Hello all, and a warm welcome to the SouthState Corporation Q2 2022 earnings conference call. My name is Lydia, and I'll be your operator today. If you'd like to ask a question after the prepared remarks, please press star followed by the number one on your telephone keypad. It's my pleasure to now hand you over to our host, Will Matthews. Please go ahead when you're ready.
Good morning, and welcome to SouthState's second quarter 2022 earnings call. This is Will Matthews, and joining me on this call are Robert Hill, John Corbett, and Steve Young. The format for the call will be that we will provide prepared remarks, and we'll then open it up for questions. Yesterday evening, we issued a press release to announce earnings for the quarter. We've also posted presentation slides that we will refer to on today's call on our investor relations website. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements we may make are subject to the safe harbor rules.
Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about risks and uncertainties which may affect us. Now I will turn the call over to Robert Hill, Executive Chairman.
Good morning, and thank you for your interest and support of SouthState. The results for the second quarter reflect the significant progress made by our team in many areas. You will hear from John and Will about the excellent progress and results we have had at the halfway point of 2022. With the many uncertainties that exist in the economy today, it gives me confidence for our shareholders that the many strengths of SouthState will stand out. Regardless of the external environment, our team, our balance sheet, our diverse customer base, and our markets are well positioned for solid, consistent performance in our three focus areas, soundness, profitability, and growth. I'll now turn the call over to John for more details on the quarter.
Thanks, Robert. Good morning, everyone. Generally speaking, this has been a good quarter for the banking industry as a whole, but it's been an exceptional quarter for SouthState. The positive momentum, it's broad-based. We saw positive trends in everything from revenue growth, expense control, loan growth, deposit betas, and asset quality. With the volatile swings of CECL reserves over the last year and with the change in our share count from the Atlantic Capital acquisition, the best measurement of core earnings growth in this environment is PPNR per share. For the second quarter, PPNR per share increased 30% from the prior quarter. On a year-over-year basis, PPNR per share is up 46%. This deep earnings ramp is a function of our liquid balance sheet, rising rates, a low deposit beta, expense focus, and strong organic loan growth.
With more Fed hikes on the way, there's room for earnings to accelerate from here. The Fed funds rate is up 150 basis points this year, and our cost of deposits only increased 1 basis point. We ended the quarter with a total cost of deposits of 6 basis points, and we were able to hold our deposit balances flat. Our deposit beta is less than 1% so far, but will naturally pick up as we move through the cycle. During the last rate cycle, our end of cycle beta was 24%, which was below industry peers, and it should be a relative advantage this cycle as well. Our plan is to hold deposits stable for the remainder of the year, since we've got plenty of cash on hand to fund our loan growth. Credit quality remains excellent.
Net charge-offs decreased, and leading asset quality indicators, such as past dues and substandard loans, also declined. Over the last year, we've been releasing loan loss reserves for a total of $115 million released in the prior four quarters. The CECL forecasts during the pandemic were too punitive and the reserves weren't necessary. This quarter, we reversed course, and we set aside a $19 million provision. Even with the extra provision, we ended up with a return on tangible common equity of about 17%. With our net interest margin on the rise, our adjusted efficiency ratio improved to 54%, down from 60% in the prior quarter. A nice six-point drop. Revenue increased 15.8%. Now that's in comparison to expenses only up 3.4%.
We saw excellent operating leverage of 12.4% from the prior quarter. We've still got opportunities to become more efficient, and as we previously announced, we're on track to consolidate 30 of our branches this quarter. On top of that, we've also got the planned cost saves from Atlantic Capital. We completed the system conversion this past weekend, and we're on track for the cost savings to be realized in the fourth quarter. Population growth continues to fuel our economy in the Southeast, and there's no sign of it slowing. In many cases, our clients are enjoying record operating results, and they're investing in the future. Over the course of the last year, we've had organic loan growth of 12%. In the second quarter, loan growth accelerated to 22% annualized and was broad-based.
Every loan category grew at double digits, led by the residential and the C&I portfolios. We're not a refi shop, so mortgage production remained surprisingly steady in the second quarter at $1.4 billion despite the rate increases. With listings at record lows, there's more construction activity now. We've also seen a pickup in our physician program. Our professional and physician loan program made up 36% of our residential production in the quarter. We've got a new slide in the deck that's pretty interesting. It illustrates how we've arrived at the decision to sell mortgages when gain on sale margins are high and the coupon rate is low, which is what happened during the pandemic. Now the opposite is true. Gain on sale spreads are low and the coupon rates are much higher. Logically, we're holding more production on the balance sheet.
