SouthState Corp
NYSE:SSB
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SouthState Corp
Earnings Call Analysis
Q3-2024 Analysis
SouthState Corp
In the third quarter, SouthState Corporation reported steady core profitability consistent with the previous quarter. Total revenues increased by $1 million, maintaining a Pre-Provision Net Revenue (PPNR) of $183 million. The bank's net interest margin (NIM) declined slightly to 3.40%, down 4 basis points due to rising deposit costs. Loan yields increased slightly, showing a growth of 4% annualized in the quarter, which aligns with their mid-single-digit growth expectation for the year. Notably, growth was primarily driven by single-family residential and commercial and industrial (C&I) loans.
Total deposits grew by 6%, with customer deposits increasing by approximately $470 million. However, deposit costs rose by 10 basis points to 1.90%, attributable to the bank's strategic shifts toward higher-yielding deposit accounts, including brokered CDs. The management indicated a proactive move by reducing deposit costs effective October 1, and they expect this to be beneficial for future NIM improvements.
Management reiterated their previous guidance, forecasting that each potential future rate cut by the Federal Reserve could enhance NIM by approximately 3 to 5 basis points. They anticipate that the majority of this NIM improvement will manifest in the first quarter following any rate cut. Looking ahead to 2025, NIM is projected to be within the range of 3.75% to 3.85% at year-end.
Noninterest expenses (NIE) were recorded at $244 million, a marginal increase of $1.2 million from the prior quarter. For the upcoming fourth quarter, the bank expects NIE to fall between $245 million and $250 million, factoring in planned cost efficiencies related to the anticipated merger with Independent Financial. This merger is expected to yield significant synergies and ultimately drive long-term shareholder value.
In terms of credit quality, SouthState noted a modest provision for credit losses of $2 million for funded loans, offset by a $9 million release for unfunded commitments. The bank's non-performing assets (NPAs) declined by $8 million, indicating stable asset quality. Importantly, past dues remain low at about 26 basis points, and charge-offs were a mere 7 basis points annualized. The management expressed confidence in the performance of their multifamily and office portfolios, reassuring investors that rising interest rates correlate to modest underperformance, which is being effectively managed.
Despite the challenges posed by the hurricane season impacting local economies, the broader economic outlook is improving. SouthState anticipates GDP growth and stability in the labor market, providing a favorable backdrop for margin expansion and loan growth. The bank's strategy focuses on building a strong market presence and leveraging economic growth to enhance profitability.
The merger with Independent Financial is progressing well, with regulatory approvals on track. Management is optimistic that the collaboration will enhance their market positioning and operational scale. They are integrating teams ahead of time to ensure a seamless transition and anticipate capturing significant growth opportunities post-merger.
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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 2024 Earnings Conference Call. [Operator Instructions]
I would now like to turn the call over to Will Matthews, Chief Financial Officer of SouthState Corporation. Will, please go ahead.
Good morning, and welcome to SouthState's Third Quarter 2024 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.
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 2025. 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 in 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 SouthState, 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 SouthState 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?
Thank you, John. High level, the third quarter core profitability was consistent with the second quarter, with total revenue up $1 million and noninterest 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 noninterest income was flat. Our NIM of 3.40% was down 4 basis points from Q2. Loan yields increased 4 basis points, or 5 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 190. 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-180s guidance. I'll note that we did lower our deposit costs effective October 1, 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.
Noninterest 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 noninterest income.
NIE, excluding nonrecurring 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 to $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 forecast drove this result. Net charge-offs remained low at $6 million or 7 basis points annualized. Total reserve levels ended the quarter at 1.52%, down 5 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 Instructions] And your first question comes from the line of Catherine Mealor, KBW.
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 move in rates. You've talked about how you're better positioned for rate cuts. I think before, you said that every rate cut is about 3 to 5 basis points in NIM improvement, just curious if that still stands and how you think about the NIM moving forward.
