(SSB)
Q2 2023 Earnings-Transcript
Operator: Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the SouthState Corporation Second Quarter 2023 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn today’s call over to the Chief Financial Officer, Mr. Will Matthews. Sir, please go ahead.
William Matthews: Good morning, and welcome to SouthState’s Second Quarter 2023 Earnings Call. This is Will Matthews, and I’m here with John Corbett, Steve Young and Jeremy Lucas. John and I will provide some brief prepared remarks, and then we’ll open it up for questions. As always, a copy of our earnings release and presentation slides are 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 federal securities laws and regulations. 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 our forward-looking statements and risks and uncertainties which may affect us. Now I’ll turn the call over to John Corbett, our CEO.
John Corbett: Thank you, Will. Good morning, everyone. Thanks for joining us. When we had our last earnings call in April, the banking industry was still in the fog of war. Three months later, the fog is starting to clear. Liquidity is stabilizing. The new regulatory framework is coming into focus and SouthState is in a position of relative strength for the next phase of the cycle. We’re pleased to report that for the first half of 2023, PPNR per share grew by 34% compared to the first half of last year. And so far this year, loan and deposit growth has been slightly better than our guidance. You’ll recall that for 2023, we plan to keep deposits flat and for loans to grow at a mid-single-digit pace. We projected that loan growth would be faster in the first half of the year a little slower in the back half of the year.
We’re now at the halfway point for 2023 and deposits are up 2%, and loans have grown at a 9% annualized pace. So balance sheet growth is on track. Our geographic business model has proven to be a competitive advantage for deposit pricing. Our regional presidents have done a superb job of efficiently using exception authority to protect our core relationships while effectively managing deposit costs. And it helps that SouthState has the lowest average deposit size of our peer group at $25,000 per account. And that granularity translates to stability. The long-term value of a bank is on the right side of the balance sheet and our granular and relationship-based deposit funding has resulted in a cumulative deposit beta of just 22% this cycle and we’re pleased to have had 6% growth in customer deposits in the second quarter.
Credit metrics are starting to normalize, but charge-offs remain very low. In the last year, we conservatively set aside $142 million in loan loss reserves to cover only $4 million in charge-offs. The result is bolstered our reserve, including unfunded loans by 30 basis points from 1.26% a year ago to a current allowance for credit losses over 1.5% at 1.56%. We believe the strength of our reserves and our capital base will give us an extra level of optionality as we enter the next phase of the cycle. The Southeast has proven to be the winner and it should continue to be the winner in a post-pandemic economy. Population growth and job growth are remarkably strong, and that’s driving real estate values and new home construction. SouthState operates in four of the six fastest growing states in the country.
And with the recent announcements of several new multibillion-dollar electric vehicle plants and battery plants and with tourism fully recovered, we see the momentum in the Southeast extending well beyond this decade. We don’t have a crystal ball, and we don’t know the ramifications of the Fed’s policies as hard as we try, but we are firm believers that granular and relationship-based deposit funding. Disciplined underwriting in high-growth markets and an entrepreneurial team of bankers is the recipe for success. Regardless of the Fed’s interest rate policies. And with that, I’ll flip it back to Will to walk you through the details of the quarter.
William Matthews: Thank you, John. I’ll go through a few details — but I think a high-level summary of the quarter is that we put up a solid PPNR, though our NIM compressed a bit to 3.62%. Our deposit costs were in line with where we expected them to fall we had forecasted an increase of 45 to 50 basis points, and they moved up 48 basis points from Q1 to 111. We had solid growth in both loans and deposits though we expect our loan growth to slow down in the back half of the year. Our non-interest income performed well, exceeding our expectations. And conversely expenses were a little higher than expected, largely due to some items that are not expected to recur. On the balance sheet, our 11% annualized loan growth brings our first half growth rate to 9%.
As I said, we expect this to moderate for the final two quarters of the year. Deposits grew at a solid 3.6% annualized rate or 6% if you exclude the approximately $210 million in brokered CD maturities we didn’t replace. Like others, we continue to see a mixed shift in our deposits from DDA into money market accounts and CDs. DDAs represent 31% of our total deposits at quarter end, down from 34% last quarter. Pre-pandemic this figure was 28% to 29%, so we appear to be moving toward pre-pandemic levels of DDA as a percentage of deposits. Turning to the income statement. Our 362 NIM was down 31 basis points from Q1. Loan yields were up 15 basis points, but deposits were up 48 basis points bringing our cycle-to-date deposit beta to 22%. Our net interest income of $362 million was approximately equal to what we reported for the 2022 third quarter.
