SouthState - Q3 2024
October 24, 2024
Transcript
Michael Rose (Analyst)
Thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to SouthState Corporation Q3 twenty twenty-four earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press Star followed by the number one on your telephone keypad. If you would like to withdraw your question, press Star one again. Thank you. I would now like to turn the call over to Will Matthews, Chief Financial Officer of SouthState Corporation. Will, please go ahead.
William Matthews (CFO)
Good morning, and welcome to SouthState's third quarter twenty twenty-four earnings call. This is Will Matthews. I'm here with John Corbett, Steve Young, and Jeremy Lucas. We'll follow our normal format, where John and I will make a few brief remarks and then turn it over for Q&A. Before we begin our remarks, I want to remind you that the 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 for SouthState's third quarter results. For the quarter, we generated broad-based growth in loans, deposits, revenue, and earnings per share. Asset quality metrics remain stable and expenses are in check, and with the backdrop of an improving yield curve, the setup is looking pretty good for twenty twenty-five. We've got a positive GDP forecast and low unemployment, so it feels like we're transitioning to a period of expanding margins and accelerating growth, two ingredients that are good for any business. It's also been a quarter that presented the challenge of the hurricane season. Our hearts go out to our teammates and clients that endured the worst of the storms. For the most part, the severe damage you see on the news is isolated to specific areas and not reflective of the broader geography.
However, power outages, cell phone disruption, and gasoline shortages were widespread for a week or more. Our business continuity team kept the bank running without disruption, so it really wasn't as much of an operational challenge since we've been through this before. But it was a chance to pull together as a community bank and for neighbors to help neighbors, and for our team members to help one another. At South State, we have an employee-funded foundation called the Sunshine Fund, and that foundation provided generators, groceries, and needed supplies to fellow employees that were impacted by the storm. Several of you reached out with notes of concern, and we appreciate that. We continue to be excited about our partnership with Independent Financial. Everything appears to be on track. We received shareholder approval in August, and things are progressing as planned with the regulatory approval process.
Rather than waiting until closing, both the Independent and South State teams are traveling together now throughout Texas, Colorado, and throughout the Southeast. We're building new friendships long before we get to the closing and a conversion next summer. All in all, things are looking pretty good. Our strategy is to build our firm in the best markets, with the best scale and the best business model and culture. Our colleagues from Independent share that vision, and together, we're working towards that goal, which we believe will drive long-term shareholder value. Will, why don't you go ahead and walk us through the moving parts on the balance sheet and the income statement?
William Matthews (CFO)
Thank you, John. High level, the third quarter core profitability was consistent with the second quarter, with total revenue up $1 million and non-interest expenses up $1 million for another quarter of PPNR of $183 million. Net interest income was up $1 million on an additional day count, and non-interest income was flat. Our NIM of 3.40% was down four basis points from Q2. Loan yields increased four basis points or five basis points, excluding accretion, with that difference due to the early payoff of an acquired loan with a premium. Loans grew 4% annualized in the quarter, consistent with our mid-single-digit expectation for the year, with single-family residential and C&I loans experiencing the highest growth. The single-family growth was mostly a result of construction loans moving into the residential portfolio upon completion.
You may notice a sizable increase in our yield on loans held for sale. That is due to our SBA securitization business, which obtained its pooling license and is now up and running. Those loans are on our balance sheet while pools are being created, and they carry higher yields than the single-family residential loans that have historically made up that line item. Deposit costs increased 10 basis points to 1.90%. Total deposits grew 6% during the quarter, with customer deposits up $470 million on an ending basis and up approximately $90 million on average. Customer deposit growth was predominantly in money market accounts, with DDAs flat. We also elected to issue some brokered CDs to replace FHLB overnight advances.
Both of these areas of deposit growth caused the overall cost of total deposits to increase a few basis points above our mid-one eighties guidance. I'll note that we did lower our deposit costs effective October first, including on exception-priced accounts, in alignment with our previous execution plan. Steve will give some color on our future margin guidance in the Q&A. Non-interest income of $75 million was slightly above expectations, with correspondent up $5 million or $1 million, excluding the expense on variation margin collateral. This was offset by a $3 million decline in mortgage and a $4 million decline in other non-interest income. NIE, excluding non-recurring items of $244 million, was up $1.2 million from Q2. Higher salary expense due to July 1 merit increases was offset by lower incentives and commissions.
