ConnectOne Bancorp Inc

NASDAQ:CNOB

Earnings Call Analysis

ConnectOne Outlook Positive Despite Margin Pressure

In 2023, ConnectOne Bancorp navigated a tough banking environment with declining net interest margins due to Fed tightening. However, solid profitability, efficiency, and asset quality measures allowed it to remain strong. The company saw a 7% growth in C&I loans and an upward trend in noninterest-bearing deposits. Despite net interest margin compression of 5 basis points in Q4, the situation is stabilizing, and margins are expected to widen as deposit costs flatten and with anticipated Fed rate cuts. Dividends increased nearly 10% to $0.17 per share with plans for future hikes, and share repurchases are set to continue in 2024. Expenses are projected to rise by 5%-7% in the coming year.

ConnectOne's Perseverance through Challenges and Future Outlook

ConnectOne Bank navigated a difficult 2023 as the industry faced significant challenges due to the Federal Reserve's tightening policy, which impacted earnings and caused net interest margin contraction. Despite these conditions, the company reported strong loan growth, an increase in tangible book value per share by over 6%, and assured investors of its commitment to disciplined growth strategies and maintaining sound credit practices. The firm anticipates gradual, opportunistic growth and net interest margin recovery in 2024, supported by a flattening of deposit costs and an ease of interest rates by the Fed.

Financial Strength and Commitment to Shareholder Value

ConnectOne highlighted its financial health, marked by a strong equity ratio of 9.3% and subsidiaries bank leverage ratio at 11.20, alongside a consistent increase in tangible book value per share, now above $23. In a move demonstrating commitment to shareholders, ConnectOne increased its common stock dividend nearly 10% to $0.17 a share and indicated potential for another increase, while planning to continue share repurchases with 900,000 shares left in the authorization for 2024.

Credit Quality and Efficiency

During the quarter, charge-offs equaled approximately $5 million, which the company identifies as isolated and not significantly impacting earnings. Although credit quality metrics remain strong, the company acknowledges the possibility of more normalized charge-off ratios industrywide in the future. Regarding tax, an effective rate of 24.4% was recorded this quarter, with expectations to return to around 26%. The firm also maintained its stature as a disciplined and efficient institution with annualized operating expenses remaining below 1.5% of average assets.

Growth Strategies and Technology Investments

ConnectOne is driving future organic growth by continuing to focus on its C&I and construction segments, which are expected to be the main drivers of loan growth going forward. The firm is undertaking key technology initiatives like the implementation of mantle, aimed at improving deposit origination conversion rates. Additionally, as the bank approaches the $10 billion in assets threshold, it is proactively addressing potential regulatory costs and containment strategies to minimize impact on financial performance.

Optimism for Increased Profitability

Management expressed optimism for enhanced profitability, especially post-2024. They foresee a scenario where despite lower interest rates, the bank's adjustable loan portfolio will reprice higher, driving up loan yields, and coupled with potentially lower deposit costs, to achieve a net interest margin over 3.40. This strategic positioning could place the bank in a favorable position to achieve a return on assets (ROA) above 1%, aligning with historical performance levels.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the ConnectOne Bancorp, Inc. Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions]. I'd now like to turn the conference over to Siya Vansia, Chief Brand and Innovation Officer. Please go ahead.

[Siya Vansia, executive]

Good morning, and welcome to today's conference call to review ConnectOne's results for the fourth quarter of 2023 and to update you on recent developments. On today's conference call will be Frank Sorrentino Chairman and Chief Executive Officer; and Bill Burns, Senior Executive Vice President and Chief Financial Officer. I'd also like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8-K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

[Frank Sorrentino, executive]