Non-interest income was up $6 million to $77 million, the best quarter we’ve had since last year’s second quarter. It was led by correspondent, which had $19 million in revenue after $8 million in interest expense on swap collateral for $27 million in gross revenue. This continues to be a difficult environment for fixed income, but our interest rate swap business had a very good quarter. Mortgage and wealth had solid quarters similar to Q1 levels. And deposit fees recovered to levels we saw in Q4. As I said, expenses came in higher than expected this quarter. A few factors impacting the quarter’s NIE. Compensation expense was up $3 million, around half of which was higher commission expense. We recorded a $1.5 million expense accrual for litigation and we recorded an adjustment for our FDIC assessment during the quarter to reflect the new assessment rate effective this year.
Our quarterly run rate going forward for FDIC insurance expense should be approximately $7 million in any special assessment and excluding other regulatory charges. Those two non-recurring items, the litigation accrual and the FDIC adjustment, along with the higher commission expense totaled around $5 million. Looking ahead, our team’s annual merit increases are effective July 1, subject to some variations in expense categories impacted by noninterest income and performance. We expect operating NIE in the next couple of quarters to be in the low to mid-240s. With respect to credit, we continue to build loan loss reserves in the face of a possible recession, with $38 million in provision expense against only $3 million in net charge-offs. Over the last four quarters, we’ve averaged one basis point in net charge-offs or a total of $4 million, while recording $142 million in provision expense for a $138 million build in total reserves in one year.
This brings our total reserve to just shy of $0.5 billion and 156 basis points of loans, up 30 basis points from a year ago. We knew the historically low levels of NPAs and criticized and classified loans we’ve enjoyed the last few quarters were not sustainable. We saw those metrics tick up a bit in Q2, though they remain at very moderate levels. I’ll note that almost 60% of our non-performing loans are current on payments. Like last quarter, we included in presentations some additional credit information on areas of interest. We continue to have very strong capital ratios with CE Tier 1 above 11% or 9.4% if AOCI were included in the calculation. Our TCE ratio improved slightly to 7.6%, with capital retention slightly offset by a higher AOCI impact versus Q1 due to increases in interest rates.
As I noted, we expect to see slower loan growth in the next couple of quarters so risk-weighted asset growth should be lower than what we experienced in the second quarter. With our solid capital position and our capital formation rate, we expect to continue to build and retain capital that we may potentially utilize our buyback authorization to repurchase shares should conditions warrant. Operator, we’ll now take questions.
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Operator: [Operator Instructions] Your first question comes from the line of Catherine Mealor with KBW. Your line is open.
Catherine Mealor: Thanks, good morning. I thought I’d start with the margin and just see if we could get an updated thoughts on how you’re thinking about the margin in the back half of the year, the deposit beta been so good. I’m just curious if you think that’s sustainable in the back half of the year, if we still have a little bit more of a catch-up coming. Thanks.
Stephen Young: Yes. Catherine, this is Steve. Thanks for the question. And just to back up for a second. Last quarter, our guidance was really kind of three things. One was interest-earning assets around $40 billion. Our deposit costs were to increase 45 to 50 basis points. They increased 48, so that was kind of right in line. And then the third piece of guidance we said was that our full year expectation for 2023 would be between 360 and 370. And then of course, second quarter came right in line with that. So as we think about going forward the rest of the year and then 2024, just a couple — there’s three really big assumptions around interest-earning assets being the first. Our rate forecast in the second deposit that would be the third.
On the first one, our interest-earning assets is around $40 billion for the full year. We haven’t changed that guidance. It started out a little lower. It’s ending a little higher, but basically pretty steady in 2023. As it relates to the second assumption of our rate forecast, during the April call, we forecast a rate based on the Moody’s baseline, the peak at 5.25%. But of course, based on the latest Fed rate hike this week, and the Moody’s consensus, we’re expecting fed funds rate to stay flat at 5.5% through the rest of the year before decreasing in the first quarter of 2024 and then going to 4.25 by the end of 2024. That’s what’s built into our forecast. And then the last assumption is just around deposit beta. And as you mentioned, and we have a page in the deck on Page 19 of our investor deck that shows our cycle-to-date deposit beta is at 22% versus our historical beta from last cycle was 24%.