Looking ahead to Q4, we expect NIE to fall in the $245 million-$250 million range, depending upon some variable expense items. One note I'll make about NIE: with the upcoming merger with Independent, several positions that are open or that were budgeted to be filled this year are being held open, with plans for Independent team members to fill those roles. As such, we're seeing some reduced NIE this year while we wait to close the merger and welcome those Independent employees to the team. Our provision for credit losses was $2 million for funded loans, offset by a release of $9 million for unfunded commitments, for a total release of $7 million. Unfunded commitment level declines, continued strong asset quality, and economic data and forecasts drove this result.
Net charge-offs remain low at $6 million or seven basis points annualized. Total reserve levels ended the quarter at 1.52%, down five basis points from Q2. NPAs declined $8 million, with substandard and special mention loans essentially flat. Past dues and payment performance continue to be strong, and line of credit utilization rates continue to remain flat, except for the funding of construction loans as projects move towards completion. Capital improved again, with our TCE ratio growing to 8.9%, our CET1 to 12.5%, and our TBV per share growing $3.36 to end at $51.26. Operator, we'll now take questions.
Operator (participant)
Thank you. We will 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, simply press star one again. We'll pause for a brief moment to compile the Q&A roster, and your first question comes from the line of Catherine Mealor, KBW. Catherine, your line is now open.
Catherine Mealor (Analyst)
Thanks. Good morning.
William Matthews (CFO)
Good morning.
Catherine Mealor (Analyst)
I thought we could just start on the margin. Steve, if you could provide us with your updated outlook on how you see the margin moving towards the next quarter and then into next year, just with the updated moving rates. You've talked about how you're better positioned for rate cuts. I think before you said that, you know, every rate cut is about three to five basis points, you know, in NIM improvement. Just curious if that still stands and how you think about the NIM moving forward. Thanks.
Stephen Young (EVP)
Yeah, sure, Catherine. And I'll try to kind of recap the third quarter, where we were and then kind of go from there forward. So, you know, if you look at page 27 on the review of quarter three results, you know, total revenue was right in line with our guidance. You know, NIM was down 4 basis points this quarter from 344 to 340, but mainly that was due to the increase in deposit costs of about 10 basis points. And for NIM, we forecasted it to be flat in the last call, and so the deposit costs to be up 5-6 basis points.
But on the other side, non-interest income, we had forecasted non-interest income to average assets to be 0.55-0.65, and it ended up on the higher end at 0.65. So a little low on NIM and a little high on non-interest income. So you know, what happened from June thirtieth to September thirtieth, the ten-year Treasury fell about 60 basis points, which caused us to have less cash collateral from our counterparties. And in order to compensate for this decrease in cash, we raised more higher cost deposits and funding throughout the quarter. The effects of this were: it moved our non-interest income up $3.9 million versus the second quarter through the interest on centrally cleared margin line on page 29.
It shows up as under the correspondent bank. That's really an interest expense, and moved our interest expense and deposits up by the same amount. So in summary, without that movement between the line items, NIM would have been 3.44%, which would have been flat. Cost of deposits would have been 1.86%, up 6, and non-interest income to average assets would have been about 0.62%. So total revenue didn't change, but it was in two different buckets. So I thought I would just kind of start out and kind of reset where we are because of the movement in the 10-year. But to your question, as we think about guidance for next year, you know, we're really just reiterating the last quarter's guidance.
You know, for every rate cut, we're looking to three to five basis points for each rate cut, which is what we've said before, and it's consistent with our modeling. Yeah, the timing of such, you know, we think that's you get the three to five basis points within the first three to six months. Roughly two-thirds of that will be within the first quarter, and then you know, the rest of it will happen as you reprice the CD books. But it'll all happen within a pretty short period of time, but if you have a mid-quarter, it's probably not going to be much in that quarter, but more in the next quarter. But I think that's a normal lag.
