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spk01: good day and welcome to the community bank system fourth quarter 2023 earnings conference call all participants will be in a listen only mode should you need assistance please signal conference specialists by pressing the star key followed by zero after today's presentation there will be an opportunity to ask questions to ask a question you may press star than one on your touchtone phone and to withdraw your question please press star than two please note this event is being recorded I would now like to turn the conference over to Mr. Dimitar Kravinov, President and Chief Executive Officer of Community Bank Systems. Please go ahead, sir.
spk09: Thank you, Chuck. Good morning, everyone, and thank you for joining Community Bank Systems Q4 2023 earnings call. The fourth quarter was an unusually noisy one for us. The company achieved record revenues in the quarter with strong and balanced performance across all of our four businesses. In fact, when looking at the full year 2023, Three of our four businesses, banking, employee benefit services, and insurance services had record revenue performance. In addition, our balance sheet remains highly liquid and well capitalized. Our diversified business model and emphasis on below average risk served us very well during a very volatile year. With that said, we also had a meaningful increase in expenses in 2023, which was particularly prominent this past quarter due to a number of elevated items. While this increase was well above our expectations, it does not reflect the core earnings power of the company going forward. With this noisy quarter behind us, as we look forward into 2024, we're optimistic about every one of our businesses. In our banking business, we continue to gain market share supported by more than $4 billion of available liquidity, low cost of funds, excellent credit quality, and robust regulatory capital levels. The opportunity to serve clients across our footprint has never been better, and our teams and balance sheet are open for quality business. In our employee benefit services business, we have a strong pipeline of client onboardings, and our reputation is quickly growing at the national level. We were recently named top five record keeper for all market sizes by the National Association of Plan Advisors. In addition, current market values provide a tailwind into 2024 after two years of headwinds. Our insurance services business, which grew 18% in 2023, is well positioned to continue to benefit from hard insurance markets, organic initiatives, and roll-up M&A activities. We were recently ranked as a top 75 PNC agency in the country and one of the nation's largest bank-owned insurance operations. Our wealth business also had a positive revenue year in 2023, and our assets under management are back to their previous peak levels from the end of 2021. That, plus the increased focus and investments in the business, position us well to regain momentum in 2024. Simply put, our focus for 2024 is to continue the revenue growth while moderating the cost pressures and achieving positive operating leverage. We're also hopeful for a more constructive M&A environment in 2024. I will now pass it on to Joe for more details on the quarter.
spk04: Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company's earnings results were down in the fourth quarter due largely to certain elevated non-interest expenses. Fully diluted GAAP earnings per share were 71 cents in the quarter, down 26 cents from the prior year's fourth quarter, and 11 cents lower than the linked third quarter results. Fully diluted operating earnings per share and non-GAAP measure were $0.76 in the quarter, $0.20 per share lower than the prior year's fourth quarter, and $0.06 per share lower than the linked quarter results. During the fourth quarter, the company recorded $123.3 million in non-interest expenses. This included $2.2 million of acquisition-related contingent consideration expenses. a $1.2 million restructuring charge related to the company's previously announced branch optimization strategy, a $1.5 million expense accrual related to the FDIC special assessment, $1 million of executive-related retirement expenses, as well as elevated fraud losses. On a full-year basis, the company's core operating expenses, which excludes acquisition-related expenses and restructuring charges, were up 10.2%. This increase was not only driven by upward pressure on market wages, and some of the previously mentioned charges, but are also reflective of the front foot investments the company made in its leadership team, talent across all lines of business, data systems, and risk management capabilities. The company's management expects the full year 2024 core operating expenses will moderate back to a mid-single-digit growth rate off a full year 2023 core operating expense base of approximately $460 million. The company recorded $177 million of total revenues in the fourth quarter, establishing a new quarterly record for the company. Comparatively, the company recorded total revenues of $175.9 million in the same quarter in the prior year and $175.4 million in the linked third quarter. The increase in total revenues over the prior year's fourth quarter was driven by a $4.1 million or 6.4% increase in non-interest revenues, partially offset by a $3 million or 2.7% decrease in net interest income. As Dimitar noted, the revenues were up in all lines of business on a full-year basis, and management believes the company is well-positioned to grow total revenues again in 2024. The company recorded net interest income of $109.2 million in the fourth quarter. This was up $1.4 million or 1.3% on a linked quarter basis, but down $3 million or 2.7% from the fourth quarter of 2022. Pressure on funding costs have not fully abated, but increases in both the outstanding balances and the yield on the company's loan portfolio largely offset the increase in