Yes. Sure, Catherine. And I'll try to kind of right set the third quarter, where we were and then kind of go from thereon forward.
So if you look at Page 27 on the review of quarter 3 results, total revenue was right in line with our guidance. NIM was down 4 basis points this quarter from 3.44% to 3.40%, 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 the deposit cost to be up 5 to 6 basis points. But on the other side, noninterest income, we had forecasted noninterest income to average assets to be 0.55% to 0.65%, and it ended up on the higher end of 0.65%. So a little low on NIM and a little high on noninterest income.
So what happened from the June 30 to September 30, the 10-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 noninterest 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 noninterest 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 right set where we are because of the movement in the 10-year.
But to your question, as we think about guidance for next year, we're really just reiterating the last quarter's guidance. For every rate cut, we're looking to 3 to 5 basis points for each rate cut, which is what we've said before and it's consistent with our modeling. The timing of such, we think that you get to 3 to 5 basis points within the first 3 to 6 months. Roughly 2/3 of that will be within the first quarter. And then the rest of it will happen as you reprice the CD book. But it will all happen within a pretty short period of time. The 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.
One of the things that we mentioned on the last call was a 3.75% to 3.85% exit NIM in the fourth quarter of 2025 with IBTX, and we continue to see that. We also looked at our balance sheet. The fourth quarter would be about roughly $50 billion in loans, $55 billion in deposits. This is the end of 2025. And then the other guidance that we've given, maybe just a little bit of an update, is pre-IBTX for noninterest income, we think we'll be around 65 basis points, a little bit on the high end, just because of the drop in rates. Post-IBTX, last quarter, we said noninterest income to average assets would be in the 50 to 55 basis points. We think now that will be on the high end of that range just because of that movement.
So anyway, I guess the point of all that, just to reiterate, let me just kind of outline a couple of factors that we're thinking through as we model. There's really 4 of them. One is the level of the 10-year treasury. So if, for some reason, the 10-year treasury went lower than 4%, it would really have no effect on the revenue, but it would have lower NIM and higher noninterest income. So really, that's not a real revenue item.
The second one is the level of the 5-year treasury. That affects our loan and securities repricing. This is just us on a stand-alone basis, between now for the fourth quarter this year and all 4 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 '25. And at today's rates, we pick up about 200 basis points over what the coupon is today. If the 5-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 6 rate cuts was factored in at the end of '25. Now it's like 7 or 8. The things that would affect would be floating rate loans and deposits. But I kind of look at the level of both 2 and 3 and those probably offset each other a little bit.
The last one is just our IBTX day 1 marks. So as we contemplate closing that in the first quarter, when we announced the deal, the 5-year treasury was around 4.5%. Today, it's about 4%, so 50 basis points lower. What that leads to is less day 1 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 there's some pluses and minuses on all of that, but our guidance, based on what we model, is the same.
Okay. That's really comprehensive and helpful. And just, Steve, next quarter, can you talk a little bit about what you're seeing in deposit costs with the first 50 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 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?
Yes. No, that's a good question. And yes, just as Will mentioned in the call, I think the cut rates were in the middle of September. We did not cut our deposit rates until October 1, but we did cut them. And if you'll recall, we have about $10 billion of 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 6 months. So we did see that. We did execute it. So we would expect that, that would happen in the fourth quarter. And we also expect that over time, that we'll get a 20% beta over time in deposits. But we did execute October 1, and we have no issue with that.
Your next question comes from the line of Stephen Scouten with Piper Sandler.
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?
Yes. What I was talking about, Stephen, sorry for the lack of clarity, I apologize for my voice, I'm down with a cold. I'll talk about the loans held for sale. We announced earlier this year a team in Houston that buys and pools SBA loans and then sales and securities. And so the loans held for sale bucket in Q3 included some SBA loans. And of course, those loans are 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 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 yield went up pretty markedly from Q2 to Q3 in that item.
Yes. 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 are 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 and doing some production.
