Earnings Call Transcript - SSB Q2 2022

Operator, Operator

Hello everyone, and welcome to the SouthState Corporation Q2 2022 Earnings Conference Call. My name is Lydia, and I will be your operator for today. It is my pleasure to introduce our host, Will Matthews. Please proceed when you're ready.

William Matthews, Host

Good morning, and welcome to SouthState's Second Quarter 2022 Earnings Call. This is Will Matthews, and joining me on this call are Robert Hill, John Corbett, and Steve Young. The format for the call will be that we will provide prepared remarks, and we'll then open it up for questions. Yesterday evening, we issued a press release to announce earnings for the quarter. We've also posted presentation slides that we will refer to on today's call on our Investor Relations website. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about risks and uncertainties that may affect us. Now I will turn the call over to Robert Hill, Executive Chairman.

Robert Hill, Executive Chairman

Good morning, and thank you for your interest and support of SouthState. The results for the second quarter reflect the significant progress made by our team in many areas. You will hear from John and Will about the excellent progress and results we have had at the halfway point of 2022. With the many uncertainties that exist in the economy today, it gives me confidence for our shareholders that the many strengths of SouthState will stand out. Regardless of the external environment, our team, our balance sheet, our diverse customer base, and our markets are well positioned for solid, consistent performance in our three focus areas: soundness, profitability, and growth. I'll now turn the call over to John for more details on the quarter.

John Corbett, CEO

Thanks, Robert. Good morning, everyone. Generally speaking, this has been a good quarter for the banking industry as a whole. But it's been an exceptional quarter for SouthState, and the positive momentum is broad-based. We saw positive trends in everything from revenue growth, expense control, loan growth, deposit betas, and asset quality. With the volatile swings of CECL reserves over the last year and with the change in our share count from the Atlantic Capital acquisition, the best measurement of core earnings growth in this environment is PPNR per share. For the second quarter, PPNR per share increased 30% from the prior quarter. And on a year-over-year basis, PPNR per share is up 46%. This steep earnings ramp is a function of our liquid balance sheet, rising rates, a low deposit beta, expense focus, and strong organic loan growth. And with more Fed hikes on the way, there's room for earnings to accelerate from here. The Fed funds rate is up 150 basis points this year, and our cost of deposits only increased 1 basis point. We ended the quarter with a total cost of deposits of 6 bps, and we were able to hold our deposit balances flat. So our deposit beta is less than 1% so far but will naturally pick up as we move through the cycle. During the last rate cycle, our end-of-cycle beta was 24%, which was below industry peers, and it should be a relative advantage this cycle as well. Our plan is to hold deposits stable for the remainder of the year since we've got plenty of cash on hand to fund our loan growth. Credit quality remains excellent. Net charge-offs decreased and leading asset quality indicators, such as past dues and substandard loans also declined. Over the last year, we've been releasing loan loss reserves for a total of $115 million released in the prior four quarters. The CECL forecast during the pandemic were too conservative and the reserves weren't necessary. This quarter, we reversed course, and we set aside a $19 million provision. Even with the extra provision, we ended up with a return on tangible common equity of about 17%. And with our net interest margin on the rise, our adjusted efficiency ratio improved to 54%, down from 60% in the prior quarter, so a nice 6-point drop. Revenue increased 15.8%. And that's in comparison to expenses only up 3.4%. So we saw excellent operating leverage of 12.4% from the prior quarter. We've still got opportunities to become more efficient. And as we previously announced, we're on track to consolidate 30 of our branches this quarter. And on top of that, we've also got the planned cost savings from Atlantic Capital. We completed the system conversion this past weekend, and we're on track for the cost savings to be realized in the fourth quarter. Population growth continues to fuel our economy in the Southeast, and there's no sign of it slowing. So in many cases, our clients are enjoying record operating results and they're investing in the future. Over the course of the last year, we've had organic loan growth of 12%. In the second quarter, loan growth accelerated to 22% annualized and was broad-based. Every loan category grew at double digits, led by the residential and the C&I portfolios. We're not a refinancing shop. So mortgage production remained surprisingly steady in the second quarter at $1.4 billion despite the rate increases. But with listings at record lows, there's more construction activity now. We've also seen a pickup in our physician program. Our professional and physician loan program made up 36% of our residential production in the quarter. We've got a new slide in the deck that's pretty interesting. It illustrates how we've arrived at the decision to sell mortgages when gain on sale margins are high and the coupon rate is low, which is what happened during the pandemic. Now the opposite is true. Gain on sale spreads are low, and the coupon rates are much higher. So logically, we're holding more production on the balance sheet. As we look ahead, we are seeing signs that the economy is cooling off, and we think that's a good thing. The housing and labor markets have been too hot to the point it's not healthy and not sustainable in the long run. So the interest rate hikes are having an impact. Loan growth will slow in the back half of the year from this quarter's level of 22%. And we now anticipate that loan growth in 2022 will be at the top end of our guidance at about 10%. I'll flip it over to Will, and he can walk you through the rest of the numbers.