funding costs between the periods. The company's total cost of funds in the fourth quarter of 2023 was 1.08% as compared to 88 basis points in the length third quarter. The 20 basis point increase in funding costs in the quarter outpaced a 17 basis point increase in earning asset yields, resulting in a three basis point decrease in the company's fully taxable net interest margin from 3.10% in the third quarter to 3.07% in the fourth quarter. On a full-year basis, non-interest revenues, excluding investment securities losses and gain on debt extinguishment, increased $8.2 million, or 3.2%. This result is reflective of the company's diversified business model. Banking-related non-interest revenues decreased $1.9 million, or 2.7%, in 2023 due primarily to the company's decision to eliminate non-sufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022, while total revenues in all three of the company's non-banking businesses, employee benefit services, insurance services, and wealth management services were up year over year. Reflective of an increase in loans outstanding, a stable economic forecast, an increase in delinquent and non-performing loans, the company recorded a provision for credit losses of $4.1 million during the fourth quarter. Comparatively, the company recorded a $2.8 million provision for credit loss in the fourth quarter of the prior year and $2.9 million in the length third quarter. The effective tax rate for the fourth quarter of 2023 was 22.8% up from 22% in the fourth quarter of 2022. On a full year basis, the effective tax rate was 21.6% in 2023 as compared to 21.7% in 2022. Ending loans increased $254.5 million or 2.7% during the quarter and $895.2 million or 10.2% over the prior year. The increase in loans outstanding in the fourth quarter was primarily driven by increases in the business lending and consumer mortgage portfolios. The increase in ending loans year-over-year was driven by organic loan growth in the company's business lending portfolio totaling $438.7 million, or 12%, and growth in all four consumer loan portfolios totaling $456.5 million, or 8.8%. The company's ending total deposits were down $102.7 million, or 0.8%, from the end of the third quarter, driven by net outflow of municipal deposits. On a full year basis, ending total deposits were down $84.2 million, or 0.6%. The company's cycle to date deposit data is 17%, reflective of a high proportion of checking and savings accounts, which represents 68% of total deposits, and the composition and stability of the customer base. During the fourth quarter, the company secured $100 million in term borrowings at the Federal Home Loan Bank of New York at a weighted average cost of 4.55% to fund continued loan growth. Comparatively, during the fourth quarter, the weighted average rate on new loan originations was 7.57%. The company's liquidity position remains strong, readily available source of liquidity, including cash and cash equivalents, funding availability at the Federal Reserve Bank's discount window, unused borrowing capacity at the Federal Home Loan Bank of New York, and Unplugged Investment Securities totaled $4.83 billion at the end of 2023. These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits, net of collateralized and intercompany deposits. The company's loan-to-deposit ratio at the end of the third quarter was 75.1%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans. At December 31st, 2023, all the companies in the bank's regulatory capital ratio significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.37% at the end of 2023, which substantially exceeded the regulatory well-capitalized standard of 5%. The company's net tangible equity to net tangible assets ratio was 5.78% at the end of of the year as compared to 4.81% at the end of the third quarter and 4.64% one year prior. During the fourth quarter, the company repurchased 107,161 shares of its common stock at an average price of approximately $41 per share and 607,161 shares on a full year basis at an average price of approximately $49 per share. At December 31st, 2023, the company's allowance for credit losses totaled $66.7 million. an increase from $64.9 million in the third quarter of 2023 and $61.1 million one year prior, but remained stable at 69 basis points of total loans outstanding. During the fourth quarter of 2023, the company recorded net charge-off to $2.3 million, or 10 basis points of average loans annualized. The company's full-year 2023 net charge-off ratio was six basis points of average loans. At December 31st, 2023, non-performing loans totaled $54.6 million or 56 basis points of total loans outstanding. This was up from $36.9 million or 39 basis points at the end of the third quarter and $33.4 million or 38 basis points one year prior. There were three additional business lending relationships that were transferred to non-accrual status in the fourth quarter, all of which are well secured with no specific loss content identified. Loans 30 to 89 days delinquent were 50 basis points of total loans outstanding at December 31, 2023, as compared to 51 basis points at both the end of the third quarter of 23 and one year prior. Overall, the company's asset quality remains strong. We believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base, and historically strong asset quality provide a solid foundation for future opportunities and growth. Looking forward, we are encouraged by the momentum in all of our businesses and prospects for continued organic growth. We believe funding cost pressures will abate in 2024, setting the table for expansion of net interest income, particularly in the last three quarters of the year. In addition, recent asset appreciation in both the stock and bond markets provide a tailwind for revenue growth in the employee benefit services and wealth management services businesses. That concludes my prepared comments. Thank you. Now I will turn it back to Chuck Openline for questions.
