Seacoast Banking Corporation of Florida (SBCF) Q3 2021 Earnings Call Transcript

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Seacoast Banking Corporation of Florida (SBCF 1.81%)
Q3 2021 Earnings Call
Oct 29, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Seacoast Banking Corporation's Third Quarter 2021 Earnings Conference Call. My name is John and I'll be your operator for today's call. Before we begin, I have been asked to direct your attention to the statement contained at the end of the company's press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act and its comments today are intended to be covered within the meaning of that act.

[Operator Instructions] And I will now turn the call over to Chuck Shaffer, President and CEO of Seacoast Bank. Mr. Shaffer, you may begin.

Charles M. Shaffer -- President and Chief Executive Officer

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

The Seacoast team generated strong operating performance during the quarter, growing tangible book value per share, 13% from the prior year to $17.52. The adjusted efficiency ratio was 51.5%, modestly better than our previous guidance. And adjusted pre-tax pre-provision earnings improved to $43.9 million, up from $37.8 million in the prior quarter. There is noise in the quarter, the result of closing the Legacy Bank transaction and negotiating and announcing the Sabal Palm Bank and Florida Business bank transactions. When you look past the day one provisioning for Legacy Bank and one-time expenses, net interest income and non-interest income were better than consensus estimates, and adjusted noninterest expense was in line with guidance. The driver of the decline in GAAP earnings, quarter-over-quarter, was solely attributable to booking the day one provision for loan losses associated with the acquisition of the Legacy Bank portfolio as compared with a reversal in the provision in the prior quarter, and one-time merger-related expenses associated with all three transactions.

Looking more deeply at the Legacy Bank transaction, it's clear this transaction was one of our better transactions completed to date. The balance sheet was larger than modeled at close and this transaction had near-zero tangible book value dilution, strong earnings accretion, and bolted on some of the best micro markets in South Florida, including Boca Raton, Delray Beach, and Pompano Beach.

Lastly, with Dennis Bedley, Marcia Snyder's leadership, the Legacy Bank team continued to produce at very strong levels through close, and the team has had a considerable pipeline of new business at Seacoast already. The Florida economy continues to expand with inbound population growth, driven by low taxes, a business-friendly environment, and a post-pandemic work-from-anywhere economy. Corporate relocations continue to occur with many organizations bringing large portions of their staff to Florida. This solid economic backdrop of population growth combined with the significant recruiting activity that ramped up materially, a year ago, has contributed to the increase in commercial loan production and resulted in an increase in the pipeline.

When analyzing the change in loan outstandings, quarter-over-quarter, there are a lot of moving parts. To help understand these dynamics, we included a table on page 11 of the slide deck, which provides growth by category. The table breaks out organic growth by removing the loans acquired from Legacy Bank and wholesale purchase pools. If you focus on the commercial banking line items, you will see growth in total commercial outstandings starting to emerge. In aggregate, the commercial portfolio grew $26 million from the prior quarter, or a 3% annualized growth rate. This growth includes the offsetting impact of a number of payoffs in the commercial land development category during the quarter. I believe this table demonstrates the underlying positive dynamic starting to show up in the balance sheet. Our strategic focus of expanding commercial banking capability in terms of bankers and technology is working, and we are only focused on acquiring and expanding value-creating relationships as this strategy delivers growth and franchise value in risk-appropriate segments.

Also, the pipeline showed significant progress in the quarter, with the late-stage pipeline increasing 44% from the same time, one year ago, as disclosed. The early stage pipeline now exceeds $1 billion, a record number. This growth is coming from a combination of C&I and CRE, with nearly 60% of the volume tear-to-date considered C&I, including owner-occupied commercial real estate and 40%investor commercial real estate.

Notably, approximately 30% of our commercial bankers joined in the last 12 months and it takes time for bankers to begin to ramp up production. This group contributed only 11% of the volume this year, indicating there is much more upside on production ahead. Lastly, there is a material opportunity to continue to add to our commercial banking team in the coming quarters as our story, tools, and process resonate with bankers who want to join a growing and dynamic enterprise.

We recently announced additional leadership hiring in the Naples in Northeast Florida markets and expect to begin building commercial banking focus teams in these markets in the coming year. We have a record pipeline of high-quality talent ready to exit larger banks for something more exciting. When you put all this together, it provides a level of confidence that loan growth is emerging and pre-pandemic growth levels are in near reach. We are targeting mid-single-digit organic loan growth in Q4 and high single-digit loan growth in 2022.

