SouthState Corp

NYSE:SSB

Earnings Call Transcript 2022-Q2

[Operator]

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 to today. [Operator Instructions]. It's my pleasure to now hand you over to our host, Will Matthews. Please go ahead when you're ready.

[William Matthews, Senior EVP & CFO]

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.

[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 3 focus areas: soundness, profitability and growth. I'll now turn the call over to John for more details on the quarter.

[John Corbett, CEO & Director]

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, and the positive momentum is 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. And on a year-over-year basis, PPNR per share is up 46%. This steep earnings ramp is a function of our liquid balance sheet, rising rates, a low deposit beta, expense focus and strong organic loan growth. And 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 bps, and we were able to hold our deposit balances flat. So 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 4 quarters.

The CECL forecast during the pandemic were too putative 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%. And with our net interest margin on the rise, our adjusted efficiency ratio improved to 54%, down from 60% in the prior quarter, so a nice 6-point drop.

Revenue increased 15.8%. And that's in comparison to expenses only up 3.4%. So 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.

And 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. So 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. But 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. So 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. So 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%. And 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.

[William Matthews, Senior EVP & CFO]

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 deposit constant and redeployed $1.450 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 noninterest 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 1 month in the prior quarter. So we have to keep that in mind as we make some income statement comparisons with the sequential quarter. Slide 12 shows our 5-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 4 quarters' loan growth to 12.3%. We held deposits and the securities portfolio essentially flat, except for AOCI moves, and our cash and Fed funds sold balances were down $1.3 billion.

Noninterest 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. So 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 and a year with industries 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 margins and our portfolio versus secondary breakout. You'll see that when rates are low and gain on sale margins are high, we intended to sell most of our production. Conversely, as rates move up and gain-on-sale margins declined, 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, but Atlantic Capital's premerger run rate was approximately $5 million per month or an additional $10 million for 3 months versus 1 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 1, 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 the CET1 ending at 11.1%.

With approximately 70% of our investment portfolio of 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.

[John Corbett, CEO & Director]

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. And as always, they rose to the challenge. Also, we just passed the second anniversary of the closing of the MOE. Our 5 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.

[Operator]

[Operator Instructions]. Our first question comes from Stephen Scouten of Piper Sandler.

[Stephen Scouten, Piper Sandler & Co.]

So I just wanted to start maybe on the share repurchase plans. I wasn't sure 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%. So would you think you would kind of hold back on the share repurchase in the near term given the ASDI moves? Or what's the logic there?

[William Matthews, Senior EVP & CFO]

Yes, Steve. Our philosophy has always been our first priority for capital generation and investment of capital is in growth. And given the strong growth we had in the quarter, 22% loan growth, 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, depending upon how growth shakes out from here. But at present time, I would expect us to continue to redeploy capital into the balance sheet as opposed to repurchasing shares.

[Stephen Scouten, Piper Sandler & Co.]

Okay. Good. And then, I guess, I think in one of the slides that 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. So I just wanted to kind of understand if all of those investments have already been made or if there is any large-scale incremental investments that need to be made to reach these targets. How we should think about the future tech spent?

[John Corbett, CEO & Director]

Stephen, it's John. 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 in the new platforms a couple of years ago during the merger of equals. So we've got nCino in place for commercial loan processing, a brand-new mobile app through Q2, Salesforce.

So really, we believe we've made the significant investments on the software platforms that needed to be made. And now we got to mature into those platforms. Moving forward, our technology investments will largely be around ways to become more efficient through robotics in the operations area of the company as well as data analytics. So it won't be near the lift going forward in the next year or two as it has been in the last two years.

[Stephen Scouten, Piper Sandler & Co.]

Okay. Great. That's really helpful. And 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 you 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? And 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?

[Stephen Young, Senior EVP & Chief Strategy Officer]

Stephen, it's Steve. That Capital Markets group has been part of our correspondent group for the last decade or so. And we continue to recruit talent in that area. Right now, it's primarily focused in 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. But that's an area as we marry the $46 billion balance sheet, along with the distribution we have into banks, money managers and others. That's clearly an opportunity for growth, but that's going to take time and continued build out. But we're real happy about that team and what the base we have today in that team, but that continues to be an opportunity to grow out in the future.

[Stephen Scouten, Piper Sandler & Co.]

