Seacoast Banking Corporation of Florida

NASDAQ:SBCF

Earnings Call Transcript 2021-Q2

[Operator]

Welcome to Seacoast Banking Corporation’s Second Quarter 2021 Earnings Conference Call. My name is Vanessa and I will be your operator.

Before we begin, I have been asked to direct your attention to the statement contained 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 call over to Mr. Chuck Shaffer, President and CEO of Seacoast Bank.

[Chuck Shaffer, President and Chief Executive Officer]

Thank you, Vanessa and thank you all for joining us this morning. As we provide our comments, we will reference the second quarter 2021 earnings slide deck, which can be found at seacoastbanking.com. With me this morning is Tracey Dexter, Chief Financial Officer and Jeff Lee, Chief Digital Officer.

During the quarter, the Seacoast team generated strong operating performance, growing tangible book value per share and annualized 11% from the prior quarter to $17.08, while distributing a dividend of $0.13 per share to our shareholders. The adjusted efficiency ratio was 53.5% in line with prior guidance and the adjusted return on tangible common equity ratio was 14.27%. We continue to manage our capital prudently focused on consistently building shareholder value over the long run while maintaining a fortress balance sheet. Additionally, we continue to deliver peer-leading operating efficiency while making investments to position the company for the accelerated growth we see in the coming periods.

The Florida economy continues to expand meaningfully with strong inbound population growth driven by low taxes, a business-friendly environment and a post-pandemic work from anywhere economy. Last year, Florida’s population grew by 388,000 residents or 1,061 people a day and Florida’s unemployment rate continues to improve each month, most recently 4.9% compared with the national unemployment rate of 5.9%. Corporate relocations continue to occur with many organizations bringing large portions of their staff to Florida. In particular, South Florida has become a hotspot for banking, financial services and technology relocations, including firms such as Elliott Management, Blackstone and Goldman Sachs. And in Orlando, for example, Deloitte and KPMG have made significant investments along with many other large corporations. This strong economic backdrop of population growth and corporate relocations helped support a robust quarter for deposit growth, interchange income and notably, a growing commercial pipeline.

Additionally, the wealth business continued its vigorous path forward generating another $133 million in assets under management this quarter, taking us to $1.2 billion in AUM at quarter end. Remarkably, deposit transaction accounts have grown $860 million from year end or 22%, demonstrating the underlying quality and strength of our customer franchise in Florida. Loan outstandings, excluding PPP and loans held-for-sale declined $6 million from the prior quarter, essentially in line with our guidance of flat growth for the second quarter. The commercial pipeline exiting the quarter is strong and growing. Our late-stage commercial pipeline was $322 million at quarter end, up 34% from the prior quarter end and up 175% from the prior year same period. We expect loan growth, excluding PPP, to be in the high single-digits annualized in Q3 and Q4 and Tracey will elaborate further in her comments.

I would also like to specifically note that despite the pressures the excess liquidity is putting on the net interest margin in the industry, we will not waver from our strict credit underwriting standards and we will focus on disciplined and appropriate growth. Our asset quality metrics remained strong with NPL and NPA ratios moving favorably quarter-over-quarter and we are pleased with the credit portfolio’s performance and continue to see no material issues on the horizon.

During the quarter, we continued to expand our commercial banking leadership team in the Tampa St. Pete MSA and we expect this to lead to further build-out of banking talent in that market. This investment follows the significant expansion of our commercial banking team in Orlando late last year and we continue to have multiple active conversations with bankers and teams occurring around the state and we expect numerous further talent announcements in the coming quarters. Additionally, we completed the significant enhancement of our nCino commercial lending platform, which will help facilitate faster turn times and further our speed to market.

We expect to close the legacy bank transaction, the first week of August and legacy is ahead of our modeled assumptions at the deal announcement with loans, deposits and net income all ahead of plan. And as a reminder, we pickup a very strong lending team in the legacy transaction with extensive experience in South Florida and we continue to have multiple conversations with potential acquisition targets across the state of Florida.

And to conclude, the company recorded another quarter of impressive performance, generating disciplined growth and franchise value. Our fundamentals remain very strong with a well-capitalized, low risk balance sheet, strict underwriting standards and a very attractive customer franchise well positioned for growth. Our goal remains to continue increasing market share in the robust Florida marketplace in a disciplined manner by focusing on growing value-creating relationships, improving digital customer experiences and driving greater productivity across the franchise. With the robust growth and transformation occurring in Florida, we believe our plan of a consolidating market share across the state will drive significant value for shareholders in the long run. We are excited about the future ahead and we are excited with the momentum occurring across the state.