I would also like to reiterate that despite the pressure the excess liquidity is putting on the net interest margin across the industry, we will not waiver from our strict credit underwriting standards and we will focus on disciplined growth with appropriate risk-adjusted returns. Our asset quality metrics remained strong, with NPL and NPA ratios moving favorably, quarter-over-quarter. And we are pleased with the credit portfolio's performance and continue to see no material issues on the horizon.

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

We are excited about the future ahead, excited about our momentum across the state. And I'll turn the call over to Tracey to walk through the financial results.

Tracey Dexter -- Executive Vice President and Chief Financial Officer

Thank you, Chuck. Good morning, everyone. Directing your attention to third-quarter results, beginning with Slide 5. On a GAAP basis, net income was $22.9 million, and on an adjusted basis, which excludes merger-related and other isolated charges, net income was $29.4 million. The decline from the prior quarter in adjusted earnings reflects an increase in the provision for loan losses that is due to the day one impact of the Legacy Bank acquisition. Pre-tax pre-provision adjusted earnings were $43.9 million, an increase of $6.1 million or 16% from the second quarter, and an increase of $7.5 million or 21% from the prior-year quarter. We continue to deliver steadily increasing tangible book value per share, which ended the period at $17.52, an increase of 13% from the same time last year.

Organic loan production is increasing with commercial loan originations increasing to $332 million from $193 million in the second quarter, and $88 million, this time last year. The late-stage commercial pipeline is also very strong at a record $369 million. We continue to see strong asset quality trends with the ratio of non-performing loans declining to 0.55%. Cost of deposits remains in the single digits as we continue to monitor the competitive landscape and adjust rates accordingly. Transaction account balances continue to grow, and excluding Legacy Bank, increased $65 million or 5.5% annualized, during the quarter.

A strong quarter for non-interest income with another record for wealth management and a new record in SBA saleable gains [Phonetic]. The acquisition of Legacy Bank was completed in August and the third quarter results reflect all associated costs and purchase accounting adjustments, including goodwill of approximately $31 million. The acquisition impact third quarter results in non-interest expense with cost of approximately $6 million, and in the provision for loan losses, where the day one impact was $8.2 million.

And lastly, during the quarter we announced the Sabal Palm and Florida Business Bank acquisitions, which will close in January 2022. Turning to Slide 6. Net interest income on a fully tax-equivalent basis was higher by $5.5 million or 8% in the third quarter, and the net interest margin declined by only 1 basis point to 3.22%. Net interest income includes higher interest and fees on loans, primarily due to growth in the loan portfolio, where ending loan balances excluding PPP, increased $642 million during the quarter. Net interest income also includes the benefit of higher fees on PPP loans. You'll recall that when those loans are forgiven, we accelerate the recognition of fees that otherwise would have been spread over the life of the loan. The Seacoast team processed $217 million in forgiveness this quarter, and we recognized $5.9 million in PPP interest and fees. Excluding PPP, yields in the core loan portfolio declined 7 basis points to 4.29%, with elevated payoffs and continuing declines in rates.

In the securities portfolio, we've continued to pace our investments of excess liquidity, adding a net $256 million, and the growth in the securities portfolio contributed to higher securities interest income. Yields in the securities portfolio declined 4 basis points to 1.59%. Offsetting and favorable is continued improvement in the cost of deposits, which dropped to 7 basis points in the third quarter as we continue to monitor the competitive landscape and adjust rates, accordingly, including for the newly acquired Legacy Bank deposits.

Overall, net interest margin dropped only 1 basis point from 3.23% to 3.22%. Excluding PPP and accretion on acquired loans, which introduced significant variability, net interest margin was in line with forecast expectations, declining from 3.03% to 2.89%. Looking ahead to the fourth quarter, we expect the cost of deposits to remain in the high single-digits. We expect that there will continue to be downward pressure on loan and securities' yields in the fourth quarter, given the continuing effect of excess liquidity and lower add-on yields, and therefore, continued modest downward pressure on net interest margin.

Our modeling suggests that the fourth quarter may represent the lower bound for net interest margin, assuming the current forward rate curve, and with loan growth, we expect the margin to begin improving in 2022.

