SouthState Corporation

Thank you, and I would now like to turn the conference over to Mr. Will Matthews. You may begin.

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 and 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.

Thank you, Will. Good morning, everybody. Thanks for joining us. As you've seen in our earnings release, South State 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. 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're trying to understand the broader macro picture, the risk of a 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, 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 CNI 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 today. 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 longstanding 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'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.

Thank you, John. Total revenue for the quarter was in line with forecasts. as NEM 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 two basis points less than last quarter's increase, and the cost of deposits at 174 was in line with our guidance. Loan yields increased eight 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 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 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 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 990s 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 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 remained very healthy, putting us in a good position with plenty of optionality, we believe. Operator, we'll now take questions.

Thank you. And we will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 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. And we will take our first question from, pardon me, Steven Scouten with Piper Sandler. Your line is open.

Hey, 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 and 4 and 25. So just given the move in the forward curve and how that might shift your guidance on the NIM.

Sure, Steven. This is Steve. Good morning. You know, as you mentioned, just to kind of give you the framework 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 data. So on our interest earning assets, the first part, you know, we mentioned full year would be average around $41 billion, so there's 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 rating asset, 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 25, so that's two fewer rate cuts than we were 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 to 10 basis points in the second quarter. And 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 NEM for the full year 2024 to range between 340 and 350 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 345 to 355 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 five 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.

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?

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, eight basis points. So, you know, we'll probably continue to see that somewhere between seven and ten basis points of movement in the loan yield on a go forward basis, assuming higher for longer and no rate cuts. And, you know, our deposit costs probably will go up somewhere between five and ten 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, 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 But that's sort of how we're thinking about that 340 to 350 range. If we have two cuts, we probably see it getting in the upper 340s by the end of the year. If we're, you know, no rate cuts, it's probably sort of that 340 to 345 range would be our current expectation.

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 hire? for higher rates, you know, for potentially higher for longer and what that looks like as the 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 over around the loan book as a whole?

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 downsizing the office portfolio. But as Will said earlier, we don't see lost content in that portfolio. You know, stepping back, there's tangible, non-subjective asset quality metrics. And then there's subjective grading metrics. The tangible metrics, past dues, non-accruals, charge-offs, we're all down for the quarter. And then as we think about, you know, loan grading, 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 the loan is a dollar below break-even cash flow we grade it substandard even if it has 50 cash equity the guarantor has got millions in liquidity there's no risk of loss but i'll give you some specifics uh 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'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 all still cash flowing, you know, in the low one. So we just don't see a lot of loss content there, even though we may, you know, move the substandards up.

Yeah, extremely helpful, Collin. Appreciate it, John. Thanks for all the time this morning. You bet.

And we will take our next question from Catherine Miller with KBW. Your line is open.

Thanks. Good morning.

Morning.

A follow-up question. So on the average size of some of the substandard loans that increase, I know your average loan size is very low, and that's probably 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 and the substandard? And are there any kind of larger credits within that, or are those still just kind of I guess, is it a lot of smaller credits or are there a couple of larger credits that we're kind of speaking to some of the details that you just gave within that, John?

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 going to 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 remix story, but it's got a good guarantor, good location. We don't think there's loss in that. There's one that's in the $10, $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.

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 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?

Sure, I will, and John can fill in what I'll 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'll 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 permanent market, but maybe they're not at the stage yet where they plan to rate gain a little bit and think that rates may go down from here. Some may be in the finalizing stabilization period or early stabilization period, so they can't yet go to the permanent market, all those kind of factors, I think, are in play there.

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.

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 may have that 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?

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 cash flow issue that we think is temporary because of this rate phenomenon.

Yeah, 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, 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, you know, as we highlight in the deck, we have built our reserves proactively pretty significantly the last couple of years as well.

Yes, for sure. 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 deposit costs are just kind of increasing by that five, you said about five to ten basis points, kind of a quarter, and still the margin is able to stabilize. Can you 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 if we start to get cuts in the back half of the year?

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 post-January, maybe a little bit of February, we did see a little bit of the acceleration in deposit costs. Now, again, there's been two inflation reports, and so the answer is I don't know. But I do think what we're seeing anyway is that deposit costs are monitoring. You've seen that through the industry too, and I think we're seeing that so far. But To your point, if deposit costs are still, or if Fed funds are still five and a half in December, where would our deposit costs be? I think the way we're thinking about it or modeling it is somewhere between, you know, five to 10 basis points a quarter would be higher. Our loan yield is going to go up, you know, seven to 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 great on the higher for longer, but that's kind of how we're thinking about it.

Yeah, that makes sense. All right, great. Thank you for all my questions.

And 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 morning, maybe just for Steve, just if we are in this hire 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'd previously laid out. Thanks.

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 to 60 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 correspondence. So You know, 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 to 60 basis point in the, you know, first half of the year until they cut rates. And then it would be, you know, 60 to 65 in the back half. And then as we get into 25, they really start moving through rate cuts 60 to 70. 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 that 55 to 60 basis point range. And then as they cut rates, that'll 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. 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 you know sort of benign we're kind of at the lows of these businesses until we start seeing some rate movement um and then it'll you know 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 uh that's very helpful i i appreciate it and maybe just one for john you know i know um

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, is that 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.

