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Seacoast Banking Corp of Florida (NASDAQ:SBCF)
Q2 2020 Earnings Call
Jul 24, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Seacoast Second Quarter Earnings Conference Call. My name is Richard, and I'll be your operator for today's call. [Operator Instructions]

Before we begin, I have 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]

I'll now turn the call over to Mr. Dennis Hudson, Chairman and CEO, Seacoast Bank. Mr. Hudson, you may begin.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Thank you all for joining us this morning. As we provide our comments, we will reference the second quarter 2020 earnings slide deck, which can be found at seacoastbanking.com.

As you know, we announced several changes this quarter in the roles of our executive leadership. With me today is, in his new role as President and COO, is Chuck Shaffer. Chuck has been with Seacoast for many years and has held roles across the organization. He has been instrumental in influencing our success in recent years, and I have every confidence in his abilities in the new position. Also in new roles this quarter are; Tracy Dexter, now CFO and formerly our Corporate Controller. And Jay Walker, who has expanded his role as Treasurer and now adds, Director of Corporate Strategy, joining us as always, are Jeff Lee, our Chief Digital Officer and David Houdeshell, our Chief Credit Officer.

I'd like to express my sincere appreciation to the Seacoast team for their hard work over the past four months. The pandemic environment has proven challenging to navigate, but our associates performed incredibly well. I am very proud of their effort to serve our customers and our communities through this challenging period.

Chuck, I'll turn it over to you to share your views on the second quarter.

Charles M. Shaffer -- President and Chief Operating Officer

Thank you, Denny. I also would like to express my sincere appreciation for the entire Seacoast team for their dedication to service and their steadfast focus on keeping Seacoast successful during this unprecedented period.

During the quarter, we saw significant increases in the number of COVID cases across the entire state. And while the state remains open for business, customers remained cautious and businesses are carefully navigating an uncertain environment. And as such, we'll continue to be vigilant in maintaining our disciplined and conservative credit culture.

We entered this downturn from a position of strength, with a fortress balance sheet, inclusive of robust capital position, ample liquidity and a diversified well underwritten credit portfolio. The underlying economic performance of the organization remains impressively resilient as a result of the efficient operating model the Seacoast team has built over the last five years.

This quarter's performance resulted in pre-tax, pre-provision adjusted return on tangible assets of 2.12%. And despite continued prudent increases in reserve levels, tangible book value per share grew by nearly 5% [Phonetic] to $15.11. We remained cautious and disciplined in extending credit, primarily focusing on current clients and have tightened credit criteria, such as increasing required debt service coverage ratios and reducing loan-to-value limits. We have also reduced focus on several industries and asset types, and are requiring customers to provide detailed and supportable medium-term to long-term cash flow projections that demonstrate an ability to sustain further revenue deterioration.

Since the Paycheck Protection Program launched in April, we've originated over 5,000 PPP loans for $591 million. And during the quarter, we saw a significant slowdown in request for deferrals. And of the loans with payment deferrals that came due in July, 60% have made a payment thus far. We continue to increase our ACL coverage ratio for the quarter, reflecting our conservative posture and adopting the more severe economic scenarios provided by Moody's. Tracy will provide further detail shortly.

Our focus is further turned to generating fee income and growing new deposit customers. Our mortgage banking and wealth businesses followed up a record-breaking Q1 with further improvements in performance. We were very impressed to see the mortgage team continue to hit their outstanding service level targets with customers, despite substantial increases in volume, while also delivering strong economic returns from the business. And our wealth team continue to grow AUM by a record-breaking figure. We also saw new business customer acquisition increased by nearly 50% in the second quarter when compared to prior quarters, and introduced over 3,000 new business customers to Seacoast.

And lastly, our call center and retail associates continue to lead the market in availability and customer service standards. Our call center has far outperformed large bank call center wait times, and service global standards have been excellent. Digital usage continues to increase with the proportion of transactions and non-branch delivery channels, up 14% over this time last year.

And to conclude, our continued focus on operating and efficient organization while maintaining robust levels of capital and liquidity will allow us to perform well through this cycle. And during this period, our goal is to capitalize on our strength to protect and grow tangible book value per share, build market share in a disciplined manner and position the company post-pandemic to consolidate weaker players across the State of Florida, should those opportunities develop.

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

Tracey Dexter -- Executive Vice President and Chief Financial Officer

Thank you, Chuck. Good morning, everyone. Directing your attention to second quarter results, let's turn to Slide 6. Net interest income increased $4.1 million sequentially. The net interest margin decreased 23 basis points to 3.70. The effect on net interest margin from accretion of purchase discounts on acquired loans was 16 basis points in the second quarter of 2020 compared to 27 basis points in the first quarter of 2020 and 27 basis points in the second quarter of 2019. The lower accretion is the result of lower levels of commercial prepayments this quarter. The effect on net interest margin of interest and fees earned on PPP loans was eight basis points in the second quarter. Excluding accretion on acquired loans and interest and fees on PPP loans, the net interest margin decreased by 20 basis points. That decrease is primarily the result of carrying conservative additional liquidity and growth in deposit balances in the second quarter.

