Q4 2023 ConnectOne Bancorp Inc Earnings Call
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 connect one Bancorp, Inc. Fourth quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I'd like to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question Press Star One again I'd now like to turn the conference over just to give NCI Chief brand and innovation Officer. Please go ahead.
Good morning, and welcome to today's conference call to review connect one'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 Executive Vice President and Chief Financial Officer I'd also like to caution you that we may make forward looking statements during today's.
Frank Joseph Schiraldi: The conference call that are subject to risks and uncertainties.
Frank Joseph Schiraldi: Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings the.
Frank Joseph Schiraldi: 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 that 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 schedule, which has been filed today on form 8-K.
Frank Joseph Schiraldi: The SEC and May also be accessed through the Companys website I will now turn the call over to Frank Sorrentino. Frank. Please go ahead. Thank you Steven and good morning, everyone. Thanks for joining us today.
Can I ask one persevered through an environment marked by significant challenges and risks as 2023 was complicated period for the banking industry.
Frank Joseph Schiraldi: The fed's unprecedented tightening had an adverse effect on industry earnings, including Kinect, one, 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.
Frank Joseph Schiraldi: 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 connect one of success since our inception, nearly 20 years ago.
Frank Joseph Schiraldi: As I've discussed many times over the years, providing unparalleled support for our clients has always been a strategic priority for Kinect one.
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.
Now, let me turn to some of the recent highlights in the near term outlook throughout the course of the past year, we strengthened our capital and liquidity levels and entered 2024 with a four to five balance sheet that positions us to support both existing and new clients.
Frank Joseph Schiraldi: Reflecting connect <unk> 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 noninterest bearing demand deposit trends.
Frank Joseph Schiraldi: 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.
Frank Joseph Schiraldi: 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 stats for.
Frank Joseph Schiraldi: 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 connect one inception.
Frank Joseph Schiraldi: Almost 20 years ago.
Bill Smith: Additionally, while <unk> efficiency ratio has been impacted by the compressing margins our annualized operating expenses remained below one 5% of average assets, placing us among the top tier of efficiency among banks.
Bill Smith: Turning to credit generic ones metrics remained solid reflecting our high credit standards, our relationship based client philosophy, and our track record of avoiding riskier sub segments.
Speaker Change: Additionally, we have been and will continue to be proactive and prudently maintaining reserve levels commensurate with our growth Bill obviously, we'll provide some more on credit metrics in a few minutes.
Bill Smith: Supporting connect one is focused 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.
Bill Smith: Further to drive future organic growth, we continue to hire quality talent away from other banks.
Bill Smith: Adding to an already experienced team of bankers here at connect one.
Bill Smith: Finally, we remain committed to enhancing shareholder value last year, we increased our common stock dividend nearly 10% to 17 cents per share and will consider another dividend increase in the next quarter.
Bill Smith: Our stock outperformed much of the industry during 2023, but we still believe it's undervalued.
Bill Smith: And we will continue share repurchases in 2024.
Bill Smith: In closing, we firmly believe that connect <unk> 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 connect ones valuable franchise. As we plan ahead, we remain committed to our client first operating model to drive the <unk>.
Bill Smith: Posits even in a competitive market.
Bill Smith: We will look to maintain continued emphasis on growth of our C&I division as our new.
Team members continue to build momentum.
Bill Smith: We will also we're also excited about the opportunities to strengthen our position in both long Island and South Florida.
Bill Smith: We are 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 Alright. Thanks, Brian 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.
Bill Smith: Forward guidance.
Bill Smith: Let me start off with deposits are client deposits grew sequentially as we continued to execute on the 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.
Bill Smith: Demand increased by $35 million and Thats, an 11, 5% increase on an annualized basis.
Bill Smith: To give you a little more color here monthly average non interest bearing demand increased each month from October through January so with that I feel confident that at a minimum we hit a floor here with potentially some growth going into 2020 for the net interest margin contracted sequentially by five basis points I think thats in line with.
