SouthState Corporation (SSB) has reported steady growth in the first quarter of 2024, with results aligning with the company's guidance. The bank has seen a modest increase in loans and deposits, while maintaining good asset quality. Despite a slight dip in net interest margin (NIM), which hit the lower end of the guidance range at 3.41%, SouthState expects it to stabilize moving forward.
The bank's capital ratios stand out, being on the higher end compared to peers, and have shown consistent growth over the past year. Fee income saw a rise due to better performance in mortgage banking and wealth management. Looking ahead, SouthState anticipates a NIM between 3.40% and 3.50% for the full year 2024, adjusting its interest rate cut forecast to two cuts in 2024 and four in 2025.
Key Takeaways
- SouthState Corporation experienced modest loan and deposit growth, with a net interest margin of 3.41%.
- Capital ratios are high, indicating a strong capital position.
- Commercial loan pipelines, particularly in the C&I portfolio, are gaining momentum.
- Fee income exceeded expectations, driven by mortgage and wealth management growth.
- The bank has adjusted its interest rate cut forecast to two in 2024 and four in 2025.
- The bank's provision for credit losses has increased, signaling growth in total reserves.
- SouthState repurchased shares during the quarter, reflecting confidence in its capital strategy.
Company Outlook
- SouthState expects its NIM to range between 3.40% and 3.50% for 2024.
- The bank remains liability-sensitive but sees potential changes with C&I lending.
- SouthState has stress-tested its loan book for higher rates and is confident in its performance.
Bearish Highlights
- Net interest margin dipped to the low end of the guidance range.
- Commercial real estate activity is slower due to low interest rates.
- The bank's provision for credit losses increased, resulting in more reserves.
- Potential credit losses may arise from the C&I and office portfolios.
Bullish Highlights
- Loan yields are on the rise, while deposit costs are controlled.
- Fee income is strong, with mortgage and wealth management leading the way.
- The Southeast region, where the bank operates, is experiencing growth with fewer supply chain issues.
Misses
- The bank originally projected four rate cuts in 2024, but Moody's (NYSE:MCO) baseline now indicates only two.
Q&A Highlights
- Steven Young discussed peak deposit costs in a higher interest rate environment.
- The bank modeled deposit cost increases of 5 to 10 basis points per quarter with the current Fed funds rate.
- Loan yields are expected to increase by 7 to 10 basis points.
- Fee income is anticipated to fluctuate but will likely increase in the latter half of the year.
- Borrower demand is up, particularly for C&I loans.
- SouthState is strategically managing stock buybacks and maintaining strong capital and reserve positions.
- The construction development portfolio has decreased, with planned exits in the business.
SouthState Corporation's first-quarter performance and forward-looking statements indicate a stable financial position with a strategic approach to managing future economic scenarios. The bank's emphasis on maintaining higher levels of capital and reserves, as well as its positive outlook on loan and deposit growth, suggest a cautious yet optimistic approach to navigating the year ahead.
InvestingPro Insights
SouthState Corporation (SSB) has demonstrated a commitment to shareholder returns, as evidenced by its notable track record of raising its dividend for 12 consecutive years, and has maintained dividend payments for an impressive 28 consecutive years. This consistency is a testament to the bank's financial stability and its ability to generate profits, as also indicated by the InvestingPro Tips that analysts predict the company will be profitable this year and it has been profitable over the last twelve months.
From an InvestingPro Data perspective, SouthState Corporation's market capitalization is currently at $5.94 billion, with a Price/Earnings (P/E) ratio of 12.73, which slightly adjusted to 12.46 in the last twelve months as of Q1 2024. This valuation metric suggests that the stock may be reasonably priced relative to its earnings. Additionally, the company's dividend yield stands at 2.67%, which is attractive to income-seeking investors, especially considering the company's history of dividend growth, with the last increase being 4.0%.
Investors considering SouthState Corporation can find additional insights and metrics on the company's financial health and future prospects on InvestingPro, where there are more InvestingPro Tips available. To get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, use the coupon code PRONEWS24.
Full transcript - First Financial (SSB) Q1 2024:
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby and I will be your conference operator today. At this time, I’d like to welcome everyone to the SouthState Corporation First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] And I would now like to turn the conference over to Mr. Will Matthews. You may begin.
