Q3 2023 Metropolitan Bank Holding Corp Earnings Call

Well first on hold we appreciate your patience and ask that you continue to standby.

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Today.

Press Star Zero.

Uh huh.

Welcome to Metropolitan commercial banks third quarter 2023 earnings call.

During the call today from Metropolitan Commercial Bank, our 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 opened for your questions following that.

Prepared remarks, if you would like to ask a question at that time. 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 we ask that you. Please pick up your handset to allow optimal sound quality.

Lastly, if you should require operator assistance, please press star zero.

During today's presentation reference will be made to the company's earnings release and investor presentation copies of which are available at M. C Bank and why Dot 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.

Sir 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.

To leave more time for Q&A.

To get started I am pleased with M <unk> third quarter and year to date results.

To say the last nine months have been challenging is an understatement. However, as you can see MTB has been able to navigate through these challenging times.

Not really because we were as prepared as we can before 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 <unk>.

Early contributions from our latest initiatives in 10, 31 title and he'd be five lines.

Excess liquidity this quarter also allowed us to pay down all federal home loan bank borrowings, which will use specifically the off ramp our previous on balance sheet could build 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.

Maintain M C b 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 we'll 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.

I will now turn the call over to Greg for more detail.

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 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 a lower cost deposits through 2024 and beyond.

M C. B 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 a $188 million.

Reflecting growth from both existing and new customers.

We did see outflows of $58 million, representing the return of our 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 eight 7%.

Versus the second quarter portfolio yield of 654%.

Showcases mtb'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 library abilities 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 sheets. The average balance sheet for the third quarter shows we've 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 cost on $300 million of F. Hlv borrowings using a pay fixed swaps at an average rate of approximately 5%.

The third quarter average borrowing rate of 566%.

That benefit will start to come into NIM and P&L in the fourth quarter.

The goal would be to exit 2023, with only $300 million of hedged borrowings remaining on the balance sheet.

And as Mark has already mentioned, we expect mtb's newest deposit verticals to provide a funding advantage well into the future.

Touching briefly on credit and asset quality remained strong.

Strong loan growth drove credit provisioning in the quarter, which was partially offset by improvement in the economic forecast underlying our seasonal 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 continued to scale with revenues up 22% in the prior linked quarter.

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 $600000.

Which we would expect to drop out of the run rate Prospectively lastly, the increase in comp and benefits relax reflects our continued investment in human capital.

This includes the increase in Ftes during 2023, many of whom were on boarded 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.

I will now turn the call back to Shelby for Q&A.

Thank you the floor is now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad.

Any point. Your question has been answered you may remove yourself from the queue by pressing star too again, we do ask that while you pose your questions you pick up your handset to provide optimal sound quality.

We'll take our first question from Nick Coppola with Hunter Group. Your line is open.

Good morning, everyone.

Good morning, Nick.

I wanted to start on the expense front nice to see a material reduction in professional fees. This quarter given the resolution of the regulatory issues is it your expectation that this line continues to normalize I heard the 600000, you expect to drop out in the third quarter, but the fourth quarter, but is there is there more to come in the near term there.

I wouldn't expect.

Any upward movement on the fresh off the line neck over the next couple of quarters, particularly from a core perspective.

I think legal event expense will settle out largely in the fourth quarter, but maybe end of the first quarter just given some timing you know given the announcement yesterday I think you'd still expect to see Simon in the quarter.

Longer term, though I mean, we've talked for many quarters and many years now about investments we make in the business and that's not just <unk>.

Human capital, which I mentioned in my prepared remarks, but also investments in technology and our digital strategies. So we did announce the fens Lee.

<unk> earlier this week. So I think he said people have seen that there there's over the last several quarters been some spend in that line related to our digital initiatives I think youre going to continue to see that and you know as we get through the budget process and Mark and team have.