William Matthews, Host

Thanks, John. As you noted, it was a very encouraging quarter for us on several fronts. If I were to give a high-level summary of the quarter, I'd say we held deposits constant and redeployed $1.450 billion of cash and Fed funds sold into loans while our spread benefited from the strength of our core funding base. I'd also note good expense control with our noninterest income businesses performing close to expectations. As I make my remarks, I'll remind everyone that we had Atlantic Capital in the company for the full quarter versus only 1 month in the prior quarter. So we have to keep that in mind as we make some income statement comparisons with the sequential quarter. Slide 12 shows our five-quarter NIM history. The quarter's net interest income of $314 million was a record with our NIM expanding by 35 basis points from Q1, reaching 3.12%. This was a $53 million increase in net interest income or approximately $36 million if you normalize for a full quarter of Atlantic Capital in Q1. Loan yields, excluding PPP, grew by 22 basis points, and earning asset yields increased by 36 basis points, and our cost of deposits rose by only 1 basis point. Accretion was $12.8 million for the quarter, and our core NIM, excluding accretion and PPP, rose 30 basis points to 3.00% for the quarter. Our $1.45 billion in loan growth equated to a 22% annualized growth rate, which brings the last four quarters' loan growth to 12.3%. We held deposits and the securities portfolio essentially flat, except for AOCI moves, and our cash and Fed funds sold balances were down $1.3 billion. Noninterest income of $88 million was up $2 million from the first quarter but essentially flat when normalized for a full quarter of Atlantic Capital. As noted on Slide 14, 89% of our $1.4 billion in mortgage production was purchase volume, and only 27% of production was sold in the secondary market. So mortgage revenue declined to $5 million for the quarter. I'll pause here to note that this means our first half 2022 mortgage production was essentially flat with the same period last year and a year with industries down approximately 36%. Housing supply constraints have continued to drive nice volume in our construction perm product. As John noted, Slide 15 shows the relationship between rates, gain-on-sale margins, and our portfolio versus secondary breakout. You'll see that when rates are low and gain on sale margins are high, we intended to sell most of our production. Conversely, as rates move up and gain-on-sale margins declined, the portfolio percentage increases. You'll also note on that same slide that even with the second quarter's growth in portfolio loans, our ending consumer real estate portfolio is only back to the size it was in the first quarter of 2020. The correspondent division, as shown on Slide 16, had another good quarter with $28 million in revenue, similar to Q1 levels. This environment continues to be better for our interest rate swap capital markets business while fixed income is a bit weaker. Our Wealth Management business also continues to perform well. With respect to expenses, our $226 million in NIE was up $7 million from Q1, but Atlantic Capital's pre-merger run rate was approximately $5 million per month or an additional $10 million for 3 months versus 1 month in Q1. So we showed some improvement quarter-over-quarter. As John noted, our revenue growth outstripped our expense growth by 12.4%, so we had very good operating leverage this quarter. Similarly, this operating leverage was also reflected in the improvement in our efficiency ratio to 53.6%. Looking ahead to the next few quarters, with merit increases effective July 1, our expense guidance would be consistent with what we said on last quarter's call, quarterly NIE in the low 230s, potentially in the high 220s in Q4. On credit, we had $2.3 million in net charge-offs or 3 basis points, and only $1 million of these were net loan charge-offs with the rest in deposit overdraft losses. As noted on Slide 24, our past dues and NPAs declined, and we also saw a further decline in criticized and classified assets. With respect to provision expense, we're cognizant of the increasing risk of a recession and we thus took a more conservative approach in our CECL modeling this quarter, again, increasing our weighting of the Moody's S3 scenario. This led to a $19 million provision expense, which brought our ending reserve to 115 basis points of loans or 127 basis points, including the reserve for unfunded commitments as is outlined on Slide 33. Turning to capital, given the strong loan growth we were experiencing, we did not conduct any further repurchase activity in the quarter beyond the 300,000 shares we repurchased in early April. The 22% annualized loan growth and those early April repurchases combined to cause a slight decline in our regulatory capital ratios, though they remain strong with the CET1 ending at 11.1%. With approximately 70% of our investment portfolio classified as AFS, the move in rates in the second quarter caused an additional decrease in AOCI, dropping our TCE ratio to 6.8%, and our TBV per share to $39.47. Given the high-quality nature of our portfolio, we don't view this accounting convention requiring a mark on only one component of the balance sheet as being a meaningful long-term measure, and we expect these securities to accrete to par as they approach maturity over time. I'll turn it back to you, John.

