SouthState Bank Corp (SSB) 2022 Q3 法說會逐字稿

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.

(Operator Instructions)

I would now like to pass the conference over to our host, Will Matthews, CFO. So please go ahead, when you're ready.

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 will 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'll turn the call over to 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 the last few 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 rebuild 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.

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 2 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. And as the Fed dramatically raises rates and embarks on Q2, good old-fashioned relationship deposits, liquidity and credit discipline will drive the distinctions in bank performance over the next 2 years. This is an environment where SouthState should shine.

Let me mention a few of our third quarter highlights. We're pleased to have 2 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 2 quarters.

And to be clear, that margin expansion is not the result of actions we took in the last 2 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 remained 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 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. So that's an area of the state where we don't have branches. After the hurricane devastated Fort Myers, it moves 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 the 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 was 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 and available for sale securities. So that's about 18% of the balance sheet that's liquid.

I'll point out 3 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 dropped 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 worked with some of our high net worth clients to purchase about $275 million of treasuries through our Wealth Management division. And we're going to continue to work one-on-one with our valuable-relationship clients, while 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 but 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 -- may be 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 4 of the 6 fastest growing states in the country. Regardless of the environment, our team will show up to work each day, and we're 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.

Thanks, John. As you noted, it was another encouraging quarter for SouthState on several fronts. We had record PPNR and PPNR per share driven by another sizable margin increase. We had a low deposit beta with a very moderate decline in balances. We had good expense control and solid growth with some weakness in a couple of our noninterest income business lines, not entirely unexpected in this rate environment, and credit metrics remained solid.

Slide 12 shows our net interest margin over the last 5 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.

Noninterest income was down $11 million 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 NDA.

For the correspondent division as noted on Slide 16, the sizable and rapid move in rates continues 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.

Noninterest 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% AOS. 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 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%, and 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 rate and resultant move in AOCI continues 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.

Yes. 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 Instructions)

Our first question today comes from the line of Michael Rose from Raymond James.

Maybe we could just start on the NIM and the kind of the rate sensitivity. Obviously, it's continued to kind of come down here a little bit. And 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 nearer-term expectations for the NIM? And I'm sorry if I missed this, but what outlook -- what rate outlook you guys are kind of assuming the forward curve or something else just as we move through the next couple of quarters?

Michael, it's Steve. Let me walk you through a couple of those assumptions and how we're thinking about the next 15 months or so. Really 3 major assumptions I'll walk through and then sort of kind of give guidance at the end.

The assumption number one is just the size of the deposits and interest-earning assets. I think this past quarter, it was a little over $40 billion. Over the last several earnings calls, you'll remember, we've given you guidance that we wanted to try to keep deposits flat through the end of 2023, which would keep earning assets flat.

We continue to reiterate that same guidance. And based on the loan growth forecast, our deposit forecast, our loan-to-deposit ratio would probably climb from somewhere around 76%, 77% where it is today to the end of 2023 around 80%. So that's kind of how we think about something else -- the size of the balance sheet management, somewhere in the $40 billion earning asset range.

The second assumption is just around interest rates. Last -- the earnings call we did in July, the Moody's consensus forecast was for the Fed funds to peak out at 3.5%. Of course, there's been a big change there. The new Moody's consensus forecast has the Fed funds peaking in 2023 at 4.75%. So there was a large move in expectations in the third quarter.

In our modeling, so that's all that built in our modeling. The deposit beta, we've talked about this before, but Page 20 speaks to both our previous cycle beta, deposit beta as well as our current cycle beta. And what it shows on the investor deck on Page 20 is that our deposit beta was 24% last cycle to date. And so far, this cycle 3%. And our assumption continues to be that this cycle will be this -- will play out in the same way as last cycle, so a 24% beta. So as we think about deposit costs, when we think about our interest rate forecast, we would expect our cost of deposits to get to around 1.10% to 1.20% sometime by the same time next year.

So if you think about that, that 4.5% increase in rates, it was 24% beta at our original deposit cost. That should get you somewhere in there. And as we think about the next 4 quarters, really thinking that -- about that ratably, that 1% change or so over the next 4 quarters sort of a ratable change.

So to kind of sum it all up, based on the assumptions of the balance sheet size, interest rate forecast and our deposit beta, we would expect our margin expansion from here and this past quarter was $355 million we would think that the margin would range somewhere between $360 million and $380 million through the end of 2023. So hopefully, that tells you the assumptions and sort of the big picture of how we got to those assumptions.