As we look ahead, we are seeing signs that the economy is cooling off, and we think that's a good thing. The housing and labor markets have been white-hot to the point it's not healthy and it's not sustainable in the long run. The interest rate hikes are having an impact. Loan growth will slow in the back half of the year from this quarter's level of 22%. We now anticipate that loan growth in 2022 will be at the top end of our guidance at about 10%. I'll flip it over to Will, and he can walk you through the rest of the numbers.
Thanks, John. As you noted, it was a very encouraging quarter for us on several fronts. If I were to give a high-level summary of the quarter, I'd say we held deposits constant and redeployed $1.45 billion of cash and Fed funds sold into loans while our spread benefited from the strength of our core funding base. I'd also note good expense control with our non-interest income businesses performing close to expectations. As I make my remarks, I'll remind everyone that we had Atlantic Capital in the company for the full quarter versus only one month in the prior quarter. We have to keep that in mind as we make some income statement comparisons with the sequential quarter. Slide 12 shows our five-quarter NIM history.
The quarter's net interest income of $314 million was a record, with our NIM expanding by 35 basis points from Q1, reaching 3.12%. This was a $53 million increase in net interest income, or approximately $36 million if you normalize for a full quarter of Atlantic Capital in Q1. Loan yields, excluding PPP, grew by 22 basis points, and earning asset yields increased by 36 basis points, and our cost of deposits rose by only 1 basis point. Accretion was $12.8 million for the quarter, and our core NIM, excluding accretion and PPP, rose 30 basis points to 3.00% for the quarter. Our $1.45 billion in loan growth equated to a 22% annualized growth rate, which brings the last four quarters' loan growth to 12.3%.
We held the securities portfolio essentially flat, except for AOCI moves, and our cash and Fed funds sold balances were down $1.3 billion. Non-interest income of $88 million was up $2 million from the first quarter, but essentially flat when normalized for a full quarter of Atlantic Capital. As noted on slide 14, 89% of our $1.4 billion in mortgage production was purchase volume, and only 27% of production was sold in the secondary market. Mortgage revenue declined to $5 million for the quarter. I'll pause here to note that this means our first half 2022 mortgage production was essentially flat with the same period last year in a year where the industry is down approximately 36%. Housing supply constraints have continued to drive nice volume in our construction perm product.
As John noted, slide 15 shows the relationship between rates, gain on sale margin, and our portfolio versus secondary market. You'll see that when rates are low and gain on sale margins are high, we've tended to sell most of our production. Conversely, as rates move up and gain on sale margins decline, the portfolio percentage increases. You'll also note on that same slide that even with the second quarter's growth in portfolio loans, our ending consumer real estate portfolio is only back to the size it was in the first quarter of 2020. The Correspondent Division, as shown on slide 16, had another good quarter with $28 million in revenue, similar to Q1 levels. This environment continues to be better for our interest rate swap capital markets business, while fixed income is a bit weaker. Our wealth management business also continues to perform well.
With respect to expenses, our $226 million in NIE was up $7 million from Q1. Atlantic Capital's pre-merger run rate was approximately $5 million per month or an additional $10 million for three months versus one month in Q1, so we showed some improvement quarter-over-quarter. As John noted, our revenue growth outstripped our expense growth by 12.4%, so we had very good operating leverage this quarter. Similarly, this operating leverage was also reflected in the improvement in our efficiency ratio to 53.6%. Looking ahead to the next few quarters, with merit increases effective July 1st, our expense guidance would be consistent with what we said on last quarter's call. Quarterly NIE in the low 230s, potentially in the high 220s in Q4.
On credit, we had $2.3 million in net charge-offs or 3 basis points, and only $1 million of these were net loan charge-offs, with the rest in deposit overdraft losses. As noted on slide 24, our past dues and NPAs declined, and we also saw a further decline in criticized and classified assets. With respect to provision expense, we're cognizant of the increasing risk of a recession, and we thus took a more conservative approach in our CECL modeling this quarter. Again, increasing our weighting of the Moody's S3 scenario. This led to a $19 million provision expense, which brought our ending reserve to 115 basis points of loans or 127 basis points, including the reserve for unfunded commitments, as is outlined on slide 33. Turning to capital.