spk01: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. And at this time, we'll take our first question from Mr. Alex Twerdahl with Piper Sandler. Please go ahead.
spk07: Hey, good morning, guys. Good morning, Alex.
spk03: Good morning, Alex. First, can you just give us a little bit more color on those three business lending relationships, you know, what this collateral is behind them, what kind of loans they were, et cetera?
spk04: Yeah, it's actually a little bit of a mixed bag, Alex, in terms of the individual credits, one of which is kind of a mixed use industrial slash office property. It was partially owner-occupied also, but... Generally classified as non-owner-occupied, because that was the majority of the space. The borrower just ran into some cash flow issues actually outside of this particular property. And so we ultimately moved the loan to non-accrual. And doing the evaluation on the asset, we believe we're well secured. And we have not identified any specific loss content on that one. And then we also had a couple of smaller ag, one ag credit, agricultural credit. that was basically flipped to non-accrual status due to cash flow challenges. And the third was actually an owner-occupied property, which the underlying businesses were just having their challenges. So nothing, you know, call it systemic or, you know, no common, real common thread between the three.
spk05: Okay. Okay.
spk03: I was wondering if you can give us a little bit more color on the loan growth that you've been seeing over the last, really this quarter, but the last couple quarters on the commercial side, just in terms of sort of the size of loans they've been putting on, the geographies. And I'm also curious, just with the pullback in rates, I think last quarter you said that you're putting loans on at roughly 250 basis points above the five-year. If the spreads have kind of held as rates have come down, or if they've potentially widened out and, you know, just any more color there would be very helpful.
spk09: Sure. So, Alex, everything that we do is basically footprint borrowers. The majority of our growth has really come from our expansion and some of the larger metro areas, which we've talked about previously. In fact, every one of our regions had a growth year in 2020. 2023. So it's been strong across the board. We're active, engaged in the markets a lot more than we were historically. There is a very favorable competitive dynamic for us as well, where a lot of the other participants, frankly, don't have the liquidity or the regulatory capacity to service clients. So We came into this cycle with a highly liquid balance sheet and no concentrations of any sort with plenty of runway. So we've taken advantage of that. In terms of where we're lending today in terms of rates, they're very similar to the last quarter that we talked about. Our business lending is kind of in the low to mid sevens. we don't expect that to change much as, again, we're benefiting from a bit of better spread due to competitive dynamics. So even if the rates are going to drift down a little bit, I think we're going to hold the ground here on our side as much as we can.
spk03: Great. And so like $170 million of commercial loan growth, would that be several loans, several larger loans, or is it much more granular than that?
spk09: It is very granular. I cannot tell you the exact average and median. We can follow up on that. But our size of loans are very, very low for the size of institution that we run and our lending capacity limits. We don't have too many loans that are anywhere close to even a third of our lending limit. So there's many loans behind those $170 million. Okay.
spk03: Great. And then just a final question, Dimitar, you said in your prepared remarks that you hope that 2024 would be a bit more conducive for M&A. I'm just curious, you know, in your mind, sort of what has to happen? And I guess first off, if you're talking about bank M&A or some of the other lines that you're in, and then, you know, if it's really more rate-driven and the rate mark-driven, or if it's driven more by sort of the willingness of the seller?
spk09: Yeah, so... In terms of our M&A focus, Alex, it hasn't changed. It is across all of our business lines. We generate a lot of capital, and our job as a management team is to deploy that capital for our investors. So we're focused on all of them. We've been doing certainly a little bit more roll-up-type opportunities in the non-banking businesses, kind of as a matter of course. we're hopeful that there might be some larger opportunities on that side as well. But certainly on the bank side, it's been a couple of years of headwinds, I would say, from an M&A perspective in terms of kind of figuring out the values, the rates, the marks. So we're hopeful that this year there's going to be a little bit more clarity and stability in the market, which would allow folks to kind of really understand what's on the balance sheet. We're hopeful that As we see more deals, they're also going to move a little bit faster through the approval process as well. But banks are sold, not bought. And we need to have willing sellers as well. So we just think that the past couple of years were pretty hard. So hopefully it should get better from a pretty low base in terms of opportunities.
