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Seacoast Banking Corp of Florida (NASDAQ:SBCF)
Q2 2019 Earnings Call
Jul 26, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Seacoast Second Quarter Earnings Conference Call. My name is Brandon, and I'll be your operator for today. [Operator Instructions]. Before we begin, I've been asked to direct your attention to the statement contained at the end of the 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 their comments today are intended to be covered within the meaning of that Act. [Operator Instructions]. And i will now turn the call over to Mr. Dennis Hudson, Chairman and CEO, Seacoast bank. Mr. Hudson, you may begin.

Dennis Hudson -- Chairman & Chief Executive Officer

Thank you very much. Good morning, everybody, and thank you for joining us today for Seacoast Second Quarter 2019 Conference Call. Our press release, which we released yesterday after the market close and our investor presentation, can be found on the Investor portion of our website under the title Presentations. With us today is Chuck Shaffer, our Chief Financial Officer and Chief Operating Officer, who will discuss our financial and operating results. Also with us today are Julie Kleffel, our Community Banking Executive; Chuck Cross, our Commercial Banking Executive; David Houdeshell, our Chief Credit Officer; and Jeff Lee, our Chief Digital Officer. As you saw in yesterday's press release, Seacoast reported another strong quarter with continued, solid organic growth in our customer base. Importantly, we generated significant improvement in operating leverage this quarter as well, the result of improved revenue growth and further streamlining our operations. We grew adjusted net revenue 18% to $74 million and achieved adjusted net income of $26 million, up 41% year-over-year. We reported $0.50 in adjusted earnings per share, an increase of 32% year-over-year, driven by higher loans and deposits as a result of our balanced growth strategy and a tremendous growth in fees this quarter. Not only were mortgage fees up, but also most of the other categories, including wealth, which produced one of its strongest quarters ever in new asset growth.

We also completed the implementation of our plan announced during last quarter's call to identify approximately $10 million in annual cost reductions. These improvements, together with continued execution of our balance growth strategy, drove operating leverage, which more than offset, and should continue to offset, what we said last quarter, would be a more challenging rate environment. These changes were taken in response to the shift in the yield curve that occurred late last year to better position us for stronger performance over the balance of this year. Last quarter, we stated that we were making adjustments in the way we operate our mortgage business to help build stronger fee growth. As you can see, our mortgage team performed beautifully, producing one of the strongest quarters ever as more production was moved into saleable product. This will, over time, allow us to adjust our loan mix with greater focus on commercial and consumer loan products that carry better spreads and better returns. We also completed our previously announced cost reductions, yielding around $10 million in annual savings. As we finish up the integration of our end-to-end digital loan origination platforms in the second half, we will begin to uncover additional efficiencies to support additional planned investments and commercial bankers in key Florida Metro markets. This, together with anticipated improvements in loan growth, are intended to support additional expansion in operating leverage to support our Vision 2020 objectives. Our strong deposit growth continued during the quarter, again demonstrating the value of our attractive customer franchise.

