Metropolitan Bank Holding Corp
NYSE:MCB
Earnings Call Analysis
Q4-2023 Analysis
Metropolitan Bank Holding Corp
Metropolitan Commercial Bank (MCB) conducted its Fourth Quarter and Full Year 2023 Earnings Call, showcasing the bank's resilience amid banking sector stress and its strategic decision-making during the period. The bank delivered robust results, with Mark DeFazio (CEO) and Dan Dougherty (CFO) highlighting the strength and stability of MCB's franchise.
MCB navigated a tumultuous economic landscape marked by what seemed to be the tail end of an aggressive interest rate tightening cycle. Despite challenging conditions, the U.S. economy demonstrated resilience, and recession fears have subsided. Experts now foresee a possible easing cycle on the horizon, suggesting a potentially more favorable economic environment for banking operations moving forward.
The bank observed a modest NIM expansion in Q4, breaking a trend of two quarters of compression, with expectations for continued NIM expansion in 2024. Loan growth, a primary driver of income, was strong and mainly funded by a $215 million increase in deposits. Noteworthy contributors to this deposit growth included municipal, loan customer deposits, and EB-5 related deposits.
MCB reported earnings per share of $6.91 and a book value per share of $58.69 for the year. There is a sanguine outlook for 2024, expecting earnings to exhibit solid growth compared to 2023. This optimism is in part underpinned by strong loan pipelines and disciplined pricing that resulted in higher weighted average coupons on new loan originations compared to the existing loan portfolio yield.
Provisions for loan losses increased, driven by overall loan growth and specific reserves tied to a nonaccrual event concerning a single sponsor. Nonetheless, improvements in macroeconomic indicators that inform the Current Expected Credit Loss (CECL) model have provided some offsets. This indicates robust risk management practices and a strong underwriting culture at MCB.
Noninterest income remained stable at $6.5 million for the quarter, reflecting resilience despite an evolving regulatory landscape. MCB has decided to strategically exit business-to-consumer (B2C) services, which is forecasted to marginally decrease fee revenue by about 2-3% of 2024's consensus revenue forecast. Conversely, the bank is focusing on business-to-business (B2B) expansion, which is expected to contribute meaningfully to revenues in 2024.
Total core noninterest expense is projected to increase by 10% to 12% compared to normalized 2023 expenses. This anticipated growth includes one-time costs of approximately $9.5 million associated with core banking modernization projects, which are expected to be implemented over a 24-month period.
Though B2C deposits, amounting to around $250 million, will gradually exit in 2024, the bank's diversified deposit base and the introduction of acquiring are set to offset this outflow effectively. MCB's deposit initiatives are geared toward growing the deposit base sustainably, with $230 million already from new initiatives, suggesting confidence in low-cost deposit growth for the coming year.
MCB’s earnings model includes two rate hikes anticipated for 2024, which could further enhance NIM by 20 basis points throughout the year. Such adjustments factor in changes to short-term interest rates and the bank's focus on maintaining deposit growth to fuel its loan portfolio expansion.
With a tax rate observed to be around 31%, MCB estimates that this rate will be a reasonable expectation for future periods. This effective tax rate reflects MCB's financial planning and the anticipated impacts on profitability.
Demand deposit account (DDA) growth is projected to be limited going forward, with DDAs increasingly hard to come by in the current market. Nonetheless, MCB remains focused on attracting and expanding its DDA base even in a challenging environment.
Contrary to concerns, the bank expressed confidence in the credit quality of its loan portfolio. A multifamily credit discussed was characterized as non-representative of broader trends, with essentially no loss expected. MCB is committed to maintaining strong asset quality across its lending operations.
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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?
Again, the exit is going to happen during the course of 2024. The reason 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 can do the math, I can do the math, let's call it $5 million to $6 million is going to be the delta there.
Got it. Great. And then...
Chris, keep in mind, just one thing that shouldn't be not focused on. As I mentioned earlier, we didn't bring in, we haven't onboarded a B2C client and GPGs revenues not only absorbed the material reduction in crypto-related transaction revenues, we not only replaced that seamlessly, we replaced the lack of revenue coming from B2C as well by adding new B2B clients. So the underpinning of that business is strong, and it's unfortunate that we're replacing 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 speak and we demonstrated that again in '23.
