SouthState - Q1 2024
April 26, 2024
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would 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 speaker's remarks, there will be a question-and-answer session. 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. Thank you, and I would now like to turn the conference over to Mr. Will Matthews. You may begin.
Will Matthews (CFO)
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'll turn the call over to John Corbett, our CEO.
John Corbett (CEO)
Thank you, Will. 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. 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 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 banker and investor, we're trying to understand the broader macro picture, the risk of a recession, and what the yield curve is gonna 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, pipelines 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, 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've 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're 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. 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. 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 CET1 currently sits at about 12%. We've also significantly increased our loan loss reserves, which currently sit at 1.6%.
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 forecasts will be wrong. So our goal is flexibility and optionality, and with these higher levels of capital and reserves, we're 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.
Will Matthews (CFO)
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 341, 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 174 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. So total revenue declined by $4 million sequentially. The non-interest income beat was driven by better mortgage revenue and lower interest on swap variation margin collateral. NIE, 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-$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 two 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 fixed 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'll note that the largest addition 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 and the sale price versus our loan balance only one quarter after our downgrade.
I'll 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 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'll now take questions.
Operator (participant)
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star one a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is star one to join the queue. We will take our first question from, pardon me, Stephen Scouten with Piper Sandler. Your line is open.
Stephen Scouten (Managing Director)
Hey, good morning, everyone. Thanks for the time here. 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 maybe 2024 and four in 2025. So just given the move in the forward curve and how that might shift your guidance on the NIM.
Steve Young (Chief Strategy Officer)
Sure, Stephen, this is Steve. Good morning. You know, as you mentioned, just to kind of give you the, the framework of, of the NIM, discussion. You know, last quarter, we were at 341. Deposit costs were 174. You know, kind of our guidance going forward continues on three things. It's interest earning assets, our rate forecast, and deposit beta. So on our interest earning assets, the first part, you know, we mentioned for full year would be average around $41 billion. So there's really no change to that, to that guidance. We still think loan growth is sort of mid-single digits. We think deposit growth is in that 2%-3% range, and then we use the investment portfolio runoff to fund the loan growth. So I think from an interest earning asset, that really hasn't changed.
You know, on the rate cut forecast, last quarter, I think Moody's
I mentioned four rate cuts in 2024 and four in 2025. 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 sorta in the 5-10 basis points in the second quarter. And some, you know, assuming we get a rate cut in the third quarter, which is what the Moody's baseline says, we would peak somewhere in the, you know, mid-180s on the 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 3.45-3.55, 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're thinking about, you know, based on the Moody's baseline, and happy to answer any additional questions on that.
Stephen Scouten (Managing Director)
Yeah, no, that's really helpful, Steve. And so based on that change, you guys in practice look like you're slightly liability sensitive then, if the NIM's 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?
Steve Young (Chief Strategy Officer)
Yeah, I think, Stephen, it probably does over time, but I don't think it materially changes anything in the short run. I mean, you know, one of the questions that investors have asked us is, you know, "If rate cuts stay flat, you know, kind of how does that affect your NIM?" And, you know, for us, you know, we've talked about our fixed-rate book, our fixed-rate loan book, that continues to be sort of a tailwind to margin. And, you know, this quarter, our total loan yield went up, I think, 8 basis points. So, you know, we'll 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.
You know, 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, you know, bottoming out. And then, for us, we think that, you know, each rate cut from here, whenever that happens, is somewhere between 3 and 5 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 3.40-3.50 range. If we have two cuts, we'd probably see it getting in the upper 3.40s by the end of the year. If we're, you know, no rate cuts, it's probably sort of that 3.40-3.45 range would be our current expectation.
Stephen Scouten (Managing Director)
Got it. Very helpful. And then just the last thing for me, you know, what kind of metrics might you guys have on hand as you've looked at stressing your portfolio for higher, for higher rates, you know, for 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, or kind of what gives you comfort over around the loan book as a whole?
John Corbett (CEO)
Yeah, Steve, you know, we had a tick up in our substandards, 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 downsize in the office portfolio, but as Will said earlier, we don't see loss content in that portfolio. You know, stepping back, there's tangible, non-subjective asset quality metrics, and then there's 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, you know, loan grading, you know, we've seen a lot of different approaches in the banks we've acquired over the years. Our approach is simple.
