Seacoast Banking Corporation Of Florida (NASDAQ:SBCF) Q1 2022 Earnings Conference Call April 29, 2022 10:00 AM ET
Chuck Shaffer - Chairman, President & Chief Executive Officer
Tracey Dexter - Executive Vice President & Chief Financial Officer
Jeffery Lee - Executive Vice President & Chief Digital Officer
Conference Call Participants
Brady Gailey - KBW
David Feaster - Raymond James
Michael Young - Truist
Steve Moss - B. Riley Securities
Good morning and welcome to Seacoast Banking Corporation's First Quarter 2022 Earnings Conference Call. My name is Brandon, and I'll be your operator today. [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 Charles Shaffer, President and CEO of Seacoast Bank. Mr. Shaffer, you may begin.
Thank you, Brandon and thank you all for joining us this morning. As we provide our comments, we will reference the first quarter 2022 earnings slide deck which you can find at seacoastbanking.com. Joining me this morning is Tracey Dexter, Chief Financial Officer; and Jeff Lee, Chief Digital Officer.
The Seacoast team delivered another outstanding quarter of earnings and growth, generating $41.7 million in pretax pre-provision earnings, 7% annualized loan growth across multiple loan categories and an impressive 25% annualized growth in deposit outstandings. In addition, the investments we have made in client-facing technology and high-performing bankers are generating solid performance in new customer acquisition and organic balance sheet growth. I'm incredibly proud of the Seacoast team's focus and dedication to building the most competitive banking franchise in Florida, integrating our recent acquisitions successfully and driving continued transformation across our technologies stack.
During the first quarter, we expanded our franchise in Fort Lauderdale and established a new presence in three markets: Naples, Sarasota and Jacksonville and announced the acquisition of Apollo Bancshares, bringing five new locations to Seacoast in Miami-Dade County. Apollo will enable us to grow our presence and expand our position in the attractive South Florida market and we look forward to welcoming their employees and customers later this year. Overall, we have received a very warm reception in these expansionary markets with customer onboarding occurring in Jacksonville and Naples which contributed to the growth in pipeline and deposit outstandings.
Let me take a moment to discuss the economic outlook in the ALLL. During the quarter, we slowed the pace of reserve release, primarily due to conservative posturing resulting from unknown potential macroeconomic impacts from the War in Ukraine, inflationary considerations and continued supply chain challenges. We will continue to take a conservative approach to reserving for the allowance for loan losses, underwriting and capital. That said, it should be noted that there is no evidence right now of any issues arising in our markets. As you can see from the slides, asset quality measures continue to improve with almost no net charge-offs and continued improvements in criticized and nonperforming loans from the prior quarter.
The business environment in Florida remains impressively strong and our consumer and business customers balance sheets are as healthy as they've ever been. Average deposit balances and liquidity held by both consumers and businesses remain higher than pre-pandemic levels. The significant migration of affluent individuals and companies relocating to Florida due to low taxes, a business-friendly environment and a post-pandemic work from anywhere economy continues to be robust and supported the material deposit growth across the franchise.
The combination of a strong Florida economy, the build-out of our commercial franchise across the state and the additions to our consumer and mortgage lending teams drove material growth in our loan pipelines. We continue to manage growth conservatively, enforcing strict underwriting standards and maintaining a fortress balance sheet. When you combine the prospect for continued high single-digit disciplined growth with the steepness in the yield curve that has emerged recently, the outlook for net interest income and resulting earnings has materially improved.
Lastly, I want to note that acquisition discussions continue across the state and we expect we will have continued opportunities to execute our successful M&A strategy over the remainder of the year.
I'll now turn the call over to Tracey, who will walk through our financial results.
Thank you, Chuck. Good morning, everyone. Directing your attention to first quarter results, beginning with highlights on Slide 5. The net interest margin expanded 9 basis points to 3.25% and on a core basis, expanded 14 basis points to 3.05%. With the increase in rates during the quarter, new purchases of securities and loan originations supported higher loan and securities yields as did the addition of the acquired bank portfolios in early January.
Our asset-sensitive balance sheet is beneficial in this rising rate environment and our high level of liquidity provides flexibility to fund growth at higher interest rates, all of which will benefit the margin in the coming periods. The recent steepening of the yield curve has had a material positive impact on new securities and loan add-on yields and has materially improved the outlook for net interest income.
