Community Bank System Inc
NYSE:CBU
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Community Bank System Inc
Earnings Call Analysis
Q4-2023 Analysis
Community Bank System Inc
Community Bank System experienced a significant quarter, setting a record in revenues with commendable performance across its primary business sectors—Banking, Employee Benefit Services, and Insurance Services. Despite facing a tumultuous year, the business emerged resilient due to its diversified model and conservative risk approach. However, it's worth noting an unexpected surge in expenses, which alongside several one-time costs, amplified the quarter's 'noise'. The management team, undeterred, looks to 2024 with optimism for all business divisions.
The bank reported a fully diluted GAAP earnings per share (EPS) of $0.71, a decrease from the previous year, mainly due to elevated noninterest expenses, including various charges such as acquisition-related costs and a restructuring charge because of branch optimization. Management highlights that this is not indicative of long-term earnings capacity and forecasts a return to moderate mid-single-digit growth in core operating expenses in 2024.
Generating $177 million in total revenues for the quarter, the bank saw a minor decline in net interest income year-over-year due to increased funding costs, which slightly outpaced earnings asset yields. Nonetheless, management remains confident in revenue growth for 2024, supported by a diversified income structure and notable increases in noninterest revenue streams.
The bank's loan portfolio grew by $254.5 million during the quarter, primarily in business lending and consumer mortgages. Year-over-year, the loan growth was substantial, mirroring a solid business lending expansion. However, total deposits experienced a slight downturn, attributed to the outflow of municipal deposits. Despite this, the bank's customer deposit base remained largely stable, dominated by checking and savings accounts.
With an overarching solid liquidity position, Community Bank System closed the year with strong capital and liquidity indicators. The bank continued to maintain a considerable amount of readily available liquid assets while effectively managing the growth of its loan book without compromising on financial stability.
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Good day, and welcome to the Community Bank System Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Mr. Dimitar Karaivanov, President and Chief Executive Officer of Community Bank Systems. Please go ahead, sir.
Good morning, everyone, and thank you for joining Community Bank Systems Q4 2023 Earnings Call. The fourth quarter was an unusually noisy 1 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, three of our 4 businesses: Banking, Employee Benefit Services and Insurance Services had a 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 1 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 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. 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 P&C agency in the country and 1 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 in 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.
We I will now pass it on to Joe for more details on the quarter.
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 noninterest expenses. Fully diluted GAAP earnings per share were $0.71 in the quarter, down $0.26 from the prior year's fourth quarter and $0.11 lower than the linked third quarter results.
Fully diluted operating earnings per share, a 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 noninterest 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 -- 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 his 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 mid-single-digit growth rate 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 noninterest 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 businesses 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 linked 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 3 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, noninterest 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 noninterest revenues decreased $1.9 million or 2.7% in 2023 due primarily to the company's decision to eliminate nonsufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022, while total revenues in all 3 of the company's nonbanking 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 nonperforming loans, the company recorded [indiscernible] 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 linked 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 lending 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 -- and growth in all 4 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 a 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 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 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 unpledged 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 collateralizing 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 31, 2023, all the companies and the bank's regulatory capital ratio significantly exceeded capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.37% at the end of 2023 which substantially exceed 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 compared to 4.81% at the end of the third quarter and 4.64% 1 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 31, 2023, company's allowance for credit losses totaled $66.7 million an increase of $64.9 million during the third quarter of 2023 and $61.1 million 1 year prior, but remained stable at 69 basis points of total loans outstanding. During the fourth quarter of 2023, the company recorded net charge-offs of $2.3 million 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, nonperforming 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 1 year prior. There were 3 additional business lending relationships that were transferred to nonaccrual 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 1 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 3 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'll turn it back to Chuck to open the line for questions.
[Operator Instructions] And at this time, we'll take our first question from Mr. Alex Twerdahl with Piper Sandler.
First, can you just give us a little bit more color on those 3 business lending relationships? What this collateral is behind them, what kind of loans they were, et cetera?
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/office property was partially owner-occupied also -- but generally classified is not 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 nonaccrual 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 on 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.
Okay. I was wondering if you can give us a little bit color -- 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 on the commercial side, just in terms of sort of the size alone 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 roughly 250 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.
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 1 of our regions had a growth year in 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 concentration 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. 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.
Great. And so like $170 million of commercial loan growth, like would that be several loans, several larger loans? Or is it much more granular than that.
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 1/3 of our lending limit. So there's many loans behind those $170 million.
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, 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 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?
Yes. 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 nonbanking 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 and 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.
Great. And then historically, CBU's appetite has been kind of $0.5 billion to $2 billion in terms of size. Has anything changed with respect to your appetite for bank M&A?
I think that's kind of where we feel that the best risk and reward lies in the opportunities. I think they'll -- they 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. .
Next question will come from Steve Moss with Raymond James.
Dimitar, just following up just on loan growth for a second. Do you think for the upcoming year total loan growth of $600 million, $700 million? Or just kind of curious as to the pace of loan growth will it be still pretty strong or how you're thinking about it?
Yes, Steve, good question. We generally 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 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, we need to get paid for what we do. So there will be that as well.
Okay. Great. And then on the employee benefit services side, you said a 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.
Yes. We target high single digits in that business, Steve. So kind of between 5% and 10% is we think the core run rate of the business is certainly been there. It's been muted by the market. So if we -- 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.
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?
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&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.
