Metropolitan Bank Holding Corp. (NYSE:MCB) Q2 2024 Earnings Call Transcript

Metropolitan Bank Holding Corp. (NYSE:MCB) Q2 2024 Earnings Call Transcript July 19, 2024

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. [Operator Instructions]. During today’s presentation, references 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 R. DeFazio: 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 imported 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. As the 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 have two loans totaling approximately 21 million that were characterized as non-performing at 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 F. Dougherty: Good morning, everyone and again, thanks for joining our earnings call. As Mark mentioned, the net interest margin increased by four basis points to 3.44% in second quarter, adding to the four basis point increase that we saw in the first quarter, as well as a nine basis point increase that we saw in the fourth quarter of 2023. Our loan reprising, loan pricing and repricing discipline are the main drivers of our ability to expand. We expect to see some additional modest uplift in the margin throughout the remainder of the year. In our updated forecast model, we have principally seen 25 basis point rate cut in September. In that scenario, we expect to see approximately three to five basis points of additional output.

In other words, we forecast a fourth quarter NIM in the range of 3.47%, the 3.50%. Focusing on lending, we grew the loan book by approximately 120 million in the same quarter. It is noteworthy that our quarterly loan growth was net more than $240 million in payoffs and pay downs 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 $28 million in multi-family loans. I’ll continue to 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 to 25 basis points per year. The coupon on [indiscernible] in curtailments in the quarter was approximately 7.88%.

The waiting 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, the experience in temporary $80 million declined in borrowed 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 what continues to be an extremely competitive deposit gathering environment. Accordingly, we are adopting guidance on new loan growth for the full year 2024, which is somewhat lower than our previous guidance. The current forecast loan growth was approximately $500 million to $600 million per year.

We believe this more conservative approach will further enhance our ability to maintain our discipline on lending and importantly, will also provide some relief on the funding side of the equation. As Mark mentioned, asset quarter remained strong with no identifiable negative trends within the portfolio. The provision in the second quarter was generally in line with the increase in loan flows. Non-interest income included an uptick in deposit fees from the first quarter, which as previously mentioned was expected to be sustainable. These increases were 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 to $11 million. Our total non-interest income expectation for 2024 is slightly higher than our previous guidance.

We now expect it report to $20 million to $22 million per year. Non-interest expense has 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 reflected 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 for the GPG clients [ph] to recoup that $2 million average in the third quarter and further to pass a significant portion of any future remediation expenses better for later than previously anticipated. For the full year 2024, our guidance remains total non-interest expense of $1.61 million to $1.63 million. Further, I expect the go forward team, for non-interest expense will be around $140 million to $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 to $13 million digital transformation budget remains unchanged. We continue to expect to complete the project in 2025. Approximately $8 million to $9 million of the project will be expenses in 2024, inclusive of the $3.5 million that has been reported 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% to 32% excluding the discrete items. Please prefer to the updated investor deck which can be accessed at our website for walk down from reported earnings to non-GAAP core earnings.

Year-to-date the one-time charge is related to our digital project regulatory remediation and [indiscernible] that totaled $10.4 million or 7.1 million after tax. I will now turn the call back to our operator for Q&A.

Q&A Session

Operator: [Operator Instructions]. Our first question will come from Alex Lau with J.P. Morgan. Please go ahead.

Alex Lau: Hey, good morning.

Mark R. DeFazio: Good morning Alex.

Alex Lau: 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 F. Dougherty: At the end of June, we had about — just great amount of moving as expected about 350 million to go out in this quarter and 450 million to go out in the fourth quarter.

Alex Lau: 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 F. Dougherty: Well, 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, ED5 and HOA and — as well. So with that, I expect that the replacement funding should come with approximately a forehand that was my guess. But again, it’s very dependent on how that mix comes down.

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

Daniel F. Dougherty: Our planning to replace all of the outflow with deposits, but we are fully prepared to use wholesale if necessary.

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

Mark R. DeFazio: Well, it is really how this is marketed. It’s more as a result of pricing. We’re here and we believe in capital preservation, especially this year is critical across the industry. And we are 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 capital today. I wouldn’t call it conservative, but it’s really not asset quality and pricing.

Alex Lau: Thank you. And just one last one from me, what is the latest update on your progress on the regulatory remediation process?

Mark R. DeFazio: We’re making a lot of progress. We are very much aligned with our regulators. We have good working relationship with them. We’re anticipating material enhancements or improvements to it. And the cost, the meaningful cost that we have been expecting in 2023 and 2024 will likely come to an end or materially come to an end by the end of this year.

Alex Lau: Great. Thanks for taking my questions.