John Corbett, CEO

Thanks, Will. Just some closing thoughts. I'm incredibly proud of our team and what they've accomplished this quarter. A lot of folks worked through the night on Saturday and Sunday to complete the Atlantic Capital conversion. And as always, they rose to the challenge. Also, we just passed the second anniversary of the closing of the merger of equals. Our five priorities heading into the merger were: to preserve the culture, to invest in digital, to protect the soundness of the balance sheet, and to position the company for top quartile profitability and growth. We're now harvesting the benefits of those priorities. Our digital platforms have been upgraded. We're situated in the best markets in the country. Our relationship managers are hitting record production. And our PPNR per share grew 46% over the past year. We now have a franchise that is built to last and in perfect position to take share from the large banks over the next several years. Operator, please open the line for questions.

Operator, Operator

Our first question comes from Stephen Scouten of Piper Sandler.

Stephen Scouten, Analyst

So I just wanted to start maybe on the share repurchase plans. I wasn't sure what you were saying there at the end completely. I know you said you didn't repurchase any additional from the 300,000, TCE 6.8%. So would you think you would kind of hold back on the share repurchase in the near term given the ASDI moves? Or what's the logic there?

William Matthews, Host

Yes, Steve. Our philosophy has always been our first priority for capital generation and investment of capital is in growth. And given the strong growth we had in the quarter, 22% loan growth, we curtailed our securities purchases based upon that growth. I think for the foreseeable future, we're likely to be less active with share repurchases, depending upon how growth shakes out from here. But at present time, I would expect us to continue to redeploy capital into the balance sheet as opposed to repurchasing shares.

Stephen Scouten, Analyst

Okay. Good. And then, I guess, I think in one of the slides that noted you guys were focused on some upgraded tech solutions and continuing to push further into digital. You set some future goals for digital adoption, I think, throughout the slide deck. So I just wanted to kind of understand if all of those investments have already been made or if there are any large-scale incremental investments that need to be made to reach these targets. How we should think about the future tech spend?

John Corbett, CEO

Stephen, it's John. We're continuing to transition our expense base from brick-and-mortar into technology. There's a slide in the back of the deck that talks about our branch consolidation efforts over the last decade. We've got another 30 branches that we're consolidating this quarter. We made a lot of technology investments in the new platforms a couple of years ago during the merger of equals. So we've got nCino in place for commercial loan processing, a brand-new mobile app through Q2, Salesforce. So really, we believe we've made the significant investments on the software platforms that needed to be made. And now we've got to mature into those platforms. Moving forward, our technology investments will largely be around ways to become more efficient through robotics in the operations area of the company as well as data analytics. So it won't be near the lift going forward in the next year or two as it has been in the last two years.

