Community Bank System Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the Community Bank System 4th Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.

Operator

Dimitar Karavanov, President and Chief Executive Officer of Community Bank Systems. Please go ahead, sir.

Speaker 1

Thank you, Chuck. Good morning, everyone, and thank you for joining Community Bank Systems Q4 2023 earnings call. The 4th 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 4 businesses. In fact, When looking at the full year 2023, 3 of our 4 businesses Banking, Employee Benefit Services and Insurance Services and record revenue performance.

Speaker 1

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 are optimistic about every one of our businesses.

Speaker 1

In our banking business, we continue to gain market share supported by more than $4,000,000,000 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 on boardings And our reputation is quickly growing at the national level. We were recently named top 5 record keeper for all market sizes by the National Association of Plan Advisors. In addition, current market values provide a tailwind into 2024 after 2 years of headwinds.

Speaker 1

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 and A activities. We were recently ranked as a top 75 P and C 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 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 a more constructive M and A environment in 2024.

Speaker 1

I will now pass it on to Joe for more details on the quarter.

Speaker 2

Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company's earnings results were down in the 4th quarter due largely to certain elevated non interest expenses. Fully diluted GAAP earnings per share were $0.71 in the quarter, down $0.26 from the prior year's 4th quarter and $0.11 lower than the linked 3rd quarter results. Fully diluted operating earnings per share, a non GAAP measure, were $0.76 in the quarter, dollars 0.20 per share lower than the prior year's 4th quarter and $0.06 per share lower than the linked quarter results. During the Q4, the company recorded $123,300,000 in non interest expenses.

Speaker 2

This included $2,200,000 of acquisition related contingent consideration expenses, a $1,200,000 direct charge related to the company's previously announced branch optimization strategy, a $1,500,000 expense accrual related to the FDIC special Assessment, dollars 1,000,000 of executive related retirement expenses as well as elevated fraud losses. On a full year basis, the company's core operating 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 2020 Four core operating expenses will moderate back to mid single digit growth rate to a mid single digit growth rate off a full year 2023 core operating expense of approximately $50,000,000 The company recorded $177,000,000 of total revenues in the 4th quarter, $400,000 in the linked 3rd quarter. The increase in total revenues over the prior year's Q4 was driven by a $4,100,000 or 6.4 On a full year basis, the management believes the company is well positioned to grow total revenues again in 2024.

Speaker 2

The company recorded net interest income of $109,200,000 in the 4th quarter. This was up $1,400,000 or 1.3 percent on a linked quarter basis, But down $3,000,000 or 2.7 percent from the Q4 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 Q4 of 2023 was 1.08% as compared to 88 basis points in the linked 3rd 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 3 basis point decrease The company's fully taxable net interest margin from 3.10 percent in the 3rd quarter to 3.07% in the 4th quarter.

Speaker 2

On a full year basis, non interest revenues, excluding investment securities losses and gain on debt extinguishment increased $8,200,000 or This result is reflective of the company's diversified business model. Banking related non interest revenues decreased 1 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 and increase in delinquent and non performing loans, The company recorded a provision for credit losses of $4,100,000 during the Q4. Comparatively, the company recorded a $2,800,000 provision for credit loss in the Q4 or prior year $2,900,000 in the linked 3rd quarter. The effective tax rate for the Q4 of 2023 was 22 8%, up from 22% in the Q4 of 2022.

Speaker 2

On a full year basis, the effective tax rate was 21.6% in 2023 as compared Ending loans increased $254,500,000 or 2.7 percent during the quarter and $895,200,000 or 10.2 percent over the prior year. The increase in loans outstanding in the 4th 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 $438,700,000 or 12 percent and growth in all four consumer loan portfolios totaling $456,500,000 The company's ending total deposits were down $102,700,000 or 0.8 percent from the end of the 3rd quarter, driven by On a full year basis, ending total deposits were down $84,200,000 or 0.6%. The company's cycle to date deposit beta 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 Q4, the company secured $100,000,000 in term borrowings at the Federal Home Loan New York at a weighted average cost of 4.55 percent to fund continued loan growth. Comparatively, during the Q4, the weighted average rate on new loan originations was 7 point 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 unpledged investment securities totaled $4,830,000,000 at the end of 2023.

