Q4 2023 Community Bank System Inc Earnings Call

Presentation

Operator

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 specialist 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 then one on your touchtone and to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Demeter Caribbean off President and Chief Executive Officer of Community Bank systems. Please go ahead, sir.

Thank you, Jack.
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 P&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, 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.

Thank you, Dymatize, and good morning, everyone. As David 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 was $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, 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 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 to a mid growth rate off a full year 2023 core operating expense base of approximately $460 million. The Company recorded $177 million of top 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 $3 million or 2.7% decrease in net interest income. As Dymatize noted, revenues were up in all lines of business on a full year basis. The 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 2020 to 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 three basis point decrease in the company's fully tax-equivalent 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 non sufficient amount of unavailable funds fees on personal accounts late in the fourth quarter of 2022, while total revenues in all three 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 nonperforming 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 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 in $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 a net outflow of municipal deposits. On a full year basis, ending total deposits were down $84.2 million or 0.6%. Company 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 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 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. The sources of immediately available liquidity represent over 200% of the Company's estimated uninsured deposits, net of collateralized and inter-company 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 securities balances into higher yielding loans at December 31st, 2023, all the companies in the bank's regulatory capital ratios significantly exceeded our capitalized standards. More specifically, the Company's Tier one 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 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, 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-offs of $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, 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 one year prior, there were three 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 31st, 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 remained 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 benefits services and wealth management services businesses.
That concludes my prepared comments.
Thank you now and I'll turn it back to Chuck to open the line for questions.

Question and Answer Session

Operator

We will now begin the question and answer session to ask a question. You may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed he 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.

Hey, morning, guys. .

Morning

I was wondering, first, can you just give us a little bit more color on those three business lending relationships with this collateral is behind them? What kind of loans, they were, et cetera,

all yes, their detection of a mixed bag, Alex, in terms of the the individual credits arm, one of which is kind of a mixed use industrial flash office property was partially owner-occupied also, but generally classified as non-owner-occupied because that was the majority of the space of the borrower just ran into some cash flow issues actually outside of this particular property. And so we hopefully move 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, one ag credit agricultural credit that was basically flipped to nonaccrual status due to cash flow challenges and the third was actually a owner-occupied property on which the underlying businesses were just having their challenges.
So nothing I'll call it systemic or.
Yes, no Pamine, real real common thread between the three.

Okay.
Tom, 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 over the last couple of quarters on the commercial side, just in terms of for the size alone, they have they've been putting on the geographies and I'm also curious just with the 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 and are 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 one of our regions have 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 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 come to service clients. So we came into this into the cycle with a highly liquid balance sheet and no concentrations of any sort with plenty of runway. So we've taken advantage of that. And in terms of where we're lending today in terms of rates, they're very similar to the last quarter and that we talked about term in our business lending is kind of in the low to mid sevens, and 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 even if the rates are going to drift down a little bit, I think we're going to hold the ground here on on our side as much as we can.

Great and so it's like $170 million of commercial loan growth like it. 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 power size of loans are very, very low for the size of institution that that we run and our lending capacity limits. We don't 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 $270 million.

Great.
And then just final question on the inventory. You said in your prepared remarks that you hope that 2024 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 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. You know, we generate a lot of capital and our job as a management team is to deploy that capital for our investors. So where 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. And 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 some headwinds, I would say from an M&A perspective in terms of kind of figuring out the values, the rates you the mark some. 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 really understand what's on the balance sheet. We're hopeful that as they see more deals, they're also going to move a little bit faster through the approval process as well. And 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 from a pretty low base in terms of opportunities.

Great.
And then, you know, historically C views on 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 a that's kind of where we feel that the best risk and reward lies in the opportunities and I think they'll kind of vary between market versus kind of contiguous markets, the markets that we've talked about. But certainly that size is where we feel is it an appropriate risk reward. It could be a little bit larger, but probably not by much.

Thanks for taking my questions again.

