Q4 2023 Community Bank System Inc Earnings Call

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.

Good day and welcome to the Community Bank System 4th Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal Conference Specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and switched to all 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. Dimitar Crabbing off President and Chief Executive Officer of Community Bank systems. Please go ahead Sir.

To ask a question, you may press star then 1 on your touchtone phone. And to withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Mr. Dimitar Kravinoff, President and Chief Executive Officer of Community Bank Systems. Please go ahead, sir.

Dimitar Kravinoff: Thank you, Jeff.

Dimitar Crabbing: Thank you Jeff.

Dimitar Kravinoff: Good morning, everyone, and thank you for joining Community Bank Systems Q4 2023 earnings call.

Dimitar Crabbing: Good morning, everyone and thank you for joining community Bank systems, Q4, 2023 earnings call.

Dimitar Kravinoff: 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.

Dimitar Crabbing: 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.

Dimitar Crabbing: In fact, when looking at the full year 2023, three of our four businesses banking employee benefit services insurance services had a record revenue performance.

Dimitar Kravinoff: In addition, our balance sheet remains highly liquid and well capitalized.

Dimitar Crabbing: Additionally, our balance sheet remains highly liquid and well capitalized.

Dimitar Kravinoff: Our diversified business model and emphasis on below average risk served us very well during a very volatile year.

Dimitar Crabbing: Our diversified business model and emphasis on below average risk served us very well during a very volatile year.

Dimitar Kravinoff: 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.

Dimitar Crabbing: 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.

Dimitar Kravinoff: While this increase was well above our expectations, it does not reflect the core earnings power of the company going forward.

While this increase was well above our expectations. It does not reflect the core earnings power of the company going forward.

Dimitar Crabbing: With this noisy quarter behind us as we look forward into 2024.

Dimitar Kravinoff: With this noisy quarter behind us, as we look forward into 2024, we're optimistic about every one of our businesses.

Dimitar Crabbing: We're optimistic about every one of our businesses.

Dimitar Crabbing: In our banking business, we continued 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.

Dimitar Kravinoff: 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.

Dimitar Kravinoff: The opportunity to serve clients across our footprint has never been better, and our teams and balance sheet are open for quality business.

Dimitar Crabbing: The opportunity to serve clients across our footprint has never been better and our teams and balance sheet are open for quality business.

Dimitar Kravinoff: In our employee benefit services business, we have a strong pipeline of client onboardings and our reputation is quickly growing at the national level.

Dimitar Crabbing: And our employee benefit services business, we have a strong pipeline of client on boarding and our reputation is quickly growing at the national level.

Dimitar Kravinoff: 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 two years of headwinds.

Dimitar Crabbing: We're recently named don't find record keeper for all market sizes by the National Association of plan advisors.

Dimitar Crabbing: In addition, current market values provide a tailwind into 2024 after two years of headwinds.

Dimitar Kravinoff: 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.

Dimitar Crabbing: 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 ought to keep it as well.

Dimitar Kravinoff: We were recently ranked as a top 75 PNC agency in the country and one of the nation's largest bank-owned insurance operations.

Dimitar Crabbing: 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.

Dimitar Crabbing: 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.

Dimitar Kravinoff: 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.

Dimitar Kravinoff: That, plus the increased focus and investments in the business, positioned us well to regain momentum in 2024.

That plus the increased focus in investments in the business position us well to regain momentum in 2024.

Dimitar Crabbing: Simply put our focus for 2024 is to continue the revenue growth, while moderating the cost pressures and achieving positive operating leverage.

Dimitar Kravinoff: Simply put, our focus for 2024 is to continue the revenue growth while moderating the cost pressures and achieving positive operating leverage.

Dimitar Kravinoff: We're also hopeful for a more constructive M&A environment in 2024.

Dimitar Crabbing: We're also hopeful for a more constructive M&A environment in 2024.

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

Speaker Change: I will now pass it onto Joe for more details on the quarter.

Joe: Thank you Dimitar and good morning, everyone as.

Joe: Thank you Dimitar and good morning everyone.

Joe: As Dimitar noted, the company's earnings results were down in the fourth quarter due largely to certain elevated non-interest expenses.

Joe: As <unk> noted the company's earnings results were down in the fourth quarter due largely to certain elevated noninterest expenses.

Joe: Fully diluted gap 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-gap measure, were $0.76 in the quarter, $0.20 per share lower than the prior year's fourth quarter, and $0.06 per share lower than the linked quarter results. During the fourth quarter, the company recorded $123.3 million in non-interest expenses.

Diluted GAAP earnings per share were <unk> 71 in the quarter down 26 from the prior year's fourth quarter, and 11 cents lower than the linked third quarter results fully diluted operating earnings per share a non-GAAP measure was 476 cents in the quarter 20, <unk> per share lower than the prior year's fourth quarter and <unk> <unk> per share lower than the linked quarter results during the fourth.

Joe: The company recorded a $123 $3 million in noninterest expenses. This included too.

Joe: 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,

Joe: $2 million of acquisition related contingent consideration expenses, a $1 2 million restructuring charge related to the company's previously announced branch optimization strategy, our $1 $5 million expense accrual related to the FDIC special assessment.

Joe: $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-footed investments the company made in its leadership team, talent across all lines of business, data systems, and risk management capabilities.

Joe: $1 million of executive related retirement expenses as well as elevated fraud losses on a full year basis. The companys 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.

Joe: Reflective of the front foot it 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 a full year of 2024 core operating expenses will moderate back to mid single digit growth rate.

Joe: The company's management expects the full year 2024 core operating expenses will moderate back to mid-single-digit growth rate.

Joe: to a mid-single digit growth rate off a full year 2023 core operating expense base of approximately $460 million.

Joe: So a mid single digit growth rate off a full year 2023 core operating expense base of approximately $460 million.

Joe: The company recorded $177 million of total revenues in the fourth quarter, establishing a new quarterly record for the company. Comparatively, the company recorded total revenues of $175.9 million in the same quarter in the prior year and $175.4 million in the linked third quarter. The increase in total revenues over the prior year's fourth quarter was driven by a $4.1 million or 6.4% increase in non-interest revenues, partially offset by a $3 million or 2.7% decrease in net interest income. As Dimitar noted, the revenues were up in all lines of business on a full-year basis, and management believes the company is well-positioned to grow total revenues again in 2024.

Joe: The company recorded $177 million of tough revenues in the fourth quarter, establishing a new quarterly record for the company comparatively the company reported 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 years for.

Joe: The quarter was driven by a $4 1 million or six 4% increase in noninterest revenues, partially offset by a $3 million or two 7% decrease in net interest income as Dermatoid noted that revenues were up in all lines of business is on a full year basis and management believes the company is well positioned to grow total revenues again in 2024.

Joe: The company recorded net interest income of $109 $2 million in the fourth quarter. This was up $1 $4 million or one 3% on a linked quarter basis, but down $3 million or two 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.

Joe: 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.

Joe: Leo.

Joe: 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 comps.

Joe: The company's total cost of funds in the fourth quarter of 2023 was 1.08% as compared to 88 basis points in the length third quarter. The 20 basis point increase in funding costs in the quarter outpaced a 17 basis point increase in earning asset yields, resulting in a three basis point decrease in the company's fully taxable net interest margin from 3.10% in the third quarter to 3.07% in the fourth quarter.

Joe: <unk> is fully taxable went net interest margin from 310% in the third quarter to 3.07% in the fourth quarter.

Joe: On a full-year basis, non-interest revenues, excluding investment securities losses and gain on debt extinguishment, increased $8.2 million, or 3.2%. This result is reflective of the company's diversified business model. Banking-related non-interest revenues decreased $1.9 million, or 2.7%, in 2023 due primarily to the company's decision to eliminate non-sufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022, while total revenues in all three of the company's non-banking businesses, employee benefits services, insurance services, and wealth management services were up year-over-year.

Joe: On a full year basis noninterest revenues, excluding investment securities losses, and gain on debt extinguishment increased $8 2 million or three 2%. This result is reflective of the company's diversified business model banking related noninterest revenues decreased $1 $9 million or two 7% in 2023.

Joe: Primarily to the Companys decision to eliminate non sufficient and I'm unavailable funds fees on personal accounts late in the fourth quarter 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.

Joe: Reflective of an increase in loans outstanding are 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.

Joe: Reflective of an increase in loans outstanding, a stable economic forecast, an increase in delinquent and non-performing loans, the company recorded a provision for credit losses of $4.1 million during the fourth quarter. Comparatively, the company recorded a $2.8 million provision for credit loss in the fourth quarter of the prior year.

Joe: and $2.9 million in the length third quarter. The effective tax rate for the fourth quarter of 2023 was 22.8%, up from 22% in the fourth quarter of 2022. On a full year basis, the effective tax rate was 21.6% in 2023 as compared to 21.7% in 2022.

Joe: 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.

Joe: Ending loans increased $254 $5 million or two 7% during the quarter and $895 $2 million or 10, 2% over the prior year the increase in loans outstanding in the fourth quarter was primarily driven by increases in the business lending and consumer mortgage portfolios the increase in ending loans year over year.

Joe: Ending loans increased $254.5 million, or 2.7% during the quarter, and $895.2 million, or 10.2% over the prior year. The increase in loans outstanding in the fourth quarter was primarily driven by increases in the business lending and consumer mortgage portfolios. The increase in ending loans year-over-year was driven by organic loan growth in the company's business lending portfolio totaling $438.7 million, or 12%, and growth in all four consumer loan portfolios totaling $456.5 million, or 8.8%.

Joe: It was driven by organic loan growth and the companys business lending portfolios totaling $448 $7 million or 12% and growth in all four consumer loan portfolios totaling $456 $5 million or eight 8%.

Joe: The company's ending total deposits were down $102.7 million, or 0.8%, from the end of the third quarter, driven by net outflow of municipal deposits.

Joe: The company's ending total deposits were down $102 $7 million of 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 of 0.6%.

Joe: On a full year basis, ending total deposits were down $84.2 million or 0.6%.

Joe: The companys cycle to date deposit beta is 17% reflective of a high proportion of checking and savings accounts, which represents 68% of total deposits.

Joe: The company's cycle to date deposit data is 17% reflective of a high proportion of checking and savings accounts, which represents 68% of total deposits.

Joe: 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%.

Joe: And the composition of the stability of the customer base during the fourth quarter. The company secured a $100 million in term borrowings at the federal home loan Bank of New York and 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 757%.

Joe: The company's liquidity position remains strong readily available sources of liquidity, including cash and cash equivalents funding availability at the federal reserve discount window unused borrowing capacity at the federal home loan Bank of New York, and Unpledged investment Securities totaling $4 eight $3 billion at the end of 2023. These sources of.

Joe: 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 totaling $4.83 billion at the end of 2023. These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits, net of collateralized and intercompany deposits.

Available liquidity represent over 200% of the company's estimated uninsured deposits net of collateralized and intercompany deposits. The companys 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.

Joe: 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.

Joe: At December 31st, 2023, all the companies in the bank's regulatory capital ratio significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.37% at the end of 2023, which substantially exceeded the regulatory well-capitalized standard of 5%.

