Earnings Call Transcript
SouthState Bank Corp (SSB)
Earnings Call Transcript - SSB Q3 2022
Operator, Operator
Hello, and welcome to today’s SouthState Corporation Third Quarter 2022 Earnings Conference Call. My name is Bailey, and I'll be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Will Matthews, CFO. Sir, please go ahead when you're ready.
William Matthews, CFO
Good morning, and welcome to SouthState's third 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 in 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. Thank you for the opportunity to kick off the call today. I have just a couple of comments before I turn the call over to John. I want to thank our shareholders for your patience over the last two years as we have moved through significant changes at SouthState. The timing to make major changes has turned out to be very good as we have enhanced our size, our scale and great businesses, our efficiency, and rebuilt our technology platform. As the economy now approaches a more uncertain and turbulent time ahead, these are the times when SouthState will really stand out. The rebuilding of the company, along with our core funding, conservative credit culture, and great markets have us well positioned for the road ahead. Thank you for your time today. I'll now turn the call over to John.
John Corbett, CEO
Thanks, Robert. Good morning, everybody. I’ll make some brief comments about the operating environment and our third quarter results. Afterwards, Will can share more detail about the financials, and then we’ll take your questions. Before we talk about the bank, it's important to take a step back and reflect on the macro environment. Over the last two years, the United States government flooded the banking system with excess deposits and basically provided a pandemic bailout with the PPP program and support for consumers. In that pandemic environment, every bank in the country was deposit-rich and had near-perfect asset quality metrics. Now, suddenly, the tables have turned as the Fed dramatically raises rates and embarks on quantitative tightening. Good old-fashioned relationships, deposits, liquidity, and credit discipline will drive the distinctions in bank performance over the next two years. This is an environment where SouthState should shine. Let me mention a few of our third-quarter highlights. We're pleased to have two sequential quarters of very strong revenue growth, operating leverage, and loan growth. Our earnings ramp has been steep and the momentum is obvious. Our PPNR per share is up 47% from the same period last year. In the third quarter, our NIM expanded significantly, operating leverage improved 8% and that drove our efficiency ratio down to 50%. We watched our NIM expand 43 basis points in the third quarter after expanding 35 basis points in the second quarter. That's pretty dramatic, 78 basis points of NIM expansion in just two quarters. And to be clear, that margin expansion is not the result of actions we took in the last two quarters but actions we took in 2021 to retain more cash on our balance sheet than many others. We took the long view and held on to plenty of dry powder to put to work in this higher rate environment. As expected, the significant NIM expansion was partially offset by weakness in our capital markets and mortgage business. Mortgage production remains strong with our focus on purchase mortgages in our growing Southeast markets. But with low gain on sale margins, we decided to hold 78% of the production on our balance sheet and only sold 22%. Total loans grew 13% on an annualized basis and were evenly split between the commercial and retail bank. Despite the recession fears, our asset quality metrics remained very clean and we had net recoveries in the quarter. Hurricane Ian hit Southwest Florida last month as a fierce Category 4 storm. That's an area of the state where we don't have branches. After the hurricane devastated Fort Myers, it moved slowly through our franchise in Central Florida, Northern Florida and on up to Charleston as a Category 1 storm, dumping over a foot of rain in some places. So the primary impact to our customers and employees were power outages and flooding in Central and Northern Florida. We sustained very little structural damage and power was restored within a week. As we examined our exposure to the hurricane, we determined that less than 1% of our loans are located in the hardest-hit areas of Lee, Collier, and Charlotte counties. And so far, we've received very few requests for payment deferrals. As I mentioned, our granular deposits will be a differentiator for us in a rising rate environment. With an abundance of cash on the balance sheet, we've lagged the Fed on the way up. Our deposit beta is 3% so far this cycle and our total deposit cost is only 11 basis points. Average deposit balances declined about 4% annualized, but that still left us with about $2.5 billion in cash and $5.5 billion in available-for-sale securities. So that's about 18% of the balance sheet that's liquid. I'll point out three areas that drove the end-of-period change to our deposits. First, we mentioned on our last earnings call the predictable fluctuation of deposits in the payroll business. If the calendar quarter ends on a Friday, deposits temporarily drop about $500 million. In this quarter, the third quarter did end on a Friday. So that's why it's better to look at average deposit balances when comparing quarters. And secondly, as we previously announced, we consolidated a number of branches in the third quarter, which accounted for a portion of the reduction. And third, with the increase in rates, we've worked with some of our high-net-worth clients to purchase about $275 million of treasuries through our wealth management division. We are going to continue to work one-on-one with our valuable relationship clients, but at the same time managing the appropriate amount of balance sheet liquidity. As we look ahead, we are cautious about the economy in 2023 and we share the concern of many that a recession may be around the corner. It's just hard to imagine a scenario where the Federal Reserve is moving this fast and something, maybe something we don't see now, but something doesn't break in the economy. But even with this uncertainty, we like the hand we've been dealt on a relative basis. We've got excellent funding, surplus capital, and we operate in four of the six fastest-growing states in the country. Regardless of the environment, our team will show up to work each day. We are going to continue to deliver exceptional client service and build franchise value, one customer at a time. With that, I'll turn it over to Will to give you more detail on the financial results.