Bill Smith: Previous guidance I gave you and it reflects a 22 basis points increase in our total cost of deposits, which is now up to $3. One four notwithstanding that increase in deposit costs, which is based on average as it pertains to the fourth quarter versus the third quarter, we saw a measurable slowdown in interest bearing deposit rates, which were flat in December.
Bill Smith: 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 of margin will expand with roughly five basis points of widening for each 25 basis point rate cut.
Bill Smith: 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 or nonrecurring items, such as prepayment fees, which can be difficult to predict.
And increased quantitative tightening, which would increased competitive pressures and therefore slow the speed of deposit rate declines.
Bill Smith: As to the impact of loan portfolio yields, which is another component of NIM forecasting we expect to benefit from our loan pipeline, which is predominantly wider spreads 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 move.
Bill Smith: Moving onto non interest income what I mentioned, one item that is SBA loan sales, which have been running at about 500000 per quarter, we expect to continue and improve on that pace throughout 2024.
Bill Smith: In terms of operating expense, we have essentially been flat the past two quarters annualized operating expense as a percentage of average assets remained at less than one 5% and looking into next year. My expectation is for an approximately 5% to 7% increase in expenses with a largest share of that increase coming in the first quarter.
Bill Smith: Usually it works that way for us.
Bill Smith: There continues to be some inflationary pressures and there is still a tight labor market keeping keep in mind some of our depending said decisions take into account revenue growth. So we can and have adjusted mid course in past years.
Bill Smith: Just a little bit on liquidity, our liquidity position remains very strong by almost any measure readily accessible liquidity remains well above two times adjusted uninsured deposits and uninsured deposit number excludes collateralized municipal deposits as well as intercompany deposits. So that number stands now at 22% of <unk>.
Bill Smith: Total deposits.
Bill Smith: Turning to capital for a second our tangible common equity ratio to all the company is very strong at nine 3% that's up from 9%, 9.0% a year ago, while our subsidiary bank leverage ratio reached $11 20 at year end up from $10 60, a year ago.
Bill Smith: Tangible book value per share has now surpassed $23 is consistently increase for many years dating back more than a decade and also was largely unaffected by OCI.
Bill Smith: Repurchases for the fourth quarter was slightly more than 100000 shares at an average price of 21 that repurchase level was a bit below the prior quarter, but we have 900000 shares left in our authorization and I would expect to utilize that capacity in its entirety during 2024 on.
Bill Smith: Our 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 taxi loan portfolio is $10 million and it's valued at 125000 per rig.
Bill Smith: Ryan.
Bill Smith: In addition, we had charge offs in the quarter totaling approximately $5 billion isolated to select credits that did not materially impact on either the annualized charge off ratio for the quarter. Excluding the taxi charge offs was 24 basis points credit quality remains sound as measured by positive trends, we see in criticized and classified classified assets.
Bill Smith: And delinquencies and Theres no discernible trend in any sector or sub sector. 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 was experienced in 2023.
Frank Joseph Schiraldi: One last note on the effective tax rate it was a little bit lower this quarter at $24 four that was due to a lower level of pre tax income, but I would expect the regular run rate of 24 to be back around 26% and with that Frank back to you.
Thanks, Bill in summary in what's been a challenging year for most of the industry. We are connecting one yet again demonstrated our ability to perform in extraordinary times.
Frank: While we are 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.
Frank: As always we appreciate your interest in Kinect, one and thanks again for joining US today, operator, we will now open the line for questions.
Frank: At this time I would like to remind everyone in order to ask a question simply press star one on your telephone keypad. Our first question will come from the line of Daniel Tamayo with Raymond James. Please go ahead.
Frank: Okay.
Daniel Tamayo: Good morning, guys. Thanks for taking my question.
Daniel Tamayo: All right.
Daniel Tamayo: And Bill I appreciate all the.
Daniel Tamayo: The detail on the NII guide in the margin as well.