A chance to finalize the plans around I think you'll get more guidance in the first quarter. You know in January I should say around what that looks like and again, that's noncore to me, but you know and I think where you kind of probably going to this is what should you expect from a core run rate perspective on expenses and I.

I think we've been pretty consistent as we talked over last couple of years. We we can really drive core efficiency ratio and then in the forties you know right now if you get looked at it on a core basis and stripped out legal fees in particular in some of the technology spend I think you'd see it in the in the high forties and I think the expectation would be to continue driving that lower as we go through time and the investments are made.

And this quarter, particularly in people it helps to do that because theres client facing people in those numbers.

And it's the team is working hard and as we've seen over the last couple of years, we typically see a pretty quick return on those types of investments probably more than you asked for in the question, Nick but I thought I'd give it to you at all at once no that's great color I appreciate it.

I know we're in the early innings and you touched on it briefly in your opening remarks, but could you update us on your on your newest deposit verticals. You know 10, 31 title he'd be five et cetera.

They're well on their way the infrastructure setting those two.

Specifically with 10 31, we can start with that there are two or three actually technologies that we have to integrate in order to be very competitive in that space and we are well on our way.

We have our I T team working with our 10 31 team in implementing these new technologies. So we would expect we had we didn't expect much out of 10 31 or <unk> 85 in 2023.

These were 2024 big initiatives for us so we'll be fully prepared and fully in the market for 10, 31 and and title in 'twenty for early January and.

E. B five also there's a lot that goes behind it it's a complicated business from a from a documentation perspective policies procedures.

And getting out into the marketplace. So.

They're fully stood up and so we expect.

Have a good runway in 2024 and beyond.

Fantastic and then loan growth was strong again this quarter, our pipelines are at similar levels relative to the previous quarter.

Yeah, I would say so yes, yeah pipeline remains robust.

Fantastic. Thank you for taking my questions.

Nick Thank you and thanks for joining.

And we'll take our next question from Chris O'connell with K B W. Your line is open.

Hey, good morning.

Good morning, Chris.

Wanted to follow up on that last question, there regarding loan growth and overall balance sheet growth.

It sounds like pipelines on the deposit side and the loan side.

Remain full.

Do you expect going forward.

On the deposit side that there is any kind of remaining core noninterest bearing deposit mix shifts.

Remaining.

Or the growth from these new deposit verticals.

Can offset any kind of related mix shift on a go forward basis.

Well in the quarter, Chris I mean, we're really pleased to see in the quarter. The existing verticals all contributed and that was largely as a lot of existing clients. It was also new clients, particularly in retail and with our lending clients importantly, though I mean, we're really focused on the mix side the mix I'm thinking I'm focused on the most is that that that DDA versus.

Interest bearing next and what the $75 million of DDA growth in the quarter. That's a direct reflection of how hard the teams are working right away they get it and they're really focused on working with our clients and bringing in the operating accounts. So I think looking ahead I really think that the mix is going to be pretty consistent I would expect to see all deposit verticals continuing to contribute the teams or what.

And really hard.

Like to see that DDA mix of existing verticals continue to scale as well.

And then the new verticals you'd be five and title and escrow 10, 31 that to me I mean that those that has a long runway for those those just to continue to scale and scope and I mean, they contributed this quarter that contributed for the last two quarters actually they're going to continue to contribute for it.

And beyond but it's you're really going to see those verticals scale in the latter half of next year and that to me is just the real exciting part here in terms of what youre going to see from a mix shift perspective, that's going to impact that cost of funds over time.

Yeah and for the new verticals in the deposit production coming on there.

Any sense, even in general terms, what what the blended cost.

The new deposit pipelines are coming on that.

Yeah, I mean, as you know, we're not going to talk about pricing in specific protocols.

Except I would say for <unk> five in particular, it's it's certainly on a blended basis inside of our current total cost of deposits. So that's going to give you. Some comfort that as we continue to put on new production yield bonds of which frankly right now or over 9%, what we see in the pipeline you're going to see healthy loan yields coming on the asset side repricing, but youre going.