Moving to Slide 7. Adjusted non-interest income, which excludes securities gains and losses, was $19.1 million, higher by $3.7 million or 24% from the previous quarter, and an increase of $2.1 million or 12% from the prior-year quarter. As you can see in the results, we've continued to focus on driving non-interest income. The wealth management team continues to deliver strong growth and successful relationship expansion. And revenue during the quarter increased to $2.6 million. We remain very focused on building the wealth management business, given its high return on capital and the value it adds to our commercial relationship.

In our mortgage banking business, as expected, revenue was lower on lower refinancing demand and tight housing inventory levels. However, the pipeline has stabilized, and the team will continue to contribute meaningful results by continuing to capitalize on low-interest rates and on a strong Florida housing market. We expect mortgage banking gains in the fourth quarter to be in line with the third quarter and results for 2022 will be dependent on rates and housing inventory levels in Florida.

Our SBA team has delivered outstanding results this quarter, generating record gains of $0.8 million as non-PPP opportunities return. We're focused on building this business in the coming year and expect continued improvements in this line item in 2022. Also, we expanded our position in bank-owned life insurance, both through purchases and through the Legacy Bank acquisition. BOLI purchase late in the second quarter for the tax-equivalent first-year yield of 4.5% contributed to the increase in BOLI income during the quarter.

Finally, meaningfully contributing to non-interest income this quarter was a gain of $3 million on one of our SBIC investments. Income from these investments can vary widely among periods. Looking ahead, we expect overall non-interest income in the fourth quarter in a range of approximately $16 million to $17 million, as we continue to focus on growing our broad base of revenue sources.

Moving to Slide 8. Adjusted noninterest expense for the third quarter was in line with the guidance we provided at $46.8 million. Salaries and benefits expenses were higher compared to the second quarter, reflecting the addition of commercial banking talent and of the Legacy Bank franchise. Legal and professional fees were higher by $450,000. This line item includes smaller increases across a number of areas including related to support for technology optimization initiative.

Other expenses were higher by $0.4 million and include higher marketing expenses due to timing of campaigns and the $133,000 day one provision for credit losses on Legacy Bank's unfunded commitments. Looking ahead, we expect to maintain our expense discipline as we always do. We expect fourth-quarter expenses excluding the amortization of intangible assets to be in the range of $48 million to $49 million. The increase quarter-over-quarter is the result of the addition of the Legacy Bank franchise and investments we're making in commercial banking talent. Looking forward to 2022, we expect expenses to reflect the full impact of the additions of Legacy Bank, Florida Business Bank, and Sabal Palm Bank, along with commercial banking talent expansion into Jacksonville and Naples, and enhancements in digital technology for our customers. We believe these investments support sustainable growth in the coming years and position the company to take advantage of the unique growing economy in Florida.

This results in a 2022 efficiency ratio target below 55% for the full year, with the ratio trending down throughout the year, and exiting 2022 near 50%. Higher results early in the year are due to the expense seasonality associated with the first quarter and timing of expenses associated with investments. Moving to Slide 9. The adjusted efficiency ratio in the third quarter decreased to 51.5% and reflects higher net interest income and higher non-interest income compared to the prior quarter, partially offset by higher noninterest expense.

Reiterating the guidance we've provided in the last several quarters, we continue to expect the full year 2021 efficiency ratio to be below 55%. Turning to Slide 10. Loan balances excluding PPP are higher by 13% from the prior quarter. That increase includes organic growth in commercial categories, loan pool purchases, and the Legacy Bank acquisition, offset by declines in consumer mortgage banking and construction and land development loans. Commercial growth is a highlight as Florida's economic recovery is now well established and recent talent additions and investments in technology, position us well as loan demand is returning.

We're very encouraged by the commercial pipeline, which has increased materially from the start of the year. We continue to be vigilant and steadfast in executing our strict credit underwriting guidelines while achieving organic loan growth. Looking forward to the fourth quarter, we continue to expect organic loan growth, excluding PPP, to be in the mid-single-digits for the coming quarter and expect loan growth to return to an annualized growth rate of high-single-digits in 2022. As a reminder, the first quarter of each year is typically a seasonally slower quarter. We expect loan yields to further modestly decline in the fourth quarter with lower add-on yields, assuming no change in the rate environment and increased originations.