William Matthews, CFO
Thanks, John. As you noted, it was another encouraging quarter for SouthState on several fronts. We had record PPNR and PPR per share driven by another solid margin increase. We had a low deposit beta with a very moderate decline in balances. We had good expense control and solid growth, but some weakness in a couple of our non-interest income business lines was not entirely unexpected in this rate environment. And credit metrics have remained solid. Slide 12 shows our net interest margin over the last five quarters. Net interest income of $358 million was up $44 million from Q2 with core net interest income of $349 million, up $47 million from the prior quarter. Tax equivalent NIM was 3.55 or 3.46 on a core basis, up 43 basis points from Q2. Total cost of deposits of 11 basis points was up 5 basis points from the prior quarter. While we hope to continue to outperform in this metric, we do of course expect our beta to rise over the cycle as deposit competition heats up. Non-interest income was down $11 billion from Q2, primarily driven by a $7 million decline in correspondent and a $3 million decline in mortgage revenue. In the mortgage business, as shown on Slide 14, we had production of almost $1.1 billion in the quarter, but only 22% of the volume was sold in the secondary market, leading to a decline in secondary income. I'll note that our retail mortgage production year-to-date is down 6% from last year versus an industry decline of approximately 46% according to the NBA. For the correspondent division, as noted on Slide 16, the sizable and rapid moving rates continue to pose a challenge for demand for fixed income securities in spite of the attractive rates now available relative to the last couple of years. Interest rate swap demand was also down a bit in the quarter, with such revenues comparable to last year's third quarter. Non-interest expense of $227 million was up $1 million from Q2, a bit better than anticipated. With that revenue growth and relatively flat NIE, our efficiency ratio dropped to 50%. On the balance sheet, loans were up 13.3% annualized from Q2. The highest percentage growth was in single-family residential, up 34% annualized, followed by C&I of 17% and investor CRE up 12% annualized. Line utilization across various loan types remained flat with prior quarters and still below pre-pandemic levels by 5% or more. John discussed some of the items impacting our decline in ending deposits. On an average basis, our deposits were down just under $400 million, or approximately 4% annualized. I'll also note that our ending deposits are slightly ahead of where we had budgeted them for September 30. With respect to credit, we have provisioned $24 million for the quarter, in spite of 2 basis points in net recoveries. $1.9 million of our charge-offs were DDA losses, so net loan recoveries were closer to 4 or 5 basis points. In our CECL model, we continue to use a more negative economic scenario weighting than baseline or consensus would indicate. Our asset quality metrics remain very good at this point, as noted on Slide 24, but we remain cautious about the economy. Our ending allowance plus reserve for unfunded commitments moved up 5 basis points in the quarter to 1.31%. With respect to capital on Slide 25, our risk-based ratios remained strong, with CET1 of 11% and total risk-based capital of 12.9%. Our leverage ratio improved approximately 30 basis points with the quarter's capital formation and slight reduction in the size of the balance sheet. The move in interest rates and results of moves in AOCI continue to negatively impact our TCE ratio and our TBV per share, with our TCE ratio ending at 6.7% and our TBV per share declining to $37.97. Excluding AOCI, our TCE ratio would have been 8.3% and our TBV per share would have been $47.44. John, I’ll turn it back to you.
John Corbett, CEO
Thanks, Will. As always, I want to thank our employees for their hard work and all they do to build value for our clients, our communities, and our shareholders. Operator, please go ahead and open the line for questions.
Operator, Operator
Thank you. Our first question today comes from Michael Rose from Raymond James. Please go ahead. Your line is now open.
Michael Rose, Analyst
Good morning, everyone.
