Q4 2023 Metropolitan Bank Holding Corp Earnings Call
Participants
Daniel Dougherty; Chief Financial Officer, Executive Vice President; Metropolitan Bank Holding Corp
Presentation
Operator
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 continues 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 modest expansion, ending what turned out to be only two quarters of compression. We expect NIM expansion to continue in 2024, 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 loan 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.
Daniel 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 was $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, a 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 name is remarkable when you consider that we offloaded [$475 million] in crypto-related DDA balances during the year.
Loan growth was funded primarily by a deposit growth of $215 million. The deposited verticals that contribute the most to that growth were municipals, loan customer deposits, and EB-5-related deposits. The remainder of balance sheet growth during the year -- during 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 remained 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 billion 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 non-accrual 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. Non-interest income was flat over the quarter at $6.5 million. Within the non-interest income bucket, GPG revenues were also flat at $4.2 million.
Importantly, due to 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 grow 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 headcount 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 noninterest expenses. After adjusting for the negative regulatory settlement reversal of 3 million in the third quarter quarter over quarter 96, non-interest expense was up approximately 3 million of the $1 million increase in fourth quarter comp and benefits reflects the timing of third quarter hires and some one-time 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 footing. 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.
A few comments on the banking modernization project. Onetime costs associated with the core banking modernization project 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 2020 for the returns on the returns on the project, which are measured largely through scalability, data mining ability, improve payment processing capabilities and improved customer experience will be evident as we integrate the new systems.
I will now turn to call back to the operator for Q&A.
Question and Answer Session
Operator
At this time, the floor is now open for your questions. If you have a question or comment, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Again, we do ask that you pose your question to pick up your handset to provide optimal sound quality.
Again, that's star one to ask a question. Our first question comes from Mark Fitzgibbon of Piper Sandler.
Daniel Dougherty
Please go ahead.
Hey, guys.
Good morning.
Morning locks.
The watermark for First question I had for you, Dan, around that the exit of the B to C business. You know, 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 what how much of that is connected TV PTC?
Hugh, this is Mark. I'll take the first half of that. So So Mark, just to bring you up to date on this of MCB hasn't brought on a B to C Cline and GPG. throughout all of 22 and all of 23. And we just started socializing this and talking about it publicly. So we have not recognized any benefit from B to C business for the last two years on the reason for it is the economics. You know, at this point, the regulatory expectations for that oversight is extraordinary and it's costly. And we're just fortunate fortunate enough to have other options to choose to grow, 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 two 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, you want to think?
Yes.
Daniel Dougherty
So Mark, the deposits that are of the B. two C. deposits foot to about 250 million. Those will we'll 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 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 a 24 to for it to start to contribute meaningfully in 24 as well as far as the 250,000 in deposits market, we have already demonstrated and over the last 24 months, we had the life of about 1 billion and a half of crypto related deposits that fully left the bank and we had replaced them very efficiently from. So we would expect on 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.
Daniel Dougherty
Okay.
And then just two modeling things.
One, on the margin. You mentioned the margin should rise throughout the course of 2024. Assuming you follow the forward curve how much how much new expansion does that imply? And also if you could share any color on the effective tax rate going forward?
Daniel Dougherty
Thank you.
It may. So our forecast has two rate hikes in it for next year. They come in the middle of middle to the back of the year, and we see another 10, 10 to 15 basis points of Nymex Nymex?
Well, actually 20 basis points of expansion through the course of the year based on that model.
Okay, great.
And then the effective rate was low low this quarter, but sort of back at 31 and change you think is a more reasonable go-forward rate?
Daniel Dougherty
That's a good assumption.
Yes.
Daniel Dougherty
Thank you.
Operator
Thank you. Our next question comes from Mick. Could you rally with Hubdoc.
Daniel Dougherty
Please go ahead.
Good morning, everyone. How are you wanting to do more than that?
Just to follow up on the expense commentary or the project related expenses that you mentioned incorporated into the 10% to 12% projected growth rate.
Daniel Dougherty
They are not if you were to include those. What does the projected growth rate for 24 versus 23 look like, and 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. I may follow up with you on that.
No problem, Tom, on the deposit front, 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 primarily driving driven by new relations?
Daniel Dougherty
That's right.
Wonderful loan growth was again strong. And even in spite of strong deposit growth, it looks like you added more wholesale 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.
Daniel Dougherty
The plan is yesterday, of course, but but but you know, I remember at year end our cash position was was elevated and that was intentional. So those dollars can quickly leave the bank. I don't need to run a cash that was quite that high. So I would think you know that 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 which is which is actually swapped out. So that's going to stick with us for the duration of those swaps, which which expire in mid 25, I believe. And so I yes. Again, I think it should happen relatively quickly as we ramp up our deposits gathering process.