See those newer deposits starting to come in inside of our current customer base and that that's a good place to be.

Got it I guess said another way I mean.

Just bearing deposit costs alright, now at 410.

How much higher do you think that those will go over the next two or three quarters.

Yeah.

My Crystal ball is broken Chris I mean, I think you're still going to see I think he is already largely seen the pull through effect of rate impacts at this point you might see a little bit more impact in the third and the fourth quarter and October potentially but I would actually expect to see that number starting to hold steady, particularly if you think we're through the rate hike cycle right. We are.

The ability sensitive state that state that as it is but.

Over the next two quarters, assuming that rate hikes kind of settle out I think we're pretty close to the high end of that that number.

Got it.

<unk>.

And just given that outlook and some of the borrowing dynamics.

You discussed in the prepared remarks.

How do you how do you see the NIM progressing near term into the fourth quarter and over the next.

Several quarters, if the rate environment kind of remains steady.

Yeah.

I really truly feel we might have seen the inflection point in the third quarter on NIM, Chris I think that's going to go back to what your kind of your embedded last question, which is is there any upward pressure on the existing interest bearing deposit side I'm not seeing it right now I.

I would expect us frankly to start that inflection point, if not already then enter into the fourth quarter you might see some modest uplift in the fourth quarter in them, but by the time, we get into the first quarter next year again combination of a more stable rate environment.

Connotation that would have on our funding cost combined with just the ability to continue to reprice the asset side, you'll you'll start to see that uplift certainly by the first quarter call at the latest.

Got it.

And on the on the G. P G pipeline.

I know you guys announced that partnership and have some.

Things that.

You'll look to update us on as we get into 2024.

But how do you see the GPT fees.

Trending into the fourth quarter should we expect those to.

On a quarter over quarter basis.

I would still expect to see GPT revenues trending as they have historically, Chris you know if you call that 15%, 20%, what whatever range youre looking at historically I'm not seeing any anything that would say otherwise I mean, we're obviously still continuing to focus on the quality clients. We want it we want to have in the portfolio there and I think as you know.

Though anybody we onboard now its really youre not going to see any substantial revenue generation fee generation for at least 12 to 18 months. It takes some time to get them through the process and ramped up but just with the existing portfolio of clients with God Youre, starting to see I called out in my prepared remarks, the corporate disbursement clients Youre starting to see some of those some of those partners really hit their stride.

And as they're building out their client base, it's filtering through but I would I would say.

Continue to look at the historic run rate I think that's a good place to start.

Got it and then just lastly on the.

On the on the consent order and the impact going forward, obviously, the the actual monetary penalty came in below expectations.

How do you have any color detail as to how much.

Internal investments related related to that are needed on a go forward basis.

I think I don't think theres any more additional internal investments, we have been working on improving the policies and procedures.

Mark Defazio: [inaudible] 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, title, and EB-5 lines.

As I mentioned in my prepared remarks, so there will be no incremental increase in costs associated with them.

Dressing as 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 too to address the concerns of the regulators.

Great.

Thank you for taking my questions.

Thank you Chris.

And we'll take our last question from Alex Lau with J P. Morgan Your line is open.

Hi, good morning, everyone.

Good morning.

Yeah.

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 G. P. G business at all thanks.

Well the the consent orders are pretty straightforward, they're specific to different areas of the.

Clients oversight, specifically for the consumer facing part of J P. G and we have been addressing it as you know this is a 2020 matter. So we have been addressing and working alongside a very productively with our regulated 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 the 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 will address them, we'll evaluate them, we'll have discussions with the regulators and then we will make the changes necessary.

We'll 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.

We don't find it to be a heavy lift we've addressed many of these already.

Because this wasn't a very acute.

Challenge in March of 2020, specifically because of the global pandemic and the.

Answers around that but no. We're in a good place and we have good dialogue with the regulators on this yeah. The only thing I would add Alex says I mean, we from an investment perspective, the human capital, we've almost doubled the number of folks in that.