Thank you, Siya, and good morning, everyone. Thanks for joining us today. ConnectOne persevered through an environment marked by significant challenges and risks as 2023 was a complicated period for the banking industry. Fed's unprecedented tightening had an adverse effect on industry earnings, including ConnectOne's causing a contraction in net interest margins. But our key profitability measures, efficiency and asset quality ratios were solid, we remained a focused, disciplined and strong financial institution. I am proud to say the continued strength of our balance sheet, our culture and the commitment of our entire organization, we were able to stay the course and continue the path that has made ConnectOne a success since our inception nearly 20 years ago. As I've discussed many times over the years, providing unparalleled support for our clients has always been a strategic priority for ConnectOne. This isn't anything new. But it's this philosophy, consistent track record and an approach that I believe positions us to outperform in 2024 and beyond. Now let me turn to some of the recent highlights and the near-term outlook. Throughout the course of the past year, we strengthened our capital and liquidity levels and entered 2024 with a fortified balance sheet that positions us to support both existing and new clients. Reflecting ConnectOne's long-standing focus on relationship-based lending during the fourth quarter, we had strong sequential C&I loan growth of nearly 7% and saw a positive traction in noninterest-bearing demand deposit trends. Looking ahead, while our loan pipeline remains robust, we will continue to be disciplined while maintaining our sound approach to both credit as well as spreads. Overall, we currently anticipate continued gradual opportunistic growth in 2024. Bill will discuss this momentarily, our fourth quarter net interest margin compressed sequentially, and trends seem to be stabilizing. We're seeing a flattening of deposit costs and anticipate that the margin will widen as the Fed eases its interest rate stance. For the year, we were also able to increase our tangible book value per share by more than 6%, a metric that we've consistently increased since ConnectOne's inception almost 20 years ago. Additionally, while ConnectOne's efficiency ratio has been impacted by the compressing margins, our annualized operating expenses remain below 1.5% of average assets, placing us among the top tier of efficiency among banks. Turning to credit. ConnectOne's metrics remain solid, reflecting our high credit standards, our relationship-based client philosophy and our track record of avoiding riskier subsegments. Additionally, we have been and will continue to be proactive in prudently maintaining reserve levels commensurate with our growth. Bill obviously will provide some more on credit metrics in a few minutes. Supporting ConnectOne's focus on driving superior growth and profitability over the long term, we've also continued key technology initiatives. This includes efforts to enhance the client experience while expanding opportunities to support our deposit franchise. Further, to drive future organic growth, we continue to hire quality talent away from other banks, adding to an already experienced team of bankers here at ConnectOne. Finally, we remain committed to enhancing shareholder value. Last year, we increased our common stock dividend nearly 10% to $0.17 a share and will consider another dividend increase in the next quarter. Our stock outperformed much of the industry during 2023, but we still believe it's undervalued and will continue share repurchases in 2024. In closing, we firmly believe that ConnectOne's financial strength, conservative client-centric model, talent base and a track record of prudent underwriting and profitability position us to capitalize on emerging opportunities to enhance ConnectOne's valuable franchise. As we plan ahead and remain committed to our client-first operating model to drive deposits even in a competitive market, we'll look to maintain continued emphasis on growth of our C&I division as our new team members continue to build momentum, and we're also excited about the opportunities to strengthen our position in both Long Island and South Florida. We're projecting modest growth and remain well positioned to capitalize on opportunities across our markets. And so at this time, I'd ask Bill to review our fourth quarter and year-end financial highlights. Bill?

[William Burns, executive]

