Q2 2022 Seacoast Banking Corporation of Florida Earnings Call
Welcome to the Seacoast Banking Corporation second quarter 2022 earnings Conference call. My name is Vanessa and I will be your operator at this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question.
Please Prestero then one on your Touchtone phone before we begin I have been asked to direct your attention to these statement contained at the end of the Companys press release regarding forward looking statements.
<unk> will be discussing issues that constitute forward looking statements within the meaning of the securities and Exchange Act and its comments today are intended to be covered within the meaning of that act. Please note that this conference is being recorded I will now turn the call over to Chuck Shaffer, Chairman and CEO of Seacoast Bank.
Yeah.
Thank you Vanessa and thank you all for joining US. This morning, as we provide our comments will reference the second quarter 2022 earnings slide deck, which you can find at seacoast banking dot com.
Joining me today are Tracey Dexter Chief Financial Officer, and Michael Young Treasurer, and director of Investor Relations.
Let me start by thanking the seacoast team for their continued focus and dedication to building the most competitive banking franchise in Florida.
They've done an outstanding job integrating sabal Palm Bank and business Bank of Florida, enabling us to enter the highly attractive dynamic Sarasota market and continuing to grow our presence in Broward County.
Looking ahead, we expect to close both the Apollo and Drummond transactions in October and are well prepared with a proven playbook integrate Apollo in the fourth quarter of this year in Germany in the first quarter of 2023.
As we've mentioned we completed our digital banking conversion in the first quarter and the feedback from customers customers has been tremendous.
This important project is a further extension how we've lowered our cost to serve while enhancing our customers' experience.
An important indicator of success is the significant reduction in inbound calls to our call centers as customers engage with our new digital banking features.
Our commercial banking transformation continues with further additions of high quality banking talent from larger organizations.
CECO is client centered culture has quickly made is the home of choice for talented bankers looking for a more culturally aligned organization.
Complementing. These efforts we are launching a revamp of our treasury business to support growth into middle market operating companies by attracting talented bankers acquisitions and through de Novo expansion, we will expanded the company into the fast growing Florida markets of Naples, Jacksonville, Sarasota, Miami, Gainesville, and Ocala by the end of.
This year.
Florida remains a robust dynamic banking market and we added an updated slide in the deck, providing additional evidence of the wealth migration to Florida post pandemic.
Got it exceeded every state in the nation and attracting affluent wealthy individuals and corporations during the last two years, adding materially to the states GDP.
Signifying a strength of the state of Florida announced a budget surplus of $21 8 billion for the fiscal year, 2021, 2022, and refunded excess tax collections to corporations.
Turning to our results the seacoast team delivered another outstanding quarter of earnings generating $46 4 million in pre tax pre provision earnings up 11% from the prior quarter driven by improved operating leverage.
Further the team achieved 7% loan growth in annualized loan growth and 8% annualized loan.
Growth in noninterest bearing demand deposits.
We saw excellent expansion in the net margin, which excluding PPP in accretion on acquired loans increased 19 basis points from the prior quarter and as a whole all of our key shareholder metrics improved with the adjusted efficiency ratio down two percentage points to 53% and the adjusted return on tangible equity up to 13, 97%.
While carrying a nine seven or 974% tangible common equity ratio.
During the quarter the ACL coverage ratio remained nearly flat at 139% and considering the loss absorption included in the purchase accounting marks the company and reserved at a $1 71% coverage rate.
Considering this credit backstop the high quality of the customer franchise and are strictly underwritten credit portfolio. We are operating with one of the most robust balance sheets in our peer group.
We continue to take a conservative approach to reserving for the allowance for credit losses underwriting and capital.
And lastly, I will point out that our credit metrics remain impressively strong classified and criticized assets continued to decline. The company recorded net recoveries for the quarter nonperforming assets declined quarter over quarter and past dues remain stable.
In summary, our quarterly performance and strategic highlights demonstrate the strength of the franchise and the quality of the agile innovative team we've built here at seacoast.
We are focused on building the most competitive banking organization in Florida by creating highly valuable statewide brand and generating a high quality customer portfolio and what is arguably the best banking market in the United States.
We will be disciplined and focused in growing and serving high value lower risk customer segments and markets, while delivering strong risk adjusted returns to our shareholders.
I will turn the call over to Tracy to walk through our financial results.
Thanks, Jeff Good morning, everyone.