Joe: At December 31, 2023, all the companies in the bank's regulatory capital ratios significantly exceeded well capitalized standards more specifically the company's tier one leverage ratio was 937% at the end of 2023, which substantially exceed the regulatory well capitalized standard of 5%.

Joe: 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.

Joe: The company's net tangible equity to net tangible assets ratio was 578% end of the year as compared to $4 eight 1% at the end of the third quarter and $4, 64% one year prior during the fourth quarter. The company repurchased 107161 shares of its common stock at an average price of approximately $41.

Joe: For share and 607161 shares on a full year basis at an average price of approximately $49 per share at December 31, 2023 companies allowance for credit losses totaled $66 $7 million, an increase from $64 $9 million in the third quarter of 2023 and $61 1 million.

Joe: At December 31st, 2023, companies' 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.

Joe: One year prior but remained stable at 69 basis points of total loans outstanding.

Joe: 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.

Joe: 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 31, 2023, nonperforming loans totaled $54 $6 million or 56.

Joe: At December 31st, 2023, non-performing loans totaled $54.6 million, or 56 basis points of total loans outstanding. This was up from $36.9 million, or 39 basis points, at the end of the third quarter, and $33.4 million, or 38 basis points, one year prior. There were three additional business lending relationships that were transferred to non-accrual status in the fourth quarter, all of which are well secured with no specific loss content identified.

Joe: Basis points of total loans outstanding this was up from $36 $9 million or 39 basis points at the end of the third quarter and $33 $4 million or 38 basis points. One year. Prior there were three additional business lending relationships that were transferred to non accrual status in the fourth quarter, all of which are well secured with no specific loss content identified.

Joe: 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 remains strong.

Joe: Loans 30 to 89 days delinquent were 50 basis points of total loans outstanding at December 31, 2023, as compared to 51 basis points at both the end of the third quarter of 23, and one year. Prior overall, the company's asset quality remained strong.

Joe: We believe the company's diversified revenue profile strong liquidity regulatory capital reserves stable core deposit base and historically strong asset quality.

Joe: 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.

Joe: Abide a solid foundation for future opportunities and growth looking forward. We are encouraged by the months of in all of our businesses and prospects for continued organic growth. We believe funding cost pressures will abate in 2020 for setting the table for expansion of net interest income, particularly in the last three quarters of the year. In addition, recent asset appreciation.

Joe: Both the stock and bond markets provide a tailwind for revenue growth in the employee benefit services and wealth management services businesses.

Speaker Change: That concludes my prepared comments. Thank you. Now I'll turn it back to Chuck Openline for questions.

That concludes my prepared comments. Thank you now I'll turn it back to Chuck off the line for questions.

Chuck: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at anytime. Your question has been addressed he would like to withdraw. Your question. Please press Star then two and at this time.

Chuck Openline: We will now begin the question and answer session. To ask a question you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. And at this time, we'll take our first question from Mr. Alex Twerdahl with Piper Sandler. Please go ahead.

Speaker Change: We'll take our first question from Mr. Alex Tour at all with Piper Sandler. Please go ahead.

Alexander Roberts Huxley Twerdahl: Hey, good morning, guys.

Alexander Roberts Huxley Twerdahl: Hey, good morning, guys.

Alexander Roberts Huxley Twerdahl: Good morning, Alex. Good morning, Alex.

Speaker Change: Good morning, Alex.

Alexander Roberts Huxley Twerdahl: First, can you just give us a little bit more color on those three business lending relationships, what the collateral is behind them, what kind of loans they were, et cetera?

Alexander Roberts Huxley Twerdahl: First can you just give us a little bit more color on those three business lending relationships.

Alexander Roberts Huxley Twerdahl: Our collateral is behind them, what kind of loans they were.

Alexander Roberts Huxley Twerdahl: Et cetera.

Speaker Change: Yeah, it's actually a little bit of a mixed bag, Alex, in terms of the individual credits, one of which is kind of a mixed use industrial slash office property. It was partially owner-occupied also, but generally classified as non-owner-occupied because that was the majority of the space. You know, 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 secured, and we have not identified any specific loss content on that one. And then we also had a couple of smaller ag, one ag credit, agricultural credit, that was basically flipped to non-accrual. One was non-accrual status due to cash flow challenges, and the third was actually owner-occupied property.

Speaker Change: Yes, it's actually a little bit of a mixed bag Alex.

In terms of the.

Speaker Change: The the individual credits.

Speaker Change: One of which is kind of a mixed use industrial slash office property was partially owner occupied.

Speaker Change: Also but generally classified as non owner occupied because that was the majority of the space. The borrower just ran into some cash flow issues actually outside of this particular property and so we ultimately move alone to non accrual and doing the evaluation on the the asset. We believe we are well secured and we are.

Speaker Change: Not identified any specific loss content on there on that one and then we also had a couple of our smaller egg one AG credit agricultural credit.

That was basically flipped to nonaccrual status due to cash flow challenges and a third was actually owner occupied property.

Speaker Change: Thank you very much.

Speaker Change: Which the underlying businesses were just having their challenges. So nothing you don't call it systemic or no common real real common thread between the three.

Speaker Change: and a real common thread between the three.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: um

Speaker Change: I was wondering if you can give us a little bit more color on the loan growth that you've been seeing over the last, really this quarter, but the last couple quarters on the commercial side, just in terms of sort of the size of loans they've been putting on, the geographies. And I'm also curious, just with the pullback in rates, I think last quarter you said that you're putting loans on at roughly 250 basis points above the five-year. If the spreads have kind of held as rates have come down, or if they've potentially widened out, and just any more color there would be very helpful.

Speaker Change: 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.

Speaker Change: What are the size alone they.

Speaker Change: They've been putting on the geographies and I'm also curious just with the pullback in our in rates I think last quarter, you said that youre, putting loans on at roughly 250 basis points above the five year. If the spreads have kind of held as rates have come down.

Speaker Change: Or if they potentially widened out and.

Speaker Change: Just any more color there would be very helpful.

Speaker Change: Sure Alex.

Speaker Change: Sure. So, Alex, everything that we do is basically footprint borrowers. The majority of our growth has really come from our expansion and some of the larger metro areas, which we've talked about previously. In fact, every one of our regions had a growth year in 2023. So it's been strong across the board. We're active, engaged in the markets a lot more than we were historically. There is a very favorable competitive dynamic for us as well, where a lot of the other participants, frankly, don't have the liquidity or the regulatory capacity to service clients. So we came into this cycle with a highly liquid balance sheet and no concentrations of any sort. We had plenty of runway. So we've taken advantage of that. In terms of where we're lending today, in terms of rates, they're very similar to the last quarter that we talked about. Our business lending is kind of in the low to mid-sevens. We don't expect that to change much as, again, we're benefiting from a bit of better spread due to competitive dynamics. So even if the... 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.

Speaker Change: Everything that we do.

Speaker Change: He 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.

Speaker Change: Every one of our regions had a growth here in 2023.

Speaker Change: So it's been strong across the board.

Speaker Change: We're actively engaged in the markets.

Speaker Change: Lot more than we were historically.

Speaker Change: 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.

Speaker Change: To service clients. So when we came into this into the cycle with a highly liquid balance sheet.

Speaker Change: And no concentrations of any sorts with plenty of runway. So we've taken advantage of that.

Speaker Change: In terms of where we're lending today in terms of rates, they're very similar to the last quarter.

Speaker Change: That we talked about in our business lending is kind of.

Speaker Change: Low to mid Sevens.

Speaker Change: We don't expect that to change much as again, we're benefiting from a bit of better spreads 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 on our side as much as we can.

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

Speaker Change: Great. So it sounds like $170 million of commercial loan growth.

That'd be several loans several larger loans or is it much more granular than that.

Speaker Change: It is very granular. I cannot tell you the exact average and median. We can follow up on that, but our size of loans are very, very low for the size of institution that we run and our lending capacity limits. We don't have too many loans that are anywhere close to even a third of our lending limit, so there's many loans behind those $170 million.

Speaker Change: It is very granular.

Speaker Change: We don't.

I cannot tell you the exact our average and median we can follow up on that but our our size of loans or very very low for the size of institution debt that we run and our lending capacity limits. We don't we don't have too many loans that are in.

Speaker Change: Anywhere close to even a third of our lending limit so theres, many loans behind those kind of things and $17 million.

Speaker Change: Great and then just a final question. The inventory you said in your prepared remarks that you hope that 2024, it would be a bit more conducive for M&A I'm just curious in your mind and sort of what has to happen.

Speaker Change: Great. And then just a final question, Dimitar, you said in your prepared remarks that you hope that 2024 would be a bit more conducive for M&A. I'm just curious, you know, in your mind, sort of what has to happen?

Speaker Change: And I guess first off, if you're talking about Bank M&A or some of the other lines that you're in,

Speaker Change: And I guess first off you're talking about bank M&A or are some of the other lines that you're in.

Speaker Change: And then, you know, if it's really more rate driven and the rate mark driven, or if it's driven more by sort of the willingness of the seller.

Speaker Change: And 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 Change: Yeah, 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, we're focused on all of them. We've been doing certainly a little bit more roll-up type opportunities in the non-banking businesses, kind of as a matter of course. We're hopeful that there might be some larger opportunities on that side as well. But certainly on the bank side, you know, 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, you know, the marks. So, we're hopeful that this year there's going to be a little bit more clarity and stability in the market, which would allow folks to kind of really understand what's on the balance sheet. We're hopeful that as we see more deals, they're also going to move a little bit faster through the approval process as well. But banks are sold, not bought. And we need to have willing sellers as well. So, we just think that the past couple of years were pretty hard. So, hopefully. It should get better from a pretty low base in terms of opportunities.

Speaker Change: Yes so.

Speaker Change: In terms of our M&A focus Alex it Hasnt 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.

Speaker Change: Been doing certainly.

Speaker Change: Little bit more roll up type opportunities in the non banking businesses.

Speaker Change: Kind of as a matter of course.

Speaker Change: 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 have had.

Speaker Change: Headwinds I would say from an M&A perspective in terms of.

Speaker Change: Figuring out the values the rates.

Speaker Change: The marks so we're hopeful that this year, there is going to be a little bit more clarity and stability in the market, which would allow folks to kind of.

Speaker Change: Really understand whats on the balance sheet.

Speaker Change: Hopeful that as we see more deals Theyre also going to move a little bit faster through the approval process as well.

Operator: Good day, and welcome to the Community Bank System 4th Quarter 2023 Earnings Conference Call.

Speaker Change: But banks are sold not bought.

Speaker Change: So we need to have willing sellers as well. So we're just seeing that the past couple of years, we're pretty hard so hopefully it should get better from a from a pretty low base in terms of opportunities.

Operator: All participants will be in a listen-only mode. Should you need assistance, please signal Conference Specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. And to withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Mr. Dimitar Kravinoff, President and Chief Executive Officer of Community Bank Systems.

Speaker Change: Yeah.

Speaker Change: Great. And then, you know, historically, CBU's appetite has been kind of half a billion to two billion in terms of size. Has anything changed with respect to your appetite for Bank M&A?

