Earnings Call Transcript - SSB Q2 2023

Operator, Operator

Thank you for joining us. My name is Brent, and I will be your conference operator today. I would like to welcome everyone to the SouthState Corporation Second Quarter 2023 Earnings Conference Call. It is now my pleasure to turn the call over to the Chief Financial Officer, Mr. Will Matthews. Please go ahead, sir.

Will Matthews, CFO

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, CEO

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.

Will Matthews, CFO

Thank you, John. I’ll go through a few details, but a high-level summary of the quarter is that we achieved solid PPNR, although our NIM compressed slightly to 3.62%. Our deposit costs aligned with our expectations, increasing by 48 basis points from Q1. We experienced strong growth in both loans and deposits; however, we anticipate our loan growth will slow in the latter half of the year. Our non-interest income performed better than expected, while expenses were somewhat higher than anticipated due to several non-recurring items. On the balance sheet, our annualized loan growth of 11% brings our first half growth rate to 9%. As mentioned, we expect this to moderate for the final two quarters of the year. Deposits grew at a solid annualized rate of 3.6%, or 6% if we exclude around $210 million in brokered CD maturities that we didn’t replace. Like others, we continue to see a shift in deposits from DDA into money market accounts and CDs. DDAs now account for 31% of our total deposits at quarter end, a decrease from 34% last quarter. Pre-pandemic, this figure was 28% to 29%, indicating a move back toward pre-pandemic levels for DDA as a percentage of deposits. Regarding the income statement, our NIM of 3.62% was down 31 basis points from Q1. Loan yields increased by 15 basis points, but deposits rose by 48 basis points, resulting in a cycle-to-date deposit beta of 22%. Our net interest income of $362 million was roughly equal to what we reported for the third quarter of 2022. Non-interest income increased by $6 million to $77 million, marking the best quarter since last year’s second quarter, primarily driven by correspondent revenue. Despite challenges in the fixed income environment, our interest rate swap business performed well, and mortgage and wealth also had solid performances similar to Q1. Deposit fees rebounded to levels seen in Q4. As previously mentioned, expenses were higher this quarter due to several factors affecting non-interest expenses. Compensation expenses rose by $3 million, partly due to increased commission expenses. We also recorded a $1.5 million accrual for litigation and adjusted our FDIC assessment to reflect the new rate. Our quarterly run rate for FDIC insurance expense moving forward should be around $7 million, excluding other regulatory charges. The non-recurring items related to litigation and FDIC adjustments, along with the higher commission costs, amounted to about $5 million. Looking ahead, our team's annual merit increases will take effect on July 1, with some variations in expense categories influenced by non-interest income and performance. We expect operating non-interest expenses in the next couple of quarters to be in the low to mid-$240 million range. Regarding credit, we are continuing to build loan loss reserves in anticipation of a potential recession, with a provision expense of $38 million and only $3 million in net charge-offs. Over the past four quarters, we've averaged one basis point in net charge-offs totaling $4 million, while recording $142 million in provision expense for a build in total reserves of $138 million over the year, resulting in total reserves just shy of $0.5 billion and 156 basis points of loans, an increase of 30 basis points from a year ago. We anticipated that the historically low levels of NPAs and criticized and classified loans we have experienced recently were not sustainable. We observed a slight uptick in those metrics in Q2, though they remain moderate. Notably, nearly 60% of our non-performing loans are current on payments. As in previous quarters, we provided additional credit information in our presentations on areas of interest. We maintain strong capital ratios, with our common equity Tier 1 above 11% or 9.4% if AOCI were included. Our tangible common equity ratio improved slightly to 7.6%, with capital retention partially offset by a higher AOCI impact due to rising interest rates. As previously stated, we expect slower loan growth in the next couple of quarters, which should result in lower risk-weighted asset growth compared to the second quarter. Given our solid capital position and capital formation rate, we aim to continue building and retaining capital, and we may utilize our buyback authorization for share repurchases if conditions allow.

Operator, Operator

Your first question comes from Catherine Mealor with KBW. Your line is open.

Catherine Mealor, Analyst

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 being 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.

Steve Young, CFO

Yes, this is Steve. Thanks for the question. To recap, last quarter, our guidance focused on three key items. First, we projected interest-earning assets to be around $40 billion. Second, we anticipated our deposit costs would rise by 45 to 50 basis points, and they increased by 48, aligning with our expectations. Lastly, we estimated our full-year results for 2023 would fall between 360 and 370, and the second quarter confirmed that expectation. Looking ahead for the remainder of the year and into 2024, we identified three major considerations. The first is our interest-earning assets, which we maintain at around $40 billion for the entire year. While it started slightly lower, it has remained steady. For our rate forecast, during the April call, we indicated a peak rate based on the Moody's baseline at 5.25%. However, following the recent Fed rate hike and the latest Moody’s consensus, we anticipate the fed funds rate will remain flat at 5.5% for the remainder of this year before decreasing to 4.25% by the end of 2024. The final consideration is deposit beta. According to our data, our cycle-to-date deposit beta stands at 22%, in comparison to the last cycle's 24%. In April, we projected that deposit betas would finish in the high 20s due to the banking turmoil in March, and we stand by that prediction based on current observations. Therefore, we expect deposit costs to rise by 30 to 35 basis points in the third quarter, and for deposit costs to conclude the year between 150 and 160 in the fourth quarter, which represents an increase of about 40 to 50 basis points from the current second quarter level. In summary, based on these assumptions, we expect our net interest margin (NIM) to range between 350 and 360 in the latter half of 2023, and we reaffirm our full-year NIM guidance of 360 to 370 for 2023. Looking ahead into 2024, we anticipate an increase in our interest-earning assets, projecting an average of around $41 million as we expand loans and grow our balance sheet. The NIM is expected to remain relatively stable in the 350 to 360 range based on these factors. That’s my comprehensive answer, and I hope it clarifies your question about the margin.