Mark R. DeFazio: Thank you Alex.

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

Christopher O’Connell: Alright. I’m 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?

Daniel F. Dougherty: The blended costs under remaining balances is around 1.5%.

Christopher O’Connell: Got it. And so as far as the NIM guide up, 3 to 5 bps 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?

Daniel F. Dougherty: That is correct.

Christopher O’Connell: 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 in the year-end depending on how much Fed funds cut through yet?

Daniel F. Dougherty: Yeah, that’s exactly right. To the extent we can work a better blend under the deposit growth that produces upside, to the extent that our timing variance has been forced into the wholesale market, that creates a little bit of a headwind. But the plan for now is pretty comfortable with it and to replace those deposits at their own with what we call core deposits.

Mark R. DeFazio: 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 instability over the last two years while we have truly decreased 800 million, it 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 wholesaler funding for a short period of time, but instability is very much in line with our expectations.

Christopher O’Connell: Great. And I think you guys said on the last quarter, but it still holds true that each Fed funds cut that we get here is about a 5 to 10 basis point list in the margin?

Mark R. DeFazio: Each 25 basis point is results — yeah, I would say 4 to 8 not 5 to 10. 4 to 8 basis points.

Christopher O’Connell: Got it. So, you guys only have one cut in the mid-guidance, correct. [Multiple Speakers] there could be some good upside there?

Daniel F. Dougherty: The [indiscernible] without a doubt, that’s correct.

Christopher O’Connell: And it looks like you guys had a good chunk of the multi-family portfolio kind of come due this past quarter and that some of it may have been regulated. You just talk about how you guys handled that, what you guys are seeing, just any additional colors as to how those loans were performing when they can do and whether you guys either refinanced them yourselves or whether they went elsewhere?

Mark R. DeFazio: No, they went elsewhere. As we have mentioned in the past, we really haven’t played in the multi-family space in any meaningful way. So these are stabilized multi-family products in and around even New York and other markets. And very refinanceable for banks that are interested in taking on — who can take on more pre-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 consider it being refinanced by us or those would pay us.

Christopher O’Connell: Great. In 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 million that set to come do in the second half of the year?

Mark R. DeFazio: I’m sure our real estate group is engaged with those clients and managing expectations as far as 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 both of those loans have materialized to a point where they will be repaid and met their next milestone or we would consider refinancing them. So that’s all in flight. But it is just normal communication between our lenders and our sponsors.

Christopher O’Connell: Great. And then the kind of clean expense run rate of 149 to 152, 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?

Daniel F. Dougherty: Yeah, when we’re behind the three projects that are on slide here that’s kind of the clean run rate that we expect. Again, 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 projects, I’m not going to repeat them again. It’s hard to say when those around us.

Christopher O’Connell: Okay. But I guess, is it based on the clean run rate kind of underlying the 2024 or — and I understand you guys have been actually done the planning yet for 2025. But is it kind of loosely assuming some annual merit increases in that number for growth or is it [Multiple Speakers] prior to that?

Mark R. DeFazio: No, no. That’s inclusive, Chris. Absolutely.

Christopher O’Connell: Okay. Got it. That’s helpful. Great. Thanks for taking my questions.

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

Mark Fitzgibbon: Hey, guys. Good morning. Happy Friday.

Mark R. DeFazio: Yeah. Thank you. We woke up to an interesting Friday. Thank you very much.

Mark Fitzgibbon: Sure. Well, let me start by following up with that question on expenses. Just to clarify the 161 million to 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 R. DeFazio: Yes, it does, Mark.

Mark Fitzgibbon: Okay. And then I’m curious where you think the balance sheet size ends up at the end of this year with the runoff and the organic growth that 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?

Mark R. DeFazio: Oh, I think they’ll be up a little bit. As 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. So another — maybe another 200 perhaps 300.

Mark Fitzgibbon: 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?

Daniel F. Dougherty: 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 cost and they also had to put up additional reserves, meaningful reserves for the rest of the year and into 2025. So there is a real good action plan right now for these properties to get sold. And yeah, this was not something that’s so unique in our business. It happens. That’s unfortunate, but it did happen.

Mark Fitzgibbon: 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 R. DeFazio: Yeah. Thank you. I was going to end with that. Yeah, we had a bit — service offer for our core provider, and we were in touch with our key stakeholders here since 6 A.M. this morning. And there’s a bit of impact in ACH postings and then unfortunately payroll. So it’s been 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 countries, many other companies are across the country and perhaps the world.

Mark Fitzgibbon: Thank you.

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.

Mark R. DeFazio: 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 am very much looking forward to it. 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: 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 lines at this time and have a wonderful day.