Speaker Change: Great and then you know historically Cpus.

Appetite has been kind of half a billion to $2 billion in terms.

Speaker Change: In terms of size has anything changed with respect to your appetite for bank M&A.

Speaker Change: No I think that's a that's kind of where we feel that the best risk and reward.

Speaker Change: I think that's kind of where we feel that the best risk and reward lies in the opportunities. I think they'll kind of vary between in-market versus kind of contiguous markets, the markets that we've talked about. But certainly that size is where we feel is an appropriate risk and reward. It could be a little bit larger, but probably not by much.

Please go ahead, sir.

Thank you, Jeff.

Good morning, everyone, and thank you for joining Community Bank Systems' Q4 2023 earnings call.

Speaker Change: Lies in the opportunities and I think they've kind of varied between in market versus a kind of contiguous markets. The markets that we've talked about but certainly that sizes, where we feel is an appropriate risk and reward it could be a little bit larger.

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.

Speaker Change: But probably not by much.

Speaker Change: Thanks for taking my questions.

Speaker Change: Thanks for taking my question.

Speaker Change: Thank you Alex.

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

Speaker Change: Next question will come from Steve Moss with Raymond James. Please go ahead.

Stephen M. Moss: Good morning.

Stephen M. Moss: Hi, good morning.

Our diversified business model and emphasis on below-average risk served us very well during a very volatile year.

Stephen M. Moss: Dimitar

Stephen M. Moss: Inventory.

Stephen M. Moss: Borden, Dimitar, just following up just on loan growth for a second, you know, do you think for the upcoming year, you know, total loan growth of, you know, six, 700 million or just kind of curious as to, you know, the pace of loan growth will be, you know, still pretty strong or how you think about it?

Stephen M. Moss: Good morning, David Karp, it's following up just on loan growth for a second.

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.

Stephen M. Moss: Do you think for.

Stephen M. Moss: For the upcoming year total loan growth.

Stephen M. Moss: Six 700 million or just kind of curious as to the pace of loan growth.

While this increase was well above our expectations, it does not reflect the core earnings power of the company going forward.

Stephen M. Moss: Won't be still pretty strong or how you think about.

Dimitar Kravinoff: Steve, good question. We generally come into the years thinking of mid-single digits. We certainly outperformed in the past couple of years by quite a margin. We didn't expect some of that. We didn't plan for it. But when you've got great borrowers and opportunities, you kind of take what they give you. The pipelines are strong. They're not as strong as they were probably last year on the commercial side at this point, but still pretty strong. The residential pipeline is also pretty good. We're still calling for mid-single digits.

Speaker Change: Yeah, Steve Good question.

Speaker Change: We generally come into deere's thinking of kind of mid single digits. We certainly outperformed in the past couple of years by by quite a margin.

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, a low cost of funds, excellent credit quality, and robust regulatory capital levels.

Speaker Change: Didn't expect some of that we didn't plan for it but one when you've got great borrowers and opportunities.

Speaker Change: You kind of take what they give you.

The opportunity to serve clients across our footprint has never been better, and our teams and balance sheet are open to 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 a 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 two years of headwinds. Our insurance services business, which grew 18% in 2023, is well positioned to continue to benefit from hard insurance markets, organic initiatives, and roll-up M&A activities. We were recently ranked as a top 75 PNC agency in the country and one of the nation's largest bank-owned insurance operations.

The pipelines are strong they're not as strong as they were.

Speaker Change: Probably last year on the on the commercial side at this point, but still pretty strong.

Speaker Change: The residential pipeline is also pretty good.

Speaker Change: We're still calling for mid single digits.

Speaker Change:

Dimitar Kravinoff: 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 some parameters around that as well.

Speaker Change: So we kind of feel comfortable at that level as we sit here today.

Speaker Change: But it will depend a lot on the competitive dynamics and price as well you know we need to get paid for what we do so there will be some some parameters around that as well.

Speaker Change: Okay, Great and then on the employee benefit services side.

Speaker Change: Okay, great. And then on the employee benefits services side, you know, you said a pretty upbeat about business development here going forward. I realized also during the quarter you had some tailwinds from, you know, fixed income asset appreciation. Just kind of curious, you know, how you're thinking about the overall revenue growth for that business line this year.

Speaker Change: You sounded pretty upbeat about business development here going forward.

Speaker Change: I realized also during the quarter you had some tailwind from fixed income asset appreciation.

Speaker Change: Curious.

Our wealth business also had a positive revenue year in 2023, and our assets under management are back to their previous peak levels at the end of 2021. That, plus the increased focus and investments in the business, positioned us well to regain momentum in 2024. Simply put, our focus for 2024 is to continue 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.

Speaker Change: How youre thinking about the overall revenue growth for that business line this year.

Speaker Change: We target high single digits in that business, Steve So kind of between five and 10% is where we think the core run rate of the businesses.

Speaker Change: We target high single digits in that business, Steve, so kind of between 5% and 10% is where we think the core run rate of the business is. Certainly on an organic basis, it has been there. It's been muted by the market. So if asset values kind of stay where they are and we start really getting paid for all the organic growth we had and we continue to capitalize on pretty good pipelines in that business, we think that that kind of high single digit metric is certainly achievable for us in 2024.

Speaker Change: Certainly on an organic basis. It has been there its been muted by by the market. So if we.

Speaker Change: If asset values kind of stay where they are and we start through the getting paid for all the organic growth, we had and we continue to.

Speaker Change: Capitalize on pretty good pipelines in that business.

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

We think that that kind of high single digit metric is certainly achievable for us in 2024.

Joe: Thank you, Dimitar, and good morning everyone. As Dimitar noted, the company's earnings results were down in the fourth quarter due largely to certain elevated non-interest expenses. Fully diluted gap 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.

Speaker Change: Okay, Great and also also for insurance the insurance business I realize it's a hard market you had some very good.

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

Speaker Change: Year over year growth I'm, just curious is it still close to a double digit pace there.

Speaker Change: I think that's fair for the current expectation. You know, we've grown that business at over 10% in the past three years. Last year was 18%, I think, between some of the continued opportunities on the M&A side, kind of the small roll-ups and kind of the market. And certainly our teams are executing organically really well as well. So double-digit, I think, is certainly achievable for us in 2024.

Speaker Change: I think I think that's fair for the current expectation and how we've grown that business set up over 10% in the past three years last year was 18% I think between some of the continued opportunities on the M&A side kind of the smaller roll ups and kind of the market and certainly our teams are ready.

Joe: Fully diluted operating earnings per share, a non-gap measure, were $0.76 in the quarter, $0.20 per share lower than the prior year's fourth quarter, and $0.06 per share lower than the linked quarter results. During the fourth quarter, the company recorded $123.3 million in non-interest expenses. This included $2.2 million of acquisition-related contingent consideration expenses, a $1.2 million restructuring charge related to the company's previously announced branch optimization strategy, a $1.5 million expense accrual related to the FDIC special assessment, $1 million of executive-related retirement expenses, as well as elevated fraud losses. On a full-year basis, the company's core operating expenses, which excludes acquisition-related expenses and restructuring charges, were up 10.2%. This increase is not only driven by upward pressure on market wages and some of the previously mentioned charges but is also reflective of the front-footed investments the company made in its leadership team, talent across all lines of business, data systems, and risk management capabilities.

Speaker Change: Are you kidding organically really well as well so double digits I think is certainly achievable for us in 2024.

Speaker Change: Okay, Great and then on the margin here just curious.

Speaker Change: Great. And then on the margin here, just curious, you know, how you guys are thinking about the margin outlook or next couple quarters and how you guys are feeling about things if we get some rate cuts here as the year progresses.

Speaker Change: You know how you guys are thinking about the margin outlook.

Speaker Change: Our next couple of quarters and what how you guys are feeling about things if we get some rate cuts here.

Speaker Change: As the year progresses.

Speaker Change: Yeah, hi Steve, it's Joe, I'll take that question.

Speaker Change: Yes, Hi, Steve It's Joe I'll take that question.

Joe: um you know so i think i kind of laid out in my prepared comments you know our expectations on and just to make the distinction on net interest income and our expectations are that net interest income given the current rate environment will will expand year over year on a full year basis and that you know that expectation is really sort of built on the fact that we've had significant loan growth um you know over the last year or so and that continues and that's going to allow us to uh you know improve overall earning asset yields um and so that we we expect that to drive in that and that the other side of that is obviously that we our expectations is that funding costs pressures will abate uh through 2024. now typically we don't see a significant pickup in net interest income um

Joe: 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 will expand year over year on a full year basis.

Joe: Net.

That expectation is really sort of built on the based on the fact that we've had significant loan growth.

Joe: Over the last year, or so and that continues and that's going to allow us to.

Joe: Prove overall, earning asset yields.

Joe: And so that we expect that to driving 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.

Joe: In the first quarter, we lose a couple of days, if you will. You know, there's just a shorter day count in the first quarter. But, you know, 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, you know, we took down some borrowings at about 4.5%, and new loans went on the books at about 7.5%. You know, so in this, you know, 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, you know, the current rate environment, you know, it was split. 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, you know, hold in there on, you know, on our new rates, new originations. And, you know, obviously, if we can get a downstroke or two from the Federal Open Market Committee on the short end, that will relieve some pressure on our ongoing funding costs. Most of our... You know, funding sources kind of look at the short end, and we have an inverted curve at the moment. So, you know, if we can get a little bit of a, again, a decrease on the short end, we think that will really help us level off the funding costs going forward.

Joe: In the first quarter, we lose a couple of days if you will.

Joe: The company's management expects the full year 2024 core operating expenses to moderate back to a mid-single-digit growth rate, to a mid-single-digit growth rate off a full year 2023 core operating expense base of approximately $460 million. The company recorded $177 million in 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 of the prior year and $175.4 million in the linked third quarter. The increase in total revenues over the prior year's fourth quarter was driven by a $4.1 million or 6.4% increase in non-interest revenues, partially offset by a $3 million or 2.7% decrease in net interest income. As Dimitar noted, revenues were up in all lines of business on a full-year basis, and management believes the company is well-positioned to grow total revenues again in 2024.

Joe: Theres just a shorter.

Joe: Day count in the first quarter.

Joe: 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 four 5% and new loans went on the books at about seven 5%.

Joe: So in this I'll call it latest round of of loan funding and origination we generated just about a 3% margin on that so the expectations for ours 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 that.

Joe: Interest income will trend up later in the year.

Speaker Change: Yes, I think with respect to you know that the current rate environment.

Speaker Change: It was we got some I'll call it relief.

Speaker Change:

On a long on the other hand that puts a little pressure on loan yields as we move ahead inventory, indicating we will try to hold in there on.

Speaker Change: On our new new rates on new originations.

Speaker Change: And obviously, if we can get a downs.

Down stroke or two from the federal open market Committee on the short end that will release some pressure on our on our ongoing funding costs most of our.

Speaker Change: 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.

Speaker Change: Okay, great. Thank you. Appreciate all the callers, Dimitar and Jeff.