John Corbett, CEO
Hi, Michael.
William Matthews, CFO
Hi, Michael.
Michael Rose, Analyst
Maybe we could just start on the NIM and kind of the rate sensitivity. Obviously, it's continued to come down here a little bit. I’m sorry if I missed this in the beginning, but just given the loan growth and the low deposit betas, can you just kind of talk about maybe some near-term expectations for the NIM? And I'm sorry if I missed this, but what rate outlook you guys are assuming for the forward curve or something else just as we move through the next couple of quarters? Thanks.
Steven Young, CRO
Hi, Michael. It's Steve. I want to discuss a few key assumptions as we look ahead over the next 15 months. There are three main assumptions I'll cover, and then I'll provide some guidance at the end. The first assumption is about the size of our deposits and interest-earning assets, which was slightly over $40 billion last quarter. In previous earnings calls, we've indicated our goal to maintain flat deposits until the end of 2023, which would keep earning assets stable. We continue to stand by that guidance. Given our loan growth and deposit forecasts, we anticipate our loan-to-deposit ratio will rise from around 77% currently to approximately 80% by the end of 2023. This reflects our expectations for managing the balance sheet in the $40 billion range for earning assets. The second assumption concerns interest rates. In our July earnings call, the Moody's consensus forecast predicted that the Fed funds rate would peak at 3.5%. However, this has changed significantly; the latest forecast now suggests a peak of 4.75% in 2023. This substantial shift in expectations will be factored into our modeling. Regarding deposit beta, we have discussed this previously, and our materials indicate that our deposit beta was 24% in the last cycle and is currently at 3%. We believe that this cycle will follow a similar pattern to the last one, expecting a 24% beta. Looking toward deposit costs and our interest rate predictions, we project our cost of deposits will reach around 110 to 120 by this time next year. As we consider this, the 4.5% increase in rates with a 24% beta on our original deposit costs aligns with these expectations. Over the next four quarters, we anticipate a gradual change of about 1%. In summary, based on our assumptions regarding balance sheet size, interest rate forecasts, and deposit beta, we expect our margin to expand. From last quarter's margin of 355, we believe it will range between 360 and 380 by the end of 2023. I hope this provides a clear overview of our assumptions and the overall outlook.
Michael Rose, Analyst
Perfect. A lot of detail as usual, Steve. Maybe just as one follow-up question, probably sticking with you, you guys have held the correspondent book, revenue stream pretty consistent over the past couple of quarters, but it did come off again this quarter or it did come up this quarter. Can you just give some greater color there just on kind of how the business works? And then maybe just as we move through this higher interest rate environment, how the different pieces of the business you would expect to work over the next couple of quarters? Thanks.
Steven Young, CRO
Sure. Let me take a big picture approach and then drill down the correspondent, and maybe I'll tie all that together. Fee income this quarter was $77 million, or about 0.67% of average assets. Our prior guidance that we had last quarter was between 0.7% and 0.8% of average assets. We said that we'd probably be at the lower end of the range until we got through some of this interest rate hiking until the end of 2022. At that point in time, we gave that guidance a terminal Fed funds rate of 3.5. But because we've had this large move in interest rates, really expectation up by another 1.25. Some of these interest rate-sensitive businesses like mortgage and correspondent slowed down from a fee income generation perspective. So think about correspondent, our guidance was $24 million to $28 million a quarter. We're lowering that guidance really to the $20 million to $25 million a quarter, until we get through, the Fed stops raising rates. So if you think about the puts and takes, our interest rate swap revenue fell this quarter, fixed income actually fell only about $1 million, but I would expect fixed income to be more challenging as the Fed continues to raise rates and that short-term and long-term rates all end up about the same. So I think fixed income will be a little more challenging. I think the interest rate swap business will get better. But our new guidance for that is somewhere between $20 and $25 until the Fed starts raising rates, and we get into a bit more normalized environment. So just to kind of sum up all of that, so with the next several quarters until the Fed stops raising rates, we would expect our non-interest income to average assets to be between 0.6% and 0.7%. If the Fed stops raising rates and we get into a more normal environment sometime in '23, we'd expect the NII to average assets to get back to 0.7% to 0.8% and kind of act as the hedge as we talked about to net interest income. So hopefully, that's helpful guidance as you think through the puts and takes of correspondent and non-interest income.
Michael Rose, Analyst
Very much so. Thanks for taking my questions, guys.