Let's begin with highlights for our second quarter results on slide five.
The net interest margin expanded 13 basis points to 338% and on a core basis expanded 19 basis points to 324%.
Adjusted pre tax pre provision net revenue was $46 4 million, an increase of 11% compared to the prior quarter and an increase of 23% compared to the prior year quarter. The result of higher net interest income driven by expanding margin.
Creasing noninterest income and a reduction in noninterest expense.
With the increase in rates during the quarter, new purchases of securities and loan originations supported higher loan and securities yields and our cost of deposits remains at six basis points.
Organic loan growth was strong this quarter at an annualized rate of 7% despite elevated payoffs when compared to the prior quarter.
With our continued investment in experienced bankers and the expanded footprint, we are well positioned for growth and during the quarter commercial originations are up 139% year over year.
Credit risk metrics continue to improve with charge offs non accrual and criticized loan ratios all lower compared to the previous quarter.
Tangible book value per share ended the period at $16 66.
Excluding the year to date decrease in fair value of available for sale debt Securities tangible book value per share would have been $18 55 or.
Or an increase of 9% year over year.
Given our higher capital ratios, we chose to maintain the majority of our securities portfolio, which impacted tangible book value per share, but provide sales optionality in future periods.
With the continued success of our balanced growth strategy and peer leading capital levels. We were pleased to deliver an increase to the dividend in the second quarter and we will continue to revisit the dividend payout ratio periodically.
I'll also highlight that since the beginning of 2022, we have executed on significant market expansion. We closed on the acquisitions of stable Palm Bank in Sarasota and business Bank of Florida in Melbourne in early January . Additionally.
Additionally, we opened the Naples branch with a market president and full team and in Jacksonville commercial lending office with a market president in five new North Florida bankers.
In March we announced the upcoming acquisition of Apollo Bank in Miami and in May we announced the upcoming acquisition of Drummond community Bank in the North, Florida market, including Gainesville in Ocala.
This expansion across some of Florida's most attractive Msas is building both franchise value and scarcity value over the long term.
Moving to net interest income and margin on slide six.
Net interest income on a tax equivalent basis increased $5 1 million or 7% compared to the prior quarter with both higher balances and higher yields on loans and securities.
These increases were partially offset by lower PPP fee accretion with only $17 million in PPP loans remaining.
Excluding PPP in accretion on acquired loans, which introduced significant variability net interest margin expanded 19 basis points from three 5% to $3 two 4%.
Securities portfolio yields increased 30 basis points to 198% and core loan yields increased 10 basis points to 410%.
The cost of deposits remained flat to the prior quarter at only six basis points.
Looking ahead, we expect net interest income and margin to increase as our asset sensitive position with significant core deposit funding and ample liquidity will benefit from higher rates.
We continue to expect that each 25 basis point rate hike on a static balance sheet would be beneficial in a range of five to six basis points to net interest margin.
Assuming the forward curve as of the first week in July which included an additional 50 basis point rate hike in September we expect an increase of approximately $5 million to net interest income in the third quarter with the core NIM, excluding purchase accounting accretion expanding to around $3 15.
Moving to slide seven.
Adjusted Noninterest income was $17 3 million, an increase of $1 4 million from the previous quarter and an increase of $1 9 million from the prior year quarter.
Service charges on deposits increased <unk> 6 million to $3 4 million, reflecting higher demand account balances and changes in monthly maintenance and ATM fees, partially offset by slightly lower overdraft fees in.
In the third quarter changes, we're making to reduce overdraft fees will take effect with an estimated impact of $1 $5 million annually.
Wealth management performed well during the quarter overcoming broad based market valuation declines with revenues, 4% higher sequentially and 16% higher compared to the same quarter last year.
Mortgage banking fees are lower reflecting the continued impact of rising rates and limited housing inventory on salable loan production.
Other income in the second quarter includes higher loan swap fees and an increase in production and resulting gains on saleable SBA loans.
Looking ahead, we continue to focus on growing our broad base of revenue sources and expect third quarter noninterest income in a range from 17% to $17 5 million.
This assumes mortgage banking fees continue to remain challenged and it includes one months impact from changes being made to the company's overdraft policy.
Moving to slide eight adjust.
Adjusted noninterest expense for the second quarter with $51 7 million.
When excluding gains on the sale of Oreo.
<unk> would be $52 6 million at the lower end of the range of guidance, we provided last quarter.