Will Matthews: Good morning, and welcome to SouthState's First Quarter 2024 Earnings Call. This is Will Matthews, and I'm here with John Corbett, Steve Young and Jeremy Lucas. As always, John and I will make some brief remarks and then move into questions. We understand you can all read our earnings release and the Investor Presentation, copies of which are on our Investor Relations website. We thus won't regurgitate all of the information, but rather we'll try to point out a few key highlights and items of interest before moving on to Q&A. 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 will turn the call over to John Corbett, our CEO.
John Corbett: Thank you, Will. Good morning everybody. Thanks for joining us. As you have seen in our earnings release, SouthState delivered a solid and steady quarter that was consistent with our guidance. At a high level, it was another quarter of positive but modest growth for both loans and deposits. Asset quality continues to be good with past dues, non-accruals and charge-offs, all declining in the quarter. Net interest margin dipped to the low-end of our guidance but should be at or near bottom. And capital ratios are on the higher-end of our peer group and have grown every quarter over the last year. Like every other banker and investor, we are trying to understand the broader macro picture, the risk of recession and what the yield curve is going to look like. At the same time, we believe the dynamics will be different in every region of the country. As we study our bank and our markets, commercial loan pipelines took a sharp drop of about 25% following the banking turmoil last spring, and they stayed low through the summer and early fall. But by November, pipeline started growing again and the last few months have now returned to the same level they were before the banking turmoil, and the momentum seems to be building, which is encouraging. But with rates where they are, CRE activity not surprising, is much slower. So nearly all the pipeline growth and momentum has been in the C&I portfolio. In fact as it relates to commercial real estate, our concentration ratios for both CRE and construction are at the lowest levels they have been in three years. Dan Bockhorst and our credit team are doing a great job servicing and analyzing our loan portfolio. And while rising interest rates are putting pressure on debt service coverage ratios, the South is disproportionately benefiting from net migration, and we clearly see that in the rental rate trends on all types of commercial real estate. In the last three years, rental rates in our markets have increased 16% for office compared to 3% outside our markets. Rental rates are up 21% in multifamily versus 14% outside our markets and rents are up 38% in industrial compared to 24% outside our markets. On fee income, we were up for the quarter. We saw some improvement in mortgage, as the gain on sale margin opened up. Wealth management continues to be a reliable and growing contributor and we now have assets under management over $8 billion. And our correspondent division recently expanded with the addition of a new team that specializes in the packaging and sale of the government guaranteed portion of SBA loans. This is a long-standing and experienced team based in Houston, and Steve can give you more information. And finally, as we think about capital management. Over the last year we've maintained a level balance sheet, it is $45 billion in assets, while earning a return on tangible common equity in the mid-teens. As a result, we have seen our capital ratios increase every quarter. Our CET1 currently sits at about 12%. We have also significantly increased our loan loss reserves, which currently sit at 1.6%. And I mentioned earlier that we are all trying to play economists and forecast the yield curve. And obviously, we don't have a crystal ball, and the only thing we know for sure is that all of our forecast will be wrong. So our goal is flexibility and optionality. And with these higher levels of capital and reserves, we are in a perfect position to be opportunistic regardless if we have a soft-landing, a hard-landing or no landing at all. I will pass it back to Will now to walk you through the details on the quarter.
