Metropolitan Bank - Q2 2024
July 19, 2024
Transcript
Operator (participant)
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 Doherty, 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 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 mcbankny.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to the company's notices regarding forward-looking statements and Non-GAAP measures that appear in the earnings release and investor presentation. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin.
Mark DeFazio (President and CEO)
Thank you. Good morning, and thank you all for joining our second quarter earnings call. MCB'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 a continued sharp focus on liquidity and interest rate risk management. I am pleased to report we saw a four basis points of NIM expansion in the second quarter. This marks our third consecutive quarter of NIM expansion. Our two major strategic initiatives, the wind down of the GPG business and the digital transformation project, are proceeding on time and on budget. We remain keenly focused on the successful completion of these important initiatives. Also, MCB remains focused on the continuation and expansion of our profitable and intentional commercial bank growth strategy.
In the second 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. 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.
As I mentioned on the first quarter earnings call, we had 2 loans totaling approximately $21 million that were characterized as non-performing as March 31 reporting date and are now current and have funded interest reserves. I will now turn the call over to our CFO, Dan Dougherty.
Daniel Dougherty (EVP and CFO)
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% in the second quarter, adding to the 4 basis point increase that we saw in the first quarter, as well as a 9 basis point increase that we saw in the fourth quarter of 2023. Our loan repricing, loan pricing and repricing discipline are the main drivers of our ability to expand the net and NIM. We expect to see an additional modest 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 3 basis points-5 basis points of additional uplift.
In other words, we forecast a four-quarter NIM in the range of 3.47%-3.50%. Focusing on lending, we grew the loan book by approximately $120 million in the second quarter. It is noteworthy that our quarterly loan growth was net more than $240 million in payoffs and paydowns in the quarter. Loan growth in the quarter was led by an increase of $48 million in C&I and an increase of $105 million in CRE, offset somewhat by a $28 million decline in multifamily loans. Our continued focus on economic loan pricing resulted in a weighted average coupon of 8.81% on second quarter new loan originations and draws. That coupon does not include deferred fees, which are typically 15-25 basis points per year.
The coupon on loan payoffs and prepayments 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%. In the quarter, deposits declined by approximately $68 million, primarily as a result of a wind down-related decline of $60 million in GPG deposits. As well, we experienced a temporary $80 million decline in borrower deposits, partially offset by an increase of $70 million in property manager deposits. Year-to-date, we are up about $320 million 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 million-$600 million for the year. We believe this more conservative approach will further enhance our ability to maintain great discipline on lending, and importantly, will also provide some relief on the funding side of the equation. As Mark mentioned, asset quality remains strong with no identifiable negative trends within the portfolio. The provision in the second quarter was generally in line with the increase in loan trades. Non-interest income included an uptick in deposit fees from the first quarter, which, as previously mentioned, is expected to be sustainable. This, increase was more than offset by declines in letter of credit fees and GPG revenue. For the full year 2024, we currently forecast BaaS revenue to total $9 million-$11 million. Our total non-interest income expectation for 2024 is slightly higher than our previous guidance.
We now expect it to put to $20 million-$22 million for the year. Non-interest expenses totaled $42.3 million in the second quarter. Expenses related to the digital transformation project totaled $1.7 million, and an additional $3.8 million reflects regulatory remediation work and costs associated with the GPG wind down. Q2 regulatory remediation costs came in approximately $2 million higher than expected. We have made arrangements with a GPG client to recoup that $2 million--that $2 million overage in the third quarter, and further, to pass through a significant, significant portion of any future remediation expenses that are greater than previously anticipated. For the full year 2024, our guidance remains total non-interest expense of $161 million-$163 million.
Further, I expect the go-forward clean run rate for non-interest expense will be around $149 million-$152 million. Of course, please keep in mind that this estimate is certainly subject to adjustment as we move through the 2025 planning season. Our $12 million-$13 million digital transformation budget remains unchanged. We continue to expect to complete the project in 2025. Approximately $8 million-$9 million of the projects will be expensed in 2024, inclusive of the $3.5 million that has been recorded through June. To date, we have executed the vast majority of the underlying major contracts. 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%-32%, excluding discrete items.
Please, you know, please refer to the updated investor deck, which can be accessed on 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 BaaS exit total $10.4 million or $7.1 million after tax. I will now turn the call back to our operator for Q&A.
Operator (participant)
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. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Thank you. Our first question will come from Alex Lau with JPMorgan. Please go ahead.
