Metropolitan Bank Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2024

There are 5 speakers on the call.

Operator

Welcome to Metropolitan Commercial Bank's Second Quarter 2024 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. 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. 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.

Operator

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 and investor presentation. It is now my pleasure to turn the floor over to Mark DiFazio, President and Chief Executive Officer. You may begin.

Speaker 1

Thank you. Good morning, and thank you all for joining our Q2 earnings call. NCE's solid second quarter financial performance was indicative of the strength of our core commercial banking franchise. During the quarter, we thoughtfully grew the balance sheet while maintaining our price discipline, credit standards and with the continued sharp focus on liquidity and interest rate risk management. I am pleased to report we saw a 4 basis points of NIM expansion in the 2nd quarter.

Speaker 1

This marks our 3rd consecutive quarter of NIM expansion. Our 2 major strategic initiatives, the wind down of the GPG business and the digital transformation projects are proceeding on time and on budget. We remain keenly focused on the successful completion of these important initiatives. Also, NCB remains focused on the continuation and expansion of our profitable and intentional commercial bank growth strategy. In the 2nd quarter, we reported earnings per share of $1.50 including $0.34 net impact of the GPG wind down, regulatory remediation and digital transformation expenses.

Speaker 1

Profitability was supported by strong growth in net interest income and continued excellent credit performance. Asset quality remains strong. We have not identified any broad based negative trends in any loan product segment, 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. Our performance is also supported by our exclusive focus on relationship based commercial banking with high quality commercial clients and sponsors in industry segments that we know exceptionally well.

Speaker 1

As I mentioned on the Q1 earnings call, we had 2 loans totaling approximately $21,000,000 that were characterized as non performing as March 31 reporting dates and are now current and have funded interest reserves. I will now turn the call over to our CFO, Dan Tawari. Good morning, everyone, and again, thanks for joining our earnings call. As Mark mentioned, the net interest margin increased by 4 basis points to 3.44 percent in the 2nd quarter, adding to the 4 basis point increase that we saw in the 1st quarter as well as a 9 basis point increase that we saw in the Q4 of 23. Our loan repricing and repricing discipline are the main drivers of our ability to expand the net dividend.

Speaker 1

We expect to see some additional modest uplift in 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 3 to 5 basis points of additional uplift. In other words, we forecast a 4 quarter NIM in the range of 3.47% to 3.50%. Focusing on lending, we grew the loan book by approximately $120,000,000 in the 2nd quarter.

Speaker 1

It is noteworthy that our quarterly loan growth was net of more than $240,000,000 in payoffs and paydowns in the quarter. Loan growth in the quarter was led by an increase of $48,000,000 in C9 and an increase of $105,000,000 in CRE, resulted in a weighted average coupon of 8.81 percent on second resulted in a weighted average coupon of 8.81 percent on 2nd quarter loan originations and draws. That coupon does not include deferred fees, which are typically 15 to 25 basis points per year. The coupon on loan balances in curtailments in the quarter was approximately 7.88%. The weighted average coupon on upcoming loan maturities for the balance of 2024 is closer to 7.5%.

Speaker 1

In the quarter, deposits declined by approximately $68,000,000 primarily as a result of a wind down related decline of $60,000,000 in GPG deposits. As well, we experienced a temporary $80,000,000 decline in borrower deposits, partially offset by an increase of $70,000,000 in property manager deposits.

Speaker 2

Year to date, we are

Speaker 1

up about $320,000,000 net of GPG flows. Importantly, we intend to maintain our discipline in what continues to be an extremely competitive deposit gathering environment. Accordingly, we are adopting guidance on loan growth for the full year 2024, which is somewhat lower than our previous guidance. We currently forecast loan growth of approximately $500,000,000 to $600,000,000 for the year. We believe this more conservative approach will further enhance our ability to maintain great discipline on lending and importantly, we'll also provide some relief on the funding side of the equation.

Speaker 1

As Mark mentioned, asset quality remains strong with no identifiable negative trends within the portfolio. The provision in the 2nd quarter was generally in line with the increase in loan inflows. Non interest income included an uptick fees from the Q1, which as previously mentioned is expected to be sustainable. This increase was more than offset by declines in letter of credit fees and GTG revenue. For the full year 2024, we currently forecast BaaS revenue to total $9,000,000 to $11,000,000 Our total non interest income expectation for 2024 is slightly higher than our previous guidance.