Turning to Slide 11, highlighting loan growth in key categories. The addition of Legacy Bank, during the quarter, added $439 million of non-PPP loan balances. Wholesale purchases totaled $198 million, having made these investments as an alternative to additional investments in the securities portfolio. We've highlighted the commercial line items in the top green box showing an organic increase of $26 million in aggregate across commercial categories. This growth represents a 3% annualized growth rate in our commercial book during the quarter. We view this as a very positive indicator of the growth that's emerging as a result of our investments in commercial talent and technology over the last year. On an overall basis, excluding the Legacy Bank acquisition and wholesale purchases, loans outstanding increased by a net $6 million during the quarter.

Turning to Slide 12. The graphic shows a year-to-date summary of PPP activity. We originated $256 million in PPP loans, earlier in the year, under the renewed program. We processed $675 million in forgiveness, year-to-date, including $217 million in the third quarter, bringing principal balances of PPP loans outstanding at September 30 to $191 million net of deferred fees. Overall, since the start of the original program, we've collected $27.6 million in SBA fees. Of that, we recognized $22.2 million life-to-date and have $5.4 million in fees remaining to be recognized in future periods. We expect the majority of this remaining fee income to be fully recognized by the first quarter 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 approximately $420 million in purchases this quarter, offset by pay downs for net growth of $256 million. Additions were largely agency guaranteed with short duration and yields of 1.42%. And overall portfolio value declined a bit with steepening of the curve during the quarter. Somewhat offsetting and beneficial to yield was a yield maintenance provision in place on one holding that resulted in $400,000 benefit when the securities paid down early. We'll continue to steadily pace our investments over time in bonds that have lower extension risk with shorter durations, and continue to expect net additions of $250 million in the fourth quarter.

Turning to Slide 14. Deposits outstanding were $8.3 billion, an increase of $498 million quarter-over-quarter, which includes the addition in August of $495 million from Legacy Bank. The cost of deposits has continued to decline, and for the third quarter, was 7 basis points. Looking ahead to the fourth quarter, we expect the cost of deposits to remain in the high-single-digits. Transaction accounts represent 59% of total deposits and have grown 30% year-over-year. Excluding the impact of Legacy Bank, transaction account balances increased $65 million or 5.5% annualized, during the quarter. We're pleased with the growth in deposit balances, year-to-date, despite the margin pressure. This growth demonstrates the strength of our customer franchise, a growing Florida economy, and our ability to win share in the marketplace.

And on Slide 15, illustrated on the chart is the deposits per branch, which stepped down only slightly this quarter to $165 million, even with the addition of net four new branches with five from Legacy Bank and one consolidation. Also, in order to manage excess liquidity, and as we approach the $10 billion asset mark, we're using off-balance-sheet deposit products through third-party programs. We expect to remain under $10 billion at year-end 2021, and at September 30, we had $233 million in off-balance-sheet deposits compared to $116 million at June 30. Our branch optimization strategy is supported by our digital and analytics competency, which continues to provide opportunity to drive growth and operating efficiency across our retail franchise. In the last five years, we've consolidated 28% of our physical branches. We think physical branches are extremely important to our customers, in fact, we're planning to de novo branches that will open in the coming months as part of our balanced expansion strategy in Florida's high-growth markets. One is in Naples, which is located in Southwest Florida and complements our West Coast growth strategy, that includes Tampa and Sarasota. The other is implantation in the dynamic Broward County market and supports our deepening presence in South Florida, which is the seventh-largest MSA in the country.

Moving to Slide 16. The wealth management business continues to deliver tremendous growth with assets under management growing at a compound annual growth rate of 34% since year-end 2019. The team has done a remarkable job building a high net worth family office model and partnering with our commercial team, generating value for our most profitable clients, and delivering another record revenue quarter. We'll continue to invest and focus on building out wealth management as we move forward.

Moving to Slide 17 and to credit topics. The allowance for loan losses increased during the quarter from $81.1 million to $87.8 million with the increase in total loan balances. In particular, we reserved, on day one, for the full life of loan expected losses on the Legacy Bank acquisition. At the date of acquisition, that added $11.2 million to the reserve, $8.2 million of which is reflected in the third quarter provision. At the end of each quarter, we update our estimate for the portfolio in line with sustained indications of overall economic recovery, the allowance as a percentage of total loans excluding PPP, decreased to 1.54% from 1.6%, in the prior quarter. In addition to assigning a day one reserve on Legacy Bank loan, we also recorded [Phonetic] a $6 million purchase discount on Legacy Bank loans, bringing the total purchase discount remaining on all bank acquisitions to $26.6 million, which will be earned as an adjustment to yield over the life of those loans.