Speaker 2

These sources of immediately available liquidity represent over 200 The company's estimated uninsured deposits, net of collateralized and intercompany deposits. The company's loan to deposit ratio at the end of the 3rd quarter 75.1 percent providing future opportunity to migrate lower yielding investment security balances into higher yielding loans. At December 31, 2023, all the companies and the bank's regulatory capital ratio significantly exceeded co capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.37% at the end of 2023, which substantially exceeds 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 the year as And 607,161 shares on a full year basis at an average price of approximately $49 per share.

Speaker 2

At December 31, 2023, company's allowance for credit losses totaled $66,700,000 an increase from $64,900,000 in the Q3 of 2023 $61,100,000 1 year prior, but remained stable at 69 basis points of total loans outstanding. During the Q4 of 2023, the company recorded net charge offs of $2,300,000 or 10 basis points of average loans annualized. The company's full year 2023 net charge off ratio was 6 basis points of average loans. At December 31, 2023, non performing loans totaled 54 $6,000,000 or 56 basis points of total loans outstanding. This was up from $36,900,000 or 39 basis points At the end of the Q3, $33,400,000 or 38 basis points 1 year prior, there were 3 additional business lending relationships that points of total loans outstanding at December 31, 2023, as compared to 51 basis points at both the end of the Q3 of 'twenty 3 and 1 year prior.

Speaker 2

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.

Speaker 2

That concludes my prepared comments. Thank you. Now I will turn it back to Chuck to open the line for questions.

Operator

We will now begin the question and answer session. And at this time, we'll take our first question from Mr. Alex Twerdahl with Piper Sandler. Please go ahead.

Speaker 1

Hey, good morning guys.

Speaker 3

Good morning, Alex. Good morning, Alex.

Speaker 4

First, can you just give us a little

Speaker 5

bit more color on those three business lending relationships, what this Collateral is behind them, what kind of loans they were, etcetera?

Speaker 2

Yes, 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 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 were well And we have not identified any specific loss content on that one. And then we also had a couple of smaller ag, 1 ag credit, agricultural credit that was basically flipped to nonaccrual status Due to cash flow challenges and the third was actually owner occupied property, which the underlying businesses were just having their challenges. So nothing, call it, systemic Or no common real common thread between the 3.

Speaker 4

Okay.

Speaker 1

I was wondering if you

Speaker 5

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 of quarters I'm also curious just with the pullback in rates. I think last quarter you said that you're putting loans on roughly 2 50 basis points above the 5 year. If the spreads have kind of held as rates have come down or if they potentially widened out and just any more color there would be very helpful.

Speaker 1

Sure. So Alex, everything that we do is basically footprint borrowers. The majority of our growth has really come from our expansion in some of the larger metro areas, which we've talked about previously. In fact, every one of our regions had a growth year in 'twenty three. So it's been strong across the board.

Speaker 1

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-7s.

Speaker 1

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 drip down a little bit, I think we're going to hold the ground here on our side as much as we can.

Speaker 5

Great. And so like $170,000,000 of commercial loan growth, like would that be several loans, several larger loans or is it much more granular than that?

Speaker 1

It is very granular. We don't 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 $170,000,000

Speaker 5

Great. And then just final question, Dheemitaur, you said in your prepared remarks that you hope that 24 will be a bit more conducive for M and A. I'm just curious in your mind sort of what has to happen? And I guess first off, if you're talking about bank M and A or some of the other lines that you're in, and then 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?

Speaker 1

Yes. So In terms of our M and 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 So 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.

Speaker 1

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 and 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 I 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.

Speaker 1

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.

Speaker 5

Great. And then historically, CBU's appetite has been kind of $500,000,000 to $2,000,000,000 in terms Size, has anything changed with respect to your appetite for bank M and A?