Quarter-over-quarter, the yield on loans decreased 34 basis points. And excluding accretion on acquired loans and interest and fees on PPP loans, the yield on loans decreased 26 basis points. The decrease reflects the first full quarter of lower rates after the Federal Reserve actions in March that lowered overnight rates by 150 basis points. The yield on securities also decreased 34 basis points, affected by lower rates. And as we noted in the first quarter, unusually high levels of paydowns in the first quarter that did not recur in the second quarter.

The cost of deposits decreased substantially from 57 basis points in the first quarter to 31 basis points in the second quarter. Late in the first quarter, we were aggressive with lowering rates on deposits and the second quarter reflects the full benefit of that action. Looking ahead, we remained cautious in providing guidance on net interest margin given the dynamic market conditions. Other than to say, we anticipate maintaining a prudent posture as circumstances warrant.

Moving to Slide 7, non-interest income was strong this quarter. On an adjusted basis, non-interest income was $13.8 million, a decrease of $0.9 million or 6% from the previous quarter and a decrease of $0.3 million or 2% from the prior year quarter. Our focus on fee income generated another record quarter in mortgage banking fees, which increased 61% to $3.6 million and reflects a continuing vibrant residential refinance market and strength in the Florida housing market.

The second quarter of 2020 was also another robust quarter for our wealth management team with $1.7 million in revenue and a record $125 million in new assets under management. Interchange revenue was near flat compared to the first quarter with declines in April, offset by increases later in the quarter when results recovered to pre-pandemic levels.

Service charges on deposits decreased $0.9 million compared to the first quarter with higher deposit balances translating to lower NSF and overdraft charges. Through much of the second quarter, we waived late payment and other fees to help our customers better manage through the financial implications of this period, and that contributed to lower other income in the second quarter. Also declining in comparison, the first quarter included income from FDIC investment, which is not routine each quarter and did not recur. Securities sales this quarter generated $1.2 million in gains. This included strengthening the credit profile of the CLO portfolio where we sold all the single A-rated CLOs and replaced them with purchases of AAA-rated CLOs.

Moving to Slide 8. Adjusted non-interest expense totaled $20.7 million [Phonetic], a decrease of $0.8 million from the prior quarter and an increase of $2.6 million compared to the prior year quarter. On an adjusted basis, which excludes merger-related charges, salaries and benefits combined decreased by $1.9 million compared to the first quarter of 2020. As you know, when we originate loans, we identify direct loan-related costs. And along with the fees we earn, those costs are recognized over time as an adjustment to interest income on those loans. Salaries represent a large portion of those eligible deferred costs. And our PPP originations drove $2.9 million of salary costs that were deferred, so a reduction of salaries expense during the quarter.

Other factors driving expenses lower this quarter were the typical seasonal decline after a higher first quarter due to payroll taxes and 401(k) contributions, and also lower second quarter health insurance costs. These decreases were offset by staffing additions, primarily as a result of the First Bank of the Palm Beaches acquisition in the first quarter. Additionally, there were temporary costs associated with our call center staffing, which has seen unprecedented volume since the pandemic began.

Data processing costs were higher by approximately $0.3 million, the result of higher lending-related costs to support the PPP effort. Other expenses in the second quarter were higher by $0.9 million and include the resumption of FDIC assessment expense in the second quarter, as we've now applied all our available credit. Other expenses also included costs associated with the PPP program and a $0.2 million increase in the reserve for unused commitments. For the third quarter of 2020, we are modeling adjusted non-interest expense to be approximately $43.5 million to $44.5 million, excluding the amortization of intangible assets, which is approximately $1.6 million per quarter and including the acquisition of Freedom Bank expected in August.

Moving to Slide 9. I'd like to highlight our continued success in generating operating leverage with managed overhead and a focus on growing revenue. The efficiency ratio improved to 50% and the ratio of adjusted non-interest expense to tangible assets dropped to 2.13% compared to 2.44% in the first quarter and 2.34% in the prior year quarter. We continue to emphasize our commitment to a proactive cost control discipline.

Turning to Slide 10. Loans outstanding increased to $5.8 billion with PPP loans driving the increase along with $311 million in other portfolio origination. Looking at our loan pipelines, as anticipated, our commercial pipeline was down 32% to $117 million at the end of the quarter, resulting from the continued conservative approach to production due to economic conditions. Given the uncertain outlook, we're only focused on relationships with liquidity and strong balance sheet that can support significant stress.