Turning to Slide 18 on asset quality. Credit measures remained strong with charge-offs, non-accrual, and criticized loans at historically low levels. Net charge-offs in the third quarter were $1.4 million or 10 basis points on average loan, and the level of nonperforming loans decreased to $32.6 million, representing 0.55% of total loans. Criticized loans, increased slightly from 13% last quarter to 14% of risk-based capital in the third quarter, with the increase driven by the addition of a small number of Legacy Bank loans, conservatively assigned risk ratings in these categories. All were also assigned appropriate reserves at the acquisition date. The overall allowance for credit losses at September 30 is $87.8 million, and allowance coverage excluding PPP loans decreased 6 basis points to 1.54%.

Turning to Slide 19. Our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet. Tangible book value per share is $17.52, an increase of 13% year-over-year. The tangible common equity to tangible asset ratio increased to 10.6% at the end of the third quarter and has consistently been among the highest in our peer group. The Tier 1 capital ratio was 17.7%, and the total risk-based capital ratio was 18.6%, at September 30. Return on tangible common equity was 11.7% on an adjusted basis. Acknowledging, our peer group leading capital levels, it's worth mentioning that if the third quarter's tangible common equity to tangible asset ratio was adjusted to an illustrative target of 8%, our adjusted return on tangible common equity would be 15.3% for the quarter and 18.5% for 2021, year-to-date. As I mentioned earlier, the current quarter's return on tangible equity was impacted by recording the day one provision for loan losses associated with acquiring Legacy Bank.

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

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

Charles M. Shaffer -- President and Chief Executive Officer

Thank you, Tracey. And, John, I think we're ready for Q&A.

Questions and Answers:

Operator

Thank you. We'll now begin the question-and-answer session. [Operator Instructions]

And our first question is from David Feaster from Raymond James.

David Feaster -- Raymond James -- Analyst

Hey. Good morning, everybody.

Tracey Dexter -- Executive Vice President and Chief Financial Officer

Good morning, David.

Charles M. Shaffer -- President and Chief Executive Officer

Hey, David.

David Feaster -- Raymond James -- Analyst

I just wanted to dig in maybe a bit into some of the commentary on the troughing NIM in the fourth quarter. I guess, could you maybe just walk us through some of the puts and takes with competitive yield and the liquidity deployment and the potential for earning asset mix, and just help us think about the margin as we go forward? And more importantly, the NII growth trajectory as well, it sounds like we should actually potentially see NII outpace loan growth next year, excluding PPP, if I'm thinking about that correctly?

Tracey Dexter -- Executive Vice President and Chief Financial Officer

I can start with that. Thanks. So, core NIM declined 14 basis points to 2.89% in the third quarter. As we look ahead, investment securities and loan yields should continue to modestly drift down, but the cost of deposits remains in the high-single-digits. We're looking at loan add on yields that are pretty stable in the fourth quarter compared to the third quarter. On new securities yields, we would expect in a range of 1.4% to 1.5% for the fourth quarter. We also expect to continue to put to work some of the excess liquidity in the investment securities portfolio, an additional $250 million there.

As PPP forgiveness starts to wind down near the end of this quarter, and largely in the fourth quarter, assuming deposit growth begins to normalize, we could see core NIM modestly decline in the fourth quarter, but we do think that to lower bound, and then building back, entering 2022. To your point, PPP forgiveness will likely have fully come off by maybe early in the first quarter of 2022. We do, however, have that significant amount of liquidity to deploy in organic loan growth, and some opportunistic loan pool purchases, to support that NII growth.

Chuck, anything you want to add to that?

Charles M. Shaffer -- President and Chief Executive Officer

No. The only thing I'd add is, I think, David, if you're thinking about modeling, we do expect sort of quarter-to-quarter continued modest increases when you look throughout 2022, primarily as the mix improves to loans out of cash, and we expect to invest about a net $250 million in the securities portfolio. When you add all that together with where we think the loan pipeline is and our expectations for growth in the coming year, we think net interest income growth looks pretty strong in 2022.

