Earnings Call Transcript
SouthState Bank Corp (SSB)
Earnings Call Transcript - SSB Q4 2021
Operator, Operator
Hello, everyone. Welcome to the SouthState Corporation Fourth Quarter Earnings Call. I'm Melissa, your operator. I will now hand it over to our host today, Will Mathews, to start. Will, it's all yours.
Will Matthews, Host
Good morning and welcome to SouthState's fourth quarter 2021 earnings call. This is Will Matthews and joining me on this call are Robert Hill, John Corbett and Steve Young. Doug Williams and Pat Oakes of Atlanta Capital are also joining us to provide some color on their quarter. The format for this call will be that we will provide prepared remarks and we will then open it up for questions. Yesterday evening, both companies issued press releases to announce earnings for Q4, 2021. 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'll turn the call over to Robert Hill, Executive Chairman.
Robert Hill, Executive Chairman
Thank you, Will and good morning. And thank you for joining our call today to discuss the fourth quarter of 2021. This was a year of transition for the company, one where we moved on the path of integration and quickly moved toward execution. I've always felt that the best sign of how our merger was progressing was how quickly the company returned to growing its customer base post integration. Our team moved into growth mode almost immediately. And you can certainly see the momentum building in the company. We're adding customers, adding talented bankers and seeing excellent opportunities to grow market share in great markets. We're making progress in each of our guiding principles: soundness, profitability and growth. Our balance sheet remains very strong and growing, and this strength will help us achieve the profitability potential of the bank. 2022 is the year of internal focus, a year where I believe we will make significant further progress in all three areas. I'll now turn the call over to John.
John Corbett, CEO
Thanks Robert. Good morning, everybody. I hope you and your families are doing well. As we reflect on 2021, it was a challenging year in many ways, but I'm proud of the way our team prevailed and successfully completed the largest conversion in our history last summer. And as soon as the conversion was complete, our bankers turned on the growth. We continue to see a lot of positive momentum in the southeast as we accelerate out of this pandemic cycle. If we step back and look at loans and deposits, this past year in 2021, we originated roughly $10 billion in new loans. To put that in perspective, we originated about $7 billion in 2019 before the pandemic and about $6.5 billion in 2020. So 2021 saw 40% to 50% higher lending volume in the past two years. And we saw that trend accelerate in the fourth quarter as loan originations increased another 19% from third quarter levels to a new record of $3.1 billion. That level of loan production resulted in 7% annualized loan growth in the fourth quarter, compared to 10% loan growth in the third quarter. After the vaccines rolled out last spring, we guided to mid-single-digit loan growth for back half of 2021. And we wound up at 8.5%, so a little better than our guidance. The excess liquidity from the Fed's monetary policy continues to flow onto our balance sheet. Deposits were up 18% in the fourth quarter, even as we drove our deposit costs down to just six basis points. And the excess liquidity in the system continues to lead to elevated loan payoffs. Many of our clients have wisely sold their operating businesses at high valuations or sold commercial real estate to lock in the gain from historically low cap rates. A few weeks ago, the Census Bureau released the latest population migration trends for 2021, and the conclusion is clear. The South won the population battle during the pandemic. The Northeast, the Midwest, and the West all lost population, while the South gained 786,000 people. Not surprisingly, the SouthState footprint is in the fastest-growing markets in the country. Florida ranked number two for population growth behind Texas, followed by Georgia, North Carolina, and South Carolina, placing SouthState in four of the six fastest-growing states in America. That population growth is driving strong housing demand as well as demand for new construction, and really all housing-related products, including furniture, appliances, and building materials. I'll give you a quick update on Atlanta Capital, and Doug is here to comment on the fourth quarter for Atlanta Capital. They continue to deliver outstanding results with 22% annualized loan growth in the fourth quarter. We've now received approvals from both the OCC and from the Atlanta Capital shareholders, but we're like many acquirers, we're just waiting for Federal Reserve approval. We're hopeful for a close in the next couple of months, but that is entirely subject to the Federal Reserve timing. As we move into 2022, we're excited about our momentum. We've been intentionally patient about deploying our excess cash. Cash now makes up 15% of our balance sheet. And with an improving economy and accelerating loan growth, we have a real opportunity to deploy that excess cash into a higher rate environment and drive our revenue higher in 2022. I'll turn it over to Will so he can give you additional color.