In consumer, the pipeline is higher by 5% to $31 million. In the residential category, pipelines were up 24% to $108 million, reflecting the impact of the still vibrant refinance market and a strong Florida housing market. A significant majority of the residential mortgage volume will be sold in the secondary market. Looking forward, we expect loan outstandings to continue to be carefully managed lower, in line with lower production expectations due to our conservative posture and declining PPP balances as the forgiveness process begins in the third quarter.

Turning to Slide 11, further highlighting our vigilant credit culture. We intend to continue to manage our credit exposures and robust capital position prudently. We are confident that our established conservative posture entering this environment will serve us well. Our portfolio is broadly distributed across various asset classes. Stabilized income producing commercial real estate represents 24% of loans outstanding. Owner-occupied commercial real estate represents 19% of the portfolio. And residential real estate comprises 25% of the portfolio. Approximately 80% of our commercial portfolio is secured by real estate with borrowers that have meaningful equity in their investments and lower loan-to-values. The average LTV of the commercial portfolio secured by real estate is 54%.

We have managed our portfolio to keep construction and land development loans and commercial real estate loans well below regulatory guidance. At June 30, that represented 32% and 176% of risk-based capital respectively, a conservative position and lower than most in our peer group. Our loan portfolio is diverse and broadly distributed across categories, with an average commercial loan size excluding PPP of $384,000. Our consumer portfolio has an average credit score of 7.51, and our residential mortgage portfolio has an average credit score of 755. Our HELOC portfolio has an average credit score of 749. The average LTV of our HELOC portfolio of 56% with 46% of the portfolio in first lien position.

Turning to Slide 12 for a look at PPP loans. As of the end of the second quarter, we have over 5,000 PPP loans, totaling over $576 million net balances with an average loan size of $116,000 and median loan size of $43,000. Earned fees, net of loan specific costs, totaled $17 million and are deferred and recognized as an adjustment to yield over the expected life of the loans. In the second quarter, we recognized $4 million of that net $17 million in fees. And we recognized contractual interest of $1.1 million, resulting in a yield of 4.81%. We expect to recognize the majority of the remaining net fees over the third quarter and fourth quarter of this year, but this could change as a result of the pace of the forgiveness process.

Turning to Slide 13 and Slide 14 to discuss loans on deferred payment status. Throughout the second quarter, along with the industry, we supported our customers with short-term payment deferral programs of three months to six months. We began offering deferrals in March, with the peak volume of deferrals processed in April. At June 30, there are nearly $1.1 billion in loans in deferral status. We are monitoring these loans closely. And looking into the second half of the year, 39% of the loans currently on deferral are scheduled to return to regular payments in the third quarter of 2020 and 61% in the fourth quarter.

Turning to Slide 15 for a more detailed look at our CRE and AD&C portfolios. Diversification across industries and collateral type has been a critical tenet of our strategy, which should position us well in this climate. The largest exposure in our CRE and construction portfolios when aggregated is office buildings, representing only 12% of the portfolio. 27% of these loans have taken advantage of a payment deferral program. The average loan size in our office portfolio is $600,000 and the average LTV is 53%. 58% of this portfolio is classified as owner-occupied. This primarily includes medical, accounting, engineering, healthcare, veterinarians and other like type professionals. The remaining 42% of the office portfolio is stabilized income-producing investment properties.

Our second largest segment is retail real estate, representing 8% of total loans, with 38% of these on deferred payment status. The average loan size in our retail portfolio is $1.3 million and the average LTV is 45%. This portfolio is diversified geographically and is characterized by multi-bay shopping centers that typically have a local anchor or are located in the shadow of the healthcare provider or large brand name or main shopping area. Multi-bay retail centers has a variety of tenants. The portfolio does not include regional mall complexes, outlet malls, movie theaters, entertainment venues or other highly trafficked larger retail centers.

Our restaurant exposure is limited, only $44 million, and is distributed among quick-serve and full service restaurants. Our hotel portfolio is only $122 million with an average loan size of $3.3 million. The restaurant and hotel portfolios are primarily secured with real estate with an average loan-to-value of 50% and 46% respectively.

Turning to Slide 16 for a more detailed look at our commercial and financial loans. The largest exposure is in holding companies owned by high net worth individuals for aircraft and marine vessels, and this represent only 3% of total loans. 22% of this segment is on deferred payment status. The remainder of commercial and financial loans are spread across multiple industries with no concentration above 2%, and overall 17% of the portfolio is on payment deferral. We have no direct exposure to the cruise line industry, casinos or the amusement park industries.

Turning to Slide 17 and Slide 18 for the securities portfolio. With the declining rates and faster prepayments on mortgage-backed securities, yields are down this quarter by 34 basis points. In terms of valuations, credit spreads increased sharply in March and the Federal Reserve stepped into purchase bonds in multiple asset classes. Lack of liquidity in some asset classes, including some of our CLOs, led to lower market values at the end of the first quarter, which then significantly recovered in the second quarter.