Loan growth improved over last quarter and is expected to continue to improve as the year plays out. Chuck will provide more color, including work we did this quarter to move certain credits out of the bank, which worked against our growth objectives, but helped strengthen our credit profile. Our loan pipelines remain robust and growing and are up 30% over last quarter. And we are continuing to see growth in the pipeline in the first few weeks of the third quarter. Overall, Seacoast continues to benefit from the continued vitality of Florida's economy as the leading Florida-based bank at attractive markets with strong growth fundamentals, we are well positioned to deliver sustainable, profitable growth. Finally, I'd like to thank Seacoast associates for their continued hard work this quarter. Many of you have been leading lots of change this quarter, and it has required an extra effort. Our sales teams delivered results this quarter, proving our balance growth strategy is working. And all of you continue to provide outstanding service to our customers. We have an outstanding team, and your dedication makes us in market-after-market, Florida's Bank of choice. With that, I'd like to call the -- turn the call over to Chuck, who's going to review a little more detail around our first quarter -- our second quarter results, and then we'd be happy to take a few questions.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Thank you, Denny. And thank you all for joining us this morning. As I provide my comments, I'll reference the second quarter 2019 earnings slide deck, which can be found at seacoastbanking.com. Beginning with slide 4, we are successfully exhibiting our strategy across all business lines. Adjusted net income grew year-over-year 41% to $25.8 million, resulting in earnings per diluted share of $0.50. We reported a 1.59% adjusted return on intangible assets and a 15.2% adjusted return on tangible common equity. Tangible book value per share grew 5.2% sequentially to $13.65. We ended the quarter with a tangible common equity ratio of 10.7% and an average loan-to-deposit ratio of 87.3%, affording ample room for continued loan growth. As we continue to grow our capital base, it's worth mentioning illustratively, if the second quarter's tangible common equity to tangible asset ratio was adjusted to a normalized target of 8%, our adjusted return on tangible common equity would be 19.2%, increasing from 18.8% in the prior quarter. And our performance was highlighted by continued improvements and generating operating leverage with a focus on growing revenues while streamlining operations. The adjusted efficiency ratio declined 4.4% sequentially to 51.4%, and the adjusted noninterest expense to tangible asset ratio declined to 2.34%. During the quarter, we completed our previously announced expense reduction initiative, reducing the full-time equivalent employee count from 902 to 852, renegotiated key vendor contracts, enhanced cost control across a number of line items and consolidate one banking center location with an additional closure planned for the third quarter. And you can be assured that our continued diligent focus on efficiency is accompanied by great care and ensuring that we do not impede on Seacoast stability to drive revenue growth. Noninterest income improved significantly from the prior quarter with improvements across most line items, notably, our mortgage banking and wealth management teams have record quarters leading to growth in noninterest income as a percentage of total revenue, excluding security losses from 17% to 19%.

And total deposits grew seasonally strong, 3%, on an annualized basis, excluding the unfavorable $99 million impact from transferring broker deposits to Federal Home Loan Bank advances. During the quarter, we took advantage of lower rate Federal Home Loan Bank advances when compared to broker deposit funding. We will continue to closely manage our overall funding mix in order to optimize funding cost. The cost of funds increased 5 basis points quarter-over-quarter, but late in the quarter, deposit pressure began to abate. Net loan growth in the quarter totaled 5% on an annualized basis, overcoming a $59 million increase in early loan payoffs, quarter-over-quarter. If early loan payoffs had remained in line with the prior quarter, loan growth would've been 10% on an annualized basis. During the quarter, we saw acceleration in commercial real estate loans being refinanced away with minimal or no covenants, limited or no guarantees, in combination with increasing leverage in projects. Additionally, we allowed higher risk assets to be refinanced away including marinas, hotels and speculative construction. We remain patient this late in the cycle and will not chase deals, carefully defending our underwriting integrity. We hit another record -- another production record for consumer and small business originations, and our commercial banking business enters the third quarter with a record pipeline of $262 million. This is a 48% increase from the first quarter. Last quarter, we provided loan growth guidance of mid-to-high single-digit growth in 2019 and added the comment that loan growth will accelerate throughout the year. We feel confident in our ability to achieve this objective and reiterating this target. Now turning to slide 5. Net interest income declined $0.7 million sequentially, and the net interest margin contracted 8 basis points to 3.94%. Excluding accretion on acquired loans, the net interest margin declined 9 basis points sequentially and was up 7 basis points from the second quarter of 2018. Quarter-over-quarter, the yield on loans declined 6 basis points, the yield on securities declined 2 basis points and the cost of deposits increased 9 basis points. During the quarter, rates declined across all points on the yield curve, affecting the variable rate portion of our loan and securities portfolio and impacted yields on both loans and securities. Our average add-on yields for new loans declined 24 basis points sequentially to 5.17% and are up 21 basis points from the prior year.