I will now turn the call over to Tracey, who will walk through our financial results.

[Tracey Dexter, Chief Financial Officer]

Thank you, Chuck. Good morning, everyone. Directing your attention to second quarter results, let’s start with Slide 5. Net income was $31.4 million for the second quarter on a GAAP basis, an increase of 25% year-over-year. On an adjusted basis, which excludes M&A and branch consolidation charges, net income was $33.3 million, an increase of 31% year-over-year. Earnings per share on a GAAP basis increased to $0.56 compared to $0.47 in the prior year. Adjusted earnings per share increased to $0.59 from $0.48.

On a GAAP basis, we reported 1.48% return on tangible assets and 13.88% return on tangible common equity. On an adjusted basis, second quarter ROTA was 1.52% and ROTCE was 14.27%. As we continue to grow our capital base, it’s worth mentioning that if the second quarter’s tangible common equity to tangible asset ratio was adjusted to an illustrative target of 8%, our adjusted return on tangible common equity would be 19% increasing from 16.7% in the second quarter of 2020.

Tangible book value per share increased to $17.08, up from $16.62 last quarter and an increase of 13% over the prior year, inclusive of a cash dividend of $0.13 issued during the second quarter. Total loan pipelines increased by 83% from this point last year, including an increase of 175% in commercial loan pipelines in line with the strong Florida economic recovery. We continue to invest in commercial talent and technology while not wavering on our strict credit underwriting policy. Looking forward, we see significant opportunity to continue expanding commercial banking talent across the state.

Credit quality remains strong and we continue to see low levels of charge-offs and declines in non-performing assets. As a result, we released $4.9 million in loan loss reserves this quarter. The cost of deposits decreased by another 5 basis points to 8 basis points. The wealth management team continues to reach new records with year-over-year growth of $451 million in assets under management, bringing total AUM to $1.2 billion and another record quarter in interchange income, which reached $4.1 million as we continue to see higher transactional volume and higher per card spending.

Turning to Slide 6, net interest income on a fully tax equivalent basis decreased 1% sequentially to $65.9 million and the net interest margin declined 28 basis points to 3.23%. I would like to take a moment here to break down the two drivers of this decline. First, we saw meaningful increases during the quarter in near zero rate transaction accounts. Transaction accounts grew 35% during the quarter on an annualized basis. This growth was the result of both the onboarding of new relationships and additional cash balances held by current relationships. These higher deposit balances, strengthened our borrowers’ balance sheets and the growth shows the incredible economic expansion that is happening in Florida.

While the resulting increase in our cash balances is impactful to the margin, we are pleased with the continuing growth of our high-quality customer franchise. Overall growth in our cash balances this quarter accounted for 23 of the 28 basis point decline in margins. The other issue that contributed to the decline in net interest margin compared to the prior quarter is lower PPP interest and fees on lower balances as those PPP loans continue through forgiveness. Lower PPP accounted for the other 5 basis points of the 28 basis point decline.

Looking at other components of the net interest margin, we are very pleased with the resilience of the securities and loan yields, despite continued falling rates in the quarter. We have been prudent in deploying excess cash with rates remaining low. We added a net $253 million to the securities book this quarter and the yield on the securities portfolio dropped only 2 basis points. In the loan book, excluding the effects of PPP and accretion of purchase discounts, loan yields decreased only 2 basis points to 4.13%. Offsetting and favorable is improvement in the cost of deposits, which decreased by 5 basis points to 8 basis points in the second quarter, reflecting our continued re-pricing down of interest-bearing deposits and time deposits.

Looking ahead to the third quarter, we expect the cost of deposits to remain in the high single-digits, including with the onboarding of the legacy Bank of Florida acquisition in the first week of August. We expect that there will continue to be downward pressure on the net interest margin in the third quarter given the continuing effect of excess liquidity and lower add-on yields.

Moving to Slide 7, adjusted non-interest income, which excludes securities gains and losses, was $15.4 million, lower by $2.4 million from the previous quarter and an increase of $1.6 million from the prior year quarter. We continue to focus on driving non-interest income. In particular, we are very focused on building the wealth management line item given its high return capital and the value it adds to our commercial relationships. The wealth management team continues to deliver strong growth and successful relationship expansion with an increase of $133 million in AUM this quarter and an increase of $451 million from this time last year. As a result, wealth management income increased to a record $2.4 million this quarter. Other increases from the prior quarter include an increase of $0.3 million in interchange revenue from higher transaction volume and higher spend.