spk03: Great. And then, you know, historically, CBU's appetite has been kind of half a billion to two billion in terms of size. Has anything changed with respect to your appetite for bank M&A?
spk09: I think that's kind of where we feel that the best risk and reward lies in the opportunities. You know, I think they'll kind of vary between in-market versus kind of contiguous markets, the markets that we've talked about. But Certainly that size is where we feel is an appropriate risk and reward. It could be a little bit larger, but probably not by much. Thanks for taking my questions.
spk01: Thank you, Alex. The next question will come from Steve Moss with Raymond James. Please go ahead.
spk07: Good morning. Good morning. Good morning. Dimitar, just following up just on loan growth for a second, you know, Do you think for the upcoming year, you know, total loan growth, you know, $600 million, $700 million, or just kind of curious as to, you know, the pace of loan growth? Will it be, you know, still pretty strong or how do you think about it?
spk09: Yeah, Steve, good question. You know, we generally... Come into the years thinking of kind of mid-single digits, we certainly outperformed in the past couple of years by quite a margin. We didn't expect some of that. We didn't plan for it. But when you've got great borrowers and opportunities, you kind of take what they give you. The pipelines are strong. They're not as strong as they were probably last year on the commercial side at this point, but still pretty strong. The residential pipeline is also pretty good. You know, we're still calling for mid-single digits, so we kind of feel comfortable at that level as we sit here today, but it will depend a lot on the competitive dynamics and price as well. You know, we need to get paid for what we do, so there will be some parameters around that as well.
spk07: Okay, great. And then on the employee benefits services side, you know, you sounded pretty upbeat about business development here going forward. I realize also during the quarter you had some tailwinds from, you know, fixed income asset appreciation. Just kind of curious, you know, how you're thinking about the overall revenue growth for that business line this year.
spk09: Yeah, we target high single digits in that business, Steve. So kind of between 5% and 10% is where we think the core run rate of the business is. Certainly on an organic basis, it has been there. It's been muted by the market. So if asset values kind of stay where they are and we start really getting paid for all the organic growth we had and we continue to capitalize on pretty good pipelines in that business, We think that that kind of high single-digit metric is certainly achievable for us in 2024.
spk07: Okay, great. And also for the insurance business, I realize it's a hard market. You had some very good year-over-year growth. I'm just curious, is it still close to a double-digit pace there?
spk09: I think that's fair for the current expectation. We've grown that business at over... 10% in the past three years. Last year was 18%, I think, between some of the continued opportunities on the M&A side, kind of the small roll-ups and kind of the market. And certainly our teams are executing organically really well as well. So double-digit, I think, is certainly achievable for us in 2024.
spk07: Great. And then on the margin here, just curious how you guys are thinking about the margin outlook or next couple quarters, and how you guys are feeling about things if we get some rate cuts here as the year progresses.
spk04: Yeah. Hi, Steve. It's Joe. I'll take that question. You know, so I think I kind of laid out in my prepared comments, you know, our expectations on – and just to make the distinction on net interest income. And our expectations are that net interest income, given the current rate environment, will – will expand year over year on a full year basis. And that, you know, that expectation is really sort of built on the fact that we've had significant loan growth, you know, over the last year or so, and that continues, and that's going to allow us to, you know, improve overall earning asset yields so that we expect that to drive. And the other side of that is obviously that our expectations is that funding cost pressures will abate through 2024. Now, typically, we don't see a significant pickup in net interest income in the first quarter. We lose a couple of days, if you will. There's just a shorter day count in the first quarter. But our expectation is that as we get beyond that, we will potentially see expansion in net interest income. With respect to the margin, I noted again in my prepared comments that we took down some borrowings at about 4.5% and new loans went on the books at about 7.5%. So in this, I'll call it latest round of loan funding and origination, we generated just about a 3% margin on that. So the expectations for us is that potentially Margin is down a little bit to flat, but at the end of the day, expectations are that the dollars and net interest income will trend up later in the year. Yes, I think with respect to the current rate environment, we got some, I'll call it relief. On the long end, on the other hand, that puts a little pressure on loan yields as we move ahead. As Dimitar indicated, we will try to hold in there on on our new rates, new originations. And obviously, if we can get a downstroke or two from the Federal Open Market Committee on the short end, that will relieve some pressure on our ongoing funding costs. Most of our You know, funding sources kind of look at the short end, and we have an inverted curve at the moment. So, you know, if we can get a little bit of a, again, a decrease on the short end, we think that will really help us level off the funding costs going forward.
