Q2 2023 Seacoast Banking Corporation of Florida Earnings Call
Participants
Charles M. Shaffer; Chairman, President & CEO; Seacoast Banking Corporation of Florida
Michael Masters Young; Treasurer & Director of IR; Seacoast Banking Corporation of Florida
Tracey L. Dexter; Executive VP & CFO; Seacoast Banking Corporation of Florida
Brady Matthew Gailey; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Brandon Thomas King; Associate; Truist Securities, Inc., Research Division
David Pipkin Feaster; VP & Research Analyst; Raymond James & Associates, Inc., Research Division
Stephen Kendall Scouten; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Presentation
Operator
Greetings. Welcome to Seacoast Banking Corporation Second Quarter 2023 Earnings Conference Call. My name is Malika, and I will be your operator. (Operator Instructions)
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 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. Shaffer, you may begin.
Charles M. Shaffer
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 Dennis Hudson, 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 asset threshold, definitively positioning Seacoast to 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 resident 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 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 costs. We expect the full benefit of the reduction in force to be realized in Q4 with a decline in expenses from the third and the fourth quarter and reduce the run rate into 2024. Tracey will provide expense guidance in our 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. And 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. And 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 positions Seacoast well compared to peers and sets us up to take advantage of opportunities we expect to arise 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 Tracey to walk through our financial results.
Tracey L. Dexter
Thank you, Chuck. Good morning, everyone. Directing your attention to second quarter results, beginning with the highlights on Slide 4. Over the past 3 quarters, we've closed and converted 3 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 TC EBITA 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 remained 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 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. 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 1 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 7. Wealth revenues increased 8% compared to the first quarter and 20% compared to the second quarter of 2022. The 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 3 years. Our family office style offering continues to resonate with customers, generating strong returns for the franchise.
Moving to Slide 8. 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 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 million to $95 million. This includes the amortization of intangibles and approximately $2 million 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 million 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 and 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. 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. Exposure across industries and collateral types is 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 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 nonowner-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 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 increase in coverage to 1.58%. The allowance for credit losses, combined with the $202 million remaining unrecognized discount on acquired loans totaled $362 million or 3.6% 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 in the broader economic environment and are carefully considering the ongoing impact 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. Nonperforming loans represent 0.48% of total loans, and the percentage of classified assets to total assets was 0.9%. 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 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 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 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. And we have a peer-leading level of noninterest-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 back 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.
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.
Charles M. Shaffer
Thank you, Tracey, and Malika, I think we're ready for Q&A.
Question and Answer Session
Operator
(Operator Instructions) Our first phone question is from the line of Brady Gailey.
Brady Matthew Gailey
I know it's embedded in your fee income guidance, but I was just wondering the size of the Durbin hit. I know I think in the past, we've talked about roughly $12 million a year, that would be $3 million a quarter. Is that still the right way to think about that impact from Durbin?
Tracey L. Dexter
It is, Brady. You can use that number.
Brady Matthew Gailey
And then noninterest-bearing fell here. You're not alone, the industry is seeing that across the board. But for Seacoast, your mid-30% noninterest-bearing deposits to total, where do you think that lands.
Michael Masters Young
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 quarters 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 into the low 30 percentage range, but 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 Matthew Gailey
And then, Chuck, I heard your comments about maybe a year from now, the M&A environment will be a little more active. You guys have been very active in Florida bank M&A. I'm just wondering, once that pain gets turned back on, what is Seacoast M&A strategy? I mean there's not a lot of larger targets left in the States. And I know professional is a big deal for you all, maybe your biggest ever. But do you return to looking at kind of smaller privately held targets when you think about bank M&A?
Charles M. Shaffer
If you sort of look back here recently, we did do a lot of deals here over the last 14, 15 months. It was a concentrated period of M&A. 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. A lot of competency here inside the organization, both in terms of technology and socially, how to bring deals into Seacoast.
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, 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 on what deals look 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 being 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 #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. And so if those opportunities emerge, it's kind of back to exactly what we've been doing, Brady.