Speaker 1

No, I think That's kind of where we feel that the best risk and reward lies in the opportunities. I think They will 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 It's an appropriate risk and reward. It could be a little bit larger, but probably not by much.

Speaker 5

Thanks for taking my questions.

Speaker 6

Thank you, Alex.

Operator

The next question will come from Steve Moss with Raymond James. Please go ahead.

Speaker 6

Hi, good morning.

Speaker 1

Hi, Steve.

Speaker 6

Divitar, just following up just on loan growth for a second. Do you think For the upcoming year, total loan growth of $600,000,000 $700,000,000 or just kind of curious as to the pace of loan growth It will be still pretty stronger. How do you think about it?

Speaker 1

Yes, Steve, good question. We generally Come into the years thinking of kind of mid single digits. We certainly outperformed in the past couple of years by 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.

Speaker 1

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. 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.

Speaker 1

We need to get paid for what we do. So there will be some parameters around that as well.

Speaker 6

Okay, great. And then on the employee benefit services side, you sounded pretty upbeat about business development here going forward. I realize also during the quarter you had some tailwinds from fixed income asset appreciation. Just kind of curious How you're thinking about the overall revenue growth for that business line this year?

Speaker 1

Yes. We target high single digits in that business, Steve. So kind of between 5% 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.

Speaker 1

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.

Speaker 6

Okay, great. And also for insurance the insurance business, I realize it's a hard market. You had some very good year over year growth. Just curious, is it still close to a double digit pace there?

Speaker 1

I think that's fair for the current expectation. We've grown that business at over 10% in the past 3 years. Last year was 18%, I think between some of the continued opportunities on the M and A side, kind of the small roll ups and 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.

Speaker 6

Okay, great. And then on the margin here, just curious how you guys are thinking about the margin outlook or next couple of quarters and what how you guys are feeling about things if we get some rate cuts here as the year progresses?

Speaker 2

Yes. Hi, Steve. It's Joe. I'll take that question. So I think I kind of laid out in my prepared comments our expectations on Just to make the distinction on net interest income.

Speaker 2

And our expectations are that net interest income, given the current rate environment, We'll expand year over year on a full year basis, and that expectation is really sort of Built on the fact that we've had significant loan growth over the last year or so and that continues and that's going to allow us You'll improve overall earning asset yields, and so that we expect that to drive. And then the other side of that is obviously that we That funding cost pressures will abate through 2024. Now typically, We don't see a significant pickup in net interest income in the Q1. We lose a couple of days, if you will. There's just a shorter They count in the Q1, but our expectation is that sort of as we get beyond that, we will potentially see expansion And 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%.

Speaker 2

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 Yes, I think with respect to the current rate environment, it was 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. We will try to hold in there on our new rates, on new originations. And obviously, if we can get a down stroke or 2 from the Federal Open Market Committee on the short end, that will release some pressure on our ongoing funding costs. Most of our funding sources kind of look at the short end and we have an inverted curve at the moment.

Speaker 2

So 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.

Speaker 6

Okay, great. Thank you. Appreciate all the color. Devittar and Jeff.

Operator

The next question will comes from Chris O'Connell with KBW. Please go ahead.

Speaker 4

Hey, good morning. Just wanted to follow-up on the NIM discussion. You guys have been holding in very well on the funding cost side. Do you have where the average CD cost was in Q4?

Speaker 2

On new CDs?

Speaker 4

No, just average for the quarter.

Speaker 2

Yes. So we can provide that. Just give me a moment here, Chris.

Speaker 4

And then basically like On the interest bearing deposit cost side, I mean, do you guys have a full cycle beta in mind or where you think that those costs could Top out at some point over the course of 2024?

Speaker 1

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, which is 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 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, Mid-twenty percent, kind of 22%, 25% probably is pretty reasonable for us in terms of total beta for the cycle.

Speaker 2

And Chris, just a follow-up on your question on time deposits. So blended cost in Q4 is about $3.30 on time deposits.