The decline, quarter-over-quarter, was primarily the result of lower add-on rates and commercial and mortgage banking due to declining yields in -- on the moderate and long end of treasure curve. Deposit pressure abated in June, and our cost to deposits began to decline in the final month of the quarter. And during the second quarter, we meaningfully shortened time deposit maturity offerings for less than 6 months and began reducing rates paid on higher yielding savings and money market products. If the FMOC does take action to reduce rates, we will follow suit with our deposit offerings. Given the outlook for potential rate cuts, this should be the peak of the deposit rate cycle. Additionally, other interest-bearing liabilities such as our trust preferred in Federal Home Loan Bank advances will benefit from short -- from falling short-term rates. While variable, we model purchase accounting accretion to be approximately 25 basis points in the third and fourth quarter of 2019. And looking ahead to the third quarter of 2019, assuming no change in the federal fund rate and no improvement in the steepness of the yield curve, we expect the net interest margin to be in the low 3.90s, given the uncertainty regarding interest rates in the yield curve, the conservative guidance of a potential slight decline in margin, the anticipated result of an assumed persistent and averted yield curve and a basis point or 2 of less purchased loan accretion. If the forward curve was to materialize, which includes a rate cut in July and September, we expect the net interest margin to be the high 3.80s in the third quarter. Despite the potential compression in the margin due to anticipated rate cuts, assuming economic conditions remain unchanged, we expect net interest income in the third quarter to be modestly higher than the second quarter and begin expanding meaningfully in Q4 and into 2020.

The result of growth in the balance sheet and planned actions to reducing rates paid to deposit customers. If the yield curve were to ultimately steepen as a result of the FMOC action to reduce rates, and we are successful in reducing deposit rates paid to customers as planned, our margin should begin an expansionary pattern in 2020. Moving to slide 6. Adjusted noninterest income increased $1.2 million sequentially and grew $1.3 million or 10% from the prior year. When compared to the prior quarter, we saw increase in almost -- increases in almost every category, led by a record quarter of performance from our mortgage banking group with mortgage making fees increasing $0.6 million quarter-over-quarter. And I'll remind you, over the first half of 2019, we introduced new saleable products in -- focused on generating saleable products. And additionally, we continue to see strong performance in wealth management. During the first half of 2019, new assets under management acquired totaled $70 million, tracking to our goal of growing AUM by $120 million to $150 million in 2019. We ended the quarter with $577 million in assets under management. And finally, service charges on deposits grew $0.2 million sequentially, primarily the result of increased fees on treasury products. Moving to slide 7. Adjusted noninterest expense declined $3.1 million sequentially and is up $1.5 million from the prior year, outperforming our previous guided range of $38.5 million to $39.5 million for the second quarter. During the quarter, we completed our previously announced $10 million annual expense reduction initiative, reducing the full-time employee -- the full-time equivalent employee count by 50, renegotiated key vendor contracts, enhanced cost control across a number of line items.

We also consolidated one banking center, and we'll have another in the third quarter. For the third quarter of 2019, we expect adjusted noninterest expense to be approximately $37.5 million to $38.5 million, excluding the amortization of intangible assets, which is approximately $1.5 million per quarter. For the full year 2019, we reiterate the full year noninterest expense guide to be $155 million to $157 million, excluding the amortization of intangibles, which is approximately $5.8 million on a full year basis. We will continue to take a proactive stance on cost control, positioning the company for success in the coming periods, regardless of what the economic or interest rate environment brings. Moving to slide 8. Our performance was highlighted by continuing improvements in generating operating leverage with declining overhead and a focus on growing noninterest income. The adjusted efficiency ratio declined 4.4% sequentially to 51.4%, and the adjusted noninterest expense to tangible asset ratio declined a 2.34%. We remain confident we are on track to achieve a below 57% efficiency ratio as a lay out in our Vision 2020 plan.

Turning to slide 9. Total new loan production was $407 million compared to $310 million in the prior quarter, resulting in net loan growth in the quarter of 5% on an annualized basis, overcoming a $59 million increase in early loan payoffs, quarter-over-quarter. If early loan payoffs had remained in line with the prior quarter, loan growth would've been 10% on an annualized basis. Our commercial pipeline has grown to a record $262 million at the end of the quarter, and we are anticipating production volume to prove through the quarter. When coupled with an expanded team of bankers in Tampa and Broward County, we are well positioned to drive attractive loan growth. Total production increased to $157 million from $109 million quarter-over-quarter, inclusive of the $20 million commercial portfolio we had the opportunity to acquire from a third-party. This portfolio was fully re-underwritten by our team, meeting our strict underwriting standards. Of all residential loans originated in the quarter, $61 million was sold in the secondary market, leading to a record quarter for mortgage banking fees. We placed $50 million in the portfolio with $30 million coming from a pool of mortgages we acquired in the wholesale secondary market. Consumer and small business had a record production -- record quarter production, totaling $136 million, $18 million greater than the first quarter. And we remain focused on generating consumer loans on our occupied CRE and CNI-related lending. Lending to these borrower classes brings higher value relationships with funding and additional fee-based opportunities. This supports our persistent focus on sustaining granularity in the portfolio and gaining greater share of wallet from our customers. And we are well positioned to drive attractive loan growth moving forward, without sacrificing our credit discipline. We are reiterating our guidance of mid- to high single-digit growth in 2019 and with loan growth accelerating throughout the year. And if not for the uncertainty on early payoffs, we'd be guiding to high single digits.