Operator

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

Good morning. My name is David to our Board and I don't respond just on loan growth for a second.
Do you think for the upcoming year your total loan growth of $600 million are just kind of curious as to the pace of loan growth, it would be still pretty strong, how you think about?

Yes, Steve, good question. We would generally come into Gears 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 when you've got great borrowers and opportunities, you kind of take what they give you and the pipelines are strong. They're not as strong as they were probably last year on the 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 and 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 know we need to get paid for what we do. So there will be some some parameters around that as well.

Okay, great.
And then on the employee benefit services side, you sounded pretty upbeat about business development here going forward on.
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,

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 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 then also 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 double digits pace there?

I think I think that's fair for the current expectation, and we've grown that business at over 10% in the past three years last year was 18%, I think between. So the continued opportunities on the M&A side, kind of the small roll-ups and to 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 of 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?

Yes.
Hi, Steve.
It's Joe. I'll take that question on. 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 we'll expand year over year on a full year basis and that that expectation is really on sort of built on the base 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 in and out.
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 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 on the books at about 7.5% or 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, our 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 one hand on the long and the other hand that that puts a little pressure on loan yields as we move ahead, as Dymatize indicated, we are trying to hold in there on and on our new new rates on new originations. And obviously, if we can get a downstroke or two from the Federal Open Market Committee on the short end, and that will relieve 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, 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.

Okay, great. Thank you appreciate all the color.

Operator

The return just from the next question will come from Chris O'Connell with KBW.

Please go ahead and good morning, Amazon. Just wanted to follow up on the discussion you guys have been holding in very well on the funding cost side. And do you have where the average CD cost was in Q4 on new cities on?
No just average for the quarter?

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

And then basically you 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 talk about that at some point over the course 2024?

I think, Chris, some as we've we discussed previously, generally our expectation for full-cycle beta, and that includes the non-interest bearing piece for us, which is are the very low interest-bearing piece for us, which is about 68% of the balances right now. And we've talked about 20% to 25% in terms of beta. And 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 20% to 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 time, deposits. So blended cost in Q4 is about three 30 on time.

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

And I think typically on we do see a I'll call it a significant repricing opportunity on the customer repurchase agreements around midyear, some of which are munis, 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 of funding a high-cost funding source for us on a on a completely 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 sort of 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 from 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?

And Chris, I think, Sam, the really hard question there is what 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 and there we do have clearly a number of accounts that will be immediately repriced down and predominantly in the money market space and kind of in line with that cut. So again, because our deposit base is heavily into non-interest bearing more were very low interest bearing my 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 two. So probably directionally in the direction we want to see it, which is up, but probably not by a huge amount

Great. And then last one 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 two years, the weighted average has been about 21.5. I think that's a fair expectation expectation going forward.

Great show inventory.
Appreciate it.

Operator

From again, if you have a question, please press star then one.
Our next question will come from Andrew Davis with DA Davidson. Please go ahead.

Have you on tissue challenge E. ON from general now that you so much for taking my question. So I was wondering what are the biggest wildcards for driving positive operating leverage in 2024.

And so thank you.
Thank you for that question. If you look at just the magnitude of our P&L, I'm the biggest wildcard for us is always NI. So depending on where NI trends and 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 ENI deposits, you're mixing Fed cuts. Pricing in the market is some is going to largely determine the outcome, the operating leverage.

Thank you so much on terms of my questions,

welcome.
The next question will come from Matthew Breese with Stephens Inc., please go ahead.

Hey, good morning, everybody. 20 masked the morning that, you know, the fee income growth as we go up and down the various business line sounds pretty optimistic robust on Dymatize. 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?

Yes. So Matt, I think that's that's a good question. And something that we talk a lot about at the Board level and at the management level. And we 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. 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 of thumb. 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.