Congrats on a phenomenal quarter.

[John Corbett, CEO & Director]

Thank you, Steve.

[Operator]

Our next question in the queue today comes from Kevin Fitzsimmons of D.A. Davidson.

[Kevin Fitzsimmons, D.A. Davidson & Co.]

Okay. Good morning, everyone. 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? So 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. 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.

So I'm just curious if you can give some of those dynamics in terms of -- 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. So just digging into a few of those items.

[Stephen Young, Senior EVP & Chief Strategy Officer]

Kevin, this is Steve. That's a mouthful, but I'll do the best I can. Just a couple of thoughts, kind of big picture, and then maybe I can drill down further in your question. 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 #35, Page 35, which talks about our cash as a percentage of assets, and it compares us versus peers and our securities peers. And what it shows is 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 -- as we funded loan growth, significant loan growth kept the balance sheet flat, 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 in normal times run that in the 2% to 3% range of assets. That's generally how we would think about it. So as we've communicated before in prior calls, but kind of what we're looking for over the next, call it, 18 months to the end of '23 is just try to keep a flat balance sheet, flat deposits and flat interest-earning assets. And the way we think we can maneuver that is through the cash we have on the balance sheet. And that will take our loan-to-deposit ratio from 71% up to 80% or so by the end of 2023. So that's how we're thinking about balance sheet management.

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 of years. As we think about sort of the assumptions for margin, 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 is telling us, and we'll see if we get there.

Another fundamental assumption around our margin is we have a page in there that talks about a historical betas and our historical deposit betas on Page 20 was around 24% for the cumulative beta. We're assuming that will be the same this cycle as it was last cycle.

So if you think about that forecast deposit cost would get in the 80 to 90 basis points in the middle of next year, assuming that we get to a 3.5% Fed funds rate. So anyway, based on all those assumptions, we would expect there to -- with a flat balance sheet, we would expect margin expansion from here. And that maybe sometime in early to mid-2023, we get to a 3.5% margin, give or take.

As we said last quarter, each 25 basis point hike to us is worth about 6 basis points NIM. So depending on that the Fed doesn't get to 3.5%, then you can subtract 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 18 to 24 months and as well as the interest rate environment. So I'm hopeful that's helpful.

[Kevin Fitzsimmons, D.A. Davidson & Co.]

Yes, that's very helpful. And 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?

[Stephen Young, Senior EVP & Chief Strategy Officer]

Yes. Our expectation with the loan growth will just keep the securities but flat. I think our securities assets on the page is around 19%. So in that 18% to 20% range would probably be right, unless something changes in the rate environment materially, that would be our expectation.

[Kevin Fitzsimmons, D.A. Davidson & Co.]

Okay. And one last housekeeping on the purchase accounting was obviously higher this quarter. Just Will, wondering what digit run rate to think of that going forward?

[Stephen Young, Senior EVP & Chief Strategy Officer]

Yes, Kevin, this is Steve. It was 12 basis points to margin this quarter. That's high. There were some payoffs and all that. Those things are always hard to predict, but our expectation is that it would be 7 to 9 basis points kind of in the next -- over the next 18 months. That's probably what it would add to margin. This quarter it was a little high at 12 basis points. So that's somewhere between $7 million and $9 million a quarter, something like that.

[Operator]

Our next question today comes from Jennifer Demba of Raymond James.

[William Matthews, Senior EVP & CFO]

Jennifer, didn't know you changed firms.

[Jennifer Demba, Truist Securities]

No, Truist Securities. A 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.

[John Corbett, CEO & Director]

Yes. Jennifer, it's John. The pipeline is -- 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. But what we are seeing is that we are losing some CRE deals to what we believe is overly aggressive competition on structure and rate.

And then secondly, with the rise in rates, we are seeing selectively some borrowers walk away from deals with the rate environment increasing. What's going on right now is that the cap rates really have not adjusted yet to what the yield curve has done. And 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. So we do see things slowing down. I mean, we are seeing it slow down as well on the residential side. The amount of house activity is declined naturally with the interest rate environment.

So 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. So if we wind up in the back half of the year in the mid-single digits, I get roughly to 10% of loan growth for 2022.

[Operator]

Our next question today comes from Michael Rose of Raymond James.