Got it. Sorry, I misunderstood that. And then just maybe to follow up on that, I guess, residential real estate, the question though, I mean, 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?
Sure, Stephen. This is Steve. 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. It might grow 1% or 2%, 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 will be more on the residential side. I think this quarter, our residential production was about 60% secondary, 40% portfolio. Our goal would be, over time, to get that closer to 70-30 and to use the balance sheet for both our private banking clients as well as some of our [ low-demand ] portfolio of products.
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, a great trajectory there. With the IBTX deal pending, does it slow down potential hiring in your existing markets? Do you kind of pull back capital and resources to think more about new hires in those new markets in '25? Or kind of how do you think about that build-out moving forward and where you want to allocate resources to talent?
Yes. Stephen, as we joined 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 SouthState. And 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, 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 doing the budget from that standpoint, we're going to remain opportunistic.
Your next question comes from the line of Michael Rose with Raymond James.
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. And it seems like the environment is now improving. Obviously, there'll be some accounting gymnastics with the acquisition. But could we expect to see either further releases as rates come down or just very low levels of provisioning as we move forward, just hopefully, that the environment remains steady to improve?
Yes, Michael, it's Will. And obviously, that's a difficult question as we've talked about before. I think what I'd say is that the loss drivers, the economic forecast that are correlated with losses historically in the various portfolios, 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 as we talk about CECL, of course, it is a forward-looking model. So 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 the bank were to see some charge-offs pick up.
But I think the answer to your question, one 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, number one, the economic loss drivers; and number two, the characteristics of the portfolio, how it's performing, what banks are seeing in their own portfolio. 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 could come to pass.
Yes. I totally understand. Just wanted to understand conceptually just because all the forward-looking indicators, criticized, classified, being kind of flat Q-on-Q and again, rates coming down.
Just separately, just wanted to touch on kind of the growth outlook. I think what we've heard from a lot of banks this quarter is some near-term trepidation, but pipelines 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 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 very strong.
And then just follow-on on that, I saw that IBTX is exiting the warehouse business. So that's one vertical that you're not going to have on a pro forma basis. Is there anything else that you're either looking to bolster or maybe not shutter but just reduce in terms of focus?
Yes, Michael, it's John. In our markets, the pipelines are steady. 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 3 or 4 quarters. And we guided late last year that we thought this year would be kind of a mid-single-digit growth year. And 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 lasts, if you'd 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.
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, 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.
Yes. And I'll just follow up, Michael, on your mortgage warehouse question from Independent. 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 there's nothing new. We just weren't able to publicly say that at the time.
Your next question comes from the line of Dave Bishop with Hovde Group.
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?
Yes. Justin, we're pretty pleased with the asset quality trends this quarter. Past dues are still low, about 26 basis points, only 7 basis points of charge-offs. Independent actually had 0 charge-offs during the quarter and NPAs have trended down. So 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 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 square feet, not the over 500,000 square feet where the Kansas City Fed thinks there'll be most of the issues.
On multifamily, as we look at that portfolio, the substandard increase that we've seen is really more about rising interest rates on floating rate loans. We continue to see absorption in those properties. It's happening a little bit slower. I think when we went back and analyzed on the construction loans, multifamily, 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, on CRE, they're performing great. I mean our past due ratio of CRE is only 7 basis points.
Yes. And I'll just add, Justin, from the standpoint of timing of downgrades, upgrades, 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.
Your next question comes from the line of Ben Gerlinger with Citi.
So I know you talked through the rate movement in 3Q and 10-year kind of impacting the NII and cash balances. I mean if we're kind of mark-to-market here, would it kind of reverse with 10-year up as much as it is this quarter? Or is there a lag effect? I'm just kind of thinking, obviously, a bit specific, the whole conversation might be futile. If the 10-year goes back down, but I'm just kind of curious on how fast that changes everything.