Speaker Change: Okay, great. Thank you appreciate all the color Jeff.

Joe: 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 has 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.

Speaker Change: Welcome.

Speaker Change: The next question will come from Chris O'Connell with KBW. Please go ahead.

Speaker Change: The next question will come from Chris O'connell with K B W. Please go ahead.

Chris O'connell: Hey, good morning.

Chris O'connell: Hey, good morning.

Chris O'connell: Thank you.

Chris O'connell: Chris.

Chris O'connell: I just wanted to follow up on the NIM discussion. You know, you guys have been holding in, you know, very well on the funding cost side. Do you have where the average CD cost was in Q4?

So just wanted to follow up on the NIM discussion.

Chris O'connell: You guys had been holding in very well.

Chris O'connell: The funding cost side.

Do you have where the average CD cost was in Q4.

Chris O'connell: On new Cds.

Speaker Change: on new CDs? No, just average for the quarter.

Speaker Change: No just average for the quarter.

Speaker Change: Yeah, so...

Joe: The company's total cost of funds in the fourth quarter of 2023 was 1.08% as compared to 88 basis points in the length third quarter.

Speaker Change: Yeah. So we can provide that.

Speaker Change: by that.

Speaker Change: Just give me a moment here Chris.

Speaker Change: Just give me a moment here, Chris.

Speaker Change: and then basically like

Joe: The 20 basis point increase in funding costs in the quarter outpaced a 17 basis point increase in earning asset yields, resulting in a three basis point decrease in the company's fully taxable net interest margin from 3.10% in the third quarter to 3.07% in the fourth quarter. On a full-year basis, non-interest revenues, excluding investment securities losses and gain on debt extinguishment, increased $8.2 million, or 3.2%. This result is reflective of the company's diversified business model. Banking-related non-interest revenues decreased $1.9 million, or 2.7%, in 2023 due primarily to the company's decision to eliminate non-sufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022, while total revenues in all three of the company's non-banking businesses, employee benefits services, insurance services, and wealth management services, were up year-over-year.

Speaker Change: And then basically.

Speaker Change: On the interest-bearing deposit cost side, do you guys have a full cycle beta in mind or where you think that those costs could top out at at some point over the course of 2024?

Speaker Change: On the interest bearing deposit cost side I mean, do you guys have you know a full cycle beta in mind or where you think that those costs could top out at some point over the course of 2024.

Speaker Change: Thank you.

Speaker Change: I think Chris is.

Speaker Change: I think Chris, as we've

Speaker Change: <unk>.

Speaker Change: Discussed previously generally our expectation for full cycle beta, and that includes the non-interest bearing piece for us, or the very low interest bearing piece for us, which is about 68% of the balances right now. We've talked about 20% to 25% in terms of beta. I think we still feel comfortable in that range. We're pretty close to the low end of that. It might be, depending on how long this cycle takes, there is a few quarters after the Fed stops.

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 balances right now.

Speaker Change: We've talked about 20% to 25% in terms of a beta.

Speaker Change: I think we still feel comfortable in that range, we're pretty close to the low end of that so it might be.

Speaker Change: Depending on how long this cycle takes there is a few quarters after the fed stops.

Speaker Change: 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

Speaker Change: Raising rates and even when they cut there's a couple of quarters potentially of still kind of lingering impact of remix.

Speaker Change: On the balance sheet, but kind of a net.

Speaker Change: and many more.

Speaker Change: Mid twenties.

Speaker Change: Mid 'twenty kind of.

Speaker Change: 20, 22, 25% probably is pretty reasonable for us in terms of total beta for the cycle.

Speaker Change: 20% to 25% probably is pretty reasonable for us in terms of total data for the cycle.

Speaker Change: And Chris just a follow up on your question on on time deposits. So blended cost in Q4 is about $3 30.

Speaker Change: And Chris, just to follow up on your question on time deposit, so blended cost in Q4 is about $3,000.

Joe: Reflective of an increase in loans outstanding, a stable economic forecast, and an increase in delinquent and non-performing loans, the company recorded a provision for credit losses of $4.1 million during the fourth quarter. Comparatively, the company recorded a $2.8 million provision for credit losses in the fourth quarter of the prior year and $2.9 million in the length of the third quarter. The effective tax rate for the fourth quarter of 2023 was 22.8%, up from 22% in the fourth quarter of 2022.

Speaker Change: Thank you for your time.

Speaker Change: Time deposits.

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

Speaker Change: Great and then you.

Speaker Change: You know on the borrowing side as far as you.

Speaker Change: The bulk of them and you guys have put on the last couple of quarters.

Speaker Change: In the mid fours range you know for.

Speaker Change: For the for the balance which is mostly as customer repurchase agreements between no act a little bit more like deposits in terms of their cost structure. I mean, do you see more pressure on those costs.

Speaker Change: We enter 2024.

Speaker Change: I think typically we do see a significant repricing opportunity on the customer repurchase agreements around mid-year.

Speaker Change: I think typically we.

Joe: On a full-year basis, the effective tax rate was 21.6% in 2023 as compared to 21.7% in 2022. Ending loans increased $254.5 million, or 2.7% during the quarter, and $895.2 million, or 10.2% over the prior year. The increase in loans outstanding in the fourth quarter was primarily driven by increases in the business lending and consumer mortgage portfolios. The increase in ending loans year-over-year was driven by organic loan growth in the company's business lending portfolio totaling $438.7 million, or 12%, and growth in all four consumer loan portfolios totaling $456.5 million, or 8.8%. The company's ending total deposits were down $102.7 million, or 0.8%, from the end of the third quarter, driven by a net outflow of municipal deposits. On a full year basis, ending total deposits were down $84.2 million, or 0.6%.

Speaker Change: We do see a I'll call it a significant repricing opportunity on the customer repurchase agreements around mid year.

Speaker Change: um

Speaker Change: Some of which are you know.

Speaker Change: 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 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 funding.

Speaker Change: Mis municipal customers and it sort of depends on the rate environment sort of when we get closer to that point.

Speaker Change: But overall.

Speaker Change: These are not high cost funding.

Speaker Change: Funding our high cost funding source for us on a you know.

On a complete blended basis in Q4 about a one 5%.

Speaker Change: Because it's largely.

Speaker Change: Kind of operating in nature, a lot of these accounts. So it's not a it's not a high cost.

Speaker Change: Cost of.

Speaker Change: Funds for us.

Speaker Change: Great.

Speaker Change: Great.

Speaker Change: Just kind of tying it all together on the margin, in the event that we start getting Fed fund cuts around mid-year, the initial reaction of the margin just off of that first quarter, do you expect that to be directionally upward or downwards in any sense of the magnitude?

And just kind of tie it altogether on the margin I mean, you know any.

In the event that we start getting you know fed fund cuts.

Speaker Change: Around midyear.

The initial reaction of the margin.

Speaker Change: Just off of that first quarter.

Do you expect that to be you know directionally.

Speaker Change: Upward or downwards, and any sense of the magnitude.

Speaker Change: Yes.

Speaker Change: Chris, I think...

Speaker Change: Chris I think.

Speaker Change: They're really hard question there as well.

Speaker Change: The really hard question there is what continuing rib 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,

Speaker Change: Continuing room mix will happen on the balance sheet and in India or in the quarter I think if everything else is equal and we get a rate cut.

Speaker Change: We do have clearly a number of accounts that will immediately reprice down, predominantly in the money market space, 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 checkings accounts...

Speaker Change: There, we do have clarity on number of accounts that will be immediately reprice down.

Joe: The company's cycle-to-date deposit data is 17% reflective of a high proportion of checking and savings accounts, which represent 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, with readily available sources 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 totaling $4.83 billion at the end of 2023.

Speaker Change: Dominantly in the money market space.

Speaker Change: In kind of in line with that cut so.

Speaker Change: Again, because our deposit base is heavily into noninterest bearing or very low interest bearing money savings accounts and checking accounts.

Speaker Change: We might have.

Speaker Change: 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.

Speaker Change: Benefit, but I don't think it will be as huge of a benefit in that immediate.

Speaker Change: Aftermath of a cut or two so probably directionally.

Speaker Change: in the direction we want to see it, which is up, but probably not by a huge amount.

Speaker Change: In the direction, we want to see it which is up.

Speaker Change: But probably not by a huge amount.

Speaker Change: Great.

Speaker Change: Great.

Speaker Change: And then last one for me is just what's a good go-forward tax rate?

Speaker Change: And then a last one for me is just a what's a good go forward tax rate.

Speaker Change: I think it's fair to use somewhere between call it 21% and 22%.

Speaker Change: I think it's fair to use somewhere between call it 21 and 22%.

Speaker Change: I think I mentioned on my prepared comments the last two years, the weighted average has been about 21 and a half.

You know on a go forward basis, I think I've mentioned on my prepared comments. The last two years. The weighted average has been about 'twenty, one and a half I think that's a fair expectation going forward.

Speaker Change: I think that's a fair expectation going forward.

Joe: These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits, net of collateralized and intercompany deposits. The company's loan-to-deposit ratio at the end of the third quarter was 75.1%, providing future opportunities to migrate lower-yielding investment security balances into higher-yielding loans. At December 31st, 2023, all the companies in the bank's regulatory capital ratio significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.37% at the end of 2023, which substantially exceeded the regulatory well-capitalized standard of 5%.

Speaker Change: great, thanks Joe, Dimitar, appreciate it

Speaker Change: Great. Thanks, Joe I appreciate it.

Speaker Change: Okay.

Speaker Change: Again, if you have a question. Please press Star then one our next question will come from Mango neighbors with D. A Davidson. Please go ahead.

Speaker Change: Again, if you have a question, please press star, then one. Our next question will come from Manuel Navis with D.A. Davidson. Please go ahead.

Speaker Change: Okay.

Manuel Navis: This is Sharon G. Onn from Manual Novice. Thank you so much.

Mango Neighbors: She Xiang Jiang.

Mango Neighbors: There's no question.

Mango Neighbors: I'm sorry.

Manuel Navis: So I was wondering, what are the biggest wildcards for driving positive operating leverage in 2020?

What is the biggest wildcard for driving positive operating leverage in 2024.

Mango Neighbors: Okay.

Speaker Change: So, thank you for that question. If you look at just the magnitude of our P&L,

Mango Neighbors: So.

Speaker Change: Thank you for that question.

Speaker Change: If you look at just the magnitude of our P&L.

Speaker Change: Yeah.

Speaker Change: The biggest wildcard for us is always NII.

Speaker Change: The biggest wild card for us is always N.I.I.

Speaker Change: So depending on where NII trends, you know, I think that's going to determine how much leverage we can drive in terms of efficiency to the bottom line. I think we feel reasonably good about our expense outlook for 2024 in terms of that mid-single digit rate off of the core base that Joe mentioned. So I think that side of the equation is a little bit easier to put your arms around, but, you know, what happens with NII, deposit-free mixing, Fed cuts, pricing in the market is going to largely determine the outcome of the operating leverage.

Speaker Change: So depending on where NII trends.

I think that's going to determine how much leverage we can drive in terms of efficiency.