Will Matthews: Thank you John. Total revenue for the quarter was in-line with forecasts as NIM came in at the lower-end of our guidance range at 3.41% and non-interest income to average assets came in above guidance at 64 basis points. Deposit costs increased 14 basis points, which was 2 basis points less than last quarter's increase and the cost of deposits at 1.74% was in-line with our guidance. Loan yields increased 8 basis points. That brings our cumulative total deposit beta to 33%, and our cumulative loan beta to 37%. Deposit mix shift was part of that deposit cost increase, though the shift appears to have slowed. The average mix of DDAs to total deposits at 28.5% in Q1, was down from Q4's average 29.9%. However, Q1's beginning, ending and average mix were all in the 28.5% range. Steve will give some color on our future margin guidance in the Q&A. Relative to Q4, our net interest income declined $10 million with one fewer day. Non-interest income was $6 million higher. Total revenue declined by $4 million sequentially. The non-interest income [beat] (ph) was driven by better mortgage revenue and lower interest on swap variation margin collateral. [NIE] (ph) excluding non-recurring items, was down $4.9 million versus Q4, but that's partially due to the adoption of the proportional amortization method for low income housing tax credits. This adoption shortens the period over which these credits amortize and essentially reduced NIE by a net $2.1 million and moved about $3.5 million in passive losses to the income tax-line. Thus, in comparing NIE and PPNR for Q1 versus Q4 on a normalized basis, if you adjust for this accounting method adoption, Q1 NIE would have been down $2.8 million compared with Q4 and Q1 PPNR, would have been down $1.5 million from Q4. We had some positives and negatives in NIE. The first quarter had the usual higher FICA and 401(k) expense, which was offset by lower professional fees associated with projects, as well as lower business development and travel expense. For the full year, we still think NIE in the $990 million to $1 billion area is a good estimate, dependent of course on expense items that vary with revenue. With respect to income taxes, in addition to the impact of the accounting method adoption I mentioned, we had two non-recurring items related to a state DTA revaluation and amended state tax returns driving our tax expense up by $3 million. For future quarters, we expect to see an effective tax rate in the 23.5% range, absent any other unanticipated discrete or non-recurring adjustments. Our $12.7 million in provision for credit losses versus $2.7 million in net charge-offs caused our total reserve to grow by 2 basis points to 1.6%. NPAs were down slightly. We saw some continued loan migration into substandard, as we monitor and downgrade credits due to higher interest costs. With many of these being floating rate borrowers that could reduce their rate by 150 basis points or so, if they fix their rate using the swap curve, but many are reluctant to do so at this point due to expectations of lower rates or a sale. I will note that the largest addition to the sub-center list from Q4 paid off in Q1 with the property selling for an amount that was approximately 134% of our loan balance. That was clearly a substandard loan with very little risk of loss, as evidenced by the margin of safety and the sale price versus our loan balance only one quarter after our downgrade. I will note that our expectation continues to be that we will not see significant losses in the loan portfolio based upon current forecast. Lastly, on the balance sheet front, growth was moderate with loans up 3.5% annualized and deposits up 1.4% annualized with brokered CDs essentially flat. We repurchased another 100,000 shares in the quarter, and our capital ratios remain very healthy, putting us in a good position with plenty of optionality we believe. Operator, we will now take questions.
Operator: Thank you. And we will now begin the question-and-answer session. [Operator Instructions] We will take our first question from Stephen Scouten with Piper Sandler. Your line is open.
Stephen Scouten: Hi, good morning everyone. Thanks for the time here. I'm just wondering if you guys can walk through kind of -- I was just thinking about the NIM from here. I think last quarter, we were looking at four cuts in maybe '24 – four in '25. So just given the move in the forward curve and how that might shift your guidance on the NIM?
Steven Young: Sure, Stephen. This is Steve. Good morning. As you mentioned, just to kind of give you the framework of the NIM discussion, last quarter, we were at 3.41%, deposit costs were 1.74%. Kind of our guidance going forward continues on three things; it is interest-earning assets, our rate forecast and deposit beta. So on our interest earning assets, the first part, we've mentioned full year would be an average around $41 billion. So there is really no change to that guidance. We still think loan growth is sort of mid-single digit. We think deposit growth is in that 2% to 3% range, and then we use the investment portfolio runoff to fund the loan growth. So I think, from an interest-earning assets, that really hasn't changed. On the rate cut forecast, last quarter I think Moody's mentioned four rate cuts in '24 and four in '25. This quarter, Moody's baseline shows two cuts in 2024 and four cuts in 2025. So that's two less -- two fewer rate cuts than we originally projecting. The third piece is just deposit beta. Page 17 shows our cycle-to-date beta at 33%, and we would expect sort of going forward that deposit costs to increase sort of in the 5 basis points to 10 basis points in the second quarter. And some -- assuming we get a rate cut in the third quarter, which is what the Moody's baseline says, we would peak somewhere in the mid-180s on deposit costs. So with all those assumptions, we would expect NIM for the full year 2024 to range between 3.40% and 3.50% and sort of start from the lower end in the first quarter to the higher end in the fourth quarter. And as you mentioned, I think in the previous quarter, we guided 3.45% to 3.55%. And really the difference in the guidance is based on the rate cut forecast having only two cuts versus four cuts, which really cost us about 5 basis points in 2024. So that's kind of how we are thinking about based on the Moody's baseline and happy to answer any additional questions on that.
Stephen Scouten: Yes. No, that's really helpful Steve. And so based on that change -- you guys in practice look like you are slightly liability-sensitive then if the NIM is a little better with more cuts? And does this move into more C&I lending, does that start to change that dynamic slowly over time?
