Q1 2024 SouthState Corp Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by my name is Abby and I will be your conference operator today.
Abby: At this time I would like to welcome everyone to the South State Corporation first quarter 'twenty 'twenty four earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Abby: If you would like to ask a question during that time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one a second time.
Abby: Thank you and I would now like to turn the conference over to Mr. Will Matthews you may begin.
William E. Matthews: Good morning, and welcome to South state'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 will try to point out a few key highlights and items of interest before moving onto 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'll turn the call over to John Corbett our CEO.
Well good morning, everybody thanks for joining us.
As you've seen in our earnings release, Southstate delivered a solid and steady quarter that was consistent with our guidance.
John C. Corbett: 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.
Net interest margin dipped to the low end of our guidance, but should be at or near a bottom.
Capital ratios are on the higher end of our peer group and have grown every quarter over the last year.
Like every other bank or an investor we're trying to understand the broader macro picture the risk of a recession and what the yield curve is going to look like at.
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 pipeline 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 in 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 as much slower so nearly all of 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've been in three years.
Dan <unk> 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.
And the last three years rental rates in our markets have increased 16% for office compared to 3% outside our markets.
Rental rates were up 21% and multifamily.
John C. Corbett: Versus 14% outside our markets and rents are up 38% and industrial compared to 24% outside our markets.
On fee income we were up for the quarter. We saw some improvement in mortgage is 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.
Steve: And finally, as we think about capital management.
Over the last year, we've maintained a level balance sheet, it's 45 billion in assets.
While earning a return on tangible common equity in the mid teens.
As a result, we've seen our capital ratios increase every quarter. Our CET. One currently sits at about 12%.
Steve: We've also significantly increased our loan loss reserves, which currently set at one 6%.
I mentioned earlier that we're all trying to play economist 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 were in a perfect position to be opportunistic regardless, if we have a soft landing a hard landing or no landing at all I'll pass it back to will now to walk you through the details on the quarter.
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 noninterest income to average assets came in above guidance at 64 basis points.
Deposit cost increased 14 basis points, which was two basis points less than last quarter's increase in our cost of deposits at 174 was in line with our guidance.
Loan yields increased eight basis points that brings our cumulative total of deposit beta to 33% and our cumulative loan beta to 37%.
Steve: Deposit mix shift was part of that deposit cost increase though the shift appears to have slowed.
Steve: The average mix of DDA 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 <unk>.
Noninterest income was 6 million higher total revenue declined by $4 million sequentially.
The noninterest income beat was driven by better mortgage revenue and lower interest on swap variation margin collateral.
N I E. Excluding nonrecurring 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.
Steve: This adoption shortened the period over which these credits amortize and essentially reduced NIH by a net $2 1 million and moved about $3 5 million in passive losses to the income tax line.
Thus in comparing Ni E and P. PNR for Q1 versus Q4 on a normalized basis. If you adjust for this accounting method adoption Q1, NII would have been down $2 8 million compared with Q4 and Q1 P. PNR would've been down one 5 million from Q4.
Steve: We had some positives and negatives in the first quarter had the usual higher FICA and 400, K expense, which was offset by lower professional fees associated with projects as well as lower business development and travel expense.
Steve: For the full year, we still think NIH E and the $9 $90 billion 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 nonrecurring 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 nonrecurring adjustments.
Our $12 7 million in provision for credit losses versus $2 7 million in net charge offs caused our total reserves to grow by two basis points to one 6%.
NPA is 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 fixed the rate used in the swap curve, but many are reluctant to do so at this point due to expectations of lower rates or a sale.
I'll note that the largest edition to the substandard 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 in 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 forecasts.
Lastly on the balance sheet front growth was moderate with loans up three 5% annualized and deposits up one 4% annualized with brokered Cds essentially flat.
Steve: We repurchased another 100000 shares in the quarter and our capital ratios remained very healthy putting us in a good position with plenty of Optionality. We believe operator, we'll now take your questions.
Thank you and we will now begin the question and answer session.
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And we will take our first question.
From.
Pardon me Stephen Scouten with Piper Sandler Your line is open.
Steve: Yeah.
