Q2 2023 Seacoast Banking Corporation of Florida Earnings Call
Ladies and gentlemen, please standby the conference will begin momentarily. We thank you for your patience and I said you. Please stay connected.
[music].
Okay.
Yeah.
Leading.
Welcome to Seacoast Banking Corporation second quarter 2023 earnings Conference call. My name is Melissa and I will be your operator during the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
At any time during the conference you need to reach an operator. Please press star zero before we begin I have been asked to direct your attention to the statement at the end of the company's press release regarding forward looking statements.
Seacoast will be discussing issues that.
That constitutes 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 conference over to Chuck Shaffer, Chairman and CEO of Seacoast Bank.
Mr. Schafer you may begin.
Okay.
Thank you all for joining us this morning, as we provide our comments will reference our second quarter 2023 earnings slide deck, which you can find at CECO spanking Dot com.
I'm joined today by Tracey Dexter Chief Financial Officer, Michael Young Treasurer, and director of Investor Relations, James Stallings, Chief Credit Officer, David household director of credit risk analyst analytics.
The secrets team produced another quarter of solid financial performance with strong adjusted earnings resulting in an adjusted return on tangible common equity of 16, 1%, our capital and liquidity ratios were robust and our asset quality remains excellent.
As noted in our press release in June we completed the technology conversion of professional bank. This wraps up a concentrated period of acquisition activity that boosted cecos beyond the 10 billion asset threshold.
<unk> positioning seacoast is Florida is back.
The company now serves the entire peninsula, Florida with a presence in every major market in the state expanding our unique locally resident banking brand across the strongest economy in the nation.
With the professional bank conversion completed we've aggressively reorder reoriented the company to focus on organic growth through the remainder of 2023.
We will leverage the exceptional talent, we acquired in recent years in combination with additional marketing investments to drive customer and low cost deposit growth.
We have launched a large scale enterprise wide plan that involves every employee in the company focusing heavily on customer growth fee income generation and streamlining operations to allow our bankers to execute with speed.
We expect this refocus plan to be a significant pivot for the company, resulting in much stronger customer acquisition for the balance of 2023 and beyond.
As part of this program will reduce head count by 5% in the third quarter.
The resulting lower third quarter compensation expense will be partially reinvested in additional marketing programs that drive low cost deposit growth and we also expect lower loan originations in the third quarter, leading to lower deferral of origination cost.
We expect the full benefit of the reduction in force to be realized in Q4 with a decline in expenses from the third and fourth quarter and will reduce the run rate into 2020 for jaycee.
Tracy will provide expense guidance in her prepared remarks.
And turning to M&A, we believe mid to late 2024 will be a period of rapid industry consolidation.
Our goal is to position the company for this opportunity by entering 2024 with strong capital and liquidity.
We'll be fully prepared to take advantage of these opportunities as they materialize and will position seacoast to be the acquirer of choice in Florida.
To conclude we continue to operate from a position of significant strength in the nation's most robust local economy.
This strong statewide economic backdrop, and our fortress balance sheet position seacoast, well compared to peers and sets us up to take advantage of opportunities, we expect a rise in the coming periods.
Like to thank all the seacoast and professional bank associates for their hard work on the professional conversion you all did an amazing job and the conversion was incredibly smooth.
I'll now turn the call over to Tracy to walk through our financial results.
Thank you Jeff good morning, everyone.
Directing your attention to the second quarter results beginning with the highlights on slide four.
Over the past three quarters, we've closed and converted three bank acquisitions, including the conversion of professional bank in early June .
Our M&A strategy has contributed to our now statewide presence growing share in all major Florida markets and positioning seacoast, among the largest Florida headquartered institutions and the only publicly traded bank with an exclusive focus on the state of Florida.
M&A opportunities may arise again soon but for now we're focused on compounding tangible book value and organic growth through customer acquisition.
Sequentially net income in the second quarter increased 164% to $31 2 million and adjusted net income increased 68% to $49 2 million.
On an adjusted basis return on tangible common equity was 16.08%.
Our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet.
The ratio of tangible common equity to tangible assets increased during the quarter to $8, 5% to 3%.
Also notable if all held to maturity securities were presented at fair value. The TCE to Ta ratio would still be a strong 787%.