David Feaster -- Raymond James -- Analyst

Yeah, OK. That makes sense. And then, just kind of following it up on the production in the new hires. You know, it's great to hear the pipeline that you have. I'm just curious how much of the new hires that you guys have recently announced have been driving some of this growth? In PPP, a client acquisition and just maybe get a sense of the embedded production from those new teams? Just an update on the expansion [Phonetic] in upstream a bit in the middle market and how that's gone?

Charles M. Shaffer -- President and Chief Executive Officer

Great, great question, David. And let me start by saying, what's been really good to see over the last quarter, in which we've talked about on prior calls, is the emergence of owner-operated companies coming back to the table and borrowing money. That was incredibly slow late last year, kind of through the first quarter, and over the last six months, we're now seeing a fair amount of growth, and if you look at the table we provided, and you look at owner-occupied CRE, for example, you see fairly solid growth during the quarter, which is great to see. When you look at the new hires, about 20% of our commercial bankers are new to the company in the last 12 months, and they've only contributed about 11%.

So, I think there is a lot more upside to come out of the work we've done on recruiting as well as I'm super excited about the amount of volume we're seeing on talent, looking forward into 2022. So, when you put all that together, that gives us confidence about loan growth in the coming year. And importantly, as I mentioned, what's been great to see is the emergence of true demand for credit out of our core C&I customers, which is really an indication of what's going on in the local economy here, and -- was just down yesterday with a number of our customers, and it was nothing short of giddy about all the population growth. We're starting to see a lot of inbound population growth from California, couple -- speaking to a couple of CPAs, they're sort of backlogged and helping get customers businesses opened in Florida, and get licensing done.

And so, just remarkable what's going on here. And I would even argue that I think the Florida economy is stronger than it was pre-COVID, and so, we're seeing to start the light back up, particularly over the last three months to six months. I think that's driving some of the growth, as well as some of the new hiring. And as I mentioned earlier, sort of our early stage pipeline is over $1 billion, which is a record number for us. So we're starting to see it come together and just couldn't be more excited about what I think is out ahead for us.

David Feaster -- Raymond James -- Analyst

That's great. And then, I mean, great to see the de novo expansion in Naples, and we've got the new hires in Jacksonville. I just wanted to -- as you step back and look at your footprint, I mean, where do you think we could see some more de novo expansion? I mean, is it more deepening in existing markets, or [Phonetic] filling in gaps?

I mean, when we look at the map, the only real gap might be along the I-4 corridor in Central Florida, but just curious, your thoughts on de novo expansion, and how you think about M&A versus de novo? A project depends on opportunities, but just wanted to get your thoughts on that.

Charles M. Shaffer -- President and Chief Executive Officer

Sure. Yes. Great question. Kind of starting with M&A, we continue to be focused on kind of -- so, I'd say Jacksonville down to South Florida, including Miami-Dade with the right opportunity. The entire I-4 quarter Tampa over, and then Southwest Florida. We're going to go where there is opportunity, as you said, where we see acquisition opportunities that make sense for shareholders. We're certainly going to pursue them.

And from a de novo perspective, it's more about talent; where we see talent and where we see disruption will lead us to opportunities to grow customers in those markets. And what's -- as I mentioned earlier, what's exciting about what's going on in the state is we're starting to see real meaningful economic expansion, and so, it gives us the opportunity to fill out more effectively in these markets with some de novo growth. And then, the amount of talent opportunities that are showing up, it gives us even more opportunity.

So I'd say, David, continuing to focus on the same exact markets we've been focused on. There's a few fill-in markets in there, for example, Naples is one where there's not a lot of M&A opportunity, but it's a great market and with the right talent, and we think we can do well there. And so, we'll go where the opportunity is.

David Feaster -- Raymond James -- Analyst

All right. Thanks.

Charles M. Shaffer -- President and Chief Executive Officer

Thank you, David.

Operator

Our next question is from Steve Moss from FBR.

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

Good morning.

Tracey Dexter -- Executive Vice President and Chief Financial Officer

Good morning, Steve.

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

Maybe just starting with loan pricing. Just kind of curious as to where the roll-on/roll-off yields are? And also, just in terms of the pay-offs and pay-downs, you're seeing, just kind of -- I mean, obviously there is pricing pressure, just wondering if you're also seeing competition on the structure?

