Seacoast Banking of Florida - Q2 2023
July 28, 2023
Transcript
Operator (participant)
Greetings. Welcome to Seacoast Banking Corporation's second quarter 2023 earnings conference call. My name is Malika, and I will be your operator. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll 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. If 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 constitute forward-looking statements within the meaning of the Securities 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. Shaffer, you may begin.
Chuck Shaffer (Chairman and CEO)
Thank you all for joining us this morning. As we provide our comments, we'll reference the second quarter 2023 earnings slide deck, which you can find at seacoastbanking.com. I'm joined today by Tracey Dexter, Chief Financial Officer; Michael Young, Treasurer and Director of Investor Relations; James Stallings, Chief Credit Officer; and David Houdeshell, Director of Credit Risk Analytics. The Seacoast 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 Seacoast beyond the $10 billion in assets threshold, definitively positioning Seacoast as Florida's bank.
The company now serves the entire peninsula of Florida, with a presence in every major market in the state, expanding our unique, locally resonant banking brand across the strongest economy in the nation. With the Professional Bank conversion completed, we've aggressively 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 refocused 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, we'll reduce headcount 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. We also expect lower loan originations in the third quarter, leading to lower deferral of origination costs. We expect the full benefit of the reduction in force to be realized in Q4, with a decline in expenses from the third to the fourth quarter and reduce the run rate into 2024. Tracy will provide expense guidance in her prepared remarks. 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 we'll 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 to rise in the coming periods. I'd 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.
Tracey Dexter (CFO)
Thank you, Chuck. Good morning, everyone. Directing your attention to second quarter results, beginning with the highlights on slide 4. 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 8.53%. Also notable, if all held-to-maturity securities were presented at fair value, the TCE to TA ratio would still be a strong 7.87%. 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 remain strong, with low levels of charge-offs, nonaccrual 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 5.
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 3.86%. In the securities portfolio, yields increased 28 basis points to 3.13%. Loan yields increased to 5.33%, excluding accretion, and the add-on rate in June averaged 7.1%. The cost of deposits increased to 1.38%, while our funding base remains strong with 57% transaction accounts. Looking ahead, we're modeling net interest margin to decline approximately 30 basis points in the third quarter, stabilizing into 2024. Moving to slide 6.
Adjusted non-interest 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. Service 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 1st 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 non-interest 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 non-interest income of approximately $20 to 21 million, having largely offset the Durbin impact with other sources of revenue. Moving to slide 7. 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 8. Adjusted non-interest 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 2024.
Salaries and benefits on an adjusted basis decreased by $600,000, reflecting the absence in the second quarter of the seasonal effect in the first quarter of higher payroll taxes and 401(k) 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 5 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 headcount by 5%. In the third quarter, we expect expenses on a GAAP basis of approximately $93 to 95 million.
This includes the amortization of intangibles and approximately $2 to 3 million in severance costs. The 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 to 4 million and maintain that run rate into 2024. Moving to slide 9. The efficiency ratio on an adjusted basis was 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 maintain our strict credit discipline as we continue to see the impact of higher rates on market demand. Average loan yields increased by 3 basis points during the quarter to 5.89% and increased 16 basis points when excluding accretion on acquired loans. We expect loan yields to continue to increase in the coming periods. 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. Exposure across industries and collateral types is broadly distributed. 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 are 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 tenet of our strategy, and the low average commercial loan sizes are the result of our longtime 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 increase in coverage to 1.58%. The allowance for credit losses, combined with the $202 million remaining unrecognized discount on acquired loans, totals $362 million, or 3.6% of total loans that's available to cover potential losses. Moving to Slide 16, looking at trends in 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 3 basis points during the quarter and have averaged 6 basis points in the last 4 quarters. Non-performing loans represent 0.48% of total loans. The percentage of classified assets to total assets was 0.9%. 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 4 basis points higher to 1.58% of total loans. Moving to Slide 17 and the investment securities portfolio. The average yield on securities increased during the quarter by 28 basis points to 3.13%, in part due to swap activity we undertook during the quarter.
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 and the deposit portfolio. Deposits outstanding were near flat at $12.3 billion. 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 1.38% 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's seasonal residents leave the state to return north for the summer.
One item that's unique to Florida: The Florida Bar 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 5 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 in higher rate categories that affected the overall mix during the quarter.