Turning to slide 10. Deposits outstanding declined $65 million sequentially. Total deposits grew a seasonally strong 3% on an annualized basis, excluding the unfavorable $99 million impact from transferring broker deposits to Federal Home Loan Bank advances. During the quarter, we took advantage of lower rate Federal Home Loan Bank advances when compared to broker deposit funding. We will continue to closely manage our overall funding mix in order to optimize funding cost. And during the quarter, we continued to successfully acquire commercial customers with business checking balances growing 8% on an annualized basis. This is one of the many positive outcomes of expanding our business banking team in Tampa and Fort Lauderdale. And of note, if you take a moment to review the customer relationship funding table in our earnings release, you will see growth in all commercial-related line items presented, including noninterest-bearing demand deposits. Rates paid on deposits increased 9 basis points to 76 basis points and looking ahead we're targeting deposit growth of 6%. We expect deposit cost in the third quarter to be approximately in line or slightly below the second quarter and given the outlook of a cut in the federal funds rate, we began reducing rates paid to customers on time deposits another higher rate savings products late in the quarter and shortened time deposit maturities. We expect the full benefit of this action to take hold in the fourth quarter.

Turning to slide 11. Our deposit beta continues to outperform peer, reflecting the attractive transactional nature of our deposit book and looking back at the start of the current rate cycle, Fed funds -- the Fed funds rate has increased 200 basis points, while our cost to deposits has increased only 61 basis points. Noninterest-bearing demand deposits represent 30% of the deposit franchise and transaction accounts represents 50% of the deposit book, in line with the prior quarter. Turning to slide 12. Credit continues to benefit from rigorous credit selection that emphasizes through-the-cycle orientation and builds on customer relationships and well-understood, known markets and sectors as well as maintaining diversity of loan mix and granularity. The overall allowance to total loans was up 1 basis point to 69 basis points at quarter end. And let me take a moment to remind you that under purchase accounting, loans acquired through an acquisition are placed in the acquired loan portfolio and a purchased mark, including both characteristics for credit and rate, is applied and accreted back through net interest income as these loans pay down are mature. At the end of the second quarter, this discount represented 3.76% of purchased loans outstanding. And the nonacquired loan portfolio, the ALLL, ended the quarter at 87 basis points of loans outstanding, down 2 basis points from the prior quarter. And we continue to prudently manage our commercial real estate exposure with construction and land development as a percentage of bank level capital at 51% and commercial real estate loans as a percentage of bank level capital at 205%, down from 57% and 216%, respectively, in the prior quarter and well below regulatory guidance. On a consolidated capital basis, construction and land development and commercial real estate loans represent 48% and 192% of capital, respectively.

Concentrations continue to be well managed with an average commercial loan size of approximately $350,000. And top 10 and top 20 relationships represent 19% and 34% of total consolidated risk-based capital, down from 25% and 42%, respectively, 1 year prior; and down 29% and 48% respectfully from 3 years prior. Our largest committed exposure totals $29 million; net charge-offs were $1.8 million for the quarter, a 15 basis point to average loans, in line with previous guidance. We forecast annualized net charge-offs approximately 15 basis points throughout 2019. The provision for loan losses will continue to be influenced by loan growth and net charge-offs. Turning to slide 13. We continue to posses a healthy balance sheet and are delivering strong capital generation through our balance growth strategy. This positions us well for additional, disciplined acquisition in organic growth opportunities and provide options to manage capital and returns moving forward. The Tier 1 capital ratio was 14.6% and the total risk-based capital ratio was 15.2% at June 30, 2019. The tangible common equity to tangible asset ratio was 10.7% at quarter end, providing capital for additional growth in 2019. Using 8%, illustratively, as a long-term normalized tangible common equity ratio target, would imply over $175 million in capital available for deployment. And to wrap up on slide 14, we are well positioned to sustain and advance momentum in 2019. Our fundamentals remain very strong with a well-capitalized low-risk balance sheet and low cost funding, and we continue to see robust opportunities to enhance our balance growth strategy in some of the -- Florida's fastest growing markets. Overall, we remain on track to meet our Vision 2020 targets and continue to create value for shareholders. And we look forward to your questions.