You know, one of the things that we mentioned on last call was 375-385 exit NIM in the fourth quarter of 2025, I'm sorry, with IBTX, and we continue to see that. We also looked at our balance sheet. You know, the fourth quarter would be about, you know, roughly $50 billion in loans, $55 billion in deposits. This is the end of 2025. Then the other guidance that we've given, maybe just a little bit of an update, is, you know, pre-IBTX for non-interest income, you know, we think will be around 65 basis points, a little bit on the high end just because of the drop in rates. Post-IBTX, you know, last quarter we said, you know, non-interest income to average assets would be in the 50-55 basis points.
We think now that'll be on the high end of that range just because of that movement. So, so anyway, I guess the point of all that is just to reiterate. Let me just kind of outline a couple factors that we're thinking through as we model. Number one. There's really four of them. One is the level of the ten-year Treasury. So if you know, for some reason, the ten-year Treasury went lower than 4%, it would, you know, really have no effect on the revenue, but it would have lower NIM, higher non-interest income. So really, that's not a real revenue item. The second one is the level of the five-year Treasury. You know, that affects our loan and securities repricing.
We have about, this is just us on a standalone basis, between now, so the fourth quarter of this year and all four quarters of next year, we have about $1 billion a quarter in loans, so $5 billion in total by the end of next year of loans, and about $1 billion in total of securities maturing by the end of 2025. At today's rates, we'd pick up about 200 basis points over what the coupon is today. If the five-year Treasury moves higher or lower, it would move that spread there. The third one is just Fed rate cuts. Last quarter, we talked about six rate cuts was factored in in the end of 2025. Now it looks like seven or eight.
You know, the things that would affect would be floating-rate loans and deposits, but I, you know, I kind of look at the level of both two and three, and those probably offset each other a little bit. The last one is just our IBTX day one marks. So as we contemplate closing that in the first quarter, you know, when we announced the deal, the five-year Treasury was around 4.5%. Today, it's about 4%, so 50 basis points lower. What that leads to is less day one dilution, more capital, and less EPS accretion, maybe NIM. However, as we think about that extra capital, the question for us going forward, if we did close on today, is, do we take that excess capital and restructure our own bond book with that capital that we already have?
Those are the things that we're thinking about. But the bottom line is, you know, there's some pluses and minuses on all of that, but our guidance, based on what we model, is the same.
Catherine Mealor (Analyst)
Okay, that's really comprehensive and helpful. And just with the next quarter, do you believe that or can you talk a little about what you're seeing in deposit costs with the first fifty basis points cut? I mean, I know deposit costs increased this quarter, but if we look kind of towards the back part of the quarter, are you seeing an inflection to where we could actually see deposit costs decline next quarter, or do you still think we're stable to up a little bit for a time period?
Stephen Young (EVP)
Yes. No, that's a good question. And yes, just as Will mentioned in the call, you know, I think they cut rates in the middle of September. We did not cut our deposit rates until October first, but we did cut them. And if you recall, we have about $10 billion of, you know, exception-priced deposits and about $4.5 billion of CDs. So as we thought about it, we're trying to get about 80% of the rate cuts on the exception-priced deposits, and then, of course, about 75% on the CDs. And of course, the CDs kind of roll out over the first six months. So we did see that. We did execute it, so we would expect that, you know, that would happen in the fourth quarter.
And we also expect that, you know, over time, that we'll get a 20% beta over time in deposits. But we did execute October first, and we look and, you know, have no issue with that.
Catherine Mealor (Analyst)
Okay. Great. Very helpful. Thank you.
Stephen Young (EVP)
Thank you, Kathy.
Operator (participant)
Your next question comes from the line of Stephen Scouten with Piper Sandler. Stephen, your line is now open.
Stephen Scouten (Analyst)
Yeah, thanks. You guys talked, I think, Will, you spoke briefly on the growth in consumer resi, and a lot of that being from construction migrating over to permanent. But I think I heard you also say the yields were better than traditional resi. Can you give us a feel for that and kind of how you think about balance sheeting consumer resi at this point, given the rate environment, just kind of strategically there?
