Metropolitan Bank Holding Corp. (MCB) Earnings Call Transcript & Summary

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. [Operator Instructions]. 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.

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'm pleased to report we saw a 4 basis points of NIM expansion in the second quarter. This marks our third 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, 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 nonperforming 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.

Good morning, everyone, and again, thanks for joining our earnings call. As Mark mentioned, 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 '23. Our loan repricing -- loan pricing and repricing discipline are the main drivers of our ability to expand the net [indiscernible]. We expect to see some additional uplift in the margins 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 forecasted the fourth quarter NIM in the range of 3.47% to 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 of 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 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 to 25 basis points per year. The coupon on [indiscernible] 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%. In the quarter, deposits declined by approximately $68 million, primarily as a result of a wind-down related decline of $50 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 plus. Importantly, we intend to maintain our discipline, what continues to be an extremely competitive deposit gathering environment. Accordingly, we are adapting guidance on the loan growth for the full year 2024, which is somewhat lower than our previous guidance. We currently forecast loan growth of approximately $500 million to $600 million 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. As Mark mentioned, the 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 fees. 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 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 for the year. Noninterest 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 the GPG client to recoup that $2 million -- $2 million overage in the third quarter. And further, to pass through a 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 to $163 million. Further, I expect the go forward clean run rate for non-interest expense will be around $149 million to $152 million. Of course, 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 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% to 32%, excluding discrete items. Please refer to the updated investor deck, which could be accessed on our website for a walk-down from reported earnings to non-GAAP core earnings. Year-to-date, the onetime charges related to our digital project, regulatory remediation and BaaS exit totaled $10.4 million or $7.1 million after tax. I will now turn the call back to our operator for Q&A.

[Operator Instructions]. Our first question will come from Alex Lau with JPMorgan.

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?

At the end of June, we had 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.

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?

We are going to -- Alex, we 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 [indiscernible] 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 out.

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

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

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?

It's really -- Alex, this is Mark. It's more as a result of pricing. We are here, we believe, in capital presentation, 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 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 around asset quality and pricing.

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

We're making a lot of progress. We are very much aligned with our regulators. We have working relationship with them. We're anticipating material enhancements or improvements to it and the cost -- meaningful cost that we have been expecting in '23 and 2024 will likely come to an end or materially come to an end by the end of this year.

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

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?

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

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 at the 4% handle are replacing the entirety of the GPG deposits. Is that correct?

That is correct.

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 flat or NIM trajectory or kind of just a modest uptick in the year-end depending on how much Fed fund cuts we get?

Yes. That's exactly right. To the extent we can work a better blend on the deposit growth that produces upside to the extent that our timing variance and when 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. It is to replace those deposits [indiscernible] with new, what we call core deposits.

And Chris, just to point out, we have been deemphasizing GPG for the last 2 years now. 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 million to the 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 NIM stability is very much in line with our expectations.

Great. And I think you guys said on the last quarter, but it still hold true that each Fed funds cut that we get here is about a 5 to 10 basis point lift in the margin.

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