Great. And just on the multifamily provision, how big was that credit? And can you give any color just around the overall circumstances, what the total reserve to the loan size is? And then just any other detailed surrounding in the credit?
It's multifamily outside of New York. I think it's Ohio and...
Louisiana
Louisiana. 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. So it's not something we haven't seen in our careers before. Considering the sponsorship behind it, we're a little bit surprised that considering how wealthy they are and how experienced they are in this asset class that they would run the risk of litigation, but they are. But we are confident. We believe the risk of loss here is minimal. I actually believe the risk of loss here is 0.
Great. And do you have what the LTV or debt service coverage ratio was on the credit going in, or the most recent?
Well, they were properties in transition. So they were not highly occupied. That was the value proposition of acquiring it at a very high cap rate going in, renovate, stabilized and the typical model of multifamily is you go in, you acquire, you stabilize, you renovate, you stabilize rates come down, cap rates come down, you refinance or sell at 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 70%, I'm sure within policy guidelines of 70%, 75%, I'm sure.
Great. And just a last one on this. Do you know when it was originated?
I think on the inside of 2 years, 2022 '21, '22?
[ '21 ]
Great. And just 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?
No. Just as I said in my prepared remarks, this isn't indicative of any trend or anything that's happening in the portfolio from an asset class perspective or geography. This is a one-off situation. Keep in mind, we do a fair amount of lending here. You will have non NPLs from time to time. The question is, your underwriting will get tested when you have non-PLs. And you'll see throughout the course of the year, how our underwriting did as a result of remediating this problem. I can tell you the clients are fully engaged now, and they are talking to us. So I would expect this to get resolved one way or the other pretty soon.
Our next question comes from Alex Lau with JPMorgan.
I wanted to start off with deposits, which deposit verticals drove the increase in noninterest-bearing deposits on a period-end basis? And what are your expectations for DDA growth outside of the B2C runoff in 2024?
So the increase in DDA was driven through GPG clients. And we've got a modest assumption in our model that we'll see fairly limited DDA growth going forward. I think DDA is becoming kind of a unicorn out there. It's hard to find noninterest-bearing deposits at this juncture in the market. But we do have a small -- a relatively small growth in our models.
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 are reasonably opportunistic. But I think they're going to continue to contribute. And our goal is as we said in the past and as we have been historically, that our funding will be -- our loan growth will be funded specifically by core funding, and they will continue to contribute. How much in any one quarter or a year? It's hard to say, but that's our goal to continue to stay a core-funded institution.
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 rate? And the timing, given your deposit mix, for example, do you have the mix of index deposits? Or how much is exception pricing?
Our assumptions trend toward a very conservative 65% inclusive of the derivatives that we have on the balance sheet. 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 the short rates move down.
And then one follow-up on expenses. You mentioned the 10% to 12% growth on core noninterest expense. What is the normalized expense base you were referring to for 2023?
I believe I quoted that as Q4 annualized and then grossed up with the 10% to 12%.
Got it. And were there any project expenses in 2023 already? And on the project expenses as well, is there a sense of timing? Will it be more front loaded or pretty spread out throughout the year?
There were some modest expenses in '23. 2024 is going to be quite lumpy. 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 subprojects, if you will, come online.
Okay and then just another follow-up on the B2C fee income loss over '24. Was that $5 million to $6 million in exit run rate for 4Q '24? Or is that the full year impact versus consensus for full year '24?
$5 million to $6 million is for the full year. Remember, the -- when you look at the 2023 results, you 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 $5 million to $6 million.
And of course, Mark touched on this, it's really important. Our B2B pipeline is strong. We have a strong commitment to growing that book of business. and we remain quite hopeful that will continue to grow and provide some -- a significant amount of low-cost funding.
And we do have a follow-up question from Chris O'Connell with KBW.
Yes. Just wanted to confirm the expense guide. I had the Q4 annualized a $37 million annualized plus 6% to 8%. And then the 2023 normalized OpEx plus the 10% to 12%. Is that correct, not the Q4 annualized [ 6% and 12%]
It's overall, overall is the comp and benefits 6% to 8% of Q4. That's kind of a specific both there. But overall, 10% to 12% of fourth quarter annualized.
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 into MCB.
Thanks, everybody.
Thank you. This does conclude today's conference call and webcast. A webcast archive of this call can be found at www.mcbankny.com. Please disconnect your line at this time and have a wonderful day.