William Matthews (CFO)
Yeah. What I was talking about, Stephen, I think, sorry for the lack of clarity, and I apologize for my voice. I'm battling a cold. But. I was talking about the loans held for sale. We, you know, we announced earlier this year a team in Houston that buys and pools SBA loans and then sells them in securities. And so the loans held for sale bucket in Q3 included some SBA loans. And of course, those loans are, you know, prime plus type, and it's all the guaranteed portion. But that's a higher yield than what you see in the loans held for sale traditionally, which has all been made up of single-family residential. So that was that comment there.
It really wasn't related to sort of the balance sheet portfolio of consumer real estate, but the loans held for sale line item. If you look at the yield table, you'll see that that yield went up pretty markedly from Q2 to Q3 in that item.
Stephen Young (EVP)
Yeah, and Steve, I'd just say there's a little bit of noise in that line just because the average balances versus ending. But the bottom line is they're a little bit higher yielding loans that are floating, and then eventually that team will turn them into securities and get fee income from them. So that's a group that we're really excited about and just started this quarter in doing some production.
Stephen Scouten (Analyst)
Got it. Thanks for the clarification there. Sorry, I misunderstood that. And then just maybe to follow up on that, I guess, residential real estate, the question, though, I mean, would you, you know, as you see spreads on that portfolio, do you want that percentage of loans to kind of remain in this 26%, or has that become a less viable or less beneficial component of the balance sheet in this rate environment? Just kind of how do you think about that percentage of loans and growing or shrinking it?
Stephen Young (EVP)
Sure, Steven, this is Steve. You know, what will naturally happen when we merge with Independent, that percentage of loans will decrease. I can't remember exactly how far, but I want to say it's 21% or 22%. And then I would think that we would kind of hold it pretty constant from there. Yeah, it might grow a percent or two, but I would expect that as we continue to grow and grow our C&I and other businesses, that the balance sheet will probably particularly be used there, and then fee income, you know, will be more on the residential side. I think this quarter, our residential production was about 60% secondary, 40% portfolio.
You know, our goal would be, over time, to get that closer to seventy-thirty and to use the balance sheet for both, you know, our private banking clients as well as some of our low to mod portfolio products.
Stephen Scouten (Analyst)
Okay. Helpful. And then just last one for me. I know, John, you kind of talked about the overall strategy of building the best team in the best markets, and obviously, great trajectory there. With the IBTX deal pending, do you guys think about, and does it slow down potential hiring in your existing markets? Do you kind of hold back capital and resources to think more about new hires in those new markets in 2025? Or kind of how do you think about that build-out moving forward and where you want to allocate resources to talent?
John Corbett (CEO)
Yeah, Steven, as we join with Independent, one of the things the team out there is excited about is the treasury management platform that we're going to bring to bear for them, that we've worked on for a number of years here at South State. If you think about C&I and middle-market banking, having that sophisticated treasury management tool really is the foundation of that. So once we get that in place, you know, we envision having our Texas team, Colorado team continue to recruit, but maybe a little bit more in the C&I area and layer that on top of the great CRE work that they do. And we're just going to continue to be opportunistic, just like we always are in our existing markets, to hire great teams and not feel constrained in the budget from that standpoint.
We're going to remain opportunistic.
Stephen Scouten (Analyst)
Perfect. Very helpful, guys. Thanks so much for the time.
Operator (participant)
Your next question comes from the line of Michael Rose with Raymond James. Michael, your line is now open.
Michael Rose (Analyst)
Hey, good morning, everyone. Thanks for taking my questions. Just wanted to touch on the reserve release this quarter. You guys have been understandably cautious and have built the reserve pretty meaningfully over the past couple of years. You know, it seems like the environment is now improving. Obviously, there'll be some accounting gymnastics with the acquisition, but you know, could we expect to see either further releases as rates come down or just very low levels of provisioning as we move forward? Just you know, hopefully that the environment remains steady to improve. Thanks.
William Matthews (CFO)
Yeah, Michael, it's Will. And obviously, that's a difficult question, as we've talked about before. I think, you know, what I'd say is that the you know the loss drivers, the economic forecasts that are correlated with losses historically in the various portfolios, you know, what they projected at the end of the third quarter run the model, generated the result that we had, which was that the reserve level needed to come down a little bit, as it did. And, you know, and as we talk about CECL, of course, it is a forward-looking model, so it in theory and in practice, I guess you should see reserve build well in advance of charge-offs, and you could see reserve releases even if a bank were to see some charge-offs pick up.
