Metropolitan Bank Holding Corp. (MCB) Earnings Call Transcript & Summary

Good day, and welcome to the Metropolitan Commercial Bank Fourth Quarter and Full Year 2023 Earnings Call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer; and Dan Dougherty, Executive Vice President and Chief Financial Officer. Today's call is being recorded. [Operator Instructions] During today's presentation, references will be made to the company's earnings release and investor presentation, copies of which are available at mcbankny.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, Todd. Good morning, and thank you all for joining our fourth quarter earnings call. MCB's ability to manage through severe banking sector stress in 2023, while simultaneously exiting less material lines of business demonstrates the impressive strength and stability of MCB's franchise. We have been able to responsibly grow the balance sheet while maintaining our credit standards and with a continued sharp focus on liquidity interest rate risk management. Importantly, the economy continued to display impressive resilience and calls for a steep recession have become less apparent over time. That said, 2023 was a challenging year for the banking industry. The effects of the most aggressive Fed tightening cycle in decades and an inverted yield curve created significant headwinds. Thankfully, experts predict that we have seen the end of the tightening cycle and many are convinced that an easing cycle is on the horizon. MCB being modestly liability sensitive will benefit from the monetary policy easing. Turning to recent results. I am pleased with MCB's performance in the fourth quarter and for year-end 2023. NIM inflected in the fourth quarter where we saw a modest expansion ending what turned out to be only 2 quarters of compression. We expect NIM expansion to continue in 2024 and supported by continued loan growth, originated at consistent spreads and funded with core deposits from our growing roster of deposit verticals. Asset quality remains strong with no identifiable broad negative trends in any long product, geography or sector. Looking forward, we are excited to formally announce that we have begun our core banking modernization initiative. We expect that this project will result in improved capabilities and efficiencies for both customer-facing and internal processes. Dan will provide financial details on the digital transformation project. I will now turn the call over to our CFO, Dan Dougherty.