Excluding the impact of merger related costs in each period salaries and benefits increased <unk> 9 million as we continue to add talent and support growth initiatives.
Smaller increases in marketing occupancy and data and other expenses were offset by decreases in legal fees.
Looking ahead, we expect to maintain our expense discipline, while continuing investments to support growth.
We expect third quarter expenses, excluding the amortization of intangible assets to be in the range of 53 million to $54 million with the planned increase resulting from continued investments in talent and scaling the business.
Turning to slide nine the efficiency ratio has improved from the prior quarter, including on an adjusted basis and we expect continued results in the low <unk> for the remainder of the year.
Turning to slide 10 highlight.
Highlighting the continued diversity of our exposure and our disciplined approach to managing concentrations the distribution of loans by category remained stable compared to the prior quarter.
Construction and commercial real estate concentrations remained well below regulatory guidelines and well below those of the peer group.
And the average commercial loan size remained low at 558000.
Turning to slide 11.
Loans net of PPP increased $112 million or 7% on an annualized basis.
Coming off a record high pipeline in the first quarter, we delivered record originations of $462 million in commercial.
Prepayments were notably higher in the second quarter totaling $348 million compared to $244 million in the first quarter and compared to an average $286 million per quarter in 2021.
If not for the $103 million increase in prepayments compared to the prior quarter loan growth would've been over 13% annualized.
Looking to the third quarter, we expect loan growth to continue with an annualized growth rate in the high single digits.
The commercial pipeline at June 30 is lower than at March 31, reflecting the impact of higher rates on loan demand. However, as long term rates have fallen the pipeline has recovered providing us confidence in our third quarter guidance.
Loan yields will continue to benefit from the higher rate environment, and what we anticipate will be slower prepayments and better new add on yields.
Through last week, New AD rates in July has moved up to around $4 60.
Using the forward curve as of the first week in July we expect core yields to expand to the low <unk> in the third quarter of 2022.
As a reminder, this exclude purchase accounting accretion.
Turning to slide 12 for the Securities portfolio, we continue.
To invest excess liquidity at a moderate pace in the investment securities portfolio with net additions of $142 million and have meaningful additional liquidity for loan production and strategic purchases at higher rates.
Additions this quarter were primarily agency Cmos with an average duration of three three and new add on yields during the quarter averaged 331% positively impacted by recent steepness in the front end of the curve.
Through last week Securities purchased add on rates in July have improved to approximately 4%.
In October with the closing of the Apollo and Drummond transactions, we will acquire cash and securities portfolios are.
Our deal models contemplated selling and reinvesting those funds and we will begin our deployment strategy for investing those funds beginning in the third quarter.
We will steadily pace, our investments expecting net growth in the portfolio by the end of the third quarter of approximately $200 million to $250 million.
Turning to slide 13.
We maintain a strong liquidity position and ample cash to deploy into rising rates.
Our cash and cash equivalents to total assets at the end of the quarter was eight 3% and combined with securities with 32%, while the loan to deposit ratio remains lower than the historical norm at 71%.
Turning to slide 14, illustrating seacoast historical deposit beta.
CECO has long standing relationships and high proportion of transaction accounts translates to a historically low beta.
In the last full rising rate cycle from the third quarter of 2015 to the second quarter of 2019, the deposit beta was 28%.
Each cycle is different but we do have an even more favorable deposit mix today than in the past with 39% noninterest bearing versus less than 32% back in 2015, and 64% transaction accounts compared to 54% at the start of the last cycle.
That evolution supports our expectation that deposit costs will remain low and that rate increases will continue to be beneficial to the NIM.
When compared to the prior cycle, we exhibit a comparatively higher liquidity position lower loan to deposit ratio and better deposit mix.
While we have not increased deposit pricing to date in this cycle, we expect the competitive environment to become increasingly dynamic we have a very strong deposit base and expect that we will continue to outperform our peers on deposit betas in the coming quarters.
Turning to slide 15 at quarter end deposits outstanding were $9 2 billion, a decrease of $55 million quarter over quarter with noninterest bearing demand deposits growing at an annualized rate of 8% during the quarter.
Offset by declines in money market and CD accounts.
Transaction accounts represent 64% of total deposits and have grown 6% on an annualized basis.
Thus far in July we have begun to see more request for exception pricing and we continue to manage this on an exception basis.
Moving to slide 16.