But I think the answer to your question with a one-word answer would be yes. I think you could see reserve releases from here, from us and others. You could see reserve levels come down, but it all will be driven by, you know, number one, the economic loss drivers, and then B, or number two, the characteristics of the portfolio, how it's performing, what banks are seeing in their own portfolios. So it's hard to predict anything looking forward, but it's not unlikely that you could see that going forward. I wouldn't necessarily build that in your model, but it well could come to pass.
Michael Rose (Analyst)
Yep, totally understand. Just wanted to understand conceptually, just 'cause, you know, all the forward-looking indicators, you know, criticized, classified, being kind of flat, Q on Q, and, you know, again, rates coming down. Just separately, just wanted to touch on, you know, kind of the growth outlook. I think what we've heard from a lot of banks this quarter is, you know, some near-term trepidation, but pipelines, you know, still remain strong, and I think people are optimistic. Once we get through the election and kind of figure out what the rules of the game are, you know, you could potentially see some acceleration next year.
So I just wanted to get a sense from you guys, what you're seeing in your markets, which are obviously, you know, very strong, and then follow on that, you know, I saw that IBTX is exiting the warehouse business, so that's one vertical that, you know, you're not going to have on a pro forma basis. Is there anything else that you either looking to bolster or, maybe, not shutter, but just, you know, reduce in terms of focus? Thanks.
John Corbett (CEO)
Yeah, Michael, it's John. You know, in our markets, the pipelines are steady. You know, they dipped in 2023 after Silicon Valley, picked up in the fall of last year, and they've really been steady at about $4 billion for the last three or four quarters. We guided late last year that we thought this year would be kind of a mid-single-digit growth year. The primary factor driving and controlling that is the shape of the yield curve. It's just not as attractive to step on the gas right now in an inverted yield curve, and it looks like that inversion, you know, lasts, if you believe the forecast, probably through mid-next year. But as the yield curve shape begins to normalize and begins to steepen, we think there will be an acceleration in growth.
You know, the components of growth, Michael, if you look at this year, have been more C&I oriented. We've done about 13% C&I growth year to date to 10% this past quarter, but CRE activity has slowed down, largely because we believe the funding of construction loans, largely multifamily, is beginning to wane and just less appetite for CRE with the shape of the yield curve. So anyway, I think going into 2025, our guidance probably remains in that mid-single-digit range, and when that yield curve starts to take a more normal shape, it probably picks up from there, given the strength of our markets.
Stephen Young (EVP)
Yeah, and I'll just follow up, Michael, on your mortgage warehouse question from Independent. And, you know, in our merger model, the way we contemplated that originally is that those balances would not be there, and that they would be in the cash balances, and that's part of our $50 billion at the end of next year guide at 5%. So that was always contemplated because of our conversations with Independent and their thought of exiting that business. So that, there's nothing new. We just weren't able to publicly say that, you know, at the time.
Michael Rose (Analyst)
All right. Great color. Thank you for taking my questions.
Operator (participant)
Your next question comes from the line of Dave Bishop with Hovde Group. Dave, your line is now open.
David Bishop (Analyst)
Good morning. This is Justin on for Dave. I had a question on credit quality in the multifamily and office portfolios. Curious if you have any line of sight into potential upgrades there. And given the recent increases in criticized assets, is that in any way related to rent abatements or lease-up issues? Thanks.
John Corbett (CEO)
Yeah, we're, Justin, we're pretty pleased with the asset quality trends this quarter. You know, past dues are still low, about 26 basis points, only 7 basis points of charge-off. Independent actually had zero charge-offs during the quarter, and NPAs are trended down. So, you know, specifically as it relates to office and to multifamily, what we're hearing from our credit team on office is they feel like from the properties that we're invested in, that the work-from-home trend has bottomed. You're seeing Amazon and other companies require employees back to the office. Now, will there continue to be, you know, some issues over the next couple of years? Sure.
