Q2 2022 SouthState Corp Earnings Call
Okay.
Hello, all and warm welcome to the South State Corporation Q2, 2022 earnings Conference call. My name is Lydia and there'll be you did 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 the South State 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 will then open it up for questions.
Yesterday evening, we issued a press release to announce earnings for the quarter.
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 South State. The results for the second quarter reflect the significant progress made by our team in many areas you will hear from John M 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 rigs.
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 south state and.
And the positive momentum is broad based we saw positive trends in everything from revenue growth.
<unk> control loan growth deposit betas and asset quality.
With a volatile swings of seasonal 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 P. P at our per share.
For the second quarter.
<unk> per share increased 30% from the prior quarter.
And on a year over year basis <unk> per share is up 46%.
This steep earnings ramp as a function of our liquid balance sheet rising rates are low deposit beta expense focus and strong organic loan growth.
And with more fed hikes on the way Theres 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 one basis point.
We ended the quarter with a total cost of deposits of six bips.
And we were able to hold our deposit balances flat.
So our deposit beta is less than 1% so far.
But well naturally pick up as we move through the cycle.
During the last rate cycle or end of cycle beta.
It 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 seasonal forecast during the pandemic, we're too punitive and the reserves weren't necessary.
This quarter, we reversed course, and we set aside at $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 six point drop.
Revenue increased 15, 8%.
Now that's in comparison to expenses only up three 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.
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 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 C&I portfolios.
We're not a refi shops, some mortgage production remained surprisingly steady in the second quarter at $1 $4 billion. Despite the rate increases.
But with listings at record lows theres more construction activity now.
And 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 is 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 sales 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 was slow in the back half of the year from this quarter's level of 22%.
And we now anticipate that loan growth in 2022, we'll 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 would say, we held deposit constant and redeployed 1 billion to $4 50 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 <unk>.
Noninterest income businesses performing close to expectations.
As I make my remarks, I'll remind everyone that we had Atlanta capital in the company for a full quarter versus only one 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 five quarter NIM history, the quarters net interest income of $314 million was a record with our NIM expanding by 35 basis points from Q1, reaching 312%.
This was a $53 million increase in net interest income or approximately $36 million. If you normalize for a full quarter of Atlanta capital in Q1.
Loan yields excluding PPP grew by 22 basis points in earning asset yields increased by 36 basis points and our cost of deposits rose by only one 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 145 billion in loan growth equated to a 22% annualized growth rate, which brings the last four quarters loan growth to 12, 3%.
We held deposits and the securities portfolio essentially flat.
Except for <unk>.
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 industry is down approximately 36%.
Housing supply constraints have continued to drive nice volume in our construction firm product.
As John noted slide 15 shows the relationship between rates gain on sale margins and our portfolio versus secondary breakout youll.
Youll 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 are ending consumer real estate portfolio is it.
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 NII was up $7 million from Q1, but Atlantic capital is 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 one our expense guidance will be consistent with what we said on last quarter's call quarterly NII in the low to <unk> potentially in the high <unk> in Q4.
On credit, we had $2 3 million in net charge offs or three basis points and only $1 million of these where net loan charge offs with the rest in deposit overdraft losses.
As noted on slide 24, our past dues and Npa's declined and we also saw a further decline in criticized and classified assets.
With respect to provision expense were cognizant of the increasing risk of a recession and we just took a more conservative approach in our system modeling this quarter again, increasing our waiting of the Moody's <unk> 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 300000 shares we repurchased in early April the.
The 22% annualized loan growth in those early April repurchases combined to cause a slight decline in our regulatory capital ratios, though they remained strong with a CET one ending at 11, 1%.
With approximately 70% of our investment portfolio classified as ASF the move in rates in the second quarter caused an additional decrease in OCI dropping our TCE ratio to six 8% and our <unk> 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 will 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 work 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 M O.
Our five priorities headed into the merger were.
To preserve the culture.
To invest in digital.
To protect the soundness of our balance sheet and.
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 P PNR 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 followed.
Followed by the number one on your telephone keypad now.
In your mind any stockholder bacci.
Please ensure your device you got me.
Our first question comes from Stephen Scouten of Piper Sandler. Your line is open. Please go ahead.
Thanks, Good morning.
So I just wanted to start maybe on the share repurchase plan.
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 300000.
The six 8% they would you think.