Alex Lau (Senior Equity Research Associate)
Hey, good morning.
Daniel Dougherty (EVP and CFO)
Morning, Alex. Good morning.
Alex Lau (Senior Equity Research Associate)
Starting on deposits, what are your expectations in terms of timing and magnitude of the exit of the $900 million in GPG deposits through year-end?
Daniel Dougherty (EVP and CFO)
At the end of June, we had about just over $800 million. I expect about $350 million to go out in this quarter and $450 million to go out in the fourth quarter.
Alex Lau (Senior Equity Research Associate)
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?
Daniel Dougherty (EVP and CFO)
Well, we're going to, you know, Alex, 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 lending customers, EB-5, and HOA and medias as well. So, with that, I expect that the replacement funding should come with a, you know, approximately a four handle is my guess. But again, it's very dependent on how that mix comes out.
Alex Lau (Senior Equity Research Associate)
Got it. Do you expect much wholesale borrowing in the near term in anticipation of the outflow of deposits?
Daniel Dougherty (EVP and CFO)
Our plan is to replace all the outflow with deposits, but we are fully prepared to use wholesale as necessary.
Alex Lau (Senior Equity Research Associate)
... 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 paydowns that you mentioned?
Mark DeFazio (President and CEO)
You know, it's, it's really, Alex, this is Mark. It's more as a result of pricing. With, you know, we are here. We believe in, you know, 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. I believe the last thing I've heard from the head of my commercial real estate group is we've turned down some $400 million 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.
Alex Lau (Senior Equity Research Associate)
Thank you. And just one last one from me. What is the latest update on your progress on the regulatory remediation process?
Mark DeFazio (President and CEO)
We're making a lot of progress. We are very much aligned with our regulators. We have a good 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 2023 and 2024 will likely come to an end or materially come to an end by the end of this year.
Alex Lau (Senior Equity Research Associate)
Great. Thanks for taking my questions.
Mark DeFazio (President and CEO)
Thank you, Alex. Thanks, Alex.
Operator (participant)
Thank you. Our next question will come from Christopher O'Connell with KBW. Please go ahead.
Christopher O'Connell (VP and Equity Research Analyst)
Morning. Just following up on the GPG runoff, of the $800 million 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?
Mark DeFazio (President and CEO)
The blended cost on the remaining balances is around 1.5%.
Christopher O'Connell (VP and Equity Research Analyst)
Got it. So as far as, you know, the NIM guide up, you know, 3 basis points-5 basis points into the end of the year here, I'm assuming that that assumes that the deposits with the 4% handle are replacing the entirety of the GPG deposits. Is that correct?
Mark DeFazio (President and CEO)
That is correct.
Christopher O'Connell (VP and Equity Research Analyst)
Got it. So depending on if you have to dip into short-term borrowings temporarily for, you know, a quarter or so here, that probably results in just either, you know, a flatter NIM trajectory or kind of just a modest uptick into the year-end, depending on, you know, how much Fed funds cuts we get.
Mark DeFazio (President and CEO)
Yeah, that's exactly right. You know, to the extent we can work a better blend on the deposit growth, that produces upside. To the extent there are timing variances, and 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 run off with new, what we call, core deposits. And, Chris, just to point out, we have been de-emphasizing GPG for the last two years now. So, we have a history of replacing those deposits. But more particularly, take a look at the NIM stability over the last two years.
While we have materially decreased, $800 million is a low point compared to where we were two 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 NIM stability is very much in line with our expectations.
Christopher O'Connell (VP and Equity Research Analyst)
Great. And, I think you guys said on last quarter, but it's still hold true that, you know, each Fed funds cut that we get here is about, you know, a 5 basis points-10 basis points lift in the margin?
Mark DeFazio (President and CEO)
Each 25 basis points results in about, I would say, 4 basis points-8 basis points, 5 basis points-10 basis points. 4 basis points-8 basis points.
Christopher O'Connell (VP and Equity Research Analyst)
Got it. So you guys only have one cut in the NIM guidance, correct? So if there-
Mark DeFazio (President and CEO)
That is correct.
Christopher O'Connell (VP and Equity Research Analyst)
an additional, there could be some good upside there?
Mark DeFazio (President and CEO)
There would be upside there with that guidance. That's correct.