[Michael Rose, Raymond James & Associates]

Most of my questions have been asked and answered. But just looking at the beta slide, which I appreciate again, and then looking at Slide 19 with the rate scenarios and the plan to 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 what the drivers of that rate -- look, I know cash is down, but cash levels are still fairly healthy. You're going to keep the securities book deposit outflow like I mentioned. It just seems to me like some of those assumptions could end up being a little bit conservative.

[Stephen Young, Senior EVP & Chief Strategy Officer]

Yes, Michael, it's Steve, and maybe Will could add to it. I guess from our history, all we can model is history. And as we think about our balance sheet, what we're hearing from our bankers and what we're telling in the market relative to deposit costs, this is sort of our history of what we were going to model. What's different this time is 2 things. One is the loan-to-deposit ratios in the industry are much lower to begin with.

But we're on a quantitative tightening cycle, too, that we're probably as larger than we've ever seen. So those kind of, to me, offset each other. And then obviously, we have a lot of flexibility with our cash sitting on the balance sheet at 9% or $4 billion. So we're going to try to manage excess deposits.

As you know, we want to grow relationships and we will. But sometimes, 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. There might be some better opportunities to earn better yields in those cases. We still control the operating accounts and the funds but they may not be on our balance sheet. So those are the things we're going to have to manage going forward. But the history is the best thing that we can look forward to in the future. But Will...

[William Matthews, Senior EVP & CFO]

Yes. And just one other difference. I guess, Michael, relative to prior cycles is just the speed and the size of the moves this time around versus what we've had in the past. So 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.

[Michael Rose, Raymond James & Associates]

Okay. That's helpful. And then maybe just, again, going back to the loan growth and the outlook. I mean as I sit here and look at the slide, I mean, the production has been really, really strong. The paydowns have slowed and that's all been good. I sense a little tone of cautiousness in kind of the prepared comments and some of the answers to the questions.

But 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, but there's -- I think what I've heard from others is there's an expectation that those will rebuild as we move into year-end. So just trying to just get a sense if you guys are perhaps being a little bit more conservative, especially with the boost that you get from ACBI.

[John Corbett, CEO & Director]

Michael, it's John. So naturally, we are adjusting our underwriting criteria based upon the increase in the yield curve. So our -- the interest rate that we use for underwriting, we've shocked it up a fair amount. So when you size credits, we are being maybe more conservative than we were historically. But 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 then 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. And we feel good about our book of business there. That's one we're watching. 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. So that kind of gives you a flavor of what we're seeing in the CRE market.

Housing will slow down with higher interest rates. There's a lot of construction activity that we're doing because inventories are so low, but in total, there will be a decline there. So that's our best judgment. When the Fed increases interest rates, it has an effect. And I think a lot of our borrowers are watching and want to see where this economy takes them and being a little more cautious as well as us being a little more cautious.

[Stephen Young, Senior EVP & Chief Strategy Officer]

Yes, I think Michael, I'd just add, just on the residential side. I mean, you saw mortgage rates get to 6.25 or so percent. Now they're down in the 5 3/8 range. So this market has been really hard to catch if you're a borrower. So it needs to settle in a little bit in order for growth to resume at those levels, I think we'll just have to see.

[Michael Rose, Raymond James & Associates]

Okay. I appreciate the color. And maybe just one final quick question for me. I noticed that the dollar amount of nonaccrual loans ticked up. Anything to read into that?

[William Matthews, Senior EVP & CFO]

No, Michael. This is Will. I don't -- there's really nothing to read into that. That doesn't signify any trend like that. I think it may have been 1 loan.

[John Corbett, CEO & Director]

I think the total dollars of NPAs decline, right?

[William Matthews, Senior EVP & CFO]

Yes. And as John said earlier, our early warning things, classified, things like that, all have good trend lines as well. So right now, we feel like all those indicators look very good.

[Operator]

[Operator Instructions]. Our next question in the queue comes from David Bishop of Hovde Group.

[David Bishop, Hovde Group]

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. But maybe what are some of the puts and takes that are causing that inflationary pressure. Is it going to purely merit raises compensation or is going to be spread out elsewhere among the expense line items?