Given the strong loan growth we were experiencing, we did not conduct any further repurchase activity in the quarter beyond the 300,000 shares we repurchased in early April. The 22% annualized loan growth and those early April repurchases combined to cause a slight decline in our regulatory capital ratios, though they remain strong with a CET1 ending at 11.1%. With approximately 70% of our investment portfolio classified as AFS, the move in rates in the second quarter caused an additional decrease in AOCI, dropping our TCE ratio to 6.8% and our TBV per share to $39.47.
Given the high-quality nature of our portfolio, we don't view this accounting convention requiring a mark on only one component of the balance sheet as being a meaningful long-term measure, and we expect these securities to accrete to par as they approach maturity over time. I'll turn it back to you, John.
Thanks, Will. Just some closing thoughts. I'm incredibly proud of our team and what they've accomplished this quarter. A lot of folks worked through the night on Saturday and Sunday to complete the Atlantic Capital conversion. As always, they rose to the challenge. Also, we just passed the second anniversary of the closing of the MOE. Our five priorities headed into the merger were to preserve the culture, to invest in digital, to protect the soundness of the balance sheet, and to position the company for top-quartile profitability and growth. We're now harvesting the benefits of those priorities. Our digital platforms have been upgraded. We're situated in the best markets in the country. Our relationship managers are hitting record production, and our PPNR per share grew 46% over the past year.
We now have a franchise that is built to last and in perfect position to take share from the large banks over the next several years. Operator, please open the line for questions.
Thank you. If you'd like to ask a question today, it's star followed by the number one on your telephone keypad now. If you change your mind, it's star followed by two. When preparing to speak, please ensure your device is unmuted locally. Our first question comes from Stephen Scouten of Piper Sandler. Your line is open. Please go ahead.
Thanks. Good morning. I just wanted to start maybe on the share repurchase plans. I wasn't sure, Will, what you were saying there at the end completely. I know you said you didn't repurchase any additional from the 300,000 TCE 6.8%. Would you think you would kind of hold back on the share repurchase in the near term given the AOCI moves? What's the logic there?
Yes, Stephen, good morning. You know, our philosophy has always been our first priority for capital generation and investment of capital is in growth. You know, given the strong growth we had in the quarter, 22% loan growth, you know, we curtailed our securities purchases based upon that growth. I think for the foreseeable future, we're likely to be less active with share repurchases, you know, depend upon how growth shakes out from here. At present time, I would expect us to continue to redeploy capital into the balance sheet as opposed to repurchasing shares.
Okay, good. I guess I think in one of the slides it noted you guys were focused on some upgraded tech solutions and continuing to push further into digital. You set some future goals for digital adoption, I think throughout the slide deck. I just wanted to kind of understand if all of those investments have already been made or if there's any large scale incremental investments that need to be made to reach these targets, how we should think about future tech spend.
Yes, Stephen, it's John. You know, we're continuing to transition our expense base from the brick and mortar into technology. There's a slide in the back of the deck that talks about our branch consolidation efforts over the last decade. We've got another 30 branches that we're consolidating this quarter. We made a lot of technology investments into new platforms a couple years ago during the merger of equals. We've got nCino in place for commercial loan processing, a brand new mobile app through Q2, Salesforce. Really, we believe we've made the significant investments on the software platforms that needed to be made, and now we've got to mature into those platforms.
You know, moving forward, our technology investments will largely be around ways to become more efficient through robotics and the operations area of the company, as well as data analytics. It won't be near the lift going forward in the next, year or two as it has been in the last two years.
Okay, great. That's really helpful. Then I guess last thing for me is I'm just curious, kind of about capital markets. You guys have noted that's a pretty big differentiator for y'all at the size of your bank, helps you compete with larger banks. Are there any capabilities you're focused on within that capital markets team that you feel like you need to expand or develop further. I guess following to that, is that an area we could potentially see some bolt-on acquisitions if there are some of those expansions needed or desired?
Hey, Stephen, it's Steve. You know, that capital markets group has been part of our correspondent group for the last decade or so, and you know, we continue to recruit talent in that area. Right now it's primarily focused on our interest rate swaps. We've got some other capabilities that we're working on, but probably not big enough to mention right now. That's you know, that's an area as we marry the $46 billion balance sheet along with the distribution we have into, you know, banks, money managers and others, that's clearly an opportunity for growth, but that's gonna take time and continued build-out. We're real happy about that team and what the base we have today in that team.