The control functions since that time since early 2020, and I think that speaks to marks point in terms of.

The level of focus on this internally since that time.

Thanks, guys and then just a follow up to that does this impact the near term growth potential of the G. P. G business with regards to gathering deposits and fee income at that historical growth pace.

Mark Defazio: Excessed 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.

I don't I don't think so as I sort of signal many times over the last several quarters.

We're repositioning and looking primarily at more b to B business in G. P. G. As it relates to the payment space and not really looking to expand the consumer side of the business. So no.

Mark Defazio: We are working on a number of other deposit and fee 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.

We don't expect any interruption of business at all.

Thank you and my last question was on the.

The nonperforming loans that was there was a tick up in the quarter or can you share some color on what the loan was and also maybe just refresh us on the health of the existing nonperformer. Thanks.

Mark Defazio: 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 on the way for some time.

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 too small loans actually with the same principle.

Mark Defazio: I will now turn the call over to Greg for more detail.

Roughly $3 5 million each.

Gregory Sigrist: Thank you, Mark, and good morning, everyone. We are pleased to report strong third quarter net income of $22.1 million and fully deluded EPS of $1.97. Despite a challenging operating environment for banks, net interest income remains steady at $53.6 million. Significant expansion in total interest income was driven both by strong loan growth to the first nine months of the year as well as the impact of two rate increases since May of 2023.

We have no concerns at all on at least half of it the one loan at $3 5 million.

The loan we are highly confident we will get paid.

100 cents on the dollar.

So no concerns at all and overall the health of the book is very good yeah, stating the obvious the nonperforming the ratio there are still incredibly low even with that modest uptick of those two smaller.

Gregory Sigrist: 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 a 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 for 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.

I appreciate it thanks for taking my questions.

Got it and then for important Mark does any closing remarks, I just want to thank mark for that for the time I've spend youre going to see me, it's remarkable franchise it depends and incredible team. So mark. Thank you to you. Thank you to the board I really enjoyed working here and working with everybody and we feel the same Greg and we wish you all the best in your new initiatives.

And hopefully, we'll keep in touch and in work together again without a doubt and Chris and Alex It's been a pleasure working with you guys last couple of years and Nick sorry for the timing on it is it's been really good getting to know you as you've gotten up because the curve here, but as you know it's a remarkable franchise. So good luck.

Gregory Sigrist: We did see outflows of $58 million representing the return of remaining corporate and reserved deposits with former crypto clients. Traditional caller, net of those outflows, non-intersparing 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 per 4% on $333 million of loan production.

And this concludes the allotted time for questions I would like to turn the call over to Martin <unk> for any additional or closing remarks.

I have nothing other than thank you again for your support and interest in M. C. B and as I've said many times, we are here and we're available to anybody any investor analysts, who we'd like to chat with us offline.

Have a nice day.

Gregory Sigrist: Figure 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 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 pricing, reprising more quickly than assets in the short run.

This does conclude today's conference call and webcast and webcast archive of this call can be found at www Dot and seed bank and why Dot com. Please disconnect. Your line at this time and have a wonderful day.

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Gregory Sigrist: There are several factors that give comfort that we are at or very near the inflection point for them, 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 reprising of the loan book, which is a relatively short duration book. Barrowings 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.

Hum.

Uh huh.

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Uh huh.

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Gregory Sigrist: We do expect to see the benefit of those reduced borrowings to benefit NIM and more importantly P&L as we move forward. We enter the year with $250 million in borrowings, and as we've said for the past three 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%.

Yeah.

Okay.

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Okay.

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Gregory Sigrist: 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.

Gregory Sigrist: 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 CSO model. Total on interest income was down approximately $1.3 million in the prior link 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% in the prior link quarter and up 104% from the prior year quarter.

Gregory Sigrist: 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 profit benefits reflects our continued investment in human capital. This includes the increase in FTEs during 2023, many of whom were onboarded in the second, 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.