In our mortgage banking business, as expected, revenue is lower on lower refinancing demand and tight housing level and inventory levels. However, the pipeline has stabilized and this team will continue to contribute meaningful results having built a strong foundation of relationships with local real estate professionals and other Florida partners and a reputation for delivering the highest service levels. We will continue to capitalize on low interest rates and on a strong Florida housing market.

In the category of other income, results are lower by comparison as the prior quarter included $1.7 million in one-time collections on previously acquired loans. We expect SBA volume to improve in the coming quarters with the focus shifting away from PPP and we purchased $25 million of BOLI late in the second quarter, with a tax equivalent first year yield of 4.5% that will positively impact future periods. Looking ahead, we expect overall non-interest income in the third quarter of approximately $16 million as we continue to focus on growing our broad base of revenue sources.

Moving to Slide 8, adjusted non-interest expense for the second quarter was slightly below the guidance range we provided and totaled $43.4 million lower by $0.5 million from the prior quarter, addressing all changes on an adjusted basis. Salaries and benefits expense was flat, reflecting the offsetting effects of lower 401(k) and other benefits compared to a seasonally high first quarter and lower deferrals of PPP loan origination costs compared to the first quarter. The PPP program ended early in the second quarter and the lower originations impacted deferred costs by $1.9 million quarter-over-quarter. Legal and professional fees were lower by $0.3 million and occupancy-related charges were lower by $0.3 million, much of which is driven by the 3 branch consolidations in the first quarter. Looking ahead, we expect to maintain our expense discipline, as we always do. We expect third quarter expenses, excluding the amortization of intangible assets and including the addition of legacy Bank of Florida to the franchise and investments in commercial banking to be in the range of $46 million to $47 million.

Moving to Slide 9, the adjusted efficiency ratio in the second quarter increased to 53%, reflecting lower PPP and mortgage banking revenue offset by higher wealth and interchange revenue, lower cost of deposits and lower non-interest expenses. Reiterating the guidance we provided last quarter, we continue to expect the full year 2021 efficiency ratio to be in the low to mid 50s.

Turning to Slide 10, loans outstanding, excluding PPP loans, decreased this quarter by only $6 million. For the first 6 months of 2021, loan production has been in line with our expectations entering the year and in line with prior guidance. We continue to be vigilant and steadfast in executing our strict credit underwriting guidelines regardless of the level of liquidity we are carrying. Florida’s economic recovery is now well established and recent talent additions and investments in technology position us well as loan demand returns. This is evident in our growing pipeline with the commercial pipeline higher by 34% compared to March 31 and the consumer pipeline higher by 13%.

Across our markets and products, we are seeing increasing loan demand in line with Florida’s strong economic recovery. In residential, lower pipelines reflect slowed refinance activity and tight housing inventory levels. During the quarter, we also purchased a $38 million residential pool. We will continue to be opportunistic where we find wholesale loan transactions that meet our underwriting criteria as an alternative to investment security purchases and have already identified additional purchase pools that we expect to close in the coming quarter.

Looking forward, we expect organic loan growth, excluding PPP, to be in the mid-single digits for the coming two quarters. And in addition, we expect to add opportunistic wholesale pool purchases that meet our underwriting criteria that should take us to annualized growth in the high single digits in each of the coming two quarters. We expect organic loan growth to return to pre-pandemic levels in 2022. We’re pleased to report loan yields this quarter, where excluding PPP and accretion of purchase discounts, we saw a decrease of just 2 basis points to 4.13%. We expect loan yields to further modestly decline in the third quarter with lower add-on yields, assuming no change in the rate environment and increased originations.

Turning to Slide 11, the graphic shows a year-to-date summary of PPP activity. We originated $256 million year-to-date under the renewed program, primarily in the first quarter. We’ve processed $457 million in forgiveness year-to-date, including $243 million in the second quarter, bringing principal balances of PPP loans outstanding at June 30 to $375 million. Overall, since the start of the original program, we’ve collected $27.6 million in SBA fees. Of that, we’ve recognized $17 million live to date and have $10.6 million in fees remaining to be recognized in future periods.