We're pleased to have maintained stability in the level of overall deposits, despite an increasingly competitive environment.
Our credit standards remain disciplined and focused on relationship lending and our loan to deposit ratio ended the quarter unchanged at 82%.
Credit risk metrics remained strong with low levels of charge offs non accrual loans and criticized assets.
We continue to maintain robust liquidity and our total borrowing capacity is 184% of uninsured and uncollateralized deposits.
Turning to slide five.
Net interest income declined by $4 2 million or 3% during the quarter with higher deposit costs and lower purchase accounting accretion, partially offset by higher yields.
Net interest margin contracted to 386%.
In the securities portfolio yields increased 28 basis points to 313%.
Loan yields increased to 533%, excluding accretion and the add on rate in June averaged seven 1%.
The cost of deposits increased to 138%, while our funding base remains strong with 57% transaction accounts.
Looking ahead, we are modeling net interest margin to decline approximately 30 basis points in the third quarter stabilizing into 2024.
Moving to slide six <unk>.
Adjusted Noninterest income was in line with the guidance, we provided at $21 8 million, an increase of $1 5 million from the previous quarter and an increase of $4 5 million from the prior year quarter.
<unk> charges increased 7% with continued expansion of our commercial treasury management offerings and new customer acquisition.
Interchange revenue increased 8% with higher transaction counts from both business and consumer customers.
As a reminder, the Durbin amendment became effective for seacoast beginning July one of this year. So our interchange income in future periods will be lower with the constraints of those rules.
The impact on net income is mitigated through our efforts to diversify revenue streams in recent years investments in our wealth management Division have resulted in significant growth and in the second quarter of 2023 wealth management income was higher by 8% from the prior quarter and by 20% from the prior year quarter.
The addition of an insurance agency business through an acquisition in the fourth quarter of 2022 added $1 2 million to second quarter noninterest income.
Looking ahead, we continue to focus on growing our broad base of revenue sources and with the benefit of the expanded franchise. We expect third quarter noninterest income of approximately $20 million to $21 million, having largely offset the durbin impact with other sources of revenue.
Moving to slide seven wealth revenues increased 8% compared to the first quarter and 20% compared to the second quarter of 2022.
Assets under management increased 36% from a year ago to $1 6 billion and have increased at a compound annual growth rate of 28% in the last three years.
Our family office style offering continues to resonate with customers generating strong returns for the franchise.
Moving to slide eight.
Adjusted noninterest expense for the quarter was in line with the guidance, we provided at $84 million.
Increases from the prior quarter reflect running the seacoast and professional customer platforms in parallel for most of the second quarter.
These platforms, along with branding systems and processes are now fully converted to seacoast and cost synergies will be fully realized in the second half of 2023 and into 2020 for them.
Salaries and benefits on an adjusted basis decreased by 600000, reflecting the absence in the second quarter of the seasonal effect in the first quarter of higher payroll taxes and 401K contributions.
Data processing costs are typically volume based and the increase aligns with the larger customer base and higher transaction volume.
Similarly occupancy related costs are in line with the bank's larger footprint for much of the second quarter.
Near the end of the second quarter, we consolidated five retail branch locations.
Looking ahead cost synergies from recent acquisitions will positively impact the back half of the year and meaningfully benefit 2024.
We've executed a number of disciplined expense initiatives in order to maintain our focus on efficiency, including a reduction of our head count by 5%.
In the third quarter, we expect expenses on a GAAP basis of approximately $93 million to $95 million. This.
This includes the amortization of intangibles and approximately $2 million to $3 million in severance costs.
Third quarter also includes additional marketing expenses and lower deferral of loan origination costs.
Adjusted expenses for the third quarter are expected to be near flat to the second quarter.
Looking further to the fourth quarter as cost synergies and efficiency initiatives take effect, we expect expenses to drop by $3 million to $4 million and maintain that run rate into 2024.
Moving to slide nine.
The efficiency ratio on an adjusted basis with 56%.
The increase quarter over quarter was primarily the result of declining net interest income as deposit costs increased.
As we scale the company and become the leading bank in our Florida markets, we continue to pace our investments with discipline.
Turning to slide 10.
