had our allowance at adequate levels.

We were able to accommodate the provision for organic loan growth from both the improving economic environment within our footprint and other qualitative factors. We did not require a provision for our lease portfolio on acquisition date. That should help the provision going forward for our new lease production. At quarter end, our allowance to originated loans and leases less PPP loans was up 0.86% and our total reserves to total loans and leases less PPP loans was up 1.37%.

Moving on to Slide 18, which gives us some information on our current capital position. Our capital ratios remained strong. We had a slight decrease from the prior quarter as we utilized capital for both our strong loan growth and for our Fountain acquisition. During the quarter, we had $906,000 of cash dividends paid, and we didn't have any stock repurchases as we have paused our stock repurchase program until after the acquisition of Sevier County Bancshares.

At our current levels, we are well positioned. We are big believers in leveraging our capital and believe we are appropriately leveraged at this time. We expect to see a gradual build on capital as we grow our loan portfolio and shrink our cash position. This mix shift will drive profitability while pausing overall asset growth and conserving capital.

With that said, I turn it back over to Billy.

Thanks, gentlemen. And to add a little more color from my standpoint as I close, our markets are all performing extremely well. And I wanted to take a minute for a couple of statistics because I do believe one of the biggest differentiators is our collection of these great smaller metro markets. We're seeing just phenomenal trends in these zones.

Our Sevier County, Tennessee market, which is the Pigeon Forge, Gatlinburg tourism area, had gross sales receipt -- tax -- gross sales receipts that were up 46% in Q1 2021 compared to Q1 2019, just phenomenal growth in our tourism zone. In our Mobile-Baldwin County, Alabama market, looking at population trends, we are seeing solid growth with every graph that we look at, moving up and steeply to the right, just phenomenal growth from a population standpoint in those zones. Chattanooga's MSA, for example, has reported historically low home inventory, down 50% from last year as more people are relocating to this outstanding city. And we're seeing these same types of trends in Knoxville, Murfreesboro and Tuscaloosa.

The Southeast is poised for great continued growth. And it's one of the reasons you are seeing us pivot a bit as we look to more commercial banking lift-out opportunities. Auburn, Alabama is a great example of this. It is a perfect market for our company, a rapidly growing small metro MSA with one of the South's best universities. The team we've added there of well-trained, sophisticated bankers will quickly become additive to our franchise. We want to do more of this and continue to explore these lift-out opportunities as a strategic focus for the coming quarters. Our loan pipelines continue to be robust and are equally distributed across all of our markets.

Like everybody, we're providing some payoffs and paydowns with excess liquidity. But we feel we can keep growing in a solid high single-digit pace or maybe even better as we demonstrated this quarter. It's a very exciting time to be part of this company as an associate and as an investor. And we're positioned well to be opportunistic moving forward.

So I'll stop there, and we can open it up for questions.

(Operator Instructions) And the first question comes from Brett Rabatin with Hovde Group.

This is actually Ben Gerlinger on for Brett. I just wanted to start off, you guys have a lot of irons in the fire here. So you have the new Auburn team, the Gulf Coast team is ramping up and becoming more accretive than originally expected. Fountain, you've got a majority of a quarter into the second quarter results and then Sevier County next quarter.

With all these different moving pieces, you guys continue to have solid loan growth and the margin looks to be pretty solid, especially with the guidance that is going to be higher going forward. I was curious, if you back out Sevier County, which should likely add around 300-or-so net loans -- maybe that's a little aggressive. But if you back out that Sevier County, I was curious if you guys had any sense of what you think total loan balances would be by the end of this year.

Total loan balance. Ron, do you have that handy? Or is that something we might need to circle back with Ben on? I think we've got -- I hope you have an (inaudible)

Yes. I think it's going to be -- just give me a second here, I do have that. Actually, I think it will be similar to what -- I think $2.4 billion, almost $2.5 billion. We're not seeing -- we're not going to see much growth in loan balances. We're really going to have a trade-off between remaining PPP loans to our originated portfolio. Yes, how about I get back to you on that? I'm not putting my hands on this exactly quick enough.

But you are right, there are a bunch going on around here and pretty energetic...

Yes, I'm sorry. $2.52 billion is what our [footings] are, not including Sevier County.

Okay. Great. That's really helpful. I mean, you guys obviously have a good sight into how fast Gulf Coast and then the Auburn team's investment bring over new...

I think it's important -- I mean, it really is. We have been thrilled with what we have seen from these lift-out opportunities thus far. And that's the reason for my comments of looking for additional opportunities like this. We're at such a great spot now because our size is giving us the ability to do more of this. And I think we're positioned well to really take advantage of these great bankers and can service those middle-market clients that they had.

Right. Yes, absolutely. I think it's a great opportunity for you guys. And then that kind of goes into my next question. With these lift-outs, should that be kind of viewed as the go-forward plan of inorganic growth, I guess, you could say? Or do you guys see the potential for more acquisitions?