Steven Young: Yes. I think, Stephen it probably does over time. But I don't think it materially changes anything in the short run. I mean one of the questions that investors have asked us, is if rate cuts stay flat, kind of how does that affect your NIM? And for us, we have talked about our fixed rate book -- our fixed rate loan book that continues to be sort of a tailwind to margin. And this quarter, our total loan yield went up, I think 8 basis points. So we'll probably continue to see that somewhere between 7 basis points and 10 basis points of movement in the loan yield on a go-forward basis, assuming higher for longer in the rate cuts. And our deposit costs probably will go up somewhere between [5 and 10] (ph), if we continue on this path. So we kind of see sort of the NIM bottoming out. And then for us, we think that each rate cut from here, whenever that happens and it's somewhere between 3 basis points and 5 basis points of NIM improvement per cut. And so we can go into that math, if you like, at some point. But that's sort of how we are thinking about that 3.40% to 3.50% range, if we have two cuts, we probably see it getting in the upper 3.40s by the end of the year if we are -- no rate cuts, it is probably sort of in that 3.40% to 3.45% range being our current expectation.
Stephen Scouten: Got it. Very helpful. And then just the last thing for me. What the kind of metrics might you guys have on hand, as you looked at stressing your portfolio for higher rates or potentially higher for longer? And what that looks like as these fixed rate loans reprice higher? Do you have any metrics kind of showing what happens to debt service coverage or kind of what gives you comfort around the loan book as a whole?
Steven Young: Yes. Steve, we had a tick up in our substandards really for the last few quarters, and it went up a little bit this quarter, little less than it did the prior quarter. And to your point, it's predominantly a rising rate story. And then some of it is from tenant downsized in the office portfolio. But as Will said earlier, we don't see loss content in that portfolio. Stepping back, there's tangible non-subjective asset quality metrics and then there is subjective tangible -- subjective [grading] (ph) metrics. The tangible metrics, past dues, non-accruals, charge-offs, were all down for the quarter. And then as we think about loan grading, we have seen a lot of different approaches in the banks we've acquired over the years. Our approach is simple. If a loan is $1 below breakeven cash flow, we grade it substandard even if it has 50% cash equity, the guarantor has got millions in liquidity. There is no risk of loss. But I will give you some specifics. Our largest loan, as Will mentioned, in the fourth quarter, they got added a substandard paid off at a substantial profit. And then the largest one that added in the first quarter kind of getting back to your question about stressing it, it is a floating rate multi-family development loan in Georgia. I checked on it yesterday. It is reached 90% occupancy, but it's got a 0.93 debt service coverage because it is a floating rate. And it is scheduled to go to the permanent market, the Fannie Mae market in the fourth quarter, and it is going to cash flow fine because the exit rate is about 125 basis points less than the current floating rate. So we have got detail in the deck that shows you our average debt service coverage ratios. We've kind of gone in and look quarter-by-quarter at the rate reset risk over the next two years. And we've got something in the deck that says we are about 7% or 8% of our commercial real estate loans reset per year for the next two years. So it is not a lot. And as we stress those to the current rate, they are all still cash flow in the low 1s. So we just don't see a lot of loss content there, even though we may move the sub-standards up.
Stephen Scouten: Extremely helpful color. I appreciate it John, thanks for all the times this morning.
John Corbett: You bet.
Operator: We will take our next question from Catherine Mealor with KBW. Your line is open.
Catherine Mealor: Thanks good morning.
John Corbett: Good morning.
Catherine Mealor: A follow-up question. So -- on the -- maybe the average has size of some of the substandard loans that increase. I know your average loan size is very low, and that is part of what we love about the risk in your portfolio. But if -- could you talk a little bit about some of the changes that we saw in office and multifamily in the substandard? And are there any kind of larger credits within that? Or are there still -- is it just kind of I guess -- is it a lot of smaller credits? Or are there kind of a couple of larger credits that were kind of speaking to some of the details that you just gave us in that, John?
John Corbett: Yes. So the move, Catherine in the first quarter, there's probably four or five loans that make up 75% or 80% of those, the largest of which is that multifamily loan I mentioned. That is at a 0.93 debt service coverage, it is going to be fine. It will go to the permanent market in the fourth quarter. There's a couple of office loans in there. One of them is a tenant remix story, but it is got a good guarantor, good location. We don't think, there is loss in that. There is one that's in the $10 million, $15 million range, we might take a reserve on that of a couple of million dollars, but that kind of gives you a flavor of the top three or four.