You would kind of hold back on the share repurchases in the near term given the <unk> moves or what's the logic there.
Yes, Stephen good morning.
Our philosophy has always been our first priority for capital generation and investment.
Capital is in growth and <unk>.
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 are 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.
Okay. Good.
And then 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 our digital adoption I think throughout the slide deck. So I just wanted to.
I understand it's all of those investments have already been made or if there any large scale incremental investments that they need to be made to reach these targets. How we should think about future tech spend.
Yes, Stephen it's John we're continuing to transition our expense base from the brick and mortar into technology.
There is 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 were consolidating this quarter, but we've made a lot of technology investments that are new platforms. A couple of years ago. During the merger vehicles. So we've got it in place.
Our commercial loan processing, a brand new mobile app through Q2.
<unk> force. So really we believe we've made the significant investments on the software platforms that needed to be made and now we've got a mature into those platforms 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. So it won't be near the lift going forward in the next year or two as it has been in the last few years.
Okay, Great. That's really helpful. And then I guess last thing for me is I'm, just curious kind of about capital market. You guys have noted that's a pretty big differentiator for you all at the size of your bank hopes 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 it.
Further and then I guess follow on 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, Steven.
Steve.
You know that the capital markets group has been part of our correspondent group for the last decade or so.
We continue to recruit talent in that area.
Right now, it's primarily focused in on our.
Our interest rate swaps.
Got some other capabilities that we're working on but probably not big enough to mention right now.
But that's.
That's an area as we 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 that team and what the base we have today in that.
Team, but.
Could be.
An opportunity to grow up in the future.
Okay, great. Thanks for the color, everyone and congrats on a phenomenal quarter.
Thank you Steve.
Our next question today comes from Kevin Fitzsimmons of D. A Davidson your line is open.
Hey, good morning, everyone.
Good 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 so.
Obviously, we've come off a period the last few years, where it has mainly been driven by the balance sheet, where the percentage margin has gone down where now that seems to be reversing or flipping in and the percentage margin has gone up and our average earning asset growth for most banks, we've seen has been.
Slower or even flat given pressure on deposits I'm just curious if you can.
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.
Average, earning assets I would think you you've already talked about the loan growth.
But how how.
How low can that cash go.
About securities. While you continue to use that to fund loan growth. So just digging into a few of those items. Thanks.
Hey, Kevin This is Steve that's a mouthful, but I'll do that again.
Yes.
Thoughts kind of Big picture, and then maybe I can drill down further than 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.
Slide number 35 page 35, which talks about.
Our cash as a percentage of of assets and the.
It compares us versus peers in their securities peers and what it shows is we came into this year with about 15% of our balance sheet and cash flow.
It gives us a lot of flexibility now where you know as we funded loan growth significant loan growth kept the balance sheet flat.
You've seen our cash assets there'll be at 9%. So it's a really good position to be $4 billion in cash.
We would normally in a normal times run that.
In the two to 2% to 3% range of assets.
How we would think about it so as we communicated before in prior calls, but you know kind of what we're looking for over the next call. It 18 months to the end of 'twenty. Three 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.
Through the through the cash we have on the balance sheet.
And you know that'll 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.
A couple of years.
You know as we think about sort of the assumptions for margin.
You know the fed has kind of guided us towards.
Three 5% fed funds rate peaked at the end of the year.
That's what the market's telling US you know, we'll see if we get there.
Another fundamental assumption around our margin as you know we have a page in there that talks about our historical data.
And our historical deposit betas on page 20 was around 24% for the cumulative beta.
Yes.
Assuming that it'll be the same this cycle as it was last cycle.
Yes, so if you think about that forecast the deposit cost.
Given the 80 to 90 basis points in the middle of next year, assuming that we get to a three 5% fed funds rate.
So anyway based on all of those assumptions, we would expect there to deal with a flat balance sheet. We would expect margin expansion from here and that may be sometime in early to mid 2023, we get to three 5% margin give or take.
You know as <unk>.
We said last quarter, each 25 basis point hike to us is worth about six basis points NIM. So depending on the preferred doesn't get the three 5% then you can subtract.
Six 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.
The interest rate environment, So I'm hopeful that's helpful.
Yeah, that's very helpful. Thank you for that detail.
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.
Yes, our expectation with the loan growth will just to keep the securities book flat I think our securities assets on that page is around 19%. So in that 18% to 20% range would probably be right yeah.