But I think as we show in our deck, we're concentrated in more small offices under 50,000 sq ft, not the over 500,000 sq ft, where the Kansas City Fed thinks there'll be most of the issues. On multifamily, as we look at that portfolio, the you know substandard increase that we've seen is really more about rising interest rates on floating rate loans. We continue to see absorption of those properties. It's happening a little bit slower. I think when we went back and analyzed on the construction loans, multifamily, we've got 70% of them are performing exactly as we planned as it relates to rental rates and vacancy. The other ones that are behind, they're not behind by much. The rental rates are off by maybe about 5%.
I feel pretty good that with the in-migration and the lack of housing supply, that those properties are going to fill up. They'll just take about a year longer than maybe we planned on that portion. So hopefully that gives you some color on what we're seeing in those properties. But right now in CRE, they're performing great. I mean, our past due ratio of CRE is only seven basis points.
William Matthews (CFO)
Yeah, and I'll just add, Justin, you know, from the standpoint of timing of downgrades, upgrades, our, our general posture is to be quick to downgrade and slower to upgrade. So if rates stay low or move lower, it doesn't mean that the next quarter we're going to start upgrading things right away. We generally like to see some trending and some sustained improvement, so we think that's a good conservative philosophy to have.
David Bishop (Analyst)
Great. Thanks for taking my question.
Operator (participant)
Your next question comes from the line of Ben Gerlinger with Citi. Ben, your line is now open.
Ben Gerlinger (Analyst)
Hi, good morning, guys.
John Corbett (CEO)
Good morning.
William Matthews (CFO)
Good morning.
Ben Gerlinger (Analyst)
So I know you talked through with the rate movement in 3Q and the ten-year kind of impacting the NII and cash balances. I mean, if we were to kind of mark the market here, would it kind of reverse with the ten-year up as much as it is this quarter, or is there a lag effect? I'm just kind of thinking, obviously, the beta specific, because this whole conversation might be futile if the ten-year goes back down, but I'm just kind of curious on how fast that changes everything.
Stephen Young (EVP)
... Sure. You know, it had been to Steve, but really, probably the best way to think about it is based on the average yield of the ten-year in any particular period of time. That's what really drives it. But, you know, I think in the second quarter, the average yield of the ten-year treasury was around 4.45, 4.50, and the average of the third quarter was about 4%. So I'd kind of use - I think it was maybe 3.5, 4%. So I would kind of use the average ten-year treasury in a quarter as sort of a benchmark. And then, you know, because I think the ten-year actually even went down to maybe 3.60 or so.
I mean, it's been kind of wild, a wild ride, 360 to 4 in a quarter. I look at the average, and assuming that, you know, most forecasts have the 10-year Treasury somewhere in the 4% range, give or take, I would use our run rate in the third, excuse me, the third quarter as kind of that interest on variation margin, sort of use that same, same number as expense there.
Ben Gerlinger (Analyst)
Got you. Okay, that's helpful, and then I know you gave some updated thoughts on margin, especially next year. I mean, it's high level, obviously, but is that marking the market both sides of the transaction, or is that just yours?
Stephen Young (EVP)
You're speaking to the Independent transaction as well? Is that what you're speaking to?
Ben Gerlinger (Analyst)
Yeah, yeah. I mean, it included IBTX.
Stephen Young (EVP)
It did. Yes, it did include IBTX. I'm sorry. So the fourth quarter exit rate would include, you know, first quarter closing, plus our 3-5 basis points for each quarter cut, plus IBTX. All of that included $50 billion in loans, $55 billion in deposits, fourth quarter exit rate, in that 3.75%-3.85% range, yes. Mm-hmm.
Ben Gerlinger (Analyst)
Got you. Okay, and then just kind of higher level here. When you think about you, you talked through deposit pricing, you trimmed it on the first of October here. Can you kind of give a sense of the response? Have people looked to shop for higher rates, potentially? I know you have a really well-diversified deposit cost, and it's low, which I think is great, but the problem with being the, kind of the lowest deposit franchise is you're kind of more at risk when things are still stay elevated. Just kind of curious on any kind of anecdotal response you might be seeing from clients.