You know, that continues to be an opportunity to grow out in the future.
Okay, great. Thanks for the color, everyone, and congrats on a phenomenal quarter.
Thank you, Stephen.
Our next question in the queue today comes from Kevin Fitzsimmons of D.A. Davidson. Your line is open.
Hey, good morning, everyone.
Morning, Kevin.
Just curious if you could dig a little deeper into the drivers of NII and what your outlook for continuing to grow that in the future is. You know, obviously we've come off a period the last few years where it's mainly been driven by the balance sheet, where the percentage margin has gone down, where now that seems to be reversing or flipping and the percentage margin is going up and average earning asset growth for most banks we've seen has been slower or even flat given pressure on deposits. Just curious if you can give some of those dynamics in terms of you know, for instance, do you see the margin having the same kind of expansion what you saw this quarter within average earning assets?
I would think you've already talked about the loan growth, but how low can that cash go? What about securities? Will you continue to use that to fund loan growth? Just digging into a few of those items. Thanks.
Hey, Kevin, this is Steve. That's a mouthful, but I'll do the best I can. Hey, you know, just a couple of thoughts, kind of big picture, and then maybe I can drill down further into your question. You know, I think we have a slide in there. I think we've had it in there for the last several quarters, but it really speaks to balance sheet management, and it's slide number 35, page 35, which talks about, you know, our cash as a percentage of assets. You know, it compares us versus peers and our securities peers. What it shows is, you know, we came into this year with about 15% of our balance sheet in cash. So it just gives us a lot of flexibility.
Now we're, you know, as we've funded loan growth, you know, significant loan growth, kept the balance sheet flat, you know, you've seen our cash assets still be at 9%. So it's a really good position to be $4 billion in cash. We would normally, you know, in normal times run that in the 2%-3% range of assets. That's, you know, generally how we would think about it. So as we, you know, we've communicated before in prior calls, but, you know, kind of what we're looking for over the next, you know, call it 18 months through the end of 2023, is just try to keep a flat balance sheet, flat deposits and flat interest earning assets.
The way we think we can maneuver that is through the cash we have on the balance sheet. You know, that'll take our loan-to-deposit ratio from 71% up to 80% or so by the end of 2023. That's how we're thinking about balance sheet management. You know, clearly the rate environment has changed, and there's just a lot of different things to think about there, but that's how we're currently and have thought about it over the last couple years. You know, as we think about sort of the assumptions for margin, you know, the Fed has kind of guided us towards a 3.5% Fed funds rate peak at the end of the year. That's what the market's telling us.
You know, we'll see if we get there. You know, another fundamental assumption around our margin is, you know, we have a page in there that talks about our historical betas, and our historical deposit betas on page 20 was around 24% for the cumulative beta. You know, we're assuming that'll be the same this cycle as it was last cycle. You know, if you think about that forecast, deposit cost would get in the 80-90 basis points in the middle of next year, assuming that we get to a 3.5% Fed funds rate.
Based on all those assumptions, you know, we would expect there to, you know, with a flat balance sheet, we would expect margin expansion from here, and that maybe sometime in early to mid-2023, we get to, you know, 3.5% margin, give or take. You know, as we said last quarter, each 25 basis point hike to us is worth about 6 basis points NIM. Depending on if the Fed doesn't get to 3.5%, then you can subtract, you know, 6 basis points for every hike they don't get there. But that's kind of how we're thinking about the balance sheet management over the next, you know, 18-24 months, and as well as, you know, the interest rate environment. I'm hopeful that's helpful.
Yeah, that's very helpful. Thank you for that detail. One last piece of the balance sheet. Securities, would that likely be more of a funding source or keeping that stable going forward, given the positive outlook on loan growth?
Yeah. Our expectation with the loan growth will just keep the securities the flat. I think our you know securities assets on that page is around 19%. So in that you know 18%-20% range would probably be right. You know unless something changes in the rate environment materially that would be our expectation.
Okay. Thanks, Steve. One last housekeeping on the purchase accounting, you know, was obviously higher this quarter. Just, Will, wondering what a decent run rate to think of that going forward.