Ben, I'll take that. Miller, you can chime in. I think it -- I think we're always looking for opportunities, Ben. I think we're an opportunistic group, an entrepreneurial group, we always have been. But I do think at this time, and I make the comment, I think you're seeing us pivot a little bit. I think our company, now that we've got this thing up, will be $4 billion in assets, give or take, after the acquisition. Our earnings streams are really starting to kick in. We've got the ability to really grow our company in a more sophisticated way. And so we'd love to do more of that. I think you would see us focus near term on a little more of that versus M&A. But strategic M&A, if presented, would be something that would interest us.

Yes. I would say that phone has -- obviously, in the last week -- with the announcement last week of one of our Nashville friends, our phone has been ringing quite a bit. But I will echo Billy that (inaudible) would be adding sales team members and lift-out opportunities and enhancing the markets we're already in, [is added to those teams].

Okay. Great. And then my final one was just on the new additions to the Gulf Coast team and the Auburn team. If you look at your loan portfolio, is there any sort of specialization across the board? Or is it more so just complementing what you already have and growing the portfolio at a consistent rate?

Yes. Rhett, do you want to kind of cover that kind of based on what you're seeing coming out of those markets?

Yes, I wouldn't say -- I don't know that I would use the term specialization necessarily as far as any kind of getting into industry segments or things of that nature. I do -- I would be comfortable saying that these teams have a much broader C&I portfolio base coming from their prior institution. And we feel like that will be a significant part of what their future loan production is going to be centered in. And again, not necessarily any specific industry segment of C&I, but it will be much more along the lines of that type of production.

(inaudible) sophistication.

Yes.

The next question comes from Graham Dick with Piper Sandler.

So I just wanted to stick on loan growth and more particularly the Auburn team. Just quickly, how -- can you guys mind sharing how big of a loan portfolio that group might have been managing at their prior institution?

It's a little tough to nail down a specific number because of different areas that they were managing. But this is probably a group that had around -- I'm looking at about $0.5 billion in total. Now I say that, I don't think we're looking to quickly move back sort of number over. But they managed a large book of business that we think we can continue to utilize for some growth.

Right. That's helpful. So about the same size of the, I guess, or the book that the Gulf Coast team is managing.

Comparable, comparable. There's -- we have more bankers in that group, a little more diversified in that one. But this is a comparable types of businesses, as Rhett had alluded to, a stronger C&I base and really a group that we think complements the bank extremely well.

Right. Well, overall, good to see that you guys are able to attract these kind of -- these producers from these larger competitors of yours. And then I guess, just shifting towards the balance sheet and liquidity, I'm just wondering if you guys have started to see deposit flows slow down at all to start the third quarter or if it's still continuing, I don't know, at a pretty good clip?

Yes. Ron -- I mean, we had a strong second quarter. Just any thoughts on trends that you're seeing?

I think we did have -- between first and second quarter still -- we've still been doing those PPP loans, still flushed a lot more deposits. I do -- I think we are expecting a slowdown. The deposits are ramping -- have ramped up quite quickly. As far as third quarter, I really haven't seen the footings because it's so variable at this point until we get to quarter end. But I think we will -- we should experience a slowdown for Q3, but we've been wrong on this before. So that's just a guess at this point.

Okay. Great. That's helpful. And then the last thing for me is just on Fountain. I know you mentioned there was a line of credit outstanding there of about 400 basis points. I was just wondering if you guys have already replaced that? Or if that's something that is yet to be completed?

Yes, yes.

Yes, we paid that off at closing.

Yes, we paid that at closing. So yes, we just -- so we're funding...

We're funding it with our cash flow.

Funding their balance sheet with our cash...

With our liquidity.

The next question comes from Stuart Lotz with KBW.

Ron, sorry if I missed this earlier on the call. I guess, what's your outlook for fees in the back half of the year? I know we were -- it down a little this quarter. But just curious if you think you could get back to that first quarter run rate.

Yes. We're at -- the third quarter run rate, we're looking at $5.5 million. Probably, it's pretty much similar to the fourth quarter. Again, our initiative for our swap fees is taking hold. So we may bear a little bit of fruit, but it's still early to tell. But -- so right now, I think we're modeling $5.5 million, $5.6 million for the remainder of the year quarter-by-quarter.

I think -- Stuart, we were pretty much on target for Q2. I think going back looking at, we had a little bit -- we at one time had a little -- not necessarily one time, but something that we had some commissions go in that not probably recurring as often as we'd like to see it because it was such a big jump in Q1 from insurance. But I really like to Ron's -- for Ron's comments and mine, and then it's really nice to see these revenue lines and these subs start to take shape. So we hope to see some consistency -- anticipate the consistency in that line moving forward.

Yes. I appreciate that detail. And I guess, maybe turning to capital, with the looming close of Sevier at 7.9% TCE right now, it's going down a little bit next quarter and with all this excess liquidity. But also with the valuation at [1.3%] of tangible book value, what's your appetite for buybacks in the back half of the year? Or are you going to wait until you have somewhat higher capital levels for us today?