The allowance for credit losses increased during the quarter by <unk> 9 million to an overall $90 8 million keeping pace with loan growth, while maintaining coverage nearly flat to last quarter at 139%.
We remain watchful of inflationary pressures and are carefully considering the impact of higher rates on the economy, though our credit metrics remain very strong and continue to improve.
In addition to the allowance the total purchase discount remaining on bank acquisitions is $21 4 million, which will be earned as an adjustment to yield over the life of those loans.
We will continue to take a conservative approach to provisioning.
When combining both the allowance for credit losses, and the purchase discount remaining we're operating from a more conservative position than our peer set.
On to credit metrics on slide 17.
We're seeing sustained positive trends with a net recovery position during the quarter and nonperforming loans decreasing to 0.4% of total loans.
The percentage of criticized loans to risk based capital moved lower this quarter and again allowance coverage is near flat to last quarter at 139%.
We continue to assess the environment and the factors that might affect loan performance and will retain a conservative posture in our outlook and estimate.
Turning to slide 18, our capital position continues to be very strong.
Tangible book value per share of $16 66.
The decline from last quarter, that's attributed solely to the decline in accumulated other comprehensive income the result of recording unrealized losses in the securities portfolio.
The ratio of tangible common equity to tangible assets was nine 7% also impacted by the change in OCI from securities.
Despite the decline this TCE to Ta ratio remains among the highest in our peer group.
Regulatory capital ratios were not affected by changes in securities valuation and were flat to prior quarter.
Return on tangible common equity was higher in the second quarter on both a GAAP and adjusted basis with the second quarter benefiting from higher net interest income in the first quarter negatively impacted by the day, one provision of $5 1 million on loans acquired from stable Palm and business Bank of Florida.
And finally on slide 19, a longer term look at tangible book value per share demonstrates our sustained ability to generate value for shareholders.
Over the last five years, we've achieved a compound annual growth rate of 9% positioned on a foundation of strong liquidity and capital from which we will continue to optimize the opportunities of a strong Florida economy and continue to execute on our strategic growth initiatives.
We look forward to your questions Chuck I'll turn the call back to you.
Alright, Vanessa I think we're ready for Q&A.
And thank you we will now begin our question and answer session. If you have a question. Please press star Zero and then one on your Touchtone phone.
I wish to be removed from the queue. Please press zero, then too if youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero then one on your Touchtone phone. Our first question is from will Jones with K B W.
Your line is open.
Great Good morning.
Good morning.
So just wanted to start on our growth guidance and are you still expecting high single digit growth, which I think is just.
This is consistent with where you've been in the past few quarters.
I know you alluded to pipelines being lower at the end of the quarter, but have recovered. Since then could you just give us a little context on where they are today in relation to the record level. We saw at the end of the first quarter.
And then how do you pay offs.
Forward looking payoffs play into your future growth guidance.
Yeah, I'll take that one.
I would say when you look at the pipeline we measured in both early stage and late stage, but if you look at the overall pipeline, it's back up about where it was.
At the end of the prior quarter and if you.
Really look at the quarter, we had a number of sort of higher payoffs that were somewhat idiosyncratic and were related to projects being sold.
The business is being liquidated. So we expect the payoffs to come back down and be more normalized in line with.
With where it was previously and we think loan production looks about stable if not up just modestly in the coming quarter. So overall very much feel very confident in the high single digit number for the coming quarter.
Okay very helpful. Thank you and then.
On the expense guide I know, there's so many moving pieces in there with us.
Stable and F&B coming all at the beginning of the year and then Youll have Apollo enrollment at the end of the year, but could you just remind us where you are in relation to cost savings on stable on the FTB today, and then how should we expect the cadence of cost saves to play out with Paul and John closing heading into the year on year, I think you said youre converting Apollo and the <unk>.
Quarter, and then drop them into the first quarter of 2023.
A little bit of help around that would be great.
Sure Yeah, when it comes to cost out on the acquisitions that closed at the beginning of the year, we had anticipated 60% of the cost out on the Sabal Palm Bank in 2022 and that certainly on track. So really all of the cost out now that the bank has been integrated and convert.
That are in place.
And so third quarter going forward anticipate that and of course for FCB really.
The large majority of the cost outs have already taken in fact, even in the second quarter.
If you look forward to Drummond and Apollo.
Apollo we expect to close both transactions. The first week of October we will close and convert Apollo and the first week and we will convert drumline right around mid first quarter.