Will Matthews, Host
Thanks John. I'll cover some highlights on margin, noninterest income and noninterest expense, as well as credit and the provision for credit losses. Slide 12 shows net interest margin trends. We had net interest income of $258 million in the quarter. The $245 million we reported excluding accretion was our best quarter ever for core net interest income and was up $6 million from the third quarter. Loan yields excluding PPP were flat with Q3 levels, and incremental improvement in our cost of deposits to six basis points, combined with $508 million growth in average loans, helped drive the growth in core net interest income. Although we deployed some cash into loans and securities, our dry powder remains extensive as noted on slide 17. We ended the year with $6.4 billion in interest earning cash and Fed Funds sold, up $700 million from the third quarter and up $2.1 billion from a year ago. Fourth quarter deposit growth was $1.5 billion, some of which we believe to be seasonal or temporary due to municipal tax collections, or asset and business sales by clients. We estimate more temporary deposit balance growth to be approximately half of the quarter's growth. Noninterest income improved approximately $5 million from the prior quarter, with a record quarter for our corresponding division and improvement in service charge income somewhat offset by a decline in our mortgage revenue. As noted on Slide 14, mortgage had a strong quarter of production of almost $1.4 billion, but a tightening of margins and a $156 million decline in the pipeline led to a decline in revenue. Service charge income increased from Q3 due to the ending of waivers and fourth quarter seasonality. Operating noninterest expense was up $2.7 million from Q3 due to a number of factors, one of which was the loan growth incentive kickers being triggered in the back half of the year. Other expense categories were slightly higher as noted in the release. Turning to credit, our asset quality metrics continue to be very strong as noted on slide 26, yet another quarter of net loan recoveries before DDA charge-offs, with total net charge-offs of two basis points. We recorded a $9 million negative provision for credit losses in the quarter. Given the changing nature of forecasts for fiscal stimulus and the impacts of Omicron, we weighted Moody's S3 scenario of 45% and the baseline scenario of 55%, a slightly more conservative weighting than for Q3. Ending reserves were 1.27% of loans, or 1.4%, including the reserve for unfunded commitments as noted on slide 31. On the capital front, we repurchased approximately 632,000 shares in the fourth quarter, bringing the 2021 full year total to 1.82 million shares, or approximately 2.6% of the company. Our 2021 capital return including dividends was approximately $282 million as outlined on slide 22. This represented a total payout ratio, dividends and repurchases of approximately 52% of adjusted earnings and approximately 59% of reported earnings. Ending capital levels remain strong, with CET1 close to 12%. And ending tangible book value per share was $44.62. I'll now turn it over to Doug to give a few highlights on Atlantic Capital's quarter.
Doug Williams, Atlanta Capital Executive
Thank you, Will and good morning. I'm pleased to have this opportunity to share Atlanta Capital's fourth quarter results with you. As we filed our earnings release and investor presentation last night, those are available on our website. I'd like to thank my Atlanta Capital teammates for another great quarter and for a great year. Despite pandemic-related uncertainties and the distractions of merger integration planning, they remained focused on helping our clients pursue opportunities and navigate the challenges. Our clients are performing well and continue to make investments for the future. Those investments are driving our new business pipelines and resulting loan growth. With strong growth in loans, deposits, and revenue, Atlanta Capital recorded another quarter of solid operating results, as we reported Atlantic Capital earned $0.57 per diluted share for the fourth quarter of 2021 compared to $0.65 in the third quarter. Excluding merger-related expenses, earnings per share were $0.59. For the full year, we earned $2.45 per diluted share. That figure, excluding merger-related expenses, was $2.60. Pre-provision net revenue for the quarter was $14.3 million or $15.1 million excluding merger expenses. Loan growth for investment excluding PPP loans grew 22% annualized from the third quarter, and 14% for the full year. Loan origination volume was strong across all of our banking teams, and net loan growth was particularly strong in the