spk07: Okay. Great. Thank you. Appreciate all the callers, Dimitar and Jeff. You're welcome.
spk01: The next question will come from Chris O'Connell with KBW. Please go ahead.
spk06: Hey, good morning. Chris O'Connell. I just wanted to follow up on the NIM discussion. You know, you guys have been holding in, you know, very well on the funding cost side. Do you have where the average CD cost was in Q4?
spk05: On new CDs?
spk06: No, just average for the quarter.
spk05: Yeah, so we could provide that.
spk04: Just give me a moment here, Chris.
spk06: And then basically, like, on the interest-bearing, you know, deposit cost side, I mean, do you guys have, you know, a full cycle beta in mind or where you think that those costs could top out at at some point over the course of 2024?
spk09: I think, Chris, as we've discussed previously, generally, our expectation for full cycle beta, and that includes the non-interest-bearing piece for us, or the very low interest-bearing piece for us, which is about 68% of the balances right now. We've talked about 20% to 25% in terms of beta. I think we still feel comfortable in that range. We're pretty close to the low end of that. So it might be, you know, depending on how long this cycle takes, there is a few quarters after the Fed stops raising rates. And even when they cut, there's a couple of quarters potentially of still kind of lingering impact of remix on the balance sheet. But kind of in that mid-20s range,
spk04: mid 20 kind of 22 25 probably is pretty reasonable for us in terms of total beta for the cycle and chris just to follow up on your question on on you know time deposits so blended cost in q4 is about 330 on time deposits great and then uh you know on the borrowing side as far as you know you know the bulk of them you guys have put on in the last couple quarters
spk06: you know, in the mid-fours range, you know, for the balance, which is mostly those customer repurchase agreements, which I know act a little bit more like deposits in terms of, you know, their cost structure. I mean, do you see more pressure on those costs as we enter 2024?
spk04: I think typically, you know, we do see a significant repricing opportunity on the customer repurchase agreements around mid-year. some of which are, you know, municipal customers, and it sort of depends on the rate environment sort of when we get closer to that point. But, you know, overall, you know, these are not high-cost funding, a high-cost funding source for us on a, you know, on a complete blended basis in Q4, about, you know, 1.5%, because it's largely, you know, you know, kind of operating in nature, a lot of these accounts. So it's not a high cost of funds for us.
spk06: Great. And just kind of tying it all together on the margin, I mean, you know, in the event that we start getting, you know, Fed fund cuts, you know, around mid-year, the initial reaction of the margin, you know, just off of that first quarter is Do you expect that to be directionally upward or downwards in any sense of the magnitude?
spk09: Chris, I think the really hard question there is what continuing remix will happen on the balance sheet in the year or in the quarter. I think if everything else is equal and we get a rate cut, we do have clearly a number of accounts that will immediately reprice down predominantly in the money market space in line with that cut. Again, because our deposit base is heavily into non-interest bearing or very low interest bearing savings accounts and checkings accounts, we might have a benefit, but I don't think it will be as huge of a benefit in that immediate aftermath of a cut or two. So probably directionally in the direction we want to see it, which is up, but probably not by a huge amount. Great.
spk06: And then last one for me is just what's a good go-forward tax rate?
spk04: I think it's fair to use somewhere between call it 21% and 22% on a go-forward basis. I think I mentioned on my prepared comments the last two years, the weighted average has been about 21.5%. I think that's a fair expectation going forward.
spk06: Great. Thanks, Joe. Dimitar, appreciate it.
spk01: You're welcome. Again, if you have a question, please press star, then 1. Our next question will come from Manuel Navas with DA Davidson. Please go ahead.
spk00: Hi, everyone. This is Sharon G. Ahn from Manuel Navas. Thank you so much for taking my question. So I was wondering, what are the biggest wildcards for driving positive operating leverage in 2024?
spk05: So thank you for that question.