Loan Outstandings were near flat as we maintained our strict credit discipline and as we continue to see the impact of higher rates on market demand.
Average loan yields increased by three basis points during the quarter to $5, 89%.
An increased 16 basis points, when excluding accretion on acquired loans.
We expect loan yields to continue to increase in the coming periods and looking forward. We believe loan Outstandings will decline modestly over the back half of 2023.
Turning to slide 11.
Portfolio diversification in terms of asset mix industry and loan type has been a critical element of the company's lending strategy.
Bowser across industries and collateral types as broadly distributed and we continue to be vigilant in maintaining our disciplined conservative credit culture.
Construction and commercial real estate concentrations remain well below regulatory guidelines and below peer levels.
We've managed our loan portfolio with diverse distribution across categories and retaining granularity to manage risk.
Turning to slide 12.
Non owner occupied commercial real estate loans represent 33% of all loans and our distributed across industries and collateral types.
Importantly, C&I loans and the related owner occupied CRE, which is repaid through cash flows of the business not from the sale or leasing of the property represent 32% of the total portfolio.
On slides 13, and 14, we provide additional detail on the dispersion of non owner occupied commercial real estate loans in markets across the state and in categories, including retail and office, noting the strong performance of these segments to date and key credit monitoring metrics.
Diversification across industries and collateral types has been a critical tenant of our strategy and the low average commercial loan sizes are the result of our long time focus on granularity and on creating valuable customer relationships.
Moving on to credit topics on slide 15.
The allowance for credit losses increased during the quarter to an overall $159 7 million with an increasing coverage to 1.58%.
The allowance for credit losses, combined with the $202 million remaining unrecognized discount on acquired loans totaled $362 million or three 6% of total loans that's available to cover potential losses.
Moving to slide 16, looking at trends and credit metrics.
Our credit metrics remain very strong Nevertheless, we remain watchful of inflation pressures and the broader economic environment and are carefully considering the ongoing impacts of higher rates on the economy.
Charge offs were three basis points during the quarter and have averaged six basis points in the last four quarters.
Nonperforming loans represent 0.48% of total loans and the percentage of classified assets to total assets was <unk>, 9%.
And in the allowance, we continue to assess the environment and the factors that might affect loan performance and this quarter. The allowance for credit losses moved four basis points higher to 158% of total loans.
Moving to slide 17 in the investment Securities portfolio.
The average yield on securities increased during the quarter by 28 basis points to three 3% in part due to swap activity, we undertook during the quarter additional.
Additional rate hikes will benefit the securities portfolio as a result.
Changes in the yield curve during the quarter were detrimental to portfolio values, increasing the overall unrealized loss position from the end of the prior quarter.
Turning to slide 18 in the deposit portfolio.
Apologize outstanding were near flat at $12 3 billion Trans.
Transaction accounts represent 57% of overall deposits, which continues to highlight our long standing relationship focused approach.
The cost of deposits increased this quarter to 138% with the dynamic changes in the industry and the materially increased competitive landscape.
Additionally, we had a full quarter impact of professional bank and for the first time since the pandemic, we're seeing Florida seasonal residents leave the state to return north for the summer.
One item that's unique to Florida, The Florida Bar Association in May amended the trust account program known as Iota requiring financial institutions to pay interest on these accounts at a specified spread to an index.
This change impacted deposit costs during the second quarter by approximately five basis points.
Overall, our expectation for the third quarter is that the cost of deposits will continue to increase with higher rates, though the extent of the impact is difficult to predict with certainty.
That said, we continue to outperform peers in our cost of deposits as the environment serves to highlight the strength of our low cost deposit base and focus on relationships.
On Slide 19, the Bar chart shows. The addition of balances and higher rate categories that affected the overall mix during the quarter.
<unk> continues to benefit from a diverse and granular deposit base with the top 10, depositors, representing only 3% of total deposits.
Our consumer franchise contributes 43% of overall deposit balances with an average balance per account of only 23000.
Business customers represent 57% of total deposits with an average balance per account of only 109000.
Our customers are highly engaged and have a long history with us.
And we have a peer leading level of noninterest bearing deposits, representing 34% of the deposit base.