Stephen Young (EVP)
Sure. Yeah, so far, you know, we're three weeks into it, and really nothing notable. I will say that, if you kind of think about, you know, we have roughly $38 billion in deposits. What I would describe to you was about $10 billion of it is exception priced. So it's a really, you know, maybe not a quarter, maybe it's 30% or so. That's really the sensitive interest rate piece of it. So the other, you know, $28 billion or whatever it is, is not all that sensitive. $28 billion is not all that sensitive because they weren't sensitive to begin with because they're checking accounts, relationship accounts. So it's really the $10 billion you're talking about. And in those cases, we exception price those, you know, closer to market.
When the Fed moves, it would make sense that those rates would come down. So it doesn't surprise me on that 10 billion, we haven't had a ton of pushback. We'll continue to monitor, of course, but that's where the sensitivity is, not on the other piece of the business. That's why our checking account franchise is so valuable with the granular retail, small business, and commercial accounts.
William Matthews (CFO)
Yeah, and then with the four billion CD book, you know, our CD rates are never top of the market. So someone who's shopping to get the best CD in the market is not gonna come into a South State because of those rates. And then the brokered CD book, of course, is, you know, at the marginal market cost.
Ben Gerlinger (Analyst)
Got you. Okay, that's helpful. I appreciate it, guys. Thanks, Ben.
Operator (participant)
Your next question comes from the line of Gary Tanner with D.A. Davidson. Gary, your line is now open.
Gary Tenner (Analyst)
Thanks. Good morning, everybody. Just wanted to ask one more NIM question. You know, if you assume that 4% ten-year and that, and that the income statement geography of the variation margin piece does not change this quarter, does the 50 basis points cut in September, as opposed to 25, kind of push out the ability to show NIM expansion all else equal?
Stephen Young (EVP)
No, I would expect, you know, all of that sort of was a third quarter event, as I was talking about, kind of the third quarter ten-year treasury. So assuming fourth quarter, ten-year treasury is roughly the same, our cost of deposits have now been fully baked in the third quarter. We did on October first, cut deposit rate. So I would expect you'd have your NIM expansion, you know, four or five basis points, something like that, in the fourth quarter, because it's all sort of right set at a three forty, and then you move up from there.
Gary Tenner (Analyst)
Okay, appreciate that. And I know you gave kind of the outlook loaded for IBTX on fees to average assets. Just kind of thinking through the year on the expense side, when the dust settles, you know, towards the end of 2025, do you have a kind of a bogey for expense to average assets, kind of exiting 2025 into 2026?
William Matthews (CFO)
Gary, I don't have that. I don't have it in that terms. I guess looking at the various components, you know, we're still, of course, doing our final planning for 2025 and trying to still, like everybody else, not ready to give real precise guidance on 2025. But in a general sense, our own legacy South State expense base, you should see sort of inflationary type, you know, let's call it 3%-4% type NIE on our books. Then we got the IBTX merger occurring, and with their NIE base, we're still confident that we will achieve the cost saves we announced on that merger.
and so if you, if you take those components, you know, that's kind of where how we think we see, NIE shaping up for next year. There are obviously going to be a lot of noise in the quarter we close, and then the quarter of the conversion, which is scheduled for the Memorial Day weekend, so in the second quarter. And then after that, the third quarter should be a pretty clean NIE quarter, and certainly the fourth quarter, even more so, for next year.
Stephen Young (EVP)
Yeah, and I would just add that I think, you know, as you think about the fourth quarter, most of the costs will probably be out of the cost savings. And if you kind of take our run rate, their run rate, add it together, you know, make the changes for CDI and get the cost savings, I think, you know, it's roughly around 2% of assets, you know, kind of $1 billion for a run rate, give or take, you know, on an annualized run rate. So I think that's about where we think that'll be, but, you know, could be, you know, could be in that general range, 2% assets, probably a good way to think about it.
Gary Tenner (Analyst)
Got it. Thank you.
Operator (participant)
There's no further question at this time. I will now turn the conference back over to John Corbett for closing remarks. John?
Stephen Young (EVP)
All right. Thanks a lot. Thanks for joining us this morning. We know you guys are jumping around on a bunch of different calls. If you need any other information, don't hesitate to give us a ring, and I hope you have a great day.
Operator (participant)
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.