Turning to Slide 12, highlighting the diversity of our exposure and concentration levels well below regulatory guidance. Our portfolio is broadly distributed across various asset classes. Stabilized income-producing commercial real estate represents 26% of loans outstanding. Owner-occupied commercial real estate represents 20% of the portfolio and residential real estate comprises 23% of the portfolio. Approximately 74% of our commercial portfolio, excluding PPP, is secured by real estate with borrowers that have meaningful equity in their investments and lower loan to values. For years, we’ve consistently managed our portfolio to keep construction and land development loans and commercial real estate loans well below regulatory guidance. At June 30, that represented 22% and 150% of risk-based capital, respectively. Our loan portfolio is diverse and broadly distributed across categories with an average commercial loan size, excluding PPP, of $420,000.

Turning to Slide 13 for the securities portfolio, purchases in the second quarter were primarily agency CMOs and the lower yield of those additions resulted in a decline in yield on the portfolio of 2 basis points. Changes in the yield curve drove unrealized gains higher during the quarter. We’re carefully making new investments in bonds would have lower extension risk with shorter durations. Looking forward to the third quarter, we will continue to be prudent on how much cash we’ll put back to work in this portfolio and expect net additions of $200 million to $250 million. We expect that these will generally be assets with a 4-year duration that will roll down the curve providing liquidity to invest at higher rates as we go through time, and we’re currently seeing add-on yields of approximately 1.35%.

Turning to Slide 14, deposits outstanding were $7.8 billion, an increase of $450 million quarter-over-quarter and an increase of $1.2 billion or 18% year-over-year. Transaction accounts represent 60% of total deposits and have grown 30% year-over-year with factors like PPP and other stimulus funds contributing to higher customer balances. We’re pleased with the growth in deposit balances for the first half of the year despite the margin pressure. This growth demonstrates the strength of our customer franchise, a growing Florida economy and our ability to win share in the marketplace.

And on Slide 15, the cost of deposits has dropped further from 13 basis points in the first quarter to 8 basis points in the second quarter. Looking ahead to the third quarter, we expect the cost of deposits to remain in the high single digits, inclusive of the addition of legacy Bank of Florida. Also illustrated on this slide is the growth in deposits per branch, which reached $163 million at June 30, 2021, an increase from June 2019 of 44%. The trend in the chart is impressive as our digital and analytics competency continues to provide opportunity to drive operating efficiency across our retail franchise.

Moving to Slide 16, the wealth management business continues to deliver tremendous growth in assets under management, which increased 13% from the end of last quarter and 64% from this time last year. The team has done a remarkable job building a high net worth family office model and partnering with our commercial team, generating value for our most profitable clients and delivering another record revenue quarter. We will continue to invest and focus on building out wealth management as we move forward.

Moving to Slide 17, the allowance for credit losses under CECL reflects our estimate of lifetime expected credit losses, which includes our expectation that some loans will migrate into law through the cycle. The allowance, as a percentage of total loans excluding PPP, declined to 1.6%, down from 1.71% in the prior quarter. This is a reflection of improvement in economic conditions and resulted in us recording a reversal of provision expense this quarter. We also have $24.4 million in purchase discount on previously acquired loans that will be earned over the life of those loans as an adjustment to yield.

As we approach the expected closing of the acquisition of Legacy Bank in early August, I’d like to provide a reminder about the accounting for loans we’ll acquire. The accounting rules require that we record a day 1 provision on loans not designated as credit deteriorated, that’s non-PCD loans, and that represents the large majority of the loans in Legacy’s portfolio. Our initial estimate of that day 1 provision was approximately $7.5 million. I will point out, though, that the actual day 1 provision and the overall portfolio valuation adjustment may be somewhat lower than the initial estimate provided as economic conditions have improved from the time of announcement of the transaction. Though the bank’s performance has exceeded our expectations and the portfolio has grown, we’ll complete the full updated portfolio valuation as of the closing date, but wanted to at least point out that we do expect to record a provision for loan losses associated with the acquisition of Legacy Bank in the third quarter.

Turning to Slide 18 on asset quality, credit measures are strong and continue to improve. Net charge-offs in the second quarter were only $655,000 and the level of nonperforming loans decreased by $2.4 million to $32.9 million, representing 0.61% of total loans. Criticized loans declined to 13% of total risk-based capital at June 30. Performance on loans previously provided with payment accommodations has remained strong, and we have only $7 million in loans with active payment accommodations. The overall allowance for credit losses at June 30 is $81.1 million and allowance coverage, excluding PPP loans, decreased 11 basis points to 1.6%. We maintain a prudent level of allowance, and we’ll continue to revisit this estimate throughout the remainder of 2021.