Speaker 1

We now expect it to put to $20,000,000 to $22,000,000 for the year. Non interest expenses totaled $42,300,000 in the 2nd quarter. Expenses related to the digital transformation project totaled $1,700,000 and an additional $3,800,000 reflects regulatory remediation work and costs associated with the GPG-one event. Q2 regulatory remediation costs came in approximately $2,000,000 higher than expected. We have made arrangements for the GPG client to recoup that $2,000,000 the $2,000,000,000 overage in the 3rd quarter and further to pass through a significant portion of any future remediation expenses that are greater than previously anticipated.

Speaker 1

For the full year 2024, our guidance remains total managed expense of $61,000,000 to 163,000,000 dollars Further, I expect the go forward clean run rate for non interest expense will be around $149,000,000 to 152,000,000 Of course, please keep in mind that this estimate is certainly subject to adjustment as we move through the 2025 planning season. Our $12,000,000 to $13,000,000 digital transformation budget remains unchanged. We continue to expect to complete the project in 2025. Approximately $89,000,000 of the projects will be expensed in 2024, inclusive of the $3,500,000 that has been reported through June. To date, we have executed the vast majority of the underlying major contracts.

Speaker 1

The effective tax rate for the quarter was approximately 30%. Going forward, we expect the effective tax rate to be in the range of 31% to 32%, excluding discrete payments. Please refer to the updated investor deck, which can be accessed at our website for a walk down from reported earnings to non GAAP core earnings. Year to date, the one time charges related to our digital project, regulatory remediation and FAS exit totaled $10,400,000 or $7,100,000 after tax. I will now turn the call back to our operator for Q and A.

Operator

Thank you. The floor is now open for questions. Our first question will come from Alex Lau with JPMorgan. Please go ahead.

Speaker 3

Hey, good morning. Good

Speaker 1

morning, Alex. Good morning.

Speaker 3

Starting on deposits, what are your expectations in terms of timing and magnitude of the exit of the $900,000,000 in GPG deposits through year end?

Speaker 1

At the end of June, we had about just our rating order moving. I expect about $350,000,000 to go out in this quarter and $450,000,000 to go out in the 4th quarter.

Speaker 3

Got it. And as these deposits leave the balance sheet, what are the key sources of funding that you plan to use to replace these deposits in the near term? And what are the costs associated with these funding?

Speaker 1

We're going to rely on our existing verticals clearly. We've actually had a meeting yesterday kind of strategizing on that and we see a lot of opportunity in our vending customers, ED5s and HOA and munities as well. So with that, I expect that the replacement for the acute cut was approximately $4,000,000 that was my guess. But again, it's very dependent on how that mix comes down.

Speaker 3

Got it. And do you expect much wholesale borrowing in the near term in anticipation of the outflow deposits?

Speaker 1

Our plan is to replace all of the outflow with deposits, but we are fully prepared to use wholesale as necessary.

Speaker 3

Thank you. And then just to touch on the loan growth. Is the slower start to loan growth for the year a factor of less demand from your customers at all? Or is it largely from the pay downs that you mentioned?

Speaker 1

It's really Alex, this is Mark. It's more as a result of pricing. We are here, we believe in capital preservation, especially this year, is critical across the industry, and we're just not seeing the risk reward out there. So we prefer to do a bit less. We're seeing a lot of opportunities.

Speaker 1

I believe the last thing I've heard from head of my Commercial Real Estate Group is we've turned down some $400,000,000 of deals so far specifically because of pricing or perhaps a little bit outside the range of asset quality that we were looking for. So we're a bit more careful today. I wouldn't call it conservative, but it's really around asset quality and pricing.

Speaker 3

Thank you. And just one last one for me. What is the latest update on your progress on the regulatory remediation process?

Speaker 1

We're making a lot of progress. We are very much aligned with our regulators. We have a working relationship with them. We're anticipating material enhancements or improvements to it. And the cost the meaningful cost that we have been expensing in 'twenty three and 'twenty four will likely come to an end or materially come to an end by the end of this year.

Speaker 3

Great. Thanks for taking my questions.

Speaker 2

Thank you. Thanks, Alex. Thank you.