Changes in the rate environment materially that would be that would be our expectation.
Okay, Thanks, Steve and one last housekeeping on on the.
Purchase accounting.
Which was obviously higher this quarter just will wondering what a decent run rate to think of that going forward.
Okay.
Yeah, Kevin This is Steve.
It was 12 basis points of the margin this quarter that that pie. There was some pay offs and all those things are always hard to predict but our expectation is that it would be seven to nine basis points kind of in the next you know over the next 18 months.
That's probably what I would add to margin this quarter. It was a little high at 12 basis points.
You know somewhere between $7 million to $9 million a quarter something like that.
Got it okay. Thanks very much appreciate it.
Our next question today comes from Jennifer Dunbar of Raymond James Your line is open.
Shannon Burns.
No.
Security.
Good morning, a question on loan growth you said it would definitely brought a rate.
In the second half of the year I'm, just wondering what you're seeing in your pipeline isn't lower than it was a quarter ago or is this.
Based on more client selectivity and conservatism.
Curious as to what you're saying.
Yeah, 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 its 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.
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 so we do see things slowing down we are seeing it slow down as well.
On the on the residential side.
The amount of.
Health activity has declined naturally with the with the interest rate environment. So 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.
So if we wind up in the back half of the year in the mid single digits that gets us roughly 10% organic loan growth for 2022.
Great. Thanks, so much.
Our next question today comes from Michael <unk> of Raymond James. Please go ahead.
Hey, good morning, guys, I guess I could be from true I was wondering do you want me to.
Spencer.
Most of my questions have been have been asked and answered, but just looking at the the beta slide which I. Appreciate again and then looking at slide 19 with the.
Rates scenarios and the plan to let the loan to deposit ratio kind of grind higher up to up to 80% of 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 race in a city like I know cash is down but your 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.
Yeah, Michael it's Steve and maybe will can add to it I guess.
You know from our history you all we can model of history and as we think about our balance sheet, what we hear from our bankers and what were telling us in the market relative deposit cost.
This is sort of our history of what we were Gonna model you know whats 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 we're on a quantitative tightening cycle too that were probably larger than we've ever seen so those kind of offset each other and then you know 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.
Yeah, we want to grow our relationships and we will but sometimes our clients have excess deposits and we'll make judgments on windows.
Let them go into like our private client group and our wealth group you know there might be off a better opportunities to earn better yields in those cases, we still control the.
The operating accounts and the fun.
But they may not be on our balance sheet.
The things, we're gonna have to manage going forward, but the.
The history is the best thing that we can look forward to in the future, but well, yes, Matt just one other difference I guess, Michael relative to prior cycles. It just the speed.
And.
The size of the moves this time around.
What we've had in the past so all those factors make it difficult to model our thought would be 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 that's helpful. And then maybe just going back to the loan growth and the outlook.
As I sit here and I look at the slide I mean, the production has been really really strong of pay downs.
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.
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 arent as suppose they were but there is I think what I've heard from others is theres, an expectation that those will rebuild as we move into.
Into year end. So just just trying to just get a sense. If you guys are perhaps being a little bit more conservative, especially with the boost that you got with from <unk> from <unk>. Thanks.
Yeah, Michael this is John so.
Naturally we are adjusting our underwriting criteria based upon the increase in the in the yield curve. So are the interest rate that we used 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 can kind of just look at the different asset classes.
As far as activity, we're seeing good activity in multifamily.
Decent activity in self storage.
Industrial.
Has slowed down and this is 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 that 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 theres some activity with certain select franchises dollar general public's tractor supply and Starbucks still expanding.
So that kind of gives you a flavor of what we're seeing in the CRE market housing, we'll 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 or watching and wanted to see where this economy takes them in.
And being a little more cautious as well as us being a little more kind of a cautious yes, I think Michael I'd just add.
Just on the residential side I mean, you saw mortgage rates.
The six in a quarter or so percent.
Now theyre down in the five and three eights range. So you know this market has been really hard to catch if you are a borrower so it needs to settle in a little bit in order for.
Growth to resume at those levels I think.
And we'll just have to see.
Okay I appreciate the color and maybe just one final quick question for me I noticed that the dollar amount of non accrual loans ticked up.
Anything to read into that.
No Michael it's will I don't know.
Really nothing to read into that there is no that doesn't signify any.
Hum.
Trends like that I think it may have been one loan.