Gregory Sigrist: 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&S. Thank you.

Operator: The floor is now open for questions. At this time, if you have a question or comment, 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. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality.

Nicholas Cucharale: We'll take our first question from Nick Coutroy with Hava Group. Your line is open.

Gregory Sigrist: Good morning, everyone. Morning, Nick. I wanted to start on the expense front. It's nice to see a material reduction in the professional fees this quarter. Given the resolution of the regulatory issues, is it your expectation that this line continues to normalize? I heard that 600,000 you expected drop out in the fourth quarter, but is there more to come in the near term there? I wouldn't expect any upper movement on the professional fee line Nick in the next couple of quarters, particularly from a core perspective.

Gregory Sigrist: I think legal expense will settle out largely in the fourth quarter, but maybe into the first quarter just given some timing. Given the announcement yesterday, I think it still looks like to see some in the quarter. Longer term though, we've talked for many quarters and many years now about investments we make in the business. That's not just human capital, which I mentioned in my prepared remarks, but also investments in technology and our digital strategies.

Gregory Sigrist: We did announce the Finnsley partnership earlier this week, so I think these people have seen that. Over the last several quarters, some spend in that line related to our digital initiatives. I think you're going to continue to see that. As we get through the budget process and Mark and team have a chance to finalize the plans around, I think you'll get more guidance in the first quarter. In January, I should say, around what that looks like, and again, that's non-core to me.

Gregory Sigrist: I think where you're probably going with this is what should you expect from a core run rate perspective on expenses. I think we've been pretty consistent as we've talked over the last couple of years. We can really drive core efficiency ratio in the 40s. Right now, if you did look at it on a core basis and stripped out legal fees in particular and some of the technology spend, I think you'd see it in the high 40s.

Gregory Sigrist: I think the expectation would be to continue driving that lower as we go through time. And the investments we're making in this quarter, particularly in people, it helps to do that. There's client-facing people in those numbers, and the team's working hard. And as we've seen over the last couple of years, we typically see a pretty quick return on those types of investments. Probably more than you asked for in the question, Nick, but I thought I'd give it two at all at once. No, that's great color. I appreciate it. I know we're in the early innings and you touched on it briefly in your opening remarks.

Mark Defazio: But could you update us on your newest deposit verticals, 1031, tidally B5, et cetera? They're well on their way. The infrastructure, setting those two specifically with 1031, we can start with that. There are two or three actually technologies that we have to integrate in order to be very competitive in that space. And we're well on our way. We have our IT team working with our 1031 team in implementing these new technologies.

Mark Defazio: We didn't expect much out of 1031 or EB5 in 2023. These were 2024 big initiatives for us. So we'll be fully prepared and fully in the market for 1031 and title in 24 early January. And EB5 also, there's a lot that goes behind it. It's a complicated business from a documentation perspective, policies, procedures, and getting out into the marketplace. So they're fully stood up. And so we expect it to have a good run rate in 2024 and beyond.

Gregory Sigrist: Fantastic, and in low growth with strong, again, this quarter, are pipelines at similar levels relative to the previous quarter? Yeah, I would say so, yes. Yeah, five plan remains robust. Fantastic. Thank you for taking my questions.

Nicholas Cucharale: Nick, thank you, and thanks for joining.

Chris O'connell: And we'll take our next question from Chris O'Connell with KBW. Your line is open. Yeah, good morning. Wanted to follow up on that last question there regarding, you know, low growth and overall balance sheet growth. It sounds like, you know, pipelines on the deposit side and the loan side remain full. Do you expect going forward on the deposit side that there's any kind of remaining core, or not interested in deposit, mixed shift, you know, remaining, or that the growth from these new deposit verticals, can offset any kind of related mixed shift on a go forward basis?