And I would expect the Apollo cost outs to come through kind of in the <unk>.
By the end of the fourth quarter, so sort of full impact first quarter, and then have the full impact of the drop in <unk>.
Cost outs from the second quarter on out for the remainder of the year.
In 2003.
Okay. That's great. Thanks, Thanks for that Chuck and then just lastly for me.
I know, it's challenging just with valuation, but do you guys ever have any internal discussion over <unk>.
Jumping into the buyback.
You guys had some modest degree of activity in the past.
But you still have just tons of excess capitals is there any conversations you guys are have about engaging in the buyback.
The way, we think about the buyback is.
We think about in terms of an earn back just like a transaction in our preference sort of in a capital.
Sort of sort of highest to lowest used highest used being organic.
M&A is sort of our primary.
Use of capital and then sort of thirdly, there would be dividends and fourth would be to the buyback. We did buy back shares of the earn back came in to a level that we felt comfortable with.
But.
We think right now the best use is definitely organic and M&A and.
And potentially further increases in the dividend over time.
Okay got it makes sense. Thank you guys I appreciate the question.
Thank you will.
Our next question is from Eric Spector with Raymond James.
Hey, How's it going guys just wanted to follow up on capital.
You guys have two deals going in the market is increasingly uncertain I'm. Just curious how you think about M&A from here and we're going to focus on digesting. These recent deals or do you feel comfortable.
Considering M&A.
Going forward.
Sure. Thanks, Eric.
I would say as we said on the last call. We've only wanted to have two deals in application. We've now gotten Apollo all the way through both approvals with the OCC and the fed.
Drummond as an approval with the OCC and the fed currently.
I would say that we would look at something if it made sense, we would want to make sure that from a pricing perspective.
We contemplated sort of downside risks and still got reasonable earn backs and solid accretion out of the deal and we would we would look at a deal. If it came along and I would say deal conversations remain as active as they have been previously we've really seen no slowdown in the amount of conversations across state.
<unk>.
Okay, great. Thanks, and then wanted to touch on the Treasury management build out to support the middle market expansion and the new hires Im just curious where you are in that build out your thoughts on moving upstream plans for doing so are there any verticals youre more focused on and just kind of generally how that's gone so far.
Yes at a high level.
As we continued to bring in some really high quality banking and credit talent across the organization.
Having the opportunity to compete at sort of the lower end of the middle market and.
It's obviously, a part of the market, where most of the regional national banks compete because of the value. That's there there is a high quality relationships, bringing deposits credit facilities wealth management other treasury fee income.
It's a space we've wanted to compete in for some time and as we've grown larger and as the balance sheet has gotten bigger and the quality of the talent come in it has allowed us to open those doors in a more rapid fast fashion and so as we built out were.
We're building out a team across the state of what I would consider sort of the best of the best Treasury folks there'll be able to go in and really.
When deals quickly and win deals impressively.
It's been a focus of ours as we continue to become.
Even more and more competitive on the commercial banking side to compete there so we're making investments both in.
Talent, primarily but also technology over time.
It is it is a focus of ours.
Your line is still open Sir do you have further questions.
Sorry, I was on mute.
Alright, one last question just wanted to touch on the funding side, obviously, you've gained more than your fair share of deposits over the past few years.
There are some seasonality in the quarter just curious how you think about deposit flows and migration within the book going forward.
Deposit franchise.
Couple of comments when you look back at the prior quarter, we did a fair amount of work looking at what the outflows were and it was primarily tax payments and in particular, we had one large customer that had an incredibly successful year that they had sent out a $190 million for to the IRS. So that was work through the numbers.
I would say looking back at the prior quarter Rep rate pressure really wasn't an issue we are starting to see more.
More.
Asks from our clients around rate will continue to manage it carefully defensively sort of on an exception basis and manage it over time.
And for the first time.
For years, we are seeing a season we.
We did sort of in 2020 one.
Our northern migration.
The state and Florida, and this year, we did see some folks go back and so are our local small businesses has seen some deposit balances come down, but I do expect that to return, but the bulk of what went out in Q1 west.
Our Q2, sorry was tax payments.
Okay, Great. That's it for me thank you.
Thanks, Eric.
Our next question comes from Steve Moss with B Riley.
Hi, good morning.
Steve maybe just starting with the.
The loan pipeline kind of curious what is within the mix, especially on the commercial side and kind of what are your thoughts on commercial real estate lending at this stage.