commercial, industrial, and commercial owner-occupied real estate categories. Since Atlantic Capital became a public company six years ago, these commercial loan categories have grown at a compound average growth rate of more than 13%. Credit quality is excellent; net charge-offs for the quarter were 11 basis points of loans. For the full year, net charge-offs were six basis points. Non-performing assets as a percentage of total assets was 0.11% at quarter end and classified loans as a percentage of total loans were 1.5% compared to 3.25% at the end of 2020. As you've seen, we recorded a negative provision of $731,000 for the quarter, compared to $2.4 million last quarter. The allowance for credit losses, including PPP loans, was 160 basis points at quarter end. With sharp focus on corporate treasury management business for Atlanta-based enterprises and for high-volume payments and fintech companies across the country, Atlanta Capital has built a strong core deposit franchise. Since we became a public company six years ago, average total deposits have grown more than 20% compounded annually. Average demand deposits have grown at a 30% compound average growth rate. Payments volumes, service charges, and average deposits in the payments and fintech business grew more than 40% annualized during the quarter. For the fourth quarter, average noninterest bearing deposits increased 33% annualized on a linked quarter basis and grew 52% year-over-year. Noninterest bearing demand deposits averaged more than 44% of average total deposits. The average cost of all deposits was seven basis points. As we look ahead to our pending merger with SouthState, our new business pipelines are robust, and we expect continued strong momentum in loan, deposit, and revenue growth. I'll be available to answer your questions during the Q&A portion of our call this morning. Now back to John.
John Corbett, CEO
Alright, thanks Doug. All the pieces are starting to come together. The population growth in the southeast, the growth of loans at both Atlanta Capital and SouthState, and a lot of dry powder in the form of excess cash to invest in a rising rate environment. Operator, please go ahead and open the line for questions.
Operator, Operator
We'll take our first question today from Stephen Scouten of Piper Sandler.
Stephen Scouten, Analyst
Good morning, everyone. How are you doing?
John Corbett, CEO
Good morning.
Stephen Scouten, Analyst
Yes, can you hear me? Okay. Great.
John Corbett, CEO
Yes, we can. Can you hear us?
Stephen Scouten, Analyst
On that first maybe, yes, I can. Can you hear me?
John Corbett, CEO
Yes.
Stephen Scouten, Analyst
Okay, sorry about that.
John Corbett, CEO
Yes, we can.
Stephen Scouten, Analyst
So I'm curious first, I know you spoke to, you've been patient about excess cash. And I think Steve had kind of laid out some targets in terms of liquidity deployment expectations last quarter, maybe the quarter previous as well. I'm wondering if you could give us an update there just in terms of how you're thinking about the pace of deployment with where rates have moved to now and where they look to be going?
Steven Young, CFO
Sure, Stephen. It's Steve. Yes, so I think what we've got it to over the last several quarters, is that our investment securities assets would be somewhere between 16% and 18% by the end of the year, and I think, right, we're now around 17%. As we think about the future, we've got all this excess powder on the balance sheet, and today, our loan to deposit ratio with and really without ACBI is 68%. So as we think about the next 24 months, our goal is to take this loan-to-deposit ratio from 68% closer to 80% in the next two years. If we can do that, that'll spend a fair amount of the excess liquidity. Having said that, there's still probably $3 million that is still dry after all that. And so as we integrate Atlanta Capital into the mix, and their investment portfolio, we'll probably have better guidance as we think about that next quarter, once we get the close there. But right now, there's really no change in that guidance, but just from a big picture perspective, 68% loan to deposit ratio going towards 80%. In the middle of that, we'll put the securities portfolio together and look at reinvesting it opportunistically.
Stephen Scouten, Analyst
Okay, that's helpful. And then, can you give any color as to where you think expenses are going to go here in 2018? Maybe pre Atlanta Capital? I know that kind of clouds the overall numbers, but on a core basis can you talk about where you think expense growth will be and kind of what the drivers of that will be in terms of maybe it's new hires? Maybe it's just inflation and kind of how we can think about that?