Hey, good morning, everyone. Thanks for the time here.
Stephen Kendall Scouten: I'm just wondering if you guys can walk through kind of how you're thinking about the NIM from here I think last quarter. We were looking at four cuts in may.
Maybe 24 and $4 25 to just given given the move in the forward curve and how that might shift your your guidance on the NIM.
Sure Steven This is Steve good morning.
Steve: As you mentioned just to kind of give you the framework of the NIM discussion last quarter. We're at $3 41 deposit costs were $1 74.
Kind of our guidance going forward continues on three things, it's interest earning assets our rate forecast in deposit beta so on our interest earning assets the first part.
Steve: We mentioned full year would be our average around 41 billion. So theres really no change to that.
Steve: To that guidance, we still think loan growth is sort of mid single digits. We think deposit growth is in that 2% to 3% range, though we used the investment portfolio runoff to fund that loan growth. So I think from an interest earning asset that really hasnt changed on.
On the rate cut forecast last quarter I think Moody's.
Steve: I mentioned four rate cuts in 'twenty, four and $4 25 this quarter.
Steve: These baseline shows two cuts in 2024, and four cuts and 25, so thats two less two fewer rate cuts that were originally projecting.
The third piece is just deposit beta page 17 shows our cycle to date beta at 33% and we would expect.
Going forward that deposit costs to increase sort of in the.
Five to 10 basis points in the second quarter and some assume then we get a rate cut in the third quarter, which is what the Moody's baseline says we would peak somewhere in the mid 100 Eighty's.
On the deposit costs.
With all of those assumptions.
We would expect NIM for the full year 2024, the range between $3 40, and $3 50.
And sort of start from the lower 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 holding two cuts.
<unk> four cuts, which really cost us about five basis points in 2024, So that's kind of how we're thinking about.
Just on the Moody's baseline and happy to answer any additional questions on that.
Yes, no that's really helpful. Steve and so so based on that change you you guys in practice looked like you're slightly liability sensitive than 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.
I think Stephen it probably does over 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 cut stay flat kind of how does that affect your NIM and for us.
<unk> talked about our fixed rate book fixed rate loan book that continues to be sort of a tailwind to margin and this this.
Steve: This quarter, our total loan.
Yield went up I think eight basis points. So.
We will probably continue to see that somewhere between 7% and 10 basis points of movement in the loan yield.
On a go forward basis, assuming higher for longer and no rate cuts.
Our deposit costs, probably will go up somewhere between five and 10, 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 three and five basis points of NIM improvement per cut.
And so we can go into that math, if you'd like at some point, but that's sort of how we're thinking about that $3 40 to $3 50 range. If we have two cuts we probably see it getting in the upper $340 by the end of the year. If were no no rate cuts, it's probably sort of that $3 40 to $3 45 range would be our current.
Steve: <unk>.
Got it very helpful. And then just the last thing for me.
What's the kind of metrics might you guys have on hand that you lifted stressing your portfolio for higher for higher rates for potentially higher for longer and what that looks like as these fixed rate loans re priced higher do you have any metrics kind of showing what happens to debt service coverage or kind of what gives you comfort over around the loan book as a whole.
Yes.
Stephen Yes, we had a tick up in our sub standards really for the last few quarters and it went up a little bit this quarter, a little less than it did the prior quarter and to your point, it's predominantly a rising rate story.
And then some of it's from tenant downsizing the office portfolio, but as will said earlier, we don't see loss content in that portfolio.
Stepping back.
There is tangible non subjective asset quality metrics and then there are subjective tangible subjective grading 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've seen a lot of different approaches and the banks we've acquired over the years our approach is simple.
If a loan is the dollar below breakeven cash flow, we graded substandard, even if it has 50% cash equity the guarantors got millions of liquidity there is no risk of loss.
But I'll 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.
Steve: It's a floating rate multifamily development loan in Georgia.
Steve: Checked on it yesterday, it's reached 90% occupancy, but it's got a 93 debt service coverage because it's a floating rate and it's scheduled to go to the permanent market. The Fannie Mae market in the fourth quarter and it's got a cash flow side, because the exit rates about 125 basis points.