You know, if a loan is a dollar below break-even cash flow, we grade it substandard, even if it has 50% cash equity, the guarantor's got millions in liquidity, and there's no risk of loss. But I'll give you some specifics. Our largest loan, as Will mentioned, in the fourth quarter, that got added as 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's a floating-rate multifamily development loan in Georgia. I checked on it yesterday. It's reached 90% occupancy, but it's got a 0.93 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 going to cash flow fine because the exit rate's about 125 basis points less than the current floating rate. So we've got detail in the deck that shows you our average debt service coverage ratios. We've kind of gone in and looked 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% 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're, they're all still cash flowing, you know, in the low ones.
So, we just don't see a lot of loss content there, even though we may, you know, move the substandards up.
Stephen Scouten (Managing Director)
Yeah. Extremely helpful color. Appreciate it, John. Thanks for all the time this morning.
John Corbett (CEO)
You bet.
Operator (participant)
We will take our next question from Catherine Mealor with KBW. Your line is open.
Catherine Mealor (Managing Director)
Thanks. Good morning.
John Corbett (CEO)
Morning.
Catherine Mealor (Managing Director)
A follow-up question. So on the, maybe the average loan size of some of the substandard loans that increased. I know your average loan size is very low, and that's part of what we love about the risk in your portfolio. But 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 those still... So is it just kind of-- I guess it's, is it a lot of smaller credits, or are there kind of a couple larger credits that we're kind of speaking to, some of the details that you just gave within that, John?
John Corbett (CEO)
Yeah. 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's at a 0.93 debt service coverage. It's gonna be fine. It'll go to the permanent market in the fourth quarter. There's a couple office loans in there. One of them is a tenant mix story, but it's got a good guarantor, good location. We don't think there's loss in that. There's one that's a in the $10 million-$15 million range. We might take a reserve on that of a couple million dollars, but that kind of gives you a flavor of the top three or four.
Catherine Mealor (Managing Director)
Great. That's helpful. And your comment, Will, on—I thought it was interesting, you said if the borrower chose to move the loan from floating to fixed, then they would be—it's basically the credit would be fine. Can you just kind of talk about that dynamic and what you're seeing in your borrower's appetite for that?
Will Matthews (CFO)
Sure, I will, and John can fill in what I leave out. I mean, essentially, you know, with inverted yield curve, you know, that presents that opportunity. I just mentioned in the remarks that a fixed rate loan would be at a lower rate. But a lot of the borrowers, you know, 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 would go down.
And some, you know, have plans to go to the permanent market, but maybe they're not at the stage yet, or they can, you know, maybe playing the rate game a little bit and think that rates may go down from here. And some may be in the finalizing stabilization period or early in the stabilization period, so they can't yet go to the permanent market. All those kind of factors, I think, are in play there.
John Corbett (CEO)
Yeah, and then maybe just add that, you know, obviously that, you know, nobody wants a prepayment penalty right before you sell it, so that would probably be the other factor there.
Catherine Mealor (Managing Director)
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, that may have, that you think there's a high likelihood that they migrate from substandard into nonaccrual? Or is it more just this kind of rate dynamic that's driving all of it?
John Corbett (CEO)
Yeah, 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 a collateral issue. It's really just a you know cash flow issue that's that we think is temporary because of this rate phenomenon.
Will Matthews (CFO)
Yeah. And it's not, Catherine, that we know for certain that our NPAs don't move up from here a little bit. You know, it's hard to have a crystal ball in that regard. But, you know, two things I'd say is, one, we, you know, our team digging through our portfolio still does not see, you know, material loss content. And secondly, you know, as you know from following us, but, you know, as we highlight in the deck, we've built our reserve proactively, pretty significantly the last couple of years, as well.
Catherine Mealor (Managing Director)
Yes, for sure. Okay, this is all really helpful. I usually don't dig in on credit, but just wanted to clarify a couple of those things. And then the one thing on the margin I wanted to ask about, you know, 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 think in that scenario that the deposit costs are just kind of increasing by that five, you said about 5-10 basis points, kind of a quarter, and still the margin is able to stabilize.
Can you just kind of talk about in a higher for longer rate scenario, maybe where you think deposit costs peak out versus, you know, the 180, the mid-180s range that you talked about, you know, if we start to get cuts in the back half of the year?