And I'll turn it back over to you, Denny.

Dennis Hudson -- Chairman & Chief Executive Officer

Great. Thank you, Chuck. And operator, we'd be pleased to take a few questions.

Questions and Answers:

 

Operator

[Operator Instructions]. And on the line from Sandler O'Neill, we have Steve Scouten. Please go ahead.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Hey! How are you?

Steve Scouten -- SBCF -- Analyst

Good, good.Chuck, I appreciate all the guidance around the NIM moving forward, and I just want to make sure I heard it properly, you said low 3.90s if we don't get a rate cut, but high 3.80s if we do get the July and September cuts. Is that correct?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Hey, exactly. Under a flat rate scenario, it would be low 3.90s. Under a -- the forward curve, which includes a rate cut in both July and September, high 3.80s for the third quarter. And if you look at net interest income, we expect net interest income to grow modestly in the third quarter and then expand meaningfully in Q4 and into 2020, primarily the result of growth in the balance sheet combined with the reducing rates paid to deposit customers. So we're going to [Indecipherable] and we've already started some of it begin -- reducing rates, and if we see the Fed cut rates next week, we're going to sort of aggressively cutting some of our deposit rates.

Steve Scouten -- SBCF -- Analyst

Okay. And can you remind us, if you have the numbers, kind of how much of your loan book adjusts immediately with the potential Fed cut and maybe conversely, how much of your deposits are indexed to some of various-related index?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Sure. I'll take -- and I'll give you securities as well. On the securities portfolio, approximately 64% is fixed, 29% is floating and then on -- the remaining 7% are adjustable that hit reset dates. On the loan book, 58% is fixed, 23% is adjustable. So in other words, once it hits it's reset date it repriced. And 22% is truly variable, which is about $1.1 billion and of that, about $800,000 is tied to prime and $200,000 is tied to 1-month LIBOR.

Steve Scouten -- SBCF -- Analyst

Okay. And then on the deposit side, do you have a large amount of index?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Yes. I would say, generally, the sweep repo in public funds that we have are generally contractual and are tied to changes in Fed fund rates as well as we'll begin reducing rates on some of our more higher-yielding money market, higher-yielding savings products.

Steve Scouten -- SBCF -- Analyst

Okay. Okay. And on the security side, I feel like that's a decent change away from a higher floating rate percentage on securities. Is that -- did that happen this quarter with that, the higher-yield securities that you invested? Were those fixed rate securities in a way from variable rate as well?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

No. I think the way to think about that is we've always carried that level of adjustable rate securities going back to about 2017, but during the quarter, we -- as the tenure dropped below 2%, we add some sub-2% securities that we sold out and reinvested -- it was kind of high 2.90s on the fixed rate side.

Steve Scouten -- SBCF -- Analyst

Okay.

Dennis Hudson -- Chairman & Chief Executive Officer

So to be clear, the reinvestment we did this quarter was indeed in fixed rates.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Yes, in fixed rates.

Dennis Hudson -- Chairman & Chief Executive Officer

And I would say the variable portion of that book is coming down due to payoffs.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Yes. That's right.

Dennis Hudson -- Chairman & Chief Executive Officer

And that's -- it's factoring down.

Steve Scouten -- SBCF -- Analyst

In what sort of securities are there that you're able to get that sort of yield on?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

It was primarily agency CMOs and MBSs.

Steve Scouten -- SBCF -- Analyst

Okay, great.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

We just kind of got, I don't know if you want to call it lucky, but we timed the tenure correctly. Kind of sold one when it was low and reinvested when it was high.

Steve Scouten -- SBCF -- Analyst

Perfect. And then maybe last question for me just on your expense guidance. How much hiring are you guys planning in terms of additional production personnel through the end of the year within that guidance you give?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Our plans calls for about 7 to -- maybe -- it's around 7 commercial bankers on -- over the remainder of the year. We hired 5 this quarter, and we've gotten the target around 7 and continue to recruit.