It's running roughly 60% CRE, 40% C&I is about the mix.
I would say when we saw rates get up in the $3 50 ish range on the long end, we we're absolutely pushing lower leverage in the commercial real estate and.
To some extent probably had a few clients go find financing elsewhere, which we are totally fine with.
We continue to navigate it carefully I would say.
We are stressing.
Rates up.
Pretty materially in those deals to make sure we get leverage correct and I'd say, that's kind of our our key focus is to make sure that.
If we're going to do a deal it's got the right leverage in it and we.
To be I would say conservative on amortization periods and interest only periods. There is a lot of pressure in the market to go longer on an periods longer on Io periods, and we continue to be defensive there and but we will look at deals we're still very active but we.
Importantly want them underwritten to our sort of conservative approach.
Okay. Appreciate the color there and then Tracy on the 5% to six basis point margin guide per 25 bps.
Just kind of wondering what you're using for a deposit beta.
Of that amount.
Yes.
Deposit beta does start to move a bit, but but really just tracking.
Similar to the last cycle, it'll remain quite low and below the peer group.
Okay, So still close to zero in the first and the first.
With the five to six basis point guidance basically.
Okay.
10%.
Something in that range right now.
That's right yes.
Okay.
And then.
In terms of just.
Just on on the pipeline of new hires and maybe just a little bit more on the middle market initiative, Chuck just kind of how many people do you think it could be bringing on later this year.
And maybe how many could be tied to the.
Middle market build out here.
Yes, I would say roughly we probably have plans to add another 15, plus bankers between now and the end of the year.
Only going higher if we find the right talented individuals that.
And the culture.
The.
The relationships in the marketplace and are focused on the type of business, we want to do but yes, we still have plans to continue to build out the team we still and importantly are seeing a lot of demand for folks that want to jump on board and be part of us. So we've kind of moved from a period maybe.
24 months ago, 18 months ago, where we're out hunting and to a point now where we're still doing that but we're seeing a lot of inbound two which is <unk>.
Fantastic I can't explain how beneficial that is so the flywheel is turning.
And.
I would say.
The.
Third if not half of those are kind of more upstream bankers that are coming out of larger regional and national banks in fact, I'd say all of our hires particularly in the last quarter or out of larger regional national banks that have the ability to handle bigger C&I clients and so.
Our high quality talent to come in the organization very pleased with it we built out the credit team to support that and brought in a lot of experience.
Credit folks for some bigger organization. So we continue to build into being a mid sized bank.
I'm very pleased with the progress.
Alright, great. Thank you very much for all the color good quarter.
Thanks, Steve.
As a reminder, if you have a question. Please press star Zero, then one to enter the queue. Our next question comes from Steve Scouten with Piper Sandler.
Hey, good morning, everyone.
Thanks, Steve.
Good good.
Question I guess first on the on the loan loss reserve and just kind of how you're handling the modeling there any changes to any of your waiting to various scenarios within that this quarter how are you.
Kind of preparing for what may or may not be a more pronounced slowdown in the economy and how you think about doing.
Yes, Thanks, I'll take that so we kept the allowance coverage essentially flat, 139% and our primary economic forecast scenario is Moody's baseline the baseline had somewhat mixed indications throughout there were obviously expectations of inflation.
Global uncertainty kind of tamping consumer confidence and the outlook for economic expansion, but as we look at activity in our markets. We really do see indications of strength. We do think it's prudent with continuing elevated uncertainties and just the fast pace of change in the macro environment that we keep those reserves at a level that the.
Kind of acknowledges that in the possibility that forecasted metrics may be different from the baseline scenario. So we do have as a part of our qualitative framework.
A tracking toward the three scenario, which we revisit each quarter and kind of a standardized way. So we did look more closely at the S. Three scenario in this case.
And kept that coverage is about flat.
Okay helpful and is that was that based off their June or July model for this quarter and I guess if it was June do you think you'd see some uptick based on what you saw on the July numbers so far.
It's the one that was published in June .
And so as we look at what was published in July I think we feel good about the decisions we made for waiting of the scenarios in June .
Okay, great very helpful Tracy.
And then I guess kind of thinking back about loan growth and you guys have given some great color there.
<unk> the growth would have been that kind of 13% plus extra elevated paydowns, but.
Im just kind of curious why you think you.
<unk> growth has been.
High single digit.