We also proactively improved the credit composition of our CLO book during the second quarter, selling single A holdings and replacing them with AAA holdings. Our CLO book has significant credit support and collateral, all are investment-grade and comprised of broadly syndicated loans. The CLO portfolio now breaks down as 52% AAA and 48% AA-graded bonds. While market values recovered significantly, the CLOs remained below book. We believe this is not a reflection of credit risk and expect these values to recover over the holding period.

Turning to Slide 19 and Slide 20. Deposits outstanding increased $779 million or 13% sequentially. In the second quarter, we saw meaningful increases in deposits, with average total deposits up $868 million or 15% from the prior quarter, reflecting our attractive deposit base. Some of the increases were associated with government support programs, including PPP, individual stimulus payments and higher unemployment compensation. Non-interest-bearing demand deposits now represent 32% of the deposit franchise, up from 29% from last quarter and transaction accounts represents 55% of total deposits, up from 50% at the end of last quarter.

Turning to Slide 21. Charge-offs during the quarter remained at historic lows at $1.8 million this quarter. And the level of non-performing loans increased only slightly to 0.52%. Classified and criticized assets was 3% and 9% respectively of total risk-based capital at June 30, down from 3% and 11% last quarter. The overall allowance reserve estimate at June 30 is $91.3 million. Excluding PPP loans, which have not been assigned a reserve given the guarantee status, our coverage of allowance to total loans is 1.76%, up from 1.61% in the prior quarter.

As you know, during the last two weeks of June, cases of COVID-19 in Florida and elsewhere began to increase again, which caused a slowing of many businesses reopening and a slowing of economic consumption by consumers. Because that happened late in the quarter, the Moody's baseline economic forecast for June had not captured this negative turn. Taking a conservative approach, our allowance estimate gives significant way to the Moody's S3 Moderate Recession Scenario. This led to the additional build in reserve that continues to provide for a scenario in which the characteristics of the downturn might be more unfavorable and could be sustained over a more extended period. As the pandemic and its impact on the economy continue to evolve, we will manage our allowance accordingly.

Turning to Slide 22, showing our conservative liquidity position. Cash totaled $524 million, notably increased given the increase in deposits from March 31. At June 30, the company had available unsecured lines of credit of $135 million and lines of credit under lendable collateral value of $1.4 billion. Additionally, the company had securities and loans totaling $1.6 billion that are available as collateral for potential borrowings and the ability to pledge PPP loans under the Federal Reserve PPP liquidity funding program.

Turning to Slide 23. Our capital position continues to be strong. And our long-standing commitment to maintaining a fortress balance sheet has positioned us for resilience in the current environment. Tangible book value per share is $15.11, an increase of 11% over prior year. The tangible common equity to tangible asset ratio was 10.2% at quarter end and has ranked among the highest in our peer group. The Tier 1 capital ratio was 16.4%. And the total risk-based capital ratio was 17.6% at June 30. Each of these ratios increased quarter-over-quarter.

To wrap up on Slide 24. Over the last three years, we have achieved a compounded annual growth rate in tangible book value per share of 12%, driving shareholder value creation. We are confident that our established conservative posture and efficient operating model will serve us well as the recovery progresses. And as opportunities ultimately arise, Seacoast is well positioned to take advantage of those opportunities.

We look forward to your questions. I'll turn the call back over to Chuck and Denny first.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Thanks, Tracy. And operator, we'd be pleased to take a few questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question on line comes from Mr. Michael Young. Please go ahead.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Hey, good morning. Thanks for the question.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Hey, Michael.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Maybe just wanted to start off with kind of the cadence of the PPP impact on the income statement. It looked like you guys already started to recognize some of the accelerated benefit on interest income. And then also just wanted to get a feel for how the expense trajectory would ramp back up?

Tracey Dexter -- Executive Vice President and Chief Financial Officer

I can take that. As we've pointed out, we had a number of costs associated with originating those loans in the second quarter, and some of that we've estimated $2.9 million in salaries expense. So you can think about whether that would be deferred if other originations occurred or wouldn't just recur in future period. In terms of earning on PPP loans, we have net $17 million in fees earned, of which $4 million were earned during the second quarter. And based on our initial judgments, you can expect the rest of that to come in over mostly the rest of the year. So we've got about 24% earned of the total $17 million so far.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay, thanks. And maybe jumping over to just kind of the loans that are on deferral. I know you guys were a little more liberal allowing those deferrals, and I appreciate kind of the timeline on when they'll return back to, I guess, a normal payment schedule if they're able. But maybe could you just walk through any additional modifications that you might plan to make kind of into that October period or beyond? And how you're kind of handling it from here?