Stephen Scouten, Analyst

Okay. Great. That's really helpful. And then I guess the last thing for me is I'm just curious about capital markets. You guys have noted that's a pretty big differentiator for you all at the size of your bank, helps you compete with larger banks. Are there any capabilities you're focused on within that capital markets team that you feel like you need to expand or develop further? And I guess following to that, is that an area we could potentially see some bolt-on acquisitions if there are some of those expansions needed or desired?

Stephen Young, CFO

Stephen, it's Steve. That capital markets group has been part of our correspondent group for the last decade or so. And we continue to recruit talent in that area. Right now, it's primarily focused on our interest rate swaps. We've got some other capabilities that we're working on, but probably not big enough to mention right now. But that's an area as we marry the $46 billion balance sheet, along with the distribution we have into banks, money managers, and others. That's clearly an opportunity for growth, but that's going to take time and continued build-out. But we're really happy about that team and what the base we have today in that team, but that continues to be an opportunity to grow out in the future.

Stephen Scouten, Analyst

Congrats on a phenomenal quarter.

John Corbett, CEO

Thank you, Steve.

Operator, Operator

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

Kevin Fitzsimmons, Analyst

Good morning, everyone. I would like to ask if you could elaborate on the factors influencing net interest income and your expectations for continued growth in that area moving forward. We have recently experienced a shift where the balance sheet primarily drove this income, but now it appears to be reversing with the percentage margin increasing. Meanwhile, many banks have seen slower or stagnant growth in average earning assets due to deposit pressures. Can you discuss these dynamics further? For example, do you anticipate the margin will expand similarly in the upcoming quarters as it did this quarter with average earning assets? You mentioned loan growth, but what is the lowest level of cash you expect that to reach? Additionally, will you maintain using securities to support loan growth? I would appreciate insight into these points.

Stephen Young, CFO

Kevin, this is Steve. I appreciate your patience as I cover a few key points. We have a slide that discusses our balance sheet management, specifically our cash as a percentage of assets, comparing us with our peers. At the beginning of this year, approximately 15% of our balance sheet was in cash, providing us with significant flexibility. Despite substantial loan growth, our cash assets currently stand at 9%, which is a strong position with $4 billion in cash. In typical conditions, we'd normally see cash representing around 2% to 3% of our assets. Over the next 18 months, we aim to maintain a flat balance sheet, flat deposits, and flat interest-earning assets, utilizing the cash we currently hold. This approach could raise our loan-to-deposit ratio from 71% to about 80% by the end of 2023. The rate environment has certainly evolved, and there are several factors to consider as we strategize. The Fed has indicated a potential peak of 3.5% for the Fed funds rate by year-end, which aligns with market expectations. Historically, our deposit betas have been about 24%, and we anticipate similar figures for this cycle. Hence, we project our deposit cost could reach 80 to 90 basis points in the middle of next year, assuming the Fed funds rate reaches 3.5%. Based on these assumptions, we expect margin expansion moving forward, possibly reaching around a 3.5% margin by early to mid-2023. Each 25 basis point increase translates to roughly 6 basis points in net interest margin for us. If the Fed does not reach 3.5%, we would adjust down by 6 basis points for any missed hikes. This encapsulates our thoughts on balance sheet management and the interest rate landscape for the next 18 to 24 months. I hope this information is helpful.

Kevin Fitzsimmons, Analyst

Yes, that's very helpful. And one last piece of the balance sheet securities, would that likely be more of a funding source or keeping that stable going forward given the positive outlook on loan growth?

Stephen Young, CFO

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

Kevin Fitzsimmons, Analyst

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

Stephen Young, CFO

Yes, Kevin, this is Steve. It was 12 basis points to margin this quarter, which is high. There were some payoffs and those are always hard to predict, but we expect it to be around 7 to 9 basis points over the next 18 months. This quarter was a little high at 12 basis points, so that's somewhere between $7 million and $9 million a quarter.

Operator, Operator

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

William Matthews, Host

Jennifer, didn't know you changed firms.