Brady Matthew Gailey
And then finally for me, bigger picture, -- if you look over time, Florida tends to be kind of a boom bus state when it comes to real estate prices. Real estate prices have been booming for a while down there. So I'm just wondering like as we head into uncertain economic times, do you think there could be some real softness in real estate prices? Or is there a dynamic difference this time around that could insulate real estate prices in Florida?
Michael Masters Young
I think a lot's changed in Florida over the last 10 years. You've had much stronger urban anchors 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. I also think in Florida, there was not a lot of construction. 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. But if you look at really since the last crisis, there's 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. And so I feel very confident in real estate values in Florida. I don't think we're going to see the pace of increase we are seeing. We're seeing stabilization in terms of value increases. And so residential, to me, feels very healthy and very strong. In the 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 the absorption has been there, the markets remain strong. Population growth is there. That all being said, we're always very mindful 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, Brady.
Operator
Our next question is from the line of David Feaster.
David Pipkin Feaster
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, I mean, you had one of the highest levels of customer account growth in -- later in the quarter. I'm just curious, where are you seeing success driving core deposit growth? And then how our new kind of core interest-bearing add-on rates at this point? Where are you able to drive new money growth?
Charles M. Shaffer
Maybe I'll start with the first part, and then Michael, you can follow up with a second on new money rates. What's very exciting to me, David, as 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 full relationships. And 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. And I think there's 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 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, very strong, what I think are -- I'm sorry to biased here, but the best commercial banking team in the state of Florida in combination with what is -- we 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 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. And I think there's a lot of opportunity.
Michael Masters Young
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 bank 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 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 3s on a blended basis is really the focus.
And one quick follow-up to Brady's question earlier. I think it's an important distinction and call out is 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 that's maybe an important call out to look at as well.
David Pipkin Feaster
Could you quantify that? That's a good point. Could you -- how big of an impact that was?
Charles M. Shaffer
It was sizable. I don't want to get too fine a point on that, but probably over $150 million.
David Pipkin Feaster
And then 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 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 with the commentary on what we're seeing with new deposit rates in the 3s kind of maybe where the core NIM can stabilize once funding costs stabilize and we can start paying down the borrowings and those types of things, what kind of the normalized margin.
Charles M. Shaffer
The roll-off rates have been increasing a little bit. We had a little higher paydown 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 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 we're seeing loan pricing generally move higher. That's been a headwind to growth for us over the last 6 to 9 months that we've articulated where we just felt like risk-adjusted returns weren't there. But now that we're getting into the 7 handles, mid-high with much better structure, much better underwriting, it's attractive.
So bringing that all together versus the 3% add-on rates, you're 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.
David Pipkin Feaster
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 I guess 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? And then I'm just curious a 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 you're hearing from your lenders? Are they pushing back at all?
Charles M. Shaffer
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 is really evaporated. There's just not been a lot of projects to pencil 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, to some extent, same thing, rates are much higher. And so I would say, probably the way I think about 3/4 of its market demand, a quarter, but it's probably us. And sort 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 is going to continue to shrink the balance sheet. We know there's going to be a quantitative tightening that 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 lending, but what we want to maintain is the firepower to go out and compete, particularly as things turn here and really compete for the broader operating companies and the broader relationships that are going to bring deposits, treasury, wealth management opportunities, equipment lending, the solid, deep, highly profitable relationships. And 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. And so 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 have come over. They are bringing relationships over. They -- 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've been brought into thinking about how to really go out and compete in there, and they're doing an incredible job. So I have really no concerns about the team are being poached. I think they're excited to be part of our franchise and continue to bring their friends with them. So I'm pretty pleased with where we are today.
Michael Masters Young
And Dave, I might just add to that. Listen, 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 served us well and will serve us well through economic volatility. So just lots of communication internally around that and the ability to get back in the market earlier than peers and the strength of our capital base and liquidity that we'll 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.
Operator
Our next question is from the line of Brandon King.
