Metropolitan Bank Holding Corp.

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. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the prepared remarks. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star 0. During today's presentation, reference 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 risk 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 nine 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, TIDAL, and EB-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 are 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 nine 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 caller net of those outflows, non-interest 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 a 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 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 NEM, 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 sheets, 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 through credit provisioning in the quarter, which was partially offset by improvement in the economic forecast underlying our CISO model. Total non-interest income was down approximately $1.3 million from 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% from the prior linked quarter and up 104% from the prior year quarter. Non-interest 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, you know, 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 percent, excluding discrete items. And I will now turn the call back to Shelby for Q&A.