Operator

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

Speaker 4

Just following up on the GPG runoff, of the $800,000,000 or so that's remaining, can you just remind us what the breakdown is either just on the blended cost or how much of that is within the non interest bearing deposits?

Speaker 1

The blended cost on the remaining balances is around 1.5%.

Speaker 4

Got it. And if so as far as the NIM guide up 3 to 5 bps into the end of the year here, that is I'm assuming that that assumes that the deposits with the 4% handle are replacing the entirety of the GPG deposits, is that correct?

Speaker 1

That is correct.

Speaker 4

Got it. So depending on if you have to dip into short term borrowings temporarily for a quarter or so here, that probably results in just either a flatter NIM trajectory or kind of just a modest uptick into the year end depending on how much Fed funds cuts we get?

Speaker 1

Yes, that's exactly right. To the extent we can work a better blend on the deposit growth that produces upside. To the extent there are timing variance and then we are forced into the wholesale market that creates a little bit of a headwind. But the plan for now, we're pretty comfortable with it, is to replace those deposits as they're modeled with new, what we call, core deposits. And Chris, just to point out, we have been deemphasizing TPG for the last 2 years now.

Speaker 1

So we have a history of replacing those deposits, but more particularly take a look at the instability over the last 2 years, while we have materially decreased $800,000,000 is a low point compared to where we were 2 years ago with the entire GPG deposit base. So this is not a heavy lift. We may come in and out of wholesale funding for a short period of time, but the instability is very much in line with our expectations.

Speaker 4

Great. And I

Speaker 1

think you guys said on

Speaker 4

the last quarter, but it still holds true that each Fed funds cut that we get here is about 5 to 10 basis point lift in the margin?

Speaker 1

Each 25 basis points results in about, I would say 4 to 8 5 to 10, 4 to 8 basis points.

Speaker 4

Got it. And so you guys only have one cut in the NIM guidance, correct? So there is some additional, there could be some good upside there?

Speaker 1

There would be upside there, but we'll have a guide. That's correct.

Speaker 4

And it looks like you guys had a good chunk of the multifamily portfolio kind of come due this past quarter and some of it may have been rent regulated. Can you just talk about how you guys handled that? What you guys are seeing? Just any additional color as to how those loans were performing when they came due and whether you guys refinanced them yourselves or whether they went elsewhere?

Speaker 1

No, they went elsewhere. As we've mentioned in the past, we really haven't played in the multifamily space in any meaningful way. So these are stabilized multifamily products in and around either New York or in other markets and very be financeable for banks that are interested in taking on who can take on more CRE concentration in that asset class. So we don't see any pressure with the remaining book as well in its ability to either be refinanced elsewhere or considered being refinanced by us, but those were payoffs.

Speaker 2

Great.

Speaker 4

And the 0% non performers on the office certainly remains impressive. Any outlook or kind of conversations with your customers that you've been having on the $115,000,000 that's set to come due in the second half of the year?

Speaker 1

I'm sure our real estate group is engaged with those clients in managing expectations as far as what either payoffs or refinancing. But I can tell you as of now there is no stress in any of those conversations. It's a normal conversation as to whether or not those loans have materialized to a point where they will be repaid and have met their next milestone or we will be considering refinancing them. So that's all in flight, but it's just normal communication between our lenders and our sponsors.

Speaker 4

Great. And then the kind of clean expense run rate of $149,000,000 to $152,000,000 is that basically where you think you'd be shaking out going into 2025 on an annual basis pre or post just kind of normal merit increases for annual merit increases?

Speaker 1

Yes. That's when we're behind the 3 projects that are in flight here, that's kind of the single run rate that we expect. Again, the 2025 planting season is just around the corner. We could refine those numbers obviously. But yes, that's the expectation once we've got the 3 major primes.

Speaker 1

I'm not going to repeat them again. Sorry to say it, when those are behind us.

Speaker 4

Okay. But I guess is it based on the clean run rate kind of underlying on the 2024 or and I understand you guys haven't actually done the planning yet for 2025. But is it kind of loosely assuming some annual merit creases in that number for growth or is that kind of a change on prior to that?

Speaker 1

No, no, that's inclusive, Chris. Absolutely.

Speaker 4

Got it. That's helpful. Great. Thanks for taking my questions.