All right. Thanks, Frank. Good morning, everyone. So as I've done in prior calls, I'm going to give more color on the fourth quarter and also provide some estimated forward guidance. Let me start off with deposits. Our client deposits grew sequentially as we continue to execute on initiatives and incentives for our team to accelerate deposit traction. And to that end, client deposits, which exclude brokered increased $100 million sequentially, which is about 5% annualized. And within that number, noninterest-bearing demand increased by $35 million, and that's an 11.5% increase on an annualized basis. I want to give you a little more color here. Monthly average noninterest-bearing demand increased each month from October through January. So with that, I feel confident that at a minimum, we've hit a floor here with potentially some growth going into 2024. The net interest margin contracted sequentially by 5 basis points. I think that's in line with the previous guidance I gave you, and it reflects a 22 basis point increase in our total cost of deposits, which is now up to 3.14%. Notwithstanding that increase in deposit costs, which is based on averages pertaining to the fourth quarter versus the third quarter. We saw a measurable slowdown in interest-bearing deposit rates, which were flat in December versus November. And that was due to CD repricing, which has essentially run its course. And then also with no recent Fed increases, savings and money market rates have stabilized. And with that, it appears that our margin will trough in the first quarter. I would say slightly below the fourth quarter level. And then going forward from there, I think we'll stick with our previous guidance that margin will expand with roughly 5 basis points of widening for each 25 basis point rate cut. As you know, there are many moving parts to modeling net interest margin forecast, but we feel relatively comfortable with the direction, the magnitude and the timing of our guidance. And the caveat to that guidance are nonrecurring items, such as prepayment fees, which can be difficult to predict and increased quantitative tightening, which would increase competitive pressures and therefore, slow the speed of deposit rate declines. As to the impact of loan portfolio yields, which is another component of NIM forecasting, we expect to benefit from a loan pipeline, which is predominantly wider spread C&I and construction while tighter spread multifamily originations have been limited. I do want to mention that we had very, very strong growth in C&I in the fourth quarter, but a portion was related to line usage, some of which has already been repaid. And although we anticipate a continuation of our emphasis on C&I growth, it will likely be lower than this past quarter. Moving on to noninterest income. Just want to mention one item here, and that is SBA loan sales, which have been running at about $500,000 per quarter. We expect to continue and improve on that pace throughout 2024. In terms of operating expense, we have essentially been flat the past 2 quarters. Annualized operating expense as a percentage of average assets remains less than 1.5%, and looking into next year, my expectation is for an approximately 5% to 7% increase in expenses with a larger share of that increase coming in the first quarter that usually works that way for us. There continues to be some inflationary pressures and there is still a tight labor market. Keep in mind, some of our decisions take into account revenue growth so we can and have adjusted midcourse in past years. Just a little bit on liquidity. Our liquidity position remains very strong by almost any measure, readily accessible liquidity remains well above 2x adjusted uninsured deposits and that uninsured deposit number excludes collateralized municipal deposits as well as intercompany deposits. So that number stands now at 22% of total deposits. Turning to capital for a second. Our tangible equity ratio of the company is very strong at 9.3%. That's up from 9%, 9.0% a year ago, while subsidiary bank leverage ratio reached 11.20 at year-end, up from $10.60 a year ago. Tangible book value per share has now surpassed $23. It has consistently increased for many years, dating back more than a decade and also was largely unaffected by AOCI. Repurchases for the fourth quarter were slightly more than 100,000 shares at an average price of 21%. That repurchase level was a bit below the prior quarter, but we have 900,000 shares left in our authorization. And I would expect to utilize that capacity in its entire during 2024. On credit quality metrics, it was an action that did not impact earnings or loan loss provisioning. We charge off taxi medallion loans that were previously reserved for in our allowance. That added approximately 20 basis points of the charge-off ratio for the quarter. Our tax loan portfolio is $10 million, and it's valued at $125,000 per value. In addition, we had charge-offs in the quarter totaling approximately $5 million, isolated select credits that did not materially impact earnings either. The annualized charge-off ratio for the quarter, excluding the taxi charge-off was 24 basis points. Credit quality remains sound as measured by positive trends we see in criticized and classified assets and delinquencies and there's no discernible trend in any sector or subsector. Nevertheless, we agree with Wall Street analyst models and that it's prudent to expect a more normalized charge-off percentage for the industry, which is a little higher than what was experienced in 2023. One last note on the effective tax rate. It was a little bit lower this quarter at 24.4%. That was due to a lower level of pretax income, but I'd expect the regular run rate to 24' to be back around 26%. And with that, Frank, back to you.

[Frank Sorrentino, executive]

Thanks, Bill. In summary, in what's been a challenging year for most of the industry, we at ConnectOne, yet again demonstrated our ability to perform in extraordinary times. While we're optimistic about 2024, we do expect it will have its challenges. However, with our strong capital foundation, our commitment to our core business and track record of navigating through uncertain times, our team is prepared to be opportunistic about the year ahead. As always, we appreciate your interest in ConnectOne, and thanks again for joining us today. Operator, we'll now open the line for questions.

[Operator]

[Operator Instructions] Our first question will come from the line of Daniel Tamayo with Raymond James.

[Daniel Tamayo, analyst]

And Bill, I appreciate all the detail on the NII guide and the margin as well. I guess I'll start on the -- on that. I appreciate the 5 basis points, but just curious like what all is going into that in terms of deposit pricing assumptions, what is going to be immediately replaceable versus you're hoping you'll be able to pass through that sort of stuff. Thanks.

[William Burns, executive]

Yes. There's a lot to our deposit makeup. But like I said in the call, we think we've maxed out what our interest-bearing balances are. And so I think first off, the deposit costs seem to be leveling off. And so we'll be able to pick up in margin by having our assets continue to reprice higher. So that's going to lead to the stopping of contraction and the beginning of a widening of the margin. And then as the Fed cuts, and when our models show about 4, we have 4 cuts throughout the year. We've got right now, we're modeling about a 50% beta on that. So I don't know if that helps you -- helps answer your question.