Yeah, Kevin, this is Steve. You know, it was 12 basis points to margin this quarter. That's high. There was some payoffs and all that. You know, those things are always hard to predict, but our expectation is that it would be, you know, 7-9 basis points, you know, kinda in the next, you know, over the next 18 months, you know. That's probably what it would add to margin. This quarter, it was a little high at 12 basis points. So that's, you know, somewhere between $7 million and $9 million a quarter, something like that.
Got it. Okay. Thanks very much. Appreciate it.
Our next question today comes from Jennifer Demba of Raymond James. Your line is open.
We're not getting changed firms.
No, no. Truist Securities. Good morning. Question on loan growth, you said it would definitely moderate in the second half of the year. I'm just wondering what you're seeing in your pipeline. Is it lower than it was a quarter ago? Or is this based on more client selectivity and conservatism? Curious as to what you're seeing.
Yeah. Jennifer, it's John. The pipeline on the commercial pipeline side is relatively flat. It was about $5.5 billion at the end of the first quarter, and it's also still about $5.5 billion. What we are seeing is that we are losing some CRE deals to what we believe is overly aggressive competition on structure and rate. Secondly, with the rise in rates, we are seeing selectively some borrowers walk away from deals with the rate environment increasing. You know, what's going on right now is that the cap rates really have not adjusted yet to what the yield curve has done.
I think a lot of the CRE folks are kind of on the sidelines waiting for that lag effect to happen and valuations to reflect the higher yield curve. We do see things slowing down. I mean, we are seeing it slow down as well on the residential side. You know, the amount of housing activity is declined naturally with the interest rate environment. You know, I think we guided to upper single digits to 10% growth for the calendar year. We've done about 14% organic loan growth annualized in the first half. If we wind up in the back half of the year in the mid single digits, that gets us roughly to 10% organic loan growth for 2022.
Great. Thanks so much.
Our next question today comes from Michael Rose of Raymond James. Please go ahead.
Hey, good morning, guys. I guess I could be from Truist.
Good morning.
... if you want me to. Switch it up a little bit. Most of my questions have been asked and answered. You know, just looking at the beta slide, which I, you know, appreciate again, and then looking at slide 19 with the rate scenarios and the plan to, you know, let the loan-to-deposit ratio kind of grind higher up to 80%, it seems to me like some of those assumptions could be perhaps a little bit conservative. Can you just give us some color as to, you know, what the drivers of that rate sensitivity. Look, I know cash is down, but you know, cash levels are still, you know, fairly healthy. You're gonna keep the securities book, you know, deposit outflow, like I mentioned.
It just seems to me like some of those assumptions could end up being a little bit conservative.
Yeah, Michael. It's Steve, and maybe Will could add to it. I guess from our history, all we can model is history. As we think about our balance sheet, what we're hearing from our bankers and what they're telling us from the market relative to deposit costs, you know, this is sort of our history of what we're gonna model. You know, what's different this time is there's two things. One is the loan-to-deposit ratios in the industry are much lower to begin with. But, you know, we're on a quantitative tightening cycle too, that's probably larger than we've ever seen. Those kind of, to me, offset each other.
You know, obviously, we have a lot of flexibility with our cash sitting on the balance sheet at 9% or $4 billion. We're gonna try to manage excess deposits. You know, as you know, we wanna grow relationships, and we will. But sometimes, you know, our clients have excess deposits, and we'll make judgments on when to let them go into, like, our private client group and our wealth group. You know, there might be better opportunities to earn better yield in those cases. We still control the operating accounts and the funds, but they, you know, may not be on our balance sheet. Those are the things we're gonna have to manage going forward.
You know, those, the history is the best thing that we can look forward to in the future. Will?
Yeah, just one other difference, I guess, Michael, relative to prior cycles is just the speed.
The size of the moves this time around, you know, versus what we've had in the past. All those factors make it difficult to model. Our thought would be we certainly would love to do better, but I don't think we would recommend modeling more aggressive than the margins that Steve outlined earlier.
Okay. That's helpful. Maybe just, you know, again, going back to the loan growth and the outlook. I mean, as I sit here and I look at the slide, I mean, the production has been really strong. The paydowns, you know, have slowed and that's all been good. You know, I sense a little tone of cautiousness in kind of the prepared comments and some of the answers to the questions. Are you really seeing any sort of pullback at this point? I know pull-through rates have been pretty strong this quarter and maybe pipelines aren't as full as they were. You know, I think what I've heard from others is there's an expectation that those will rebuild as we move into year-end.