Yes on the current floating rates. So we've got detailed on the deck that shows you. Our average debt service coverage ratios, we've kind of gone ahead 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're about 7% or 8%.
<unk> of our commercial real estate loans reset.
Per year for the next two years, so it's not a lot and as we stress those to the current rate.
They are all still cash flow.
The low one so.
Just don't see a lot of loss content, there, even though we may move.
Move the sub standards up.
Yes extremely helpful color I appreciate it John Thanks for all the times won.
You bet.
We will take our next question from Catherine Mealor with <unk>. Your line is open.
Thanks, Good morning.
Good morning.
Follow up question says it.
On the maybe the average size of some of the substandard loans that increase I know your average loan sizes.
Very low and that's probably what we love about the risk in your portfolio, but could you talk about some of the changes that we saw in office and multifamily in the sub standard and are there any kind of larger credits within that or are there still.
So 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 case.
The details that you just gave us on that journey.
Yes, so the move Katherine in the first quarter, Theres, probably four or five loans that make up 75 or 80% of those.
The largest of which is that multifamily loan I mentioned, that's at a 93 debt service coverage, it's going to be fine. It will go to the permanent market in the fourth quarter. There's a couple office loans in there.
One of them, it's a tenant remix story, but it's got a good geared toward good location, we don't think theres loss and that Theres one thats.
In the $10 million to $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.
Great that's helpful.
And can you comment on that or is there anything you said.
If the borrower.
Two mid to learn from floating fixed then.
Steve: They would be basically the credit would be fine can you guys talk about that dynamic and what youre seeing in your borrowers appetite for that.
Sure I will and Jai can fill in what I'll leave out.
Essentially with the inverted yield curve.
That presents that opportunity.
I just mentioned.
March set a fixed rate loan would be at a lower rate, but a lot of the borrowers.
Plans to in many cases exited a property like the one that happened in the first quarter and they don't want to fixed.
Right, even though the debt service.
Requirement will go down.
And some.
Has plans to grow the parent market that may be.
Steve: They're not at the stage yet.
Let me play the rate game, a little bit and think that rates may go down from here.
Some may be in finalizing stabilization period early and stabilization periods. So I can't yet go to the permanent market all of those kind of factored I think.
Our in play there.
And then maybe just add that obviously that nobody wants a prepayment penalty right before you sell it so that would probably be the other factor there.
That makes sense, okay, that's great.
Youre seeing and Youre looking at your in your classifieds today.
Steve: Are there any that you look at that you may have may have do you think there is a high likelihood that they migrate from standard into non accrual or is it more just this kind of rate that's driving all of it yes.
Yes, when you dig into that sub standard portfolio. The past due portion of that Kathryn. It is only 12 basis points. So really this is not a payment issue. This is not on the collateral issue, it's really just a.
Cash flow issue that we think is temporary because of this rate phenomenon.
Kathryn that we know for certain that our Npa's don't move up from here a little bit.
It's hard to have a crystal ball in that regard, but two things I would say, it's one week.
Our team digging through are still does not see material loss content and secondly, as you know from following us.
Highlighting the deck we have.
We built a reserve proactively pretty significantly last couple of years.
Steve: As well.
Yes for sure Okay. That's all really helpful.
We don't dig in on credit, but just wanted to clarify a couple of other things and then the one thing on the margin I wanted to ask about.
And in the higher for longer.
Rate scenario that you kind of laid out Steve do you think.
And it's kind of amazing that you're still thinking that scenario that deposit costs are just kind of increasing by that.
You said about.
At the 10 basis points, a quarter and still.
The margin is able to stabilize can you can you talk about in a.
Steve: Higher for longer rate scenario, maybe where you think deposit costs peak out first is the.
Uh huh.
The 180 <unk> range that you talked about if we start to make cuts in the back half of the year.
Yes, I think.
You never can measure this by a month or even 45 days, but.
I would say the general commentary that we're seeing right now is that.
<unk> January maybe a little bit of February we did see a little bit of it.
The acceleration in deposit costs now.
Again, theres been three to inflation reports and and so the answer is I don't know.