And borrower demand is up, Michael. We said in our prepared remarks, the pipelines 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 a billion dollars. Most of it's CNI. 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 has 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 cost has come back down to $2,500 a container, but labor's 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.

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 are pretty solid um just any any thoughts there just given where the you know the stock is trading i understand you're a premium to most peers but just want to get a sense for you know what the uh what the thought processes are on the buyback thanks yeah michael that's will i i think our attitude remains one of um

A, being opportunistic and 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 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 creating capital probably continues to make sense for them.

I understand. Thanks for taking my question.

And we will take our next question from Brandon King with Truist Securities. Your line is open.

Hey, good morning. Good morning. So I wanted to follow up on 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?

Hey, Brandon. Steve, I would call it a deceleration in deposit costs. You know, last quarter, I think, let me think through. I think of the second quarter. It shows it on page 17, I think. But in 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 been coming down. And I think 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. Typically, there's some seasonality. Those typically have a little bit higher deposit cost, and those ran down a couple hundred million, 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, a team led by Jared heard, 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 certainly wouldn't call it accelerating. I would call it decelerating as a general rule. Okay.

I was kind of referring to, I guess, the pickup after the CPI reports that you mentioned. I'm sorry.

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 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 five to 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.

Okay. Okay. Thanks for the clarity. And I guess when it regards to credit, I recognize, you know, the movement in special mission 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?

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 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 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 can't judge the magnitude of this. Right now, it doesn't look like there's much magnitude at all. But that's where he sees potential loss content.

Yeah. And just curious, what sort of assumptions was he making?

with those comments as far as kind of that that would be probably in a in a i guess higher for longer means basically static kind of rate curve you know and if if brandon if the five-year treasury and it's kind of assuming the five-year treasury stays in that five percent or less range if the five-year treasury moves to six seven percent i i think the industry's headed for more noticeable losses across the board, particularly CRE.

Okay.

Very helpful. Thanks for taking my questions.

You bet.

And we will take our next question from Gary Tenner with DA Davidson. Your line is open.

Thanks. Good morning. I just wanted to ask a follow-up on the fee income side of things, you know, particularly in mortgage and correspondent banking. Given that you're 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 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? Yes, Gary, that's right. I think as we think about corresponding, you know, we're sort of near the bottom on sort of the gross income. We think somewhere that, you know, $14 to $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 contrary income account, up a few million dollars a quarter. So, you know, 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 to 60 basis points range until we get some footing on the, you know, on whether we get rate cuts and when we get them know the fixed income business of course right now with higher rates is a much challenging business um you know and as we you know move our sba team up in houston that we just recruited over you know that'll that'll help that but it takes a few quarters to get that up and moving but that really mostly a 2025 event okay thank you for that and then just uh one question on the construction piece obviously you know, not, uh, much the way of new commitments, I'd assume in that business right now, hence the kind of rolling over of the, of the period on balances, how much kind of planned exits are there in the construction side? As you look over the, you know, the remain the remainder of the year. Yeah, you're, you're right, Gary. I think our construction 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, Will, as far as the unfunded piece that's left in construction, do you have that number?

Yeah. Let's see. The unfunded piece is around $2 billion. And, you know, the biggest piece of that would be, Mokotown would be 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'd be the second biggest. Then it's just kind of a bunch of different categories.

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 quarters, as well as the reserve fund funding, accordingly, as well as those amounts come down.

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.

That's what it looks like right now, yeah. All right. Thank you.

And as a reminder, it is star one if you would like to ask a question. And we will take our next question from Dave Bishop with Hovde Group. Your line is open.

Yeah, 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 be pricing to and from. Thanks.

Yeah, this is, this is Steve. Um, you know, when we were thinking about loan repricing, basically it's, you know, rough numbers of billion dollars a quarter. I think we have about 3.3 billion left in, in, uh, 2024. Um, and it's repricing in that four 60 or it's a four 67 coupon. So, you know, our average loan yield this quarter was around seven and a half. 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 three and a half billion at a 493 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 billion or so in securities repricing over the next seven quarters or so, that's, you know, kind of help think about the next, you know, to get to the end of 25. And, and, and so, you know, we, one of the questions I think, you know, it seems like sentiment has changed to 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 going to 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 three to five basis point, you know, 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'll cost us $150 million. We also have a $37 billion deposit portfolio. We're sort of modeling a 20% down beta, 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 and we have six rate cuts. But really the thing left that really sort of propels everything is the $8 billion or so we just talked about that reprices 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 on the deposits, and then you gain another $160 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 three to five basis point, you know, as we think about rate cuts. So 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, that's how we're thinking about sort of rates now.

I appreciate that. That's great, Keller. 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.

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% to 3% of assets. So sometimes it moves a little higher, sometimes a little lower, but that's generally 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.

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.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.