Metropolitan Bank Q1 2024 Earnings Call Transcript

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April 19, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to Metropolitan Commercial Bank's First Quarter 2024 Earnings Call. Hosting the call from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer and Dan Doherty, Executive Vice President and Chief Financial Officer. Today's call is being recorded. At this During today's presentation, reference will be made to the company's earnings release and investor presentation, copies of which are available at mcbank ny.com. Today's presentation may include forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially.

Operator

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.

Speaker 1

Thank you. Good morning and thank you for joining our Q1 earnings call. The Q1 of 2024 was a very productive for MCB. Our Q1 results were a strong start for the company. During the quarter, we carefully grew the balance sheet while maintaining our price discipline, credit standards and with a continued sharp focus on liquidity and interest rate risk management.

Speaker 1

We were also able to grow core deposits well of our loan growth. Our 2 major initiatives planned for 2024, the wind down of the GPG business and the digital transformation project have begun in earnest and are proceeding on time and on budget. While we remain focused on the on quarter, we reported an earnings per share of $1.46 which was reported by strong I'm sorry, which was supported by strong growth in net interest income and continued excellent credit performance. In the meantime, the successful completion of our other initiatives remain a high priority. The economy continues to display strong fundamentals and impressive resilience.

Speaker 1

This is evident the evident strength of the economy provides us with an optimistic outlook for loan growth and credit performance. The outlook for monetary policy has changed dramatically over the last several months. Rather than expectations of significant easing throughout 2024, the market is now pricing in less than 50 basis points of easing in the back half of the year. I am pleased to report we saw a 4 basis points NIM expansion in the Q1. Even with the change in the outlook of monetary policy, we continue to expect further margin expansion as the year progresses.

Speaker 1

Asset quality remains strong. We have not identified any broad based negative trends in any loan product, geography or sector that is impacting our portfolio. We believe that our healthy credit metrics are a direct result of MCB's pricing discipline, conservative underwriting and portfolio diversity. Also as our performance is supported by the exclusive focus on relationship based commercial banking and high quality commercial clients and sponsors in industry segments that we know exceptionally well. Finally, I am pleased to report that the 2 loans totaling approximately $21,000,000 that were classified as non performing loans at twelvethirty one last year are now current, have substantial funded interest reserves, and the related workouts also include targeted and aggressive amortization requirements throughout this year.

Speaker 1

I will now turn the call over to Dan Daugherty.

Speaker 2

Thank you, Mark. Good morning and thanks again for joining our Q1 earnings call. 1st quarter loan growth, over $94,000,000 was funded entirely by core deposit growth of more than $340,000,000 excluding additional growth in the VaaS vertical. As mentioned in the press release, multiple deposit verticals contributed to the core deposit growth. As a result of our deposit growth, our end of period and average balance of cash parked at the Fed was substantially elevated.

Speaker 2

Despite the outsized cash position and the current rate environment, we were able to increase the net interest margin by 4 basis points in the Q1. Our loan pricing and repricing discipline was the main driver of our ability to expand the NIM. We expect to see some additional uplift in the margin throughout the remainder of the year. In our updated forecast model, we have penciled in a single 25 basis point rate cut in September. In that scenario, we expect to see approximately 5 to 10 basis points of additional uplift.

Speaker 2

Put it another way, we forecast the 4th quarter NIM in the range of 3.45% to 3.5%. Focusing on lending, it is noteworthy that our quarterly loan growth was net of more than $225,000,000 in payoffs and paydowns. Continued focus on economic loan pricing resulted in a weighted average coupon, net of deferred fees, which are typically 15 basis points to 25 basis to 25 basis points per year of 8.47 percent on 1st quarter new loan originations and draws versus a December 2023 portfolio coupon of 6.92%. Loan growth is expected to accelerate as the year progresses. We continue to plan on loan growth of between $608,000,000 $800,000,000 for the year.