Will Matthews, Host
Sure, Steven. It's Will. The fourth quarter of noninterest expense and legacy South was up a bit from the third quarter. And there are a few items that we noted in there in the release. As I mentioned, I think in our third quarter call, our goal for 2022 is to try to hold the inflation in noninterest expense to low single digits. And that's certainly our plan in our budget. We do recognize there's an inflationary environment that we're all subject to, and that's we have to compete in the market. But that will be our plan. So if you look at the Q4 run rate, up a bit from Q3, something in that general range, where we were in Q4 to maybe a little bit higher is sort of how we see things shaping up in 2022. But again, we'll have to compete with market forces and react accordingly, but that's our plan right now.
Operator, Operator
We will now move over to Michael Rose of Raymond James.
Michael Rose, Analyst
Hey, good morning, guys. Thanks for taking my questions. I just want to talk about slide 13. I think it's really compelling the fact that the origination volumes have been up so nicely year-on-year, and obviously, the pay downs have been an issue. Doug's obviously grown at a really high rate as well. When do you think the pay down slows? Is it as rates rise? You talked about M&A activity and selling businesses and things like that. But when can we expect to see a more robust pickup in net loan growth? Any commentary will be helpful, thanks.
John Corbett, CEO
Hey, Michael, it's John. Good morning. For the back half of the year, we wound up at about 8.5% annualized loan growth; that was 10% in the third quarter and 7% this quarter. But yes, to your point, it's kind of interesting. Our loan production went up, but our net growth went down. And so we spent some time analyzing that. And sure enough, we looked at our big payoffs, and we had about $170 million more of large payoffs in the fourth quarter than we did in the third. And you go down the list and it's family businesses, multi-generational operating companies that sold. We have a lot of real estate investors selling CRE at these record low cap rates to get the gains. So I do think that interest rates play a big part of this and the extra liquidity in the system. So we've kind of thought that at this level of loan production, we ought to be producing high single digits to 10% if we could slow the prepayments down. So I think as interest rates drift up, you're going to have less prepayments on residential. And as interest rates trend up, cap rates are going to move up on CRE, and those gains are going to be less. So there's probably going to be less churn in the CRE portfolios. So I feel I'm real pleased with the level of production. And if you get a little less liquidity in the system, a little higher interest rates, it could very easily move into high single digits to 10% loan growth where we're at.
Michael Rose, Analyst
Okay, that's very helpful. Thanks John. And then maybe just following up on slide 19, because I think this is also pretty compelling. I don't know if this is for Steve or Will, but if you can comment on some of the assumptions for that one-year change, which was relatively unchanged from last quarter in terms of what that implies, in terms of securities portfolio deployment, deposit betas, etc., and then what the impact could potentially be based on initial scoring marks and the like from the addition of ACBI. Thanks.
Steven Young, CFO
Yes, Michael, it's Steve, and maybe Will can follow up with anything I missed. But all this is doing is taking our balance sheet as a point-in-time static balance sheet, so it's not growing it for securities or anything like that. And just shocking it for rates 100 basis points across the curve. And so when you look at that number, what it does is it makes the net income of the bank go up about 15%. Now, we all know, it's not all going to be 100 basis points on one day, but this is directionally just tells you as you incrementally move 25 basis points, or whatever have you, that's how that would play out for our model. A couple of things to note on that slide too is our floating rate loans around 31% on a daily basis, and then we have about another 20% that are variable, and a lot of that reprices in the first year, while only 49% are fixed. So that drives some of it. But I kind of go back to what really is the asset sensitivity to our entire franchise, obviously, we have a lot of cash on the balance sheet today that we normally don't have, so 15% of assets, that's obviously a driver. Number two, our floating rate loan portfolio is probably well within peers and pretty normal for our size. But the piece that I think is probably the most important is just our deposit portfolio and the power of our franchise, and in a rising-rate environment, we have a slide in here that details about our deposits. We have 59% of our deposits in checking accounts, versus 41% of our peers. That's just a significant advantage or change; we have 816,000 checking accounts and 1,000,002 total accounts in higher rates, and that's when the betas stay lower than hopefully peers. And that's where you outperform. So all of that is built into this model that hopefully helps to answer your question.
