MCB - NYSE

Welcome to Metropolitan Commercial Bank's Third Quarter 2023 Earnings Call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer; and Greg Sigrist, Executive Vice President and Chief Financial Officer. Today's call is being recorded. [Operator Instructions] During today's presentation, reference will be made to the company's earnings release and investor presentation, copies of which are available at ncbankny.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to the company's notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin.

Thank you, Shelby, and good morning, and thank you all for joining our third quarter earnings call. I will be brief today because I'd like to leave more time for Q&A. . To get started, I am pleased with MCB's third quarter and year-to-date results. To say the last 9 months have been challenging is an understatement. However, as you can see, MCB has been able to navigate through these challenging times, primarily because we were as prepared as we can be for them. Along with our ability to grow alongside of these challenges, Year-to-date, we have experienced reasonable balance sheet growth funded by new core deposits while maintaining our underwriting and pricing disciplines. All deposit verticals contributed to our growth in liquidity as well as early contributions from our latest initiatives in 1031, title and EV 5 lines. Excess liquidity this quarter also allowed us to pay down our Federal Home Loan Bank borrowings, which were used specifically to off-ramp our previous on-balance sheet crypto deposits. We are confident we will see further reductions of these borrowings over the coming quarters. We are also confident that each of our deposit verticals will continue to set us aside from others. And maintain MCB as a core-funded institution. We are working on a number of other deposit and fee income initiatives, which we will start discussing in the coming months. And I'm confident they will all add to our liquidity Arsenal, which will not only stave off margin compression, but will start to expand it. Finally, as many of you may have seen online last night, we issued a press release related to the settlement with the Federal Reserve and the New York State Department of Financial Services pertaining to a matter from March 2020. The amount of the fine has been fully reserved for and enhancements to our processes and procedures have been well underway for some time. I will now turn the call over to Greg for more detail.

Thank you, Mark, and good morning, everyone. We are pleased to report strong third quarter net income of $22.1 million and fully diluted EPS of $1.97. Despite a challenging operating environment for banks, net interest income remained steady at $53.6 million. Significant expansion in total interest income was driven both by strong loan growth through the first 9 months of the year as well as the impact of two rate increases since May of 2023. While funding costs have largely offset this increase in the quarter we were able to substantially pay down borrowings late in the quarter and remain confident in our ability to drive lower cost deposits through 2024 and beyond. MCB saw deposit growth across all verticals, as Mark had mentioned, with total deposit verticals increasing $291 million or nearly 6% despite the challenges of an evolving rate environment and its influence on customers. Net inflows were particularly strong for retail deposits, including those with loan customers, which collectively were up $188 million, reflecting growth from both existing and new customers. We did see outflows of $58 million, representing the return of remaining corporate and reserve deposits with former crypto clients. For additional color, net of those outflows noninterest-bearing deposits increased in the quarter by $75 million or just over 4%. We had a very strong quarter for lending with net loan growth of $205 million or 4% on $333 million of loan production. Bigger picture, year-to-date net loan growth of $514 million has been fully funded by $738 million of net inflows from our deposit verticals. The excess liquidity in the quarter has been used to reduce borrowings. New loan production came in at an average yield of 8.7% versus the second quarter portfolio yield of 6.54%, which showcases MCB's pricing discipline and the resilience of the lending franchise. There was 17 basis points of net interest margin compression in the quarter primarily as a result of liabilities pricing, repricing more quickly than assets in the short run. There are several factors that give comfort that we are at or very near the inflection point for NIM, assuming, of course, a stable rate environment. Loan pricing discipline has been maintained, which is evident in our new production yields. We do expect to see the continued repricing of the loan book, which is a relatively short duration book. Borrowings have been substantially paid down and while that is apparent in the spot balance sheet. The average balance sheet for the third quarter shows we have incurred interest expense on a much higher average balance for borrowed funds. We do expect to see the benefit of those reduced borrowings to benefit NIM and more importantly, P&L as we move forward. We entered the year with $250 million in borrowings. And as we've said for the past few quarters, we do expect to reduce borrowings close to this level by year-end. We did see an opportunity late in the third quarter to lock in funding costs on $300 million of FHLB borrowings, using a pay-fixed swap at an average rate of approximately 5% versus the third quarter average borrowing rate of 5.66%. That benefit will start to come into NIM and P&L in the fourth quarter. The goal would be to exit 2023 with only the $300 million of hedged FHLB borrowings remaining on the balance sheet. And as Mark has already mentioned, we expect MCB's newest deposit verticals to provide a funding advantage well into the future. Touching briefly on credit. Asset quality remains strong. Strong loan growth drove credit provisioning in the quarter, which was partially offset by improvement in the economic forecast underlying our CECL model. Total noninterest income was down approximately $1.3 million in the prior linked quarter due largely to the exit from crypto. We were particularly pleased, however, to see corporate disbursement client revenues continue to scale with revenues up 22% on the prior linked quarter and up 104% from the prior year quarter. Noninterest expense in the quarter did benefit from the settlement reserve related release of $3 million. Legal fees came down substantially from the prior quarter, but remained elevated by roughly $600,000 which we would expect to drop out of the run rate prospectively. Lastly, the increase in comp and benefits reflects our continued investment in human capital. This includes the increase in FTEs during 2023, many of whom were onboarded in the second and third quarters and is in line with increased profitability. There was a discrete tax benefit of approximately $1.8 million in the quarter from the conversion of stock awards. Going forward, we would expect the effective tax rate to be in the range of 31% to 32%, excluding discrete items. And I will now turn the call back to Shelby for Q&A.