Charles M. Shaffer -- President and Chief Executive Officer

I'll [Phonetic] start with the roll-on/roll-off and I'll hit the structure question, Tracey.

Tracey Dexter -- Executive Vice President and Chief Financial Officer

Sure. If I carve out the loan purchases, our organic add-on rates were about 3.61 [Phonetic] in this quarter. Just a little lower than last quarter, it was 3.69 [Phonetic]. The pricing does remain competitive, but we saw some recent steepening in the curve, so that should help those -- those levels stabilize as we go into the fourth quarter.

In terms of payoffs, our overall payoffs remained elevated, although marginally lower than the prior quarter. And our overall fall-off rate moved down a little bit from last quarter, 4.22%, this quarter.

Charles M. Shaffer -- President and Chief Executive Officer

Yeah, Steve, on the structure side. We don't see -- we've seen a few things come to market that we wouldn't do. But for the most part, the competitive pressures have been around pricing. I'd say the pricing pressures are intense more than we've seen in the past, given the level of liquidity seems that for the most part, people are holding the line on structure, which is good to see. But it's definitely very competitive in the marketplace given the levels of liquidity.

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

Okay, that's helpful. And then, in terms of -- hear you guys on sweeping off-balance sheet deposits. I know the two pending acquisitions, obviously, add more assets, but you guys have just a tremendous amount of liquidity, the mass gets [Phonetic] tight, but kind of curious, do you think you could sweep in standard $10 billion by year-end '22?

Tracey Dexter -- Executive Vice President and Chief Financial Officer

[Speech Overlap] we do expect -- yeah -- we do expect to stay under $10 billion this year and plan to exceed, certainly with the acquisitions that are coming in the first part of 2022. So, we are planned and our guidance includes the assumption that we'll cross $10 billion in 2022.

Charles M. Shaffer -- President and Chief Executive Officer

Yep. We've built up a number of vehicles that we think will allow us to continue to move the deposits off-balance sheet and stay under $10 billion at the end of the year, Steve.

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

Right. Okay, that's helpful. And just in terms of M&A, I know you guys have -- obviously, two deals pending, but kind of curious how are discussions going? I hear you on the new hires and the pipeline new hires, does that kind of tilt toward more organic growth and hiring going forward? Or -- yeah, just kind of curious if there is any real shift in M&A there?

Charles M. Shaffer -- President and Chief Executive Officer

No. I would say it's same strategy, no shift. We continue to focus on the right opportunities, in the right markets, and if it makes sense for shareholders, we'll pursue M&A as we have in the past. It's good to see the organic hiring coming online. I think that enhances what we're doing already, so it'll be a combination of the two moving forward.

The two pending deals we have, we've received approval from the OCC. We're still awaiting our Fed waiver, which we expect to come in the near term, and expect to close those probably in the first week of January. So, we expect to get those closed and if we come across something that makes sense, it'll likely be a announcement in 2022, but we want to get the two deals closed that we have and continue to focus on growth.

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

Okay, great. Thank you very much. Appreciate all the color.

Charles M. Shaffer -- President and Chief Executive Officer

Thanks, Steve.

Operator

Our next question is from Steve Scouten from Sandler O'Neill.

Stephen Scouten -- Sandler O'Neill -- Analyst

Hey. How's it going, guys?

Charles M. Shaffer -- President and Chief Executive Officer

Hey, Steve.

Tracey Dexter -- Executive Vice President and Chief Financial Officer

Hey, Steve.

Stephen Scouten -- Sandler O'Neill -- Analyst

I guess a couple things. Tracey, it sounds like you guys were thinking deposit growth, maybe, from here might kind of normalize, be a little bit -- a little bit lower than what we've seen in the past; [Speech Overlap] if that's correct, what would kind of what kind of lead you to believe that what are you guys seeing that would lend to that direction?

Tracey Dexter -- Executive Vice President and Chief Financial Officer

Yeah, we think -- the ending deposit balances have continued to increase over the last couple of quarters. We've seen some interesting studies that have found some correlations between the Fed securities holdings. So, we are looking at the timing of the Fed tapering of purchases. That's one of the things that tells us that the balances will stay around a little longer, but maybe -- maybe not necessarily continue to grow at this pace. We're also, as Chuck said, starting to see really increasing appetite in our market for expansion.