spk09: If you look at just the magnitude of our P&L, the biggest wildcard for us is always NII. So depending on where NII trends, you know, I think that's going to determine how much leverage we can drive in terms of efficiency to the bottom line. I think we feel reasonably good about our expense outlook for 2024 in terms of that mid-single digit rate off of the core base that Joe mentioned. So I think that side of the equation is a little bit easier to put your arms around. But, you know, what happens with NAI, deposit-free mixing, Fed cuts, pricing in the market is going to largely determine the outcome of the operating leverage.
spk00: Thank you so much. That was all for my questions.
spk01: Welcome. The next question will come from Matthew Breeze with Stevens, Inc. Please go ahead. Hey, good morning, everybody.
spk07: Good morning, Matt. Good morning, Matt.
spk08: You know, the fee income growth as we go up and down the various business lines sounds pretty optimistic, robust. Dimitar, I'm just curious your thoughts on overall fee income as a percentage of revenues, which at nearly 40%, I think is one of the largest differentiators of CBU versus your traditional bank competitors. I'm curious if longer term you have any goals, if there's a percentage of revenues you'd like fee income to represent over time.
spk09: Yeah, so Matt, I think that's a good question. It's something that we talk a lot about at the board level and at the management level. And we run a diversified financial services company, not a bank with hobbies. So all of our four businesses are equally important to our ability to generate returns going forward, our ability to grow the dividend, create sustainable earnings. So we've organized also our company along those lines. For example, I've got four direct reports for each one of the businesses. So our emphasis is to drive each one of those businesses. With that said, as you mentioned, we're about 40% right now We don't really think of it as a hard and fast number of kind of where do we want to be. I think the more diversified we can be, the better. But ultimately, it comes down to quality of earnings. And certainly in the banking business, there's plenty of quality ways to generate earnings on a sustainable basis. So as you kind of look at our P&L, you're not going to see a lot of volatility in terms of mortgage fees or SBA fees or leasing fees. Those are the kind of things that we generally don't like because of the volatility aspect to it and kind of the quality aspect to it. But high-quality NII that is sustainable with a strong deposit base certainly is a quality earning outcome as well. So we want to be as diversified as we can. We don't have a hard and fast rule. I think... Our goal is to always have quite a bit more than others because of just the nature of the company we run, which is a diversified financial services company. And we do plan on leaning into all of our businesses, both organically and inorganically.
spk04: I would just add one comment to Dimitar's, which is with four businesses, we do have the opportunity to deploy capital in four different businesses. where, you know, a lot of our peer institutions don't necessarily have all of those options. And, you know, there are times when, you know, opportunities present themselves in different businesses and, you know, we're in the business of allocating capital to the one that makes the most sense, you know, given our other alternatives in that moment. So I think, you know, just, you know, kind of to level set that thinking is that, you know, we do have, you know, options to deploy capital in four different businesses. And I think, you know, the best Option in the moment when we have those opportunities is kind of how we kind of look at that capital deployment. Again, a lot of our peer institutions, they have one or maybe two businesses in which they can deploy capital, and we have four.
spk08: Understood. Okay, I appreciate all that. I did want to touch just on your comments around the margin slash NII outlook. I mean, just curious. So, you know, given your overall level of deposit costs, which, you know, sub 1% at this stage is pretty amazing. Dimitar, I think you suggested that, you know, with rates down, we'll see a lag, but is it possible for a time we may even see kind of a negative deposit beta, meaning, you know, deposit costs at your institution continue to decline as the Fed is cutting just because of that delta? And then second question is you had mentioned deposit that repriced immediately. How much of the deposit base, in fact, does that?
spk09: I think, Matt, if you look at the historical cycles, there is that lag of a few quarters where deposit costs in the industry continue to rise while the Fed is not moving. So if you want to, I don't know how we would qualify that beta, but it would be a very large number, essentially, right? So I don't think that we're going to be immune to that. But I just think that the pace, as you've seen, that our deposit costs are increasing quarter by quarter is consistently lower than the aggregate industry and our peers. And I don't think that that will change. So there will be some lagging effect on when the Fed is not moving and deposits are still remixing And Joe can give you the number of the ones that we have that are a little bit more price sensitive and probably more likely to reprice quickly on the down.
spk04: Yeah. So, Matt, we do have, you know, approximately, call it $7 billion of... non-time deposits that are interest-bearing, right? So that's comprised of interest checking and savings and money market. And the money market being the more sensitive of the group there. And the money markets total about $2.4 billion on roughly a $13 billion base. Savings accounts are about $2.3 billion and interest-bearing checking about $2.9 billion. So if we have a a reduction in the rates at the Federal Open Market Committee and that funds comes down a quarter, that's the opportunity set for us. I would just emphasize that the money market deposits are the more sensitive of those kind of three portfolios.