Perfect. A lot of detail as usual, Steve. Maybe just as 1 follow-up question, probably sticking with you. You guys have held the corresponding book revenue stream pretty consistent over the past couple of quarters, but it did come off again this quarter -- did come up this quarter. Can you please 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?

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. And 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 '22. At that point in time when we gave that guidance, the terminal Fed funds rate was 3.5%.

But because we've had this large move in interest rates, really expectation up another 1.25%, some of these interest rate-sensitive businesses like mortgage and correspondent have slowed down from a fee income generation perspective. So you may think about correspondent, we -- our guidance was $24 million to $28 million a quarter. We're lowering that guidance really to $20 million to $25 million a quarter until really we get through the Fed stopped 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 the short-term rates 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 million and $25 million until the Fed stops 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 and until the Fed stops raising rates, we would expect our noninterest income to average assets to be between 0.6% and 0.7%. As the Fed stops raising rates when we get in 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 we think through the puts and takes of course on it and noninterest income.

The next question today comes from the line of Kevin Fitzsimmons from D.A. Davidson.

Just wondering if you can talk a little bit about loan growth, how you -- 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 on underwriting or stepping back on certain kind of loan segments? Any color on that front?

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 kind of a wait-and-see approach. We'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 are -- have been very slow to adjust to the yield curve. But we're starting to see that bid-ask spread on CRE properties starting to widen out. I think there's a number of folks that were in the development business, the merchant builders that are preparing to become owner managers and what that's going to do, it's going to slow pay downs 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. So I think the Fed is having and seen the desired effect of the rate increases. So while loan originations are going to slow, growth is going to be a little bit different. There are some cross currents with growth. And then number one, payoffs that we've been talking about for 2 years, I think payoffs are going to start slowing. And there's a number of loans that we originated in the last 2 years that are still in the fund-up scenarios.

So I do think that growth is not going to slow down as fast as new loan originations slow. So 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, and that gets us to that 80% loan-to-deposit ratio, that Steve talked about, if we hold the balance sheet and deposits flat. But that's the macro picture. We're very, very bullish on the markets in the southeast. They're going to outperform the rest of the country. The in-migration that Will talked about, you can see it in the residential numbers.

The nation -- mortgage origination this year, year-to-date is down 46%, 47%. We're only down about 6%. So 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 in the last couple of years with the automobile industry in the southeast. But we've had just a ton of announcements.

I mean, in Georgia, there's a new $5 billion Hyundai plant for electric vehicles, 8,000 new jobs. The South Korean has just built a new battery plant for electric vehicles north of Atlanta, 2,000 jobs, $1.7 billion investment. Last week, BMW announced an expansion to their plant in Greenville, South Carolina, $1.7 billion. And we've got a new assembly plant in Huntsville, Alabama, with 4,000 new jobs for Mast 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, and 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.

Yes, that's great, John. Just 1 quick follow-up. I was just wondering if -- I guess it's understandable we wouldn't hear as much about it with the deal being closed for a while now, but if you can speak to any observations on Atlantic Capital in terms of any remaining savings and/or contributions that you're seeing from them, whether better or less than expected?

Yes. This is John. Our pipeline and production in Georgia have been fantastic. So we completed the conversion in July. 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.

Yes. And Kevin, I'll take it on the savings side. Maybe I'll go ahead and wrap this into the context of 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's still a few little trickle in, in subsequent quarters, including Q4. And that also goes for the branch consolidations we did. There'll be a little bit more in Q4 than Q3. But I'd say our guidance for the Q4, i.e., still would be where we thought it would be, and that's somewhere in the low 230s and if we're lucky, maybe down below 2.30%.

This quarter, we had a few items moving positively and negatively and did a little bit than we thought. One item, of course, is production in the correspondent business lower that drives down some of the commission compensation expense there. And so depending upon that fluctuations in that business, that will impact NIE as well. But also in Q4, we'd expect to probably continued incentive 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]. It feels like a good number.

And then looking ahead to next year, I'd say we're -- for NIE, 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, and 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. And we've done a good job, I think, this year with our incentive plans of keeping that front of mind with our teams and hope to do so next year as well.

The next question today comes from the line of Stephen Scouten from Piper Sandler.