[Daniel Tamayo, analyst]

No, that's helpful. And you're modeling that to take place immediately or with a bit of a lag?

[William Burns, executive]

Well, like I said, it's -- there's a lot of moving parts. So I am actually saying it's concurrent with it. So it's 50 basis -- it's 50%. There's different ways of looking at beta. You can look at it as it's immediate 50% or you could look at that as a lag that gets to 100%. But the way the model works, we have at 50% in MDA.

[Daniel Tamayo, analyst]

Got it. And then maybe one for Frank, just on the loan growth. I know, Bill, you also mentioned that you're expecting C&I to slow from the strong growth that you saw in the fourth quarter, but wondering if you could just kind of put a finer point on what type of loan growth you're expecting this coming year.

[Frank Sorrentino, executive]

Sure. I think we've mentioned a number of times that we've been focusing a lot on our construction portfolio. We think it's actually a really great asset class at this point in time, notwithstanding the fact that interest rates are higher. There's a tremendous amount of demand for the product that most of our builders are bringing to market. And we're seeing that with complete projects. And so we've continued to expand not only the size of the portfolio, but also the geographies in which we operate in. And so we're pretty excited about that. And as you know, over the last 10 years, we've been saying that we've been slowly but surely building out our C&I team. And pretty much every quarter, we see more and more C&I loans coming into the portfolio. And that's just an evolution that's occurring that we're pretty happy about deemphasizing a little bit of the commercial real estate and a little bit more on the commercial side. So I'm pretty confident that those trends will continue. As you know, in the -- certainly in the greater New York market, we're woefully under housed. And so I don't see anything that's going to change my opinion about the housing market or the construction market in general, at least not at the moment. And in the C&I world, when you look at the strength of businesses today, their balance sheet in some of the best shape they've ever been, notwithstanding some of the changes since the end of COVID. But businesses in general in and around the New York market are doing quite well. And so we're pretty confident about the types of businesses that we've been in, whether it's in the school space, whether it's in light manufacturing, whether it's in the health care environment, all of those areas all have very, very promising futures. And so we keep building the capabilities to service those clients and they like the ConnectOne model. So...

[Daniel Tamayo, analyst]

So you expect growth to accelerate as the year goes on as your pipelines kind of fill back up? Is that a good way to think about it?

[Frank Sorrentino, executive]

I wouldn't call it an acceleration necessarily. I think we will have growth. As I said in my comments, I think the year is going to be a challenging one overall for a lot of different reasons. But I do think that we will, as we did in this last quarter, eke out growth, and it will be on an opportunistic basis. I really don't want to project whether it's going to be 3%, 5%, whatever, 10%. I think it's going to be on a one-off opportunistic basis. We're doing things that seem to make sense. We'll be happy with any growth this year. I think there will be growth. But again, there are a lot -- notwithstanding all of my positive comments. We are involved in 3 wars. We have an uncertain set at this moment. We have a presidential election coming up. There's lots of things that give me pause about where we may or may not be going forward and the competitive environment, while we found it to be favorable for us at the moment, I'm not so sure it's going to stay that way going forward.

[Daniel Tamayo, analyst]

All right. Understood. I appreciate all the color. I'll step back.

[Operator]

Your next question comes from the line of Frank Schiraldi with Piper Sandler.

[Frank Schiraldi, analyst]

Just wondered, just following up on the NIM dynamics. I mean, Bill, is it -- so just the 5 basis points, I guess, for a given 25 basis point rate cut that I would assume it sounds like you have kind of a steady beta, but is it may be reasonable to assume that deposit pricing that -- that 5 basis points is sort of average 25 bps. And if there is some lag, it could take maybe a little bit longer to run through the NIM, if there's some lag in deposit pricing. Is that the best way to think about it?

[William Burns, executive]

That certainly could happen, but that's not exactly what I was trying to communicate to you because it's -- it could be -- the beta could be higher with a lag. There's 2 ways to do it. You're going to have a higher beta with a lag or 50% in media. And the way the model runs out on the different scenarios, the best way to run the model, in my view, is to improve -- if the average rate for a quarter is up x percent, the 20% of that number in terms -- sorry, if the Fed funds rate is down on average by a certain number of basis points, I predict our margin will be up 20% of that number.

[Frank Schiraldi, analyst]

Right. Okay.