And I think the total dollars of Npa's declined Ryan Yeah.
Yeah.
John said earlier, our early warning things you know classified things like that all have good trend lines as well so right now we feel 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 and stuff on it by the number one on your telephone keypad.
Question in the queue comes from David Bishop.
Great.
Please go ahead.
Yes, good morning, gentlemen, thanks for taking my questions.
Yes.
Hey, good morning.
I think in the preamble you noted that operating expenses.
Expect some inflationary pressure here in the third quarter up to the.
<unk>, maybe coming back to the high Twenty's, just curious and I appreciate the slide on slide 29 in terms of the <unk>.
Planned branch consolidation, but maybe what are some of the puts and takes that are causing that inflationary pressures are going to purely merit raises.
Compensation or is going to be spread out elsewhere.
The expense items.
Yeah, Dave.
It's predominantly in the compensation side. So we have our merit increases kick in July one so that'll be fully evident beginning of the third quarter. We also raised our.
Our tailor our frontline pay in the middle of the second quarter. So all of a full quarter of that that kicks in.
And I'm sure you've heard a lot of other calls too where you know this is an environment with tight labor supply and a lot of inflationary pressure.
And so we feel all of that on the positive side we.
We we have some additional Atlantic capital cost saves to realize there will be more evident in the fourth quarter.
The branch closing cost saves kick in there as well so all of those puts and takes kind of led to that guidance of the low to <unk> and maybe get into high <unk> in the fourth quarter.
Got it appreciate that guidance and then.
The increase in the loan loss provision this quarter there was.
Did I hear right. There was some change in some of the seasonal assumption and modeling there just curious what.
Yeah, maybe I'll back up a second talk about our seasonal process I think we have a very healthy process. It's.
<unk> based process and what the committee does.
Yes in addition to receiving the Moody's.
Forecast in.
And in addition to just reading the numbers they put out actually reading the forecast themselves and what the verbiage is around that and compare that to what we read and other publications in here.
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 with 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.
We are saying so we have steadily increased the weighting of their F.
<unk>, which is their recessionary scenarios, it's not a no.
Great financial crisis type scenario, but in 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 of that as you can see from a percentage standpoint, essentially left our reserve flat with last quarter, and so with it being tied to loan growth.
And in keeping those are flat that ended up being a generally that $19 million provision number, but that's really 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.
And as we sort of model forward with the moderation in loan growth.
From a Ah Ah moment.
That drove our targeted are you targeting a dollar amount of reserves a potential or a ratio and I'm. Just curious how we should think about the overall down yeah or set of loans.
Yeah, I wish I could tell you it'd be easier for all of us.
No we're not.
In either case dollar or format, we're really working with the Los driver forecast.
They come out and sort of if you know if unemployment and housing price index, 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 we 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 more or less.
No totally got it thank you for the color.
Thank you.
Okay.
The next question comes from Catherine Mealor with <unk>.
Please go ahead.
Thanks, Good morning, everyone.
Good morning.
I wanted to go back to the margin and talk about when you throw a bit of yes, I think as we think about your margins should actually be no one's going to argue that deposit betas.
Last cycle, there will be a.
Well again, the cycle that I think the loan yield piece, that's harder to model because it's all the acquisitions in accretable yield and all of that and that historical numbers.
Think about loan yield.
Going forward.
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.
It gets back to a certain level of as we kind of head towards that 350 margin and how quickly we see loan yields repriced as well.
Yeah sure sure Catharine.
You know we have a slide I guess, it's slide 19, which talks about our loan repricing and basically what it says there is that we have about.
31% of our portfolio that floats on a kind of a daily basis.
So.
If you 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.
And so if you kind of just look at.
Basis points increase in the fed funds rate would would move your loan yield up 31 basis points over over a period of time, So I think yeah.
Just thinking about the loan yield beta being sort of tied to that and sort of the.
I call it the.
The three month range three to three to six 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 zero and three.
Is 31% of our loan book and that would be pretty direct.
Fed rate hike.
Driver and then after that.
Think about you know.
Middle of the late 2023 2024, if it would be more just sort of the repricing of the five year fixed from wherever it was couple of years ago to something in the $5 if rates hold.
That helps.
It does yes. It does it happen on the new production you saw this quarter, we saw that heard mixed reviews on where new pricing.