Operator, Operator
Thank you. The next question today comes from the line of Kevin Fitzsimmons from D.A. Davidson. Please go ahead. Your line is now open.
Kevin Fitzsimmons, Analyst
Good morning, everyone. Just wondering if you can talk a little bit about loan growth, how the pipelines look, how you feel about growth going forward in terms of both what you're seeing in demand, but maybe what you're also implementing in terms of maybe raising the bar in underwriting or stepping back on certain kinds of loan segments, any color on that front? Thanks.
John Corbett, CEO
Yes, sure, Kevin. It's John. Big picture, I would say that the Fed's rate increases are working. They're slowing things down. But it takes time. There's a lag effect that's working through the psychology of our clients and our borrowers. Our pipelines are coming down. From a C&I borrower standpoint, a lot of them are doing fine, but they're taking a kind of wait and see approach. They’re still borrowing money, but it's more to replace existing equipment versus expanding. On the CRE side, we're in a period here of price discovery. Cap rates have been very slow to adjust to the yield curve. But we're starting to see that bid-ask spread on CRE property starting to widen out. I think there are a number of folks that were in the development business, the merchant builders that are preparing to become owner-managers, and that's going to slow paydowns down. On the residential side, I think the fundamental question is, what kind of house can I buy with a $2,500 a month payment? In January, when rates were 3%, you could borrow $600,000. Today, you can borrow $380,000. So I think that is going to cause a real slowdown in the residential side, and we're seeing that in some of the rate locks. I believe the Fed is having and seeing the desired effect of the rate increases. While loan originations are going to slow, growth is going to be a little different. There are some crosscurrents with growth in that, number one payoffs that we've been talking about for two years, I think payoffs are going to start slowing. There are several loans that we originated in the last two years that are still in the fund-up scenario. I do think that growth is not going to slow down as fast as new loan originations slow. If we had to give some guidance, we'd say our fourth quarter estimate would be that we'd be growing loans in the upper single digits. If we enter into a mild recession in 2023, maybe mid-single-digit growth. But ultimately, our goal by the end of 2023 is probably to put on another $1.5 billion to $2 billion of net loan growth. That gets us to that 80% loan-to-deposit ratio that Steve talked about if we hold the balance sheet in deposits flat. But that's the macro picture. We're still very, very bullish on the markets in the Southeast. They're going to outperform the rest of the country. In migration that Will talked about, you can see it in the residential numbers. The nation’s mortgage origination this year, year-to-date is down 46%, 47%, we're only down about 6%. That speaks to the strength of the southeastern job front and in-migration, but a lot of it's not just retirees, it's just great jobs and great economic activity in the Southeast. I don't know that many people are as aware of what's going on over the last several years and really the last couple of years with the automobile industry in the Southeast. But we've had just a ton of announcements. In Georgia, there's a new $5 billion Hyundai plant for electric vehicles, 8,000 new jobs. The South Koreans just built a new battery plant for electric vehicles north of Atlanta, 2,000 jobs, a $1.7 billion investment. Last week, BMW announced an expansion to their plant in Greenville, South Carolina, $1.7 billion. We've got a new assembly plant in Huntsville, Alabama with 4,000 new jobs for Mazda and Toyota. So the Southeast is going to be just fine. From an underwriting standpoint, we try not to be a faucet on, faucet off lender. We are abiding by our policies right now. We're stressing the loans we're making with this new interest rate environment. So hopefully, that gives you a flavor of what we're seeing.
Kevin Fitzsimmons, Analyst
Yes, that's great, John. Thanks. Just one quick follow-up. I was wondering if you could share any observations on Atlanta Capital regarding any remaining savings or contributions that you're noticing, whether they are better or less than expected. Thanks.
John Corbett, CEO
Yes. This is John. Our pipeline and production in Georgia have been fantastic. So we completed the conversion in July. The conversion went extraordinarily well. We are still continuing to work through the normal integration issues as the team members get accustomed to the new processes. But they haven't missed a beat from a loan production and growth standpoint.