But I do think what we're seeing anyway is is that deposit costs are monitoring you're seeing that through the industry too.
And I think where we're seeing that so far but.
To your point as deposit costs are still alright fed funds is still five and a half in December where where our deposit costs B I think the way we're thinking about other modeling it is somewhere between five to 10 basis points a quarter would be higher our loan yields go up 7% to 10 somewhere in there.
And we would think margin would kind of hold in there because of those two factors, but thats.
Steve: Crystal ball is not that great on the higher for longer, but that's kind of how we're thinking about it.
Yes that makes sense alright, great. Thank you follow up questions.
We will take our next question from Michael Rose with Raymond James Your line is open.
Hey, good morning, guys. Thanks for taking my questions.
Maybe for good morning, Amit.
Just for Steve.
If we are in this higher for longer environment and understanding that you're just kind of added a team for 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.
<unk> ratio, which was kind of at the higher end of the guidance that you had previously laid out thanks.
Thanks.
No Michael we withdrew the guidance as you mentioned.
I will tell you that was a great quarter for fee income, but much better than we expected to be honest with you.
You mentioned.
Our fee income was $72 million or <unk> 64 basis points, which was higher than our guide of 55 to 60 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 a correspondent so.
It is.
I think what we've mentioned before was.
Steve: We thought that.
Non interest income to average assets would be sort of in that 55 to 60 basis points.
First half of the year until they cut rates and that it would be 60 to 65 in the back half and then as we get into 'twenty five as they really start moving through rate cuts 60 to 70.
Steve: The way I would kind of characterize it I would just say it's been delayed a little bit so they don't cut rates until the third quarter.
Steve: Kind of expect.
Our noninterest income to average assets to be sort of that 55% 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 towards the end of the year in that 55 to 60 basis points, So really our guidance for 25000.
It changed 60 to 70, which is the 60 to 70 basis points is really what.
2022, noninterest income to average assets, so kind of the pathway is sort.
Sort of benign and we're kind of at the lows of these businesses until we start seeing some rate movement.
And then it'll move up five or so basis points and then from there as we really get down a rate cutting cycle, we'd see it kind of go up 10% to 15, which is a bit more normal.
That's very helpful. I appreciate it and then maybe just one for John I know.
It's 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 worldview, but.
Is the environment, where people are starting to pull back is that creating opportunities for you guys with a bigger balance sheet versus.
The banks in your in your marketplace and just wanted to get a sense for borrower demand and your willingness to.
To make loans at this point in the cycle.
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's C&I, it's pretty broad based it's not CRE related.
And when you think about the southeast clearly there is the net migration story, but theres a lot of them.
The manufacturing story in the southeast we've opened seven new auto plants in the last three years for electric vehicles and batteries in every one of those plants as thousands of new jobs generally speaking, there's fewer supply chain issues.
And there were before the ports are not backed up in Savannah, and Charleston like they were.
Container shipping cost has come back down to 2500 Bucks a container.
Labor is still tight there is some.
Slack, maybe in white collar jobs, but there is a considerable labor shortage still in construction.
In 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.
Yeah.
Very helpful and 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 any thoughts there just given where the.
The stock is trading I understand youre premiums most peers, but just wondering if a sense for what the what the thought processes around the buyback.
Yes, Michael.
I think our attitude remains one of <unk>.
Avian opportunistic and being having the ability and flexibility to use that buyback authorization, particularly if we see.
Weakness.
When our window is open I think we also though value of the Optionality that we think we have from our 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.
We also like the the strong capital position, we're in and we think of creating capital probably continues to make sense for the.
Speaker Change: Understood. Thanks for taking my questions.
And we will take our next question from Brandon King with Truest Securities. Your line is open.
Brandon Thomas King: Hey, good morning.
Brandon Thomas King: Good morning.
Brandon Thomas King: 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.
What type of accounts the type of customers et cetera.
Hey, Steve I would call it a deceleration in deposit costs.
Last quarter I think let me think through I think of the second quarter. It showed that 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 the fourth quarter. They were up to 16 and then the fourth.
In the first quarter, they were up 14 basis points.