Turning to Slide 19, our capital position continues to be very strong, and we’re committed to maintaining our fortress balance sheet. Tangible book value per share is $17.08, an increase of 13% year-over-year. The tangible common equity to tangible asset ratio was 10.4% at the end of the second quarter, and has consistently been among the highest in our peer group. The Tier 1 capital ratio was 18.3%, and the total risk-based capital ratio was 19.2% at June 30, each increasing over the prior quarter, even with the impact of the new shareholder dividend. Return on tangible common equity was 14.3% on an adjusted basis.

And finally, on Slide 20, looking back from the beginning of 2017 to today, we’ve achieved a compounded annual growth rate in tangible book value per share of 12%, driving shareholder value creation and successfully navigating the pandemic. We’ve positioned this franchise with a foundation of strong liquidity and capital from which we will execute on our strategic growth initiatives and optimize the opportunities of this strong Florida economy.

We look forward to your questions. I’ll turn the call back over to Chuck.

[Chuck Shaffer, President and Chief Executive Officer]

Thank you, Tracey, and Vanessa, I think we’re ready for Q&A.

[Operator]

Thank you, sir. [Operator Instructions] And we have our first question from David Feaster. Please go ahead, sir.

[David Feaster, Raymond James]

Hi, good morning everybody.

[Chuck Shaffer, President and Chief Executive Officer]

Hi, David. Good morning.

[Tracey Dexter, Chief Financial Officer]

Good morning.

[David Feaster, Raymond James]

So look, the Florida economy has been doing very well. Economic activity is improving. It’s great to hear the commentary on the new hires and the pipeline builds. I’m just curious, as you look at your pipeline and the originations, how much of the growth that you’re seeing, you think is from existing clients just being more active and more confident in the economic recovery and demanding new credit? And then how much do you think is from these new hires or client migration from the PPP, just curious some of the dynamics within that?

[Chuck Shaffer, President and Chief Executive Officer]

Great question, David. Thank you. What’s exciting, at least over the last couple of quarters is we are starting to see customers come off the sidelines that were sitting on large portion of the cash and reinvesting in our business. We’re seeing that kind of across the state, particularly in our owner-operated companies, which is great to see, and we’re seeing more CRE opportunities that continue to fill the pipeline. I would say that it’s a mix between both current customers, which is the amount of activity there is growing. And importantly, a lot of it is coming from the new hiring. The Orlando team that we acquired late last year is now well established and sort of in the growth side of that trajectory. And we’ve just brought on a new team over in the Tampa-St. Pete market. I expect further bankers to follow there and build out as we move through time. So it’s a mix, but both current customers and prospects and the velocity that’s going on there gives us some confidence that we’re going to see sort of organically mid-single-digit growth in the next couple of quarters. And then return back to high single-digit growth moving into next year. So we’re feeling good where we’re at. We’re right on where we would thought we would be this time of year, right on our guidance. And we’re starting to see the acceleration. We’re expecting 2022 to be a much better year for loan growth.

[David Feaster, Raymond James]

That’s terrific. And then I just wanted to touch base on M&A. I appreciate your commentary in the prepared remarks. And look, M&A has been a bit more competitive in Florida. It’s been interesting to see some out-of-state buyers that maybe hadn’t been expected. Just curious, the pulse of the M&A landscape, the strategy near-term, how pricing and conversations are trending and what geographies that you’re most focused on?

[Chuck Shaffer, President and Chief Executive Officer]

Thank you, David. And I would say we’ve been very active in the M&A space. As you know, over the last 8 years. We’ve done 11 transactions. We’ve done two or three transactions a year over that period of time. I would expect that pace to continue. We continue to have multiple conversations around the state. We – I think we’ve established ourselves as a high-quality acquirer, a good integrator. And we know Florida, and that goes a long way in understanding the management teams that we’re trying to acquire and the banks we’re acquiring. And I think there is a lot of opportunities as we move forward. There’s 87 banks remaining in Florida. I would say as we’ve gotten larger and we’re growing, about half of those make sense. So there is 40 plus opportunities in the state. And then lastly, I would say we continue to be focused on Naples up to Tampa, the entire I-4 region, all of Central Florida at large and the entire East Coast of Florida from Jacksonville to South Florida. As we continue to build what we think is Florida’s Bank, extending our Broward presence to the adjacent Miami-Dade market will make sense at some point as we move forward. We’ve entered that market organically over the last couple of years, and we’ve been focused primarily on domestic commercial businesses there. But there are a few well-run commercial banks in that market with deep roots that could make sense for us as we move through time. And so the combination of what’s happening in the state, the growth in the economy, the M&A. I think when we think about building shareholder value, concentrating market share in and around the entire state, I think, makes the most sense in the long run, and we are very focused on getting that done for our shareholders.