But Nick year-over-year, if you look at the difference between core funding and net new loan growth there was it was minimal. We didn't really rely at all heavily at all on wholesale funding to fund that growth.
Right, right. And then lastly, another solid rise in the health care portfolio this quarter where you comfortable bringing that book as an overall percentage of total loans?
We're studying that right now. We're having stress test, as you know, as you. As you know, we do stress testing of the entire portfolio twice a year, but having a targeted stress test done on the health care, I have a sense of where that's going to come out will be very positive and we like the risk profile there. So we we'll announce some new numbers on 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 healthcare. Remember, it's a very diversified portfolio. It's just not skilled nursing homes and assisted living facilities.
I appreciate the color, and thank you for taking my questions.
Daniel Dougherty
Thanks, Nick.
Thanks.
Thank you.
Operator
Our next question comes from Chris O'Connell with KBW.
Please go ahead and Hey, good morning, Tony Cristello.
And just wanted to circle back to the guidance of the 20 basis points and just confirm that's off of the 4Q 23 for Q. 20 for time line numbers, not off of the annual meeting, it starts actually off the annual minutes. So that's so that's RUB20 billion in 2020 and 20 basis points above the 30 40?
Daniel Dougherty
That's correct.
Rate.
And how much does that change I guess, you know, 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, just one other way of looking at that to 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 two 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 two in our projections, but it is not the underpinning of that margin compression. That margin expansion we saw is our deposit initiatives.
Daniel Dougherty
Yes. So the NIM. forecast that my team has produced it that adds relatively conservative assumptions related to core deposit growth. So and if anything, there's there should be upside there, assuming that the past administered rates is generally aligned with what we've talked about they come in on the B to CAZE.
I appreciate all the color that you guys gave. And as far as the actual impact to the GBG. fee line? And do you have what that is, I guess on an annual basis once the exits complete? And then any sense of just even if it's, you know, rough the timing of that, how that will play out.
Daniel Dougherty
Again, the agency is going to happen during the course of 2020 for the reason like I couched it in terms of forecasted revenue for next year is to emphasize the fact that it's a relatively small number. It's 2% to 3% of consensus right now for 2024. So you know that you can do the math. I can do the math that's call it five to 6 billion. It's going to be the delta there.
Got it and Great.
Daniel Dougherty
And then I guess.
Hi, this is Chris from Chris because keep in mind, um, just one thing that shouldn't be not focused on. As I mentioned earlier, we didn't bring in. We have onboarded a B to C client and GPG.'s revenues not only absorbed the material reduction in crypto related transaction revenues. We put not only replaced that seamlessly. We replaced on the lack of revenue coming from B to C as well by adding new B2B clients. So the underpinning of that business is strong and it's unfortunate that we're replacing some some some some opportunities there for a lot of different reasons, but we are not coming out of a hole because we are replacing it as we as we speak, and we demonstrated it again in 23.
Daniel Dougherty
Great.
And just buying the multi-family provision, how big was that a credit?
And can you give any color just around the overall circumstances, what the total reserve loan size is just any other detail surrounding the credit and it's multifamily outside of New York, I think it's Ohio and on Louisiana, Louisiana, what as what we understand, it's a dispute between partners and the lack of willingness to put capital into the projects to bring them to be stabilized on. So it's not something we haven't seen in our careers before considering the sponsorship behind that. We're a little bit surprised on that dumb. But considering how well do they are and how experienced they are in this asset class that they would run the risk of litigation of them, but they are what we are confident of. We believe the risk of loss here is minimal. Why I actually believe the risk of loss here is here.
Daniel Dougherty
Great.
And do you have what the LTV or debt service coverage ratio was on the credit gone in their most recent?
Well, they were properties in transition. So if they were not highly occupied, that was the value proposition of acquiring it at a very high cap rate going in renovate stabilize and the typical model of multi-families you go and you acquire you stabilize, you renovate, you stabilize rates, come down, cap rates come down, you refinance or sell at a higher a higher return and they just rates are likely to come down, but they're not finishing the renovation. So the debt service coverage is almost irrelevant because of the guarantee and the global cash flow of the guarantors, which supported the projects on the way in the LTVs were project were 70, I'm sure within policy guidelines 70, 75%, I'm sure.
Daniel Dougherty
Great.
And just last one on this, I do know when it was originated. And I think on the inside of two years, 2022, 21, 2020 or 2020, whenever clients Great and just D, do you view this as a read-through to any other parts of the portfolio? And how are you guys seeing credit transform over the past quarter and kind of the outlook going forward?