[William Burns, executive]

I wouldn't really put a lag on the 50%.

[Frank Schiraldi, analyst]

Okay. And then just in terms of growth to the extent you get it and you talked about some of the higher-yielding products that there's some opportunity even if C&I growth isn't as great as it was in the quarter. Just wondering your thoughts on aside from the Fed and deposit rates stabilizing overall, just where net new business is coming on the books in terms of loan yields versus the funding cost as new business comes on.

[William Burns, executive]

Yes, what the spreads are on our business. And the good thing about C&I is it generally comes along with the deposits, and that's why we're focused on C&I. But I think the spreads are 300 to 400 basis points on C&I lending and similar for construction. Could be little higher structure.

[Frank Schiraldi, analyst]

Okay. And then just thinking through just I think you said maybe the 5% to 7% expense growth year-over-year.

[William Burns, executive]

Yes, that's what I have modeled in. There's still inflationary pressures. Labor market is still a little bit tight. And so a lot of that is compensation expense. We usually see a bigger uptick in the first quarter. But when I look at my current projections versus the total to 23%, I come to the 5% to 7% range.

[Frank Schiraldi, analyst]

Okay. Is there anything baked in or maybe you can just remind us in going through the threshold of $10 billion in assets, timing there and any incremental costs that might be baked into that 5% to 7% growth.

[William Burns, executive]

Well, we're almost already there. The -- this pullback and the Fed tightening slowed things down, but we were ready to go over. And so everything we're doing today from a regulatory perspective is if we're already there.

[Frank Schiraldi, analyst]

Okay. So it's already baked in. And then if I could just sneak in the last one, just on buybacks. I always thought you guys were sensitive around tangible book value and you buy back if the stock get below. And it looks like in the quarter, you were buying on average below tangible book. But it sounds like maybe that's not the right way to think about it going forward, Bill, you said maybe less price sensitive than that and anticipate completing the program this year?

[William Burns, executive]

Yes. I mean I do remember saying that it makes all the sense in the world when it's below tangible book -- but even now, given our retained earnings and the growth and the dividends, we still have room to buy back stock. And the 900,000 shares over the course of this year and what we're seeing in terms of earnings to me is not a dramatically large number. So I feel very comfortable with that. I can't say it any price, but for the foreseeable future, I would say on that plan.

[Frank Schiraldi, analyst]

Okay, thanks for the color.

[Operator]

Your next question comes from the line of Michael Perito with KBW.

[Michael Perito, analyst]

Hey guys. Happy to hear from you. Just a couple of follow-ups. One on the -- just on the balance sheet makeup. As we think about the loan opportunities and being opportunistic, Frank, and the environment we're coming out of still in, I mean, is it -- do you guys expect in the budget for the loan-to-deposit ratio to maybe drift low, does deposit growth kind of steadily outpace loan growth? Just I don't even know if it's a caution or what the right word for it is, but is that just kind of the norm we're in for now in terms of what you guys would hope to see on the balance sheet growth side or not necessarily?

[Frank Sorrentino, executive]

Look, I know opportunistic is a really big, wide word, but it really defines who we are and who we've been as a company. We've operated anywhere from about 105% loan-to-deposit ratio up as high as 120%. We've averaged around where we are right now. We've been bouncing around between 108% and 112% and sort of around 110, I think is where we are at the moment. Yes, I'd like to see that number come in a bit just based on changes in the marketplace and things that we've seen, I think are doubling down on really reexamining the entire balance sheet and portfolio and list of clients and making sure we have the relationship type clients that we are determined to have, I think, will pressure that loan-to-deposit ratio lower. So I'm happy about some of the results we saw there. We saw it on -- in some of the lending attributes relative to a little bit more C&I, a little bit more construction. So I think over time, yes, I would say all things being equal, that number should drift down. But again, we're going to be opportunistic. There's a great opportunity to onboard a client that we think is going to create a lot of value for us going forward. We're going to do that. And so I don't want to guide to a number, but I would say that the general direction would be for a lower loan-to-deposit ratio.

[Michael Perito, analyst]

Helpful. And maybe switching over to an expense growth question. Just on the SBA side, I mean, when you talk about the 5% to 7% expense growth, Bill, I imagine there's still some like FTE adds maybe not on a net basis, but like commercial lenders, SBA producers in the budget. Can you talk about that business? And it seems like that's probably the most capital-efficient fee growth opportunity you guys have on the horizon. I just want to try and get a better handle of what that opportunity looks like today.