Speaker 2

Our loan pipelines, especially on the C and I side, are growing after a slower than expected start to the year. Importantly, our plan assumes that we're able to fund all of that planned loan growth with deposits. As Martin mentioned, asset quality remains strong with no identifiable negative trends in the portfolio. The provision in the Q1 was generally in line with the increase in loan footings offset somewhat by improvements in the macroeconomic variables that underlie our Q1 CECL model forecast. Non interest income increased by approximately 7% from the linked quarter as fees associated with letter of credit activity and deposit service charges more than offset a small decline in BaaS revenue.

Speaker 2

The uptick in deposit fees is expected to be sustainable, while the increase in letter of credit fees is more aligned with borrower behavior. The decline in BaaS revenue will accelerate as the wind down project proceeds throughout the year. We expect BaaS revenue to total $8,000,000 to $10,000,000 and total non interest income to foot to $19,000,000 to $21,000,000 for the year. Going to noninterest expenses. Non interest expenses totaled $41,900,000 in the Q1.

Speaker 2

Importantly, expenses related to the digital transformation project totaled $1,800,000 and an additional $3,100,000 reflects remediation work and severance payments associated with the GPG wind down. There was also an increase in core operating expenses compared to the Q4. This was primarily due to seasonally elevated employer tax payments. Our $12,000,000 digital transformation budget remains unchanged and we continue to expect to complete the project in 2025. We currently expect about $8,000,000 to $9,000,000 of the project to be expensed in 2024, including what has already been recorded for the Q1.

Speaker 2

Non interest expenses for the full year, including the digital transformation investment are expected to total in the range of $160,000,000 to 100 and $63,000,000 The effective tax rate for the quarter was approximately 33%. The tax rate was negatively impacted by discrete items that came through in the quarter, primarily related to the conversion of employee stock based awards. Going forward, we expect the effective tax rate to be in the range of 31% to 32% excluding discrete items. Finally, please refer to the updated investor deck, which can be accessed from our website for a walk down from reported earnings to non GAAP core earnings. As well the deck now includes slides that provide details about the bank's multifamily and office loan portfolios.

Speaker 2

I will now turn the call back to our operator.

Operator

Thank you. Our first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Speaker 3

Hey guys, good morning. Nice quarter.

Speaker 4

Thank you, Mark.

Speaker 1

Good morning.

Speaker 3

First question I had, just to clarify, we still should expect about $300,000,000 of B2C deposits running off in the second quarter. Is that right?

Speaker 2

Approximately yes, that's a good estimate towards the end of the second quarter especially, yes.

Speaker 3

Okay. And should we assume that your deposit pipelines continue to be strong given the success you had in the Q1?

Speaker 1

The answer is sorry, Dan. The answer is yes, but the timing of these new relationships and deepening some of them could be a bit different. But to Dan's point, at the end of the year, we are confident that we will not only replace those deposits, but we will have funded our loan growth. So from a quarter by quarter basis, it could be a little timing could be slightly off. But on an annualized basis, we are still in line with our projections.

Speaker 3

Okay. And then in the past, you all had indicated that you were talking to some teams from neighboring banks. I haven't seen any announcements from you all. Is that still in process? Is it likely that you'll hire some of those deposit teams in coming quarters?

Speaker 1

It's an interesting question. We've met with several and none of them were really a good fit so far for a lot of different reasons from cultural fit to pricing to loan expectations to support clients. There's a whole host of parts of that conversation. And so far, we've never built this franchise based on teams for a lot of different reasons. And but we did speak to several teams and but we have not made a decision on any one.

Speaker 1

But I would put a low probability on that happening in 2024.

Speaker 3

Mark, do you think some of these teams are getting unrealistic deals from other banks or other banks are paying too much to bring these teams on?

Speaker 1

Well, I don't know what they negotiated. Perhaps they're better negotiators than me. But when I look at the 3 biggest hurdles, so all nice people, by the way coming into the bank, but culturally it's a very difficult fit. They're used to working in teams. They're not integrated with company.

Speaker 1

It's sort of out of character for what we've built here as a commercial bank. The kind of integration we have here, the kind of culture not only works for our staff, but it also works for our clients. Our clients expect that kind of relationship banking. So that's the problem, number 1. Number 2, on the way in, even if you think that the cost of those deposits are affordable today or efficient, you got to dig in a little deeper and look at total compensation expectations.