Charles M. Shaffer -- President and Chief Operating Officer

Yeah. As we talked about in the last call, we were aggressive in reaching out to our customers to assist through the challenging period where in we got those customers early and it was something our bankers executed on well. And therefore, we were able to offer payment deferrals to a number of our customers. To give you a sense of what we've seen through the first 15 days of July, we've had about 1,200 loans reached their deferral status through July 15. 60% of those have return to making payments. 18% of those took another deferral. And the remainder are still working their way through the payment and billing cycle. So that -- if that helps to give you some sense of where we're at.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Yeah, that's helpful. I guess, just trying to get a feel for, would you expect deferral levels to come down to kind of low-single-digits maybe through the end of this year? And would you look to do any just kind of TDRs or something like that as we head into 2021 if there were still some beleaguered credits?

Dennis S. Hudson -- Chairman and Chief Executive Officer

We haven't put together a projection, per se of exactly where this heads, but we do feel fairly strongly that they should come down in the coming quarters. And if anything were to move to TDR status, it will be dependent on largely where the economy is and how those borrowers are doing by the time we get to the fourth quarter.

Charles M. Shaffer -- President and Chief Operating Officer

Based on the first 15 days, you're right, that would be pretty significant, the decline. We'll just have to see how things evolve over time here. But we're very encouraged with what we've seen thus far.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay. And maybe just one last one, and this may be too early. But on capital, I mean, your capital levels are very high, quite strong, obviously, that's a good place to be right now. But as we look out to more of a medium or maybe even longer term, how do you think about kind of capital levels? And when would you start to -- what would give you confidence, I guess, to start to return those to a more normalized level?

Charles M. Shaffer -- President and Chief Operating Officer

Yeah. And as we said, in the current environment, I think our key focus is to continue to protect and build tangible book value and grow capital. That's I think the most important thing we can be focused on. And we'll remain conservative in our posturing around capital through this period. The biggest thing that will help us make any decision on capital will be clarity. And as clarity emerges late this year into 2021, there is a number of options for capital, including organic growth in M&A as well as buybacks and dividends. And so we'll consider the various capital options as clarity emerges, but that likely -- it doesn't seem like it will occur until later this year or into 2021.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay, thanks. That's all for me.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Thanks, Michael.

Operator

Thank you. Our next question on line comes from Mr. Steve Moss. Please go ahead.

Stephen M. Moss -- B. Riley FBR Inc. -- Analyst

Good morning.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Good morning, Steve.

Stephen M. Moss -- B. Riley FBR Inc. -- Analyst

I want to start off maybe with kind of what you're seeing for business activity here. You guys mentioned that interchange income return to pre-pandemic levels in June, kind of wondering what you're seeing for July?

Charles M. Shaffer -- President and Chief Operating Officer

Yeah. I don't think we have anything on July yet. We haven't gotten the data yet. We did definitely saw business activity pick back up at a fairly rapid pace through the months of May and June as we came out of the stay at home orders. We're still fully open for business in the State of Florida and consumers are out doing business. Obviously, COVID cases have increased fairly significantly here in the last five weeks, but things are happening, businesses are opening, our conversations with customers, they continue to reiterate to us that they're focused on maintaining operations and focused on being successful through this period and we're working to assist them in doing that. So things have come back. Things are happening, but certainly not at the levels that they were pre-pandemic.

Dennis S. Hudson -- Chairman and Chief Executive Officer

So there has been some improvement, as I've talked with individual customers, certainly with the recent increase in cases we saw some declines. I've heard about some declines in revenue in restaurants. But generally speaking, I don't think we've seen that. And so we're pretty optimistic about where we are right now.

The state did not close down in response to the increased cases just about every municipality and every county in the state now requires folks to wear masks when they're in public areas. And if you walked around Florida right now, that's what you'd see. And that's kind of interesting, we've seen the number of new cases begin to stabilize in the last two weeks or three weeks. And we've seen the number of deaths come way down across the state over the last two weeks. So it's kind of encouraging information that perhaps would suggest that things are stabilizing now in Florida.

Stephen M. Moss -- B. Riley FBR Inc. -- Analyst

Great. That's helpful. And then on the margin here, you obviously have a lot of PPP noise. But outside of that, it was a really healthy decline in funding costs, and I heard your commentary about you're fully reflected in the numbers. Just kind of curious as to maybe ex-PPP, how you are thinking about the margin here going forward?

Jay Walker -- Executive Vice President and Treasurer

Hey, Steve, Jay here. I'll take that. Yeah, I think if you assume kind of similar accretion levels on loans, we would probably see some more pressure on the asset side, securities and loans, just from dilution from lower add-on rates. But we do have a little bit of room on the funding side. We have some higher rate brokered funding that we would expect to roll off the balance sheet as well as some retail CDs that we'll reprice over the back half of the year. So overall, I think there is less of a liquidity effect as some of these higher rate wholesale funding rolls off the balance sheet and any excess liquidity we're looking to deploy into the securities book. So kind of ex-PPP, I think under this scenario, you could expect core margin to be maintained at roughly the same level you saw exiting the second quarter.

