Seacoast Banking Corporation of Florida
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Seacoast Banking Corporation of Florida
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Welcome to Seacoast Banking Corporation's Second Quarter 2022 Earnings Conference Call. My name is Vanessa and I'll be your operator. At this time, all participants are in a listen-only. Later, we will conduct a question-and-answer session. [Operator Instructions]
Before we begin, I've 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 this conference is being recorded.
I will now turn the call over to Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Shaffer, you may begin.
Thank you, Vanessa and thank you all for joining us this morning. As we provide our comments, we will reference the second quarter 2022 earnings slide deck, which you can find at seacoastbanking.com. Joining me this morning is Tracey Dexter, Chief Financial Officer; and Michael Young, Treasurer and Director of Investor Relations.
Let me start by thanking the Seacoast team for their continued focus and dedication to building the most competitive banking franchise in Florida. They've done an outstanding job integrating Sabal Palm Bank and Business Bank of Florida, enabling us to enter the highly attractive dynamic Sarasota market and continuing to grow our presence in Brevard County.
Looking ahead, we expect to close both the Apollo and Drummond transactions in October and are well prepared with a proven playbook to integrate Apollo in the fourth quarter of this year, and Drummond in the first quarter of 2023.
As we've mentioned, we completed our digital banking conversion in the first quarter and the feedback from customers has been tremendous. This important project is a further extension of how we've lowered our cost to serve, while enhancing our customers experience. An important indicator of success is the significant reduction in inbound calls to our call centers as customers engage with our new digital banking features.
Our commercial banking transformation continues with further additions of high quality banking talent from larger organizations. Seacoast's client-centered culture has quickly made us the home of choice for talented bankers looking for a more culturally-aligned organization.
Complementing these efforts, we are launching a revamp of our treasury business to support growth into middle market operating companies by attracting talented bankers, acquisitions, and through de novo expansion, we will expanded the company into the fast growing Florida markets of Naples, Jacksonville, Sarasota, Miami, Gainesville, and Ocala by the end of this year.
Florida remains a robust dynamic banking market and we added an updated slide in the deck providing additional evidence of the wealth migration to Florida post-pandemic.
Florida exceeded every state in the nation in attracting affluent wealthy individuals and corporations during the last two years, adding materially to the state's GDP. Signifying its strength, the State of Florida announced the budget surplus of $21.8 billion for the fiscal year 2021-2022 and refunded excess tax collections to corporations.
Turning to our results, the Seacoast team delivered another outstanding quarter of earnings, generating $46.4 million pretax pre-provision earnings, up 11% from the prior quarter, driven by improved operating leverage.
Further, the team achieved 7% loan growth in annualized loan growth and 8% annualized loan growth in non-interest bearing demand deposits. We saw excellent expansion in the net interest margin, which excluding PPP and accretion on acquired loans increased 19 basis points from the prior quarter. And as a whole, all of our key shareholder metrics improved, with the adjusted efficiency ratio down two percentage points to 53% and the adjusted return on tangible equity, up to 13.97%, while carrying and 9.74% tangible common equity ratio.
During the quarter, the ACL coverage ratio remained nearly flat at 1.39% and considering the loss absorption included in the purchase accounting marks, the company reserved a 1.71% coverage rate.
Considering this credit backstop, the high quality of the customer franchise, and our strictly underwritten credit portfolio, we are operating with one of the most robust balance sheets in our peer group. We continue to take a conservative approach to reserving for the allowance for credit losses, underwriting, and capital.
And lastly, I'll point out that our credit metrics remain impressively strong, classified and criticized assets continue to decline, yhe company recorded net recoveries for the quarter, non-performing assets declined quarter-over-quarter, and past dues remain stable.
In summary, our quarterly performance and strategic highlights demonstrate the strength of the franchise and the quality of the agile, innovative team we've built here at Seacoast.
We are focused on building the most competitive banking organization in Florida by creating highly valuable statewide brand and generating a high quality customer portfolio and what is arguably the best banking market in the United States.
We will be disciplined and focused in growing and serving high-value lower-risk customer segments and markets, while delivering strong risk adjusted returns to our shareholders.
I'll turn the call over to Tracey to walk through our financial results.
Thanks Jeff. Good morning everyone. Let's begin with highlight for our second quarter results on slide five. The net interest margin expanded 13 basis points to 3.38% and on the core basis, expanded 19 basis points to 3.24%.