Speaker Change: Efficiency to the bottom line I think we feel reasonably good about our expense outlook for 2024.

Joe: 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, companies' 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 it 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.

In terms of that mid single digit rate.

Speaker Change: 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 deposits Remixing fed cuts.

Speaker Change: Pricing in the market is.

Speaker Change: Going to largely determine the outcome of the operating leverage.

Speaker Change: Thank you so much.

Speaker Change: Thank you so much.

Speaker Change: That's all for my questions.

Speaker Change: Welcome.

Speaker Change: Welcome.

Speaker Change: The next question will come from Matthew Breese with Stephens, Inc. Please go ahead.

Speaker Change: The next question will come from Matthew Breeze with Stevens Inc. Please go ahead.

Matthew M. Breese: Hey, good morning, everybody.

Matthew M. Breese: Hey, good morning, everybody.

Matthew M. Breese: Good morning, Matt. Good morning, Matt. You know, the fee income growth as we go up and down the various business lines sounds pretty optimistic, robust.

Speaker Change: Good morning, Matt Good morning, Matt.

Matt: The fee income growth I can go up and down the various business lines.

Matt: Sounds pretty optimistic robust.

Matthew M. Breese: Dimitar, I'm just curious your thoughts on overall fee incomes

Matt: Inventory I'm just curious your thoughts on overall fee income.

Dimitar Kravinoff: as a percentage of revenues, which, you know, 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.

Matt: As a percentage of revenues.

Matt: Nearly 40% I think is one of the largest differentiators of you versus your traditional bank competitors.

Matt: I'm curious if longer term you have any goals if there is a <unk>.

Matt: We're sending your revenue seems like fee income representing over time.

Speaker Change: Yeah, so Matt, I think that's a good question. It's something that we talk a lot about at the board level and at the management level. And we run a diversified financial services company, not a bank with hobbies. So all of our four businesses are equally important to our ability to generate returns going forward, our ability to grow the dividend, create sustainable earnings. So we've organized also our company along those lines. For example, I've got four direct reports for each one of the businesses.

Speaker Change: Yeah, So Matt I think that's a good question and something that we talk a lot about it.

Speaker Change: At the board level and at the management level, and we will run a diversified financial services company.

Joe: The company's full-year 2023 net charge-off ratio was 6 basis points of average loans. At December 31st, 2023, non-performing loans totaled $54.6 million, or 56 basis points of total loans outstanding. This was up from $36.9 million, or 39 basis points, at the end of the third quarter and $33.4 million, or 38 basis points, one year prior. There were three additional business lending relationships that were transferred to non-accrual status in the fourth quarter, all of which are well secured with no specific loss content identified. Loans 30 to 89 days delinquent were 50 basis points of total loans outstanding at December 31st, 2023 as compared to 51 basis points at both the end of the third quarter of 2013 and one year prior. Overall, the company's asset quality remains strong.

Speaker Change: Not a banquet 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 our company along those lines.

Speaker Change: 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.

Speaker Change: So our emphasis is to drive each one of those businesses. With that said, as you mentioned, we're about 40% right now.

Speaker Change: As you mentioned, we're at about 40% right now.

Speaker Change: Thank you very much. Thank you very much.

Speaker Change: 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.

Speaker Change: 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, we're not going to see a lot of volatility in terms of mortgage fees or SBA fees or leasing fees those are too.

Things that we generally don't like because of the volatility aspect to it and kind of the quality aspect to it.

Speaker Change: So.

Speaker Change: But high quality NII that is sustainable with a strong deposit base certainly is a quality, earning outcome as well.

Speaker Change: So we want to be as diversified as we can.

Speaker Change: We don't have a hard and fast rule.

Joe: 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 provides a tailwind for revenue growth in the employee benefits services and wealth management services businesses.

Speaker Change: I think.

Speaker Change: 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.

Speaker Change: Our goal is to always have quite a bit more than others.

Speaker Change: 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.

Speaker Change: Both organically and Inorganically.

Speaker Change: I would just add one comment to Dimitar's, which is with four businesses, we do have the opportunity to deploy capital in four different businesses.

Speaker Change: I would just add one comment to dimitar switches with four businesses, 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.

Speaker Change: 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.

Speaker Change: Themselves in different businesses and you know.

We're in the business of allocating capital to the one that makes it makes the most sense.

Speaker Change: Given our other alternatives in that moment.

Speaker Change: So I think, you know, just, you know, kind of to level set that thinking is that, you know, we do have, you know, options to play capital in four different businesses. And I think, you know, the best

So I think just to level set that thinking is that we do we have.

Speaker Change: Options to deploy capital in four different businesses and I think you know the best.

Joe: That concludes my prepared comments.

Speaker Change: Option in the moment when we have those opportunities is kind of how we kind of look at that, you know, that capital deployment. Again, a lot of our, you know, peer institutions, they have one or maybe two businesses in which they can deploy capital, and we have four.

<unk> in the moment when we have that we have those opportunities just kind of how how we kind of look at that.

Joe: Thank you.

Operator: Now I'll turn it back to Chuck Openline for questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star then two. And at this time, we'll take our first question from Mr. Alex Twerdahl with Piper Sandler.

Speaker Change: That capital deployment again, a lot of our peers.

Our institutions they they have one or maybe two businesses in which they can deploy capital and we have four.

Speaker Change: Understood. Okay, I appreciate all that.

Speaker Change: Understood. Okay I appreciate all that.

Speaker Change: I did want to touch just on, you know, your comments around, you know, the margin slash NII outlook. I mean, just curious. So, you know, given your overall level of deposit costs.

Speaker Change: I did want to touch just on your comments around.

Speaker Change: The margin Slash NII outlook I mean, just curious so you know given your overall level of deposit cost, which.

Speaker Change: and Sub1% 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 the Fed 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 mean?

Speaker Change: Sub 1%.

Speaker Change: Steve It's pretty amazing.

Speaker Change: Inventory I think you've suggested that.

Speaker Change: With rates down we will see a lag but is it possible for a time, we made some kind of a.

Speaker Change: A negative deposit beta meaning deposit cost continue to decline.

Please go ahead.

Hey, good morning, guys.

Speaker Change: Cutting just because of that delta.

Good morning, Alex.

Good morning, Alex.

Speaker Change: And then second question is you had mentioned deposits that reprice immediately how much of the deposit base in fact does that.

Joe: First, can you just give us a little bit more color on those three business lending relationships, what the collateral is behind them, what kind of loans they were, et cetera? Yeah, it's actually a little bit of a mixed bag, Alex, in terms of the individual credits, one of which is kind of a mixed-use industrial slash office property. It was partially owner-occupied also, but generally classified as non-owner-occupied because that was the majority of the space. You know, the borrower just ran into some cash flow issues outside of this particular property, and so we ultimately moved the loan to non-accrual and did the evaluation on the asset, we believe were well secured, and we have not identified any specific loss content on that one.

Speaker Change: I think Matt if you look at your the historical cycles.

Speaker Change: I think Matt, if you look at the historical cycles,

Speaker Change: 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.

Speaker Change: There is that lag of a few quarters, where deposit costs in the industry.

Speaker Change: Continued to rise while the fed is not moving so if you want to.

Speaker Change: I don't know, how we would qualify that beta but it would be.

Speaker Change: Very large number essentially right. So I don't think that we're going to be immune to that.

Speaker Change:

Speaker Change: 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.

Speaker Change: But I just think that that 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.

Speaker Change: So there will be some lagging effect on when the fed is not moving in deposits are still remixing.

Joe: And then we also had a couple of smaller ag loans, one ag credit, agricultural credit, that was basically flipped to non-accrual. One was in non-accrual status due to cash flow challenges, and the third was actually owner-occupied property. Thank you very much, and a real common thread between the three. Okay, um, I was wondering if you could give us a little bit more color on the loan growth that you've been seeing over the last, really this quarter, but the last couple quarters on the commercial side, just in terms of sort of the size of loans they've been putting on, the geographies. And I'm also curious, just with the pullback in rates. I think last quarter you said that you were putting loans on at roughly 250 basis points above the five-year.

Speaker Change: 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.

Yeah. So so Matt we do have.

Joe: Yeah, so Matt, we do have...

Joe: you know approximately call it seven billion dollars of

Joe: Approximately call it $7 billion of.

Joe: are 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 total about $2.4 billion on roughly a $13 billion base. Savings accounts are about $2.3 billion, and interest-bearing checking about $2.9 billion. So if we have a reduction in the rates at the Federal Open Market Committee and the Fed funds comes down a quarter, that's the opportunity set for us. I would just emphasize that.

Joe: Non HR or excuse me non time deposits that are interest bearing right. So that's comprised of interest checking and savings and money market.

Joe: And the money market being the more sensitive of the of the group there in the <unk>.

Joe: Money markets total about $2 4 billion on a roughly a $13 billion base.

Joe: Savings accounts are about $2 3 billion in interest bearing checking about $2 $9 billion. So if we have a.

Joe: A reduction in the rates.

Joe: At the.

Joe: The federal open market committee in the fed funds comes down a quarter. That's the opportunity set for us I would just emphasize that the.

Joe: If the spreads have kind of held as rates have come down, or if they've potentially widened out, and just any more color there would be very helpful. So, Alex, everything that we do is basically a footprint borrower. The majority of our growth has really come from our expansion into some of the larger metro areas, which we've talked about previously. In fact, every one of our regions had a growth year in 2023, so it's been strong across the board. We're active, and 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.

Joe: The money market deposits are the more sensitive of those kind of three portfolios.

Joe: Money market deposits are the more sensitive of those kind of three portfolios.

Speaker Change: Matt, maybe just to add a little bit to that, you know, we manage ALCO to a roughly neutral outcome, you know, in terms of rate exposure. So let's not forget about the asset size. You know, we've been lagging on the asset side in the cycle because we've got a more fixed profile on the asset side. So that's allowed us to, you know, our deposit base has allowed us to do that. And 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.

Speaker Change: Matt maybe just to add a little bit to that.

Matt: We manage alco to roughly neutral outcome.

Matt: In terms of rate exposure so.

Matt: Let's not forget about the asset size, we've been lagging on the asset side and the cycle because we've got a a more fixed profile on the asset side. So that's allowed us to to 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.

Matt: In a down cycle. So that's why we kind of look at our margin is probably a little bit sideways.

Matt: Kind of.

Speaker Change: plus or minus a few cuts type of scenario.

Or minus.

Matt: <unk> cuts type of scenario.

Matt: Okay understood. Thank you.

Matt: Okay, understood, thank you. And then I did wanna touch on the securities portfolio

Matt: And then I did want to touch on the securities portfolio.

Joe: So we came into this cycle with a highly liquid balance sheet and no concentrations of any sort. We had plenty of runway. So we've taken advantage of that. In terms of where we're lending today, in terms of rates, they're very similar to the last quarter that we talked about. Our business lending is kind of in the low to mid-sevens, but we don't expect that to change much as, again, we're benefiting from a bit of a 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.

Matt: I mean, judging from the swing in rates, you know, first of all, it's safe to assume that a lot of that higher move is really valuation driven versus purchase driven.

