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spk00: Welcome to Metropolitan Commercial Bank's second quarter 2023 earnings call. Hosting the call today for Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer, and Greg Sigrist, 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 their prepared remarks. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star 0. 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 risk 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. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin.
spk03: Thank you, and good morning, and thank you for joining our second quarter earnings call. The first six months of this year was a very interesting but disruptive time. Bank management teams were challenged to prove how prepared they were to manage their business and balance sheet in a sustained high-rate environment. It's clear there is no quick fix to this problem if you came into the year unprepared. Thin and compressing margins will continue to plague many banks for years to come. For those banks like MCB who prepared for such an environment and have the capital, core funding strategies, and growth opportunities will continue to secure more organic market share, driving material shareholder value. I believe that identifying these well-prepared banks will be easier than in the past, and the focus will be on true fundamentals and a strategy to produce sustainable shareholder value. I am pleased with MCB's second quarter as well as year-to-date results. We continue to achieve critical objectives, including but not limited to demonstrating margin stability, driving lower-cost funding, reducing the reliance on higher cost borrowings, bringing our crypto deposits to zero, sustained loan growth with very attractive loan yields. Margin compression has been a core challenge for the industry since the start of rate hikes. What has been evident in MCB's fundamentals is that we have absorbed a portion of this compression by managing a diversified earning assets balance sheet that allowed us to maintain lending spreads as well as various deposit verticals that continue to drive lower-cost core funding. It is important to recognize that MCB caused more margin compression than we would have experienced to date by deciding to offload 100% of crypto deposits. In 2022, MCB moved off balance sheet a total of $754 million in zero-cost deposits from their peak at June 30th. And year-to-date, June 30th, 2023, we moved off an additional $436 million of crypto-related deposits now at zero. The final exit decision was the right decision. And what it demonstrates is that MCB was prepared from a risk management perspective, as well as having the ability to absorb the temporary margin compression that came with replacing these deposits. Looking forward with the addition of lower cost deposits that are coming in from the new verticals, we have announced in the second quarter, along with the many diversified core deposit verticals we already have embedded into the franchise, we are very close to at an inflection point where NIM compression from replacing crypto deposits with borrowings will transition to expanding net interest margin as we efficiently replace those borrowed funds with lower cost deposits and maintain our discipline on low pricing. I am confident about the future of MCB, and I believe executable opportunities for MCB will continue to emerge from the disruption the industry will continue to experience. I will now turn the call over to Greg, who will share some specific results with you.
spk01: Thank you, Mark, and good morning, everyone. While the second quarter was a turbulent one for the industry, MCB had a very strong quarter for deposit and loan growth, which is evident in our June 30th balance sheet. In the quarter, MCB's deposit verticals grew $377 million, or nearly 8%, as we successfully expanded our existing deposit verticals, thanks to the dedication and hard work of the MCB team in what was a very challenging time for the industry. Net inflows were particularly strong for retail deposits, including those with loan customers, which collectively were up nearly 13% in the quarter, reflecting growth from both existing and new customers. Crypto deposits were substantially reduced by $220 million in the quarter. What remained at quarter end was $58 million of corporate and reserve deposits with crypto-related companies, which we expect to be fully transitioned away from MCB within the next few weeks. While borrowings were utilized to manage those expected outflows, growth of our deposit verticals has allowed us to reduce borrowings from an average balance of $568 million during the second quarter to $443 million at the end of June. We expect to further reduce borrowings over the balance of the year. We also had a very strong quarter for lending with loan growth in the quarter of $297 million or 6% on $425 million of loan production. Notably, Loan pay down and payoff activity occurred largely early in the second quarter, while loan closings generally occurred late in the quarter. Combined, this had an obvious muting effect on net interest income in the quarter. New loan production came in at an average yield of 8.19% versus the portfolio rate for the first quarter of 6.34%, as we have stayed focused on our pricing discipline. While we did see 42 basis points of net interest margin compression in the quarter, Replacing non-interest-bearing crypto deposits with borrowing did drive half of that compression. The remainder of the compression came from the impact of rising short-term market rates on deposit costs only partially offset by increasing asset yields. The lag in asset yield uplift was magnified by the timing of loan closings in the quarter. Through the industry's recent turbulence, MCB has emerged with a well-positioned balance sheet thanks to the success of our historical funding strategies and strong capital levels, which demonstrates the strength and stability of the franchise. Asset quality remains strong. Loan growth drove the majority of the second quarter credit provision, with the remainder being driven by macroeconomic factors in our CECL model. Our global payments business also performed quite well in the quarter, with revenues from non-bank financial service companies up 21% from the first quarter of 2023, as our partners continue to hit their stride. Within that growth, we are particularly pleased to see corporate disbursement client revenues up 27% in the quarter. Overall, non-interest expenses remained very well managed, but I do want to give Collar on a few items. The decline in compensation of benefits largely reflects the first quarter seasonality in employer taxes. Looking ahead, we do expect to continue our investment in human capital and technology. We do expect professional fees to revert back to historical levels. While legal fees were elevated, outside counsel engagement on open matters wound down in the second quarter. We've also been making investments in several corporate initiatives, including strategic planning, and technology consultants, which will begin winding down in the third quarter. Collectively, we would expect approximately $2 million to drop out of the run rate for professional fees in the third quarter of 2023. Lastly, there was a discrete item in the quarter that increased income tax expense by $1.7 million. We will see a discrete tax benefit of $1.7 million in the third quarter on the conversion of stock awards that have already occurred. we would expect the effective tax rate to be in the range of 31 to 32% excluding discrete items. And I will now turn the call back to Shelby for Q&A.
spk00: The floor is now open for your questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. Again, we do ask that while you pose your question, you pick up your handset to provide optimal sound quality. And we'll take our first question from Alex Lau with JP Morgan.