Closer to 10% you have had some of that would be in the residential mortgage purchases I know, we've seen a lot of your peers grow it.
Kind of astronomical rates this quarter, so given the strength of your market. The team build out do you guys have had all of the things that are going right. Why do you think there is that delta between what some of your other peers might be seeing and what youre seeing is it just conservatism smaller loan sizes. There is there anything else at play.
Yeah, just to clarify a little bit around the.
Residential loans, we didn't purchase anything and just we put more in our portfolio that came in through both our.
Bank channel and our correspondent channel, but.
I'd say generally.
Steve It gets back to the fact that we have not been a large commercial real estate lender and we're not a heavy spec lender and so I think youre seeing a lot of our peers do a couple of things one their portfolio and significant portfolios of mortgages, which.
Sort of understand.
Challenge with that has been.
There's tremendous optionality in favor of the borrower. Unlike a commercial loan where you can get a prepayment penalty or a floor if rates fall, which we are already seeing the three or the 10 year dropped only almost 70 basis points you get another 50, you would defer the cost all of that comes back through and all of a sudden you're not made any money on that mortgage and then if rates go up the mortgage extends in.
You're stuck with this long duration assets. So we've avoided that asset class in a material way into the portfolio and then the other piece is I think a lot of other <unk>.
<unk> in the marketplace, particularly regional banks had bigger spec portfolios that are funding up through construction cycles and thats supporting growth that we just don't have the portfolio of we've focused on stabilized income producing commercial real estate.
We do do some spec, but it tends to be.
Very high quality spec and so I think thats why we stand out. So if you want to kind of characterize it as running a conservative book, that's what we do.
Yeah, No. That's very helpful. I mean do you think a lot of that is just positioning from what you guys learned from the last cycle and just hey things are great in Florida, but Theres no reason to get out ahead of our skis and whats.
Just kind of stay within the guardrail.
Yes, I think we will we will always be there Steve.
Steve.
We've built a series of guardrails around the bank, we have a very strong portfolio and credit administration process.
And we run the bank for the long run and so we take relationships, we take assets that we think we will.
Withstand the test of time, and we look for strong balance sheets, and well heeled borrowers and.
You can always go find commercial real estate is always there and it is.
Not to say that there isn't good commercial real estate, because we certainly do do plenty of it but.
We pick our spots carefully and we build the bank for.
The panel of different cycles and.
So I think that is all lessons from the past that.
Built into the fabric of the company for it and we really do think about things in terms of risk adjusted return we look for assets that we get good yield good relationships. The depth of return on that asset and I think it shows up in the shareholder returns we deliver.
Yes, I think thats fantastic, sometimes you get further away from those events and people start to forget so it's encouraging that you guys are holding to that.
And then I guess the last thing for me would be just as you make this push in the middle market and I think the average loan size you guys noted what like.
Maybe something like that do you think youll start to see that average loan size move materially higher as you make some of these.
Larger regional bank types of hires I guess, maybe more weighted to the C&I side of things.
Maybe modestly, yes, but that being said.
The way we've built our internal hold limits, we can handle clients up to 200 $300 million of revenues without any issue without sort of materially pushing it when you look at the capital ratios and you look at the.
Yes.
The ability to add that asset class and then add another set of diversity to the portfolio.
I think in the end of the yen is adding actually more diversity into the book and so while the average loan size may go up modestly over time now we have a lot of loans. So it would take a long time to get that average up.
It will probably move north from here that all being said, we will continue to very carefully manage our top 10 top 20 exposures in our top of the house exposures and manage our relationship limits appropriately.
Sell down where we need to.
Find partners to take some of that asset so we have ways to manage that Steve.
Yes, great.
It all makes sense congrats on another great quarter guys.
Thank you.
Thank you.
We have no further questions.
I will now turn the call back over to Chuck Shaffer for closing remarks.
Okay. Thank you. Thank you very much Vanessa and thanks for all joining the call I think it was a great quarter another sort of <unk>.
Indication of the strength, we carry in the company and.
Looking forward to talk to you all next quarter.
And thank you ladies and gentlemen, this concludes our conference. We thank you for participating you may now disconnect.
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Yes.
[music].
Sure.
Yes.
Yes.
Okay.
Yes.
Yes.
Yes.
Yes.
Sure.
<unk>.
Yes.
Yes.
Yes.
Yes.
Okay.
Yes.
Okay.
Okay.
Okay.