Matt: I mean, just judging from the swing in rates no first of all is it safe to assume that a lot of that higher movement is really valuation driven versus purchase driven.

Matt: And then secondly, could you just remind us what the cash flows are and what the outlook for that portfolio is in 2020?

Matt: And then secondly could you just remind us what the cash flows are.

Matt: With the outlook for that portfolio is in 'twenty one.

Speaker Change: Yeah, So Matt with respect to the with.

Speaker Change: So Matt, with respect to the cash flows, we have somewhat limited cash flows in 24 and 25, less than $100 million in each of those years.

Speaker Change: With respect to the cash flows we have.

Speaker Change: Somewhat limited cash flows in 'twenty, four 'twenty five less than $100 million in each of those each of those years.

Speaker Change: and if you recall we did the repositioning back in the first quarter we pulled forward most of the most of the cash flows

Speaker Change: If you recall, we did the repositioning back in the first quarter, we pulled forward most of the most of the cash flows.

Speaker Change: that we're basically coming to in 2024 and 2025. We get to some more significant cash flows in 2026 and 2027 on a combined basis about a billion dollars in those years and then another billion or so in 2028 and 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.

Speaker Change: In that we are basically coming due in 'twenty four 'twenty five we get to some more significant.

Great

Joe: And so, like $170 million of commercial loan growth, would that be several loans, several larger loans, or is it much more granular than that? It is very granular. I cannot tell you the exact average and median.

Speaker Change: Cash flows in 'twenty.

Speaker Change: 26, and 27 on a combined basis about $1 billion in those years and then another $1 billion or so in 2008 2009. So we just effectively pulled pull forward. Those cash flows. We also have potentially small opportunities later in the year.

Joe: We can follow up on that, but our loan sizes are very, very low for the size of the institution that we run and our lending capacity limits.

Speaker Change: We continue to kind of see this rate environment to pull forward some.

Speaker Change: and 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 hundred million dollars if

We don't have too many loans that are anywhere close to even a third of our lending limit, so there are many loans behind those $170 million.

Speaker Change: Some some shorter term.

Speaker Change: Securities cash flows maybe at par without a 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 of.

And then just a final question, Dimitar. You said in your prepared remarks that you hope that 2024 would be a bit more conducive to M&A. I'm just curious, you know, in your mind, sort of what has to happen. And I guess, first off, if you're talking about Bank M&A or some of the other lines that you're in, and then, you know, if it's really more rate driven and the rate mark driven, or if it's driven more by sort of the willingness of the seller. Yeah, 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, we're focused on all of them.

Speaker Change: We are we see that opportunity.

Speaker Change: Thank you for joining us.

Speaker Change: see that opportunity here in the coming quarter.

Speaker Change: Here in the coming quarters.

Speaker Change: Sorry, 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 rolls.

Speaker Change: Oh, sorry, trying to but thank you.

Speaker Change: And then last one for me just on.

Speaker Change: Would love some general commentary on credit what you're seeing.

Speaker Change: As you know the consumer goes into India.

Speaker Change: Indirect auto loans commercial real estate rolls.

Speaker Change: and then how does that kind of filter into provisioning in the charge-off outlook for 2024?

Speaker Change: And then how does that kind of filter into provisioning in net charge off outlook for 2024.

Speaker Change: That's all I had.

Speaker Change: That's all I had thank you.

Speaker Change: 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.

Speaker Change: Yes, sure Matt I'll take that.

Speaker Change: 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.

Speaker Change: and we

Speaker Change: And we.

Speaker Change: If you look at our substandard and special mentions, so if you kind of think of it as kind of the early warning buckets, they're still roughly half of where they were pre-pandemic levels.

Speaker Change: If you look at ours 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.

We've certainly been doing a little bit more roll-up type opportunities in the non-banking businesses, kind of as a matter of course. We're hopeful that there might be some larger opportunities on that side as well. But certainly on the bank side, you know, 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, you know, the marks. So, we're hopeful that this year there's going to be a little bit more clarity and stability in the market, which would allow folks to kind of really understand what's on the balance sheet.

Speaker Change: Um,

Speaker Change: So we're certainly moved up a little bit, and you saw a few relationships get a little bit more challenged this quarter, which is normal, expected, still well below the historical averages. Our charge-offs in our commercial business last year were one basis point.

Speaker Change: 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.

Speaker Change: Our charge-offs in the auto business, which I know you love, were about 20 basis points, 22 basis points, and we consistently believe that they should be higher. And I think what's happening behind a lot of that is...

Speaker Change: Our charge offs in the auto business, which I know you love.

Speaker Change: We're about 20 basis points 22 basis points and we've consistently believed that there should be higher.

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.

Speaker Change: I think whats happening behind a lot of that.

Speaker Change: Is.

Speaker Change: Just the economic environment is such when you have a low unemployment rate.

Just the economic environment as such when you have a low unemployment rate.

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, you know, historically, CBU's appetite has been kind of half a billion to two billion in terms of size. Has anything changed with respect to your appetite for bank M&A? I think that's kind of where we feel that the best risk and reward lies in the opportunities. I think they'll kind of vary between in-market versus kind of contiguous markets, the markets that we've talked about. But certainly, that size is where we feel there is an appropriate risk and reward. It could be a little bit larger, but probably not by much. Thanks for taking my question.

Speaker Change: and a lot of government spending in the economy.

Speaker Change: And a lot of government spending in the economy.

Speaker Change: It's really providing a support to asset values across the board. You look at mortgage, our mortgage business, you know, we're going to have a little bit more delinquencies as things normalize. But when we take these things to through the process, you know, we get paid fully because the values of housing in our markets are actually back up. They're actually higher than they were, you know, when we talked about the peak on kind of a post-pandemic basis.

Speaker Change: It's really providing a a.

Speaker Change: Port 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.

Speaker Change: But when we think these things to through the process, we get paid fully because the values of housing in our markets are actually back up.

Speaker Change: They are actually higher than they were when we talked about the peak on kind of in a post pandemic basis. So asset values are very strong due to limited supply.

Speaker Change: 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. You know, the collateral values, even on the commercial side, are holding in pretty well. You know, those businesses are profitable. We have not seen anything that's kind of consistent in terms of pressure in a specific geography or an industry. And again, when the government is spending so much money, that deficit is the private sector surplus. So that's supporting just a lot of liquidity in the system and activity. And as we've talked before, in our markets, you know, for the first time in a long while, we're actually getting a little bit of an economic lift from the spending around some of the kind of the advanced technologies, the CHIPS Act, you know, all of that stuff is helping our geographies.

Speaker Change: People have jobs, even if they lose a job info delinquent a little but it's too easy to find another job and get back get back in line.

Speaker Change: Did the collateral values, even on the on the commercial side or are holding in pretty well those businesses are profitable.

Stephen M. Moss: The next question will come from Steve Moss with Raymond James.

We have not seen anything that's.

Speaker Change: Kind of consistent in terms of pressure in a specific geography or.

Please go ahead.

Good morning.

Dimitar, Borden, Dimitar, just following up just on loan growth for a second. Do you think for the upcoming year, total loan growth of, you know, six, 700 million or just kind of curious as to, you know, the pace of loan growth will be, you know, still pretty strong or what you think about it?

Speaker Change: And 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.

Speaker Change: And as we've talked before in our markets for the first time in a long while.

Speaker Change: Actually getting a little bit of a good economic lift from.

Speaker Change: The spending around.

Steve, a good question.

Speaker Change: Some of the kind of the advanced technologies.

We generally come into the years thinking of mid-single digits.

Speaker Change: The chips.

Speaker Change: Chips Act.

We certainly outperformed in the past couple of years by quite a margin.

And all of that stuff is helping our geographies.

Speaker Change: Great I appreciate all that and Thats all I had thank you.

Speaker Change: Great. I appreciate all that. That's all I had.

Speaker Change: Okay.

We didn't expect some of that.

Speaker Change: Thank you okay.

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

Speaker Change: The next question is a follow up from Chris O'connell with K B W. Please go ahead.

We didn't plan for it.

But when you've got great lenders and opportunities, you kind of take what they give you.

Chris O'connell: I just wanted to follow up on the $2.4 billion of money market that you guys mentioned. Do you have where the rate on those are today or in the fourth quarter?

Chris O'connell: Hey, Yeah, just wanted to follow up.

The pipelines are very strong.

They're not as strong as they were probably last year on the commercial side at this point, but they're still pretty strong.

Chris O'connell: On the $2 4 billion of money market.

Chris O'connell: You guys mentioned did.

Chris O'connell: Did you do you have where the rate on those are today here in the fourth quarter.

The residential pipeline is also pretty good, but we're still calling for mid-single digits.

Speaker Change: Yes on a blended basis, Chris is about 2%.

Speaker Change: Yeah, on a blended basis, Chris, it's about 2%.

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 Change: Great.

Speaker Change: Thank you.

Speaker Change: That's all I had thank you.

Speaker Change: Thank you.

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

This concludes our question and answer session I would like to turn the conference back over to Mr. Kurt Carrabba's for any closing remarks. Please go ahead Sir.

We need to get paid for what we do, so there will be some parameters around that as well. Okay, great. And then on the employee benefits services side, you know, you said you were pretty upbeat about business development here going forward. I realized also during the quarter you had some tailwinds from, you know, fixed income asset appreciation. Just kind of curious, you know, how you're thinking about the overall revenue growth for that business line this year. 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.

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

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

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Speaker Change: Thank you Nick.

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It's been muted by the market. So, if asset values kind of stay where they are and we start really getting paid for all the organic growth we had and we continue to capitalize on pretty good pipelines in that business, we think that that kind of high single-digit metric is certainly achievable for us in 2024. Okay, great. And also, for the insurance business. I realize it's a hard market. You had some very good year-over-year growth. Just curious, you know; is it still close to a double-digit pace there? I think that's fair for the current expectation. You know, we've grown that business by over 10% in the past three years. Last year was 18%, I think, between some of the continued opportunities on the M&A side, kind of the small roll-ups, and the market.

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And certainly, our teams are executing organically really well as well. So double-digit, I think, is certainly achievable for us in 2024. Great. And then on the margin here, just curious, you know, how you guys are thinking about the margin outlook for the next couple quarters and how you guys are feeling about things if we get some rate cuts here as the year progresses.

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Joe: Yeah, hi Steve, it's Joe, I'll take that question, um you know so i think i kind of laid out in my prepared comments you know our expectations on and just to make the distinction on net interest income and our expectations are that net interest income given the current rate environment will will expand year over year on a full year basis and that you know that expectation is really sort of built on the fact that we've had significant loan growth um you know over the last year or so and that continues and that's going to allow us to uh you know improve overall earning asset yields um and so that we we expect that to drive in that and that the other side of that is obviously that we our expectations is that funding costs pressures will abate uh through 2024. now typically we don't see a significant pickup in net interest income um, In the first quarter, we lose a couple of days, if you will.