[David Feaster, Raymond James]

That makes a lot of sense. And then just pro forma for the deal that’s pending right now, we are going to be pushing up close to that $10 billion asset threshold. I am just curious, how do you think about $10 billion? It doesn’t seem as daunting as it used to be, but I am just curious your thoughts on crossing it organically, opportunities that you might have to stay under $10 billion near-term in delayed Durbin. And then just could you remind us of the impacts of Durbin on the bank.

[Chuck Shaffer, President and Chief Executive Officer]

Thank you, David. Yes. Obviously, with where we are at $9.3 billion and the addition of Legacy, we will be approaching $10 billion as we get to the end of the year. We do have a number of options to move deposits off balance sheet. As such, we will not or we don’t expect to cross $10 billion in the current year. We do expect to cross in the coming year. And as we cross, the Durbin impact is approximately $7.7 million after tax and roughly another $1.5 million after tax due to higher FDIC expense and reduction of the Federal Reserve dividend. And so – and just as a reminder on that, it only impacts half the year, the year after we cross. And so really, we are only – we won’t see the impacts of crossing $10 billion until the second half of 2023. And we believe we have identified a path forward. We know we need to offset that revenue impact, and we believe there is a number of M&A transactions that could be put together in a way that get us across during that period of time. And the last thing I would add to that is, I think our strategy of doing smaller, low-risk accretive transactions, specifically in Florida, adds considerable shareholder value over time and is the most effective way to neutralize the Durbin impact.

[David Feaster, Raymond James]

That makes a lot of sense. Alright. Thanks everybody.

[Chuck Shaffer, President and Chief Executive Officer]

Thank you, David.

[Operator]

And thank you. We have our next question from Michael Young. Your line is open.

[Michael Young, SunTrust Robinson Humphrey]

Hi, good morning. Thanks for taking the question.

[Chuck Shaffer, President and Chief Executive Officer]

Good morning Michael.

[Michael Young, SunTrust Robinson Humphrey]

I wanted to ask maybe sort of a bigger picture question just on the efficiency ratio guide. Obviously, impressive that you guys are able to hold that despite kind of lower rate environment, but also, over time, you have been investing into some more fee-oriented businesses, which typically come at higher efficiency ratios. So, that plus potential Durbin amendment hit coming, etcetera, etcetera. Are there areas that you are still able to pull cost savings from or is there sort of an expectation of higher rates or just kind of what all is built into the longer term kind of low-50s efficiency ratio guide?

[Chuck Shaffer, President and Chief Executive Officer]

Yes. When we look forward to ‘21 and into ‘22, we think we can remain in that low to mid-50s efficiency ratio. Part of its growth, we expect growth to return in the coming year, which drives NII. We expect NII to be higher as we go into the coming year. We expect the wealth management business to continue to grow, and we still have opportunities to be thoughtful about branch consolidation where it makes sense. And through M&A, we will have opportunities to take cost out as well. And so we feel fairly confident that we can maintain that low-50 to mid-50s efficiency ratio as we move in the coming year, and obviously, higher rates would be even more beneficial. But even on a forward rate curve, we think that, that really is will be our objective. I think that drives the most amount of return to shareholders, and that will continue to be our goal.

[Michael Young, SunTrust Robinson Humphrey]

Okay. That’s helpful. Yes, M&A is probably the hidden piece there. I wanted to also just ask kind of on the growth outlook, obviously, good to see the pipelines rebounding. I know you guys have done a tremendous amount of hiring. So, it might be good to get an update on kind of number of lenders now versus maybe a year ago. But also just sort of as we look at growth from here, what’s sort of the constraining factor? Is it client demand? Is it pricing and price competition versus other players in the market? Any other color there would be helpful.