Just trying to get a sense if you guys are perhaps being a little bit more conservative, especially with, you know, the boost that you get from ACBI. Thanks.
Yeah, Michael, it's John. You know, naturally we are adjusting our underwriting criteria based upon the increase in the yield curve. The interest rate that we use for underwriting, we've shocked it up a fair amount. When you size credits, we are being maybe more conservative than we were historically. If you kind of just look at the different asset classes, as far as activity, we're seeing good activity in multifamily and decent activity in self-storage. Industrial has slowed down, and some of this is the Amazon effect, and the only exception to that would probably be the Savannah area because the port activity is so strong. Office activity, there's very little activity in office. We feel good about our book of business there.
That's one we're watching. You know, over 80% of our offices are suburban rather than metro. Retail, there's some activity with certain select franchises, Dollar General, Publix, Tractor Supply, and Starbucks still expanding. That kind of gives you a flavor of what we're seeing in the CRE market. Housing, you know, will slow down with higher interest rates. There's a lot of construction activity that we're doing because inventories are so low. You know, in total there will be a decline there. That's our best judgment. When the Fed increases interest rates, it has an effect. I think a lot of our borrowers are watching and wanna see where this economy takes them and being a little more cautious as well as us being a little more cautious.
Yeah. I think, Michael, I'd just add, you know, just on the residential side, I mean, you saw mortgage rates get to 6.25% or so. You know, now they're down in the 5.38% range. This market has been really hard to catch if you're a borrower. It needs to settle in a little bit in order for, you know, growth to resume at those levels, I think. You know, we'll just have to see.
Okay. I appreciate the color. Maybe just one final quick question from me. I noticed that the dollar amount of non-accrual loans ticked up. Anything to read into that?
No, Michael. It's Will. There's really nothing to read into that. That doesn't signify any, you know, trend or anything like that. I think it may have been one loan.
I think the total dollars of NPAs declined.
Right. Yeah. You know, and as John said earlier, our early warning things, you know, Plus Five, things like that, all have good trend lines as well. You know, right now we feel like all those indicators look very good.
Perfect. I appreciate all the color, guys. Thanks.
Thank you.
Thank you. As a reminder, if you do want to ask a question today, it's star followed by the number one on your telephone keypad. Our next question in the queue comes from David Bishop of Hovde Group. Please go ahead.
Yeah, good morning, gentlemen. Thanks for taking my questions.
Good morning.
I think in the preamble you noted that operating expenses you expect some inflationary pressure here in the third quarter up to the low 230s, maybe coming back to the high 220s. Just curious, and I appreciate the slide on slide 29 in terms of the planned branch consolidation. Maybe what are some of the puts and takes that are causing that inflationary pressure? Is it gonna purely merit raises, compensation, or is it gonna be spread out elsewhere among the expense line items? Thanks.
Yeah, Dave, it's Will. It's predominantly in the compensation side. We have our merit increases kick in July 1, so that'll be fully evident beginning of the third quarter. We also raised our teller, our frontline pay in the middle of the second quarter, so we'll have a full quarter of that that kicks in. I'm sure you've heard a lot of other calls too, where, you know, this is an environment with, you know, tight labor supply and a lot of inflationary pressure. We feel all that. You know, on the positive side, we have some additional Atlantic Capital cost savings to realize that'll be more evident in the fourth quarter. The branch closing, you know, cost savings kick in there as well.
All those puts and takes kind of led to that guidance of the low 230s and maybe getting to high 220s in the fourth quarter.
Got it. Appreciate that guidance. You noted the increase in the loan loss provision this quarter. Did I hear right there was some change in some of the CECL assumption and modeling there? Just curious what changes that?
Yeah. Let me maybe I'll back up a second, talk about our CECL process. I think we have a very healthy process. It's a committee-based process, and what the committee does is in addition to receiving the Moody's forecast and you know and in addition to just reading the numbers they put out, actually reading the forecast themselves and what the verbiage is around that, and comparing that to what we read in other publications and hear out in the market and whatnot. Based upon you know the assimilation of all of that, the committee has some healthy discussions around essentially do we think that Moody's scenarios are right on the money, or are they too pessimistic or too optimistic? You know, that varies quarter by quarter.