Steve Young (Chief Strategy Officer)
Yeah, I think, you know, you never can measure this by a month or even 45 days. But, you know, I'd say the general commentary that we're seeing right now is that, you know, post-January, maybe a little bit of February, we did see a little bit of the acceleration in deposit costs. Now, you know, again, there's been two inflation reports, and so the answer is, I don't know. But I do think, you know, what we're seeing anyway is that deposit costs are moderate, and you're seeing that, you know, through the industry too. And I think we're, you know, we're 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 will our deposit costs be?
I think the way we're thinking about it or modeling it is somewhere between, you know, 5-10 basis points a quarter would be higher. Our loan yield is going to go up, you know, 7-10, somewhere in there. And we would think margin would kind of hold in there because of those two factors. But that's... You know, the crystal ball is not that, that great on the higher for longer, but that's kind of how we're thinking about it.
Catherine Mealor (Managing Director)
Yeah, that, that makes sense. All right, great. Thank you for all my questions.
Operator (participant)
We will take our next question from Michael Rose with Raymond James. Your line is open.
Michael Rose (Managing Director)
Hey, good morning, guys. Thanks for taking my questions.
Will Matthews (CFO)
Good morning.
Michael Rose (Managing Director)
Morning. 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, you know, just wanted to get your kind of updated expectations, you know, as it relates to kind of the fixed income and the swap piece, and then, you know, 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'd previously laid out. Thanks.
Steve Young (Chief Strategy Officer)
Yeah, no, no, Michael, it blew 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. You know, to your mention, you know, our fee income was $72 million or 64 basis points, which was higher than our guide at $55 million-$60 million in the first half of the year. And, you know, as you mentioned, we have two interest rate-sensitive businesses, primarily, one being mortgage and one being correspondent. So, you know, as.
I think what we mentioned before was, we thought that, you know, non-interest income to average assets would be sort of in that 55-60 basis points in the, you know, first half of the year until they cut rates, and then it would be, you know, 60-65 in the back half. And then as we get into 2025, as they really start moving through rate cuts, 60-70. And the way I would kind of characterize it, I'd just say it's been delayed a little bit. So if they don't cut rates until the third quarter, I, you know, I would kind of expect, our non-interest income to average assets to be sort of in that 55-60 basis points range.
And then, as they cut rates, that'll create, you know, some volatility and other things for both mortgage, fixed income, and our swap desk. And that we think is, you know, towards the end of the year, in that 55-60 basis points. And really, our guidance for 2025 hasn't changed, 60-70, which is, you know, the 60-70 basis points is really what twenty twenty-two non-interest income to average assets. So kind of the pathway is, you know, sort of benign. We're kind of at the lows of these businesses until we start seeing some rate movement, and then it'll, you know, move up 5 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 10-15, which is a bit more normal.
Michael Rose (Managing Director)
That's very helpful. I appreciate it. And then maybe just one for John. You know, I know it's really hard to predict, you know, the economy, but just wanted to get a sense for the competitive landscape. And you know, I know you guys are somewhat cautious, always kind of have been, and have a great worldview. But you know, is the environment where people are starting to pull back creating opportunities for you guys with a bigger balance sheet versus you know, a lot of the banks in your marketplace? And just wanted to get a sense for you know, borrower demand and your willingness to make loans at this point in the cycle. Thanks.
Steve Young (Chief Strategy Officer)
Yeah. Borrower demand is up, Michael. We said in our prepared remarks, the pipeline's 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. You know, you think about the Southeast, clearly there's the net migration story, but there's a lot to the manufacturing story in the Southeast. You know, we've 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, you know, there's fewer supply chain issues than there were before. The ports are not backed up in Savannah and Charleston like they were.
Container shipping costs has come back down to $2,500 a container, but labor is still tight. There's some slack maybe in white-collar jobs, but there's 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 (Managing Director)
Very helpful. Maybe just finally for me, it looks like you guys repurchased a little bit of common stock again. You know, this quarter, your capital levels are pretty solid. Just any thoughts there, just given where the, you know, the stock is trading? I understand you're a premium to most peers, but just wanted to get a sense for, you know, what the thought processes are on the buyback. Thanks.
Will Matthews (CFO)
Yeah, Michael, it's Will. I think our attitude remains one of, you know, a being opportunistic and having the ability and flexibility to use that buyback authorization, particularly if we see, you know, 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, you know, to grow organically, to execute other things with, you know, with that capital. So I think, you know, sitting here today, we like the flexibility of being able to do something with it, but we also like the strong capital position we're in, and we think accreting capital probably continues to make sense for a bit.