Sure. Ben, this is Steve. Really, probably the best way to think about it is based on the average yield of the 10-year in any particular period of time. That's really what drives it. But I think in the second quarter, the average yield on the 10-year treasury, I think, was sitting around 4.45%, 4.50%. And the average in the third quarter was about 4%. I think it was maybe 3.95%, 4%. So I would kind of use the average 10-year treasury in a quarter as sort of a benchmark because I think the 10-year actually even went down to maybe 3.60% or so. I mean it's been kind of a wild ride, 3.60% to 4.25%. I look at the average, and assuming that most forecasts have the 10-year treasury somewhere in the 4% range, give or take, I would use our run rate in the third quarter as kind of that interest on variation margin, sort of use that same number as expense there.
Got you. Okay. That's helpful. And then I know you gave some updated thoughts on the margin especially next year. I mean, it's high level, obviously, but is that marking to market both sides of the transaction? Or is that just yours?
You're speaking to the Independent transaction as well. Is that what you're speaking to?
Yes.
It included IBTX.
It did. Yes, it did include IBTX, I'm sorry. So the fourth quarter exit rate would include first quarter closing plus our 3 to 5 basis points for each cut plus IBTX. All of that included $50 billion in loans, $55 billion in deposits, fourth quarter exit rate in that 3.75% to 3.85% range, yes.
Got you. Okay. And then just kind of higher level here, you talked to deposit pricing, you trimmed it on the 1st of October here, can you kind of give us 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 kind of the lowest deposit franchise is you get kind of more at risk when things still stay elevated. Just kind of curious on any kind of anecdotal response you might be seeing from clients.
Sure. Yes. So far, we're 3 weeks into it and really nothing notable. I will say that, if you kind of think about that we have $38 billion roughly in deposits, what I would describe to you was about $10 billion of it is exception priced. So maybe not a quarter, maybe it's 30% or so. That's really the sensitive interest rate piece of it. So the other $23 billion, or whatever it is, is not all that sensitive. $28 billion, it's 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 closer to market. And so 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. And that's why our checking account franchise is so valuable with the granular retail, small business and commercial accounts.
Yes. And then with the $4 billion CD book, our CD rates are never top in the market. So someone who is shopping to get the best CD in the market is not going to come into SouthState because of those rates. And then the brokered CD book, of course, is at the marginal market cost.
Your next question comes from the line of Gary Tenner with D.A. Davidson.
I just wanted to ask one more NIM question. If you assume that 4% tenure and that the income statement geography of the variation margin piece does not change this quarter, does the 50 basis point cut in September as opposed to 25 kind of push out the ability to show NIM expansion, all else equal?
No. All of that sort of was a third quarter event as I was talking about kind of the third quarter 10-year treasury. So assuming fourth quarter 10-year treasury is roughly the same, our cost of deposits have now been fully baked into the third quarter. We did on October 1 cut deposit rates. So I would expect a NIM expansion of 4 or 5 basis points, something like that, in the fourth quarter because it's all sort of right set at a 3.40% and then you move up from there.
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 towards the end of 2025, do you have a kind of a bogey for expense to average assets kind of exiting '25 into '26?
Gary, I don't have it in that terms. I guess looking at the various components, we're still, of course, doing our final planning for 2025 and, like everybody else, not ready to give real precise guidance on 2025. But in a general sense, our own legacy SouthState expense base, you should see sort of inflationary type, let's call it, 3% to 4% type NIE on our book. Then we got the IBTX merger occurring. And with their NIE base, we are still confident that we will achieve the cost saves we announced on that merger. And so if you take those components, that's kind of 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.
Yes. And I would just add that I think, as you think about the fourth quarter, most of the costs will probably be out of the cost saves. And if you kind of take our run rate, their run rate, add it together, make the changes for CDI and get the cost saves, I think that it's roughly around 2% of assets, kind of $1.4 billion run rate, give or take, on an annualized run rate. So I think that's about where we think that will be, but it could be in that general range, 2% of assets is probably a good way to think about it.
There's no further question at this time. I will now turn the conference back over to John Corbett for closing remarks. John?
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.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.