Our cost of deposits remained steady at 6 basis points. Organic loan growth was strong this quarter at an annualized rate of 7%. With our investment in a number of very experienced bankers over the last few quarters, 20 bankers in 2021 and 14 bankers so far in 2022. The momentum continues with commercial originations up 83% year-over-year and a strong pipeline that's 56% higher than at December 31. I'll emphasize that the growth is in keeping with the bank's credit standards and the additional volume is being driven by the larger team.
Credit risk metrics continue to improve with charge-offs, nonaccruals and criticized loans all lower compared to the previous quarter. The quarterly provision for credit losses includes $5.1 million from the day one impact of the two bank acquisitions that closed in January. Deposit growth was also very strong this quarter. Outside of growth related to acquisitions, organic deposits were up over 6% this quarter and 25% annualized due in large part to new commercial relationships and an expanding Florida economy.
The rate environment has been beneficial to yields but had a negative effect on the value of our investment portfolio. Available for sale securities declined in value this quarter by approximately 5%. The resulting drop in accumulated other comprehensive income due to lower securities values impacted tangible book value per share by $1.07. There's also significant market expansion to highlight this quarter. We closed on the acquisitions of Sabal Palm Bank in Sarasota and Florida Business Bank 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. This expansion across some of Florida's most attractive MSAs will build franchise value over the long run.
Finally and subsequent to quarter end, last week, we announced that in the second quarter, the cash dividend on common shares will increase 31% to $0.17 per share. With the continued success of our balanced growth strategy and peer-leading capital levels, we're pleased to be able to deliver the dividend increase and we'll continue to revisit the dividend payout ratio periodically.
Let's move on to some of the detail. Turning to Slide 6. We Overall, net interest margin expanded 9 basis points from 3.16% to 3.25%. Excluding PPP and accretion on acquired loans which introduced significant variability, net interest margin increased by 14 basis points from 2.91% to 3.05%. Net interest income on a fully tax equivalent basis increased by $4.2 million or 6% sequentially to $76.6 million. The increase in net interest income reflects both higher average balances and higher yields on loans and securities during the quarter.
In the securities portfolio, we've continued to pace our investments of excess liquidity with ending balances higher by $171 million and yields increasing 11 basis points to 1.68%. The non-PPP loan yields expanded 6 basis points to 4.24%, supported by the two acquired bank portfolios. 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 net interest margin will expand 5 basis points to 6 basis points for each 25 basis point increase in the Fed funds rate on a static balance sheet. Assuming the forward curve as of April 14 which includes eight additional rate hikes in 2022, we expect the core NIM to expand to the low 3.40s by the end of 2022. To be clear, this expected significant expansion of net interest margin in combination with expected growth over the remainder of the year has materially improved the outlook for net interest income.
Moving to Slide 7. Adjusted noninterest income was $15.8 million, a decrease of $2.5 million from the previous quarter and a decrease of $2 million from the prior year quarter. The main driver of the decrease from the prior quarter is the absence of significant SBIC investment income this quarter, the timing and amount of which vary meaningfully between periods. And a gain in the fourth quarter of $750,000 from the sale of a website domain name.
In our core activities, our growing deposit base generated a 7% sequential increase in service fees and interchange revenue was flat coming off the seasonally high fourth quarter and with two fewer days in the first quarter. Wealth management income was higher by $300,000 or 13% from the prior quarter as we continue to successfully add new relationships. In mortgage, despite low housing inventory and continued slowing refinancing demand, the mortgage banking team has done a tremendous job refocusing on purchase money. And as a result, mortgage banking fees were $1.7 million, a decline of only $300,000 from the prior quarter. Looking ahead, we continue to focus on growing our broad base of revenue sources and expect second quarter noninterest income in a range from $17 million to $17.5 million.
Moving to Slide 8. Adjusted noninterest expense for the first quarter was below the range of guidance we provided at $50.7 million. Salaries and benefits expenses were higher compared to the fourth quarter, reflecting the growth in the associate base as the footprint has expanded, the two acquisitions and also due to the seasonal effect of higher payroll taxes and 401(k) contributions. Data processing costs increased primarily as a result of the launch of the upgraded online and mobile banking platform which I will discuss momentarily and increases in occupancy reflect the impact of the expanded footprint into Naples, Sarasota and Jacksonville.