This provides significant strength and maintaining deposit costs over time and reflects the granular relationship nature of our franchise.
On slide 20, demonstrating our significant capacity to fund potential outflows.
Bar on the right identifies balances above the FDIC insured limit excluding public funds accounts that have collateral backed protection.
Uninsured and uncollateralized deposits total approximately $3 5 billion, which if needed would be almost completely funded by <unk> cash and borrowing capacity at the federal reserve.
Beyond that seacoast has an additional nearly $3 billion in sources of liquidity above the $3 5 billion.
We have not used and don't plan to use the federal Reserve's, New bank term funding program.
And finally on slide 21, our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet.
You can see the increase in tangible common equity to tangible assets in the second quarter as we move past. The initially dilutive effect of recent acquisitions, reflecting our commitment to driving shareholder value creation.
In summary, considering our strong capital levels prudent credit culture and high quality customer franchise, we have one of the strongest balance sheets in the industry, providing optionality, if the environment becomes more challenging and to continue building Florida's leading community bank.
Chuck I'll turn the call back to you. Thank you Tracy and Malika, we're ready for Q&A.
Perfect. Thank you, ladies and gentlemen on the phone lines. If we wish to register for a question. Please press. The one followed by the four on your telephone you will hear a tone pump technology request.
Question has been answered and I would like to withdraw your registration. Please press. The one followed by three once again it is one four to ask a question.
Our first phone question is from the line of Brady Gailey. Please go ahead. Your line is now open.
Hey, Thank you good morning, guys.
Morning Brady.
No. It's embedded in your fee income guidance, but I was just wondering the size of the Durbin hit.
In the past, we've talked about roughly $12 million of years there'll be $3 million a quarter is that still the right way to think about that impact from durbin.
It is Brady you can use that number.
Okay, Alright, and then.
Non interest bearing.
So youre not allowed the industry is seeing that across the board.
<unk>.
Mid 30% noninterest bearing deposits to total where do you think that lands.
Yes, Brady this is Michael.
I would just call. It a couple of things we had some elevated tax payments this quarter early in the quarter and then as was mentioned in the prepared remarks, we really had a return to a true season in Florida, which is a little idiosyncratic for us versus some of the other banks nationally. So we hope to see some kind of return of that benefit into the coming quarter.
<unk> into the back half of the year, but generally we're modeling from a conservative perspective that that might trend down a little bit from here.
The low 30 percentage range, but.
Just from a modeling conservatism point of view, but we do think there was some kind of idiosyncratic drivers this quarter.
It may have returned positively in the future.
Okay Alright.
Yes, Chuck I heard your comments about maybe a year from now.
M&A environment will be a little more active.
You guys have been very.
Active in Florida Bank M&A, just wondering whats the bigger it gets turned back on.
What is cecos M&A strategy, I mean, theres not a lot of larger targets.
Sorry.
Professional is a big deal for you all maybe your biggest ever.
Return.
Looking at kind of small where privately held targets when you're talking about bank of America.
Yes, thanks for the question Brady.
Sort of look back here recently, we did do a lot of deals here over the last 14 15 months.
Was it concentrated period of M&A, we did that to position ourselves as a state wide brand. We're now in every major metro market team did an incredible job of integrating and bringing those deals on a lot of.
Competency here inside the organization, both in terms of technology and socially how to bring deals into <unk> I think in the near term as I mentioned in my prepared comments. Our focus is on organic growth kind of we've had a lot of resources a lot of effort focused on.
Consolidating banks and at this point here at least in the near term. The next couple of quarters at least through our focus will be heavily on organic growth, we're going to sort of release, all those resources and energy into growing the bank here on the back half of the year I'm pretty excited about what we can possibly get done there.
And then moving into the 2024, depending on the environment and depending what deals looks like I think it's probably more of a return to a smaller bank M&A as you say if you look across the landscape, there's about 60% to 70 banks, probably 20% to 25 banks that fit within our profile, primarily smaller billion and under institutions that we think could make a lot of <unk>.
We still think the highest and best franchise value for seacoast is consolidating market share in Florida. If you were to look at where we are in terms of market share we're right around number 15.
To drive the company into the top 10, I think that would create incredible value for shareholders over the long run and so those opportunities emerge it's kind of back to exactly what we've been doing Brady.