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You know, there's just a shorter day count in the first quarter. But, you know, our expectation is that, sort of, as we get beyond that, we will potentially see an expansion in net interest income. With respect to the margin, I noted again in my prepared comments that, you know, we took down some borrowings at about 4.5%, and new loans went on the books at about 7.5%. You know, so in this, you know, I'll call it the latest round of loan funding and origination, we generated just about a 3% margin on that. So the expectations for us are that potentially margin could be 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.

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Yes, I think with respect to the current rate environment, you know, it was split. 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, you know, our new rates, and new originations. And, you know, obviously, if we can get a downstroke or two from the Federal Open Market Committee on the short end, that will relieve some pressure on our ongoing funding costs. Most of our... You know, funding sources kind of look at the short end, and we have an inverted curve at the moment. So, you know, if we can get a little bit of a, again, a decrease on the short end, we think that will really help us level off the funding costs going forward. Okay, great. Thank you. I appreciate all the callers, Dimitar and Jeff. The next question will come from Chris O'Connell with KBW.

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Chris O'connell: Please go ahead.

Hey, good morning.

Thank you. I just wanted to follow up on the NIM discussion.

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You know, you guys have been holding in, you know, very well on the funding cost side.

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Do you have any idea what the average CD cost was in Q4? on new CDs? No, just average for the quarter. Yeah, so... by that. Just give me a moment here, Chris, and then basically, on the interest-bearing deposit cost side, do you guys have a full cycle beta in mind or where you think that those costs could top out at at some point over the course of 2024? Thank you. I think Chris, as we've discussed previously generally our expectation for full cycle beta, and that includes the non-interest bearing piece for us or the very low interest bearing piece for us, which is about 68% of the balances right now.

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We've talked about 20% to 25% in terms of beta.

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I think we still feel comfortable in that range, but we're pretty close to the low end of that.

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It might be, depending on how long this cycle takes, there are a few quarters after the Fed stops raising rates, and even when they cut, there are a couple of quarters potentially of still kind of lingering impact of remix on the balance sheet but kind of in that and many more.

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20, 22, 25% is probably pretty reasonable for us in terms of total beta for the cycle. And Chris, just to follow up on your question on time deposit, so the blended cost in Q4 is about $3,000. Thank you for your time. And then, you know, on the borrowing side, as far as, you know, the bulk of them you guys have put on in the last couple of quarters, you know, in the mid-fours range for the balance, which is mostly those customer repurchase agreements, which I know act a little bit more like deposits in terms of, you know, their cost structure. I mean, do you see more pressure on those costs as we enter 2024? I think typically we do see a significant repricing opportunity on the customer repurchase agreements around mid-year, um, some of which are municipal customers, and it sort of depends on the rate environment sort of when we get closer to that point.

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But overall, these are not 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 funding. Great.

Just kind of tying it all together on the margin, in the event that we start getting Fed fund cuts around mid-year, the initial reaction of the margin just off of that first quarter, do you expect that to be directionally upward or downwards in any sense of the magnitude? Chris, I think... The really hard question there is what continuing rib 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, we do have a number of accounts that will immediately reprice down, predominantly in the money market space, in line with that cut. So, again, because our deposit base is heavily invested in 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 the 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%. I think I mentioned in my prepared comments that the last two years, the weighted average has been about 21 and a half.

Well, as well as great. And then, you know, historically, CBU's appetite has been kind of half a 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 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 the appropriate risk and reward. It could be a little bit larger, but probably not by much.

I think that's a fair expectation going forward, great, thanks Joe, Dimitar, appreciate it. Again, if you have a question, please press star, then one. Our next question will come from Manuel Navis with D.A. Davidson.

Please go ahead.

This is Sharon G. Onn from Manual Novice.

Thank you so much. What are the biggest wildcards for driving positive operating leverage in 2020? So, thank you for that question. If you look at just the magnitude of our P&L, the biggest wild card for us is always N.I.I. So depending on where NII trends, you know, I think that's going to determine how much leverage we can drive in terms of efficiency to the bottom line. I think we feel reasonably good about our expense outlook for 2024 in terms of that mid-single digit rate off of the core base that Joe mentioned. So I think that side of the equation is a little bit easier to put your arms around, but, you know, what happens with NII, deposit-free mixing, Fed cuts, and pricing in the market is going to largely determine the outcome of operating leverage.

Operator: Thanks for taking my question. The next question will come from Steve Moss with Raymond James. Please go ahead. Good morning.

Stephen M. Moss: Good evening or good morning, Devin Tarver, just following up on loan growth for a second. You know, do you think for the upcoming year, total loan growth of, you know, six, seven hundred million, or just kind of curious as to, you know, the pace of loan growth, will it be, you know, still pretty strong, or what you think about it? Yeah, Steve, good question. You know, we generally come into the years thinking of kind of mid-single digits. We certainly outperformed in the past couple of years by quite a margin. But we didn't expect some of that. We didn't plan for it.

Thank you so much.

But when you've got great borrowers and opportunities, you kind of take what they give you. The pipelines are strong. They're not as strong as they were probably last year on the commercial side at this point, but still pretty strong. The residential pipeline is also pretty good.

Welcome.

The next question will come from Matthew Breeze with Stevens Inc.

Matthew M. Breese: Please go ahead.

Matthew M. Breese: Hey, good morning, everybody.

Good morning, Matt.

Good morning, Matt.

Matthew M. Breese: You know, the fee income growth as we go up and down the various business lines sounds pretty optimistic and robust.

Dimitar, I'm just curious about overall fee income as a percentage of revenues, which, you know, at nearly 40%, I think, is one of the largest differentiators of CBU versus your traditional bank competitors.

You know, we're still calling for mid-single digits. So, we kind of feel comfortable at that level as we sit here today, but it will depend a lot on the competitive dynamics and price as well. You know, we need to get paid for what we do. So, there will be some parameters around that as well. Okay, great.

Matthew M. Breese: I'm curious if, longer term, you have any goals, if there is a percentage of revenues you'd like fee income to represent.

Stephen M. Moss: And then on the employee benefits services side, you know, you sounded pretty upbeat about business development here going forward. I realized, also, during the quarter you had some tailwinds from, you know, fixed income asset appreciation. Just kind of curious, you know, how you're thinking about the overall revenue growth for that business line this year. 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.

Yeah, Matt, I think that's a good question. It's something that we talk a lot about at the board level and at the management level. And we run a diversified financial services company, not a bank with hobbies. So all of our four businesses are equally important to our ability to generate returns going forward, our ability to grow the dividend, and create sustainable earnings. So we've organized our company along those lines, too. 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.

Stephen M. Moss: It's been muted by the market. So, if asset values kind of stay where they are and we start really getting paid for all the organic growth we had and we continue to capitalize on pretty good pipelines in that business, we think that that kind of high single-digit metric is certainly achievable for us in 2024. Okay, great.

Matthew M. Breese: Thank you very much.

Thank you very much.

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. I would just add one comment to Dimitar's, which is that with four businesses, 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 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, you know, just, you know, kind of level the playing field is that, you know, we do have, you know, options to invest capital in four different businesses.

Stephen M. Moss: And also, for insurance, the insurance business, I realize it's a hard market, but you had some very good year over year growth. Just curious, you know, is it still close to a double digit pace there? I think I think that's fair for the current expectation. You know, we've grown that business at over 10% in the past three years. Last year was 18%, I think, between some of the continued opportunities on the M&A side, kind of the small roll-ups, and the market. And certainly, our teams are executing organically really well as well.

Joe: So double digit, I think, is certainly achievable for us in 2024. Great. And then on the margin here, just curious, you know, how you guys are thinking about the margin outlook for the next couple quarters and how you guys are feeling about things if we get some rate cuts here as the year progresses. Yeah, hi, Steve. It's Joe.

And I think, you know, the best option at the moment when we have those opportunities is how we kind of look at that, you know, capital deployment. Again, a lot of our, you know, peer institutions have one or maybe two businesses in which they can deploy capital, and we have four.

Matthew M. Breese: Okay. I understand all that. I just wanted to touch on, you know, your comments around, you know, the margin slash NII outlook. I mean, just curious. So, you know, given your overall level of deposit costs, and Sub1% 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 the Fed is cutting just because of that delta? And then the second question is, you mentioned deposits that reprice immediately. How much of the deposit base, in fact, does that mean?

Joe: I'll take that question. Uh, you know, I kind of laid out in my prepared comments, you know, our expectations for and just to make the distinction between net interest income and total 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, you know, that expectation is really sort of built on the fact that we've had significant loan growth, you know, over the last year or so, and that continues, and that's going to allow us to, you know, improve overall earnings asset yields. And so we expect that to drive, and then, and then the other side of that is obviously that we expect funding costs 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. You know, there's just a shorter day count in the first quarter.

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, at which 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 lag effect when the Fed is not moving and deposits are still fluctuating.

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. Yeah, so Matt, we do have... you know, approximately $7 billion of them are non-time deposits that are interest-bearing, right? So that's comprised of interest checking and savings in the money market, and the money market being the more sensitive of the group there. And the money markets total about $2.4 billion on roughly a $13 billion base. Savings accounts are about $2.3 billion, and interest-bearing checking accounts are about $2.9 billion.

Joe: But, you know, our expectation is that sort of as we get beyond that, we will potentially see expansion and net interest income with respect to the margin. I noted again in my prepared comments that we took down some borrowings at about four and a half percent, and new loans went on the books at about seven and a half percent. You know, so in this, you know, I'll call it, the latest round of loan funding and origination, we generated just about a 3% margin on that. So the expectations for us are that, potentially, the 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.

So if we have a reduction in the rates at the Federal Open Market Committee and the Fed funds rate comes down by a quarter, that's the opportunity set for us. I would just emphasize that money market deposits are the more sensitive of those three portfolios.

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

Yes, I think with respect to the current rate environment, you know, 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, you know, hold in there on our new rates and new originations. And, you know, obviously, if we can get a down stroke or two 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, 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. I appreciate all the callers, Dimitar and Jeff.

Matthew M. Breese: Okay, understood, thank you. And then I did wanna touch on the securities portfolio. I mean, judging from the swing in rates, it's safe to assume that a lot of that higher move is really valuation driven versus purchase driven. And then secondly, could you just remind us what the cash flows are and what the outlook for that portfolio is in 2020?

So Matt, with respect to the cash flows, we have somewhat limited cash flows in 24 and 25, less than $100 million in each of those years, and if you recall we did the repositioning back in the first quarter, we pulled forward most of the cash flows that we're basically coming to in 2024 and 2025. We get to some more significant cash flows in 2026 and 2027, on a combined basis, about a billion dollars in those years and then another billion or so in 2028 and 2029.

Matthew M. Breese: So we have just effectively pulled forward those cash flows.

We also potentially have potentially small opportunities later in the year if we continue to kind of see this rate environment to pull forward some, and 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 hundred million dollars if, Thank you for joining us, we see that opportunity here in the coming quarter.

Chris O'connell: The next question will come from Chris O'Connell with KBW. Please go ahead. Hey, good morning. Of course, I just wanted to follow up on the NIMH discussion. You guys have been holding in very well on the funding cost side. Do you have any idea what the average CD cost was in Q4? on new CDs?