Yes, I would say. So yes.

Yes, pipeline remains robust.

I think I don't think there's any more additional internal investments. We have been working on improving the policies and procedures, as I mentioned in my prepared remarks. So there will be no incremental increase in costs associated with addressing the concerns of the regulators. We may have some outside validation done through some consulting work to validate what we have done, but we're in a pretty good shape to address the concerns of the regulators.

We'll take our last question from Alex Lau with JPMorgan.

Good morning, everyone. Just a follow-up on the previous topic. Can you talk -- walk through the two consent orders and how you expect to respond to these if this changes how you approach the GPG business at all?

Well, the consent orders are pretty straightforward. They're specific to different areas of compliance oversight, specifically for the consumer-facing part of GPG. And we have been addressing -- as you know, this is a 2020 matter. So we have been addressing and working alongside very productively with our regulators. So we have a very good relationship with the regulators. Open communication, good transparency. They've had some very good ideas and some suggestions on how to address these type of business relationships. You saw recently, there was joint agency guidance that came out on third-party oversight for these types of relationships. So that's been very helpful. and we'll address them one by one. It's no different than findings in any report of exam. We'll address them. We'll evaluate them. We'll have discussions with the regulators. And then we will make the changes necessary. We will likely get some of the changes looked at by outside companies to validate and then we'll present them to the regulators for their review and consideration. But we don't find it to be a heavy lift. We've addressed many of these already because this was in a very acute challenge in March of 2020, specifically because of the global pandemic and the circumstances around that. But no, we're in a good place, and we have good dialogue with the regulators on this.

I don't think so. As I sort of signaled many times over the last several quarters, we are repositioning and looking primarily at more B2B business in GPG as it relates to the payment space. and not really looking to expand the consumer side of the business. So no, we don't expect any interruption of business at all.

And my last question was on the nonperforming loans. There was a tick up in the quarter. Can you share some color on what that loan was? And also maybe just refresh us on the health of the existing nonperformer.

Working backwards. We are still going through the foreclosure process on that one loan that's in emission Kansas, and we're still fairly optimistic on a positive outcome likely to be a 2024 event. As it relates to the tick up, it was two small loans actually with the same principle, I think, roughly $3.5 million each. We have no concerns at all on at least half of it, one loan at $3.5 million. The other loan, we are highly confident we'll get paid 100 cents on a $1. So no concerns at all. And overall, the health of the book is very good.

Yes. And stating the obvious, the nonperforming ratio there is still incredibly low even with that modest uptick of those two small loans. . And for Mark, does any closing remarks. I just want to thank Mark for the time spent is a remarkable franchise. It's an incredible team. So Mark, thank you to you. Thank you to the Board. I really enjoyed working here and working with everybody to.

Yes. And we feel the same, Craig, and we wish you all the best in your new initiatives. And hopefully, we'll keep in touch and work together as again.

That's not about. And Chris and Alex, it's been a pleasure working with you guys the last couple of years. And Nick, sorry for the timing on it. It's been really good getting to know you as you've gotten up to the curve here. But as you know, it's a remarkable franchise, so good luck. .

And this concludes the allotted time for questions. I would like to turn the call over to Mark DiFazio for any additional or closing remarks.

I have nothing other than thank you again for your support and interest in MCB. And as I've said many times, we are here and we're available to anybody, any investor or analyst who would like to chat with us offline. Have a nice day.