Catherine Mealor, Analyst

That's really great. Thank you so much, Steve. As we consider the margins for 2024, it makes sense to discuss the rest of the year. I assume loan yields will be the main factor, particularly if we assume rates stay at 550 with potential cuts next year. The key question is what loan yields will look like next year. This quarter, I noticed that the change in loan yields decreased slightly compared to the pace we've observed in the last few quarters. Could you provide insight into what caused that? Each quarter tends to be different, but could you share your thoughts on loan repricing and your guidance for loan yields by the end of the year, as well as potential upside moving forward?

Steve Young, CFO

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 things that would give us some confidence in the loan yield continue to increase over time.

Catherine Mealor, Analyst

Got it. Great. Thanks for the help. Appreciate it, great quarter.

Operator, Operator

Your next question is from the line of Stephen Scouten with Piper Sandler. Your line is open.

Stephen Scouten, Analyst

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?

Will Matthews, CFO

Yes, Stephen, it’s Will. The main reason for the provision this quarter was the change in the commercial real estate price index forecast. To give you some context about our model, it relies on historical loss data from 60 different bank charters that form SouthState, covering the years 2004 to 2019. This allows us to evaluate various economic environments and the loss rates that emerged in those periods through regression analysis. Additionally, we need to factor in the specific characteristics of certain loan portfolios, especially construction loans. For instance, prior to the great financial crisis between 2000 and 2010, a significant portion of the construction portfolio was driven by speculative land acquisition and development, making up over half at times. Today, however, that represents only a small fraction of our portfolio, as we now focus more on industrial and multifamily projects in this category. Therefore, we have to adjust for these changes. It's also important to note that CECL is a forward-looking measure, meaning the increase we are reporting isn’t a reflection of our current portfolio but is influenced by shifts in loss drivers, particularly the CRE price index this quarter.

Stephen Scouten, Analyst

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?

Will Matthews, CFO

It’s a combination of the two. Our unfunded portion of the loan commitments is decreasing as we are not adding as many construction loans to the pipeline, and this also reflects some of the loss drivers in the different segments and the quality of overlays. We generally consider the total reserve at 156 basis points as opposed to just the reserve on the loans themselves. It all represents capital set aside to cover loan losses.

Stephen Scouten, Analyst

Yes, that's perfect. Regarding the loan growth guidance for the latter half of the year, it appears to be consistent, which I appreciate. It seems that in this quarter, investor commercial real estate and residential mortgages were the main contributors. Are we seeing one or both of these slowing down more than others? Is that the reason for the expected decrease in loan growth, or is it just a matter of being more cautious? Could you provide some insight into that situation?

John Corbett, CEO

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 are 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, Analyst

Yes. That’s great. And then just the 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?

Steve Young, CFO

Yes. In our models, we are at 31% at the end of the quarter, down from 34% last quarter. Most of this change is attributed to the business DDA side of it. Prior to 2020 in the last cycle, we ended up in the 28% to 29% range. Based on our forecast, we expect to reach that level by the end of the year. We foresee a couple of percentage points of degradation, although we anticipate that the rate of decline will not accelerate significantly over the next two quarters, which is how we are approaching it.

Stephen Scouten, Analyst

Okay. Perfect, great. Appreciate all the color guys.

Operator, Operator

Your next question is from the line of Kevin Fitzsimmons with D.A. Davidson. Your line is open.

Kevin Fitzsimmons, Analyst

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 cite 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?

Steve Young, CFO

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, Analyst

Okay. And Steve, I apologize if I missed this, but it was a very good quarter for corresponding capital markets. As Will pointed out earlier regarding the swap side, can you provide an update on your outlook for noninterest income? If we’re looking at a run rate in the second quarter of $77.2 million, how should we think about that moving forward?

Steve Young, CFO

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, Analyst

Okay. Great. I think I know the answer to this, but I just want to ask. You are cash flowing the available for sale securities. I would imagine that at some point the AOCI has been unwound for you, but we’ve seen a few banks engage in larger bond restructuring transactions. I'm just curious if that's something you are considering, given your strong capital, that could potentially expedite that process. Thanks.

Steve Young, CFO

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 out.