spk09: Matt, maybe just to add a little bit to that, we manage ALCO to a roughly neutral outcome in terms of rate exposure. let's not forget about the asset size. You know, we've been lagging on the asset side in the cycle because we've got a more fixed profile on the asset side. So that's allowed us to, you know, our deposit base has allowed us to do that. It's also going to allow us on the other side now to have less of a pricing and repricing pressure on the assets in a down cycle. So that's why we kind of look at our margin as probably a little bit sideways, kind of in a plus or minus a few cuts type of scenario. Understood.
spk08: Thank you. And then I did want to touch on the securities portfolio. I mean, just judging from the swing in rates, first of all, it's safe to assume that a lot of that higher move is really valuation-driven versus purchase-driven. And then secondly, could you just remind us what the cash flows are and what the outlook for that portfolio is in 2014?
spk04: So Matt, with respect to the cash flows, we have somewhat limited cash flows in 24 and 25, less than $100 million in each of those years. And if you recall, we did the repositioning back in the first quarter. We pulled forward most of the cash flows that we're basically coming to in 24 and 25. We get to some more significant cash flows in 2026 and 27, you know, on a combined basis, about a billion dollars in those years and then another billion or so in 28 and 29. So we just effectively pulled forward those cash flows. We also have potentially small opportunities later in the year if we continue to kind of see this rate environment to pull forward some, you know, some shorter-term opportunities you know, securities, cash flows, maybe at par without a loss and basically be able to migrate those into the loan portfolio. But we're only, you know, potentially looking at a couple hundred million dollars if, you know, if we see that opportunity here in the coming quarters.
spk05: Sorry, trying to hit the mute button. Thank you.
spk08: And then last one for me is just on We'd love some general commentary on credit, what you're seeing as the consumer goes into indirect auto loans, as commercial real estate rolls, and then how does that kind of filter into provisioning in the charge-off outlook for 2024? That's all I have. Thank you.
spk09: Sure, Matt. I'll take that. So if you step back and look at credit, and we've talked about it, obviously, about a recession and impact for a couple of years now. And we, if you look at our substandard and special mentions, so if you kind of think of it as kind of the early warning buckets, they're still roughly half of where they were pre-pandemic levels. So We're certainly moved up a little bit, and you saw a few relationships get a little bit more challenged this quarter, which is normal, expected, still well below the historical averages. Our charge-offs in our commercial business last year were one basis point. Our charge-offs in the auto business, which I know you love, were about 20 basis points, 22 basis points. And we consistently believe that they should be higher. And I think what's happening behind a lot of that is just the economic environment is such when you have a low unemployment rate and a lot of government spending in the economy, it's really providing a support to asset values across the board. You look at our mortgage business. We're going to have a little bit more delinquencies as things normalize. But when we take these things through the process, we get paid fully because the values of housing in our markets are actually back up. They're actually higher than they were when we talked about the peak on a post-pandemic basis. So asset values are very strong due to limited supply. You know, people have jobs. Even if they lose a job and fall delinquent a little bit, it's still easy to find another job and get back in line. You know, the collateral values, even on the commercial side, are holding in pretty well. You know, those businesses are profitable. We have not seen anything that's kind of consistent in terms of pressure in a specific geography or an industry. And again, when the government is spending so much money, that deficit is the private sector surplus. So that's supporting just a lot of liquidity in the system and activity. And as we've talked before in our markets, you know, for the first time in a long while, we're actually getting a little bit of an economic lift from the spending around some of the kind of the advanced technologies. The CHIPS Act, you know, all of that stuff is helping our geographies.
spk08: Great. I appreciate all that. That's all I had. Thank you. Thank you.
spk01: You're welcome. The next question is a follow-up from Chris O'Connell with KBW. Please go ahead.
spk06: Hey. Yeah, just wanted to follow up on the $2.4 billion of money market that you guys mentioned. Do you have where the rate on those are today or in the fourth quarter?
spk04: Yeah, on a blended basis, Chris, it's about 2%. Great.
spk06: That's all I had. Thank you.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Mr. Kirovanov for any closing remarks. Please go ahead, sir.
spk09: Thank you, Chuck, and thank you all for your interest in our company. And we will see you again in April. Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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