<unk> not as big of a move on the fixed rate side, but just any any kind of color you can give on her new pricing is going.
Yeah I'll.
I'll just tell you that there was such a direct I think probably the same answer you've gotten from others. There was such a dramatic movement in.
In the rate cycle. This past quarter that you know for your customers you lock in you know when you when you talk to your customers you lock them in for somewhere between 30, and 60 days, depending on the type of product and so you know youre locked in rate than the production.
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 quarter, new production yield within the.
I don't know low three <unk>, but it started off in 360, so it's probably hard to judge honestly at this stage just because of the movement in rates.
Yeah that makes sense.
Okay, Great and then.
Service charges and saw really nice.
Nice increase this quarter and I'm, assuming that's a tbi or or just kind of a rebound off of that Covid love it but any any thoughts on the trajectory of service charges for the rest of the earnings.
It would be a little a little bit on what you just said Kathryn and we'd like to see some seasonality in the second quarter, particularly the month of June and we saw a lot more consumer activity in that month.
Looking ahead.
<unk> sort of historical seasonality pattern, we've had there.
Yeah, Mike.
Tamped down a little bit from here, but it's hard to say with a lot of precision.
And I think Katherine just the other thing to add is we didn't talk about in our last quarter about the <unk>.
<unk>, we are making to our overdraft plan then that'll kick in in the third quarter and so that will have an effect kind of going forward.
One of the things that.
You know as we think about fee income I know we guided between.
As a percentage of assets and understand kind of advertised to us I think.
Last quarter because of the acquisition of <unk>, we got it between 70 <unk>.
This points and 80 basis points.
Kind of the go forward run rate this quarter. This past quarter, we were 77 basis points, so 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.
Particularly with our.
Interest rate sensitivity or sensitivity businesses like corresponded mortgage we think that's probably going to be on the lower end of the range between 70, and 80 basis points to the next.
You know a quarter or two and then kind of rebound in the middle of the range in 2023, but what's.
This volatility of the market.
Sort of have to settle down before you can kind of move higher so anyway, hopefully all of that helps you model with your non interest income.
Yes, definitely thats, great. Thank you and great quarter.
Thank you Catherine.
As a final reminder, if you do want to ask a question followed by the number one on your telephone keypad.
Have a question from Christopher <unk> of Janney Montgomery Scott.
Your line is open.
Thanks very much. Thank you for all the information this morning, as well and I wanted to drill down on the deposit growth and particularly the deposit accounts that you highlighted in the slides are.
Are you sensing 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 out earlier in the call.
Okay.
Chris This is Steve I mean.
I think on the slide 18, we talk about our deposit portfolio that 60% of it isn't.
Is in checking accounts, which you know either in DDA or very low interest bearing deposit accounts.
We sort of break out the checking account, it's 37% commercial 34% small business and 29% retail so it's a pretty diversified portfolio and the way we 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 that in Miami, which would be more commercial markets I think what we have seen particularly post the MLR.
Is with the advent of the new Treasury management platform as well as you know he used to be I coming on the commercial cash management portfolio continues to grow from a deposit perspective.
In the small business really has been pretty resilient, but 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 of some of that cash comes down. So it's really kind of hard hard to say, we havent incentive any any differently than what we have done in the past.
Core deposits.
I have always been a huge incentive metrics at our banks and you know even when rates were zero, we still we still implemented that because lift where we think the value of the franchises.
Great, Steve and just a related question on some of the state government.
Support relationships are there any behavior changes there of note.
Nothing nothing to note you know typically what happens.
And 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 in second and third quarter. So typically from a seasonal pattern. They typically move up in the fourth.
Fourth quarter, they sort of start drain in the first second third and then back up in the fourth.
So theres really no trend to report.
Where we do a lot of work in that business as we do a lot of in the small municipality range because we're in a lot of small town school districts. So on and so forth. So so far we haven't seen a huge move in that but 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've disclosed this but and we may have disclosed in the past, but I think our.
Portfolios in the.
3% to 5% range of deposits I don't remember exactly the number but its.
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.
Thank you Chris.
You have no further questions. So I'll hand, the call back over for any final remarks.
Alright. Thank you Lydia it's Jon I'd be remiss, if I didn't take a moment and just congratulate our Atlantic capital Bank team.
Had a tremendous conversion over the last week and a lot of our support team work really really hard and they did a great job and I just I'm so proud of them in.
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.
Okay.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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