Catherine Mealor: Great. That's helpful. And your comment Will on [indiscernible] you said, if the borrower chose to move the loan from floating to fixed, then they would be -- basically, the credit would be fine. Can you just kind of talk about that dynamic and what you're seeing your borrowers' appetite for that?
Will Matthews: Sure. I will and John can fill it well [what I'll leave out] (ph). I mean, essentially, with inverted yield curve, that presents that opportunity. I just -- I mentioned in the remarks that the fixed rate loan would be at a lower rate. But a lot of the borrowers have plans to -- in many cases, exit the property like the one that happened in the first quarter, and they don't want to fix the rate even though the debt service requirement will go down. And some have plans to go to the current market, but maybe they're not at the stage [indiscernible] -- maybe playing the rate game a little bit and think that rates may go down from here. Some may be in finalizing stabilization period or early in the stabilization period, so I can't yet go to the permanent market. All those kind of factors, I think are in play there.
John Corbett: Yes. And then maybe just to add that, obviously that nobody wants a prepayment penalty right before you sell it. So that would probably be the other factor there.
Catherine Mealor: That makes sense. Okay. That's great. And still, as you're seeing and you're looking at your classifieds today, are there any that you look at that you may have -- you think there's a high likelihood that they migrate from substandard into non-accrual? Or is it more just this kind of rate dynamic that's driving all of it?
John Corbett: Yes. When you dig into that substandard portfolio, the past due portion of that, Catherine is only 12 basis points. So really, this is not a payment issue. This is not the collateral issue. It's really just a cash flow issue that we think is temporary because of this rate phenomenon.
Will Matthews: It's not, Catherine, that we know for certain that our NPAs don't move up from here a little bit. It's hard to have a crystal ball in that regard. But two things, I'd say is, one -- we -- our team digging through our portfolio still does not see material loss content. And secondly, as you know from following us -- as we highlighted in the deck, we've built our reserves proactively pretty significantly the last couple of years as well.
Catherine Mealor: Yes, for sure. That's all really helpful. You don't dig in on credit, but I just wanted to clarify a couple of those things. And then the one thing on the margin I wanted to ask about, in the higher for longer rate scenario that you kind of laid out Steve -- do you think -- it's kind of amazing that you still thinking that scenario that the deposit costs are just kind of increasing by that 5 -- that you said about 5 basis points to 10 basis points kind of the quarter and still the margin is able to stabilize. Can you just talk about in a higher for longer rate scenario maybe where you think deposit costs peak out versus the 180s – the mid-180s range that you talked about if we start to get cuts in the back half of the year?
Steven Young: Yes. I think, you never can measure this by a month or even 45 days. But I'd say, the general commentary that we are seeing right now is that post January, maybe a little bit of February, we did see a little bit of deceleration in deposit costs. Now again, there is been three – and two inflation reports. And so the answer is, I don't know. But I do think, what we are seeing anyway is that deposit costs are [modeling] (ph). You've seen that through the industry, too. And I think we are seeing that so far. But to your point, if deposit costs are still -- or if the Fed funds is still 5.5% in December, where were our deposit costs be? I think the way we are thinking about it, they're modeling it, it is somewhere between 5 basis points to 10 basis points a quarter would be higher. Our loan yield is going to go up 7 to 10, somewhere there. And we would think margin would kind of hold in there because of those two factors. But that's -- the crystal ball is not that great on the higher for longer, but that's kind of how we are thinking about it.
Catherine Mealor: Yeah, that make sense. All right. Great, thank you for all my questions.
Operator: We will take our next question from Michael Rose with Raymond James. Your line is open.
Michael Rose: Hi, good morning guys. Thanks for taking my questions. Maybe just for Steve. Just if we are in this higher for longer environment and understanding that you just kind of added a team to the correspondent business, but -- just wanted to get your kind of updated expectations as it relates to kind of the fixed income and the swap piece and then the other components and how we should just be thinking about maybe that fee to average asset ratio which was kind of at the higher end of the guidance that you had previously laid out. Thanks.