Alright, that's helpful and then finally for me.
Bigger picture, if you look over time, our Florida tends to be kind of a boom bust state when it comes to real estate prices.
Real estate prices of the drilling for a while down there. So I'm just wondering.
The uncertainty.
Uncertain economic times.
Could be some real softness.
Prices or is there a dynamic different this time around that could ensue.
Instantly.
Will it stay prices in Florida.
I think a lot's changed in Florida over the last 10 years, you've had much stronger urban.
<unk> built out in Orlando, South, Florida, Tampa, Jacksonville, and in particular, southeastern Florida has become incredibly strong incredibly diverse in terms of the economic drivers.
So think in Florida, there was not a lot of construction typically they issue with Florida has been in the past and where the boom bust sort of history comes from is construction and oversupply sort of chasing the demand of inbound.
Sort of population growth, but if you look at really since the last crisis. There isn't really construction didn't come on until the last three or four years and so the housing market remains remarkably stable, we see absorption being very reasonable we see supply being very reasonable we still see strong population.
<unk> growth and so.
So I feel very confident in real estate values in Florida, I don't think were going to see the pace of increase were seeing were seeing stabilization stabilization in terms of value increases.
So residential to me feels very very healthy and very strong and a large part the same thing on the commercial side again, Theres just not been a lot of new supply coming in the market and so the absorptions been there. The markets remained strong population growth is there that all being said, we're always very mindful.
All of that we're very mindful of the fact that we have a concentrated geography in Florida. That's why we tried to build a.
Very diverse portfolio in terms of both asset size asset type and.
The granularity that we build and the strength of the capital base. So we know, Florida, we know the history, but I feel good about where we are already.
Great. Thanks Chuck.
Thank you.
Thank you. Our next question is from the line of David Feaster. Please go ahead. Your line is now open.
Hi, good morning, everybody.
Morning, David Good morning, maybe just shifting back to the deposit side I'm curious on the organic core deposit growth that youre seeing where are you having success in and how do you think about core deposit growth going forward. I know you said last quarter I mean do you have one of the highest.
Levels of <unk>.
Customer count growth.
Later in the quarter.
I'm, just curious where are you seeing.
Success, driving core deposit growth and then how are new kind of.
Core interest bearing add on rates at this point, where are you able to drive new money growth.
Maybe I'll start with the first part and then Michael you can follow up on the second on new money rates.
That's what's very exciting to me David as you know, we built an incredible commercial banking team across the state over the last couple of years and I think we're still in the first quarter of moving those relationships over weekend and week out I've been out with those teams calling on customers, calling on really strong relationship opportunities.
We're seeing really great opportunities around sort of small to medium size enterprises that are willing to bring on full relationships.
Ed.
We've had a lot of focus on consolidating and converting banks that now is behind us and so I'm excited about combining some additional marketing expenses. Some additional branding here in the coming periods in conjunction with a lot of new bankers, we've added to the team.
Sure.
I think there is an incredible opportunity to go out and unleash that team. We have also as you know a really strong retail footprint, we have a really strong sales and service culture in that retail footprint and we're going to we're going to unleash those guys as well so kind of as we think about the back half of the year, we're going to combine a lot of new <unk>.
Strong what I think are.
Sorry biased here, but the best commercial banking team in the state of Florida in combination with what is we've talked about in the past that unique ability to drive cross sell.
Our digital and data analytics platform in combination with additional marketing expenses and we're going to we're going to go. After this really hard so I'm excited about the back half of the year, there's a lot of energy in the company about this.
I think there's a lot opportunity David.
And then as a follow up on the rate piece of that conversation David.
I think we've made a lot of investments into Treasury management platform to go along with our commercial banking expansion.
And the combination of that and all the new relationships that Chuck mentioned is bringing over a lot of new accounts and the blended average of those new add ons are still pretty pretty attractive as we move volume on we're obviously paying a little higher rate on the interest bearing portion.
To be competitive in the market, but then trying to get those core operating DDA accounts alongside of that to blend that average cost down probably into the threes.
On a blended basis.