Jennifer Demba, Analyst

No, Truist Securities. A question on loan growth. You said it would definitely moderate in the second half of the year. I'm just wondering what you're seeing in your pipeline, is it lower than it was a quarter ago? Or is this based on more client selectivity and conservatism? Curious as to what you're seeing.

John Corbett, CEO

Yes, Jennifer, it's John. The commercial pipeline remains relatively unchanged at around $5.5 billion, consistent with what it was at the end of the first quarter. However, we are losing some commercial real estate deals due to what we believe is overly aggressive competition in terms of structure and rate. Additionally, as rates rise, some borrowers are choosing to walk away from deals. The current cap rates have not yet adjusted to align with the changes in the yield curve, and many in the commercial real estate sector seem to be waiting for this adjustment, hoping that valuations will reflect the higher yield curve. We're noticing a slowdown, which is also evident in the residential sector where housing activity has decreased due to the interest rate environment. We projected an upper single digits to 10% growth for the year, and we've experienced about 14% organic loan growth annualized in the first half. If the second half of the year sees mid-single digit growth, we would achieve roughly 10% loan growth for 2022.

Operator, Operator

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

Michael Rose, Analyst

Most of my questions have been addressed. However, looking at the beta slide and then Slide 19 with the rate scenarios, where the plan is to allow the loan-to-deposit ratio to gradually increase to 80%, I feel that some of those assumptions might be overly conservative. Could you provide us with more insight into the factors influencing that rate? I understand that cash levels have declined, but they still appear to be relatively strong. You'll maintain the securities book despite deposit outflows, so it seems to me that some of those assumptions could be on the conservative side.

Stephen Young, CFO

Yes, Michael, it's Steve, and maybe Will could add to it. I guess from our history, all we can model is history. And as we think about our balance sheet, what we're hearing from our bankers and what we're telling in the market relative to deposit costs, this is sort of our history of what we were going to model. What's different this time is 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 we're probably larger than we've ever seen. So those kind of, to me, offset each other. And then obviously, we have a lot of flexibility with our cash sitting on the balance sheet at 9% or $4 billion. So we're going to try to manage excess deposits. As you know, we want to grow relationships, and we will. But sometimes, our clients have excess deposits. And we'll make judgments on when to let them go into like our private client group and our wealth group. There might be some better opportunities to earn better yields in those cases. We still control the operating accounts and the funds, but they may not be on our balance sheet. So those are the things we're going to have to manage going forward. But the history is the best thing that we can look forward to in the future. But Will...

William Matthews, Host

Yes. And just one other difference. I guess, Michael, relative to prior cycles is just the speed and the size of the moves this time around versus what we've had in the past. So all those factors make it difficult to model. Our thought would be we certainly would love to do better, but I don't think we would recommend modeling more aggressive than the margins that Steve outlined earlier.

Michael Rose, Analyst

Okay. That's helpful. Going back to the loan growth and the outlook, the production has been very strong. Paydowns have slowed, which is positive. However, I sense a bit of caution in the prepared comments and some responses. Are you experiencing any pullback at this point? Although pull-through rates have been strong this quarter and pipelines may not be as full as before, I've heard from others that there is an expectation for them to rebuild as we approach year-end. I’m trying to understand if you may be being more conservative, especially considering the advantage you gain from ACBI.

John Corbett, CEO

Michael, it's John. We are adjusting our underwriting criteria due to the rise in the yield curve. The interest rate used for underwriting has been increased significantly. Consequently, when assessing credits, we are taking a more conservative approach compared to our historical practices. Looking at different asset classes, we're seeing strong activity in multifamily and decent activity in self-storage. However, industrial activity has slowed down, partly due to the impact of Amazon. The Savannah area remains an exception due to strong port activity. In terms of office space, there is very little activity, but we are comfortable with our portfolio in that sector, which we monitor closely. Over 80% of our offices are in suburban areas rather than metropolitan regions. In retail, we are observing some activity from specific franchises such as Dollar General, Publix, Tractor Supply, and Starbucks, which continue to expand. This gives you a snapshot of the current conditions in the commercial real estate market. Housing is expected to slow down due to higher interest rates, though we are involved in a lot of construction activity because inventories are low. Overall, there will be a decline in that sector. This reflects our best judgment. When the Federal Reserve raises interest rates, it has an effect. Many of our borrowers are also observing closely, wanting to see how the economy progresses, leading them to adopt a more cautious stance, similar to ours.