Seacoast 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 $23,000. Business customers represent 57% of total deposits, with an average balance per account of only $109,000. Our customers are highly engaged and have a long history with us. We have a peer-leading level of non-interest-bearing deposits, representing 34% of the deposit base. This provides significant strength in 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, the 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 Seacoast's 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. 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.
Chuck Shaffer (Chairman and CEO)
Thank you, Tracy and, Malika, I think we're ready for Q&A.
Operator (participant)
Perfect. Thank you. Ladies and gentlemen, on the phone lines, if you wish to register for a question, please press the one followed by the four on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered, and you would like to withdraw your registration, please press the one followed by the 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.
Brady Gailey (Executive Director of Corporate Development)
Hey, thank you. Good morning, guys.
Chuck Shaffer (Chairman and CEO)
Good morning, Brady.
Tracey Dexter (CFO)
Good morning.
Brady Gailey (Executive Director of Corporate Development)
I know it's embedded in your fee income guidance, but I was just wondering the size of the Durbin hit. I think in the past, we've talked about roughly $12 million a year, so that'd be $3 million a quarter. Is that still the right way to think about that impact from Durbin?
Tracey Dexter (CFO)
It is, Brady. You can use that number.
Brady Gailey (Executive Director of Corporate Development)
Okay. All right, then, you know, non-interest-bearing, you know, fell here. You're, you're not alone. The industry is seeing that across the board. For Seacoast, you know, your mid 30% non-interest-bearing deposits to total, where, where do you think that lands?
Michael Young (Treasurer and Director of Investor Relations)
Yeah, Brady, this is Michael. You know, I would just call it a couple of things. You know, we had some elevated tax payments this quarter, early in the quarter, and then as was mentioned in the prepared remarks, we really had to return to a true season in Florida, which is a little idiosyncratic for us versus some of the other banks nationally. We hope to see some kind of return of that benefit into the coming quarters, into the back half of the year. You know, generally, we're modeling from a conservative perspective, that, that might trend down a little bit from here into the low 30% range.
You know, that's, that's just from a modeling conservatism point of view, but we do think there were some kind of idiosyncratic drivers this quarter, that may return positively in the future.
Brady Gailey (Executive Director of Corporate Development)
Okay. All right, then, you know, Chuck, I heard your comments about maybe a year from now, the M&A environment will be a little more active. You know, you guys have been very active in the Florida bank M&A. Just wondering, you know, once that spigot gets turned back on, you know, what, what is Seacoast M&A strategy? I mean, there, there's not a lot of larger targets left in the state. I mean, I know Professional was a, a big deal for you all, maybe your biggest ever. Do, do you return to, you know, looking at kind of smaller, privately held targets when you think about bank M&A?
Chuck Shaffer (Chairman and CEO)
Yeah, thanks for the question, Brady. You know, if you sort of look back here recently, you know, we did do a lot of deals here over the last 14 to 15 months. It was a concentrated period of M&A. You know, we did that to position ourselves as a statewide brand. We're now in every major metro market. Team did an incredible job of integrating, bringing those deals on. There's a lot of competency here inside the organization, both in terms of technology and socially, how to bring deals into, into Seacoast. I think in the near term, as I mentioned in my prepared comments, our focus is on organic growth. You know, kind of we've had a lot of resources, a lot of effort focused on consolidating banks.
At this point here, at least in the near term, the next couple of quarters, at least, 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. Then moving into 2024, depending on the environment, and depending on what deals look like, I think it's probably more of a return to smaller bank M&A. As you say, you know, 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, $1 billion and under institutions that we think could make a lot of sense.
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. I'd love to drive the company into the top 10. I think that would create incredible value for shareholders over the long run. So if those opportunities emerge, it's kind of back to exactly what we've been doing, Brady.
Brady Gailey (Executive Director of Corporate Development)
All right, that's, that's helpful. Then finally, for me, you know, bigger picture, if you look over time, Florida tends to be kind of a boom-bust state when it comes to real estate prices. You know, real estate prices have been booming for a while down there. I just wondering, like, as we head into, you know, uncertain economic times, like, do you think there could be some real softness in real estate prices, or is there a dynamic different this time around that could, you know, insulate, real estate prices in Florida?