Adjusted pretax pre-provision net revenue was $46.4 million, an increase of 11% compared to the prior quarter, and an increase of 23% compared to the prior year quarter, the result of higher net interest income, driven by expanding margin, increasing non-interest income, and a reduction in non-interest expense.
With the increase in rates during the quarter, new purchases of securities and loan origination supported higher loan and securities yields and our cost of deposits remains at six basis points.
Organic loan growth was strong this quarter at an annualized rate of 7%, despite elevated payoffs when compared to the prior quarter. With our continued investment in experienced bankers and the expanded footprint, we're well-positioned for growth and during the quarter, commercial originations are up 139% year-over-year.
Credit risk metrics continue to improve with charge-off, non-accrual, and criticized loan ratios all lower compared to the previous quarter. Tangible book value per share ended the period at $16.66. Excluding the year-to-date decrease in fair value of available for sale debt securities, tangible book value per share would have been $18.55 or an increase of 9% year-over-year.
Given our higher capital ratios, we chose to maintain the majority of our securities portfolio in AFS, which impacted tangible book value per share, but provide sales optionality in future periods.
With the continued success of our balanced growth strategy and pure leading capital levels, we were pleased to deliver an increase to the dividend in the second quarter, and we'll continue to revisit the dividend payout ratio periodically.
I'll also highlight that since the beginning of 2022, we've executed on significant market expansion. We closed on the acquisition of Sabal Palm Bank in Sarasota and Business Bank of Florida in Melbourne in early January.
Additionally, we opened the Naples branch with a Market President and full team and a Jacksonville commercial lending office with a Market President and five new North Florida bankers.
In March, we announced the upcoming acquisition of Apollo Bank in Miami. And in May, we announced the upcoming acquisition of Drummond Community Bank in the North Florida market including Gainesville and Ocala. This expansion across some of Florida's most attractive MSAs is building both franchise value and scarcity value over the long-term.
Moving to net interest income and margin on slide six. Net interest income on a tax equivalent basis increased $5.1 million or 7% compared to the prior quarter, with both higher balances and higher yields on loans and securities. These increases were partially offset by lower PPP fee accretion, with only $17 million in PPP loans remaining. Excluding PPP and accretion on acquired loans, which introduced significant variability, net interest margin expanded 19 basis points from 3.05% to 3.24%.
Securities portfolio yields increased 30 basis points to 1.98% and core loan yields increased 10 basis points to 4.10%. The cost of deposits remained flat to the prior quarter at only six basis points.
Looking ahead, we expect net interest income and margin to increase as our asset sensitive position with significant core deposit funding and ample liquidity, will benefit from higher rates. We continue to expect that each 25 basis point rate hike on a static balance sheet would be beneficial in a range of five to six basis points to net interest margin.
Assuming the forward curve as of the first week in July, which included an additional 50 basis point rate hike in September, we expect an increase of approximately $5 million to net interest income in the third quarter, with the core NIM excluding purchase accounting accretion, expanding to around 3.50.
Moving to slide seven, adjusted non-interest income was $17.3 million, an increase of $1.4 million from the previous quarter and an increase of $1.9 million from the prior year quarter. Service charges on deposits increased $0.6 million to $3.4 million, reflecting higher demand account balances and changes in monthly maintenance and ATM fees partially offset by slightly lower overdraft fees.
In the third quarter, changes we're making to reduce overdraft fees will take effect with an estimated impact of $1.5 million annually. Wealth management performed well during the quarter, overcoming broad based market valuation declines with revenues 4% higher sequentially and 16% higher compared to the same quarter last year.
Mortgage banking fees are lower, reflecting the continued impact of rising rates and limited housing inventory on saleable loan production. Other income in the second quarter includes higher loan swap fees and an increase in production and resulting gains on saleable SBA loans.
Looking ahead, we continue to focus on growing our broad base of revenue sources and expect third quarter non-interest income in a range from $17 million to $17.5 million. This assumes mortgage banking fees continue to remain challenged and it includes one month impact from changes being made to the company's overdraft policy.
Moving to slide eight, adjusted non-interest expense for the second quarter was $51.7 million. When excluding gains on the sale of REO, that figure would be $52.6 million at the lower end of the range of guidance we provided last quarter.