Will Matthews, Host
Yes. And Steven, it's Will. I'll just elaborate a little bit on that. The modeling we use does incorporate our historical deposit betas. And as Steve just alluded to, one thing that's a little bit different this time around is that we're entering this rising rate cycle with a much lower loan-to-deposit ratio. If you look back to the last one, I think we ended the second or third quarter of '19 with the loan-to-deposit ratio in the low to mid 90s, 93% to 94% or so. As Steve said, we're at 68% today, and that's not uncommon, so the question will be how different betas this time around, given all the liquidity on all of our competitors' balance sheets. Action, a big removal of all that liquidity, and very rapidly one would expect that betas would be lower across the industry this time around, and we'll see.
Steven Young, CFO
Yes, and just to add one other thing. I know we'll have 10-K disclosures that will come out at some point, but this is a net income disclosure, not a net interest income disclosure. So net interest income disclosure will be closer to 9%. But the net income disclosure is what we have here, which is probably the more permanent one that you'll care about.
Michael Rose, Analyst
Helpful because I think that's up quarter-on-quarter. Correct? Because I think the NII sensitivity in the last quarter was closer to 6%. And now you're saying nine for NII?
Will Matthews, Host
9% with a shock; a ramp was around 6%. So that may be, and may be what you're thinking, Michael. I don't think it's changed that dramatically.
Steven Young, CFO
No, it hasn't.
Michael Rose, Analyst
Okay, understood. Maybe just one final one for me. So Steve, maybe if you can go into the increase in correspondent banking scores a little bit more than we're expecting. Can you just talk about the puts and takes as we think about 2022? Thanks.
Steven Young, CFO
Sure. Yes, it was a really great quarter from the correspondent team. And kind of the driver of this quarter was our interest rate swap business; I think this quarter was up about $7 million quarter-to-quarter. Actually our fixed income business was down a couple million dollars. And it really comes back to if you think about the environment we were in the fourth quarter. There was a lot of loan production that was going on. And then also, the yield curve was a little bit flatter in the fourth quarter before it steepened up in the first quarter. So those ingredients, along with just great loan production kind of caused the fourth quarter to be very strong, and fixed income to be a little weaker, but ultimately up $5 million, so very happy about that. As we think about overall fee income, our guidance hasn't changed for that, over several quarters, I think we've laid it out as a percentage of assets. And what we've said as a standalone SouthState would be 80 to 90 basis points. On a standalone basis, and with Atlantic Capital, combined, it would be more like 75 to 85 basis points in noninterest income assets. And we don't really see that change a whole lot over the next, over the course of the next 12 to 24 months. So that's helpful.
Operator, Operator
We will now move over to our question from Jennifer Demba from Truist.
Jennifer Demba, Analyst
Good morning. Well, question about your buyback appetite at this point over the next several months. How are you thinking about that?
John Corbett, CEO
Jennifer, it's John. The board authorized a buyback of 5% of the company about a year ago. And we're a little more than halfway through that of 1.8 million shares out of the 3.5 million. So we bought back 2.6% of the company. Our thinking is we're continuing to generate excess capital. We do not believe that we're going to be growing; there's no need to grow the balance sheet, because we've got so much liquidity today. So we think we'll continue to generate excess capital. And we think that as interest rates rise in the course of the next year or so, bank valuations will improve. So we think it's a good time to put our capital to use in buybacks. So we've been reasonably active in the last two or three quarters. If the valuation stayed close to where they are today, we probably continue to stay active in the next couple of quarters.
Jennifer Demba, Analyst
Okay, great. And what is your outlook on the correspondent banking area for the next year with higher rates?
Steven Young, CFO
Yes, Jennifer, it's Steve. I think what we've said over the course of several quarters is that we will be ranging between $24 million to $28 million this quarter, we hit $30 million, which was a really good quarter for us. But I think the same guidance is kind of the same thing as what we've talked about, and I'll tell you why. Back to all of this excess liquidity in the banking system and all of our clients, they all have this excess liquidity. Some have more than others. And they're going to do one of two things with it over the next 24 months just like we are. Whether they're going to loan it or they're going to invest it. And so for us, we have the products to both sell them on the fixed income side at the yield curve gets steeper; or if it flattens, we'll probably be more interest rate swap business. There's a slide that we put out there on page 15 and it shows the last I think five quarters of fee income for the correspondent, and then we have 1,060 financial institution clients. And you can see it, it's reasonably steady, but for different reasons. Sometimes the arc revenue, which is our interest rate swap business, does better in the environment, and sometimes our fixed income does a little bit better. A lot of that really depends upon the yield curve and how that moves. So I hope that's helpful.