Daniel Tamayo: I guess I'll start on the.
Daniel Tamayo: On that.
Daniel Tamayo: I appreciate the.
Five basis points, but just curious like what else going into that in terms of deposit repricing assumptions, what what is going to be immediately reprice a bowl versus.
Daniel Tamayo: Youre, hoping you'll be able to pass through.
Daniel Tamayo: That sort of stuff.
Daniel Tamayo: Yes.
Daniel Tamayo: There's a lot to our deposit makeup, but like I said in the call. We think we've maxed out our interest bearing balances are and so.
I think.
Daniel Tamayo: 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 thats going to lead to the stopping of contraction in the beginning of a widening of the margin and then as the fed cuts.
Daniel Tamayo: Model show that for which we have four cuts throughout the year. We've got right now we're modeling about 50% data on there. So I hope that helps you helped to answer your question.
Daniel Tamayo: No.
Daniel Tamayo: Helpful. In your modeling that to take place immediately or with a bit of a lag.
Daniel Tamayo: Well like I said, it's there's a lot of moving parts, so I'm actually saying, it's concurrent with that.
So it's 50 basis, 50%, there's different ways of looking at data you can look at it as its immediate 50% or you can look at that as a lag that gets to 100, but the way the model works, we have it at 50% and media.
Daniel Tamayo: Got it.
Frank: And then and then maybe one for Frank just on.
Frank: On the loan growth.
Frank: One Bill you also mentioned that Youre expecting C&I to slow from the strong growth that you saw in the fourth quarter, but.
Frank: I'm wondering if you could just kind of put a finer point on on what type of loan growth Youre expecting this coming year.
Frank: Sure.
Bill Smith: I think we.
Bill Smith: We've mentioned a number of times that we.
Bill Smith: 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 is a tremendous amount of demand for the product that most of our builders are bringing to market.
Bill Smith: And we're seeing that with completed projects and so we've continued to.
Bill Smith: Expand not only the size of the portfolio, but also the geographies in which.
Bill Smith: 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 in pretty much every quarter, we see more and more C&I loans coming into the portfolio and that's just.
Bill Smith: And 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.
Daniel Tamayo: On the commercial side so.
Bill Smith: I'm pretty confident that those trends will continue.
Bill Smith: As you know in the.
Certainly in the greater New York market, where woefully under housed in.
Bill Smith: So I don't see anything thats going to change my opinion about the housing market or the construction market in general.
Bill Smith: At least not not at the moment and.
Bill Smith: In the C&I World when you look at the strength of businesses today.
Bill Smith: Their balance sheets are in some of the best shape they've ever been notwithstanding some of the changes since the end of Covid.
Bill Smith: 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 <unk>.
Bill Smith: Slight manufacturing, whether it's in the healthcare environment all of those areas all have very very promising futures and so we keep building.
Bill Smith: The capabilities to service those clients and they like the connect one model so.
Bill Smith: Okay. So you expect growth to accelerate as the year goes on is your pipeline kind of fill back up is that.
Bill Smith: Good way to think about it.
Bill Smith: I wouldn't call it an acceleration necessarily I think we will have growth.
Bill Smith: I said in my comments I think the year is going to be a challenging one overall for a lot of different reasons.
Bill Smith: But I do think that we will as we did in this last quarter.
Daniel Tamayo: GAAP 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%.
Daniel Tamayo: I think it's going to be on them on a one off opportunistic basis, we're doing things that seem to make sense, we will be happy with any growth. This year I think there will be growth.
Daniel Tamayo: But again there are a lot notwithstanding.
Daniel Tamayo: And one of my positive comments, we are involved in three wars, we have an uncertain said at this moment.
Daniel Tamayo: We have a presidential election coming up there is lots of things that give me pause about where we may or may not be going forward and the competitive environment.
Daniel Tamayo: While we found it to be favorable for us at the moment I am not so sure it's going to stay that way going forward.