We have for the last few quarters felt like we needed to be more conservative, you know, more pessimistic, if you will, than what Moody's was saying. We have steadily increased the weighting of their S3, which is their recessionary scenario. It's not a great financial crisis type scenario, but a recessionary scenario to where it is now more than half. We also have overlaid some qualitative factor adjustments as well based upon all that. As you can see from a percentage standpoint, you know, it essentially left our reserve flat with last quarter. With $1.5 billion in loan growth and keeping the reserve flat, that ended up generating that $19 million provision number.
That's really kind of how the process works, and that was really our thinking. Just everything we read seemed to be people talking more and more about the likelihood of a recession.
As we sort of model forward with the moderating loan growth, you know, from a model perspective or target, are you targeting a dollar amount reserves, the potential or ratio? I'm just curious how we should think about the
Yeah
overall allowance.
Yeah
% of loans.
You know, I wish I could tell you. It'd be a lot easier for all of us. We're really working with the loss driver forecasts that come out and sort of if, you know, if unemployment and House Price Index and CRA index and things like that, you know, the GDP for our region, if those things change dramatically for the better or for the worse in terms of their forecasts, that's gonna drive statistically a higher or lower reserve requirement. You know, we, based on what we see in those and what we see in other things, we may weigh the baseline or the more pessimistic scenario more or less.
I know it makes it hard to model, but it's hard for us to model internally too until we know what those loss drivers, how they're gonna change.
No, totally got it. Thank you for the color.
Thank you.
The next question in the queue comes from Catherine Mealor of KBW. Please go ahead.
Thanks. Good morning, everyone.
Good morning.
I wanted to go back to the margin and talk about loan yields for a little bit. I mean, I think if we think about your margin trajectory, no one's gonna argue that deposit betas were low last cycle and will be, you know, low again this cycle. But I think the loan yield piece is harder to model because of all the acquisitions and accretable yields and all that that's in that historical number. So as we think about loan yields moving forward, you know, Steve, you mentioned the kind of 3.50% margin as we kind of head into next year. How are you thinking about the repricing of loan yields and maybe where that gets back to a certain level as we kind of head towards that 3.50% margin and how quickly we see loan yields reprice as well?
Yeah, sure. Sure, Catherine. You know, we have a slide, I guess it's slide 19, which talks about our loan repricing. Basically what it shows there is that we have about 31% of our portfolio that floats on a kind of a daily basis. So, you know, if you kind of run that through the model, you know, we started this whole cycle, I think our loan yield in the first quarter was around 3.69%, something like that. If you kind of just look at, you know, a 100 basis point increase in the Fed funds rate would move your loan yield up 31 basis points over, you know, a period of time.
I think, you know, just thinking about the loan yield beta being sort of tied to that in sort of the, you know, I'd call it the three-month range, three to six-month range. After that, you'll of course have higher loan yields as you reprice some of the older fixed rate stuff on your books. I think the best way to think about it is the, you know, the sort of the floating rate loan book, which is somewhere between 0 to three months, is 31% of our loan book, and that would be, you know, a pretty direct, Fed rate hike, driver.
After that, as you think about, you know, middle to late 2023, 2024, it would be more just sort of the repricing of the five-year fixed from, you know, wherever it was a couple of years ago to something in the fives if rates hold. Does that help?
It does. Yep, it does. It helps on the new production you saw this quarter. I feel like I've heard mixed reviews on where new pricing has gone. Maybe not as big of a move on the fixed rate side, but just any kind of color you can give on how new pricing is going?
Yeah. I'll just tell you that, you know, there was such a. I think it's probably the same answer you've gotten from others. There was such a dramatic movement in the rate cycle this past quarter that, you know, for your customers, you lock in. You know, when you talk to your customers, you lock them in for somewhere between 30 and 60 days, depending on the type of product. you know, you're locking rates in, production in June that you did in April, and the things you did in April back in February. What we saw was about a 50 basis point move or so, from the lows to the highs in the quarter, and you would kind of expect that.
I think our average loan yield for the quarter, new production yield was in the, I don't know, low 3.90%, but it started off in 3.60%. It's, you know, probably hard to judge honestly at this stage just because of the movement rates.
Yeah, that makes sense. Okay, great. On service charges, I saw a really nice increase this quarter. I don't know some of that's ACBI or just kind of a rebound off of the COVID lows. Any thoughts on the trajectory of service charges for the rest of the year and into next?
It'd be a little bit of what you just said, Catherine. We like to see some seasonality in the second quarter, particularly the month of June. We saw a lot more, you know, just consumer activity in that month. You know, looking ahead, that's sort of historical seasonality pattern we've had there. You know, it might tamp down a little bit from here, but it's hard to say with a lot of precision.