Operator, Operator
We will take our next question from Catherine Mealor of KBW.
Catherine Mealor, Analyst
Thanks. Good morning. One more follow-up on fees on just service charges. I was surprised to see the increase this quarter. I'm assuming some of that's just kind of a higher seasonal, fourth quarter like we typically see, but how do you think about the outlook for service charges and some changes received in overdraft fees in the industry?
Robert Hill, Executive Chairman
Let me start with the quarterly update, and then John will discuss the outlook moving forward. You're correct, Catherine; there are two main factors that contributed to our growth. One is the seasonal increase in card usage due to Christmas shopping, among other reasons. The second major factor was the waivers we implemented after the conversion in the second quarter, which remained in effect through the third quarter. By the fourth quarter, those waivers expired, so they were no longer in place. The combination of these two elements really drove the increase from the previous quarter.
John Corbett, CEO
Yes, and as far as going forward, clearly, the market is moving very quickly, Catherine, as it relates to overdraft fees and practices. And I would just tell you that are something we continually evaluate, we continue to make adjustments to, and we'll do that in the future.
Catherine Mealor, Analyst
Generally, as you look at the service charge number it's hard because we haven't really seen a full kind of normal year of service charges with SouthState and Center State combined. Since the first time we saw that together was in COVID. So do you think we're still not at a full kind of operating run rate that truly shows the benefit of the merger? Is that fair? Do you think there's still kind of headwinds and maybe this quarter's run rates have maybe a more appropriate base?
Robert Hill, Executive Chairman
Catherine, I'd say my impression is that the fourth quarter did have some seasonality, I know have that most fourth quarters, or I guess, as long as consumer behavior is where it is. But the fourth quarter is the first quarter where we didn't have any of the waivers. So if you normalized for a little bit of seasonality, maybe that fourth quarter's run rate is a pretty good look with where we are. Legacy South, we don't have a good year of history to show you yet, obviously, with the conversion occurring in the second quarter, and then the waivers that we did, and then the fourth quarter, of course, having some seasonality.
Catherine Mealor, Analyst
That makes sense. And then on loans alone yields that actually stayed in a little bit more stable than I was expecting. So any kind of color you can give on loan pricing, and where you think that loan yield maybe bottoms before we kind of get start, to get the benefit of higher rates?
Will Matthews, Host
Yes, sure. Catherine, this quarter, I think our loan yield for the portfolio excluding accretion was around 377, and our going yield for loans was in the 313 range, I think, for this quarter. A lot of that, as you know, has to do with where you are out on the curve. We had a fair amount of production, a fair amount of that we ended up swapping to floating ratios because we felt like maybe the Fed would probably start making rates, the same reason our clients said. So the way I think about that is if we can get rates to move up from Fed front LIBOR perspective, 31% of our portfolio, we should be bottoming out here in the next quarter or so. And then from there, we'll start increasing with the rest of the market.
Operator, Operator
We're now going to move over to Christopher Marinac of Janney Montgomery.
Christopher Marinac, Analyst
Thank you, ma'am. Good morning, I wanted to ask about the accretion income relative to total NII. Will, the slide you gave was very helpful. Just as a reminder, does that relationship change much with ACBI coming in, and will it continue to decline these next two years?
Will Matthews, Host
Yes, let me tell you maybe in components, so the PPP deferred fee equation, that's essentially gone. I mean, we've got a little bit less than the balance sheet. But that's take out our remodels if you hadn't already, of course, and I'd say our normalized run rate for the regular required accretion, as they are today, we take it out in the sort of $5 million to $6 million range, just score's a little bit higher than that. Some of that's hard to predict. But that's sort of how I think about it. We don't anticipate the accretion on the Atlantic Capital side dramatically changing our equation out. We don't think accretion is really a big part of the story post-Atlantic Capital closing, so not a big number addition there in our modeling.