[William Matthews, Senior EVP & CFO]

Yes, Dave, it's Will. It's prominently in the compensation side. So we have our merit increases kick in July 1. So that will be fully evident at the beginning of the third quarter. We also raised our teller frontline pay in the middle of the second quarter. So I have a full quarter of that, that kicks in. And I'm sure you've heard a lot of other calls too, this is an environment with tight labor supply and a lot of inflationary pressure and to feel all that. On the positive side, we have some additional Atlantic Capital cost saves to realize that it will be more evident in the fourth quarter. The branch closing cost saves kick in there as well. So all those puts and takes kind of led to that guidance of the low 230s and maybe get in the high 220s in the fourth quarter.

[David Bishop, Hovde Group]

Got it. Appreciate that guidance. And then you noted the increase in the loan loss provision this quarter, there was -- did I hear right there was some change in some of the CECL assumption in modeling there? Just curious what stayed intact?

[William Matthews, Senior EVP & CFO]

Maybe I'll back up a second, talk about our CECL process. I think we have a very healthy process. It's committee-based process. And what the committee does is in addition to receiving the Moody's forecast and in addition to just reading the numbers they -- actually reading the forecast themselves and what the verbiage is around that. And comparing that to what we read in other publications in here and out in the market and whatnot. And based upon 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. And that varies quarter by quarter.

We have, for the last few quarters, felt like we needed to be more conservative, more pessimistic, if you will, than what Moody's was saying. So 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, and we also have overlaid some qualitative factor adjustments as well based upon all that.

As you can see from a percentage standpoint, we essentially left our reserve flat with last quarter. And so with $1.5 billion in loan growth and keeping it sort of flat that would have been -- generated that $19 million provision number. But that's really kind of how the process works, and that was really our thinking. Just everything we read seem to be people talking more and more about the likelihood of a recession.

[David Bishop, Hovde Group]

And as we sort of model forward with the migration of loan growth from a motive or target, are you targeting a dollar amount of reserves or potential or ratio? I'm just curious how we should think about the overall allowance -- percent of loans?

[William Matthews, Senior EVP & CFO]

Yes, I wish I could tell you, it'd be easier for all of us. We're not -- in either case, dollar or form, we're really working with the loss driver forecasts that come out and sort of -- if unemployment and housing price index and CRE index and things like that, the GDP for our region, if those things change dramatically for the better or for the worse in terms of their forecasts, that's going to drive statistically a higher or lower reserve requirement.

And then based on what we see in those and what we see and other things, we may weigh the baseline or the more pessimistic scenario more or less. But it's really too hard to give you -- I know it makes it hard to model, but it's hard for us to model internally too until we know what those lost drivers, how they're going to change.

[Operator]

The next question in the queue comes from Catherine Mealor of KBW.

[Catherine Mealor, KBW]

I wanted to go back to the margin and talk about loan yields for a little bit. I mean, I think as we think about your margin trajectory, no one is going to argue about deposit betas or a little less cycle and will be low again this cycle. But I think the loan yield piece is harder to model because of all the acquisitions and accretable yield and all that, that's in that historical number.

So as we think about loan yields, moving forward, Steve, you mentioned the kind of 350 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 350 margin? And how quickly we see loan yields reprice as well?

[Stephen Young, Senior EVP & Chief Strategy Officer]

Yes. Sure, Catherine. We have a slide, I guess, Slide 19, which talks about our loan repricing. And basically, what it shows there is that we have about 31% of our portfolio that floats on kind of a daily basis. So if you kind of run that through the model, we started this whole cycle. I think our loan yields in the first quarter was around 369, something like that.

And so if you kind of just look at a 100 basis point increase in the Fed funds rate would move your loan yield up 31 basis points over a period of time. So I think just thinking about the loan yield beta being sort of tied to that in sort of the, I'd call it, the 3-month range, 3- to 6-month range. And then after that, you'll, of course, have higher loan yields as you reprice some of the older fixed rate stuff on your books. So I think the best way to think about it is the sort of the floating rate loan book, which is somewhere between 0 and 3 months is 31% of our loan book and that would be a pretty direct Fed rate hike driver. And then after that, as you think about middle to late 2023, 2024, it would be more just sort of the repricing of the 5-year fixed from wherever it was a couple of years ago to something in the 5 if rates hold. Does that help?

[Catherine Mealor, KBW]

It does. Yes, it does. And on the new production you saw this quarter, I've heard of 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?