Dennis Hudson -- Chairman & Chief Executive Officer

And what we're seeing is some of the hires we did last year and earlier this year now starting to.

Steve Scouten -- SBCF -- Analyst

Yeah.

Dennis Hudson -- Chairman & Chief Executive Officer

perform. And that's why we're confident in the forward guidance that we gave you, that as well as just continued good performance on the part of the whole team, is driving higher levels of loan production as we get into the second half of this year. So we're really confident about the net interest income expansion beginning next quarter and accelerating as we get deeper into the year and into 2020. And I think that's a key thing to really keep thinking about -- is the volume side of this play.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Yes. And if you step back and look at the growth in the pipeline and as well as the growth in the commercial deposit customers, you can see indications of this team coming online and sort of the first thing they bring over is relationships with deposit funding and then adds to credit needs come behind that, we're starting to see that build as well. So we're very pleased with where we are at halfway through the year here.

Dennis Hudson -- Chairman & Chief Executive Officer

Yes. And that's really best demonstrated in some of the great deposit growth we had this quarter in the commercial book that Chuck talked about earlier.

Steve Scouten -- SBCF -- Analyst

Great, thanks again.

Dennis Hudson -- Chairman & Chief Executive Officer

Thanks, Steve.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Thanks, Steve.

Operator

From Raymond James, we have Michael Rose. Please go ahead.

Michael Rose -- Raymond James -- Analyst

Hey good morning guys.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Hey Mike.

Michael Rose -- Raymond James -- Analyst

I just wanted to talk about the capital generation. As we think about deployment, and you guys have obviously done some M&A, what does the M&A landscape look like? And would you be open to buy back at some point? Thanks.

Dennis Hudson -- Chairman & Chief Executive Officer

Thanks. Our preferences is to use capital for growth, and there's no question about it. We continue to, I would say, stay active in that market, in the M&A market. And we think there's potential for that growth. Using capital for growth provides better returns, we think, for shareholders, as we look forward. And I would just state that we can buy back shares at any time, and you certainly can see that our capital ratios are strong today. And we continue to accrete capital, and we can make the decision at any time. And we're mindful that doing so dilutes tangible book value and when we look at the crossover payback it can be -- we're going to competing that, in our minds, against what we see out there in terms of other growth plays around M&A and the like. So we'll continue to evaluate our growth opportunities and again, I'd just reiterate we can initiate a buy back at any time. And that's something we continue to look at.

Michael Rose -- Raymond James -- Analyst

I appreciate the color. And just moving back to loan growth. I appreciate the hires and how that will impact growth as we move forward, but the pay downs -- I mean I know they're hard to predict, but I'm sure you have some scheduled pay downs, but as we think about accelerated pay downs, I mean would the ball process be that with rates coming down if the Fed does cut then we could see some acceleration in the market and in pay downs? Thanks.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Yeah. There's no doubt as rates fall, the opportunity for pay downs goes up, but we've worked that into our forward guide, and we feel like the mid- to high single-digit capsulates the potential for those higher pay downs, and we're pleased with the growth on the -- in the pipeline and the like. So we think we have enough momentum to overcome that on the back half of the year.

Dennis Hudson -- Chairman & Chief Executive Officer

But just to reiterate, we've worked that assumption into our go-forward guidance that we had around growth. We feel pretty confident about that. When we look at this quarter, Q2, we did see, as Chuck said, an increase in payoffs, early payoffs, that was quite meaningful, $56 million, I think you said Chuck.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Quarter-over-quarter.

Dennis Hudson -- Chairman & Chief Executive Officer

Quarter-over-quarter. So that was an increase over Q1 in payoffs. So payoffs have been running high, they increased this quarter. And when we deconstruct that delta, that included some loans that we decided to let go and let run, and there were some things that had weaker credit, metrics that we felt was a good move as we saw borrowers looking to cash out and take additional funding and so forth that we think made sense. So the reason I tell you that is I think that contributed to the -- to that increase this quarter, and we do not expect to see that to happen in the coming quarter, but we'll have -- just have to see.

Operator

And from B.Riley, we have Steve Moss. Please go ahead.