Yeah. I think, Catherine, just the other thing to add is, you know, we didn't talk about in our last quarter about the, you know, changes we were making to our overdraft plan, and that'll kick in in the third quarter, and so that'll have an effect kind of going forward. One of the things that, you know, as we think about fee income, I know we've guided between as kind of a percentage of assets, non-interest income to average assets. I think we last quarter, because of the acquisition of ACBI, we guided between 70 basis points and 80 basis points kind of the go forward run rate. This quarter, this past quarter, we were 77 basis points. Kind of right in the middle of the range, maybe a little higher than the middle of the range.
You know, as we think about the next couple of quarters and just particularly with our interest rate sensitivity businesses like correspondent mortgage, we think that's probably gonna be on the lower end of the range between that 70 and 80 basis points for the next, you know, quarter or two and then kind of rebound to the middle of the range, you know, in 2023. You know, with this volatility of the markets, you know, we just sort of have to settle down before you kind of move higher. Anyway, hopefully, all that helps you model with your non-interest income.
Yes, definitely does. Great. Thank you and great quarter.
Thank you, Catherine.
As a final reminder, if you do want to ask a question, it's star followed by the number one on your telephone keypad. We have a question from Christopher Marinac of Janney Montgomery Scott. Your line is open.
Thanks very much. Thank you for all the information this morning, as well. I want to drill down on the deposit growth and particularly the deposit accounts that you highlighted in the slides. Are you incenting any differently now? Sort of how do you think about trying to push for more deposit growth just as you manage the balance sheet, given Steve's comments earlier in the call?
Hey, I mean, Chris, this is Steve. I mean, you know, I think on the slide 18, we talk about our deposit portfolio, that 60% of it is in checking accounts, which you know either in DDA or very low interest-bearing deposit accounts. We sort of break out those checking accounts. It's 37% commercial, 34% small business, and 29% retail. It's a pretty diversified portfolio. You know, the way we've run our model, depending on which area of the company you are, there are markets that are more small business and retail, kind of in the suburban markets. Then there are more markets like Atlanta, Tampa, Orlando, Charlotte, and Miami, which would be more commercial markets.
I think what we have seen, particularly post MOE, is with the advent of the new treasury management platform as well as, you know, ACBI coming on, the commercial cash management portfolio continues to grow from a deposit perspective. The small business, you know, really has been pretty resilient. You know, if we're into a point where there might be a potential recession, you could see some of those deposit balances coming down a little bit and clearly on the retail side if some of that cash comes down. It's really kind of hard to say. We haven't incented any differently than what we have done in the past. You know, core deposits have always been a huge incentive metrics at our banks.
You know, even when rates were zero, we still implemented that because that's where we think the value of the franchise is.
Great, Steve. Just a related question. On some of the state government and municipal relationships, is there any behavior changes there of note?
Nothing to note. You know, typically what happens in those balances is they typically ramp up in the fourth quarter, and then they're here quite a bit for the first quarter, and then they start draining down second and third quarter. Typically, from a seasonal pattern, they typically move up in the fourth quarter, they sort of, you know, start draining in the first, second, and third, and then back up in the fourth. There's really no trend to report. You know, where we do a lot of work in that business is in the small municipality range because we're in a lot of small towns, school districts, so on and so forth. So far, we haven't seen a huge move in that.
You know, clearly, as rates continue to move up, I would expect those to be reasonably sensitive. I believe, I don't know that we disclosed this, but we may have disclosed it in the past, but I think our portfolio is in the you know, 3%-5% range of deposits. I don't remember exactly the number, but it's you know, somewhere around $2 billion, give or take.
Sounds good. That's what I would call as well. Thank you all very much for all the disclosure this morning.
Thank you, Chris.
We have no further questions in this, so I'll hand the call back over for any final remarks.
All right. Thank you, Lydia. This is John. I'd be remiss if I didn't take a moment and just congratulate our Atlantic Capital Bank team. They had a tremendous conversion over the last week, and a lot of our support team worked really hard, and they did a great job, and I just am so proud of them. Anyway, thank you guys for calling in today. If there's any questions in your models, don't hesitate to reach out to Steve or to Will, and I hope you have a great weekend.
This concludes today's call. Thank you for joining. You may now disconnect your lines.