[Stephen Young, Senior EVP & Chief Strategy Officer]

Yes. I'll just tell you that there was such a direct -- 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 for your customers, you lock in -- when you talk to your customers, you lock them in for somewhere between 30 and 60 days, depending on the type of the product. And so if your lock in rates in production in June that you did in April and the things you did in April back in February. So what we saw was we saw about a 50 basis point move or so from the lows to the highs in the quarter, and you would kind of expect that.

So I think our average loan yield for this quarter -- new production yield was kind of in the low 390s, but it started off in 360. So it's probably hard to judge, honestly at this stage just because of the movement in rates.

[Catherine Mealor, KBW]

Yes, that makes sense. Okay. Great. And then on service charges, saw really nice increase this quarter. And I don't know some of that's ACBI or just kind of a rebound off of the COVID loads. But any thoughts on the trajectory of service charges for the rest of the year and into next?

[John Corbett, CEO & Director]

It'd be a little bit of what you just said, Catherine, we see some seasonality in the second quarter picking up in the month of June, and we saw a lot more just consumer activity in that month. Looking ahead, that sort of historical seasonality pattern we've had there. It might tap down a little bit from here, but it's hard to say with a lot of precision.

[Stephen Young, Senior EVP & Chief Strategy Officer]

Yes. I think, Catherine, just the other thing to add is we didn't talk about in our last quarter about the changes we are making in our overdraft plan, and that will kick in, in the third quarter. And so that will have an effect kind of going forward.

One of the things that as we think about fee income, I know we've guided between kind of a percentage of assets, noninterest income to average assets. I think last quarter because of the acquisition of ACBI, we got 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.

As we think about the next couple of quarters and just -- particularly with our interest rate sensitivity businesses like correspondent and mortgage, we think that's probably going to be on the lower end of the range between that 70 and 80 basis points for the next quarter or 2 and then kind of rebound in the middle of the range in 2023. But with this volatility of the markets, we just sort of have to settle down before you kind of move higher. So anyway, hopefully, all that helps you model with your noninterest income.

[Operator]

[Operator Instructions]. We have a question from Christopher Marinac of Janney Montgomery Scott.

[Christopher Marinac, Janney Montgomery Scott]

And 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? And 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.

[Stephen Young, Senior EVP & Chief Strategy Officer]

Yes. I mean, Chris, this is Steve. I mean I think on the Slide 18, we talk about our deposit portfolio that 60% of it is in checking accounts, which either in DDA or very low interest-bearing deposit accounts. And then we sort of break out those checking accounts. It's 37% commercial, 34% small business and 29% retail. So it's a pretty diversified portfolio. And 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. And 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 ACBI coming on, the commercial cash management portfolio continues to grow from a deposit perspective. And the small business really has been pretty resilient. But if we're into a point where there might be a potential recession, you could see some of those deposits balances coming down a little bit. And clearly, on the retail side, if some of that cash comes down. So it's really kind of hard to say. We haven't incented any differently than what we have done in the past. But core deposits have always been a huge incentive metrics at our banks. And even when rates were zero, we still implemented that because that's where we think the value of the franchise is.

[Christopher Marinac, Janney Montgomery Scott]

Great. Steve, just a related question on some of the state government municipal relationships? Is there any behavior changes there of note?

[Stephen Young, Senior EVP & Chief Strategy Officer]

Nothing to note. Typically, what happens in those balances as 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 the second and third quarter. So typically, from a seasonal pattern, they typically move up in the fourth -- fourth quarter they sort of start draining in the first, second and third and then back up in the fourth.

So there's really no trend to report. Where we do a lot of work in that business is we do a lot of it in the small municipality range because we're in a lot of small towns, school districts, so on and so forth. So, so far, we haven't seen a huge move in that. But clearly, as rates continue to move up, I would expect those to be reasonably sensitive. And I believe -- I don't know that we disclose this, but we may have disclosed it in the past, but I think our portfolio is in the 3% to 5% range of deposits. So I don't remember exactly the number, but it's somewhere around $2 billion, give or take.

[Operator]

We have no further questions in the queue. So I'll hand the call back over for any final remarks.

[John Corbett, CEO & Director]

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, really hard, and they did a great job. And I just am so proud of them.

And 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.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your lines.