Steven Young: Yes. No, Michael, [blew] (ph) through the guidance as you mentioned. So I'll tell you that was a great quarter for fee income, but much better than we expected, to be honest with you to your mention, our fee income was $72 million or 64 basis points which was higher than our guided 55 basis points to 60 basis points in the first half of the year. And as you mentioned, we have two interest rate-sensitive businesses, primarily one being mortgage and one being correspondent. So I think, what we mentioned before was -- we thought that non-interest income to average assets would be sort of in that 55 basis points to 60 basis points in the first half of the year until they cut rates, and then it would be 60 to 65 in the back half. And then as we get into '25, as they really start moving through rate cuts 60 basis points to 70 basis points. And the way I would kind of characterize it, I'd just say, it's been delayed a little bit. So they don't cut rates until the third quarter, I would kind of expect our non-interest income to average assets to be sort of in that 55 basis point to 60 basis point range. And then as they cut rates, that will create some volatility and other things for both mortgage, fixed income and our swap desk and that, we think is towards the end of the year, in that 55 basis points to 60 basis points. And really, our guidance for '25 hasn’t changed, 60 to 70, which is the 60 to 70 basis points is really what 2022 non-interest income to average assets. So kind of the pathway is sort of benign, and we are kind of at the lows of these businesses until we start seeing some rate movement and then it will move up 5 or so basis points. And then from there, as we really get down to rate cutting cycle, we'd see it kind of go up 10 to 15, which is a bit more normal.
Michael Rose: That's very helpful. I appreciate it. And then maybe just one for John. I know, it is really hard to predict the economy, but just wanted to get a sense for the competitive landscape? And I know you guys are somewhat cautious always kind of have been and have a great world view. But is the environment where people are starting to pull back? Is that creating opportunities for you guys with a bigger balance sheet versus a lot of the banks in your marketplace? And just wanted to get a sense for borrower demand and your willingness to make loans at this point in the cycle. Thanks.
John Corbett: Yes. borrower demand is up, Michael. We said in our prepared remarks, the pipeline has really shrunk after Silicon Valley last spring. But in November, they really started picking up. So our pipelines are up about 33% since November, a little over $1 billion. Most of it is C&I. It is pretty broad based, it's not CRE related. When you think about the Southeast, clearly, there's the net migration story, but there is a lot of -- to the manufacturing story in the Southeast. We have opened seven new auto plants in the last three years for electric vehicles and batteries and every one of those plants is thousands of new jobs. Generally speaking, there is fewer supply chain issues than there were before. The ports are not backed up in Savannah and Charleston like they were. Container shipping cost has come back down to $2,500 a container. But labor is still tight. There is some slack maybe in white collar jobs, but there is a considerable labor shortage still in construction and hospitality. So overall, it feels like the Southeast is going to continue to grow and be able to work its way through these interest rate increases.
Michael Rose: Very helpful. Maybe just finally for me, it looks like you guys repurchased a little bit of common stock again. This quarter, your capital levels are pretty solid. Just any thoughts there just given where the stock is trading? I understand your premium to most peers. But just wanted to get a sense for what the thought processes are around the buyback. Thanks.
Will Matthews: Yes, Michael, it's Will. I think our attitude remains one of a being opportunistic and being -- having the ability and flexibility to use that buyback authorization, particularly if we see weakness when a window is open, I think we also though value the optionality that we think we have from a strong capital and strong reserve position to allow us to grow organically, to execute other things with that capital. So I think sitting here today, we like the flexibility of being able to do something with it, but we also like the strong capital position we are in. And we think accreting capital probably continues to make sense for [that] (ph).
Michael Rose: Understood. Thanks for taking my questions.
Operator: And we will take our next question from Brandon King with Truist Securities. Your line is open.
Brandon King: Hi, good morning. So I wanted to follow up on the comments around the acceleration in deposit costs, I guess some acceleration in the quarter. Could you kind of describe where you saw that as far as what type of accounts, the type of customers, et cetera?
Steven Young: Hi, Brandon, it's Steve. I would call it a deceleration in deposit costs. Last quarter, I think -- let me think through -- I think in the second quarter, it shows it on Page 17, I think. But in the second quarter -- excuse me, the third quarter our deposit costs were up 33 basis points. I think in the fourth quarter, they were up 16 basis points. And then the fourth -- in the first quarter, they were up 14 basis points. So it's been coming down. And I think in the -- as we look at the first quarter, there is a bit of a remix and some seasonality. I guess, as I think about the deposit base, sort of some of the pluses and minuses happening in the first quarter. So the minuses first would be just around public funds. Typically, there is some seasonality. Those typically have a little bit higher deposit cost and those ran down a couple of hundred million, which is typical in the first quarter. On the positive side, we had a really good growth and have over the last couple of quarters in our homeowners association business over $100 million, a team led by Jarrod Hurd. And that team brings in a little bit lower cost of deposits or significantly lower cost of deposits, a lot of cash management business. So I kind of look at it as – there is a bit of a remix within that whole deposit piece, but I wouldn't -- certainly didn't call it accelerating, I would call it, decelerating as a general rule.