In April, we did give guidance that we expected our deposit betas to finish up in the high 20s due to the March banking turmoil. We continue to reiterate that expectation based on what we’re seeing. And so as we think about based on our interest rate forecast, we would expect deposit cost to increase 30 to 35 basis points in the third quarter and for deposit costs to end the year between 150 and 160 in the fourth quarter, which is up about 40 to 50 basis points from the current 2Q level. So you kind of put all that together, and in summary, based on these assumptions, we expect NIM to be between 3 50 to 3 60 in the back half of 2023, and we reiterate our full year NIM guide of 360 to 370 for 2023. And as we think going forward and of course, there’s a lot of assumptions going forward in 2024 really our biggest change would be just we expect our interest-earning assets to grow in 2024.
So we expect it to average around $41 million for 2024 as we can grow loans and continue to grow the balance sheet. And the NIM would be relatively stable in that 3 50 to 3 60 range just based on all those assumptions. So that’s a long-winded answer to your question, but I think hopefully that encapsulates the margin question.
Catherine Mealor: That’s really great. Perfect. Thank you so much Steve. Maybe just thinking about the margins in 2024 because I think for the rest of the year, it makes perfect sense. But as we think to 2024, I’m assuming loan yields is really the biggest factor there we assume the sad staying at 550 and then even cuts in the next year. The big question is what can loan yield do into next year. And this quarter, I noticed loan yield change fell back a little bit from the pace that we’ve seen in the past couple of quarters. And any commentary on what drove that and every quarter can be kind of different. But just maybe — can you give us some thoughts on loan repricing and maybe within that guidance where you’re thinking loan yields in the end of the year and upside as we move into that.
Stephen Young: Yes, I think last quarter, we answered this sort of question on the call. And I think what we were talking about that based on the forecast we thought loan yield for our total portfolio would end between 5.5% and 5.75% at the end of fourth quarter. So there’s really no change to that. And that’s probably why our NIM guidance really hasn’t changed a whole lot. We would expect that the loan yields will continue to increase, one, based on the Fed rate; two, based on new production; and three, the last is just the maturing or repricing adjustable fixed rate loans. That represents about $1 billion a quarter that is sort of repricing somewhere in that 4 25 to 4 40 range and of course over 7%. So those are kind of thing that would give us some confidence in the loan yield continue to increase overtime.
Catherine Mealor: Got it. Great. Thanks for the help. Appreciate it, great quarter.
Operator: Your next question is from the line of Stephen Scouten with Piper Sandler. Your line is open.
Stephen Scouten: Hey good morning guys, appreciate it. I guess I appreciate the commentary around $142 million and provisions only $4 million in net charge-offs. We can see the reserve build. But are there any other dynamics at play there that’s leading to a little bit more elevated provisions than what maybe I don’t know, I would expect from my side of things?
William Matthews: Yes, Stephen, it’s Will. The short answer is the biggest driver to the provision this quarter was the change in the commercial real estate price index forecast. But let me maybe back up just a second sort of talk about our model. Our model is built on historical loss data for 60 different bank charters that make up to SouthState from the period of 2004 to 2019. So obviously looking at different economic environments, different loss rates that occurred in those different environments and running regression analysis. We have to also on top of that though, incorporate a quality of other way to account for the different nature of some loan portfolios, particularly construction loan portfolio, which as you might imagine, heading into the great financial crisis and the in the 2000, 2010 time frame was much more heavily speculative land acquisition and development.
It was in some cases, definitely well over half of the construction portfolio where today, it’s a miniscule fresh and almost on an exception only basis, whereas we’re doing more industrial and multifamily type only in that construction category. So we have a [indiscernible] to adjust for that factor. But you have to keep in mind that CECL is a forward-looking measure. And so the increase that we show is not based on what we see in our portfolio, but rather based upon drivers the changes in the loss drivers, particularly CRE price index in this quarter.
Stephen Scouten: Okay. And the big move from the unfunded reserve to the funded, is that about loan fundings? Or is that still kind of more model-driven into what you just spoke to Will?