Stephen Young, CFO

Yes, I think, Michael, I'd just add, just on the residential side. I mean, you saw mortgage rates get to 6.25 or so percent. Now they're down in the 5.375 range. So this market has been really hard to catch if you're a borrower. So it needs to settle in a little bit in order for growth to resume at those levels, I think we'll just have to see.

Michael Rose, Analyst

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

William Matthews, Host

No, Michael. This is Will. There's really nothing to interpret from that. It doesn't indicate any trend like that. I think it may have just been one loan.

John Corbett, CEO

I think the total dollars of NPAs declined, right?

William Matthews, Host

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

Operator, Operator

Our next question in the queue comes from David Bishop of Hovde Group.

David Bishop, Analyst

I think in the preamble, you noted that operating expenses you expect some inflationary pressure here in the third quarter up to the low 230s, maybe coming back to the high 220s. Just curious, and I appreciate the slide on Slide 29 in terms of the planned branch consolidation. But maybe what are some of the puts and takes that are causing that inflationary pressure? Is it going to purely merit raises compensation or is it going to be spread out elsewhere among the expense line items?

William Matthews, Host

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

David Bishop, Analyst

I understand. Thank you for the guidance. You mentioned an increase in the loan loss provision this quarter. Did I hear correctly that there were some changes in the CECL assumptions in the modeling? I'm just curious what aspects remained unchanged.

William Matthews, Host

Let me take a moment to discuss our CECL process. We believe it is very effective and operates through a committee. This committee not only reviews the Moody's forecast but also analyzes the language used in the forecast and compares it with information from other sources both internally and in the market. Based on this comprehensive review, the committee engages in meaningful discussions about whether we believe Moody's scenarios are accurate, too pessimistic, or overly optimistic. This assessment can change from quarter to quarter. Recently, we have felt a need to adopt a more conservative and somewhat pessimistic view than what Moody's has indicated. As a result, we have gradually increased the emphasis on their recessionary scenario to the point where it now represents more than half of our considerations. Additionally, we have applied some qualitative adjustments based on our observations. As a result, we kept our reserve steady compared to last quarter. With $1.5 billion in loan growth and maintaining our reserve flat, this led to a $19 million provision. This summarizes our approach and reasoning, reflecting a growing concern about the potential for a recession based on what we are observing in the market.

David Bishop, Analyst

As we look ahead to the migration of loan growth from a motive or target, are you aiming for a specific dollar amount of reserves, potential, or ratio? I'm interested in understanding how we should view the overall allowance as a percentage of loans.

William Matthews, Host

Yes, I wish I could provide more clarity; it would make things easier for everyone involved. We are not focused solely on dollar amounts or specific forms; instead, we are closely analyzing the loss driver forecasts that emerge. Factors like unemployment rates, housing price indexes, the commercial real estate index, and regional GDP all play significant roles. If these indicators improve or decline significantly, it will statistically influence our reserve requirements. Based on our observations of these factors and other variables, we may adjust our weighting of the baseline or pessimistic scenarios accordingly. However, it's challenging to offer precise insights right now, as it is equally difficult for us to model internally until we have a clearer understanding of how these loss drivers will evolve.

Operator, Operator

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

Catherine Mealor, Analyst

I wanted to go back to the margin and talk about loan yields for a little bit. I mean, I think as we think about your margin trajectory, no one is going to argue about deposit betas or a little less cycle and will be low again this cycle. But I think the loan yield piece is harder to model because of all the acquisitions and accretable yield and all that that's in that historical number. So as we think about loan yields moving forward, Steve, you mentioned the kind of 350 margin as we kind of head into next year. How are you thinking about the repricing of loan yields and maybe where that gets back to a certain level as we kind of head towards that 350 margin? And how quickly we see loan yields reprice as well?