Daniel Tamayo: Alright understood I appreciate all the color I'll step back.
Daniel Tamayo: Your next question comes from the line of Frank Schiraldi with Piper Sandler. Please go ahead.
Daniel Tamayo: Good morning.
Daniel Tamayo: Thanks Ryan.
Frank Joseph Schiraldi: I'm wondering just following up on the NIM dynamics, Yes, I mean bill is it really just the five basis points I guess for a given 25 basis point rate cut.
Frank Joseph Schiraldi: Yes.
Frank Joseph Schiraldi: I would assume it sounds like you have kind of a steady beta but.
Frank Joseph Schiraldi: It may be reasonable to assume that.
Frank Joseph Schiraldi: Deposit pricing.
Frank Joseph Schiraldi: 5% five basis points of sort of average 25 bps and if there is some lag.
Frank Joseph Schiraldi: It could take maybe a little bit longer and run through the NIM. If there is some lag in deposit pricing is that the best way to think about.
Frank Joseph Schiraldi: That certainly could happen, but that's not exactly what I was trying to communicate to you.
Frank Joseph Schiraldi: Because.
Frank Joseph Schiraldi: It could be the beta could be higher with a lag. This two 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 under 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 to 20% of that number in terms sorry, if the fed funds rate is down on average by a certain number of basis points.
Frank Joseph Schiraldi: I predict our module will be up 20% of that number.
Frank Joseph Schiraldi: Alright, okay.
Frank Joseph Schiraldi: Okay.
I wouldn't really put a lagging on the <unk> on the 50%.
Frank Joseph Schiraldi: Okay.
Frank Joseph Schiraldi: And then.
Daniel Tamayo: Just in terms of growth to the extent you got it and you talked about some of the higher yielding product that there's some opportunity.
Speaker Change: Even if C&I growth isn't as great as it was in the quarter.
Speaker Change: Just wondering your thoughts on aside from the fed and deposit.
Speaker Change: <unk> stabilizing overall just.
Speaker Change: We're net new business is coming out of the box in terms of loan yields versus funding costs.
Speaker Change: As new business comes on.
Daniel Tamayo: In business, yes, when the spreads are on our business.
Daniel Tamayo: The good thing about C&I as it's generally comes along with the deposits.
Daniel Tamayo: That's why we focus on C&I.
Daniel Tamayo: But I think the spreads are.
Daniel Tamayo: Three 303 to 400 basis points on C&I lending and similar for construction.
Daniel Tamayo: So a little higher.
Daniel Tamayo: <unk> structured.
Daniel Tamayo: Okay.
Daniel Tamayo: And then.
Just thinking through just I think you said.
Bill Smith: Thank you Sir.
Bill Smith: It is a 5% to 7% expense growth year over year.
Bill Smith: Yes, that's what I have model then.
There are still inflationary pressures labor market is still a little bit Ty.
Bill Smith: 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.
Bill Smith: Okay is there anything baked in there or maybe you can just remind us in going through.
Bill Smith: And the threshold.
Bill Smith: Of.
Daniel Tamayo: $10 billion in assets.
Daniel Tamayo: Timing, there and any incremental costs that might be baked into that 5% to 7% growth.
Daniel Tamayo: Well, we're almost already there you know.
Daniel Tamayo: The.
Daniel Tamayo: This pullback in the fed tightening slows things down, but we were ready to go over and so.
Daniel Tamayo: Everything we're doing today from a regulatory perspective is if we're already there.
Okay. So its already baked in.
Daniel Tamayo: And then if I could just sneak in a last one just on buybacks.
Daniel Tamayo: I'd always thought you guys were sensitive around tangible book value and your buyback if the stock dipped below and it looks like in the quarter you are buying on average below tangible book, but sounds like maybe that's not the right way to think about it going for Bill you said.
Bill Smith: Maybe less price sensitive to that and anticipate completing the program this year.
Bill Smith: Yes.