[William Burns, executive]

Yes. I think we continue to build that out there for us with some great people there and make sure we have the right support for an increased portfolio and volume going through there. But it's take into the numbers. We're not adding -- we're not doubling the team. We've added people kind of one at a time around the organization. Same token. There are people that have left the institution. And so we think we've upgraded around the organization. We've hired some great people, some others have left and the staff count increase has actually not been that high.

[Michael Perito, analyst]

Okay. And then just lastly for me, just as we think about '24, some of the initiatives you guys have announced over the last couple of quarters like Nimbus or even longer-dated stuff like BoeFly. Any kind of deliverables or certain things that you're comfortable telling us from an expectation standpoint about where we can maybe start to see some of those things impact financials in '24? Or is it still not entirely kind of clear yet the timing of some of those benefits?

[Frank Sorrentino, executive]

I think on the case of BoeFly, we've seen a lot of improvements around the entire company. It's part of what's driving our SBA division, and you're seeing some of those numbers there. We have been increasing pretty dramatically the number of franchisers that we service on the BoeFly platform, which is driving other incremental business into the organization. BoeFly really acts as sort of a linchpin or a center pin for lots of other things that are going on within the company, which just show up in other places and hard to just put on a BoeFly balance sheet or financial statement. But we're very, very happy with the results that are accruing there. And at some point, I do think we will be able to show some level of financial metrics for that unit. On the Nimbus side, we've just launched that family and friends recently. The platform is up and running, and we're seeing some successes there. I don't have to remind you that, that entire vertical was turned upside down in March and April. And so we're rethinking how we're going to go after that marketplace and where do we want to add value for that specific vertical. But the Nimbus platform is up, Venturon is live, and we're pretty confident that, that's going to make a difference as we move through '24 and into '25.

[William Burns, executive]

We're also implementing mantle throughout the organization, the omnichannel deposit origination. And what the hope there is that we improve conversion rates, and that will lead to higher deposit origination.

[Michael Perito, analyst]

Great. Very good guys.

[Operator]

[Operator Instructions] Your next question comes from the line of Nick Cucharale with Hudbay Group.

[Nicholas Cucharale, analyst]

Just to follow up on the composition of the loan growth. Just given the strong C&I momentum and the positive construction commentary, is it your expectation that most of the loan growth this year is driven by those 2 segments?

[William Burns, executive]

Yes. C&I and construction. Yes, I think that's fair. Yes, I think there are other CRE opportunities that are out there that we continue to -- we're not abandoning any of our clients or any of the verticals that we're in. So -- but we are seeing momentum and we have seen for years, momentum building in the C&I portfolio. And construction has always been a place where we've had a very deep amount of experience. And as you know, that portfolio rises and falls depending on what's going on in the economy. I have to tell you, I don't think I've ever seen a stronger time or a better time to be in construction based on the demographics, based on what's going on, based on where people want to live and based on just the available supply of housing units. So I would look to increase it even more if I could. As you know, it's a very fast-moving asset. So as quickly as you put it on the books, it comes off. So typically, these projects last anywhere from 10 or 11 months out to 18 or so months. So the turnover is very, very quick in the construction portfolio. So even maintaining standing still in that portfolio means they're putting a lot of assets on.

[Nicholas Cucharale, analyst]

It's very helpful. And then as it relates to the $10 billion in asset threshold, is there an incremental cost that you need to incur? Or is that already baked into the numbers? And then secondarily, are there any containment strategies you plan to pursue in order to manage that crossing until 2025?

[William Burns, executive]

I would say no. I mean, we continue to build risk controls related to being over $10 billion. So it's -- yes, there's more to come, but it's no more of an increase than what's in those numbers that I'm forecasting for you.

[Nicholas Cucharale, analyst]

Perfect. And then just lastly for me, just to clarify on the 5% to 7% expense growth guide, that year-over-year increase excludes the special assessment in the fourth quarter, correct?

[William Burns, executive]

Correct.

[Nicholas Cucharale, analyst]

Thanks for taking my questions.

[Operator]

Our final question comes from the line of Matthew Breese with Stephens.

[Matthew Breese, analyst]

Just hoping for some additional color on new loan yields. I heard you loud and clear on C&I and construction spreads. As you look at the pipeline today, what is kind of the blended all-in rate? And oppositely, what is rolling off as you put these in long term?