Kevin Fitzsimmons, Analyst

Okay, thanks very much guys.

Operator, Operator

Your next question comes from the line of Michael Rose with Raymond James. Your line is open.

Michael Rose, Analyst

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.

Steve Young, CFO

Yes, it includes all of the purchase accounting accretion, which continues to decrease. You saw it decrease by a few million this quarter, and we expect that to keep going down through 2024. So it really becomes a smaller issue when you're dealing with around $300 million in net interest margin. So yes, that includes everything.

Michael Rose, Analyst

Great. I wanted to revisit loan growth. One slide that stands out to me is Slide 5, which shows that the GDP of your area is aligned with Japan and above Germany. Given your footprint, why isn't growth stronger? I understand you've mentioned that growth has slowed partly due to the tapering off of some construction projects. Is this a more cautious approach from your side, or are your markets genuinely slowing down with fewer opportunities available? Thank you.

John Corbett, CEO

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, Analyst

Great. That’s good information, John. I appreciate it. I have one final question. You are trading around 1.8. I know you mentioned some buybacks and there have been two larger deals this week. What’s the outlook for mergers and acquisitions considering your stronger currency? If you're looking at potential deals, is there a preferred size range? Would you consider a merger of equals? There are likely to be many interesting developments, so I’d love to hear your overall thoughts on your view of M&A at this time. Thanks.

John Corbett, CEO

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, Analyst

Appreciate the color, John. Thanks everyone.

Operator, Operator

Your next question comes from the line of Brody Preston with UBS. Your line is open.

Broderick Preston, Analyst

Good morning everyone. I wanted to delve deeper into the margin. Steve, do you have any insight into the loan yield? I understand it’s still on track to reach the range you mentioned, but it seems a bit lower than I expected. Within the over $9 billion unfunded commitment you have, is there anything coming up that might be funded at yields agreed upon a year ago, which are now lower than the current market? Is that what’s preventing the loan yields from moving toward the upper end of the $575 million you anticipate?

Steve Young, CFO

It's a good question. Some of this relates to the number of days in a quarter and similar factors. For example, in the first quarter, February has only 28 days, which can slightly elevate the yield. However, I don't believe there is any significant change compared to our forecasts from last quarter or our expectations for this quarter for the latter half of the year. We anticipate remaining within the range of 550 to 575 by year-end based on our current observations. Our models incorporate adjustments for repricing and maturing loans, but I don't see anything unusual affecting this situation. I don't have any immediate response for your specific question, but I don't believe there is a strong influence driving the change.

Broderick Preston, Analyst

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.

Steve Young, CFO

Yes. A significant part of the remix this quarter was from business DDA moving into business money market. The rates on those accounts are largely influenced by relationship pricing, so it really depends. I believe our average money market rate for the quarter was in the high 270 to 280 range. We saw a considerable remix from business to business money market. I think your main question is about when that might slow down. If we see another 3% or so move in, money market rates could continue to rise. Historically, looking back to 2007 when Fed funds were around 5.25%, our average money market rate was in the 3% range. It’s not surprising that we are trending toward that as this rate hike cycle comes to an end. However, this cycle has been different, making it hard to predict, but those are some data points for you.

Broderick Preston, Analyst

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?

Steve Young, CFO

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, Analyst

I have a couple of additional questions. Regarding the litigation expense, was there something specific that it was associated with? I'm curious about the nature of that expense. Also, the guidance you provided for expenses in the low 2.40s to mid-2.40s suggests a slight increase compared to the full year 9 50 you mentioned earlier. Is there anything particular contributing to that increase?

Will Matthews, CFO

The litigation accrual was related to settling an ongoing case, which we finally resolved after accruing for it and addressing remediation costs. Regarding the expense guidance, it falls within the low to mid-2.40s range, combining various factors. One challenge in predicting expenses involves variable compensation related to certain revenue-generating business lines, such as commissions. This element varies depending on overall performance. Additionally, loan production volume affects the deferral of loan origination costs, and if loan volume decreases, the net interest expense impact will also be reduced. As the year progresses, you will see incentive compensation that may also fluctuate. These factors contribute to the expense range we've communicated.

Broderick Preston, Analyst

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, CEO

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, Analyst

Got it. Thank you very much for that. I appreciate it guys.

Operator, Operator

Your next question comes from the line of David Bishop with the Hovde Group. Your line is open.

David Bishop, Analyst

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?

Steve Young, CFO

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, Analyst

Got it. And then one follow-up question. The guidance in terms of loan yield expectations here was 5.50% to 5.75%? Thanks.

Steve Young, CFO

Yes, just to clarify, that would be in the fourth quarter, and we anticipate it to fluctuate somewhat between now and then in the third quarter. This is also part of our margin guidance. We expect the loan yield to be approximately in that range by the end of the year.

David Bishop, Analyst

Great. Thank you.

Operator, Operator

There are no further questions at this time. I will now turn the call back over to Mr. John Corbett.

John Corbett, CEO

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, Operator

Ladies and gentlemen, thank you for participating. This concludes today’s conference call. You may now disconnect.