Speaker 1

And what I found most problematic is the implication of loan expectations. A lot of these deposit teams represent a lot of real estate owners in multifamily. And although we have multifamily on the balance sheet, it will never be a primary asset class at MCB. It is a low profitable business. So I don't want to set anybody up for failure, encourage them to come here.

Speaker 1

We attempt to integrate them and then find out we can't replace the loans as they mature out of their existing banks in multifamily. So there's a few other conversation points, all nice people. I wish them well. But so far, it has not been a good fit for MCB for a lot of reasons.

Speaker 3

Okay. And last question. Dan, the guidance you gave was super helpful. The one thing you didn't give guidance on was the provision. Based on your projection for 6 $100,000,000 to $800,000,000 alone growth and assuming no real changes to the economic model, what does that kind of spit out in terms of provisioning for the year?

Speaker 2

We should see about 1% of growth as our provision level. So I'm thinking 6% to 8%, maybe a little bit more, but I think 6% to 8% is a good context for the provision for the remainder of the year.

Speaker 3

Thank you.

Operator

Thank you. Our next question will come from Christopher O'Connell with KBW. Please go ahead.

Speaker 4

Hey, good morning.

Speaker 1

Good morning, Chris. Good morning, Chris.

Speaker 4

So just wanted to start off on the expense side, appreciate the guidance there and the guidance around the digital transformation costs as well. For the guide of the $160,000,000 to $163,000,000 that includes the core OpEx plus the digital transformation. Does that include the GPG wind down in regulatory remediation costs?

Speaker 2

Yes, it does, Chris.

Speaker 4

Okay, got it. And can you just walk us through like what exactly regulatory remediation costs relate to and how much of the GPG wind down and regulatory remediation costs remain, if any, over the course of the year?

Speaker 1

It really is made up of legal and professional fees, consulting fees. As you all know, we have 2 public consent orders out there, which are expensive, to unwind and get removed. We're confident that we can satisfy the expectations throughout this year. But consultants are very expensive today. Regulators expect independent validations done by 3rd parties.

Speaker 1

You need lawyers to look at every document you send to regulators today. So it's an expensive and unfortunate expense, but we expect it to run off at the end of this year and not be in a 20 20 5 run rate. Can't really allocate that. We're very precise on the budget for the integration. But regulatory expenses and legal fees and consulting fees is somewhat of a moving target.

Speaker 1

We think we gave you worst case scenario in Dan's projections.

Speaker 4

Got it. And just do you have any ball park as to like the total dollar amount of those costs throughout 2024? Not not cost.

Speaker 1

Got it. Well, if you just back out, well, you know how much we're spending in the digital transformation, back out, take that off of what the guidance Dan just gave you, gives you the ball park of the exit fees and professional fees, the GPG exit cost and the professional fees. But it's we'd rather give you a worst case scenario than to try and allocate it.

Speaker 4

I guess what I'm getting at is, when you back out the digital transformation costs and the rest of these one time costs, as you're getting to 4Q 'twenty four, 1Q 'twenty five, do you have a sense of what the core kind of underlying expense run rate will shake out at?

Speaker 2

It's a really good question, Chris. And I've been noodling on that for quite some time. I come up with around 148 to 150 as a range of core expenses by the time we get to 25. Now again, that estimate is very dependent on the timing and success of our remediation project and remediation requirements. But I think that's a good placeholder.

Speaker 4

No, yes, that's super helpful. Thank you.

Speaker 5

And then

Speaker 4

just as far as really appreciate the color on the multifamily and office slides in the deck. It looks to be that there's on the rent regulated side and on the office side, no non performers right now from what I could tell. How are you guys feeling about the maturities in those two buckets over the course of 20 24, do you guys have a good look into those borrowers and those credits? It looks a little bit lighter on the rent regulated multifamily side, but about roughly a third give or take of the office kind of matures this year?