Excluding the impact of merger-related costs in each period, salaries and benefits increased $0.9 million as we continue to add talent and support growth initiatives. Smaller increases in marketing, occupancy and data, and other expenses were offset by decreases in legal fees.
Looking ahead, we expect to maintain our expense discipline while continuing investments to support growth. We expect third quarter expenses excluding the amortization of intangible assets to be in the range of $53 million to $54 million, with the planned increase resulting from continued investments in talent and scaling the business.
Turning to slide nine, the efficiency ratio has improved from the prior quarter, including on an adjusted basis and we expect continued results in the low 50s for the remainder of the year.
Turning to slide 10, highlighting the continued diversity of our exposure and our disciplined approach to managing concentrations, the distribution of loans by category remained stable compared to the prior quarter.
Construction and commercial real estate concentrations remain well below regulatory guidelines and well below those of the peer group and the average commercial loan size remains low at $558,000.
Turning to slide 11, loans net of PPP increased $112 million or 7% on an annualized basis. Coming off a record high pipeline in the first quarter, we delivered record originations of $462 million in commercial.
Prepayments were notably higher in the second quarter, totaling $348 million, compared to $244 million in the first quarter and compared to an average $286 million per quarter in 2021. If not for the $103 million increase in prepayments compared to the prior quarter, loan growth would have been over 13% annualized.
Looking to the third quarter, we expect loan growth to continue with an annualized growth rate in the high single-digits. The commercial pipeline at June 30th is lower than at March 31st, reflecting the impact of higher rates on loan demand. However, as long-term rates have fallen, the pipeline has recovered, providing us confidence in our third quarter guidance.
Loan yields will continue to benefit from the higher rate environment and what we anticipate will be slower prepayments and better new add on yields. Through last week, new ad rates in July has moved up to around 460. Using the forward curve as of the first week in July, we expect core yields to expand to the low 430s in the third quarter of 2022. As a reminder, this excludes purchase accounting accretion.
Turning to slide 12 for the securities portfolio. We continue to invest excess liquidity at a moderate pace in the investment securities portfolio with net additions of $142 million and have meaningful additional liquidity for loan production and strategic purchases at higher rates.
Additions this quarter were primarily agency CMOS with an average duration of 3.3%. A new add on yield during the quarter average 3.31% positively impacted by recent steepness in the front end of the curve. Through last week, securities purchase add on rates in July have improved to approximately 4%.
In October, with the closing of the Apollo and Drummond transactions, we will acquire cash and the securities portfolios. Our deal models contemplated selling and reinvesting those funds, and we will begin our deployment strategy for investing those funds beginning in the third quarter. We will steadily pace our investments expecting net growth in the portfolio by the end of the third quarter of approximately $200 million to $250 million.
Turning to slide 13, we maintain a strong liquidity position and ample cash to deploy into rising rates. Our cash and cash equivalents to total assets at the end of the quarter was 8.3% and combined with securities with 32%, while the loan to deposit ratio remains lower than the historical norm at 71%.
Turning to slide 14, illustrating Seacoast's historical deposit beta. Seacoast's long standing relationship and high proportion of transaction accounts translates to a historically low beta. In the last full rising rate cycle from the third quarter of 2015 to the second quarter of 2019, the deposit beta was 28%.
Each cycle is different, but we do have an even more favorable deposit mix today than in the past with 39% non-interest bearing versus less than 32% back in 2015 and 64% transaction accounts compared to 54% at the start of the last cycle. That evolution supports our expectation that deposit costs will remain low and that rate increases will continue to be beneficial to the NIM.
When compared to the prior cycle, we exhibit a comparatively higher liquidity position, lower loan to deposit ratio, and better deposit mix. While we have not increased deposit pricing to-date in this cycle, we expect the competitive environment to become increasingly dynamic. We have a very strong deposit base and expect that we will continue to outperform our peers on deposit betas in the coming quarters.
Turning to slide 15, at quarter end, deposits outstanding were $9.2 billion, a decrease of $55 million quarter-over-quarter, with non-interest bearing demand deposits growing at an annualized rate of 8% during the quarter, offset by declines in money market and CD accounts.
Transaction accounts represent 64% of total deposits and have grown 6% on an annualized basis. Thus far in July, we've begun to see more requests for exception pricing and we continue to manage this on an exception basis.