Stephen M. Moss -- B. Riley FBR Inc. -- Analyst

All right, great. Thank you very much. I appreciate all the color.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Thanks, Steve. Operator, we'll take another question.

Operator

So sorry, I was on mute. Our next question on line comes from David Feaster. Please go ahead.

David Feaster -- Raymond James Financial Inc. -- Analyst

Hey, good morning, everybody.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Hey, David.

Charles M. Shaffer -- President and Chief Operating Officer

Hey, David.

David Feaster -- Raymond James Financial Inc. -- Analyst

I just wanted to -- I appreciate the commentary on loans in the prepared remarks, but just wanted to get any thoughts on organic growth ex-PPP. Loans ex-PPP decreased a bit more than expected. Just curious the trends you're seeing. It sounds like some of this was strategic where you're tightening the credit box. But just any commentary on C&I utilization, pay-offs and paydown trends, competitive landscape. Just what's the overall demand for new credit?

Charles M. Shaffer -- President and Chief Operating Officer

Yeah. I would describe it as you're thinking about modeling is the third quarter will probably look a lot like the second quarter pretty much across the businesses. We expect mortgage to remain very strong. Refinance remains very strong as well as residential real estate market has been surprisingly resilient to all this. And so we expect mortgage business to remain very strong going in the quarter as well as I would expect our consumer businesses to look a lot like the second quarter.

And on the commercial side, we remained very conservative, prudent in our underwriting practices. I would say there is not a tremendous demand out there for credit in the marketplace right now. And we're picking our path very cautiously and thoughtfully. And so I'll out pass the quarter. It's really hard to provide any guidance. But if you're thinking about the third quarter, I think it will look a lot like second quarter.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Borrower selection in a time like this is critical. And that's where we've been very focused, as you know, forever and some of the work we've done around borrower selection, loan selection and that continues today. So...

Charles M. Shaffer -- President and Chief Operating Officer

And I'll just also mention, the other thing is, there is other ways to drive revenue, which is mortgages and deposits. And we saw almost a 50% increase in new customer acquisition on the business side quarter-over-quarter, which I was very encouraged by. And the large banks remain very difficult from availability standpoint, performed poorly when compared to the community banks on PPP. And just access to the national banks has been hard for customers, we're taking advantage of that. We've been aggressive out in the marketplace with outreach from our bankers and that's turned in the business. So in some ways, while it's a challenging environment, it's provided opportunities for us to grow the franchise.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Just to be clear, I mean, many of the large bank competitors here, the mega banks have many and many of their offices closed fully.

Charles M. Shaffer -- President and Chief Operating Officer

Yeah.

Dennis S. Hudson -- Chairman and Chief Executive Officer

So customers are confused. They are having a hard time, as Chuck said, getting into talk with anybody or -- and they've had some real problems with call centers, wait times and the like. So there's a lot of dissatisfaction out there. And we're hopeful, but maybe that's been helpful to our recent surge in new customer growth. So we feel pretty good about that. We started advertising again, which we think is important. And it will -- should be an interesting period over the balance of the year.

David Feaster -- Raymond James Financial Inc. -- Analyst

Yeah, that's helpful color, and that's a great trend. But just kind of following up on that. What are you seeing on the opportunities for new hires? I mean as you guys are sitting, maybe some of the big banks getting frustrated by the performance there. Are they -- are you seeing more inbound calls? Are you interested in new hires or even a potential growth, maybe trying to be a bit more aggressive in terms of hiring and expansion when others are being a bit more careful?

Charles M. Shaffer -- President and Chief Operating Officer

Yeah. I'd describe our strategy around new hires is opportunistic. Where we see well seasoned strong bankers in the marketplace that we think would be additions to the franchise, we'll make those hires, all while being thoughtful about cost. In this environment, we need to continue to be prudent on our expense discipline, something that's weaved into the fabric of our organization. But where we have opportunities to acquire good solid bankers with track records and portfolios to customers, we'll absolutely take a look at them.

David Feaster -- Raymond James Financial Inc. -- Analyst

Okay. That's helpful. And then last one for me. Just, obviously, I think this whole environment has really just supported your strategy overall. But just curious, as you look forward and maybe do your strategic planning, is there other opportunities that you've identified to either enhance the product offering or digital initiatives or any comments on how you're planning to maybe adapt further in this new normal or is it just more of an affirmation of your business model?