Steven Young, CFO
Yes, and Chris, I'd just add that I think what we've said a couple of quarters ago, then as we thought about 2022, was that our accretion income would be somewhere in that $5 million to $6 million range. And after we got through PPP, so I think it's the same that we've said for the last several quarters.
Christopher Marinac, Analyst
Great, Steve. Thanks for that. And Will, thank you as well, just a quick follow-up on Doug and Pat from Atlanta Capital. The change in cash and deposits that we saw at period end, was any of that seasonal for them? And if that's something that would come back this first half of the year?
Doug Williams, Atlanta Capital Executive
Yes, Chris, this is Doug. Some of it is seasonal, which we observe every fourth quarter. However, there is also some strong organic growth during this time. I believe they may be slightly lower in the first quarter of this year, but not significantly. So Pat, would you --
Pat Oakes, Atlanta Capital Executive
Yes, so Chris, if you look at the average deposit growth rate, it's very pretty flat, and part of that was striving down deposit costs in particularly products that probably caused a decrease. If you've carved that piece out, it was actually up for the quarter, and then the period had number just depends on the day of the week, especially with our payments business. It's not significantly at 930 because of the Thursday, and then that's year-end is down because of the day of the week being on a Friday. So you really look at averages when you look at that.
Christopher Marinac, Analyst
Got it, thanks, folks. I appreciate that. That's helpful.
Doug Williams, Atlanta Capital Executive
The mix has continued to shift more towards noninterest-bearing demand deposits. These deposits averaged 44% in the fourth quarter, an increase from the third quarter. This category of deposits continues to grow at a strong pace.
Operator, Operator
We will now move over to Brody Preston of Stephens.
Brody Preston, Analyst
Good morning, everyone. I wanted to follow up on the arc revenues. I just wanted to clarify if that was all considered operating or if there were any mark-to-market gains included, particularly since the $7 million quarter-over-quarter increase is quite substantial.
Steven Young, CFO
No, it was all organic, no mark-to-market. And that, I mean, if you remember, I don't know if I've described it on this call or another, but in 2020, when the yield curve was flat, that business did $80 million in revenue for the year of 2020. So this quarter at $17 million is a really good quarter, not a record quarter by any means, but it's better than they've been over the last couple of quarters.
Brody Preston, Analyst
Got it. That's helpful. Thank you. And then just maybe one more on fees, just the mortgage production. It looks like you're continuing to balance sheet a relatively larger mix of the mortgage production than you historically have. So I guess I wanted to ask, one, why? And then two, if the gain on sale margins are going to track this level going forward, do you envision maintaining that mix of portfolio versus secondary just give that the margins are starting to get a little slimmer?
Steven Young, CFO
Yes, Brody, this is Steve. I think you're referencing page 14, and hopefully this disclosure that we'll put together in the last couple of quarters has been helpful, and it's helpful for me as we look at. The mortgage production just back to it, it's very robust. I mean, it was almost $1.4 billion for this quarter; last quarter was $1.3 billion, and then fourth quarter last year, which was an excellent quarter, was $1.4 billion. So really, year-to-year, the production, 2020, which was a record year for us, was $5.5 billion, this year was $5.4 billion. So congratulations to that team. They've just been really working hard and doing really well. The things that strike me on this page are a couple of things. One is if you look at the trend on the gain on sale margins a year ago, they were 4.56%. Now they're 2.83%. Well, 2.83% is just much more of a normalized gain on sale margin, so there's nothing to be alarmed about; it's just more normal. But that's down 170 basis points, which is obviously taking away some of the fee income. And that's why I think what you see in the top right column there is we're moving more of that production, which was a year ago, 72%, of secondary now down to 53% secondary. So I would assume that as we kind of move forward here and to higher rates, and we're getting more opportunities to do arms on balance sheet, we'll have more of an opportunity to continue to kind of that mix. So I would say that 55% secondary and 45% portfolio would probably be a good mix. And some of the things that are driving that again to the portfolio is just a lot of new construction on single-family homeowners who come in there and do a custom-built house, because there's just not a lot of inventory. So we're doing a lot of that, and we're doing a construction loan and then putting an arm on it on the back end. So anyway, a lot of commentary, but I've just described it's a really strong production year, more that for portfolio. We saw in the fourth quarter, consumer real estate went up around 6%; if you pulled out HELOC, it's been more like 9%. So I see that as sort of a good run rate going forward.