Moving to slide 16, the allowance for credit losses increased during the quarter by $0.9 million through an overall $90.8 million, keeping pace with loan growth. While maintaining coverage nearly flat to last quarter at 1.39%. We remain watchful of inflationary pressures and are carefully considering the impact of higher rates on the economy, though our credit metrics remain very strong and continue to improve.
In addition to the allowance, the total purchase discount remaining on bank acquisitions is $21.4 million, which will be earned as an adjustment to yield over the life of those loans. We will continue to take a conservative approach to provisioning. When combining both the allowance for credit losses and the purchase discount remaining, we're operating from a more conservative position than our peers set.
On to credit metrics on slide 17, we're seeing sustained positive trends with a net recovery position during the quarter and non-performing loans decreasing to 0.4% of total loans.
The percentage of criticized loans to risk based capital moved lower this quarter and again, allowance coverage is near flat to last quarter at 1.39%. We continue to assess the environment and the factors that might affect loan performance and will retain a conservative posture in our outlook and estimate.
Turning to slide 18, our capital position continues to be very strong, tangible book value per share is $16.66, a decline from last quarter that's attributed solely to the decline in accumulated other comprehensive income, the result of recording unrealized losses in the securities portfolio.
The ratio of tangible calm equity to tangible assets was 9.7%, also impacted by the change in AOCI from securities. Despite the decline, this TCE to TA ratio remains among the highest in our peer group.
Regulatory capital ratios were not affected by changes in securities valuations and were flat to prior quarter. Return on tangible common equity was higher in the second quarter on both a GAAP and adjusted basis, with the second quarter benefiting from higher net interest income and the first quarter negatively impacted by the day one provision of $5.1 million on loans acquired from Sabal Palm and Business Bank of Florida.
And finally, on slide 19, a longer term look at tangible book value per share demonstrates our sustainability to generate value for shareholders. Over the last five years, we've achieved a compound annual growth rate of 9% positioned on a foundation of strong liquidity and capital from which we'll continue to optimize the opportunities of a strong Florida economy and continue to execute on our strategic growth initiatives.
We look forward to your questions. Chuck, I'll turn the call back to you.
All right, Vanessa, I think we're ready for Q&A.
Thank you. We will now begin our question-and-answer session. [Operator Instructions]
Our first question is from Will Jones with KBW. Your line is open.
Hey, great. Good morning.
Good morning.
Hey. So, just wanted to start on the growth guidance, I know you're still expecting high single-digit growth, which I think is consistent with where you've been in the past two quarters. Tracey I know you alluded to pipelines being lower at the end of the quarter, but have recovered since then. Could you just give us a little context on where they are today in relation to the record level you saw in the first quarter? And then how do you pay off? Forward-looking payoffs play into your future growth guidance?
Yes, I'll take that one. The -- I would say, when you look at the pipeline, we measured in both early stage and late stage. But if you look at the overall pipeline, it's back up about where it was at the end of the prior quarter. And if you really look at the quarter, we had a number of sort of higher payoffs that were somewhat idiosyncratic and were related to products being sold and businesses being liquidated.
So, we expect the payoffs to come back down and be more normalized in line with, with where it was previously, and we think loan production looks about stable, it's not up just modestly in the coming quarter. So, overall, very much feel very confident in the high single-digit number for the coming quarter.
Okay, very helpful. Thank you. And then on the expense guide, I know, there's so many moving pieces in there with the Sabal and FBB coming on beginning of the year, and then you'll have the Apollo and Drummond at the end of the year, but can you just remind us where you are in relation to cost savings on Sabal and FBB today?
And then how should we expect the cadence of cost savings to play out with Apollo and Drummond closing into the year? And I think you said you're converting Apollo in the fourth quarter, and then Drummond in the first quarter of 2023. Just a little bit of help around there would be great.
Sure, yes. When it comes to cost out on the acquisitions that closed at the beginning of the year, we had anticipated 60% of the cost out on the Sabal Palm Bank in 2022 and that's certainly on track. So, really, all the cost outs now that the bank has been integrated and converted are in place. And so third quarter going forward, anticipate that, and of course, for FBB, really, the large majority of the cost outs have already taken effect even in the second quarter.