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 balance sheet, and kind of around funding and rate paid on the resi-mortgage side?

Sure, Stephen. We talk about our residential portfolio on Page 14 and 15 in the deck. And just a couple of points to make there, and then I'll kind of try to frame all that up. Last quarter and the third quarter, we produced about $1.1 billion in production. 78% of that was portfolio, 22% with the secondary. And of course, 92% was purchased. So a lot of this is the refi business is pretty much done.

On Page 15, we show a historical look at the portfolio residential growth and shrinkage over the past 2.5 years and characterize that around gain on sale spreads and mortgage rates. The key takeaway when you look at that slide is we've sort of used residential as a balance sheet management tool. When rates are low and gain on sale margins were high back in 2020 and 2021, we sold most of the production and took the fee income. Lately, when rates have risen and gain on sale margins have declined, we've grown the portfolio balances over the last couple of quarters.

Since -- if you kind of take a cycle look since the December of 2019, we're at only $450 million in total for 8% over that 2.5-year period. This quarter, we produced about $825 million of portfolio production. 47% of that was for our professional doctor program. And we like that credit. We think that's an appropriate place to put -- production to put on our balance sheet.

Having said all that, residential production will slow along with a lot of other production. This year, we'll probably do somewhere in the $4.5 billion range relative to production of which the entire period, we'll do about 70% of the portfolio. If you look at next year, our preliminary forecast and will continue to get sharpened up, but this is probably more like $3 billion, which is about what we did in 2019 before we had the pandemic. And so we're thinking that's probably more like 60% portfolio, 40% secondary.

So just if you think about the balance sheet, we're going to probably produce more as we get into 2023, just because the shocking rates, and we have to kind of work through that period for the next 6 to 9, 12 months or whatever before rates start stabilizing and production gets back where it might have been this year. Is that helpful?

Yes. That's extremely helpful. 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 of the 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?

Yes. The main driver in that is our assumption around deposit beta. If you look at it from the first quarter, our NIM was 2.77%. This quarter, 3.55%. So we're up 78 basis points and our deposit beta is only 3%. So if you just run the math and say, based on history, our deposit beta is going to be 24% in the entire cycle versus where we are. That's really what's driving this. We've picked up a lot of asset sensitivity from here. The question really that is going to be difficult to answer for anybody is what is deposit beta going to do over the next 12 months. The best thing that we can model is our history. And that's the reason that, that asset sensitivity comes down, and then we'll see how everybody performs over the next year or so.

And 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 precise guide.

Great. Good reminder. 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?

It feels like the M&A environment is going to be a little slow for the next few quarters. Stephen, just with PE valuations where they are, uncertainty around inflation in a recession. So 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.

The next question today comes from the line of David Bishop from Hovde Group.

Yes. Sticking with the -- and Steve, I appreciate all the guidance there. As it pertains to the balance sheet, just curious, exiting the quarter, your view of excess cash. I'm just curious maybe what you view as a floor for that? Does it get back to the pre-pandemic level about $1.2 billion? Just maybe your view of sort of excess cash and liquidity at the standpoint.

David, it's a good question. This is Steve. Yes, that's right. Around 2.5% of assets, give or take, is probably sort of the floor for cash. As you know, we have very little in the way of wholesale have drawn any of that down. So I think our broker CDs are about $150 million or so that we did during the pandemic. We did long-term CDs. We have no Federal Home Loan Bank borrowings. So we have quite a few levers relative to the flexibility within our balance sheet to raise cash. But yes, I think that's a good way to think about the modeling. And that's -- if you kind of run that out, that's probably an 80% loan-to-deposit ratio at the end of '23 and roughly around 2.5%, 3% of assets in cash if we do what we just spoke about.

Got it. Then 1 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 higher unemployment rate outlook? Just curious maybe what sort of drove that elevated provision and what we should think about that moving into 2023?

Yes, Dave, that's exactly right. We -- in our -- and of course, as you know, with CECL, you have loss drivers that are selected based on statistical correlation with prior loss events. And in our case, dates back to 2000 -- the year 2000 for every bank that makes up SouthState with the exception of failed banks. And as we've looked at Moody's forecast each quarter, we do a pretty thorough analysis of not only the output they have in these various economic things, but the underlying assumptions behind them. And from that, we make a judgment about whether we believe Moody's is right on the money or maybe a little too optimistic or pessimistic.