It was really the focus and one quick follow up to Brady's question earlier, I think it's an important distinction and call out as you know following the events in March and April we moved a lot of those operating accounts into the Ics product and so that does come with a bit of a reclassification from DDA into now so thats, maybe an important call out to look at as well.
Do you could you quantify that that's a good point.
Could you.
How big of an impact that was.
It was it was sizable.
I don't want to get too fine a point on that but probably over $150 million.
Okay.
And then.
Maybe on the other side of the equation could you help us think about like the.
The expectations for payoffs and Paydowns on the loan side in the next six to 12 months.
And maybe where roll off rates are in and how.
New loan yields add on rates are I'm, just trying to combine.
With the commentary on what we're seeing with new deposit rates in the threes kind of maybe where the core NIM can stabilize once once funding costs.
Stabilize and we can start paying down the borrowings and those types of things what would be the normalized margin you know.
Yes, no definitely understand David.
The roll off rates have been increasing a little bit.
Had a little higher pay down quarter this quarter, a little over $300 million and the rates are a little higher I think what we're seeing is people with variable rate loans are electing to pay those down a little bit so.
That's kind of leading to at least thus far a little higher roll off rate on on loans that are paying off and maturing.
Then on the add on side, though we're definitely seeing good add on yields I think risk adjusted returns are starting to improve in the market and were seeing loan pricing generally move higher.
Been a headwind to growth for us over the last six months to nine months that we've articulated where we just felt like risk adjusted returns weren't there, but now that we're getting into the <unk>.
Seven handles mid high sevens with much better structure much better underwriting it's attractive so bringing that all together versus the 3% add on rates Youre kind of looking at a blended 4% margin on new production.
And that's kind of really the focus here is to defend that margin and the profitability now that we're getting paid for the risk that's there in the market.
Yes, Okay that makes a ton of sense I'm glad to hear that and then maybe following up on your point on the risk adjusted returns I mean, you've been very disciplined on the pricing and structure front not surprisingly that's translated into slowing originations.
But im guessing Im just curious I guess, how much of the slowdown in our rate originations. Maybe do you think is strategic on your part in terms of being a bit more selective versus.
Slower market demand and then I'm just curious.
Twofold question, where are you still seeing good risk adjusted returns and then are you concerned at all about lender retention and maybe some poaching.
As you slow down production I'm, just curious what youre hearing from your lenders are they pushing back at all.
Yes, just starting with the market demand side.
If you think about what we do in the areas. We focus on it's primarily operating companies and stabilized income producing commercial real estate and so.
On the stabilized income producing real estate market demand has really evaporated theres just not been a lot of projects that pencil and a lot of.
Acquisitions of stabilized commercial real estate is just not happening now.
So that I would describe largely.
Slowing down due to market demand C&I.
C&I to some extent the same thing rates are much higher and so I would say probably the way I think about three quarter of a three quarters of its market demand a quarter thats probably us.
And.
Sorry about stepping back and looking at the bigger picture of the way we've thought about the business is as we go through the coming quarters and into next year. We know the fed is going to continue to shrink the balance sheet, we know theres going to be a quantitative tightening.
Will occur in both terms of rate and monetary supply and so protecting the liquidity of the company is incredibly important, particularly as you enter into 2024, where you could fill the loan portfolio with transactional.
Lend lending, but what we want to maintain as the firepower to go out and compete particularly as things turn here and really compete for the broader operating companies in the broader relationships that are going to bring deposits treasury wealth management opportunities equipment lending these solid deep highly.
Capital relationships and what we don't want to do is burn up our liquidity on solving alone growth problem in the near term when knowing long term, we need to get out and compete for funding and compete into what will be a shrinking pie of deposits. So we know that the overall industry deposit.
Pie if you think about it that way is going to continue to shrink that fed has told us so.
So maintaining liquidity, maintaining flexibility and maintaining optionality to take on very high quality strong risk adjusted returns.
Where we've been incredibly focused.
The last part of your question with our banking teams they are incredibly engaged there.
Have come over they are bringing relationships over.
In terms of incentives, we rotated them to deposits and other things. So they have the opportunity to make plenty of money. They have an opportunity to make a huge contribution here and they have been brought into thinking about how to really go out and compete in there than they are doing an incredible job. So I have really no concerns about the team being poached I think they're excited to be part of our frac.