William Matthews, CFO
Yes. And Kevin, I'll take it on the saving side, maybe I'll go ahead and wrap this into context in sort of the NIE outlook, and certainly can take further questions on NIE as desired. But we have pretty much essentially gotten most of the cost savings out through the third quarter. There are still a few that will trickle in, in subsequent quarters, including Q4. And that also goes for the branch consolidations we did. There will be a little bit more in Q4 than Q3. But I’d say our guidance for the Q4 NIE still would be where we have thought it'd be and that’s somewhere in the low $230s. If we're lucky, maybe down below $230. This quarter we had a few items moving positively and negatively and did a little bit better than we thought in NII. One item, of course, is production, the correspondent business lower, that drives down some of the commission compensation expense there. And so depending upon that fluctuation in that business, that will impact NIE as well. But also in Q4 we would expect this probably continued, instead of accruals that will drive that number up. So still feel like Q4 that number we’ve been guiding towards of low $230s, maybe high $220s feels like a good number. And then looking ahead to next year, I'd say we’re still in the process of our budgeting cycle, which is a very thorough bottoms-up process where we review requests for capital in the form of fixed asset dollars as well as technology dollars as well as in terms of investment in people dollars, and make decisions about those requests based on projected capital returns across the company. So that's our normal cycle. We're in the middle of it now. We'll have better guidance we'll be able to give on NIE when we get to our January call, but I'll just reiterate that we remain very focused on trying to manage our expenses in every environment, including one that's got some inflationary pressures like this one. We've done a good job I think this year with our incentive plans of keeping that front of line with our teams and hope to do so next year as well.
Kevin Fitzsimmons, Analyst
Great. Thanks for all the color. Thank you, guys.
Operator, Operator
Thank you. The next question today comes from the line of Stephen Scouten from Piper Sandler. Please go ahead. Your line is now open.
Stephen Scouten, Analyst
Yes, sorry about that. I was curious around your residential mortgage production, kind of how you're thinking about that in this rate environment, putting more of that on the balance sheet and kind of around funding and rate paid on the residential mortgage side?
Steven Young, CRO
Sure, Stephen. We discuss our residential portfolio on Pages 14 and 15 of the deck, and I have a few points to highlight before summarizing. Last quarter and in the third quarter, we generated about $1.1 billion in production, with 78% being portfolio and 22% secondary, and 92% of it purchased. The refinancing business is mostly done. On Page 15, we provide a historical view of the residential portfolio's growth and shrinkage over the past two and a half years, which we relate to gain on sale spreads and mortgage rates. The main takeaway from that slide is that we've utilized residential as a tool for managing our balance sheet. During periods of low rates and high gain on sale margins in 2020 and 2021, we sold most of our production to earn fee income. Recently, as rates increased and gain on sale margins fell, we've expanded our portfolio balances over the last couple of quarters. Looking at the long-term since December 2019, we’ve reached only $450 million in total, or 8% growth during that two and a half years. This quarter, we produced around $825 million of portfolio production, with 47% allocated to our professional doctor program. We believe this is a suitable credit to include on our balance sheet. Given all this, residential production will align with our overall production. This year, we anticipate around $4.5 billion in total production, with about 70% of that being portfolio. For next year, our initial forecast suggests about $3 billion, similar to what we achieved in 2019 before the pandemic, with an estimated 60% in portfolio and 40% in secondary. Considering the balance sheet, we expect to produce more as we move into 2023 due to the rate fluctuations, and we'll need to navigate this for the next 6 to 12 months or so until rates stabilize and production returns to where it might have been this year. Is that helpful?
Stephen Scouten, Analyst
That's extremely helpful. Thanks, Steve. And then maybe a quick follow up on Michael's earlier question around kind of the reduction in asset sensitivity. Is that primarily a reduction just as you've deployed more excess liquidity and you do expect betas to move higher from here? What's the main driver around that kind of quarter-over-quarter change in the modeling?
Steven Young, CRO
Yes, the key factor here is our assumption regarding the positive beta. In the first quarter, our net interest margin was 2.77%, and this quarter it has risen to 3.55%, showing an increase of 78 basis points while our deposit beta stands at only 3%. If we project based on historical data, our deposit beta could average 24% for the entire cycle compared to our current position, which is significantly influencing our increased asset sensitivity. However, predicting the deposit beta's behavior over the next 12 months is challenging for anyone. The best we can rely on is our past data, which explains why our asset sensitivity has decreased, and we will observe how performance evolves over the coming year.
William Matthews, CFO
And I’ll also remind you, Stephen, that is a static balance sheet model. So there’s no changes in the mix or anything like that. So it's an indicator rather than a guide.