Brandon King: Okay. I was time referring to kind of, I guess, the pickup after the CPR reports that you alluded to earlier.
Steven Young: I am sorry. No, if I may have been misunderstood. I think what I was saying was that we did see during the quarter, a deceleration of deposit costs but it's hard to know, as we continue to see these other [CPR reports] (ph) as we think in the second, third, fourth quarter, how that plays out. But what we actually see on the ground is a little bit of deceleration and that's why our guide is kind of a 5 basis points to 10 basis points of deposit costs versus 14 last quarter. But if we stay at a higher for longer, how will that look in the third or fourth quarter. I don't know, that we know for sure.
Brandon King: Okay. Okay. And I guess in regards to credit, I recognize the movement in [special mention] is substandard but not really reflecting lost content. But in your view, how do you see potential credit loss trajectory if kind of rates stay here for a while and even if long-term yields continue to rise higher?
John Corbett: We're trying to forecast and ask our credit team that same question and we are trying to understand where the loss content might come from in a higher for longer. So we had meeting other day and Steve asked our Chief Credit Officer Dan, not the magnitude of losses, but where would those losses come from the cycle, and I thought his answer was insightful. He thought that 40% of it would probably be in the C&I portfolio. He thought that 40% of whatever the potential losses would be would probably be in office. And then the other 20% would be in smaller SBA and consumer kind of losses. So interestingly, he saw no loss content or very little to no loss content in multi-family, retail or industrial. So I thought that was an enlightening answer of kind of what his crystal ball was but you can't judge the magnitude of this. Right now, it doesn't look like there is much magnitude at all. But that's where he sees potential loss content.
Brandon King: Yes. And just curious, what sort of assumptions was he making with those comments as far as kind of [get there] (ph)?
John Corbett: That would be probably in a -- I guess, higher for longer means basically static kind of rate curve. And if -- Brandon, it's the five-year treasury, and it is kind of assuming the five-year treasury stays in that 5% or less range, if the five-year treasury moves to 6%, 7%, I think the industry is headed for more noticeable losses across the board, particularly CRE.
Brandon King: Okay, very helpful. Thanks for taking my question.
John Corbett: You bet.
Operator: And we will take our next question from Gary Tenner with D.A. Davidson. Your line is open.
Gary Tenner: Hi guys good morning. I just wanted to ask a follow-up on the fee income side of things, particularly in mortgage and correspondent banking. Given that you are at the top end of the range of this quarter, what are you seeing in terms of maybe early second quarter activity in both areas? And is the correspondent piece -- is the pushout of lower rates? Does that just keep the variation margin, interest piece higher a little bit deeper into the year? Is that the biggest delta in terms of that line item?
Steven Young: Yes, Gary. That is right. I think as we think about correspondent, we are sort of near the bottom on sort of the gross income, we think somewhere in that $14 million to $18 million range over the next few quarters. But you are right, with the move up in long-term interest rates, the variation margin gets to be a little higher. So that moves -- move that -- I'll call it, contra income account up a few million dollars a quarter. So it's -- and then we think as we think about mortgage, the second quarter should be a good quarter, but it is a little too early to tell. We definitely did have a spike up in the first quarter. So as we think about the entire picture and think about where non-interest income to average assets, we just really think with all the things we are looking at today, we think it is probably in that 55 basis points to 60 basis points range until we get some footing on the -- on whether we get rate cuts, when we get them. The fixed income business, of course right now with higher rates is a much challenging business. And as we move our SBA team up in Houston that we just recruited over, that will help that. But it takes a few quarters to get that up and moving, but that really mostly a 2025 event.
Gary Tenner: Okay. Thank you for that. And then just one question on the construction piece. Obviously, not much of new commitments, I'd assume in that business right now. Hence, the kind of rolling over of the period imbalances. How much kind of planned exits are there on the construction side as you look over the remainder of the year?