Brody Preston, Analyst
Got it, no, that's very helpful. Thank you for that. And then just on the origination yields, the 313. Those down five basis points, I think quarter-over-quarter, similar to the core loan yield without any accretion. And so I guess just as we think about new origination yields going forward, I know that we've all got our own different kind of Fed rate hike assumptions, but do you expect maybe further compression on new origination yields in the first and second quarter of the year, depending on what the Fed does? Or can you help us think about that?
Steven Young, CFO
Brody, the way I would say is our average loan size this quarter was up a little bit. And so typically as you get higher new loan origination, those spreads tighten up a little bit, just because of the nature of that. So I guess it probably depends upon our mix. At the end of the day, we have a loan pricing model that prices to the current. And so as the curve moves up, we still want to continue to get our spreads. And there's always a dance in there, particularly when rates rise for the first quarter or two; the long term that model works. And over time, you do get the spreads. The question is with all the liquidity sitting in the system, will you get it this year like with this time, which is a great question, I don't think any of us know the answer. I do know that when securities yields go to 2.5%, you can do it risk-free. Yes, it makes it a whole lot easier to loan to be more disciplined on that.
Brody Preston, Analyst
Got it. Okay. Regarding the growth rate of loans, particularly in Commercial and Industrial (C&I), you had a solid year with growth around 13% excluding any PPP-related loans. However, this quarter's performance was somewhat weaker compared to the high averages and what some of your competitors reported. I wanted to ask if there were specific factors that contributed to this decline beyond the business sales you mentioned, John. Additionally, any insights on the extent of the pay downs within C&I would be helpful.
John Corbett, CEO
Sure, Brody, if you recall in the third quarter, we had a seasonal surge in C&I loans that was attributed to some hurricane cleanup business that we do. And we mentioned that would start to tail off seasonally in the fourth quarter or the first quarter. So that was a little bit of a headwind, but we're still happy year-over-year C&I have grown 13%. A lot of that's attributable to the middle-market bankers that Greg Lapointe has recruited and brought into the company. But I do think that this particular quarter at a 6% growth, it was probably that seasonality, the hurricane business, as well as just more of these operating companies selling and paying off at a higher rate than they did in the third quarter.
Brody Preston, Analyst
Got it. Thank you for that. And if I could just sneak in just a couple more quick ones. On slide 25, you all have given really good detail around the checking accounts. And I wanted to ask, you know if that two-thirds to one-third mix of commercial versus retail checking is similar to what it was last cycle on a pro forma basis?
Steven Young, CFO
Yes, Brody, this is Steve. I don't think we've checked that number. It's a good question, but I don't think we've looked at it pre-MOE.
Robert Hill, Executive Chairman
I don’t think we’ve checked that number. It’s a good question, but I don’t think we’ve looked at it before MOE.
Brody Preston, Analyst
Okay. And then just one on the securities book. Do you happen to know what the duration, the effective duration of the AFS portfolio is? And then for the total portfolio, do you know what percent of the book is floating rate?
Steven Young, CFO
Yes, I think our effective duration for the entire book is around 4.7 years. I think the floating piece is about 6% of the book. So really, most of those are fixed securities. When we bring on the book for ACBI, they have a little bit of a longer portfolio; we'll evaluate that when we put the fair value marks, depending on which day we close, and put all that together at that point.
Robert Hill, Executive Chairman
Steve's response was regarding the entire portfolio, and we don't have the breakdown between AFS and HTM. I would estimate that AFS might have a slightly shorter duration based on the typical characteristics of HTM, but I don’t have the exact figures available right now.
Operator, Operator
That was our final question. So I'm going to hand back to the management team.
John Corbett, CEO
Alright, thanks Melissa. And thank you all for joining us this morning. We appreciate your continued coverage of SouthState and Atlantic Capital. And as always, if you have any questions, don't hesitate to reach out to Will or Steve as you're working on your models. I hope you have a great day.
Operator, Operator
This concludes today's call. Thank you all for joining and have a great rest of your day.