Steve Moss -- B.Riley -- Analyst

Hi. Good morning guys. Just want to follow-up on the loan production side. A really good year-over-year increase in the pipeline here. You just -- you guys have spoken to even more production going forward, obviously given the hires. Just kind of wondering how much more of an increase could we see into the third and fourth quarters?

Dennis Hudson -- Chairman & Chief Executive Officer

The increase in loan growth pipeline?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Pipeline.

Steve Moss -- B.Riley -- Analyst

Pipeline.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Yeah. I think we expected it to continue accelerating, Steve, and if you look at the growing balance sheet, we've got to continue to grow the pipeline, and we'll continue to focus on it growing it here into the third and fourth quarter. I would say, the bulk of the new members we brought on the team are just hitting their strides and on -- by the end of the third and fourth quarter, we'll start to see some of those deals come into the pipeline. So we feel good about the momentum there. And just kind of overall, we continue to play sort of defense around portfolio administration, letting go some of the higher-risk relationships that we see coming due in at the same time sort of playing heavy offense on expanding our distribution in Tampa and as well as in South Florida, Chuck. You got anything you want to add to that?

Charles K. Cross Jr. -- Executive Vice President and Commercial Banking Executive

Yes. This is Chuck Cross. I'll add a little more color on that. The bankers that we hired in Q1 and Q2 are really starting to add to the pipeline and the pipeline has grown since June 30, meaningful. And we've got a number of offer letters out right now. So we think we'll continue to hit hiring another 7 commercial bankers before the end of the year, and those folks will help us grow the pipeline. So things are looking good for what we've...

Dennis Hudson -- Chairman & Chief Executive Officer

Forecast.

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

And I think generally, across the board, we also expect better production out of the team, even the existing legacy team, here on the back half of the year.

Dennis Hudson -- Chairman & Chief Executive Officer

And I just want to add a couple of comments. First of all the top half of the pipeline, which we do not publish, has grown very meaningfully in the last 2 quarters. That speaks to our increased confidence. Second of all, Chuck mentioned portfolio administration aspects kind of working against us here. I view that as an anomaly this quarter. We are not going to see that happen in the same way this quarter. We just don't have things that we're really worried about in the portfolio. We feel very good about the credit that we have in the portfolio. Those were just some anomalies that I think, an opportunity, kind of presented itself.

Steve Moss -- B.Riley -- Analyst

Right. And then I guess in terms of the mix of pipeline is also shifting most towards C&I. Is it a correct assumption?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Yes.

Steve Moss -- B.Riley -- Analyst

Okay. And then the other thing I did want to ask on is in terms of the competition you're seeing per commercial real estate. Who's been most aggressive in that market these days?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Yes. This is Chuck Cross again. I think the white con companies and the conduits are really coming on strong, and they're the ones that have the long amortization, nonrecourse, higher loan to values than we're used to as the bank, and they do really long interest-only periods.

Steve Moss -- B.Riley -- Analyst

Okay. And then my third question, just on the CD rates. Chuck, you discussed lowering them here this quarter. Kind of wondering where that's pricing today versus what we thought for the portfolio?

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Yes. We we're down, if you were to go back, 3 months ago, the CD market, it had gone well above 2% into the 2.30-ish range, we're down below 2% now, 1.75%. And we think there'll continue to be opportunities to cut that back. I think given the meaningful shift in the yield curve, you're going to see -- we've already seen it out of the large banks, which really control deposit pricing, really a fairly strong pull back in money market offers as well as CD rates, and we'll follow suit. And that should allow us to get deposit cost down.

Steve Moss -- B.Riley -- Analyst

All right. Thank you very much.

Operator

Thank you. We'll now turn it back to Mr. Hudson for closing remarks.

Dennis Hudson -- Chairman & Chief Executive Officer

Great. Well, thank you all for joining us today, and we look forward to talking with you again as we close out the third quarter. Thanks a lot.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Dennis Hudson -- Chairman & Chief Executive Officer

Charles M. Shaffer -- Chief Operating Officer & Chief Financial Officer

Steve Scouten -- SBCF -- Analyst

Michael Rose -- Raymond James -- Analyst

Steve Moss -- B.Riley -- Analyst

Charles K. Cross Jr. -- Executive Vice President and Commercial Banking Executive

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