Michael Rose (Managing Director)
Understood. Thanks for taking my question.
Operator (participant)
We will take our next question from Brandon King with Truist Securities. Your line is open.
Brandon King (Treasury Sales Analyst)
Hey, good morning.
Will Matthews (CFO)
Morning.
Brandon King (Treasury Sales Analyst)
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, you know, what type of accounts, what type of customers, et cetera?
Steve Young (Chief Strategy Officer)
Hey, Brandon, Steve, I would call it a deceleration in deposit costs. You know, last quarter, I think in the second quarter, it shows it on page 17, I think, but or excuse me, the third quarter, our deposit costs were up 33 basis points. I think the fourth quarter, they were up 16, and then in the first quarter, they were up 14 basis points. So it's, it's been coming down, and I think in the, you know, as we look at the first quarter, there's 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.
You know, typically, there's some seasonality. Those typically have a little bit higher deposit costs, and those ran down $200 million, which is typical in the first quarter. On the positive side, we, you know, we had really good growth and have over the last couple of quarters in our homeowners association business, over $100 million, a team led by Jared Hurd, and that team brings in a little bit lower cost of deposits or significantly lower cost of deposits with a lot of cash management business. So I kind of look at it as there's a bit of a remix within that whole deposit piece, but I wouldn't certainly shouldn't call it accelerating. I would call it decelerating, you know, as a general rule.
Brandon King (Treasury Sales Analyst)
Okay. Oh, I was kind of referring to kind of, I guess, the pickup after the CPI reports that you alluded to earlier.
Steve Young (Chief Strategy Officer)
I'm sorry. No, if I'm misunderstood. I think what I was saying was that we did see, during the quarter, a deceleration of deposit costs, but it's, you know, hard to know as we continue to see these other CPI reports, 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 that 5-10 basis points of deposit costs versus 14 last quarter. But if we stay at a higher for longer, you know, how will that look in the third or fourth quarter? I don't know that we know for sure.
Brandon King (Treasury Sales Analyst)
Okay. Okay, yeah, thanks for the clarity. And I guess, when in regards to credit, I recognize, you know, the movement in special mention and substandard, but not really affecting loss content. But in your view, how do you see the 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?
John Corbett (CEO)
You know, we're trying to forecast and ask our credit team that same question, and we're trying to understand where the loss content might come from in a higher for longer. So we were in a meeting the other day, and Steve asked our Chief Credit Officer, Dan, you know, 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 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 multifamily, retail, or industrial.
So I thought that was an enlightening answer of kind of what his crystal ball was. But, you know, you can't judge the magnitude of this. Right now, it doesn't look like there's much magnitude at all, but, but that's where he sees potential loss content.
Brandon King (Treasury Sales Analyst)
Yeah. And just curious, what sort of assumptions was he making with those comments as far as kind of.
Steve Young (Chief Strategy Officer)
That would be probably in a, in a, I guess, higher for longer means basically static kind of rate curve. You know, and if Brandon, it's the five-year treasury, and it's 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's headed for more noticeable losses across the board, particularly CRE.
Brandon King (Treasury Sales Analyst)
Okay, very helpful. Thanks for taking my questions.
Steve Young (Chief Strategy Officer)
You bet.
Operator (participant)
We will take our next question from Gary Tenner with D.A. Davidson. Your line is open.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good morning. I just wanted to ask a follow-up on the income side of things, you know, particularly in mortgage and correspondent banking. You know, given that you are at the top end of the range of this quarter, what are you seeing, you know, in terms of maybe early second quarter activity in both areas? And is the correspondent piece, is the push out 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?
Steve Young (Chief Strategy Officer)
Yes, Gary, that's right. I think as we think about correspondent, you know, we, you know, we're sort of near the bottom on sort of the gross income. We think somewhere in that, you know, $14 million-$18 million range over the next few quarters. But you're right, with the move up in long-term interest rates, the variation margin gets to be a little higher, so that moves that, I'll call it, contra income account up a few million dollar a quarter. So, you know, it's... And then we think as we think about mortgage, you know, the second quarter should be a good quarter, but it's, you know, a little too early to tell. We definitely did have a spike up in the first, you know, first quarter.