Looking ahead, we expect to maintain our expense discipline while investing for growth. Expenses were lower in the first quarter than expected as the full impact of planned hires won't fully materialize until the second quarter. We expect second quarter expenses, excluding the amortization of intangible assets to be in the range of $52.5 million to $53.5 million. The increase quarter-over-quarter is primarily the result of continued investments in talent and the full impact of additional overhead from new locations opened and overhead associated with the two bank acquisitions.
On Slide 9, you can see the typical seasonal trend of an increase in adjusted efficiency ratio from Q4 to Q1. We expect the adjusted efficiency ratio to remain below 55% in the second quarter and to decline throughout the year, resulting in a full year 2022 ratio that will be in the low 50s. Assuming the forward yield curve plays out, we could see the overhead ratio dip into the high 40s towards the end of 2022.
Turning to Slide 10. The record pipeline this quarter is, in large part, the result of our success in recruiting talent, including leaders with proven success in developing high-performing commercial banking teams. We brought in 14 experienced bankers during the quarter in addition to the 20 bankers we added during 2021. We continue to add high-quality commercial banking talent recruiting from large regional banks. As a result, we've experienced material improvement in productivity across the commercial banking franchise and expect continued recruiting success over the remainder of the year.
Turning to Slide 11, highlighting the continued diversity of our exposure and concentration levels well below regulatory guidance. Activity this quarter included the two acquisitions and a residential purchase pool. Nonowner-occupied commercial real estate increased from 29% last quarter to 30% and residential real estate increased from 24% last quarter to 25%, offset by a lower percentage of PPP loans. This diversification highlights our disciplined approach to managing concentrations. Construction and commercial real estate concentrations remain well below regulatory guidelines and you can see the average commercial loan size remains low at $524,000.
Turning to Slide 12. Beyond acquisitions and a loan pool purchase, organic loans increased $104 million or 7% on an annualized basis. The record pipeline of nearly $620 million in commercial bodes well for production next quarter and loan yields are benefiting from acquisitions and the higher rate environment. Looking forward, we expect loan growth to continue with an annualized growth rate in the high single digits for the remainder of the year. Additionally, we've seen the market reprice fixed rate new loan pricing materially, up over 100 basis points over the last 60 days. We expect core yields to continue to increase with higher rates translating to slower prepayments, better new add-on yields and the positive impact of the portfolios coming on from the acquisitions. Using the forward curve as of April 14, we expect core yields to expand to the low 4.10s in the second quarter and to the 4.40s by the end of 2022.
Turning to Slide 13 for the securities portfolio. We continue to invest excess liquidity at a moderate pace in the investment securities portfolio with net additions of $171 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 3.9% and a weighted average yield of 2.1% and new add-on yields so far in April have averaged 3.3%, positively impacted by recent steepness in the front end of the curve. The duration of the portfolio remains short within our three to four target that will roll down the curve and allow us to deploy the resulting cash flow at higher future rates. With new purchases in the second quarter, we will continue to steadily pace our investments, expecting net growth of approximately $150 million to $250 million.
Turning to Slide 14. We maintain a strong liquidity position with ample cash to deploy into rising rates. Our cash and cash equivalents to total assets at the end of the quarter was 11.2% and combined with securities was 33.7%, while the loan-to-deposit ratio remains lower than the historical norm at 70%.
Turning to Slide 15, illustrating Seacoast's historical deposit beta. Seacoast long-standing relationships and high proportion of transaction accounts translates to a relatively 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 38.1% noninterest-bearing versus 31.7% back in 2015 and 62% 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 be directly impactful to the NIM, particularly in the early hikes. When compared to the prior cycle, we exhibit a comparatively higher liquidity position, lower loan-to-deposit ratio and better deposit mix. As a result, we expect we would continue to outperform most in the industry.
Turning to Slide 16. Deposits outstanding were $9.2 billion, an increase of $1.2 billion quarter-over-quarter. Outside of the growth coming from the two bank acquisitions, organic deposits increased 6% this quarter or 25% annualized, with much of that growth coming from new commercial relationships generated by the expansion of our commercial banking franchise. Transaction accounts represent 62% of total deposits and have grown 33% year-over-year, demonstrating the strength of our customer franchise, a growing Florida economy and our ability to win share in the marketplace.
Moving to Slide 17. The Wealth Management business continues to build new relationships. Assets under management have more than doubled in the last two years and revenues are up 13% quarter-over-quarter. The team has done a remarkable job building a high net worth family office model and partnering with our commercial team to build and deepen banking relationships. This relationship-driven approach generates value for our most profitable clients and will continue to deliver strong returns over the long run.