And if you looked forward to Drummond and Apollo, Apollo, we expect to close both transactions the first week of October. We will close and convert Apollo in the first week and we will convert Drummond right around mid-first quarter. And I would expect the Apollo cost outs to come through kind of in the -- by the end of the fourth quarter. So, sort of full impact first quarter and then have the full impact of the Drummond cost outs from the second quarter on out for the remainder of the year in 2023.
Okay, that's great. Thanks for that Chuck. And then just lastly for me. I know it's challenging just with valuation, but do you guys ever have any internal discussion over jumping into the buyback? I know you guys may have had some modest degree of activity in the past, but you still have just tons of excess capitals. Is there any conversations you guys ever have about engaging the buyback?
The way we think about the buyback is we think about in terms of an earn back just like a transaction and our preference, sort of, in a capital, sort of, highest to lowest use, the highest use being organic. And M&A is sort of our primary use of capital.
And then, sort of thirdly, there would be dividends. And fourth would be the buyback. We would buy back shares if the earn back came in to our level that we felt comfortable with. But we think right now, the best use is definitely organic and M&A and potentially further increases in the dividend over time.
Got it. Makes sense. Thank you guys. Appreciate the questions.
Thank you, Will.
Our next question is from Eric Spector with Raymond James.
Hey, how's it going, guys?
Good morning Eric.
Just want to follow-up on capital. Obviously, you guys have two deals going and markets increasingly uncertain. Just curious how you think about M&A from here? And are we going to focus on digesting these recent deals? Or do you feel comfortable considering M&A going forward?
Sure. Thanks Eric. I'd say as we said on the last call, we've only wanted to have two deals in application. We've now gotten Apollo all the way through both approvals with the OCC and the Fed. Drummond is in approval with the OCC and the Fed currently.
I would say that we would look at something if it made sense, we would want to make sure that from a pricing perspective, the -- we contemplated sort of downside risks and still got reasonable earn backs and solid accretion out of the deal. And we would look at a deal if it came along. And I would say deal conversations remain as active as they have been previously, we've really seen no slowdown in the amount of conversations across the state.
Okay, great. Thanks. And then wanted to touch on the treasury management build out to support the middle market expansion and the new hires. I'm just curious where you are in that build out? Your thoughts on moving upstream and plans for doing so? Are there any verticals you're more focused on? And just kind of generally how that's gone so far?
Yes, at a high level, as we continue to bring in some really high quality banking and credit talent across the organization. We're having the opportunity to compete in sort of the lower end of the middle market and it's obviously a part of the market where most of the regional national banks compete because of the value that's there.
There's a high quality relationships, bring in deposits, credit facilities, wealth management, other treasury fee income, it's a space we've wanted to compete in for some time. And as we've grown larger and as the balance sheet has gotten bigger, and the quality of the talents come in, it's allowed us to open those doors in a more rapid fashion.
And so if we built that up, we're building out a team across the state of what I would consider sort of the best of the best treasury folks. They'll be able to go in and really win deals quickly and win deals impressively. And it's been a focus of ours as we continue to become even more and more competitive on the commercial banking side to compete there. So, we're making investments both in talent primarily, but also technology over time and it is a focus of ours.
Your line is still open. Sir, do you have further questions?
Hey sorry. I was on mute. One last question. Just wanted to touch on the funding side. Obviously, you've gained more than your fair share of deposits over the past few years. Is there some seasonality in the quarter? Just curious how you think about deposit flows and migration within the book going forward as you -- low-cost deposit franchise?
Couple of comments. When you look back at the prior quarter, we did a fair amount of work looking at what the outflows were and it was primarily tax payments. And in particular, we had one large customer that had an incredibly successful year that they'd sent out $190 million for -- to the IRS. So, that was worked through the numbers.
I would say looking back at the prior quarter, rate pressure really wasn't an issue. We are starting to see more asks from our clients around rate. We'll continue to manage it carefully defensively, sort of, on an exception basis and manage it over time.
And for the first time in a couple of years we are seeing in a season. We did -- sort of, in 2020 and 2021, our northern migration state and Florida and this year, we did see some folks go back, and so our local small businesses have seen some deposit balances come down. But I do expect that to return, but the bulk of what went out in Q1 was -- or in Q2, sorry, was tax payments.
Great. That's it for me. Thank you.
Thanks Eric.
Our next question comes from Steve Moss with B. Riley.