Speaker 4

Great. And then on the borrowing side, as far as the bulk of them you guys have put on the last couple of quarters In the mid-4s range, for the balance, which is mostly as customer repurchase agreements, which I know act a little bit more like deposits in terms of their cost structure. I mean, do you see more pressure on those costs as we enter 2024?

Speaker 2

I think typically, we do see a, I'll call it, a significant repricing on the customer repurchase agreements around mid year, some of which are municipal customers and it sort of depends on the rate environment, Sort of when we get closer to that point. But overall, these are not high cost funding, A high cost funding source for us on a complete blended basis in Q4 about 1.5%, Because it's largely kind of operating in nature, a lot of these accounts. So it's not a high Cost of funds for us.

Speaker 4

Great. And just kind of tying it all together on the margin, I In the event that we start getting Fed fund cuts around midyear, The initial reaction of the margin just off of that Q1, do you expect that to Surely upward or downwards, any sense of the magnitude?

Speaker 1

Chris, I think the really hard question there is what Continuing rate mix 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. There we do have clearly a number of accounts that will immediately reprice down In the money market space, in kind of in line with that cut. So Again, because our deposit base is heavily into non interest bearing or very low interest bearing savings accounts And checking 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 2. So probably directionally in the direction we want to see it, which is up, But probably not by a huge amount.

Speaker 4

Great. And then last one for me is just what's a good go forward tax rate?

Speaker 2

I think it's fair to use somewhere between, call it, 21% 22% On a go forward basis, I think I mentioned on my prepared comments the last 2 years, the weighted average has been about 21.5%. I think that's a fair expectation going forward.

Speaker 4

Great. Thanks, Joe and Mitar. Appreciate it.

Speaker 1

Welcome. Welcome.

Operator

Our next question will come from Emmanuel Nieves with D. A. Davidson. Please go ahead.

Speaker 3

This is Sharon Gee on for Manuel Nieves. Thank you so much for taking my question. So I was wondering, what are the biggest

Speaker 1

So thank you for that question. If you look at just the magnitude of our P and L, The biggest wildcard for us is always NII. So depending on where NII trends, 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 freight 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 what happens with NII, deposit remixing, Fed cuts, Pricing in the market is going to largely determine the outcome of the operating leverage.

Speaker 3

Thank you so much. That was all for my questions.

Speaker 1

Welcome.

Operator

The next question will come from Matthew Breese with Stephens Inc. Please go ahead.

Speaker 2

Hey, good morning, everybody.

Speaker 1

Good morning, Matt. Good morning, Matt.

Speaker 7

The fee income growth as we go up and down the various business lines sounds pretty optimistic, robust. Jim, 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 is a percentage of revenues you'd like fee income to represent over time?

Speaker 1

Yes. 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 4 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 4 direct reports for each one of the businesses.

Speaker 1

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.

Speaker 1

And certainly in the banking business, there is plenty of quality ways to generate earnings on a sustainable basis. So as You kind of look at our P and 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. So 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.

Speaker 1

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 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.

Speaker 2

I would just add one comment to Dimitar's, which is with 4 businesses, we do have the opportunity to deploy Capital in 4 different businesses, where a lot of our peer institutions don't necessarily have all of Those options and there are times when opportunities present themselves in different businesses and We're in the business of allocating capital to the one that makes the most sense, given our other alternatives in that moment. So I think just kind of to level set that thinking is that we do have options to play capital in 4 different businesses. And I think The best option in the moment when we have that 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 1 or maybe 2 business In which they can deploy capital, we have 4.

Speaker 7

Understood. Okay. I appreciate all that. I did want to touch just on your comments around the marginNII outlook. I mean, just curious, So given your overall level of deposit costs, which sub-one percent at this stage is pretty amazing.

Speaker 7

Dimitar, I think you suggested that with rates down, we'll see a lag. But is it possible for a time you may even see kind of A negative deposit beta, meaning deposit costs at your institution continue to decline, as I said, is cutting just because of that delta? And then second question is you had mentioned deposits that reprice immediately. How much of the deposit base impact does that?