[William Burns, executive]

Well, it's about $825 million to $850 million is the new rate going on. And the loans coming off is about 7%. So is that based on the volume and that spread, it does add basis points, 5 to 8 basis points a quarter as we move forward. In the past, we've had expense deposit costs increased greater than that. So it really depends on how much volume we see going forward. The greater the growth rate, the greater the increase in our margin, in my view.

[Matthew Breese, analyst]

Considering what you just said that the loans coming off a 7% range, what's going on is north than 8%, but then considering your average loan or this quarter is kind of 80-ish. Does that imply that the pace of payoffs is really slow right now? Or could you characterize...

[William Burns, executive]

Okay. Yes. So it is slow. And that number relative to the size of the $9 billion interest earning assets is isn't as big as you might think. And so the impact of it is not all that great.

[Frank Sorrentino, executive]

5 years ago, we were less than $5 billion in size. We were half the size -- so those loans that are renewing are small relative to the...

[Matthew Breese, analyst]

That's right. Okay. And then considering what you just say which is the north of 8% stuff is going on, and we're starting to see stability in deposit costs. It feel like to me as we enter the middle part of the year that the NIM expansion on Fed cuts should be greater than 5 basis points.

[William Burns, executive]

Well, it could be, Matt. I am being conservative, I'll tell you why. I am -- the one worry I have is the quantitative tightening is even more than we expect, and that's going to suck deposits out of the system and make the competition for deposits greater and it's going to slow the decline in the rate of deposits, which means the beta 50% could be lower. So that's the offset to the projection you just sort of just made. It's not just a rate gain.

[Matthew Breese, analyst]

Right. Understood. Okay. And then... I'm sorry, Bill to interrupt you, go ahead.

[William Burns, executive]

No, go ahead. No, go ahead, I'm sorry.

[Matthew Breese, analyst]

You had mentioned kind of a normalization of charge-offs. That being said, the reserve was down 10 bps this quarter. I'm assuming some of that was taxi, but I was hoping you could just comment on the overall reserve level heading into a year where credit might normalize. Should we anticipate some build throughout the year?

[William Burns, executive]

Yes, you were a little bit garbled there, but we had about -- I think it was 15 or 16 basis points of charge-offs on '23 -- there's nothing that I see specifically that's making me say the number should be larger. But I think everyone is sort of agreeing that in the 20s is not a bad way to project charge-offs. So that's one part of your question. The other is the reserve ratio. It went down, but it's more of an accounting geography because those balances -- those reserves were in a specific reserve, and they were taken out and take it off a loan balance. So there was no real change to our allowance coverage per se. And being under one listen, this is the way our CECL model works. We have a lot of additional qualitative amounts in there. And so we feel very comfortable with where our allowance is today.

[Matthew Breese, analyst]

Okay. And then along the credit lines, can you provide us an update of what your -- I know it's small, but your rent-regulated multifamily. What's the exposure there? And have you seen any sort of credit deterioration.

[William Burns, executive]

It was under $100 million. And for the most part, doing well, there's 1 or 2 situations that we're working on, but we're working through those. We have a lot of tools in our arsenal for it. So I don't see anything material coming from that small portfolio.

[Matthew Breese, analyst]

Okay. And then last one for me. I've covered you guys for a long time, the challenging rate challenging macro environment. I think given that you're generally under earning, particularly versus kind of historical levels. As you look out '24, '25, when do you think you can get profitability as measured by ROA back to over 1% level, somewhere where we're more accustomed to seeing you.

[William Burns, executive]

Well, I am optimistic about the years beyond '24. There's a lot of this -- there's hundreds of millions, if not billions of loans that are going to reprice either maturing or adjustable rate. So even though rates are coming down, our adjustable portfolio is going to reprice higher. So when you combine all those things, where rates coming down, potentially that we could be in a situation where our deposit costs are going down and our loan yields keep going up, and that will get us to spreads over 3.40. And if we're in that level, we would certainly be at back to 15% ROE.

[Matthew Breese, analyst]

Got it. Okay. That's all I had.

[Operator]

I'll turn the call back to management for any closing remarks.

[Frank Sorrentino, executive]

Well, thanks again for everyone's time today. And certainly, we look forward to speaking to you again during our first quarter conference, a call that will take place in April. So everyone. Have a very nice day. Thank you.

[Operator]

That does conclude today's conference call. We thank you all for joining. You may now disconnect.