Chuck Shaffer (Chairman and CEO)
I think a lot's changed in Florida over the last 10 years. You know, you've had much stronger urban anchors built out in Orlando, South Florida, Tampa, Jacksonville, you know, and in particular, Southeastern Florida has become incredibly strong, incredibly diverse in terms of the economic drivers. I also think in Florida, there was not a lot of construction. You know, typically, the 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. If you look at really since the last crisis, really, construction didn't come on until the last 3 or 4 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 growth.
I feel very, very confident in real estate values in Florida. You know, I don't think we're going to see the pace of increase we're seeing. We're seeing stabilization in terms of value increases. Residential, to me, feels very, very healthy and very strong. In a large part, the same thing on the commercial side. Again, there's just not been a lot of new supply coming in the market, and so, you know, the absorption's been there, the markets remain strong, population growth is there. That all being said, we're always very mindful of that. You know, 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, that we build and the strength of the capital base. you know, we know Florida, we know the history, but I, I feel good about where we are, Brady.
Michael Young (Treasurer and Director of Investor Relations)
Great. Thanks, Chuck.
Chuck Shaffer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question is from the line of David Feaster. Please go ahead, your line is now open.
David Feaster (Managing Director and Analyst of Banking)
Hey, good morning, everybody.
Chuck Shaffer (Chairman and CEO)
Morning, David.
Michael Young (Treasurer and Director of Investor Relations)
Morning.
David Feaster (Managing Director and Analyst of Banking)
Maybe just shifting back to the deposit side. I'm curious on the organic core deposit growth that you're seeing. Where are you having success, and how do you think about core deposit growth going forward? I know you said last quarter, you know, I mean, you had one of the highest levels of, of customer account growth in, you know, 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?
Chuck Shaffer (Chairman and CEO)
Maybe I'll start with the first part, and then, Michael, you can follow up with the second on new money rates. You know, what's, what's very exciting to me, David, is, you know, we've 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. Week in 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-sized enterprises that are willing to bring on, you know, full relationships. You know, we've had a lot of focus on consolidating and converting banks that now is behind us.
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. You know, I think there's an incredible opportunity to go out and, and unleash that team. We have also, as, 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.
Kind of as we think about the back half of the year, we're going to combine a lot of new, very strong, what I think are, you know, I'm sort of biased here, but the best commercial banking team in the state of Florida, in combination with, what is, you know, we've talked about in the past, a unique ability to drive cross-sell via, 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. I'm, I'm excited about the back half of the year. There's a lot of energy in the company about this, and, you know, I think there's a lot of opportunity, David.
Michael Young (Treasurer and Director of Investor Relations)
Then as a follow-up on the, the rate piece of that conversation, David, you know, I think we've made a lot of investments into treasury management platform to go along with our commercial bank expansion. The combination of that and all the new relationships that Chuck mentioned, is bringing over a lot of new accounts. You know, the blended average of those, you know, new add-ons are, are still pretty, pretty attractive. As we move volume on, you know, 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, you know, core operating DDA accounts alongside of that to blend that average cost down, you know, probably into the 3s, on a blended basis, is, is really the focus.
One quick follow-up to, to Brady's question earlier, I think it's an important distinction and call out, is, you know, following the, 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. That's, you know, maybe an important call out to look at as well.
David Feaster (Managing Director and Analyst of Banking)
Could you quantify that? That's a good point. Do you know, do you know how, how big of an impact that was?
Michael Young (Treasurer and Director of Investor Relations)
Yeah, it was, it was, it was sizable. I don't want to get too fine a point on that, but, you know, probably over $150 million.
David Feaster (Managing Director and Analyst of Banking)
Okay. Maybe on the other side of the equation, could you help us think about, like, the expectations for payoffs and paydowns on the loan side in the next, you know, 6 to 12 months, and maybe where roll-off rates are and how new loan yield add-on rates are? I'm just trying to combine what, you know, with the commentary on what we're seeing with new deposit rates in the 3s, you know, kind of maybe where the core NIM can stabilize once funding costs, you know, stabilize, and we can start paying down the borrowings and those types of things. What kind of would be the normalized margin, you know?
Michael Young (Treasurer and Director of Investor Relations)
Yeah, no, definitely understand that, David. You know, the, the roll-off rates have, have been increasing a little bit. You know, we had a little higher paydown quarter this quarter, a little over $300 million, and, and the rates are a little higher. You know, I think what we're seeing is people with variable rate loans are, are electing to pay those down a little bit. That's, 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. On the add-on side, though, we're, we're definitely seeing good add-on yields. I think risk-adjusted returns are starting to improve in the market, and we're seeing, you know, loan pricing generally move higher.