On Slide 18, we highlight our delivery this quarter of an upgraded online and mobile banking platform for consumers and businesses. We've been a leader in digital servicing for a number of years and this new platform strengthens our position even further by providing a better user experience, better tools and enabling better digital sales capabilities. The new digital platform works seamlessly across mobile, tablet and desktop, offering many new features and over 400 functions to our customers. Some of the new features include Zelle, account aggregation and new reporting tools with account opening functionality launching this summer. Additionally, we've integrated this platform with our existing customer analytics platform, thereby enabling us to cross-sell digitally at a much higher level. Customer adoption thus far has exceeded our internal benchmarks and customer feedback has been overwhelmingly positive.
Moving to Slide 19. The allowance for credit losses increased during the quarter by $6.5 million to an overall $89.8 million, with the increase in loan balances from organic growth and acquisitions, partially offset by slightly lower coverage. The provision this quarter was $6.6 million which includes $5.1 million to establish an initial allowance on the two acquired banks. We remain watchful of inflation 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 $24.1 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.
On to credit metrics on Slide 20. We're seeing sustained positive trends with net charge-offs near 0, nonperforming loans decreasing to 0.41% of total loans and the percentage of criticized loans to risk-based capital moving lower this quarter. There's a modest decrease in allowance coverage to total loans compared to last quarter from 1.43% to 1.40%. The decrease reflects these sustained positive trends in credit loss indicators. We continue to assess the environment and the factors that might affect loan performance and this quarter concluded that this modest decrease in reserves was appropriate.
Turning to Slide 21. Our capital position continues to be very strong. Tangible book value per share is $17.12, a decline from last quarter that's attributed solely to the decline in accumulated other comprehensive income, the result of recording increasing unrealized losses in the securities portfolio. Without the impact of securities valuations on AOCI, tangible book value per share would have increased to $18.19. The ratio of tangible common equity to tangible assets was 9.9%, impacted by both the AOCI impact on securities and also by balance sheet growth, yet remains among the highest in our peer group. Regulatory capital ratios declined modestly on growing asset balances, particularly through acquisition. The Tier 1 capital ratio was 16.8% and the total risk-based capital ratio was 17.7%.
And finally, on Slide 22, a longer-term look at tangible book value per share. Over the last five years, we've achieved a compounded annual growth rate of 10%, driving shareholder value creation. Our growth outlook remains favorable, evidenced by growth in commercial loans and deposits, driven by the expansion of our commercial banking franchise. The recent steepening of the yield curve and the potential for rising rates will have a material positive impact on net interest income looking forward, particularly in light of our low-cost funding base. All this is positioned on a foundation of strong liquidity and capital from which we will optimize the opportunities of this 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.
Thank you, Tracey and Brandon, I think we're ready for Q&A.
[Operator Instructions] And from KBW, we have Brady Gailey.
So I'm just curious, the 20 new bankers that you added last year 14 just in the first quarter. Does that include the bankers you've acquired via M&A? Or is that true you've hired them outside of M&A?
It's primarily outside of M&A, I'd say 90% to 95% of it is outside of M&A.
Okay. So I mean that's a big step-up. You did, on average, five hires per quarter last year, now you're at 14. Is that a one-off? Or have efforts to hire really stepped up and you think you could hire 60 people this year?
No. We -- I would say our target for the remainder of the year is probably roughly another 10 to 15 is more of a way to think about it over the remainder of the year. And over the last, I'd say, 15 to 18 months, we've been very focused on taking advantage of disruption from larger regional banks and providing a better opportunity for bankers and it's just been an incredibly opportunistic environment to bring in high-quality talent to the organization. And what's been really great to see is it's a great mix of C&I bankers as well as a few CRE bankers along the way and these are very high-quality relationship-focused bankers that are doing a great job of bringing new opportunities to us. And when you look at our sort of late-stage pipeline that we disclosed in the public filings, roughly about half of that is coming from the new team that's come on.
And so we're seeing them bring credit facilities, we're seeing them bring deposits. A big part of our deposit growth in the quarter was from the new hiring. And so it is a full sort of relaunch of our commercial banking franchise across the state and we're super excited about it.