Bill Smith: I do remember, saying that that it makes all the sense in the world when its below tangible book.
Bill Smith: But even now given our retained earnings and the growth in the dividends, we still have room to buyback stock and the 900000 shares over the course of this year and what we're seeing in terms of earnings to me is not a dramatically large numbers, so I feel very comfortable with that.
Yes.
Bill Smith: I can't say at any price, but for the foreseeable future I would stay on that plan.
Bill Smith: Great. Okay. Thanks for the color.
Bill Smith: Sure. Thanks, Brian.
Bill Smith: Your next question comes from the line of Michael Perito with K B W. Please go ahead.
Hey, guys happy new year, good desk could you hear from you. Thanks for taking my questions.
Bill Smith:
Bill Smith: Just a couple of follow ups.
Bill Smith: One on the.
Just on the balance sheet makeup as we think about the loan opportunities and being opportunistic Frank.
Bill Smith: And yes, the environment work.
Frank: Coming out of slash still in I mean is it do you guys expect in the budget for the loan to deposit ratio to maybe drift lower as deposit growth kind of steadily outpaced loan growth just arent.
Frank: 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 Moran for now in terms of what you guys would hope to see on the balance sheet growth side or or or not necessarily.
Frank: Look I know opportunistic is really big wide word but.
Frank: It really defines who we are and who we have been as a company.
Moran: 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 in sort of around 110, I think is where we are at the moment yes.
Daniel Tamayo: I would 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.
Daniel Tamayo: We arent 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 an on and some of the lending.
Daniel Tamayo: Attributes relative to a little bit more C&I, a little bit more construction.
Daniel Tamayo: So I think over time, yes, I would say all things being equal that number should drift down.
Daniel Tamayo: But again, we're going to be opportunistic.
Daniel Tamayo: 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.
Daniel Tamayo: So.
Daniel Tamayo: 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.
Daniel Tamayo: Helpful.
Maybe switching over to.
Daniel Tamayo: And expense growth.
Daniel Tamayo: 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 FTE adds maybe down on a net basis, but like commercial lenders SBA producers and 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.
Bill Smith: On the Horizon, just wanted to try and get a better handle of what that opportunity looks like today.
Bill Smith: Yes, I'd say, we continue to build that.
Bill Smith: That asset for us with some great people there.
Bill Smith: Make sure we have the right support for an increased portfolio and volume going through there, but it's but it's baked 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.
Bill Smith: The 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.
Bill Smith: Okay.
Bill Smith: And then just lastly for me just as we think about 'twenty for some of the <unk>.
Daniel Tamayo: Initiatives, you guys have announced over the last couple of quarters like nimbus or even longer dated stuff like both lie in any kind of deliver roles or or certain things that you are comfortable telling us from an expectation standpoint about where we can maybe start to see some of those things impact financials in 'twenty four or is it still not entirely kind of.
Daniel Tamayo: Clear yet the timing of some of those.
Daniel Tamayo: Benefits.
Daniel Tamayo: I think on the.
Bill Smith: On the case of both lie we've seen a lot of improvements around the entire company its part of whats driving our SB.
Bill Smith: SBA Division and Youre seeing some of those numbers there.
Bill Smith: Have been increasing pretty dramatically the number of franchise ores that we.
That we service on the both side platform, which is driving other incremental business.
Bill Smith: And to the into the organization, both lie really acts as sort of a lynchpin of our center pin for lots of other things that are going on within the company, which to show up in other places and hard to just put on a BOE fly quote unquote balance sheet, our financial statement, but we're very very happy with the results that are accruing there and at some point I do.
Bill Smith: Thank you, we will be able to show some level.
Bill Smith: Ill.
<unk> financial metrics for that unit on the Nimbus side, we've just launched that family and friends recently that 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 are going.
Bill Smith: To go after that marketplace, and where do we want to add value for that specific vertical but.
Bill Smith: The Nimbus platform is up venture on his life and.