Speaker 1

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 It's not moving and deposits are still remixing.

Speaker 1

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.

Speaker 2

Yes. So Matt, we do have Approximately, call it, dollars 7,000,000,000 of Non time deposits that are interest bearing, right? So that's comprised of interest checking and savings in money market. And the money market being the more sensitive of the group there. And the money markets totaled up $2,400,000,000 on a roughly $13,000,000,000 base.

Speaker 2

Savings accounts are about $2,300,000,000 and interest bearing checking about $2,900,000,000 So if we have a reduction in the rates at the Federal Open Market Committee and that funds That's the opportunity set for us. I would just emphasize that the money market deposits are the more sensitive of those kind of 3 portfolios.

Speaker 1

Matt, maybe just to add a little bit to that. We manage ALCO to roughly neutral outcome in terms of Great exposure. So let's not forget about the asset size. We've been lagging on the asset size in the cycle because we've got a more fixed Profile on the asset side. So that's allowed us to deposit base has allowed us to do that.

Speaker 1

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. Okay.

Speaker 7

Understood. Thank you. And then I did want to touch on the securities portfolio. I mean, judging from the swing in rates, first of all, is it safe to assume that a lot of that Higher move is really valuations 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 2024.

Speaker 2

Yes. So Matt, with With respect to the cash flows, we have somewhat limited cash flows in 'twenty four and 'twenty five, less than $100,000,000 in Each of those years. And if you recall, we did the repositioning back in the Q1, we pulled forward Most of the cash flows in that were basically coming due in 2024 and 2025. We get to some more significant cash flows in 2026 and 'twenty seven, on a combined basis, about $1,000,000,000 in those years and then another $1,000,000,000 or so in 'twenty eight and 'twenty nine. So we just effectively pulled forward those cash flows.

Speaker 2

We also have potentially small opportunities later in the year if we continue to kind of see this rate environment to pull forward Some shorter term securities, cash flows, maybe at par Without a loss and basically be able to migrate those into the loan portfolio, but we're only Potentially looking at a couple of $100,000,000 if we see that opportunity here in the coming quarters. Sorry,

Speaker 7

trying to hit the mute button. Thank you. 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 roles and then how does that kind of filter into provisioning and the charge off outlook for 2024? That's all I had.

Speaker 1

Thank you. 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 mention, so if you kind of think of it as kind of the early warning buckets, There's still roughly half of where they were pre pandemic levels.

Speaker 1

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 1 basis point. Our charge offs in the auto business, which I know you love, were about 20 basis 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 mortgage our mortgage business, we're going to have a little bit more As things normalize, but when we take these things through the process, we get paid fully because the values we're closing Our markets are actually back up.

Speaker 1

They're actually higher than they were when we talked about the peak on kind of on a post pandemic basis. So Asset values are very strong due to limited supply. People have jobs. Even if they lose a job and fall delinquent a little bit, It's too easy to find another job and get back in line. The collateral value, Sivan, on the commercial side are holding in pretty well.

Speaker 1

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, for the first time in a long while, We're actually getting a little bit of economic lift from the spending around some of the kind of the advanced technologies, The CHIPS Act, all of that stuff is helping our geographies.

Speaker 7

Great. I appreciate all that. That's all I had. Thank you.

Speaker 1

Thank you, Mike. Welcome.

Operator

The next question is a follow-up from Chris O'Connell with KBW. Please go

Speaker 4

ahead. Hey. Yes, just wanted to follow-up on the $2,400,000,000 of money market that you guys mentioned. Did you do you have where the rate on those are today or in the Q4?

Speaker 2

Yes. On a blended basis, Chris, it's about 2%.

Speaker 4

Great. That's all I had. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Karavanov for any closing remarks. Please go ahead, sir.

Speaker 1

Thank you, Chuck, and thank you all for your interest in our company, and we will see you again in April.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Community Bank System Q4 2023
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