So, you know, 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're looking at today, we think it's probably in that 55-60 basis points range until we get some footing on whether we get rate cuts and when do we get them. You know, the fixed income business, of course, right now with higher rates, is a much challenging business. You know, and as we move our SBA team up in Houston, that we just recruited over, you know, that'll help that, but it takes a few quarters to get that up and moving. But that really mostly a 2025 event.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. Thank you for that. And then just one question on the construction piece. Obviously, you know, not much in the way 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 in the construction side as you look over the remainder of the year?
Steve Young (Chief Strategy Officer)
Yeah, you're 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 in construction, do you have that number?
Will Matthews (CFO)
Yeah, let's see. The unfunded piece is around $2 billion. You know, the biggest piece of that would be multifamily, the largest, largest property type within that. 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'd be the second biggest. Then just kind of a bunch of different categories after that.
But 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 there's payoffs along the way, and it kind of drifts sideways roughly from here.
Yeah, 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 reserve for unfunded accordingly, as well as those amounts come down.
Gary Tenner (Managing Director and Senior Research Analyst)
But you're 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 (CFO)
That's what it looks like right now, yeah.
Gary Tenner (Managing Director and Senior Research Analyst)
All right. Thank you.
Operator (participant)
As a reminder, just star one if you would like to ask a question. We will take our next question from David Bishop with Hovde Group. Your line is open.
David Bishop (Director)
Yeah, good morning. A quick question during the preamble. I think, I think it was Will noted maybe the loan repricing on the fixed rate side could provide a tailwind. Just, remind us what the, I guess, the dollar volume of repricing looks like over the next few quarters and what they might be pricing, you know, to and from. Thanks.
Steve Young (Chief Strategy Officer)
Yeah, this is, this is Steve. You know, when we're thinking about loan repricing, basically, it's, you know, rough numbers, $1 billion a quarter. I think we have about $3.3 billion left in 2024, and it's repricing in that 4.67 coupon. So, you know, our average loan yield this quarter was around 7.5, so you know, it's not quite 300 basis points, but somewhere in that, you know, in that general range. Next year, we have about $3.5 billion at a 4.93 coupon, you know, repricing in 2025. So it's, you know, if you kind of look at it over the next, you know, seven or so quarters, you know, 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, you know, kind of how to think about the next, you know, to get to the end of 2025. And so, you know, one of the questions, I think, you know, 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, you know, when rate cuts do happen, and we don't know when they're gonna happen, but sort of the pluses and minuses in our book, the way we're thinking about it, and how we're sort of guiding in that 3-5 basis point, you know, margin expansion when that happens.
You know, it has to really do with our loan construct. You know, we have about $10 billion of floating-rate loans, and if we get six rate cuts, you know, that'll cost us $150 million. We also have, you know, a $37 billion dollar deposit portfolio. We're sort of modeling a 20% down beta. You know, it's 33% on the way up, 20% on the way down. So that would help us by, you know, $110 million or so if we get to the end of next year, and we have six rate cuts.
But really, the thing left that really sort of propels everything is the, you know, the $8 billion or so we just talked about, that reprices somewhere in that 2%-3% range above where we are today. So let's call it 2%, that's $160 million. So you, you lose $150 million on the floating, you gain $110 million on the, on the, deposits, and then you, gain another $160 million on the, on the fixed-rate repricing. You know, 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 3-5 basis point, you know, as we think about rate cuts.
So I know everybody right now is thinking that we're gonna be higher for longer, and certainly, that's what the data is telling us. But if to the extent the Fed does pivot at some point, that's how we're thinking about sort of rates now.
David Bishop (Director)
I appreciate that. That's great color. And then final question. I noticed just, maybe a housekeeping, a little bit of a tick-up in short-term cash and liquidity. Did that have anything to do with, the seasonality mentioned? Thanks.
Steve Young (Chief Strategy Officer)
Not really. It's probably just an end-of-the-quarter type of event. Sometimes, it moves around a little bit, but typically, we're trying to manage the cash bucket somewhere around 2.5%, 2%-3% of assets. So sometimes it moves a little higher, sometimes a little lower, but that's generally how we do it.
David Bishop (Director)
Great. Thank you.
Operator (participant)
There are no further questions at this time. I will now turn the call back to Mr. John Corbett for closing remarks.
John Corbett (CEO)
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 (participant)
Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.