Thank you, Mark, and good morning, everyone. I am pleased to join my first conference call as CFO of Metropolitan Bank, and I look forward to meeting with all of you at future conferences and investor events. As Mark mentioned, the operating environment continues to be quite challenging. However, despite rate related headwinds, the changing dynamics of depositor behavior and a material shift in the bank's funding profile, we have continued to deploy our capital prudently and profitably. For the year, earnings per share were $6.91 and our book value per share at year-end was $58.69. As we transition to 2024, we are optimistic about the path of the economy and the direction of short-term interest rates. Even though many challenges remain, we believe that the 2024 earnings will show solid growth relative to 2023. Quarter-over-quarter, we saw an increase of $270 million in the loan book growth of approximately 5%. Net interest income was up $3.4 million or about 6.4%, driving an increase in the net interest margin of 9 basis points. Our ability to reach an inflection point in the NIM is remarkable when you consider that we offloaded $475 million in crypto-related DDA balances during the year. Loan growth was funded primarily by deposit growth of $215 million. The deposit verticals that contributed the most to that growth were municipals, loan customer deposits and EB-5 related deposits. The remainder balance sheet growth during the year -- during the quarter, excuse me, which included increases in both cash and securities was funded through wholesale channels. Liquidity risk management remains a key focus. At year-end, total secured borrowing capacity was approximately 200% of our estimate of uninsured deposits. Our loan pipelines remain strong. A continued focus on pricing discipline resulted in a weighted average coupon net of deferred fees of 8.7% on fourth quarter new loan originations versus a September loan portfolio yield of 6.73%. The loan book mix continues to shift towards fixed rate as the mix of recent originations has been more heavily weighted towards fixed. As well, recent payoffs have been weighted towards float. Now a few comments on credit. As Mark mentioned, asset quality remains strong with no identifiable negative trends within the portfolio. We did, however provision $6.5 million in the fourth quarter. The increased provision was driven primarily by loan growth as well as a specific reserve connected with outstandings to a single sponsor that went nonaccrual in December. All of that offset somewhat by improvements in the macroeconomic variables that underlie our CECL model. Although we saw an increase in NPLs in the fourth quarter, we are confident that the ultimate risk of loss in the NPL book is minimal because of strong sponsor guarantees and collateral values that are generally well aligned with outstandings. Noninterest income was flat over the quarter at $6.5 million. Within the noninterest income bucket, GPG revenues were also flat at $4.2 million. Importantly, due to an evolving regulatory environment that has challenged the cost-benefit equation related to the business-to-consumer or B2C fintech business, the bank has decided to exit B2C. The plan is to complete the B2C exit over the course of this year. The implications of the B2C exit are focused on the GPG fee revenue outlook and the impact from the outflow of low-cost deposits. The overall fee revenue decline related to the B2C exit should equate to approximately 2% to 3% of the current consensus 2024 revenue forecast. The related deposit outflows, which will also occur over the course of the year, are expected to be immaterial to 2024 results. We remain committed to growing the GPG business line, especially as a source of low-cost funding. But for the time being, we think a focus on the business-to-business or B2B is appropriate. We do not plan on any specific head count reduction as a result of the B2C exit. As opportunities present themselves, existing employees will work to support new deposit gathering initiatives. Now let's talk about noninterest expenses. After adjusting for the regulatory settlement reversal of $3 million in the third quarter, quarter-over-quarter, noninterest expense was up approximately $3 million. The $1 million increase in fourth quarter comp and benefits reflects the timing of third quarter hires and some onetime charges related to placement fees and severance costs. We will continue to invest in human capital this year as we prepare for our continued approach towards $10 billion in balance sheet footings. The 2024 run rate for comp and benefits will reflect an increase to annualized fourth quarter expense of approximately 6% to 8%. Professional fees should trend down towards $4 million per quarter over the course of the year. And finally, in the aggregate, it is reasonable to assume that total core noninterest expense will increase in the 10% to 12% area versus normalized 2023 expenses. Few comments on the banking modernization project. One time costs associated with the core banking modernization projects are expected to total approximately $9.5 million in 2024. These expenses will be somewhat lumpy throughout the year. We will make best efforts to report core as well as project-related expenses each quarter. The modernization project is planned to be implemented over a roughly 24-month period. Approximately 80% of the total project spend is expected to occur in 2024. The returns on the project, which are measured largely through scalability, data mining ability, improved payment processing capabilities and improved customer experience will be evident as we integrate the new systems. I will now turn the call back to the operator for Q&A.

[Operator Instructions] Our first question comes from Mark Fitzgibbon of Piper Sandler.

First question I have for you, Dan, around the exit of the B2C business. Two questions related to that. First, what was sort of the impetus for exiting the business? And second, of the $781 million of GPG deposits, roughly how much of that is connected to B2C?

This is Mark. I'll take the first half of that. So Mark, just to bring you up to date on this, MCB hasn't brought on a B2C client in GPG throughout all of '22 and all of '23. We just started socializing this and talking about it publicly. So we have not recognized any benefit from B2C business for the last 2 years. The reason for it is the economics. At this point, the regulatory expectations for that oversight is extraordinary and it's costly. And we're just fortunate enough to have other options to choose to grow the bank. So we have decided that the economics to profit margins on that business used to be very substantial. They have served us well. And for everyone listening, we were in that business for 2 decades. Very successfully. So it has served the bank well. It just no longer has the risk reward or the economics to support staying in the business. Dan, do you want to take the other half?

Yes. So Mark, the deposits that -- the B2C deposits [ flew ] to about $250 million. Those will exit the bank, the plan is to exit the bank over the course of the 12 months of 2024.

Okay. Great. And then can you share with us any thoughts on the pipeline in the B2B business? How that's looking right now, how it's shaping up?

Yes, it's strong. It's strong, it's diverse, and we also have acquiring, which we stood up in 2023, which we expect '24 for it to start to contribute meaningfully in '24 as well. As far as the $250,000 in deposits, Mark, we have already demonstrated over the last 24 months, we had the likes of about $1.5 billion of crypto-related deposits that fully left the bank and we had replaced them very efficiently. So we would expect it to be a nonevent on the $250 million. It will not happen in one moment. It will happen gradually over the year and I don't think you'll end up noticing it at all.