Okay. And then maybe on the flip side, one of your competitors just had their earnings call last hour and they had mentioned an opportunity for them to grow market share and to recruit talent. They specifically called out their TD-First Horizon and the Seacoast-Apollo deal is an opportunity for them. So maybe on the flip side, how do you go about retaining the talent that you do acquire via M&A?
We focus very heavily on building a culture where bankers want to be and we feel very confident in our ability to integrate bankers. We've done a great job now. We're long experienced in the acquisition sort of game and fully understand the social considerations and have a very good track record of maintaining talent. So to answer your question directly, Brady, I have no concern.
Okay. You guys give great guidance which is helpful. But I just had one question. But the high single-digit loan growth, I know you guys have been purchasing the resi mortgage pools here and there. But does that high single-digit loan growth include additional resi purchases of pools? Or how should we think about how active you all will be in purchasing those resi pools?
Yes. We're pretty much done with that for now. That's on hold and that guidance does not include any pool purchases. So I think when you look at the pipeline and our outlook for growth, we're not going to buy any wholesale purchases in the near term.
From Raymond James, we have David Feaster.
Maybe just following up on that last question. The high single-digit pace. Just given the first quarter results, the economic backdrop, I mean, a 70% increase in the pipeline and the lender hires, it feels pretty conservative. I'm just curious what's embedded in that growth outlook? How payoffs and -- payoffs and paydowns are trending? And what kind of expectations as rate continue to increase, maybe we see a deceleration in production? Or I'm just curious what's embedded in that growth outlook.
Yes, it's a great question, David. And maybe, Tracey, I'll let you talk about prepayments or payoffs in a second because I know you have the numbers. But generally, I'd say, in the coming quarter, we expect to be at the very high end of single digits. You can see from the pipeline that we're exiting the quarter very strong and it's a diversified group of lending that we'll put into the portfolio. So I feel great about that. Over the more longer-term view, I think high single digits is where we'll land. It remains to be seen what the impact of higher rates do on loan demand. We have not seen any issues emerge to date but it's something we'll carefully keep our eye on.
And Tracey, you want to talk about payoffs for the quarter?
Sure. Just the numbers on the first quarter, we did see a moderate slowdown in payoffs in the first quarter, about 18% lower than the prior quarter. And I think we'll expect a little further moderation in payoffs to your point.
And maybe just a follow-up, David, kind of the very positive sort of outlook here is that because we have the hiring that's gone on and the quality of the teams we're bringing on, it's allowed us to be very thoughtful and conservative around the type of assets we want to put in the portfolio. And so we continue to execute a very conservative approach to underwriting and that's a good place to be.
Okay. That's helpful. And then maybe on the ore side of the equation, the deposit growth front has been phenomenal. I mean, organically, up around like $600 million. I'm just curious what your crystal ball has for deposit growth as we look forward. I mean as you continue to bring on new C&I bankers and increase stock composition, it feels like there could -- should be some continued growth. Just curious whether you're starting to see migration within that book or whether you'd expect deposit growth to slow? And then just how deposit pricing is trending more broadly?
Yes. I think in our core deposits, we think, at least in the short term, you'll see some outflows related to tax payments in the second quarter. So we're expecting more normalized deposit growth, maybe mid-single digits for the remainder of '22. On rates, we just continually review market rates. We'll act to make sure that we remain competitive for our customers as we've observed historically, banks traditionally are slower to move rates earlier in the rate hike cycle and with a large amount of liquidity on balance sheet, we expect this time to be similar but we're certainly monitoring that closely and looking at our relationship status with our customers to make sure that we remain competitive.
Yes. We've really seen no deposit pricing pressure to date, David, at all. And when you step back and look at deposit growth, it's a combination of the hiring we brought in and the strength of the Florida economy. Our business customers are doing just incredibly well given the population growth. And so they're generating capital and building our balances and it's contributing to our deposit growth and as well as the hiring. In the first quarter, the 14 hires we brought, pretty much all were C&I. In fact, the entire team with C&I. So they're bringing great relationships that are full relationships and the exact kind of business we want to see.
That's great. And then maybe just touching on credit more broadly. You've got a pretty good pulse on the landscape and asset quality is phenomenal. You've got an incredibly conservative approach to credit. But just kind of given some of the macro concerns, given the inflationary pressures and supply chain issues and a pretty aggressive pace of Fed hikes that seem to be coming. Just curious what keeps you up at night. What you're watching closely? And is the macro environment or any other trends on the competitive landscape lead you to start tightening the credit box at all?