You know, that's been a headwind to growth for us, over the last six to nine months that we've articulated where we just felt like risk-adjusted returns weren't there. Now that we're getting into the, you know, 7 handles, you know, mid-high 7s with much better structure, much better underwriting, it's attractive. Bringing that all together versus the 3% add-on rates, you know, you're, you're kind of looking at a blended, you know, 4% margin on new production. That's kind of really the focus here, is to defend that margin and the profitability now that we're getting, you know, paid for the risk that's there in the market.
David Feaster (Managing Director and Analyst of Banking)
Yeah. Okay, that makes a ton of sense, and I'm glad to hear that. But maybe following up on your point on, on the risk-adjusted returns, I mean, you've, you've been very disciplined on the pricing and structure front. Not surprisingly, that's translated into slowing originations. I'm just curious, I guess, A, how much of the slowdown in originations maybe do you think is strategic on your part in terms of being a bit more selective versus slower market demand? I'm just curious, a twofold question: Where are you still seeing good risk-adjusted returns? Are you concerned at all about, you know, lender retention and maybe some poaching, as you, as you slow down production? I'm just curious what you're hearing from your lenders. Are they pushing back at all?
Chuck Shaffer (Chairman and CEO)
Yeah, just starting with the market demand side. You know, if you think about what we do and the areas we focus on, it's primarily operating companies and stabilized income-producing commercial real estate. So, you know, on the stabilized income-producing real estate, you know, market demand is really evaporated. There's just not been a lot of projects to pencil. You know, a lot of acquisitions of stabilized commercial real estate is, it's just not happening now. So that, that I would describe largely as slowing down due to market demand. C&I, to some extent, same thing. Rates are much higher. So I, I would say probably the way I think about it, is three-quarters of it's market demand, a quarter of it's probably us.
You know, kind of stepping back and looking at the bigger picture, the way, we've thought about the business is, as we go through the coming quarters and into next year, we know the Fed's gonna continue to shrink the balance sheet. We know there's gonna be a quantitative tightening, that will occur in both terms of rate and monetary supply. You know, protecting the liquidity of the company is incredibly important, particularly as you enter into 2024, where, you know, you could fill the, the loan portfolio with transactional, lending. What we wanna maintain is the firepower to go out and compete, particularly as, as things turn here, and really compete for the broader operating companies and the broader relationships that are gonna bring deposits, treasury, wealth management opportunities, equipment lending, you know, these solid, deep, highly profitable relationships.
What we don't want to do is burn up our liquidity on solving a loan 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. We know that the overall industry deposit pie, if you think about it that way, is going to continue to shrink. The Fed has told us so. You know, maintaining liquidity, maintaining flexibility, and maintaining optionality to take on very high quality, strong risk-adjusted returns, is where we've been incredibly focused. Kind of the last part of your question with our banking teams, they're incredibly engaged. They're, you know, they have come over, they're bringing relationships over. They...
You know, in terms of incentives, we rotated them to deposits and other things, they have the opportunity to make plenty of money. They have an opportunity to make a huge contribution here. They've been brought into thinking about how to really go out and compete, and they're doing an incredible job. I have really no concerns about the team or being poached. I think they're excited to be part of our franchise and continue to bring their friends with them. I'm pretty pleased with where we are there, too, David.
Michael Young (Treasurer and Director of Investor Relations)
Dave, I might just add to that, you know, listen, it, ever, you know, as, as you all know, and as we communicate to those lenders when they're joining the company, they know our conservative culture, and they know that that's served us, you know, well and will serve us well through, through economic volatility. Just lots of communication internally around that and, and the ability to get back in the market, you know, earlier than peers and, and the strength of our capital base and liquidity that we'll be able to deploy. We've just been, you know, very communicative about generating, you know, kind of capital and dry powder so we can serve clients when other banks have to step away, likely in the coming quarters.
David Feaster (Managing Director and Analyst of Banking)
Makes complete sense. Thank you.
Chuck Shaffer (Chairman and CEO)
Thank you, Dave.
Operator (participant)
Thank you. Our next question is from the line of Brandon King. Please go ahead. Your line is open.