Okay. Great. And then on the margin here, just curious how you guys are thinking about the margin outlook over the next couple of quarters? And what -- how you guys are feeling about things if we get some rate cuts here as the year progresses?
Steve, it's Joe. I'll take that question. So I think I kind of laid out in my prepared comments, 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 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 to improve overall earning asset yields. And so that we expect that to drive that. And then the other side of that is obviously that we -- our expectation 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 sort of 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 been 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 in net interest income will trend up later in the year. 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 as Dimitar indicated, we will try to hold in there on our new rates, new originations.
And obviously, if we can get a downstroke 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. 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.
The next question will come from Chris O'Connell with KBW.
I 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?
On new CDs...
No, just average for the quarter.
Yes. So we could provide that. Just give me a moment here, Chris.
And then basically, like on the interest-bearing deposit cost side, I mean, do you guys have full-cycle beta in mind or where you think that those costs could top out at some point over the course of 2024.
I think, Chris, as we've discussed previously, generally our expectation for full cycle beta, and that includes the noninterest-bearing piece for us, which is -- or the very low interest-bearing piece for us, which is about 68% of the balance is 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-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 time deposits. So blended cost in Q4 is about $330 on time deposits.
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 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?
I think typically, we do see a, I'll call it, significant repricing opportunity on the customer repurchase agreements around midyear 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.
Great. And just kind of tying it all together on the margin, I mean, in the event that we start getting Fed fund cuts around midyear. The initial reaction of the margin just off of that first quarter, do you expect that to be directionally upwards or downwards? Any sense of the magnitude?
Chris, I think the really hard question there is what continuing rem 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 predominantly in the money market space and kind of in line with that cut.
So again, because our deposit base is heavily into noninterest-bearing or very low interest-bearing savings accounts and checking accounts. We might have 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 help but probably not by a huge amount.
Great. And then last 1 for me is just what's a good go-forward tax rate?
I think it's fair to use somewhere between, call it, 21% and 22% on a go-forward basis. I think I mentioned in my prepared comments, the last 2 years, the weighted average has been about 21.5%. I think that's a there expectation going forward.
Our next question will come from Manuel Navis with D.A. Davidson.
This is Sharon on from Manuel Navis. So I was wondering what are the biggest wildcards for driving positive operating leverage in 2024?
So thank you for that question. 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, 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 what happens with NII, depository mixing, fed cuts, pricing in the market is going to largely determine the outcome of the operating leverage.
The next question will come from Matthew Breese with Stephens Inc.
The fee income growth as we go up and down in various business lines 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 1 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've like fee income that represent over time.
Yes. So Matt, I think -- 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 equal important to our ability to generate returns going forward, our ability to grow the dividend to create sustainable earnings. So we've organized also our company along those lines.
For example, I've got 4 direct reports for each 1 of the businesses. So our emphasis is to drive each 1 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 is 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 bite 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 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.
Matt, I would just add 1 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 1 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 deploy capital in 4 different businesses. And I think the best option in the moment when we have that -- 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 businesses in which they can deploy capital and we have 4.
Understood. Okay. I appreciate all that. I did want to touch just on your comments around the margin NII outlook. I mean, just curious, so given your overall level of deposit costs, which sub-1% at this stage is pretty amazing. Dimitar, I think you suggested that 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 deposit costs at your institution continue to decline, as we 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 in fact, does that.
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 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.
Yes. So Matt, we do have approximately, call it, $7 billion of non -- or excuse me, nontime deposits that are interest-bearing, right? So that's comprised of interest checking and savings and money market and the money market being sensitive the more sensitive of the group there in the money markets totaled 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 in a quarter, that's the opportunity set for us. I would just emphasize that the money market deposits, so the more sensitive of those kind of 3 portfolios.
Matt, maybe just to add a little bit to that. We manage ALCO to roughly a neutral outcome in terms of rate exposure. So let's not forget about the asset size. 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 -- 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 is probably a little bit sideways kind of in a plus or minus a few cuts type of scenario.
Okay. Understood. 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 the -- what the outlook for that portfolio is in 2014?
So Matt, with respect to the cash flows, we have somewhat limited cash flows in '24 and '25 million, less than $100 million in each of those years. And as -- if you recall, we did the repositioning back in the first quarter, we pulled forward most of the most of the cash flows in -- that were basically coming due in '24 and '25.
We get to some more significant cash flows in '26 and '27 on a combined basis, about $1 billion in those years and then another $1 billion or so in 2029. 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 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 -- we we see that opportunity here in the coming quarters.
Sorry, trying to hit the meat -- and then last 1 for me is just on -- would love some general commentary on credit, what you're seeing as the consumer goes into indirect auto loans is 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.
Sure, Matt. I'll take that. So if you had 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 if you kind of think about it as kind of the early warning buckets, there's still roughly half of where they were pre-pandemic levels.
So we've 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 -- 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 mortgage -- 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 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 follow delinquent a little bit, it's too easy to find another job and get back in line, the collateral values even on the commercial side are holding in pretty well.
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 a 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.
The next question is a follow-up from Chris O'Kane with KBW.
I just wanted to follow up on the $2.4 billion of money market that you guys mentioned, you do you have where the rate on those are today or in the fourth quarter?
Yes. On a blended basis, Chris, is about 2%.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Karaivanov for any closing remarks. Please go ahead, sir.
Thank you, Chuck, and thank you all for your interest in our company, and we will see you again in April. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.