Okay. And then just 2 modeling things. One, on the margin, you mentioned the margin should rise throughout the quarter of 2024. Assuming you follow the forward curve, how much NIM expansion does that imply? And also if you could share any color on the effective tax rate going forward?

All right. Mark, so our forecast has 2 rate hikes in it for next year. They come in the middle to the back of the year. And we see another 10 to 15 basis points of NIM expansion -- well, actually, 20 basis points of NIM expansion through the course of the year based on that model.

Okay. Great. And then the effective rate was low this quarter, sort of back to 31% and change, do you think is a more reasonable go-forward rate?

That's a good assumption, yes.

Our next question comes from Nick Cucharale with Hovde Group.

Just a follow-up on the expense commentary. Are the project-related expenses that you mentioned incorporated into the 10% to 12% projected growth rate?

They are not.

If you were to include those, what does the projected growth rate for '24 versus '23 look like?

I have to come back to you on that one, Nick. I don't have it handy in front of me. I could do quick math, but let me follow up with you on that.

No problem. No problem. On the deposit front, as you mentioned, nice growth in the municipal book. We had a similar dynamic in the year ago quarter. Is this mainly due to seasonality? Or have you added significant new relationships into that vertical?

But mostly new relationships Nick, primarily driven by new relationships.

That's right.

Wonderful. Loan growth was again strong. And even in spite of strong deposit growth, it looks like you added more [ wholesale of ] funding to support that rise. When do you anticipate you'll be able to drive down borrowings to levels that are more in line with your history?

The plan is yesterday, of course, but remember, at year-end, our cash position was elevated, and that was intentional. So those dollars can quickly leave the bank. I don't need to run a cash balance quite that high. So I would think that it should be pretty quick over the course of the year that we drive this thing back towards the current minimum, which is around -- which is $300 million, which is actually swapped out. So that's going to stick with us for the duration of those swaps, which expire in mid-'25, I believe. And so yes, again, I think it should happen relatively quickly as we ramp up our deposit gathering process.

But Nick, year-over-year, if you look at the difference between core funding and net new loan growth, it was minimal. We didn't really rely at all heavily at all on wholesale funding to fund that growth.

Right, right. Okay. And then lastly, another solid rise in the healthcare portfolio this quarter. Where are you comfortable bringing that book as an overall percentage of total loans?

We're studying that right now. We're having stress tests, as you know, as you know, we do stress testing of the entire portfolio twice a year. We're having a targeted stress test done on the healthcare. I have a sense of where that's going to come out. It will be very positive. We like the risk profile there. So we'll announce some new numbers at some point, but we're going through that analysis now in the first quarter. But we do like the risk profile and the economics around health care. Remember, it's a very diversified portfolio. It's just not skilled nursing homes and assisted living facilities.

Our next question comes from Chris O'Connell with KBW.

Just wanted to circle back to the NIM guide of the 20 basis points and just confirm that's off of the 4Q '23 to 4Q '24 timeline in numbers, not off of the annual NIM?

It's actually off the annual NIM.

So that's -- so that's 2024. 20 basis points above the [ 348 ]?

That's correct.

Great. And how much does that change, I guess, if the rate -- if there's no Fed cuts next year?

I don't have that handy, Happy to run the model and let you know.

One other way of looking at that too, Nick, is we have some very big deposit initiatives that should drive lower-cost deposits throughout 2024. So we're not just relying on the Fed to give us some expansion here. We're driving it ourselves as we have historically, and you saw in this year, that just passed, we had only 2 quarters of compression with the kind of tightening that we face. So we're not relying on the Fed. The Fed has many more cuts predicted we only have 2 in our projections, but it is not the underpinning of that margin expansion. It's our deposit initiatives.

Yes. So the NIM forecast that my team has produced does -- has relatively conservative assumptions related to core deposit growth. So yes, if anything, there should be upside there, assuming that the path of administered rates is generally aligned with what we've talked about.

Great. And on the B2C exit, I appreciate all the color that you guys gave. As far as just the actual impact to the GPG fee line, do you have what that is, I guess, on an annual basis once the exit is complete? And then any sense of just even if it's rough the timing of that -- how that will play out?