Bill Smith: We're pretty confident that that's going to make a difference as we move through 'twenty four 'twenty five.
Daniel Tamayo: We're also implementing mantle throughout the organization the Omnichannel.
Daniel Tamayo: Posit origination.
Daniel Tamayo: And look the hope there is that we improved conversion rates and that will lead to higher deposit origination.
Daniel Tamayo: Great very good guys. Thanks for taking my time and for the color. This morning.
Okay.
Daniel Tamayo: And as a reminder to ask a question press star one on your telephone Keypad. Your next question comes from the line of Nick could you rally with Hebei Group. Please go ahead.
Daniel Tamayo: Morning, everyone how are you.
Daniel Tamayo: Okay.
Daniel Tamayo: 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 two segments.
Daniel Tamayo: Yes, C&I and construction I think Thats fair.
Bill Smith: Pipeline, Yes, I think there are other CRE opportunities that are out there that we continue to so we're not abandoning any any of our.
Bill Smith: 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 in the C&I portfolio.
Bill Smith: And construction has always been a place where we've had very deep amount of experience and as you know that portfolio rises and falls, depending on what's going on in the economy.
Bill Smith: I don't think I've ever seen a stronger time or a better time to be in construction.
Bill Smith: Based on the demographics based on what's going on based on where people want to live in based on just the available supply of housing units.
Bill Smith: No.
Bill Smith: I would 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 that comes off so typically these projects last anywhere from.
Bill Smith: 10, or 11 months out to 18 or so months. So the turnover is very very quick in the construction portfolio, so maintaining even maintaining standing still in that portfolio means you are putting a lot of assets on.
Bill Smith: It was very helpful. And then as it relates to the 10 billion asset threshold is there any incremental costs 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.
Daniel Tamayo: I would say no.
Daniel Tamayo: To build.
Daniel Tamayo: Our risk controls related to being over $10 billion. So it's yeah, there's more to come but it's no more of an increase in what's in those numbers around forecasting for Ya.
Daniel Tamayo: Perfect.
And then just lastly for me just to clarify the 5% to 7% expense growth guide that year over year increase excludes the special assessment in the fourth quarter correct.
Daniel Tamayo: Correct.
Daniel Tamayo: Thank you for taking my questions.
Daniel Tamayo: Great.
Daniel Tamayo: Our final question comes from the line of Matthew Breese with Stephens. Please go ahead.
Matthew M. Breese: Hey, good morning.
Matt: Good morning, Matt.
Hoping for some additional color on new loan yields I heard you loud and clear on C&I and construction spreads, but if you look at the pipeline today, what is kind of the blended all in rate and an office.
Matt: Oppositely what is rolling off as you as you put these loans on.
Matt: Well.
Matt: It's about 825% to $8 50 is the new rate going on.
Matt: And the loans coming off as in the.
Matt: About 7%.
Matt: Is that based on the volume and that spread it does add basis points five to eight basis points a quarter as we move forward.
Matt: In the past, we've had expense deposit costs increase greater than that so it really depends on how much volume we see going forward.
Matt: The greater the growth rate the greater the increase in our margin in my view.
Matt: Considering what you just said the loans coming off 7% range Thats going on is north of eight but then considering your average loan yield. This quarter was $5 80 ish does that rate does that imply that the pace of pay offs is really slow right now or could you characterize that.
Matt: Okay.
I would agree with that okay.
Matt: Okay, Yes.
Daniel Tamayo: So it is slow in that number relative to the size of the $9 billion.
Daniel Tamayo: Just earning assets isn't as isn't as big as you might think.
Bill Smith: And so the impact of it is not all that great.
Bill Smith: Okay.
Bill Smith: But it is a positive.
And then people forget five years five years ago, we were less than $5 billion in size or half the size. We are today. So.
Daniel Tamayo: Those loans that are renewing are small relative to the right.
Daniel Tamayo: That's right okay.
Bill Smith: And then considering considering what you've just said.