Then coming down and I think in the yes.
Brandon Thomas King: We look at the first quarter Theres 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 hundred million dollars, which is typical in the first quarter.
On the positive side, we had really good growth and have over the last couple of quarters in our homeowners Association business over $100 million of team led by Jarrett heard in that that that.
<unk> team brings in a little bit lower cost of deposits are significantly lower cost of deposits and a lot of cash management business. So I kind of look at it is there's a bit of a remix within that whole deposit piece, but I wouldnt, certainly couldnt call. It accelerating I would call it decelerating.
Brandon Thomas King: As a general rule.
Okay.
Brandon Thomas King: I'm, referring to that kind of I guess the pick up after the CPI reports.
That you alluded Oh, sorry.
Alright.
If I if I.
I may have been misunderstood I think what.
What I was saying was that we did see during the quarter deceleration of deposit costs, but it's hard to know as we continue to see these other CPI reports as we think in the second third and fourth quarter, how that plays out, but what we actually see on the ground a little bit of deceleration and Thats why our.
<unk> is kind of in that five to 10 basis points of deposit cost 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.
Speaker Change: Okay. Okay. Thanks for the clarity and I guess with regard with regards to credit and I recognize the movement in specialization and sustain there, but not really exciting loss 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 you know long term yields continue to rise higher.
Okay.
Yes.
Speaker Change: We're trying to forecast that asked our credit team that same question.
And we're trying to understand where the loss content might come from it are higher for longer. So we're at a meeting the other day and Steve asked our Chief Credit Officer, Dan not the magnitude of losses, but where would those losses come from this cycle and I thought his answer was insightful he thought that 40% of it would probably.
In the C&I portfolio.
He thought that 40% of whatever the potential losses would be would probably be in office and in the other 20% would be in.
Smaller SBA and consumer kind of losses, so interestingly he saw.
<unk> loss content or very little to no loss content in multifamily retail or industrial.
Speaker Change: 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's much magnitude at all but but thats, where he sees potential loss content.
Yes.
And just curious what sort of assumptions, you're making those comments as far as content.
That would be probably be in a.
I guess higher for longer means basically static kind of rate curve.
Speaker Change: And if if Brandon its a five year treasury and its kind of assuming the five year treasury stays in that 5% or less range.
Speaker Change: If the five year treasury moves to 67%.
The industry is headed for more.
Noticeable losses across the board, particularly CRE.
Okay.
Very helpful. Thanks for taking my questions.
Beth.
We will take our next question from Gary Tenner with D. A Davidson your line is open.
Thanks, Good morning.
I wanted to ask a follow up on the fee income side of things, particularly in mortgage and correspondent banking given that you're at the top end of the range. This quarter what are you seeing.
Gary Tenner: In terms of maybe early second quarter activity.
Both areas and is the correspondent piece is the push out of lower rates is that just keep the variation margin interest piece.
Gary Tenner: <unk>, a little bit deeper into the year is that the biggest delta.
In terms of that line item.
Yes, Gary that's right I think as we think about correspondent.
We're sort of near the bottom on sort of the gross income we think somewhere in that 2000 $14 million to $18 million range over the next few quarters, but you are right with the move up in la.
Long term interest rate the variation margin gets to be a little higher so that moves moves that I'll call. It contract income account up a few million dollars a quarter. So.
Gary Tenner: And then we think as we think about mortgage second quarter should be a good quarter, but it's a little too early to tell we definitely had a spike up in the first first quarter. So as we think about the entire picture and think about where.
Noninterest income to average assets, we just really think.
With all of the things we're looking at today, we think it's probably in that 55 to 60 basis points range until we get some flooding.
Gary Tenner: On whether we get rate cuts or when do we get on the fixed income business of course, right now with higher rates is a much challenging business.
And as we can.
Move our SBA team up in Houston that we just recruited over yeah that'll that'll help that but it takes a few quarters to get that up and move them, but that really mostly a 2025 of them.
Okay. Thank.
Thank you for that and then just one question on the construction piece obviously not.
Gary Tenner: <unk>.
Gary Tenner: Much like <unk>.