Speaker 1

Thanks, Eric.

Operator

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

Speaker 2

Hey, guys. Good morning. Happy Friday.

Speaker 1

Thank you. We welcome to an interesting Friday. Thank you very much, Martin. Sure.

Speaker 2

Well, let me start by following up with that question on expenses. Just to clarify, the $161,000,000 to $163,000,000 of expenses you're assuming for this year, does that incorporate all of the charges that you're expecting to take on the various projects?

Speaker 1

Yes, it does, Mark. Okay.

Speaker 2

And then I'm curious where you think the balance sheet size ends up at

Speaker 4

the end of this year with the runoff and the organic growth that

Speaker 2

you're going to have. What do you think the total balance sheet footings, are they sort of flattish or maybe up a little bit from where they are today?

Speaker 1

I think they'll be up a little bit. As you know, we kind of closed the quarter at $7,200,000 I think it was. And I really think that we'll see some additional growth into year end here. So another maybe another 200 permits, 300. Okay.

Speaker 1

Great. And

Speaker 2

then, was curious on that one multifamily loan that cured sort of during the quarter went back on accrual status. What changed? Was it simply having a conversation with the company and causing them to come in with additional cash or interest reserves or something else?

Speaker 1

So all of the above, as I mentioned, the root cause of that problem was a dispute between partners. So a few things occurred. The dispute got reconciled with a little help from us. In addition, they then had to step up with a plan of to execute to get us paid off and decide how to liquidate these properties. And as a result, they had to bring the interest current and they also had to put up additional reserves, meaningful reserves for the rest of the year and into 'twenty five.

Speaker 1

So there is a real good action plan right now for these properties to get sold. And yes, this is not something that's so unique in our business. It happens. It's unfortunate, but it did happen.

Speaker 4

Okay.

Speaker 2

And then lastly, and I hate to ask this, but it is relevant this morning. Just curious, any impact on your systems today associated with the CrowdStrike situation?

Speaker 1

Yes. Thank you. I was going to end with that. Yes, we had a big Pfizer is our core provider and we were in touch with our key stakeholders here since 6 am this morning and there is a bit of impact in ACH post incentive unfortunately payroll. So it's being rectified as we speak.

Speaker 1

I haven't heard any other material issues since I've been in this room now on the earnings call. We already reported to the regulators first thing this morning about where we stand. And I think we're going through just the process as many other countries as many other companies are across the country and perhaps the world.

Speaker 3

Thank you.

Speaker 1

Thanks, Mark.

Operator

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

Speaker 1

The only thing that I'd like to say is I'm very much looking forward to the second half of the year and closing out 2024 for a lot of different reasons. We are turning the corner on some very strategic initiatives and I'm very much looking forward to. We have a very clear line of sight into 2025 and we're excited about getting back to historical performance standards here at MTB that we've experienced for years over the last 2 decades. We just celebrated 25 years of operating performance in June and we're very much looking forward to heading through 2024. Thank you all very much for your support and taking the time out morning to listen in and participate.

Speaker 1

Have a nice day.

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.

Powered by Quartr

Key Takeaways

  • Metropolitan reported a 4 bps NIM expansion to 3.44% in Q2—its third consecutive quarter of improvement—and delivered $1.50 EPS (including $0.34 of one-time charges) driven by net interest income growth and stable credit performance.
  • The loan portfolio grew by $120 million in Q2 despite $240 million of paydowns, and the bank now guides to $500 million–$600 million of loan growth for full-year 2024 while preserving rigorous pricing discipline.
  • GPG deposit runoff continues as planned, with ~$60 million exiting in Q2 and ~$800 million remaining (projected $350 million in Q3 and $450 million in Q4), and the firm expects to replace these with new core deposits without material wholesale borrowing.
  • Non-interest expenses totaled $42.3 million in Q2 (including $1.7 million of digital transformation and $3.8 million of remediation/GPG costs), and full-year expense guidance is $161 million–$163 million with a run rate of $149 million–$152 million post-projects.
  • Asset quality remains strong with no broad-based negative trends; the bank’s conservative underwriting, pricing discipline and relationship-based commercial focus have kept nonperforming loans at minimal levels.
AI Generated. May Contain Errors.
Earnings Conference Call
Metropolitan Bank Q2 2024
00:00 / 00:00