I would just add one comment to Dymatize, which is with four businesses on. We do have the opportunity to deploy capital in four different businesses where a lot of our peer institutions don't necessarily have all of those 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 it makes the most sense given our other alternatives in that moment. And so I think just kind of to level set that thinking is that we do have some options to deploy capital in four 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, 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.

Understood.
Okay.
I appreciate all that. I did want to touch just on your comments around yield the margins, flattish NII outlook. I mean, just curious, so given your overall level of deposit costs, which it's sub 1% at this stage, it's pretty amazing inventory. I think you suggested that with rates down, we'll see a lag, but is it possible for a time we may see kind of a negative deposit beta, meaning deposit costs at your institution continue to decline as the sales 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 those?

I think, Matt, if you look at through 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 and 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. And so there will be some lagging effect on on when the Fed is not moving and deposits are still remixing and Joe can give you the number of the ones that that we have that are a little bit more price sensitive and probably more likely to reprice quickly on the on the down.

Yes. So So Matt, we do have some approximately, call it, $7 billion of our noninterest or excuse me, none time deposits that are interest bearing rates. So that's comprised of interest, checking and savings and money market and the money market being the more sensitive of the of the group, they're in the money markets totaled up $2.4 billion on a roughly a $13 billion base our savings accounts are about $2.3 billion and interest-bearing checking about $2.9 billion. So we have a a reduction in the rates of the Federal Open Market Committee and Fed 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.

If not, maybe just to add a little bit to that, you know, we manage Alcoa to a roughly neutral outcome in terms of rate exposure. So let's not forget about the asset size. And we've been lagging on the asset side in the cycle because we've got to a more fixed profile on the asset side. So that's allowed us to to our deposit base has allowed us to do that. And it's also going to allow us on the other side now to have less of 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. I'm kind of going to plus or minus in a few cuts type of scenario.

Understood.
Thank you. And then I just wanted to touch on the securities portfolio. I mean, just judging from the swing in rates now, first of all, is it 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 beyond what the outlook for that portfolio is in 2014?

So Matt, with respect to the with respect to the cash flows, we have on somewhat limited cash flows in 24 and 25 less than $100 million in each of those each of those years.
And if you recall, we did the repositioning back in the first quarter.
We pulled forward on most of the most of the cash flows in that we're basically coming due in 24, 25. We get to some more significant cash flows in 2026 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 pull 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 and some some shorter term securities cash flows may be at par with or without a loss and basically be able to migrate those into the loan portfolio. But we're only potentially looking at a couple of hundred million dollars if we see an opportunity and here in the coming quarters, sorry, trying to hit the mute button.

Thank you. And then last one for me just on and we'll have some general commentary on credit, what you're seeing as the consumer goes into the indirect auto loans as commercial real estate rolls? And then how does that kind of filter into provisioning and the charge-off outlook for 2024.
That's all I had.
Thank you.

Sure, Matt. I'll take that. And 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 ours, substandard and special mention, 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 sold a few relationships get a little bit more challenged this quarter, which is normal expected still well well below the historical averages. Our charge-offs in our commercial business last year were one basis point on our charge-offs in the auto business, which I know you love, it 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 because the economic environment, as 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 to the process. We get paid fully because the values of housing in our markets are actually back-up on. They're actually higher than they were when we talked about a peak on kind of the post-pandemic basis. So asset values are very strong due to limited supply and people have jobs even if they lose a job for delinquent a little bit too easy to find on our job and get back and I get back in line, you know, the the collateral values, even on the on the commercial side are holding in pretty well in all those businesses are profitable and 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 then 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 the some of the kind of the advanced technologies on the debt, the CHIPS Act and all of that stuff is helping our geographies.

Great.
I appreciate all that. And that's all I had thank you.

Thank you and welcome.

Operator

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

I just wanted to follow up on the $2.4 billion of money market that you guys mentioned that you do have where the rate on those are today or in the fourth quarter?

On a blended basis, Chris was about 2%.

Right.
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. Karan one-off for any closing remarks.
Please go ahead, sir.

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

Operator

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