Brandon King (Equity Research Analyst)
Hey, good morning. Thanks for taking my questions.
Chuck Shaffer (Chairman and CEO)
Good morning, Brandon.
Brandon King (Equity Research Analyst)
Yes, I wanted to follow up on the conversation on deposits and, and then also loan growth and managing the balance sheet. You know, seems like core deposit growth should kind of trend higher from here and, you know, loans seem like they're being stable to down a little bit. How are you thinking about the loan-to-deposit ratio going forward? I know it's in the 80s now. Are you looking to kind of drive that down kind of in the 70s, or just, just in general, how are you thinking about the balance sheet?
Michael Young (Treasurer and Director of Investor Relations)
Yeah, Brandon, this is Michael. You know, I think holistically, some of that will be driven by the amount of success we have in on the deposit side. We do have an opportunity, I think, as, you know, the securities yield securities cash flow comes in, you know, loan growth has been a little softer, we generate more cash, and we're probably able to pay down, you know, some higher cost 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 84% to 85%, is probably the trajectory we would head towards.
You know, a lot of that will depend on just if we're getting paid for risk on the loan side and if we are, you know, able to generate that, that deposit growth that we think might be coming in the back half of the year.
Brandon King (Equity Research Analyst)
And with that, what do you think about the securities portfolio now with those cash flows coming online? Are you looking to redeploy that potentially to higher-yielding securities, or would that generally just go down to paying down higher cost lending?
Michael Young (Treasurer and Director of Investor Relations)
Yeah, I think generally we're just using the cash flow off the securities book at this point to fund lending, and loan growth. I think you should, you know, just assume we've got about $300 million in cash flow off the securities book over the next 12 months with, you know, half of that roughly, principal payments. You should just assume that the securities book continues to trend lower, related to that kind of trend.
Brandon King (Equity Research Analyst)
And how much cash flow are you expecting again? Could you remind us?
Michael Young (Treasurer and Director of Investor Relations)
Yeah, it's a little over $300 million over the next 12 months.
Brandon King (Equity Research Analyst)
Okay. Then lastly, I noticed the interest rate swaps that have benefited securities yields. Could you give us the thought process around putting on those interest rate swaps and how you're managing the asset sensitivity going forward?
Michael Young (Treasurer and Director of Investor Relations)
Sure. you know, just good opportunity, in the market, and we had, you know, a portion, as, as Tracy mentioned, of the deposits that flipped to floating related to an IOTA deposits. It was a proactive opportunity to really kind of mute some of those impacts. We moved $400 million to a pay-fixed swap. We were paying about 3.90 and now receiving overnight SOFR, which moved us to more variable. The securities book now is just under 30% variable versus 70% fixed. It's just a proactive opportunity to pick up a good bit of incremental yield here near term over the next 2 years, without a lot of downside risk from rates potentially moving lower. That's kind of the, the overall opportunity there that we took.
Remind me the second part of your question there, Brandon.
Brandon King (Equity Research Analyst)
Oh, yeah. Just going forward, you are expecting to, you know, do more trades like this, or do you think you're in a good spot just given the, the position of funding?
Michael Young (Treasurer and Director of Investor Relations)
Yeah, we'll, we'll always be opportunistic and, you know, depending on our expectations of the market and interest rates and our balance sheet positioning, you know, kind of what the appropriate moves are to make to manage that risk, you know, in the environment ahead as we see, you know, rate volatility and things unfolding. We'll be incremental there. No big swings, no big bets, just, just incremental movements to improve the overall positioning and earnings and yield returns for the bank within the risk context. I think that's kind of the right way to think about it. Nothing specific to call out today.
Brandon King (Equity Research Analyst)
Okay. That's all I had. Just take my questions.
Michael Young (Treasurer and Director of Investor Relations)
Thank you, Brandon.
Operator (participant)
Thank you. Our next question is from the line of Stephen Scouten. Please go ahead. Your line is now open.
Stephen Scouten (Managing Director and Senior Research Analyst)
Yeah, thanks. Good morning. Hey, I wanted to follow around on the NIM guidance, the 30 basis points quarter-over-quarter decline. Kind of what's 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 Bank that make your, you know, NIM move into the third quarter any different? Just kind of walk me through those pieces, if you could.