Charles M. Shaffer -- President and Chief Executive Officer

Yeah, I'd say, Stephen, it's clear that the industry was very correlated to the Fed's increase in the balance sheet. We think even with tapering that really doesn't pull back on deposits, it will take all the way to the point of pure contraction of that balance sheet before we'll see any challenge there. So, we think it's multiple years of high levels of liquidity here before we start to see that come back out of the marketplace.

Stephen Scouten -- Sandler O'Neill -- Analyst

Yeah. No, that makes sense. Okay, helpful. And then, kind of thinking about forward rate sensitivity as we hope to be prepared for some higher rates here in '23. I think at last update, you guys were screening that like plus 7% and up 100 basis point-scenario. Any changes to that asset sensitivity, or are you planning to do anything differently? And I guess, what are you assuming for deposit betas moving forward because I would assume it's demonstrably less than your peers?

Tracey Dexter -- Executive Vice President and Chief Financial Officer

Yeah, no significant change in our expectations in terms of asset sensitivity. We have an asset-sensitive balance sheet with a strong core low-cost deposit base. So, higher rates would certainly provide more upside to loans and securities yields, while we would expect that continued benefit of low-cost funding. So, we would expect meaningful increases in NII and NIM in the first 12 months of the rate adjustment.

Charles M. Shaffer -- President and Chief Executive Officer

Yeah, we don't -- I don't -- we don't have the deposit betas in front of us, Steve, and we can get that to you. But that -- what I would state is, as you know about our franchise, it's highly transaction-funded, nearly 60% of the deposit base is transaction-oriented. And given the history and long time nature of the organization. the duration of that funding base is extremely long. And so, historically, and we believe even going forward in a higher rate environment, the ability to lag the rise in deposit cost is probably better than others. And kind of the true -- it's kind of -- its rates have gotten low here. It's hard to sort of look between the banks and see the good deposit bases and the not-so-good deposit bases. But we've always had one of the premium deposit franchise in the country, and it's because of the duration that's in that deposit base and the engagement that exists there too, as we've talked in the past. The bulk of our commercial portfolio leans into owner-operated companies of which generally have deeper, more thorough depository relationships with us.

So, there's a lot of upside for us when rates go up. The deposit base provides a lot of franchise value in that scenario. And I think we'd perform very well in a higher-rate scenario.

Stephen Scouten -- Sandler O'Neill -- Analyst

Yeah, for sure. That's helpful. Okay. And then maybe just last thing for me, I mean you guys have been definitely ahead of the curve from your peers, in terms of use of digital tools, and kind of implementing technology in the way you deliver to customers. I'm wondering if there is any push into -- we're seeing a lot of these banks pushing the DeFi-type initiatives, pushing to -- I mean, buy now, pay later-types. I mean, there's all these different avenues, I feel like banks, they are moving into point of sale lending and the like. Are there any other kind of technology-driven initiatives that you guys are undertaking that might be new to the story?

Charles M. Shaffer -- President and Chief Executive Officer

Yeah, nothing around DeFi or the pay-now models. We continue to be focused on grill-and-building [Phonetic]; a very strong franchise in Florida. And we're doing that through the investments we'd made in data -- data analytics, over time. And then, here in the first quarter, we're going to fully upgrade our digital toolset for our customer base. And we think the combination of that with high-quality bankers building a bank that's super competitive, generates the most value for shareholders over time, we'll continue to carefully watch what's emerging out there in DeFi, and other things. But nothing to talk about today.

Stephen Scouten -- Sandler O'Neill -- Analyst

Great. Okay. Thanks for the color. Appreciate again.

Charles M. Shaffer -- President and Chief Executive Officer

Thanks, Stephen.

Operator

[Operator Instructions] And I have no further questions, I'll turn it back to Charles for closing remarks.

Charles M. Shaffer -- President and Chief Executive Officer

Thank you, John. I appreciate everybody's time and I appreciate everybody calling into the call, and look forward to 2022. We'll talk to you soon.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Charles M. Shaffer -- President and Chief Executive Officer

Tracey Dexter -- Executive Vice President and Chief Financial Officer

David Feaster -- Raymond James -- Analyst

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

Stephen Scouten -- Sandler O'Neill -- Analyst

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