For several quarters now, we have viewed Moody's as being more optimistic. And Moody's base -- I'm talking about their baseline. And their baseline is pretty similar to consensus. And so we have been waiting more pessimistically. We did find -- Moody's did move more pessimistically between Q2 and Q3, which did drive some of those loss drivers to be more indicative of higher losses.

We continue to be -- wait in the recession scenario, which is an S3 and for a decent portion of our allowance. So yes, the loss driver was sold based on that. As you saw in the quarter, our -- we had net recoveries in the quarter and generally pretty consistent asset quality metrics. So really the loss drivers for -- or the economic forecast for Moody's really drove our provision expense this quarter.

Our next question today comes from the line of Catherine Mealor from KBW.

One follow-up on the margin. We spent the last -- I'm talking about the deposit betas, but just wanted to get your thoughts, Steve, on loan yields. You saw a nice increase in your loan yields this quarter. What are you thinking about for kind of where new loans are coming on and then what ultimately won betas may be over the cycle as well?

Thanks, Catherine. Pretty much the same. We have a slide in our deck that speaks to, I think, it's page 19 which speaks to the loan repricing frequency. And what that basically says is about 30% of our loan portfolio reprices on a kind of daily basis, whenever they raise rates, it goes up. And then we also have another 11% that reprices that are adjustable that were repriced in the next year. So total, 41% of the portfolio will reprice in the next 12 months. So that's probably a good indication of sort of how we think about beta.

On the short end, it's roughly 30% on that. And then over time, as you produce more and as those adjustments come in the adjustable rate book, there's another 11% that will reprice. As it relates to loan yield, obviously, we had a big shock in interest rates in the third quarter. And so our loan yield continued to move up. And I think by the end of the quarter was over 5% for new production.

Of course, some of that is floating and then as they raise rates, it will go over to 6% just because it's floating. But anyway, hopefully, that's a good characterization of how we're thinking about loan betas from here.

Catherine, I'd just add that we benefit from -- we benefit from a lag effect on the positive side. There's a little bit of a lag effect on the loan side, too, as the market and lenders acclimate to rising rates, particularly ones moving as fast as these have and you have commitments out there that take a little bit to close. So there's a lag effect on both sides.

Great. Okay. And any -- and do you have the rate at which where loan yields were maybe for the month of September?

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.

Great. Okay. That's helpful. Great. And then 1 just follow-up on the reserve. I noticed that your reserve front-ending commitment increased a little bit more this quarter. Just any commentary on what drove that?

No, 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 the 131 basis point number versus the 113 basis point number. And it will fluctuate quarter-to-quarter. The fluctuation in 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.

Great. Okay. That's a one thing. Sure there wasn't anything to be aware of in terms of change in how you're accounting or provisioning for that? I got everything else was answered. Great quarter, guys.

(Operator Instructions)

The next question today comes from the line of Christopher Marinac from Janney Montgomery Scott.

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?

Yes. I don't think it's anything unusual, Chris. And dovetailing with the question, Catherine just asked, that drove -- that was some of the reasons for the growth in the total reserve being more towards unfunded commitments. But in terms of our -- I don't know if you want to add to that, John?

Yes. I mean other than just to say that the unfunded commitments really HELOCs and C&Is have been relatively flat where 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. It gives our clients some flexibility going into it because there's the recession.

Yes. It's interesting, Chris, as we've seen with some of our other releases, they 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 across -- pretty much across the board.

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 an additional business side? And 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.

Yes, Chris, we have a very interesting move. To your point, there was a lot of liquidity out the system, probably 9 months ago and because of loan growth and maybe the Fed doing quantitative tightening, that liquidity has definitely come down for our correspondent bank clients. And we are seeing as opposed to more fixed income, we are seeing some borrowers from the brokered market and system sales from our desk there. But most of our clients, and I'll speak to the Community Bank clients, typically have lower loan-to-deposit ratios and have really good funding basis. And so most of them probably are much bigger users of fixed income because they have excess liquidity and lower loan-to-deposit ratios than they are of buying brokerage CD -- buying or issuing brokered CDs.

But clearly, there's been an uptick on our desk, which I'm sure is true for everybody just because the certain clients are using it more than, call it, a year ago.

There are no additional questions waiting at this time. So I'd like to pass the conference over to John Corbett for closing remarks.

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.

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