Christopher O'Connell (VP and Equity Research Analyst)
It looks like you guys had you know a good chunk of the multifamily portfolio kind of come due this past quarter, and that some of it may have been rent-regulated. Can you just talk about you know how you guys you know handled that, what you guys are seeing, just any additional color as to you know how those loans were you know performing when they came due and whether you guys either refinanced them yourselves or whether they went elsewhere?
Mark DeFazio (President and CEO)
No, they, 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, you know, you know, multifamily products, in and around, you know, either New York or in other markets and very refinanceable, you know, for banks that are interested in, in taking on, who can take on, you know, more 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.
Christopher O'Connell (VP and Equity Research Analyst)
Great. And the, you know, 0% nonperformers on the office, you know, certainly remains impressive. Any outlook, or, you know, kind of, conversations with your customers that you've been having on the $115 million that's set to come due in the second half of the year?
Mark DeFazio (President and CEO)
I'm sure our real estate group is engaged with those clients in managing expectations as far as what either payoffs or refinances. 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 would be consider refinancing them. So that's all in flight, but it's just normal communication between our lenders and our sponsors.
Christopher O'Connell (VP and Equity Research Analyst)
Great. Then, the kind of clean expense run rate of $149-$152, is that, basically, you know, 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, you know, annual merit increases?
Mark DeFazio (President and CEO)
Yeah, that's you know, when we're behind the three projects that are in play here, that's kind of the clean run rate that we expect. Again, you know, the 2025 planning season is just around the corner. We could refine those numbers, obviously. But yeah, that's the expectation once we've got the three major products. I'm not gonna repeat them again. Tired of saying it, once those are behind us.
Christopher O'Connell (VP and Equity Research Analyst)
Okay. But I guess, you know, is it based on the clean run rate kind of underlying on, you know, the 2024? Or, you know, and I understand you guys haven't, you know, actually, you know, done the planning yet for 2025. But is, is it kind of loosely assuming some, you know, annual merit increases in that number for growth? Or is that-
Mark DeFazio (President and CEO)
Oh, no
Christopher O'Connell (VP and Equity Research Analyst)
kind of run rate prior to that?
Mark DeFazio (President and CEO)
No, no, that's inclusive, Chris, absolutely.
Christopher O'Connell (VP and Equity Research Analyst)
Okay.
Mark DeFazio (President and CEO)
Yep.
Christopher O'Connell (VP and Equity Research Analyst)
Got it. That's helpful. Great. Thanks for taking my questions.
Mark DeFazio (President and CEO)
You bet, Chris.
Operator (participant)
Thank you. Our next question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Hey, guys. Good morning. Happy Friday.
Mark DeFazio (President and CEO)
Yeah, thank you. We woke up to an interesting Friday. Thank you very much.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Sure. Well, let me start by following up with that question on expenses. Just to clarify, the $161 million-$163 million 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?
Mark DeFazio (President and CEO)
Yes, it does, Mark.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Okay. And then I'm curious where you think the balance sheet size ends up at the end of this year with, you know, the runoff and the organic growth that you're going to have. What do you think the total balance sheet footings are? Are they sort of flattish or maybe up a little bit from where they are today?
Mark DeFazio (President and CEO)
Oh, I think they'll be up a little bit. You know, we kind of closed the quarter at 7.2, I think it was, and I really think that we'll see some additional growth into year-end here. So another, maybe another, you know, 200 perhaps, 300.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Okay. Great, and 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?
Mark DeFazio (President and CEO)
So all, 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 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 25. So, there is a real good action plan right now for these properties to get sold. And yeah, this is not something that's so unique in our business. It happens, and it's unfortunate, but it did happen.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Okay. 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?
Mark DeFazio (President and CEO)
Yeah, thank you. I was going to end with that. Yeah, we had a bit, Fiserv, is our core provider, and we were in touch with our key stakeholders here since 6:00 A.M. this morning, and there's a bit of impact in ACH postings and then, unfortunately, payroll. So, it's being rectified as we speak. I haven't heard of 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 companies are across the country and perhaps the world. Mm-hmm.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Thank you.
Mark DeFazio (President and CEO)
Thanks, Mark.
Operator (participant)
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.
Mark DeFazio (President and CEO)
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 MCB that we've experienced for years over the last two decades. We just celebrated 25 years of operating performance in June, and we're very much looking forward to getting through 2024. Thank you all very much for your support and taking the time out this morning to listen in and participate.
Have a nice day.
Operator (participant)
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.