Hi, good morning.
Hey Steve.
Maybe Chuck just starting with the loan pipeline, kind of, curious what is within the mix, especially on the commercial side? And kind of, what are your thoughts on commercial real estate lending these days?
It's running roughly 60% CRE, 40% C&I is about the mix. I would say, when we saw rates get up in the 3.50-ish range, on the long end, we were absolutely pushing lower leverage in the commercial real estate and to some extent, probably had a few clients go financing elsewhere, which we're totally fine with.
We continue to navigate it carefully, I would say, we are stressing rates up pretty materially in those deals to make sure we get leverage correct. And I'd say that's kind of our key focus business to make sure that if we're going to do a deal, it's got the right leverage in it. And we continue to be, I would say, conservative on amortization periods and interest-only periods.
There's a lot of pressure in the market to go longer on periods, longer on I/O periods and we continue to be defensive there. And -- but we will look at deals. We're still very active, but we importantly, want them underwritten to our sort of conservative approach.
Okay, appreciate the color there. And then Tracey on the five to six basis point margin guide per 25 bps, I'm just kind of wondering what you're using for a deposit beta in that math?
Yes, they deposit beta does start to move a bit, but really just tracking somewhat similar to the last cycle, it'll remain quite low and below the peer group.
Okay, so still close to zero in the first hikes with these five or six basis points, basically.
Okay.
Maybe 10%? Something in that range, maybe?
That's right. Sorry, Steve. Yes.
Okay. And then in terms of just on the pipeline of new hires and maybe just a little bit more on the middle market initiative, Chuck, just kind of how many people do you think you could be bringing on later this year? And maybe how many could be tied to the middle market build out here?
Yes, I'd say roughly, we probably have plans to add another 15 plus bankers between now and the end of the year. We were only going to hire if we find the right talented individuals that fit in the culture, have the relationships in the marketplace, and are focused on the type of business we want to do.
But yes, we still have plan to continue to build out the team. We still -- and importantly, are seeing a lot of demand for folks that want to jump on board and be part of us. So, we've kind of moved from a period maybe 24 months ago, 18 months ago, where we were out hunting and to a point now where we're still doing that, but we're seeing a lot of inbound too, which is fantastic. I can't explain how beneficial that is. So, the flywheel is turning.
And I would say a third, if not half of those are kind of more upstream bankers that are coming out a larger regional and national banks. In fact, I'd say all of our hires, particularly in last quarter out of larger regional national banks that have the ability to handle bigger C&I clients. And so a lot of high quality talent come in the organization, very pleased with it. We built out the credit team to support that and brought in a lot of experienced credit folks for some bigger organization. So, we continue to build into being a midsize bank, which I'm very pleased with progress.
All right, great. Thank you very much for all the color. Good quarter.
Thanks Steve.
[Operator Instructions]
Our next question comes from Steve Scouten with Piper Sandler.
Hey, good morning, everyone.
Hey Steve, how are you?
Good, good. Question, I guess first on the loan loss reserve and just kind of how you're handling the modeling there, any changes to any of your waiting to various scenarios within that this quarter? How are you, kind of, preparing for what may or may not be a more pronounced slowdown in the economy? And how you think about?
Yes, thanks. I'll take that. So, we kept the allowance coverage, essentially, flat 1.39%. And our primary economic forecast scenario is Moody's baseline. The baseline had somewhat mixed indications throughout. There were obviously expectations of inflation. So, global uncertainty, kind of, tamping consumer confidence and the outlook for economic expansion.
But as we look at activity in our markets, we really do see indications of strength. We do think it's prudent with continuing elevated uncertainties and just the fast pace of change and the macro environment that we keep those reserves at a level that kind of acknowledges that, and the possibility that forecasted metrics may be different from the baseline scenario.
So, we do have as a part of our qualitative framework, tracking toward the S3 scenario, which we revisit each quarter and kind of a standardized way. So, we did look more closely at the S3 scenario in this case, and kept that coverage just about flat.
Okay, helpful. And is that -- was that based off their June or July model for this quarter? And I guess it was June, do you think you'd see some uptick based on what you saw on the July numbers so far?
It's the one that was published in June and so as we look at what was published in July, I think we feel good about the decisions we made for weighting of those scenarios in June.