Matthew M. Breese: Sorry, I was trying to hit the mute button.

Matthew M. Breese: Thank you.

Matthew M. Breese: And then last one for me is just on credit, what you're seeing as the consumer goes into indirect auto loans, as commercial real estate rolls, and then how does that kind of filter into provisioning in the charge-off outlook for 2024? That's all I had.

Operator: No, just an average for the quarter. Yeah, so, provide that. Just give me a moment here, Chris.

Operator: 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 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 non-interest-bearing piece for us or the very low interest-bearing piece for us, which is about 68 percent of the balances right now. We've talked about 20 to 25 percent in terms of beta. I think we still feel comfortable in that range.

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 its impact for a couple of years now, and we, If you look at our substandard and special mentions, so if you kind of think of them as kind of the early warning buckets, they're still roughly half of where they were pre-pandemic levels. Um, So we've certainly moved up a little bit, Our charge-offs in our commercial business last year were one basis point. Our charge-offs in the auto business, which I know you love, were about 20 basis points, 22 basis points, and we consistently believe that they should be higher.

Operator: We're pretty close to the low end of that, so it might be, depending on how long this cycle takes, there are a few quarters after the Fed stops raising rates and even when they cut, there are a couple of quarters potentially of still kind of lingering impact of remix on the balance sheet, but kind of in that mid-twenties, mid-20s, 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, you know, time deposits, so the blended cost in Q4 is about three-thirds of Planned Parenthood. Great, and then, you know, on the borrowing side, as far as, you know, the bulk of them you guys have put on in the last couple of quarters, you know, in the mid-fours range for the balance, which is mostly those customer repurchase agreements, which I know act a little bit more like deposits in terms of, you know, their cost structure.

And I think what's happening behind a lot of that is, just the economic environment is such that when you have a low unemployment rate and a lot of government spending in the economy, it's really providing support to asset values across the board. You look at our mortgage business; we're going to have a little bit more delinquencies as things normalize, but when we take these things through the process, we get paid fully because the values of housing in our markets are actually back up.

They're actually higher than they were, you know, when we talked about the peak on kind of a post-pandemic basis. Asset values are very high 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 on line.

You know, the collateral values, even on the commercial side, are holding in pretty well.

Operator: I mean, do you see more pressure on those costs as we enter 2024? I think typically we do see a significant repricing opportunity 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, you know, overall, these are not high-cost funding sources, a high-cost funding source for us on a, you know, on a complete blended basis in Q4, about 1.5 percent, because it's largely, you know, kind of operating in nature, a lot of these accounts, so it's not a high cost of funds. Great. And just kind of tying it all together on the margin, I mean, you know, in the event that we start getting, you know, Fed fund cuts, you know, around mid year, the initial reaction on the margin, you know, just off of that first quarter, do you expect that to be, you know, directionally, upward or downwards in any sense of the magnitude? Chris, I think...

You know, those businesses are profitable.

We have not seen anything that's kind of consistent in terms of pressure on a specific geography or an industry.

And again, when the government is spending so much money, that deficit is the private sector surplus. So that's supporting just a lot of liquidity in the system and activity. And as we've talked before, in our markets, you know, for the first time in a long while, we're actually getting a little bit of an economic lift from the spending around some of the kind of advanced technologies, the CHIPS Act, you know, all of that stuff is helping our geographies. Great.

Matthew M. Breese: I appreciate all that.

Matthew M. Breese: That's all I had.

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

Chris O'connell: Please go ahead. I just wanted to follow up on the $2.4 billion in money market that you guys mentioned.

Chris O'connell: Do you have any idea what the rate on those is today or in the fourth quarter?

Yeah, on a blended basis, Chris, it's about 2%.

Chris O'connell: Thank you.

This concludes our question and answer session.

I would like to turn the conference back over to Mr. Kirovanov for any closing remarks. Please go ahead, sir.

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

Operator: The really hard question there is what continuing remix will happen on the balance sheet in the year or in the quarter. I think if everything else is equal and we get a rate cut. We do have a number of accounts that will immediately reprice down, predominantly in the money market space, 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 the 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. Rae

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Joe: 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 percent on a go-forward basis. I think I mentioned in my prepared comments that for the last two years, the weighted average has been about 21.5. I think that's a fair expectation going forward. Great. Thanks, Joe, and Dimitar. I appreciate it. Again, if you have a question, please press star, then 1. Our next question will come from Manuel Navis, with D.A. Davidson. Please go ahead. This is Sharon G. Onn from Manual Novice.

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Sharon G. Onn: Thank you so much for taking my question. Um, so I was wondering, what are the biggest wildcards for driving positive operating leverage in 2020? Thank you for that question. If you look at just the magnitude of our P&L, the biggest wild card for us is always NII. So, depending on where NII trends, you know, I think that's gonna determine how much leverage we can drive in terms of efficiency to the bottom line. I think we feel reasonably good about our expense outlook for 2024 in terms of that mid-single-digit rate off of the core base that Joe mentioned. So, I think that side of the equation is a little bit easier to put your arms around. But, you know, what happens with NII, deposit remixing, Fed cuts, and pricing in the market is going to largely determine the outcome of operating leverage. Thanks so much.

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Matthew M. Breese: Have a great day. The next question will come from Matthew Breese with Stevens Inc. Please go ahead. Hey, good morning, everybody.

Matthew M. Breese: Good morning, Matt. Good morning, Matt. You know, the fee income growth as we go up and down the various business lines sounds pretty optimistic and robust. Dimitar, I'm just curious about overall fee income as a percentage of revenues, which, you know, at nearly 40%, I think, is one of the largest differentiators of CBU versus your traditional bank competitors. I'm curious if, longer term, you have any goals, if there's a, you know, percentage of revenues you'd like the income to represent. Thank you. Thank you.

Yeah, so, Matt, I think that's a good question. It's something that we talk a lot about at the board level and at the management level. And we run a diversified financial services company, not a bank with hobbies. So all of our four businesses are equally important to our ability to generate returns going forward, our ability to grow the dividend, and create sustainable earnings. So we've organized our company along those lines. For example, I've got four direct reports for each 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. But we don't really think of it as a hard and fast number of kind of where we want to be.

I think the more diversified we can be, the better. But ultimately, it comes down to the quality of earnings. And certainly in the banking business, there are 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 them and the quality aspect to them.

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...

Transcribed by https://otter.ai, 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. I would just add one comment to Dimitar's, which is that, with four businesses, 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 options. And there are times when opportunities present themselves in different businesses.

Operator: 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 to level set that thinking is that we do have options to deploy capital in four different businesses. And I think the best option at the moment when we have those opportunities is how we look at that capital deployment. Again, a lot of our peer institutions have one or maybe two businesses in which they can deploy capital, and we have four. Okay. I understand all that. I just wanted to touch on, you know, your comments around, you know, the margin slash NII outlook. I mean, just curious.

So, you know, given your overall level of deposit costs, sub 1% at this stage is pretty amazing. Dimitar, I think you suggested that, you know, with rates down, we'll see a lag, but is it possible for a time that we may even see kind of a negative deposit beta, meaning, you know, deposit costs at your institution continue to decline as the Fed is cutting just because of that delta? And then the second question is, you 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 number, 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, of our deposit costs increasing quarter by quarter is consistently lower than the aggregate industry and our peers. And I don't think that that will change.

Joe: So there will be some lag effect when the Fed is not moving and deposits are still mixing. 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. Yeah, so Matt, we do have, you know, approximately $7 billion of non-time deposits that are interest-bearing. So that's comprised of interest checking and savings, and money market. And the money market, being the more sensitive of the group there. The money markets total about $2.4 billion on roughly a $13 billion base. Savings accounts are about $2.3 billion, and interest-bearing checking accounts are about $2.9 billion.

Joe: So if we have a reduction in the rates at the Federal Open Market Committee and that funds come down by a quarter, that's the opportunity set for us. I would just emphasize that the money market deposits are the more sensitive of those three portfolios. Matt, maybe just to add a little bit to that, you know, we manage ALCO to a roughly neutral outcome in terms of rate exposure. So let's not forget about asset size. We've been lagging on the asset side of the cycle because we've got a more fixed profile on the asset side. So that's allowed us to, you know, our deposit base has allowed us to do that. It's also going to allow us, on the other side now, to have less of a pricing and repricing pressure on the assets in a down cycle. So that's why we kind of look at our margin as probably a little bit sideways, kind of in a plus or minus, you know, a few cuts type of scenario.

Okay, I understand. Thank you. And then I did want to touch on the securities portfolio. I mean, judging from the swinging rates, it's safe to assume that a lot of that higher move is really valuation-driven versus purchase-driven. And then secondly, could you just remind us what the cash flows are and what the outlook for that portfolio is in 2014? So Matt, with respect to the cash flows, we have somewhat limited cash flows in 2024 and 2025, less than $100 million in each of those years. If you recall, we did the repositioning back in the first quarter.

Operator: We pulled forward most of the cash flows. We get to some more significant cash flows in 2026 and 2027, on a combined basis, about a billion dollars in those years and then another billion or so in 2028 and 2029. So we just effectively pulled forward those cash flows. We also have potentially small opportunities later in the year if we continue to see this rate environment to pull forward some, 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 hundred million dollars; http://TheBusinessProfessor.com see that opportunity here in the coming quarters. Sorry, I'm trying to hit the mute button.

Matthew M. Breese: And then the last one for me is just on credit, what you're seeing as the consumer goes into, you know, new 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. 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 its impact for a couple of years now. And we. If you look at our substandard and special mentions, so if you kind of think of it as kind of the early warning buckets, they're still roughly half of where they were pre-pandemic levels, um, 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 and expected, although still well below the historical averages. Our charge-offs in our commercial business last year were one basis point; our charge-offs in the auto business, which I know you love, were about twenty basis points, twenty-two 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 that when you have a low unemployment rate and a lot of government spending in the economy, it's really providing support to asset values across the board. You look at our mortgage business; we're going to have a little bit more delinquencies as things normalize, but when we take these things through the process, we get paid fully because the values of housing in our markets are actually back up. They're actually higher than they were when we talked about the peak on kind of a post-pandemic basis. So asset values are very high due to limited supply. You know, 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 on line.

You know, collateral values, even on the commercial side, are holding in pretty well. You know, those businesses are profitable. We have not seen anything that's kind of consistent in terms of pressure on a specific geography or an industry.

And again, when the government is spending so much money, that deficit is the private sector surplus. So that's supporting just a lot of liquidity in the system and activity. And as we've talked before, in our markets, you know, for the first time in a long while, we're actually getting a little bit of an economic lift from the spending around some of the, kind of, advanced technologies, the CHIPS Act, you know, all of that stuff is helping our geographies. Great. I appreciate all that. That's all I had.

Chris O'connell: Okay. The next question is a follow-up from Chris O'Connell with KBW. Please go ahead. Hey, I just wanted to follow up on the $2.4 billion of money market that you guys mentioned. Do you have where the rates on those are today or in the fourth quarter? Yeah, on a blended basis, it is about 2%.

Operator: Great. That's all I had. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Korovanov 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.

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