Michael Young (Treasurer and Director of Investor Relations)
Sure, Stephen, this is Michael again. You know, I think that, you know, a couple, couple key call-outs I would, I would make there. One is the IOTA impact. That's about a 10 basis point increase to the cost of, of funding or cost of deposits there. You know, that's a idiosyncratic driver for us that's maybe different from peers. It's kind of a one-time reset. And then we should be kind of on a normalized run rate from there. You know, the other piece is just probably the, the spot rate exiting the quarter is a little higher. If we just kind of run rate that going forward, you know, there's a, a little pressure to be felt there.
You know, as we mentioned, kind of the seasonality around deposits for us, we're, 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, and maybe next quarter that, you know, I think with, with some return of seasonality tailwinds as opposed to headwinds, you could see some benefit along with all the organic growth efforts that we're, we're discussing internally. I think that's kind of the, the moving pieces that's getting us there. You know, hopefully we'll, we'll see those benefits kind of start to materialize as we head later in the year and maybe into 2024.
Stephen Scouten (Managing Director and Senior Research Analyst)
Okay, 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 beta perspective?
Michael Young (Treasurer and Director of Investor Relations)
Sure. On the loan beta side, you know, we are not growing very quickly at the moment, you know, we'll, we'll see probably less loan beta. We've got about, you know, 60% kind of fixed rate balance sheet on the loan side. You know, just not as much loan repricing there, but we'll see some incremental movement obviously, as lower rate loans mature, and then we're able to reprice and any, you know, refinancing that we can do in the interim. That's kind of on the loan side. On the deposit side and betas, you know, I think just generally for the industry, you're gonna see higher betas on the incremental Fed hikes from here. I don't think there's, there's a differential there for us versus anyone else, really.
We'll just kind of have to see how far the Fed moves and, and what the impacts will be there. You know, we've managed cum beta 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. We think we likely stabilize a little bit from here and, and likely trend better, hopefully.
Stephen Scouten (Managing Director and Senior Research Analyst)
Perfect. Perfect. On that 60% fixed rate, how do you think about the, the rollover of that? I mean, is that like a 5-year kind of time period that we can think of fairly ratably over that book of loans and, and how they reprice over time?
Michael Young (Treasurer and Director of Investor Relations)
Yeah, that's about right, Stephen. You know, most things are, are kind of maturing, or, or really, the life of the loan is, extending to maturity. You know, 5-year average life is probably fair. You know, in, in higher rate times, you might have seen a 3.5-year life or something like that. You know, we're not seeing those early payoffs or pay downs, so 5 years is probably appropriate at this point.
Stephen Scouten (Managing Director and Senior Research Analyst)
Makes sense. Makes sense. Okay, then last thing for me, you know, with the, with the discounts, the purchase discounts, I mean, your total reserve and purchase discounts, what, like around 2%? The Florida economy is strong. Y'all's loan book is super conservative and granular. You're 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 seem possible in your modeling?
Tracey Dexter (CFO)
Yeah, Stephen, you know, our allowance coverage is up, about 4 basis points from the prior quarter. The economic scenarios that we use continue to contemplate risks related to sustained higher rates, persistent inflation. We just look at those economic scenarios each quarter in the context of, you know, our Florida environment and what we're seeing in our portfolio, and, you know, we just try and make our, our best estimate each quarter. It's difficult to say in advance. I do think that we are, you know, well covered when you certainly include the impact of the remaining purchase discount, and I think we feel pretty comfortable at that level.
Chuck Shaffer (Chairman and CEO)
Yeah, I'd just follow up with that. You know, it's the balance sheet's incredibly strong. When you look at the capital we have, the loss absorption that's there in our ACL coverage ratio, we feel very confident in our position here.
Stephen Scouten (Managing Director and Senior Research Analyst)
Yeah, no question. Great. Thanks, guys, for the color and the time. Appreciate it.
Chuck Shaffer (Chairman and CEO)
Thank you, Stephen.
Operator (participant)
Thank you. Once again, as a reminder, ladies and gentlemen, it is one, four to ask a question on the phone lines. At this moment, I'm showing no further question on the phone lines.
Chuck Shaffer (Chairman and CEO)
Okay, thank you, operator, and, we're around if anybody wants to have follow-up calls, and, appreciate everybody joining us this morning. Thank you.
Operator (participant)
Thank you, ladies and gentlemen. That does conclude today's call. We thank you for your participation, and I'll ask you to please disconnect your lines. Have a good day.