Stephen Scouten, Analyst
Great. Good reminder, Will. Thank you. And then last question I guess for me is just things have been trending phenomenally well for you guys, I think, the last couple of years really, obviously, but for a longer period of time as well. But the stock has outperformed significantly year-to-date. How does that make you all think about the M&A environment given the value of your currency, especially coupled with the rate environment marks, et cetera? How should we think about the likelihood of you guys dipping your toe back into the M&A game?
John Corbett, CEO
It feels like the M&A environment is going to be a little slow for the next few quarters, Stephen, just with P/E valuations where they are, uncertainty around inflation, and a recession. I think we've got a little more work to do internally to continue to refine our processes and our technology. So M&A in the short term is not a high priority.
Stephen Scouten, Analyst
Got it. Thanks, John. A lot of great color on the call today. Appreciate it, everyone.
Operator, Operator
Thank you. The next question today comes from the line of David Bishop from Hovde Group. Please go ahead. Your line is now open.
David Bishop, Analyst
Yes, good morning. Regarding the balance sheet, I'm interested in your perspective on excess cash as we exit the quarter. What do you consider to be a reasonable minimum for that? Do you think it will return to the pre-pandemic level of around $1.2 billion? I'd like to hear your thoughts on excess cash and liquidity at this point. Thanks.
Steven Young, CRO
Hi, David. That’s a good question. This is Steve. Yes, that's right, around 2.5% of assets is probably the lower limit for cash. As you know, we have very little in the way of wholesale funding and haven’t drawn any of that down. Our brokered CDs are about $150 million that we issued during the pandemic, and these are long-term CDs. We have no borrowings from the federal home loan bank. So we have several options regarding our balance sheet to increase cash. I think that's a good framework for modeling. If you project that out, it suggests an 80% loan to deposit ratio by the end of '23, with approximately 2.5% to 3% of assets in cash, assuming we implement the strategies we just discussed.
David Bishop, Analyst
Got it. And one follow up in terms of the loan loss provision this quarter, just curious how much of that was sort of deterioration and maybe the model-driven inputs? Is that factoring a higher unemployment rate outlook? Just curious maybe what sort of drove that elevated provision and what we should think about that moving into 2023? Thank you.
Steven Young, CRO
Yes, that's correct. With CECL, loss drivers are chosen based on their statistical correlation with past loss events, dating back to the year 2000 for all banks except for those that have failed. We assess Moody's forecasts each quarter, conducting a thorough analysis of their output and the underlying assumptions. This helps us determine whether we find their projections to be accurate or overly optimistic or pessimistic. For several quarters now, we have seen Moody's as being more optimistic, particularly their baseline forecast, which aligns closely with the consensus. Consequently, we have maintained a more cautious outlook. Moody's did adopt a more pessimistic view between Q2 and Q3, which influenced some of the loss drivers toward indicating higher losses. We are still preparing for the recession scenario, which is incorporated into a significant portion of our allowance. The loss drivers reflect that, and as observed this quarter, we experienced net recoveries along with generally consistent asset quality metrics. Thus, the economic forecast from Moody's significantly impacted our provision expense this quarter.
David Bishop, Analyst
Great. Thank you.
Operator, Operator
Thank you. Our next question today comes from the line of Catherine Mealor from KBW. Please go ahead. Your line is now open.
Catherine Mealor, Analyst
Thanks. Good morning.
John Corbett, CEO
Good morning.
Catherine Mealor, Analyst
I want to follow up on the margin. We spent a lot of time talking about the deposit betas, but just wanted to get your thoughts, Steve, on loan yields. You saw a nice increase in your loans this quarter. What are you thinking about for where new loans are coming on and then what ultimately might loan betas be over the cycle as well?
Steven Young, CRO
Thank you, Catherine. It's pretty much the same situation. We have a slide in our presentation that addresses the loan repricing frequency, which indicates that around 30% of our loan portfolio reprices on a daily basis when rates increase. Additionally, we have another 11% that are adjustable and will reprice within the next year. Therefore, a total of 41% of the portfolio will reprice in the upcoming 12 months. This probably gives a good insight into our view on beta. On the short end, it's approximately 30%. As we produce more and those adjustments occur in the adjustable rate book, there is another 11% that will also reprice. Regarding loan yield, we experienced a significant shock in interest rates during the third quarter, and our loan yield continued to rise. By the end of the quarter, it exceeded 5% for new production. Some of this is floating, and as rates increase, it will surpass 6% due to the floating nature. Hopefully, this provides a good overview of our thoughts on loan betas moving forward.