Bill Smith: North of 8% stuff is going on and we're starting to see stability in deposit costs.
Daniel Tamayo: I would like to me as we enter the middle part of the year that the NIM NIM.
Bill Smith: NIM expansion on fed cuts should be greater than five basis points.
Bill Smith: Yes.
Bill Smith: Well it could be Matt Im being conservative I'll tell you why I am one worry I have is the quantitative tightening is even more than we expect and thats going to suck deposits out of the system and make the competition for deposits greater and where it's going to slow the decline in the rate of deposits.
Bill Smith: Which means the beta of 50 could be lower.
Matthew M. Breese: So that's the offset to.
Matthew M. Breese: The projection you just sort of just Nate.
Matthew M. Breese: It's not just a rate gain.
Right understood Okay.
Matthew M. Breese: And then Tony.
Matthew M. Breese: I am sorry, Bill interrupts me go ahead no go ahead no go ahead I'm sorry.
Matthew M. Breese: You had mentioned kind of a normalization of charge offs.
Bill Smith: 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 the year, where credit might normalize should we anticipate some build throughout the year.
Bill Smith: Yes, you were a little bit garbled, there, but we had about I think it's 15 or 16 basis points of charge offs on in 'twenty three.
Nothing that I see specifically, that's making me say the number should be larger, but I think everyone is sort of agree that in the twenty's is not a bad way to project charge offs. So thats one part of your question. The other is the reserve ratio it went down but thats more of an accounting geography.
Bill Smith: Because say those those balances those reserves were in a specific reserve and they were taken out and taken off the loan balance. So there was no real change to our allowance coverage per se and being under one listen this is the way our our seasonal model works, we have additional a lot of additional qualitative.
Bill Smith: And there and so we feel very comfortable with where our allowances today.
Bill Smith: Okay.
Bill Smith: And then along the credit lines.
Daniel Tamayo: Can you provide us an update of what you're I know, it's small but your rent regulated multifamily what's your exposure there and have you seen any sort of.
Daniel Tamayo: Credit deterioration.
Daniel Tamayo: Alright.
Daniel Tamayo: I assumed it was under $100 million.
Daniel Tamayo: <unk>.
Daniel Tamayo: For the most parts doing well, there's one or two situations that we're working on but we're working through those and we have a lot of tools in our arsenal for so.
Daniel Tamayo: I don't see anything material coming from that small portfolio.
Daniel Tamayo: Okay.
Daniel Tamayo: And then last one for me.
Daniel Tamayo: I've covered you guys for a long time, it's a challenging rate challenging macro environment I think.
Daniel Tamayo: Given that you are generally under Ernie, particularly versus kind of historical levels.
Daniel Tamayo: As you look out 'twenty four 'twenty five when do you think you can get profitability as measured by ROA back over.
Daniel Tamayo: Over 1% level somewhere where we're all more accustomed to seeing it.
Daniel Tamayo: Well I am optimistic about the year is beyond 24, there is a lot of there's hundreds of millions if not billions of loans that are going to reprice, either maturing or adjustable rate. So even that even though rates are coming down our adjustable portfolio is going to reprice higher.
Daniel Tamayo: So when you combine all of those things where rates coming down potentially potentially.
Daniel Tamayo: We can be 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 weil.
Daniel Tamayo: Add back to 15% ROA.
Daniel Tamayo: Got it okay. That's all I had I appreciate taking my questions. Thank you.
Daniel Tamayo: Yes.
Daniel Tamayo: I'll turn the call back to management for any closing remarks.
Daniel Tamayo: Well, thanks again for everyone's time today and certainly we look forward to speaking to you again during our first quarter conference call that will take place in April so everyone have a very nice day. Thank you.
Daniel Tamayo: That does conclude today's conference call. We thank you all for joining you may now disconnect.
Daniel Tamayo: [music].
Daniel Tamayo: Yes.
Daniel Tamayo: Sure.