William Matthews: It’s a combination of the two. Our unfunded portion of the loan commitments is reducing as we’re not refilling the pipeline as much with construction loans and also just reflects some of the loss drivers in the different segments and the quality of overlays. We kind of view — we tend to view – whether or no we tend to view the total reserve to 156 basis points versus just the reserve on the loans themselves. It’s all capital set aside to cover loan losses.
Stephen Scouten: Yes. Perfect. Okay. And then on the loan growth guidance kind of lower in the back half of the year. That’s very consistent, which I appreciate. Is that — I know like this quarter it looked like investor CRE and resi mortgage were the two biggest drivers. Is one or both of those falling off more so than anything else? Is that why loan growth will back off? Or what’s kind of — is it just more conservatism? Can you give me some color on that dynamic?
John Corbett: Yes, it would be the residential loan growth category, Stephen. I mean, that’s grown far beyond our forecast for the first half of the year. Basically in the Southeast with all this population migration, there’s more buyers than sellers. There’s a lack of inventory. So we’ve been financing new home construction for end users, not for builders, but for the end users. But we see that residential production moderated in the back half of the year as we just adjust the mortgage rates higher. And what I would add is we have a slide in the deck, and I think probably this last time we put it in there, but Page 35, which speaks to kind of the residential loan growth over the past really three years in what you notice is when rates are low, we typically sell more in the secondary when rates are higher, we put more in the portfolio.
If you look at that whole three years. And you said, once your compounded growth rate over that 3-year period for residential, it’s right at 9%. And so as we think about managing our balance sheet and our capital allocation we sort of got it back to where we think the long-term average is and growing at 25% a quarter from here doesn’t make as much sense. So I think we’ve kind of allocated what we were going to allocate. Now we just got to grow it with the rest of the portfolio.
Stephen Scouten: Yes. That’s great. And then just last thing for me. Obviously, the NIM guidance was very detailed. I appreciate that Steve. And no pressure on that basis point change quarter-over-quarter. You did so well this quarter. Now we’re all going to expect it to be dried again. But I’m wondering, within that guidance, what’s the noninterest-bearing deposit percentage look like in your models and your thinking? It’s because it’s still 35%, which is phenomenal, but down from 40%. Where do you think that’s going to trend from here?
Stephen Young: Yes. So in our models, we are at 31% at the end of the quarter, which fell from 34% last quarter. So — and most of that, of course is just the business DDA side of it. Prior to 2020 in the last cycle, we ended up in I think, in that 28%, 29% range. So just based on our forecast we’re getting to that level by the end of the year. So we think there’s a couple of percent degradation, although like everything else, stops accelerating so much over the next two quarters, it’s kind of how we’re thinking about it.
Stephen Scouten: Okay. Perfect, great. Appreciate all the color guys.
Operator: Your next question is from the line of Kevin Fitzsimmons with D.A. Davidson. Your line is open.
Kevin Fitzsimmons: Hey good morning guys. I was just wondering on the deposit cost headwinds, the level of competition the mix shift that we just were speaking about a minute ago. We’ve had a few banks site that they’ve observed that easing over the course of the quarter and specifically here in the last month of June and coming into July, is that consistent with what you’re seeing? Or you’re seeing some of those end abating or not necessarily? Is it just as fierce in terms of the pace that you’re dealing with?
Stephen Young: Kevin, this is Steve. Yes, that’s consistent with what we’re seeing. Certainly, it can change, but that’s really built into our guidance. Last quarter we guided between 45 and 50 for the quarter. This year we’re sort of the 30 to 35 range. And that’s consistent with what we’re seeing today and probably consistent with the industry. Certainly, anything else can happen that would move or change that. But right now, that’s sort of where we’re seeing it.
Kevin Fitzsimmons: Okay. All right. And Steve I apologize if who said, I missed it, but it was a very good quarter for corresponding capital markets. And as Will pointed out earlier on the swap side. Can — is there any — can you update us on what your outlook or how we should be thinking about noninterest income, if we’re looking at like a run rate in the second quarter of $77.2 million, how we should be thinking about that going forward?
Stephen Young: Sure, Kevin. You’re right. So the fee income was $77 million or the way we think about it, 69 basis points of assets, which was better than our guide of between 55 and 65 the biggest drivers you mentioned was correspondent. And really, it came down to our interest rate swap revenue. And if you think about the environment in the second quarter one of the things that happened was we had much lower 10-year treasury, and then we had some conversions on LIBOR that sort of drove some of the revenue. The way we’re thinking about that business for the back half of the year is sort of back at its first quarter levels because the 10-year treasury has now picked up to about 4%. So that sort of drives a little bit of that.