New commitments I'd assumed in that business right now.
Kind of rolling over of the period and balances how much kind of planned exits are there in the construction side as you look over the.
The remainder of the year.
Yes, you're right, Gary I think our construction and development portfolio decreased significantly by down by like $500 million roughly in the quarter and that was some of these projects just coming to completion, but.
As far as the unfunded piece that's left the construction do you have that number yes.
<unk> unfunded piece.
Gary Tenner: He has around $2 billion.
And the biggest piece of that would be most of that would be the largest largest property types within that.
Then secondly, the owner constructed single family residential so alone to Gary Tenner to Bill is custom house Rajiv the borrower not the builder.
Second Vegas.
Gary Tenner: And then I'm just kind of budgeting in the categories.
The ratio of construction to 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 Theres payoffs, along the way and it kind of drift sideways roughly from here, yes, we have not been <unk>.
We filled in that bucket and Thats why you have seen.
That number come down as it has the last couple of quarters as well as the reserve for unfunded supporting lease as well as those those amounts come down.
Okay, but youre, saying it sounds like youre, saying that funding of existing commitments sort of offsets exits for the remainder of the year versus another step down.
Speaker Change: That's what it looks like right now.
Speaker Change: Alright.
Thank you.
And as a reminder, the star one if you would like to ask a question.
And we will take our next question from Dave Bishop with Husky Group. Your line is open.
David Jason Bishop: Yes. Good morning, a quick question during the preamble I think.
David Jason Bishop: I think it was well noted may be the the loan repricing on the fixed rate side could provide a tailwind just remind us what the.
I guess the dollar volume of re pricing it looks like over the next few quarters and what they might be pricing to and from.
Yes. This is Steve.
When we were thinking about loan repricing basically it's rough numbers of $1 billion a quarter I think we have about $3 3 billion left in 2024 and Thats repricing in that 460 <unk> at 467 coupons. So.
Our average loan yield this quarter was around seven five so it's not quite 300 basis points, but somewhere in that in that general range next year, we have about $3 5 billion at a $4 93 coupons repricing in 2025.
David Jason Bishop: If you kind of look at it over the next seven or so quarters.
Yes, it's roughly $7 billion, if you add another $1 billion or so in securities repricing over the next seven quarters or so thats kind of help think about the mix to get to you at the end of 'twenty five.
And so one of the.
The questions I think it.
It seems like the sentiment has changed the higher for longer and what I wanted to do.
Maybe before we closed the just to think about a little bit around.
Win rate cuts do happen and we don't know when they're when they're going to happen, but what are the pluses and minuses in our in our book the way, we're thinking about it and how we're sort of guiding in that three to five basis point.
David Jason Bishop: Margin expansion when that happens.
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.
Cost of the $150 million.
We also have $37 billion deposit portfolio were sort of modeling a 20% down data, 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 six rate cuts, but really the thing left that really sort of propel as everything is there.
$8 billion or so we just talked about that re prices somewhere in that 2% to 3% range above where we are today, so let's call it 2% that's $160 million.
The $150 million on the floating gate of 110 on the on the deposits and then you gained another 160 on the on the fixed rate repricing, you're at $120 million or so on a run rate of $40 billion. That's about a 30 basis point improvement that's sort of how we unpack the three to five basis points.
David Jason Bishop: As we think about rate cuts I know everybody right now is thinking that we're going to be higher for longer and certainly that's what the data is telling us but to the extent the fed does pivot at some point thats, how were thinking about sort of rates down.
I appreciate that that's great color and then final question.
Noticed it.
A housekeeping a little bit of a pickup in short term cash and liquidity did that have anything to do with.
The seasonality mentioned thanks.
No not really probably just in the quarter type of event, sometimes it moves around a little bit, but typically we're trying to manage the cash bucket somewhere around two 5% to two to three percentage of assets, sometimes it moves a little higher than that will lower but that's generally how we how we do it.
Great. Thank you.
And there are no further questions at this time I will now turn the call back to Mr. John Corbett for closing remarks.
Alright, 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 I hope you have a great day.
Speaker Change: Ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.
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Speaker Change: Okay.