William Matthews, CFO
Catherine, I’d just add that we benefit from the lag effect on the positive side; there's a little bit of lag effect on the loan side too as the market and lenders acclimate to rising rates, pick the ones moving as fast as these have. You have commitments out there that take a little bit to close. So there's a lag effect on both sides.
Catherine Mealor, Analyst
Great. Okay. And do you have the rate at which where loan yields were maybe for the month of September?
Steven Young, CRO
Catherine, I don't know exactly right in front of me, but it was just north of 5%. I don't have the number, but it was just north of 5% for the month of September.
Catherine Mealor, Analyst
Great. Okay, that's great. And then one just follow up on the reserve. I noticed that your reserve for unfunded commitments increased a little bit more this quarter. Just any commentary on what drove that?
Steven Young, CRO
Catherine, we did have some growth in our unfunded commitments in the quarter, and just sort of how the math worked out. When we think about the reserve in our allowance committee, we do sort of think about it as a whole so that the 131 basis point number versus the 113 basis point number, and it will fluctuate quarter-to-quarter. The fluctuation and the portion that goes in the reserve for unfunded, i.e. the liability versus the allowance for credit losses, the contra asset, it does swing quarter-to-quarter. But I kind of think of it in terms of the combination of the two.
Catherine Mealor, Analyst
Great. Okay. Just want to make sure there wasn't anything to be aware of in terms of changing your accounting or provisioning for that.
Steven Young, CRO
No.
Catherine Mealor, Analyst
Everything else was answered. Thank you very much. Great quarter, guys.
Steven Young, CRO
Thank you, Catherine.
Operator, Operator
Thank you. The next question comes from Christopher Marinac from Janney Montgomery Scott. Please go ahead. Your line is now open.
Christopher Marinac, Analyst
Hi. Thanks very much. Will and John, I know you gave a lot of details on the reserve and prior questions. I noticed that the CECL reserve for the unfunded commitments went up a pretty good amount this quarter and that the unfunded commitments themselves grew a lot from June to September. Just want to get a little more background on that. Is that unusual or is more of that sort of line growth possible in the future?
William Matthews, CFO
Yes, I don’t think there’s anything unusual, Chris. In response to Catherine's question, that contributed to the growth and the increase in total reserves related to unfunded commitments. But in terms of our situation, go ahead, John.
John Corbett, CEO
Other than just to say that the unfunded commitments really HELOCs and C&I have been relatively flat. We have not yet returned to the funding levels we had pre-pandemic. We’re about 5% to 10% under the funding we had before the pandemic to give our clients the flexibility going into if there's a recession.
William Matthews, CFO
Yes. It's interesting, Chris, as we've seen with some of our other releases, we are trying to see higher line utilization. I'm sure we will at some point. But thus far, we're still below pre-pandemic levels pretty much across the board.
Christopher Marinac, Analyst
Okay. I'm just looking at the $9.9 billion that's up from the $8.2 billion from June to September. So if I somehow missed that, that's fine. And I guess my follow-up question just relates to kind of what you're seeing from your clients on the fixed income side as it pertains to kind of their use of wholesale funds? Do you expect them to be net borrowers and does that possibly spill over into additional business? I know the guide that Steve gave earlier, which is very helpful, just kind of want to get more context in terms of their behavior changes that might be happening.
Steven Young, CRO
Yes, Chris, that's an interesting observation. There was a significant amount of liquidity in the system about nine months ago due to loan growth and possibly the Fed's quantitative tightening, but that liquidity has certainly decreased for our correspondent bank clients. Instead of focusing on fixed income, we are now seeing some borrowers coming from the brokered market and system sales from our desks. Most of our clients, particularly community banks, generally maintain lower loan to deposit ratios and have strong funding bases. Many of them are bigger users of fixed income since they have excess liquidity and lower loan to deposit ratios, rather than buying or issuing brokered CDs. However, there has definitely been an increase in activity on our desk, which is likely the case for others as some clients are utilizing this more than they did a year ago.
Christopher Marinac, Analyst
Sounds good, Steve. Thanks very much, and thanks again for all the information this morning.
Steven Young, CRO
All right. Thanks, Chris.
Operator, Operator
Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference over to John Corbett for closing remarks.
John Corbett, CEO
All right. Thank you, Bailey. Thank you all for calling in today and thank you for your interest in SouthState. If you have any follow-up questions, don't hesitate to give us a ring. And I hope you have a great day.
Operator, Operator
This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.