As we’re thinking about obviously, service charges came up a little bit too. We think that probably comes down a little bit in the rebound in the fourth quarter, like it usually does. But from here I think our guidance really hasn’t changed. I think it’s sort of that 55 to 65 basis points for the rest of the year. And then as we think about the get clarity on the fed rate hikes and maybe even potential cuts in 2024, we’d expect in 2024 that, that non-interest income to average assets would start moving up from more in that 60 to 70 basis points due to these interest-sensitive businesses like mortgage and correspondent, which tends to do a lot better during a period of stable to lower rates. So really no change. We had a really good quarter.
We’re not expecting quite those levels going forward for at least the next couple of quarters. But into 2024 we’d expect those to sort of rebound back just due to the fact that, that’s a little bit more stable.
Kevin Fitzsimmons: Okay. Great. And I think I know the answer to this, but I just want to ask, there’s been — you guys are cash flowing the available for sale securities. I would imagine at one point — at some point AOCI has been unwind for you, but we’ve had a few banks pull the trigger on chunkier bond restructuring transactions and just wondering if that’s something that’s on the table or on the radar for you guys given your strong capital that you could kind of accelerate that process or not? Thanks.
Stephen Young: Yes. Sure, Kevin. I mean it’s certainly something that we’ve talked about and you want to always want to keep our options open because, as you know, things change, yield curve levels change, shape to the yield curves change. I think the way we think about it is we’re really balancing kind of three things: Capital, earnings and liquidity. So as we think about NIM potentially stabilizing here, you’ll probably see less of a need to do that. But at the same time, if the yield curve changed and moved down and there was an opportunity, we might want to do it. So I guess, that’s really a non-answer, but I think we always look at it, but there’s nothing burning that makes us want to do it but at the same time, there could be an opportunity at some point if the yield fiddles [Ph] out.
Kevin Fitzsimmons: Okay, thanks very much guys.
Operator: Your next question is from the line of Michael Rose with Raymond James. Your line is open.
Michael Rose: Hey good morning everyone. Thanks for taking my questions. Hey Steve, I just wanted to confirm that the margin guide that you gave includes purchase accounting accretion? Or is that on a core basis? Just trying to clarify.
Stephen Young: Yes, it includes all of the above purchase accounting accretion continues to move down. You saw it move down a few million this quarter. I think and we expect that to kind of continue to move down through 2024. So it really becomes less of a story when you’re having several — $300 million worth of NIM. So I think yes, all that includes everything.
Michael Rose: Great. And just wanted to circle back to loan growth. One slide that really sticks out to me is Slide 5, where you have kind of the GDP of the footprint being in line with Japan and above Germany. Why is there not — why are you guys not — given your footprint, why is growth not stronger? I know you said it try to decelerate some of that’s just the fund up of some of the construction stuff that was on the books that’s waning. Is it more of a measured approach from you all? Or is it just — the market is really — your markets are slowing down and there’s just not as many opportunities? Thanks.
John Corbett: Yes. I think, Michael, it’s a measured approach from our bankers and it’s a measured approach from our clients. Our C&I clients there’s still good business in the marketplace, but as they think about making large strategic decisions and they’re thinking about the implications of an inverted yield curve and the potential recession in 2024, they’re just being more cautious. And then you go back to CRE and clearly, with the interest rate environment like it is, a lot of these deals don’t pencil out for us as underwriters. They don’t pencil out for the developers. It requires them to put 45%, 50% cash in the deals. So that activity is slowing down. And that’s what the Fed is designed. I think that’s what the Fed wants to happen.
So we don’t want to fight the Fed here from a growth standpoint. But I would tell you as I think about different regions of the country about the amount of opportunities for loan growth that we’re going to see in the next couple of years, I think we’ll be at a faster pace than other areas of the country. And I think when it comes to potential recessionary risk it’s going to be a lot less in the Southeast.
Michael Rose: Great. That’s good color, John. I appreciate it. And maybe just one final one for me. You guys are trading around 1 8 of [indiscernible]. I know you talked about maybe some buybacks that we have seen two kind of larger deals this week. I mean what’s the outlook for M&A here, just given that you have a stronger currency. And if you were to look at something I mean is there a preferred size range? Would you consider an MOE? I mean I think there’s going to be a lot of interesting things that happen, but we just love your overall thoughts on how you view M&A at this point? Thanks.