Chris O'connell: Well, in the quarter, Chris, I mean, we're really pleased to see in the quarter, you know, the existing verticals all contributed. You know, that was largely a lot of existing clients. It was also new clients, trickling retail and with our lending clients. Importantly though, I mean, we're really focused on the mix. I'm thinking I'm focused on the most is that that that DDA versus interest bearing mix. And you know, with the 75 million of DDA growth in the quarter, that's a direct reflection of how hard the teams are working, right?

Chris O'connell: They get it and they're really focused on, you know, working with our clients and bringing in the operating account. So, I think looking ahead, I really think that the mix is going to be pretty consistent. I would expect to see all deposit verticals continuing to contribute. The teams are working really hard. I'd like to see that DDA mix existing verticals, you know, continue to scale as well. And then, you know, the new verticals, EB5 and Thailand escrow 1031, that to me, I mean, those that's a long runway for those those just to continue to scale and scope.

Chris O'connell: And I mean, they contributed this quarter. They've contributed for the last two quarters. Actually, they're going to continue to contribute for quarter and beyond. But you're really going to see those verticals scale in the latter half and next year. And that to me is just the real exciting part here in terms of what you're going to see from a mix ship perspective. That's going to impact that cost of funds over time.

Chris O'connell: Yeah, and for the new verticals and the deposit production coming on there. Any sense even in general terms, you know, what what the blended costs of the new deposit pipelines are coming on that. Yeah, I mean, as you know, we're not going to talk about pricing and specific verticals, except I would say for EB5 in particular, it's it's certainly on a blended basis inside of our current total cost of deposits. So, you know, that's going to give you some comfort as we continue to put on, you know, new production yield loans, which frankly right now are over 9% what we see in the pipeline.

Chris O'connell: You're going to see healthy loan yields coming on, you know, the asset side repricing, but you're going to see those newer deposits are coming inside of our current funding base. And that's that's a good place to be. Yeah, I guess that's another way. I mean, I'm just trying to pause the cost are at, you know, now at 410. How much higher do you think that those will go over the next, you know, two or three quarters.

Chris O'connell: My crystal ball is broken, Chris. I think you've already largely seen the pull-through effect of rate impacts to this point. You might see a little bit more impact in the fourth quarter in October, potentially. But I would actually expect to see that number starting to hold steady, particularly if you think we're through the rate hike cycle. We are liability sensitive, state that as it is. But over the next two quarters, assuming that rate hikes kind of settle out, I think we're pretty close to the high end of that number.

Chris O'connell: In just giving that outlook and some of the borrowing dynamics that you discuss in the prepared remarks, how do you see the nymph progressing near term into the fourth quarter and over the next several quarters if the rate environment kind of remains steady? Yeah, I really, truly feel we might have seen the inflection point in the third quarter on them, Chris. I think that's going to go back to your kind of your last question, which is, is there any upward pressure on the existing, you know, interest bearing deposits?

Chris O'connell: I'm not seeing it right now. I would expect us, frankly, to start that inflection point, you know, if not already then into the fourth quarter. You might see some modest uplift in the fourth quarter in them. But by the time we get into the first quarter next year, again, combination of a some more stable rate environment and a connotation that would have on our funding cost, combined with just the ability to continue to reprise the asset side, you'll start to see that uplift certainly by the first quarter at the latest.

Chris O'connell: Got it. And on the, on the GPG pipeline, you know, I know you guys announced that partnership and have some, you know, things that, you know, you look up data on as we get into 2024. But how do you see the GPG fees, you know, trending into the fourth quarter? Should we expect those, you know, to be up on a quarter of a quarter basis? I would still expect to see GPG revenues trending as they have historically, Chris, you know, if you call that 15%, you know, 20%, you know, whatever range you're looking at historically, I'm not seeing anything that would say otherwise.