There's been no concern to date. As you know, as you look at the asset quality metrics, credit quality has been just pristine. Florida unemployment rate is at 3.2% which is back to pre-pandemic levels. And as I mentioned earlier, we've seen our consumer and business customers are just stronger than they've ever been. But that being said, David, our heads aren't in the sand. We read the headlines just like everybody else, clearly, higher rates will slow the economy and that impact will be felt across the country. That being said, Florida is doing incredibly well. The inbound population growth continues. And I think there are unique factors in Florida specifically compared to other geographies in combination of sort of the work from anywhere, demographic shifts and other sort of reasons to move to Florida. We think that continues. When you look at housing demand, it continues to be primarily driven by out-of-state buyers, primarily cash buyers. I mean these are very affluent people continuing to move to Florida.
We'll carefully continue to monitor past dues, FICO scores, other indicators of stress and carefully navigate this. But what I'll -- last thing I'll point out is unlike the '07, '08 or maybe the 1991 downturns where the fight was against valuation issues and oversupply, this fight is against inflation and supply chain. So it's a very different outlook we're facing today. And so the impact of that remains uncertain and we'll see how fast the Fed moves and whether or not they overdo it. But I feel good about the fact we're in Florida. I think Florida outperforms in this type of cycle and we feel pretty good about what things look like. I would say when you say what keeps us up at night, I would say we're carefully looking at the impact of higher rates on cap rates as rates go up, investors have other alternative investments; as you sort of push the risk-free rate against the cap rate, I think you have to be very thoughtful about sizing and leverage in commercial real estate.
And sort of the offset to that is increase in rental rates which you've certainly seen in things like multifamily. But when you look at like office, for example, you get higher risk free rates, pushing cap rates and then you combine that with potentially slower demand for end use of lease terms, that's where we're being a little more cautious and careful. But overall, things, as of this point, remain incredibly good in Florida.
From Truist, we have Michael Young.
Tracey, I wanted to start with just a clarification on your comments, I think, on the $150 million to $250 million of securities growth. Is that from -- is that for the remainder of the year starting in 2Q? Is that cumulative for the year? Or is that per quarter? Just was trying to clarify that.
Yes, Michael, we expect that amount per quarter over the remainder of the year.
Okay, perfect. And is there any issue or concern with kind of making that deployment as rates are rising, that you would kind of fire that bullet a little too early versus getting higher yields in the couple of quarters?
I think our approach has been to just be steady and deploy that cash in -- at our pace over time. So we've been purposeful over the last year to keep new investments around that range. We do keep the AFS portfolio at a target duration between three and four. We've added any longer duration securities or anything with duration extension risk to the HTM portfolio over that time. But really generating cash flow and able to follow the cycle with the cash flow that comes off of that portfolio.
Yes. And I'll point out, when you look at our asset liability sort of scenario, you see material increases in net interest income on the up scenarios and that's in large part because of the quality of the deposit franchise. And when you look at the loan book, it is relatively short as well. So a lot of cash continues to roll down the curve that will get reinvested. And so that's why we steady it with the sort of dollar cost averaging of putting a little bit in each quarter but rather than trying to time it exactly. But it is something we're carefully considering.
Okay, perfect. And then another clarifying question, just Tracey, on the purchase accounting accretion this quarter. Is that kind of a good run rate to move forward for the rest of the year with? Or is there any puts and takes to that?
Yes, that varies. It's really difficult to predict but this quarter is as good of a benchmark as any. I think that's fair.
Okay. And then last one, just, Chuck, I guess, bigger picture kind of asking the growth question another way. You're at a 70% loan-to-deposit ratio. You've got 34 new bankers kind of year-over-year added and you've got plenty of capital to fund growth. So is there anything that would cause you to, I guess, not pursue growth if it were there, i.e., have growth be higher than kind of the high single-digit range? I know you've kind of talked about that as a speed limit in the past but given kind of where the economy is at, would you be willing to go faster than that, just kind of given all those building blocks?
I think high single digits is about the fastest speed we want to go. We want to continue to carefully put assets in the portfolio we know will carry us through the long term. And so that's kind of our objective, Michael.
Okay. So would you -- if there was a stronger demand, would you just see more remix potentially? I mean are there other things that you would kind of shrink or...
Yes, we have the option of selling more. So for example, one of the vehicles we have is in our marine book. We can sell more of that, we can sell more of the mortgage banking. I mean we have other levers that we can push to drive more fee income as offset.