And.
Do you need to bring their friends with them. So.
I am pretty pleased with where we are there too David.
And Dave I might just add to that list.
Ever.
As you all know and as we communicated to those lenders when they are joining the company. They know our conservative culture and they know that that's served us well and will serve us well through through economic volatility. So just lots of communication internally around that and the ability to get back in the market earlier than peers in the strength of our capital base and liquidity.
They will be able to deploy so we've just been very communicative about generating kind of capital and dry powder. So we can serve clients when other banks have to step away likely in the coming quarters.
Yes.
Makes complete sense. Thank you.
Thank you Dave.
Thank you. Our next question is from the line of Brendan King. Please go ahead. Your line is open.
Hey, good morning, Thanks for taking my questions.
Brendan.
So I wanted to follow up on the conversation on deposits and then also loan growth and managing the balance sheet.
It seems like core deposit growth to kind of trend higher from here in loans.
Sure.
Stable to down a little bit. So how are you thinking about the loan to deposit ratio going forward.
<unk> now.
Are you looking to kind of drive that down kind of mid seventies.
In general how you think about the balance sheet.
Yes, Brendan this is Michael.
I think holistic we some of that will be driven by the amount of success. We have in on the deposit side, but we do have an opportunity I think as the securities yield securities cash flow comes in <unk> loan growth has been a little softer we generate more cash than we're probably able to pay down some higher.
<unk> borrowings and Delever, the balance sheet, a little bit, which would take our loan to deposit ratio a little higher from here probably in towards 80, 485% is probably this trajectory we would head towards but a lot of that will depend on just if we're getting paid for risk on the loan side and if we are able to generate that that deposit growth that we have.
It might be coming in the back half of the year.
Yes.
And with that what are you thinking about the securities portfolio now with those cash flows coming online are you looking to redeploy that particularly it's a high yielding securities or would that give me just go down to pay down higher cost formula.
Yes, I think generally we're just using the cash flow off the securities book at this point to fund lending.
And loan growth. So I think you should just assume we've got about $300 million in cash flow off the securities book.
Over the next 12 months with.
Half of that roughly principal payments. So you should just assume that the securities book continues to trend lower related that kind of trend.
And how much cash flow, you're expecting again could you remind us.
Yes, it's a little over $300 million.
Over the next 12 months.
Okay.
Then lastly, I noticed the interest rate swaps that had benefited securities yields could you give us the thought process around putting all those interest rate swaps and how you manage the asset sensitivity going forward.
Sure so.
Good opportunity.
And the market and we had you know a portion as Tracy mentioned of the deposits that flipped to floating related to an iota deposits and so as a proactive opportunities that really kind of mute some of those impacts.
And so we moved $400 million pay fixed swap, where we're paying about $3 90, and now receiving overnights ofer.
Which moved us to a more variable. So the securities book now is just under 30% variable versus 70% fixed. So it's just a proactive opportunity to pick up a good bit of incremental yield here near term over the next two years without a lot of downside risk from rates potentially moving lower so thats kind of the overall.
An opportunity there that we took and remind me the second part of your question there Brandon.
Yes, just going forward you are expecting to do more trades like this or do you think that despite just given.
Traditional funding.
Yes, we'll always be opportunistic and depending on our expectations of the market and interest rates and our balance sheet positioning kind of what the appropriate.
Moves are to make to manage that risk in the environment ahead as we see.
Rate volatility and things unfolding. So we will be incremental there are no big swings no big bets, just just incremental movements to improve the overall positioning in the earnings and yield returns for the bank within the risk context. So I think that's kind of the right way to think about it nothing specific to call out today.
Okay.
So I had just taking my questions.
Thank you Brian .
Thank you. Our next question is from the line of Stephen Scouten. Please go ahead. Your line is now open.
Yeah. Thanks, Good morning, Hey, I wanted to.
Follow around on the NIM guidance.
30 basis points quarter over quarter decline.
What you.
Fueling that larger shift maybe than what we're hearing from a lot of other banks into the third quarter.
If there's any dynamics with professional that make your.
NIM move into the third quarter any different just kind of walk me through those pieces if you could.