Chris O'connell: I mean, we're obviously still continuing to focus on the quality, you know, clients we want to be, you know, having in the portfolio there. And I think as you know, though, anybody we onboard now, it's really, you're not going to see any substantial revenue generation fee generation for at least 12, 18 months. It takes some time to get them to the process and ramped up. But just with the existing portfolio clients, we've got, you know, you're starting to see, you know, I called out on my prepared remarks, the corporate disbursement clients, you're starting to see some of those, some of those partners really hit their stride.

Chris O'connell: And as they're building out, you know, their client base is filtering through. But I would, I would say, you know, continue to look at this historic run rate. I think that's a good place to start. Got it.

Gregory Sigrist: And then just lastly, on the on the consent order and the impact going forward. Now, obviously, the, the actual, you know, monetary penalty came in below expectations. How, how do you have any color details to, you know, how much of the kind of internal investments related related to that are needed on a go forward basis? I think I don't think there's any more additional internal investments. We have been working on improving the policies and procedures.

Gregory Sigrist: As I mentioned in my prepared remarks, so there will be no incremental increase in in cost associated with addressing the concerns of the regulators. We may have some outside validation done to some consulting work to validate what we have done. But we're in a pretty good shape to address the concerns of the regulators.

Chris O'connell: Great, that's all I had. Thank you for taking my questions.

Gregory Sigrist: Thank you, Chris.

Alex Lau: We'll take our last question from Alex Lau with JP Morgan. Your line is open. Hi, good morning everyone. Good morning.

Mark Defazio: Just to 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, thanks. 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.

Mark Defazio: 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, you know, one by one. It's no different than findings in any report of exam.

Mark Defazio: You know, 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 reviewing consideration. But we don't find it to be a heavy lift. We've addressed many of these already because this wasn't 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. Yeah.

Gregory Sigrist: And the only thing I would add Alex is, I mean, we from an investment perspective in the capital, we've almost doubled the number of folks in that. You know, the control function since that time since early 2020. And I think that speaks to Mark's coin in terms of, you know, the level of focus on this internally since that time. Thanks, guys.

Mark Defazio: And just to follow up to that, does this impact the near term growth potential of the GPG business with regards to gathering the pauses and fee income at that historical growth pace? I don't think so as I sort of signaled many times over the last several quarters, we're repositioning and looking primarily at more B2B business in GPG as related to the payment space and not really looking to expand the consumers out of the business. So no, we don't expect any interruption of business at all. Thank you.

Gregory Sigrist: My last question was on the non performing loans. There's a pickup 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 non performer? Thanks.

Gregory Sigrist: Working backwards, we are still going through the foreclosure process on that one loan that's in mission Kansas and we're still fairly optimistic on a positive outcome likely to be a 2020 for event as it relates to the pickup. It was two small loans actually with the same principle. I think roughly three and a half million each. We have no concerns at all on at least half of it, the one loan at three and a half million.

Gregory Sigrist: The other the other loan, we are highly confident we'll get paid 100 cents on a dollar. So no concerns at all and overall the health of the book is very good. Yeah, stay in the obvious. The non performing the ratio there are still incredibly low even with that modest that take of those two small. Thank you so much. Appreciate it. Thanks for taking my question. You got it.

Mark Defazio: And for Mark, it doesn't need closing remarks.

Gregory Sigrist: I just want to thank Mark for the time I've spent here at MCV. It's remarkable for Ancise. 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.

Mark Defazio: Yeah, and we feel the same Greg and we wish you all the best in your new initiatives and hopefully we'll keep in touch and work together as well. And Chris and Alex has 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 the curve here. But as you know, it's remarkable for Ancise.

Gregory Sigrist: So good luck.

Operator: And this concludes the allotted time for questions.

Mark Defazio: I would like to turn the call over to Mark DeFazio for any additional or closing remarks. I have nothing other than thank you again for your support and interest in MCB. And as I said many times we are here and we're available to anybody and the investor analyst who would like to chat with us offline.

Operator: Have a nice day. This does conclude today's conference call and webcast. A webcast archive of this call can be found at www.MCBankNY.com.

Operator: Please disconnect your line at this time and have a wonderful day.