I'll take it. And Ron, if you've got anything. Yes, I think, Ron -- as Ron said, I think we feel pretty good about capital levels. We're big believers, as we got a lot of shareholders that sit around our tables, we like to appropriately leverage capital. But at the same time, making sure we've got the right levers. I think, so yes, I like where we are. I do think we're in a spot now where we'll see that start to build as earnings go in.

I don't foresee as heavy a buyback. It's tough for us to buy back a lot of shares anyway. But we're probably not going to look at that maybe quite as robust as we did back when we were trading at a lower valuation, but we're going to continue to watch it. But I think from a capital standpoint, we're in a nice spot and have the ability to really continue to move it up.

[The big player will like] the buyback. [We're going] to do buybacks. Again, that's a great use of capital.

As far as sub debt, the -- we're continually evaluating this arena because sub debt rates are so efficient for us to execute on. So that's something that we have a lot of options that we're exploring. Fortunately, it's not a rush because we don't need it. But we are looking at these avenues in totality.

The next question comes from Feddie Strickland with Janney Montgomery Scott.

So just wanted to start, in the deck, you mentioned that the Auburn team handled some health care banking relationships. Forgive me if I missed this, but more specifically, is that more like managed care or individual family practices? Or is that kind of all of the above?

Mix. It's really a good mix. Auburn's got a really -- some really nice medical components to the market. And so what we've seen from that group is just -- it's really a nice mix of all of those things, so nothing real -- I don't think there's any of the real -- any real concentration or niche to pay focus on, very generally related to the medical field.

Got it. And then just switching gears. I'm curious what you're hearing on the equipment finance business. I guess, more specifically, we've heard some other banks talk about supply chain constraints. And we've all kind of heard about supply chain constraints. Is that playing a role there? And could that maybe mean more upside to that business down the road as those constraints work themselves out? Or is it not really playing as much of a role for them?

I think, for a Fountain team, again, as we specialize in a little more of that heavy equipment, yellow iron-type equipment. What we're seeing, we have a great strategy session with that team last week, and we're going to talk about it. I think what we're seeing is supply chain is having an impact because -- what our business line is more focused on used equipment financing. What you're seeing is that the supply chain related to new equipment has tightened that up, so it's tightened up the used market, just like you're seeing in the auto industry.

Now we do think that will continue to open up. As those supply chains open back up, it will be -- I think it will be fine. But we are seeing just some lack of inventory being a little bit of a challenge. On the flip side of that is a (inaudible), as you're seeing these Southeastern markets, where we are, the growth, the residential expansion, that is -- the demand for these small excavating companies, those types of businesses are in high demand. So those folks are at needed equipment. So we're seeing a lot of need. We're picking up our volume. And our production numbers have stayed extremely -- has been (inaudible)

(inaudible)

If not a little ahead of our targets. So we like where we are. But supply chain -- if supply chain opens up, we think it will actually help us. We're able to go to kind of handle it really well now with what we've got. But new equipment sales...

(inaudible) is very bullish and then it will remain this year and next year.

(Operator Instructions) The next question comes from Kevin Fitzsimmons with D.A. Davidson.

Most of my questions have been asked and answered. But I figured on this topic, which seems to be a main theme here, the lift-out strategy. When you look geographically, any particular regions that would be higher priority in terms of either adding teams to where you already are or Southeastern markets where you don't have a presence, where you'd be very interested in entering via team? And on a side note, I want to throw out Metro Nashville, given last week's announcement, whether that would be high up there on the priority and likelihood in terms of being able to get some teams, given some potential merger disruption there?

Yes. Good (inaudible) question. Yes, I think our goal would be to work primarily here in the Southeast, continue to build density in Arizona (inaudible) Tennessee and Alabama and Northern Florida zones. So that's going to be primarily where we focus. In specific regards to Nashville, tough to say if the transaction that was announced would create opportunities. But I think Nashville has always been on our radar and it's still on our radar.

We would love to add some density in and around Metro Nashville, maybe not Nashville proper. But (inaudible) that we have has been just growing phenomenally well over the course of the last couple of quarters. So I think we could easily bridge that into that South Nashville market, which is something that we'd love to do if the opportunity presents.

Density, density, density with a couple of markets that you're probably very well aware of.

Miller, just on a follow-up, you had mentioned earlier that, after last week's announcement, your phone had been buzzing. So I'm just curious, is that smaller banks? Is that larger banks? Is that investment bankers? Is that all of the above? I'm just curious what you were referring to.

Absolutely all of the above.

Okay. I serve that up on a silver platter, I guess.

I got to be careful there. You made it easy.

You made that question really easy for me. But based on our comment, I will just add to it. I think Miller said it, it's a great -- we -- Miller and I will talk about optionality in our company. And we just got -- there are so many great opportunities for us right now. So it's a great time to be sitting in our seat. We've got several great strategic options that we can evaluate. And all of them are really, really good. We're just trying to pick the right path.

As we have no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Miller Welborn for any closing remarks.

Thanks, Tom. Thank you very much, everybody, for joining us today. We appreciate your interest in our company, and I hope you have a great rest of your week. Take care.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.