Sure Stephen This is Michael again.
I think the couple.
A couple a couple key call outs I would I would make there one is the Io to impact that's about a 10 basis point increase to the cost of funding our cost of deposits. There. So that's idiosyncratic driver for us that's maybe different from peers, it's kind of a onetime reset.
And then we should be kind of on a normalized run rate from there.
The other piece is just probably the spot rate exiting the quarter is a little higher so if we just kind of run rate that going forward.
A little pressure to be felt there and as we mentioned kind of a seasonality around deposits for us we're kind of at that trough from a deposit perspective around that seasonality. So it's driving a little incremental margin pressure this quarter and maybe next quarter that I think with with some return of seasonality.
<unk> as opposed to headwinds you could see some benefit along with all the organic growth efforts that we're discussing internally. So I think thats kind of the moving pieces, that's getting us there and then hopefully we'll see those benefits kind of start to materialize as we had later in the year and maybe into 2024.
Okay. So it really just those things you spoke to earlier can you give us a feel for what you're assuming from a loan beta perspective, moving forward and the deposit perspective.
Sure on the loan beta side.
We are not growing very quickly at the moment and so we'll see probably less loan beta we've got about 60% kind of fixed rate.
Balance sheet on the on the loan side, so just not as much loan repricing there, but we'll see some incremental movement, obviously is lower rate loans mature and then we're able to reprice and any refinancing that we can do.
In the interim.
So thats kind of on the loan side on the deposit side and betas I think just generally for the industry youre going to see higher betas on incremental fed hikes from here. So I don't think there is there is a differential there for us versus anyone else really.
So, we'll just kind of have to see how far the fed moves and what the impacts will be there, but we've managed Q data pretty well, thus far and really are outperforming peers from a cumulative beta perspective, though we did have a lot of catch up obviously this quarter, where we think we likely stabilize a little bit from here and likely trend.
Better hopefully.
Perfect perfect on that 60% fixed rate how do you think about the rollover of that I mean is that like a.
Five year kind of time period that we can think of fairly ratably over that book alone and how they re price over time.
Yes, that's about right, even most things are kind of maturing or really the life of the loan is.
Extending to maturity so five year average life is probably fair.
Right times, you might have seen a three and a half year life or something like that but we're not seeing those early payoffs or paydowns of five years, probably appropriate at this point makes sense makes sense. Okay, and then last thing for me.
With the with the discounts the purchase discounts I mean your.
So reserve and purchase it sounds like around 2% of Florida economy strong <unk> loan book is Super Conservative and granular youre going to be growing a little slower it sounds like.
I mean could we see this kind of.
Zero ish provision for a while is that possible in your modeling.
Yes Stephen.
Coverage is up about four basis points from the prior quarter. The economic scenarios that we use continue to contemplate risks related to sustained higher rate persistent inflation. We just look at those economic scenarios each quarter in the context of.
Our Florida environment, and what we're seeing in our portfolio and we just try and make our best estimate each quarter. So it's difficult to say in advance I do think that we are.
Well covered when you certainly include the impact of the remaining purchase discount and I think we feel pretty comfortable at that level.
Yes, just a follow up to that.
The balance sheets incredibly strong when you look at the capital we have the loss absorption thats, there and our ACL coverage ratio, we feel very confident in our position.
Yes, no question great. Thanks, guys for the color on the time I appreciate it.
Steve.
Thank you once again as a reminder, ladies and gentlemen, it is one four to ask a question on the phone lines.
And at this moment I am showing no further question on the phone lines.
Okay. Thank you operator, and we're around if anybody wants to have follow up calls and I appreciate everybody joining us. This morning. Thank you.
Thank you, ladies and gentlemen that does conclude today's call. We thank you for your participation and ask that you. Please disconnect your lines have a good day.
Okay.
Yes.
Okay.
Okay.
Sure.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
So.
Okay.
Sure.
Sure.
[music].
Sure.
Yes.
Okay.
[music].
Okay.
Sure.
Okay.
Sure.
Okay.
Sure.
Sure.
Okay.
Sure.
Yes.
Great.
Thanks.
Yes.
Yes.
Sure.
Sure.
Okay.
Okay.
Okay.
[music] permanent.