Speaker 1

Yes, I would expect that with the exception of the credits that we want to keep and we reprice and keep it because we have a high retention rate here, The rest of them will get paid off. Out of the over $200,000,000 in the Q1, some of it was multifamily as well and perhaps some office. So yes, we do not expect to be in a rollover situation where one cannot be refinanced or we would not be interested in refinancing the credit.

Speaker 2

I would add further that our credit team has looked at each of if it's maturing in 2024, we've already been in touch with the customers. And we again, we don't detect anything negative trends out there that are material nature to bring it to your attention.

Speaker 4

Great. And just the timing of the GPG deposit roll off, I know you guys covered Q2 and but just given that there was actually kind of surprisingly growth this quarter in that category, How are you guys thinking about the timing of the rest of that roll off into the back half of the year? Is it going to be more weighted toward Q3 or Q4? Or is it pretty even across those two quarters?

Speaker 1

I think based on our schedule, what we call B2C, by the end of the summer, by August, that should be complete. And then in the 3rd Q4, the B2B deposit should be complete. But I would extend the B2C to the end of the summer to August.

Speaker 4

Was the growth this quarter in B2C or B2B or a mix?

Speaker 2

It was a mix actually.

Operator

Great.

Speaker 4

All right. That's all I have for now. Thanks for taking my questions.

Speaker 2

Thanks, Joseph.

Operator

Thank you. Our next question comes from Alex Lau with JPMorgan. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 2

Good morning, Alex. Hi, Alex.

Speaker 5

Staying on the GPG runoff schedule, what are your expectations for the quarterly pace of reduction in GPG fee income and expenses for the year?

Speaker 2

So as you saw in the Q1, we printed $4,000,000 of fee income. I don't expect that the decline in the second quarter is going to be materially different than that. But then as you get into Q3 and Q4, it's going to accelerate rapidly. Again, dollars 8,000,000 to $10,000,000 is my forecast for the entirety of the year. But I think that's the best way to think about it.

Speaker 5

Great. Thank you. And on the $90,000,000 increase in non interest bearing deposits this quarter, where did you see that come from in terms of deposit verticals? And looking ahead, where do you expect these balances to grow, if any?

Speaker 2

A significant portion of that was from the BaaS side. So some of it was from retail, but again, there was a good portion on the BaaS side and it becomes part of the forecasted outflows over the remainder of the year.

Speaker 5

Great. Thank you. And then regarding the NPA that moved to current, were there any specific reserves? And do you expect any releases related to these loans?

Speaker 1

Yes. We're hoping that in the Q2 when we report we could release those reserves, but we wanted to season for a bit. It's prudent to just let it season there at least for a quarter. But as I said, we have substantial interest reserves now that go well beyond the Q1. So yes, we'll take a hard look at that, but we're expecting it to get reversed in the second quarter.

Speaker 5

Great. Thank you for answering my questions.

Speaker 2

Thank you, Alex.

Operator

Thank you. This does conclude the allotted time for questions. I would now like to turn the call back to Mark DiFazio for any additional or closing remarks.

Speaker 1

Thank you. I do not have any specific remarks. I just want to thank everyone again for their continued support and continue then the continued support of MCB. And we are an exciting franchise here with a great growth story that will just continue. So thank you again and enjoy the rest of your day and weekend.

Speaker 2

Thank you everyone.

Operator

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.

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Key Takeaways

  • Strong Q1 performance with EPS of $1.46 driven by a 4 bps expansion in NIM and robust net interest income growth alongside excellent credit metrics.
  • Loan growth of $94 million in Q1 was fully funded by a $340 million increase in core deposits, reflecting disciplined pricing and continued deposit diversification.
  • On track with two major 2024 initiatives: the wind-down of the GPG business and a $12 million digital transformation, both proceeding on time and budget.
  • Guidance for the full year includes loan growth of $600–$800 million, a 4Q NIM of 3.45–3.50%, and a CECL provision rate of approximately 6–8 basis points of growth.
  • Asset quality remains strong with no broad-based negative trends; two previously nonperforming loans are now current with substantial interest reserves.
AI Generated. May Contain Errors.
Earnings Conference Call
Metropolitan Bank Q1 2024
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