Jeffery Lee -- Executive Vice President and Chief Digital Officer

Hey, David, Jeff Lee. I'll take that. I think to start, certainly an affirmation of the business model, which we introduced at the Investor Day in February 2017, if you'll remember that. The notion of multi-channel distribution being vitally important, and now it's really in our mind positioned us well. But if you think about where we want to push harder, I think it's about the digital suite that we have to serve those business customers. We've made a lot of progress with consumer and we've seen really good momentum with the business side of the house.

I do think that there is more to be done in that area. There is probably more from a servicing aspect that we can look at and we continue to look at our product set as well. We think that's a part of the consideration set for the businesses that we want to attract to the franchise in this opportunity, it's the capability set. So you expect to see us pushing even more on the business side of the digital front.

David Feaster -- Raymond James Financial Inc. -- Analyst

That's helpful. Thank you.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Thank you, David.

Charles M. Shaffer -- President and Chief Operating Officer

Thanks, David.

Operator

Thank you. Our next question on line comes from Christopher Marinac. Please go ahead.

Christopher W. Marinac -- FIG Partners LLC -- Analyst

Yeah, thanks. Good morning. Thanks for all the information last night and today, and I had a similar question for you, Jeff, too. Sort of what is next in the industry? I think you mentioned it well that focus on the business customer. But are other banks catching up to Seacoast or is it simply that they kind of figured out what you introduced three years ago?

Jeffery Lee -- Executive Vice President and Chief Digital Officer

I would tell you, I think every bank in the country now understands that you've got to be thoughtful about how you interact with customers when you don't see them face-to-face anymore. That was a major part of our thesis back in '14, '15 before we even unveiled that in the '17 Investor Day, right? We expected customers to naturally migrate to more convenient channels. It's just a logical thing to expect whether it's the call center, whether it's the digital channels. And that's why we really locked in on, well, how do you interact with customers and have thoughtful conversations when you don't see them face-to-face.

And so I know for a fact, there is a heightened sense of urgency across the non-mega banks when you look at kind of what's happening and the ideas about a new normal, about what this is going to look like. I do think it positions us well. This notion of multi-channel distribution really focused on driving the non-routine activities or the routine activities to the non-branch channels. I think you're going to see that take hold at a greater pace across the industry. But I think it's a cultural change too that I think a lot of these banks are going to have to go through. We've focused a lot on the cultural aspects of what we're trying to do. That can't be underestimated, in my view. Chuck?

Charles M. Shaffer -- President and Chief Operating Officer

Yeah, and I'll just add to that. That's exactly what I was thinking about when you were talking there is that when you look back at what we've gotten done from a cultural perspective and the performance of our bankers with outreach, we were already moving toward accessing customers via phone, via digital, via online and using other channels to support those needs of customers, and this pandemic has largely accelerated that.

And if you look at the integrated approach we've taken with appointments in the branches, over 6,000 appointments since we rolled out the appointment tool earlier in the year, the availability of our call center and our call centers' availability to serve all needs of customers and providing mobile suite. It's integrated approach along with an analytics-driven sales process that I think allows us to probably outcompete here for a while in this environment.

Christopher W. Marinac -- FIG Partners LLC -- Analyst

Great. So I guess there's a kind of a scorecard going forward, is it -- it's simple or simply watching the new business wins on deposits as well as loans is kind of the best way to keep track. Is there anything else that you would look forward?

Charles M. Shaffer -- President and Chief Operating Officer

Yeah. And the other piece would be continuing to move the servicing part of our organization to lower cost channels. That's a big emphasis for us. I think the pandemic allow us to accelerate that as customers seek for other ways to service their relationships. And the more we can get servicing cost down, the more it frees up the availability to take cost in the franchise and move them over into growth-oriented activities and support capital. And so that's the way we'll be approaching this moving forward.

Christopher W. Marinac -- FIG Partners LLC -- Analyst

Okay, great. Thanks again for the color this morning.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Thanks, Chris.

Operator

Thank you. And our final question comes from Jeff Cantwell. Please go ahead.

Jeff Cantwell -- Guggenheim Securities LLC -- Analyst

Hey, and congrats to you, Chuck, and congrats to you as well, Denny.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Thanks.

Charles M. Shaffer -- President and Chief Operating Officer

Thank you.

Jeff Cantwell -- Guggenheim Securities LLC -- Analyst

Chuck, I just want to ask you a strategic one, and I'm going to piggyback on a question you were just asked earlier. Can you tell us a little bit about how you're thinking about managing the balance sheet in this environment? The question is actually, what are you most focused on right now? And what should we expect over the next few months or couple of quarters? Just how fast should Seacoast be growing the balance sheet? And how prudent do you think is the approach in this environment could all be in uncertainty out there? Thanks.