[Chuck Shaffer, President and Chief Executive Officer]

Yes. The best way I can describe the environment is, obviously, there is a lot of liquidity in the industry and therefore, pricing competition and to some extent, growing structure competition has been challenging. And as we mentioned in our prepared comments, we are not going to, in any way, loosen our credit underwriting, our standards. We will continue to maintain our same policy as we move through time. But what gives me some comfort is we are starting to see more opportunities with existing clients that are sort of coming off the sidelines and investing back in their businesses. That’s exciting. We are seeing expansion in, for example, the healthcare sector and in many other cases with companies getting larger. And so we feel fairly confident moving forward. And the sort of additional to that is we have tremendous momentum in the hiring space. We – what’s been great is we brought on new talent in the organization. That talent has further talent that wants to follow and be a part of Seacoast. And given the size we are, the balance sheet we are, the growth trajectory and what’s going on in and around the state. There is a lot of excitement within our franchise around commercial banking and the momentum there. And I think all of that leads us to a great place in the coming year.

[Michael Young, SunTrust Robinson Humphrey]

Okay. And one last one for me, if I could, just on capital, obviously, you guys announced the share buyback, dividends in place. But the recent kind of drop in bank valuations has led to maybe slightly more attractive share price for Seacoast. Should we expect that you guys might consider nibbling if we got any lower than where we are today or given the kind of the M&A environment and organic growth that you are talking about over the next 6 months, 12 months, is that really on the back burner?

[Chuck Shaffer, President and Chief Executive Officer]

As we mentioned in the past, we look at things in terms of earn-back, and we will compare the earn-back and a buyback until the earn-back in deals and constantly weigh the two against each other. So, all I can tell you Michael is we will continue to revisit it as time moves on. We will see where prices go. We are not buying any shares right now, but we will continue to monitor the situation.

[Michael Young, SunTrust Robinson Humphrey]

Okay. Thanks. I appreciate the color.

[Operator]

And we have our next question from Steve Moss. Please go ahead

[Steve Moss, B. Riley FBR Inc.]

Hi, good morning.

[Chuck Shaffer, President and Chief Executive Officer]

Hi Steve.

[Steve Moss, B. Riley FBR Inc.]

Maybe just following up on the pipeline here, just kind of curious what the underlying mix is between commercial and CRE and where are you guys seeing new opportunities in CRE as well?

[Chuck Shaffer, President and Chief Executive Officer]

Roughly, if you were to break it down today, 22% of the pipeline, C&I, 44% is non-owner occupied CRE and another 30% is owner occupied CRE is about what the pipeline looks like on the commercial side.

[Steve Moss, B. Riley FBR Inc.]

Okay. And just – okay, that’s helpful. And in terms of the types of properties you are just seeing on commercial real estate. Just kind of curious as to where the opportunities are for you guys these days?

[Chuck Shaffer, President and Chief Executive Officer]

The mix between – we tend to see smaller deal sizes, but smaller multifamily, smaller warehouse, other smaller office-type projects is really where we are seeing the volume.

[Steve Moss, B. Riley FBR Inc.]

Okay. That’s helpful. And then in terms of loan pricing here, just kind of curious where add-on yields are relative to the portfolio?

[Tracey Dexter, Chief Financial Officer]

Yes, I have got that. The add-on yields for the second quarter, 3.68%.

[Chuck Shaffer, President and Chief Executive Officer]

Portfolio yield. Yes, you can see the portfolio yield in the release. Exactly, it sounds about right.

[Steve Moss, B. Riley FBR Inc.]

Okay. Perfect and that’s pretty much for me. Thanks for all the color here today.

[Chuck Shaffer, President and Chief Executive Officer]

Thanks Steve.

[Operator]

And thank you. Our next question is from Stephen Scouten. Please go ahead sir.

[Stephen Scouten, Piper Sandler]

Hi, good morning everyone.

[Tracey Dexter, Chief Financial Officer]

Good morning.

[Chuck Shaffer, President and Chief Executive Officer]

Hi Steve.

[Stephen Scouten, Piper Sandler]

So, I guess maybe kind of following up on that last question. With the 3.68% add-on yields, the 4.17%, may get like 4.13% if I strip out accretion, kind of maybe more core loan yield. Obviously, as growth picks up, that will put more pressure on average loan yields, but you are deploying liquidity. But I guess, can you talk a little bit about what you see as the path for the NIM, maybe over the next 12 months to 18 months? I know that’s really hard to predict. But I am just kind of curious how much you think it can move up off these levels as liquidity gets deployed?