Stephen Young, CFO

Yes. Sure, Catherine. We have a slide, I guess, Slide 19, which talks about our loan repricing. And basically, what it shows there is that we have about 31% of our portfolio that floats on kind of a daily basis. So if you kind of run that through the model, we started this whole cycle. I think our loan yields in the first quarter was around 369, something like that. And so if you kind of just look at a 100 basis point increase in the Fed funds rate, it would move your loan yield up 31 basis points over a period of time. So I think just thinking about the loan yield beta being sort of tied to that in sort of the, I'd call it, the 3-month range, 3- to 6-month range. And then after that, you'll, of course, have higher loan yields as you reprice some of the older fixed-rate stuff on your books. So I think the best way to think about it is the sort of the floating rate loan book, which is somewhere between 0 and 3 months is 31% of our loan book, and that would be a pretty direct Fed rate hike driver. And then after that, as you think about middle to late 2023, 2024, it would be more just sort of the repricing of the 5-year fixed from wherever it was a couple of years ago to something in the 5 if rates hold. Does that help?

Catherine Mealor, Analyst

It does. Yes, it does. And on the new production you saw this quarter, I've heard of mixed reviews on where new pricing has gone maybe not as big of a move on the fixed rate side, but just any kind of color you can give on how new pricing is going?

Stephen Young, CFO

Yes. I can tell you that there was a significant change in the rate cycle this past quarter. When you speak with your customers, you typically secure rates for a period between 30 to 60 days, based on the product. For instance, if you're locking in rates for production in June, those would reflect the rates from April, which were influenced by February data. We observed about a 50 basis point variation from the lowest to the highest rates throughout the quarter, which was to be expected. Our average loan yield for this quarter, based on new production, was in the low 390s, starting from around 360. At this point, it’s tricky to assess accurately due to the recent rate fluctuations.

Catherine Mealor, Analyst

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

John Corbett, CEO

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

Stephen Young, CFO

I want to add that we didn't discuss the changes we are implementing in our overdraft plan last quarter, which will take effect in the third quarter, impacting future operations. Regarding fee income, we had previously indicated a range for noninterest income relative to average assets. After acquiring ACBI, our run rate was projected between 70 and 80 basis points. Last quarter, we reported 77 basis points, slightly above the midpoint of that range. As we look ahead to the next couple of quarters, especially with our interest-sensitive businesses such as correspondent and mortgage, we expect to be at the lower end of that range, between 70 and 80 basis points, before potentially rebounding to the middle by 2023. However, due to market volatility, we need to stabilize before moving higher. I hope this information aids you in modeling our noninterest income.

Operator, Operator

We have a question from Christopher Marinac of Janney Montgomery Scott.

Christopher Marinac, Analyst

And I want to drill down on the deposit growth and particularly the deposit accounts that you highlighted in the slides. Are you incenting any differently now? And sort of how do you think about trying to push for more deposit growth just as you manage the balance sheet given Steve's comments earlier in the call.

Stephen Young, CFO

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

Christopher Marinac, Analyst

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

Stephen Young, CFO

Nothing to note. Typically, those balances increase in the fourth quarter and remain high in the first quarter before decreasing in the second and third quarters. So, following a seasonal pattern, they rise in the fourth quarter, decline in the first three quarters, and then rise again in the fourth. There is really no trend to highlight. We focus a lot of our efforts in the small municipality sector, including numerous small towns and school districts. So far, we haven't observed a significant shift in that area. However, as interest rates keep rising, I expect those to be somewhat responsive. I believe our portfolio is around 3% to 5% of deposits, amounting to approximately $2 billion, though I don't recall the exact figure.

Operator, Operator

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

John Corbett, CEO

All right. Thank you, Lydia, this is John. I'd be remiss if I didn't take a moment and just congratulate our Atlantic Capital Bank team. They had a tremendous conversion over the last week, and a lot of our support team worked really, really hard, and they did a great job. And I just am so proud of them. And anyway, thank you, guys, for calling in today. If there's any questions in your models, don't hesitate to reach out to Steve or to Will. And I hope you have a great weekend.

Operator, Operator

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