Brandon Thomas King
So I wanted to follow up on the compensation on deposits and then also loan growth and managing the balance sheet. It seems like core deposit growth should kind of trend higher from here and loans seems like they're being stable to down a little bit. So how are you thinking about the loan-to-deposit ratio going forward? I know it's in 80s now. Are you looking to kind of drive that down kind of in the 70s? Or just in general, how you're thinking about the balance sheet?
Michael Masters Young
So I think holistically, some of that will be driven by the amount of success we have on the deposit side. But we do have an opportunity, I think, as the securities. Securities cash flow comes in. Loan growth has been a little softer. We generate more cash, and we're probably able to pay down 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 towards 84%, 85% is probably the 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 deposit growth that we think might be coming in the back half of the year?
Brandon Thomas King
And with that, what are you thinking 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 just go down to paying down higher cost lending?
Michael Masters Young
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, you should just assume that the securities book continues to trend lower related to that kind of trend.
Brandon Thomas King
And how much cash flow are you expecting? Again, could you remind us?
Michael Masters Young
Yes, it's a little over $300 million over the next 12 months.
Brandon Thomas King
And then lastly, I noticed the interest rate swaps that had benefited securities yields. Could you give us the thought process on putting on the swaps and how you're managing asset activity going forward?
Michael Masters Young
So just good opportunity in the market, and we had a portion, as Tracey mentioned, of the deposits that flip to floating related to iota deposits. And so it was a proactive opportunity to really kind of mute some of those impacts. And so we moved $400 million to a pay fixed swap where we're paying about 390 and now receiving overnight SOFR, which moved us to 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 2 years without a lot of downside risk from rates potentially moving lower. So that's kind of the overall opportunity there that we took. And remind me the second part of your question there, Brandon.
Brandon Thomas King
Yes. Just going forward, you are expecting to do more trades like this? Or do you think in this spot, just given the position of funding?
Michael Masters Young
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'll be incremental there, no big swings, no big bets, just incremental movements to improve the overall positioning in 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.
Operator
Our next question is from the line of Stephen Scouten.
Stephen Kendall Scouten
I wanted to follow around on the NIM guidance, the 30 basis point 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 that makes your NIM move into the third quarter, any different? Just kind of walk me through those pieces, if you could.
Michael Masters Young
I think a couple of key callouts I would make there. One is the [iota] impact. That's about a 10-basis point increase to the cost of lending or cost of deposits there. So that's an 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, there's a little pressure to be felt there. And as we mentioned, kind of the 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 some return of seasonality tailwinds as opposed to headwinds, you could see some benefit along with all the organic growth efforts that we're discussing internally. So I think that's 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 head later in the year and maybe into 2024.
Stephen Kendall Scouten
So 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 in the deposit made perspective?
Michael Masters Young
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 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 any refinancing that we can do in the interim. So that's kind of on the loan side. On the deposit side and betas, I think just generally for the industry, you're going to see higher betas on incremental Fed hikes from here. So I don't think there's 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 (inaudible) 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, but we think we'll likely stabilize a little bit from here and likely trend better, hopefully.
Stephen Kendall Scouten
On that 60% fixed rate, how do you think about 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 a loan and how they reprice over time?
Michael Masters Young
Yes, that's about right, Stephen. Most things are kind of maturing or really the life of the loan is extending to maturity. So 5-year average life is probably fair. In higher rate times, you might have seen a 3.5-year life or something like that, but we're not seeing those early payoffs or pay downs for 5 years is probably appropriate at this point.
Stephen Kendall Scouten
And then last thing for me. With the discounts -- the purchase discounts, I mean, your reserve and purchase sales was like around 2%, Florida economy is strong. You all 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 0-ish provision for a while? Does that seem possible in your modeling?
Tracey L. Dexter
Yes, Stephen, 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 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.
Michael Masters Young
Yes, I'd just follow up that the balance sheet is 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.
Operator
(Operator Instructions) And at this moment, I'm showing no further questions on the phone lines.
Charles M. Shaffer
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.
Operator
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.