[Tracey Dexter, Chief Financial Officer]

Yes. Thanks, Stephen. Yes, the core NIM, excluding PPP and the purchase loan accretion declined 22 basis points for at 3.03% in the second quarter. And like we mentioned in the prepared remarks, 23 basis points, essentially the whole decline is really due to the extra liquidity between quarters with that likely continued build of liquidity, elevated deposit growth and PPP forgiveness in the coming quarters. We do expect continued pressure on the NIM into the third quarter and likely through year-end. Beyond year-end, it’s pretty difficult to provide guidance given all of the uncertainties. But if I break down the other parts of the NIM investment securities and loan yields, they should continue to modestly drift down for the next couple of quarters while the cost of deposits should remain in the high-single digits. We are looking at, like we said, add-on yields in Q2, 3.68%, but we would expect those to come down modestly if the rate environment remains the same. In the securities book, 1.39% in Q2, we would expect to moderate a little maybe in the range of 1.3% to 1.4% in Q3.

[Chuck Shaffer, President and Chief Executive Officer]

The only thing I would add to that, Stephen, is a reminder, the Legacy Bank’s portfolio as we bring that on is a higher-yielding portfolio with a higher margin on the aggregate bank transaction. So, that’s supportive in the coming quarters.

[Stephen Scouten, Piper Sandler]

Yes. Got it. And I guess maybe ex the legacy portfolio, do you think you can grow NII even with that margin pressure? I mean, obviously, the liquidity is a drag on the NIM. But you still earn money there and you still earn some spread and it gives you a lot of potential. So, how do you think about that as it relates to NII dollars?

[Chuck Shaffer, President and Chief Executive Officer]

Yes, we expect NII to grow as we move forward into the coming year.

[Stephen Scouten, Piper Sandler]

Great. Okay. And then the loan loss reserve 1.49. It seems this is odd to say as we just came out of the pandemic, but it seems a lot higher relative to maybe where some of your peers have already bled theirs down to. So, is there any specific reason why that would be? I mean, obviously, your portfolio is traditionally a lot more granular. So, I am wondering is there anything there or you think maybe it’s just differences and views about how to model the different scenarios?

[Tracey Dexter, Chief Financial Officer]

Yes. We really don’t see anything in the near-term. You can see the improvements in some of the credit quality metrics. We reduced the allowance coverage by 11 basis points this quarter when you look at excluding PPP. And really, our primary economic forecast scenario is the Moody’s baseline. That had generally improved indications throughout particularly in the near-term. And as we look out at the activity in our markets, we certainly see all these indications of strength, but we still think it’s prudent given just the unprecedented economic conditions that we keep a reserve at a level that acknowledges that there may be potential bumps in the road on the way.

[Chuck Shaffer, President and Chief Executive Officer]

And I will just add, we will take a conservative approach to that.

[Stephen Scouten, Piper Sandler]

Yes. Got it. And then I guess the last thing, Chuck, you mentioned the potential to look further expanding further into the Miami area from Broward. How different of a market is that from the rest of your Florida footprint? I mean, is that – how cohesive, I guess, is that to the rest of your franchise? I know some people will talk about Miami almost as its own state down there. So, is that a concern for you at all or do you feel like that will blend well into the rest of your franchise?

[Chuck Shaffer, President and Chief Executive Officer]

Well, we are already down there organically. We are already calling in the market, so we know it pretty well. I mean there is obviously a different market to many other parts of the state. But there are a few very high-quality banks there with very strong, well-run operations and good operators. And what I would say is that we are already sort of adjacent. We are in Broward. We have bankers that call down in the market. We know the market well. We have to be thoughtful when we are down there. There is obviously different types of risks that have to be considered. But we have worked pretty hard to be prepared for that. And if opportunities come, we will look at them. In the meantime, we continue to look in and around the entire state. So, it’s – I would also add, with Miami, it really is transforming like the rest of the state. There is a lot of Northeastern money moving into Miami, bringing with it growth and bringing with it businesses. And so big transformation happening in South Florida to the positive.

[Stephen Scouten, Piper Sandler]

Yes. That makes a lot of sense. That’s very helpful. Thanks so much. Chuck, Tracey, I appreciate the time.

[Chuck Shaffer, President and Chief Executive Officer]

Thanks Steve.

[Operator]

And thank you. We have no further questions. I will now turn the call back over to Mr. Shaffer for closing remarks.

[Chuck Shaffer, President and Chief Executive Officer]

Thank you, Vanessa, and thank you, everybody, for joining us this morning. And this will conclude our call. And I appreciate the time.

[Operator]

And thank you, ladies and gentlemen. This concludes our conference. Thank you for your participation. You may now disconnect.