Okay, great, very helpful, Tracey. And then I guess, kind of, thinking back about loan growth, and you guys have given some great color there and understand the growth would have been that kind of 13% plus ex the elevated pay downs. But I'm just kind of curious why you think your growth has been high single-digit, closer to 10%, you've had some of that be in the residential mortgage purchases.
I know we've seen a lot of your peers grow it, kind of astronomical rates this quarter. So, given the strength of your market, the team built out to you guys that had all the things that are going right, why do you think there's that delta between what some of your other peers might be seeing and what and what you're seeing? Is it just conservatism, smaller loan sizes or is there anything else at play?
Yes, just to clarify a little bit around the residential loans, we didn't purchase anything, it just -- we put more in a portfolio that came in through both our bank channel and our correspondent channel. But I'd say generally, Steve, it gets back to the fact that we have not been a large commercial real estate lender and we're not a heavy spec lender. And so I think you're seeing a lot of our peers do a couple things; one, their portfolio -- and significant portfolios of mortgages, which sort of understand my challenge with that has been.
There's tremendous optionality in favor of the borrower, unlike a commercial loan, where you can get a prepayment penalty or a floor, if rates fall, which we've already seen the three or the 10-year drop only almost 70 basis points, you get another 50, you defer the cost, all that comes back through and all of a sudden, you not made any money on that mortgage. And then if rates go up, the mortgage extends, and you're stuck with this long duration assets. So, we've avoided that asset class in a material way into the portfolio.
And then the other piece is, I think a lot of other banks in the marketplace, particularly regional banks have bigger spec portfolios that are funding up through construction cycles. And that's supporting growth that we just don't have the portfolio of. We focused on, stabilized income producing commercial real estate. We do some spec, but it tends to be very high quality spec. And so I think that's why we stand out. So, if you want to kind of characterize it is running a conservative book, that's what we do.
Yes. No, that's very helpful. I mean do you think a lot of that is just positioning from what you guys learned from the last cycle and just, hey, things are great in Florida, but there's no reason to get out ahead of our skis and let's just kind of stay within the guardrail.
Yes, I think we'll, we'll always be there, Steve. It's -- we've built a series of guardrails around the bank, we have a very strong portfolio and credit administration process and we run the bank for the long run. And so we take relationships, we take assets that we think will withstand the test of time and we look for strong balance sheets and well-heeled borrowers.
And it's -- you can always go find commercial real estate, it's always there and not to say that there isn't good commercial real estate, because we certainly do plenty of it. But it's -- we pick our spots carefully and we build the bank for to handle different cycles. And I think that is all lessons from the past that are built into the fabric of the company.
And we really do think about things in terms of risk adjusted return. We look for assets that we get good yield, good relationships, the depth of return on that asset and I think it shows up in the shareholder returns we deliver.
Yes, I think that's fantastic. Sometimes you get further away from those events and people start to forget, so it's encouraging that you guys are holding to that. And then I guess the last thing for me would be just as you make this push in the middle market and I think average loan size you guys now do what, like $558,000, maybe something like that, do you think you'll start to see that average loan size move materially higher, as you make some of these larger regional bank types of hires, I guess, maybe more weighted to the C&I side of things?
Maybe modestly, yes. But that being said, the way we built our internal hold limits, we can handle clients up to $200 million, $300 million revenues without any issue, without sort of materially pushing it.
When you look at the capital ratios and you look at the ability to add that asset class in and add another set of diversity to the portfolio, it's -- I think, in the end, it's adding actually more diversity into the book. And so while the average loan size may go up, modestly over time now, we have a lot of loans. So, it'll take a long time to get that average up, but it will probably move north from here.
That all being said, we'll continue to very carefully manage our top 10, top 20 exposures and our top of the house exposures and manage our relationship limits appropriately and sell down where we need to and bind partners to take some of that asset and so we have always manage them, Steve.
Yes, great. That all make sense. Congrats on another great quarter, guys.
Thank you.
Thank you. We have no further questions. I will now turn the call back over to Chuck Shaffer for closing remarks.
Okay, thank you. Thank you very much, Vanessa and thanks for all joining the call. I think it was a great quarter, another sort of indication of the strength we carry in the company and looking forward to talk to you all next quarter.
Thank you. Ladies and gentlemen, this concludes our conference. We thank you for participating. You may now disconnect.