John Corbett: I think those two deals kind of caught everybody a little bit by surprise last week. In the short term, there are obvious headwinds. The economic uncertainty the interest rate markets on this deal math and then the regulatory approval process is just too long. So that’s the short term. But from a long-term standpoint, the logic is there. If we’ve got an inverted yield curve and there’s continued revenue pressures, and we’re starting to see Michael dispersion of multiples that could drive good accretion in M&A. But really, our guidance hasn’t changed. As we think about good partners for us. Ideally, we would like to partner with banks that are about 10% to one third of our size. Our preference geographically would be to double down in the great markets that we’re in. And if we ever look to expand into an area outside of our markets, we want it to be similar high-growth markets that we’re already in.
Michael Rose: Appreciate the color, John. Thanks everyone.
Operator: Your next question comes from the line of Brody Preston with UBS. Your line is open.
Broderick Preston: Hey good morning everyone. I was hoping to maybe just dig in a little bit more granular on the margin. I was wondering Steve, do you guys have any loan just because the loan yield — I know that it’s still kind of on track to kind of get into the range you outlined, but came up a little bit less than what I was looking for. And so is there any — I guess, within kind of the $9-plus billion unfunded commitment that you that you have, is there anything that’s like funding up that is maybe coming on at yields that were agreed to a year ago or something like that, that’s a bit below the market right now that’s kind of stopping that loan yields for moving towards the high end of the $575 million that you expect?
Stephen Young: It’s a good question. I think some of this has to do with the number of days in a quarter and all those kinds of things. If you think about the first quarter, for instance, a lot of the things that can drive some distortion maybe is just around like February a 28-day month and you have 360 that sort of make that yield a little higher. There’s things like that. I don’t think there’s anything back to what we forecasted last quarter and what we’re forecasting this quarter hasn’t changed for kind of the back half of the year. So I don’t think there’s anything that we’re seeing that kind of keeps us from being in that 550 to 575 range by the end of the year based on what we see. But some of that is — our models have repricing in them and loans that are adjusted all those that are maturing, those kinds of things.
But there’s nothing in there that I think is unusual or anything that the question you ask, I don’t have right off the top of my head. I don’t think there’s anything that’s really driving that.
Broderick Preston: Okay. Got it. And then I did also want to ask on the opposite side of the ledger, just the transaction and money market cost of deposits, they were up again, but they held in I think, quite a bit better than some of your peers. And so I was wondering kind of what the interest rate you’re paying on money market is for kind of negotiated rates for your business clients or just a broad kind of average rate? Like any detail you can give us there would be helpful.
Stephen Young: Yes. Obviously, so much of that remix this quarter was in the business DDA going into business money market. So that’s that’s that. And then as it relates to the rates that are paid on those particular accounts is really driven by so much of it being relationship pricing. And so it really — the answer is it depends. I think our average money market rate for the quarter was in the high maybe 280 — 270, 280 kind of range. And of course, you saw a huge remix into from business money or business to business money market. So I would — I guess, the question really that you’re asking is when does that slow down. So if we have another 3% or so that moves in, you could continue to see that money market rates move up.
Remember looking back and this is a long time, it was a different bank, but 2007, when Fed funds was around 5.25%. Our money market average rate was in the 3% range. So it doesn’t surprise me a whole lot that we’re sort of trending towards that at the end of this rate hike in the cycle. But obviously, the cycle has been different. And so it’s hard to predict, but that’s maybe some data points for you.
Broderick Preston: Okay. Could I ask just on that remix that’s happening from the business checking to the business money market? We can we can see that pretty well on the end of period balance sheet, but those two categories get consolidated for the average balance sheet. And so as did any of that happen later in the quarter that might have influenced the cost of deposit being lower than we should expect going forward?
Stephen Young: I think the events of March really kicked in some of that remix in April and probably May and certainly to a lesser extent, June. So I think back to our earlier comments on the cost of deposits, what other banks are seeing and sort of that a little bit of a deceleration. I would say that probably most of that was maybe a little bit. It was all throughout the quarter, but I’d say more heavily weighted towards April and May versus June.