Steven Young: Yes. You are right, Gary. I think our construction development portfolio decreased significantly. It was down by like $500 million roughly in the quarter. And that was some of these projects just coming to completion. But Will, as far as the unfunded piece that's left to construction, do you have that number?
Will Matthews: Yes. Let's see. Unfunded piece is around $2 billion. And the biggest piece of that would be -- most of the largest property type within that. And then the second would be the owner constructed single-family residential. So a loan to Gary Tenner to build his custom house where he's the borrower, not the builder. That would be the second biggest. And just kind of a bunch of different categories.
John Corbett: But the ratio of construction to the capital, Gary dropped pretty significantly during the quarter, below 50% and we really don't see in the near term that moving up even with some of those fundings. We sort of think there is payoffs along the way and it kind of drift sideways roughly from here.
Will Matthews: We've not been refilling that bucket, and that's why you've seen that number come down as it has the last couple of quarters, as well as the reserves were [unfunded supportingly] (ph), as well as those amounts come down.
Gary Tenner: Okay. But you are saying -- it sounds like you're saying that funding of existing commitments sort of offsets exits for the remainder of the year versus another step down?
Will Matthews: That's what it looks like right now, yes.
Gary Tenner: Thank you.
Operator: [Operator Instructions] And we will take our next question from Dave Bishop with Hovde Group. Your line is open.
Dave Bishop: Hi, good morning. A quick question during the preamble. I think it was Will noted maybe the loan repricing on the fixed rate side could provide a tailwind. Just to remind us what the -- I guess, the dollar volume of repricing looks like over the next few quarters and what they might see pricing to and from? Thanks.
Steven Young: Yes, this is Steve. When we are thinking about loan repricing, basically, it's rough numbers, $1 billion a quarter. I think, we have about $3.3 billion left in 2024, and it is repricing in that -- it's [4.67] (ph) coupon. So our average loan yield this quarter was around [7.5%] (ph). So it's not quite 300 basis points, but somewhere in that general range. Next year, we have about $3.5 billion of the [4.93%] coupon repricing in 2025. So it's -- if you kind of look at it over the next seven or so quarters, it's roughly $7 billion. If you add another $1 billion or so in securities repricing over the next seven quarters or so, that's kind of how to think about the next -- to get you at the end of '25. And so one of the questions I think it seems like sentiment has changed the higher for longer. And what I wanted to do maybe before we close, is just to think about a little bit around when rate cuts do happen and we don't know when they're going to happen, but sort of the pluses and minuses in our book, the way we are thinking about it and how we are sort of guiding in that 3 basis point to 5 basis point margin expansion when that happens. And it has to really do with our loan construct. We have about $10 billion of floating rate loans. And if we get six rate cuts, that will cost us $150 million. We also have a $37 billion deposit portfolio, we're sort of modeling a 20% down beta, it is 33% on the way up, 20% on the way down. So that would help us by $110 million or so. If we get to the end of next year, we have 6 rate cuts. But really, the thing left that really sort of propels everything is the $8 billion or so we just talked about that reprice is somewhere in that 2% to 3% range above where we are today. So let's call it 2%, that's $160 million. So you lose $150 million on the floating, you gain $110 million on the deposits and then you gain another $160 million on the fixed rate repricing. That's $120 million or so on a run rate on $40 billion, that's about a 30 basis point improvement. And that's sort of how we unpack the 3 basis point to 5 basis point as we think about rate cuts. So I know, everybody right now is thinking that we are going to be higher for longer, and certainly, that is what the data is telling us. But to the extent the Fed does pivot at some point, that is how we are thinking about sort of rates down.
Dave Bishop: I appreciate that. That's great color. And then final question. I noticed it maybe a housekeeping a little bit of a tick up in in short-term cash and liquidity. Does that have anything to do with the seasonality you mentioned? Thanks.
Steven Young: Not really. Probably just end of the quarter type of event. Sometimes it moves around a little bit. But typically, we are trying to manage the cash book at somewhere around 2.5% -- 2% to 3% of assets. So sometimes it moves a little higher, sometimes a little lower, but that's generally how we do it.
Operator: And there are no further questions at this time. I will now turn the call back to Mr. John Corbett for closing remarks.
John Corbett: All right. Thanks for joining us this morning. We know it's busy with a lot of calls out there. So if we can provide any other clarity for your models, don't hesitate to give us a ring. Hope you have a great day.
Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
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