From B. Riley Securities, we have Steve Moss.
Most of my questions have been asked and answered here. I guess just maybe following up on your CECL comments, Chuck. You put some overlays there. Just kind of curious, it sounds like this is probably the bottom until there's better economic clarity on the reserve model. Or are you guys leaning in maybe there's some reserve building going forward here?
No, Steve, I think that's the right way to think about it. We reduced the allowance coverage modestly this quarter. We're comfortable with this level of reserves, given the uncertainty and economic conditions. Certainly, as we look at the activity in our markets, we see indications of strength. But underlying -- no underlying asset quality concerns. And I think we'll just continue to consider each quarter what the circumstances are, what our model and our process tell us. At this point, we think our reserve levels are prudent. We don't see a benefit in releasing but we'll have a better read on that each quarter going forward.
Given all the variables that are going on in the sort of macro headlines, it's a quarter-to-quarter issue.
Okay, sounds good. And then just on the tech initiatives side, kind of you guys talked about the relaunch of the commercial bank here. Kind of curious what upcoming initiatives you guys have in the pipeline?
Yes, a number of things. One, we continue to push forward on commercial. There's a lot being laid out to be more competitive on the treasury side of commercial as we're bringing in C&I bankers, particularly C&I bankers that are focused on the sort of lower end of the middle market, if you will, bringing up our tech stack and our offerings there is a focus of ours, bring a lot to the table here over the remainder of the year. And Jeff, anything you'd add on the technology side? I know we've done a great job bringing Q2 to where it is and then some of the work we've done to integrate the analytics but any other thoughts you have on that?
All in good hands, especially after the most recent integration, great sales capabilities, great servicing capabilities and just echo to Chuck, just a continued focus on commercial with the aim of making it easier for bankers, make it easier for customers. And so that will continue to be a big area of focus for us.
And the last thing I'd add to that, Steve, just when you look at this quarter, what's remarkable and what I'm incredibly proud of the team for doing is amongst driving an acquisition strategy, we've built out an incredible organic operating model here where we've built out better client-facing technology. We bolted on new markets. We're bolting on new bankers. The demand for our bank is getting stronger and stronger every day in terms of both customers and bankers. And it is material and we are feeling it and it is exciting. So it's incredible looking back at this quarter, maybe the quarter prior. A lot of transformational work has gone on in the company to position ourselves for being more competitive and solid disciplined growth here over the coming couple of years. So I just couldn't be more proud of what the team has put together.
We have a follow-up from Michael Young.
Tracey, I just wanted to kind of follow up on the expense outlook. So I appreciate the color for 2Q. But given kind of the acquisitions and related cost saves, just trying to figure out how much of that sort of is embedded by Q2 or if there's kind of levers there into the back half of the year? And any other kind of puts and takes that we should be expecting as we move forward?
Yes. As we look ahead for expenses, you'll continue to see higher salary and production-related costs as we move through the year. The market for talent has been very competitive in all areas of the bank. So we've accounted for that in the forecast. Also the impact of the expanded footprint which you see pretty fully in the first quarter but of course, that will continue in volume-driven costs like data processing and ongoing investments in technology will continue to scale with growth over time offset. As we move through the year, particularly in the second half, you'll see the full effect of cost efficiencies once the Sabal Palm acquisition is fully converted. So all in, then the adjusted efficiency ratio will come in closer to the 54% to 55% range in the first half of the year and then step down to the low 50s as we exit 2022.
Okay. And then last one for me. Just, Chuck, maybe bigger picture on kind of rates rising. As you mentioned, it's driven more by the need to fight inflation. That's obviously going to have some impact on the cost base going forward. So just how should we think about sort of the benefit to revenue versus trying to manage the inflationary pressure as we think just longer term and reinvestment, et cetera? Just how much of that kind of rate hikes is going to flow through to the bottom line versus being eat up by expenses?
Our thinking right now is most of the rate hikes fall to the bottom line. We guided to the efficiency ratio starting to drop into the high 40s exiting the year. Like I mean when you look at high single-digit growth and the impact of the forward curve, it materially improves the outlook for net interest income and earnings. So it's not a small change, it is -- things -- the outlook has gotten a lot stronger as you look forward.
Thank you. We will now turn it back to Chuck Shaffer for closing comments.
Okay. Thank you, Brandon. And I appreciate everybody's time today and that will conclude our call.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.