Broderick Preston: Got it. Okay. And I just had a couple left. Will — I guess, the litigation expense, was that for anything specific. I was just kind of wondering what that was. And then the guidance you gave for expenses, the low 2.40s, to mid-2.40s it implies just — it’s small, but it implies a step up in the expense side just a little bit off of the full year 9 50 that you had talked about before. Is there anything specific that’s kind of driving that as well?
William Matthews: Yes. So the litigation accrual was related to settlement of a case from — that’s been out there for a while, and we had accrued and remediation and finally got it settled. So that’s accrued up for the amount. The expense guide, there’s a little bit of both that 9 50 range if you put them all together, I’d say the hard thing to predict there, as you know, one would be variable compensation expense associated with some of the variable revenue business lines, commission, etcetera. That’s a component that depends upon those. The other is loan production volume impacts the FAS 91 loan origination cost deferral as well. So that’s one that’s hard to predict. If loan volume slows down, you’ll have less of that as an NIE offset.
Those would be two of the things. And then as you look through the year, you’re first going to sure if your incentive compensation through the rest of the year, and that’s one that has some variability to it. So that’s all — those are some of the things that are in there that lead to that being a range like it is.
Broderick Preston: Got it. Thank you for that detail. And then the last one I had was I did notice that when I was kind of comparing the investor CRE slides quarter-over-quarter. I did notice that there was a step-up in the substandard and special mention office portfolio. I wanted to ask if that was the result of any reappraisal that you had done or if it was something different?
John Corbett: Yes, Broderick, it’s the second quarter of the year. So this is when we get in a lot of the year-end financial statements. So we’ve been actively doing the normal servicing of the commercial loan portfolio. And to your point on Page 25, you can kind of see that over the last year, special mention loans have been trending lower. Substandard loans have drifted higher. If you put it all together, we’re roughly flat from about where we were a year ago, but we are seeing a mix, and I think it’s predictable. We’ve been upgrading hotel loans coming out of the pandemic, and we’ve been putting some of the office deals on watch. If you look at our NPAs today nearly 60% I think Will said this in the prepared remarks, nearly 60% of them are current on payments, about $19 million have a government guarantee.
There were two C&I credits that migrated to non-performers in the second quarter. One, we feel pretty good about. We don’t think there’s a loss. The other one might have a charge in the third quarter. But based on what we know today, we should finish the calendar year with total charge-offs probably at or below 10 basis points.
Broderick Preston: Got it. Thank you very much for that. I appreciate it guys.
Operator: Your next question comes from the line of David Bishop with the Hovde Group. Your line is open.
David Bishop: Yes, good morning gentlemen. Most of my questions have been asked and answered. Just one final question maybe on new loan origination deals. Just curious where you saw those trending this quarter relative to last? And are you seeing any differential or better pricing in some of your markets and others. Just curious what you’re seeing overall in terms of new loan origination yields?
Stephen Young: Yes David, this is Steve. They did improve for the quarter. And I guess, I don’t have the data right in front of me as far as where they trended up from the first quarter. But part of it is I do have the residential loan yields which I think was in the 6 20 range, give or take. And so as we think about the commercial loan yields are much higher than that. And so as we think about moderating the loan growth in the back half of the quarter, most of that’s going to be in residential we’ll start seeing that new loan yield probably be over 7 is probably where we’re thinking. I think we’re in the high 6s, give or take, in the second quarter. But as we kind of move residential down, which is a lower yielding where we think a safer asset, it really it will move back towards that 7% is kind of what we’re thinking.
David Bishop: Got it. And then one follow-up question. The guidance in terms of loan yield expectations here was 5 50 to 5 75? Thanks.
Stephen Young: Yes. That would be — just to be clear, that would be in the fourth quarter, and we would expect it to move kind of in between here and there in the third quarter. So — and that’s all part of the margin guidance. But yes, we would expect the loan yield to sort of to be roughly in that range by the end of the year.
David Bishop: Great. Thank you.
Operator: There are no further questions at this time. I will now turn the call back over to Mr. John Corbett.
John Corbett: All right. Thanks everybody for joining us this morning. We know it was a busy morning with a lot of earnings calls going on. If we can provide any other clarity for you, don’t hesitate to give us a ring. I hope you have a great day.
Operator: Ladies and gentlemen, thank you for participating. This concludes today’s conference call. You may now disconnect.