Charles M. Shaffer -- President and Chief Operating Officer

Yeah. I think if you just think about just balance sheet management in this environment, obviously, interest rates have changed meaningfully and the outlook has changed given the dynamic environment we're in. I think the best way to describe it is, we'll be very prudent and conservative as we move forward. We've put more liquidity in the balance sheet given the environment we're in. We'll continue to manage to a robust capital position. And from a loan growth expectation, as we talked about, I'd probably expect loans outstandings to decline modestly in the coming quarter given our conservative posturing around credit.

Overall though, there's other ways to, as I mentioned earlier, there's other ways to generate franchise value, and that's focusing on fees. It's also focusing on growing deposit customers and customers in general, and maintaining a prudent approach to our expense base. And so we'll continue to appropriately manage both income and the balance sheet as we move through time, but we'll -- and we'll do that from sort of a conservative lane.

Jeff Cantwell -- Guggenheim Securities LLC -- Analyst

Okay, great. Thanks. My second question is on interchange income. Is it fair for us to assume that the second quarter should be the bottom for revenue there and that there should be improvement from here on out? I guess, the base case is, economic activity will probably improve over the next few months off the bottoms that we up saw here in the second quarter. Is that fair? And can you maybe just talk to us about that a little bit? Thanks.

Dennis S. Hudson -- Chairman and Chief Executive Officer

At this point, barring anything wildly unexpected from a pandemic standpoint. I mean, one would expect the number to continue to recover. When you peel apart the quarterly aspect, it was really April that took a big hit, and I think that's where everyone took a pause on what they were doing. And then in May the number honestly pop right back up to prior levels. A lot of people buying staples and doing the things you have to do to keep your household kind of operational. So again, Jeff, barring anything wildly unforeseen, I would expect to see the number to continue to trend the way it had been previously.

Charles M. Shaffer -- President and Chief Operating Officer

And I'll mention too. The vast majority of our interchange comes from debit, which is more every day type interchange versus vacation interchange of credit cards and other rewards programs. So as every day spend returns, we expect debit to return.

Jeff Cantwell -- Guggenheim Securities LLC -- Analyst

Got it. And then lastly on -- if I could squeeze in one final one in. There's a lot of chatter in the fintech world right now about digital migration. And what I mean by that is that's basically consumers moving over to digital banking in response to COVID. Seacoast has always had a very strong tech sector. I think you are the right people to be asking this. And the question is, are you seeing digital migration by your customers? And if so, can you tell us in what ways you are seeing them migrate to digital? Is it wealth? Is it mobile banking? Is it online bill payments? Is it sell or sending people money? I'm just curious if you could give us a feel for what you're seeing. And maybe just remind us how digital banking by consumers helps Seacoast from an operational standpoint? I appreciate that. Thanks very much.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Yeah, no problem. We've certainly seen the usage number go up. And I think, Jeff, when you dig into those numbers, what you're seeing is you've got always a portion of your users that are always active, right? What we've seen now was those people who were moderately active are now becoming much more dependent on the channel to stay connected with their bank and their banking relationship. And so that's kind of the first thing that pops when you look at just the usage numbers across consumer and across, importantly for us, business, you've seen those numbers pop.

I think also numbers that you've seen pop is just the amount of deposits that are now being done outside of the branch network. That's a number we've focused on for a number of years now where now nearly 60% of all consumers are making their deposits outside the branch network. So that's kind of a big deal. That number gives us a lot of operating flexibility as we move forward. Those small businesses now are increasingly finding the digital channels and non-branch channels even more convenient in this environment, 44%.

So we think as that continues to evolve, it gives us some flexibility. But importantly, Chuck mentioned it well, it helps our organization free up time to focus on the high value things we can do for our clients, growing relationships as more and more of the routine is digitize. I do think it's an inflection point for the industry. Does it mean we're all digital-only banks? Of course, not. That's just not who we are and that's not what our customers expect. But it does mean that we're providing really good digital experiences for our customers. And then when that face-to-face moment of truth happens, whether it's by Zoom or truly face-to-face, we're there and we have the technology to be able to facilitate that.

Jeff Cantwell -- Guggenheim Securities LLC -- Analyst

Okay, great. Thank you, and congrats again.

Dennis S. Hudson -- Chairman and Chief Executive Officer

Thank you, Jeff. Great. Thank you, operator. I think that concludes the question-and-answer session. And we all look forward to speaking again as we complete the third quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Dennis S. Hudson -- Chairman and Chief Executive Officer

Charles M. Shaffer -- President and Chief Operating Officer

Tracey Dexter -- Executive Vice President and Chief Financial Officer

Jay Walker -- Executive Vice President and Treasurer

Jeffery Lee -- Executive Vice President and Chief Digital Officer

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Stephen M. Moss -- B. Riley FBR Inc. -- Analyst

David Feaster -- Raymond James Financial Inc. -- Analyst

Christopher W. Marinac -- FIG Partners LLC -- Analyst

Jeff Cantwell -- Guggenheim Securities LLC -- Analyst

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