And does it impact any of your appetite for loan growth going forward of note, just as I said in my prepared remarks, this is income indicative of any trend or anything that's happening in the portfolio from a asset class perspective or geography. And this is a one-off situation. And keep in mind, we do a fair amount of lending here, you will have not the NPLs from time to time. The question is your underwriting will get tested when you have nine PLs and you'll feel throughout the course of the year, how our underwriting bid as a result of remediating this problem. I can tell you the clients are fully engaged and now they are talking to us. So I would expect this to get resolved one way or the other pretty soon.
Daniel Dougherty
Great. Thank you, guys.
Appreciate the time.
Daniel Dougherty
Thanks, Chris.
Thank you.
Operator
Our next question comes from Alex Lau with JPMorgan.
Daniel Dougherty
Sinclair.
Hi, good morning, Tony, Alex.
Daniel Dougherty
Good morning.
Those I wanted to start off with deposits, which deposit verticals drove the increase in non-interest bearing deposits on a period-end basis and what are your expectations for DDA growth outside of the BDC runoff in 2024.
Daniel Dougherty
And so the increase in EBITDA was driven through GTAGPG. clients and we've got a purely a modest assumption in our model that we'll see and, you know, fairly limited DDA growth going forward. I think, A., it's becoming kind of kind of a unicorn out here. It's hard to find non-interest bearing deposits at this juncture in the market. But we do have a small assumption about a relatively small pump growth in our models Thank you and also for the thank you for the breakout of the 230 million in deposits from the new deposit initiatives.
Can you talk about the opportunities for these deposit verticals to increase their contribution to the funding base this year?
I think you're going to continue to see stable increase. I mean, there are projections out there that some that are reasonably reasonably opposite opportunistic. But I think what they're going to continue to contribute and our goal is on, as we said in the past, we've as we have been historically that off that our funding will be our loan growth will be funded specifically by core funding, and they will continue to contribute on how much in any one quarter or year, it's hard to say, but that's our goal to continue to stay a core-funded.
Yes, thank you.
And then a question on deposit costs. Given your higher payer on deposit costs, how do you think about the beta moving downwards as the Fed cuts, the funds rates and the timing, given your deposit mix? For example, do you have the mix of index deposits that's or how much is exception pricing? Thanks.
Daniel Dougherty
I mean our assumptions trend toward a very conservative 65%, inclusive of the derivatives that we have in the balance sheet and take the derivatives off, it gets closer to 75%. I think we're pretty hopeful that in fact, it will be higher than that as short rates move down.
Thanks and then on I can follow up on expenses. You mentioned the 10% to 12% growth on core noninterest expense.
Daniel Dougherty
What is the normalized and space you are referring to for 2023, I believe I quoted that as Q4 annualized and then grossed up with the U.S. 10% to 12%.
And were there any project expenses in 2023 already and on the project expenses as well, is there a sense of timing will be more front-loaded or pretty spread out throughout the year?
Daniel Dougherty
There were some modest expenses in 23, 2024 is going to be placed lumpy. I it's very difficult to say they will be spread out through the year, but it's going to be quite lumpy as these as these sub projects, if you will, it could become online.
Okay.
And then just another follow-up on the B to C fee income, a loss over 24. Was that 5 to 6 million in exit run rate for 4Q 24. Is that the full year impact versus consensus for full year 24 five to $6 million for the full year.
Daniel Dougherty
Remember, the when you look at the 2020 23 results, you've got to back out the crypto from there, that's obviously not going to be recurring. And then the adjustment, as we just mentioned, over the course of the year will be approximately five to 6 million. And of course, as Mark touched on, this is really important. Our our B2B pipeline is strong. We have a strong commitment to growing that book of business, and we remain quite of hopeful that that will continue to grow and it provides low cost it's got a significant amount of low-cost funding.
Great.
Thanks for taking my questions.
Right.
Daniel Dougherty
Thank you.
Operator
And we do have a follow-up question from Chris O'Connell with KBW.
Yes, just wanted to confirm the expense guide, if I had it at the Q4 annualized sort of $37 million annualized, a plus 6% to 8%, and then the 2023 normalized OpEx plus the 10% to 12%. Is that correct?
Not the Q4 9% call.
Daniel Dougherty
It's overall overall, is the the comp benefit, 68% of Q4. That's kind of U.S. specific, both the but overall 10 to 12 off fourth quarter annualize.
Thank you.
Daniel Dougherty
You're welcome.
Operator
Thank you. This does conclude the allotted time we have for questions. I will now turn the call back to Mark DeFazio for any additional or closing remarks.
I don't have any closing remarks, other than thank you all for attending and your continued support in to MCV.
Daniel Dougherty
Thanks, everybody.
Operator
Thank you. This does conclude today's conference call and webcast. A webcast archive of this call can be found at w. w. w. dot NC. bank NY. dot com. Please disconnect your line at this time and have a wonderful day.