spk04: Hi, good morning. Good morning, Alex. Greg, last quarter you mentioned you thought the NIM could get back to the 1-2 level, call it 380 or 390 range. Is it fair to assume that with NIM expanding for the next two quarters, we could see that move back to that level, or has that exit rate changed? Thanks.
spk01: I think it's possible, Alex. I mean, obviously, the balance sheet is still slightly liability sensitive. So, you know, that rates would be a bit of a headwind going forward. I mean, if we have 25 BIPs next week, that's one conversation. But to me, it's really the uplift is going to come from a combination of, you know, asset yields. Obviously, we've had a lot of success maintaining loan yields in the quarter. We expect that to continue. We are taking 20 to 25 million a quarter of investment securities, which are rolling off at a very low rate. putting those into loans at a higher rate. I think getting back to that level is going to be dependent upon what we think is very possible, which is continuing to bring in low-cost deposits, particularly from our new verticals, which will come in at a much lower rate. So I think we can get back to that level, if not in the fourth quarter, then very early next year, first quarter. To Mark's point, though, on his prepared remarks, we are at that inflection point. I really think if we haven't hit that floor, we'll hit that floor early in the third quarter. And with the build and the low-cost deposits, I think we get back up to that prior rate pretty quickly. But this is a marathon, right, not a sprint for us, so we're looking to do it over a couple of quarters.
spk04: I wanted to move on to deposits. So non-interest-bearing deposits were down $400 million, half of that coming from crypto-related deposits. On the other half of the $400 million, where did that come from in terms of deposit verticals? And has this shown any signs of moderating?
spk01: Frankly, it was just normal flows in the quarter. You know, some of that was coming from retail clients, you know, especially commercial lending clients as they deploy liquidity. So it kind of came across a number of different verticals, Alex, and it wasn't repricing, wholesale repricing of DDAs into interest-bearing. So it's really more of a timing issue. I think some of that will come back in normal course as DDAs again. But as I kind of parsed through it, I didn't really see any red flags or any storylines to pull forward for you.
spk04: Thanks. And you mentioned you had good quarters on the retail and loan customer segments. Can you give some colors in terms of the rates that you're paying on those balances that you brought on board?
spk01: I mean, as you know, we don't publish our money market rates or rates on individual customers. I would say we brought it in well inside of what our borrowing costs would be. So if we're out with our borrowings, that fund's effective, plus a spread, we'd be well inside of that. I think as part of that, you would see just naturally, and not just to the growth in the quarter, but We certainly had rates up in the first quarter and second quarter. You'll continue to see a little bit of just pull through in the cost of funds or cost of deposits into the third quarter. But again, I think it's going to be offset very well by what we're able to do on the loan pricing side.
spk04: Thanks. And you mentioned in the last few months, you've added a couple of deposit gathering teams, the EV5 teams, title and escrow and charter schools. Can you give some colors on these deposit opportunities in terms with these teams? And, you know, when should these deposit gathering pick up and contribute? And if you could also touch on briefly about the type of costs that are associated with these deposits. Thanks.
spk03: Yeah. Hi, Alice. It's Mark DeFazio. Each and every one of them have now started to contribute to that increase in deposits in the third quarter. We've been working on these new channels for quite a while. So as we reported in the past, we get a return on investment pretty quickly at this stage of our operating efficiency. So we're very optimistic. The one item you didn't mention was our 1031 and title escrow as well is really hitting their stride today. And we're doing a fair amount of technology integration. So we have the human capital in place. We're doing the legal framework around these structures, which are fairly complex as well. And we are doing a technology integration with what is required as well to be very competitive. So I think we're not sure if we're going to report specifically on these line items in the third and fourth quarter and beyond, but we do believe they are going to be meaningful and can assist us with going back to our traditional activities. funding strategy, which is very, very core and relies very little at a minimum level to borrowed funds. As I said, in the first quarter, we would expect by year-end to be back at the original levels of borrowed funds when we came into 2023. So, we're optimistic. And all in on the cost, And, Greg, keep me honest here. I think they'll be well on the inside on our total deposit costs tonight. Yeah, I agree with that.
spk04: Thanks for all that color there. And then this one on loan growth. You're close to 100% loan-to-deposit ratio now. How do you think about loan growth for the rest of the year considering you're at this 100% mark? Are you comfortable running above 100% level? Thanks.
spk03: I am comfortable at running above 100%, but as we have been talking, this six months was a disruptive six months, and we relied more on borrowed funds than we have in two decades. So I think, as I just mentioned, we will go back to normal trends. So I would expect you will see that number stay south of 100% in the future.
spk01: Yeah, and again, I think we've had this conversation before. If we thought that if we didn't have the ability to grow our deposit verticals and to bring in the new verticals, which will contribute significantly over the balance of the year, Alex, I think that might be one conversation that might lead us down the path of slowing down loan growth. But the reality is we see the runway not only to fund loan growth, It's also, you know, significantly reduced the borrowing balances over the next quarter or two. So, you know, we're comfortable, you know, at a short term in a moment in time being closer to 100% on that loan to deposit ratio because I think over the next several quarters, you know, whether it's two to four quarters, I think to Mark's point, that'll come down to a more historic level.
spk04: Thanks. And then just on the GPG group, the fee income was up nicely in the quarter. Is there anything one time in nature in that increase, or was that mostly transaction volume related?
spk01: It was mostly transaction related volumes. I mean, there's always quarter on quarter, you might have a little bit of just contractual revenues, you know, peek into it. There might have been a little bit of that, but frankly, on balance, it was really just transaction revenues, Alex.
spk04: Thank you. And then this last one for me. On the GPG deposits, it's been holding in that $700 million range in deposits. Is this still a deposit growth vertical for you in the near term, or is that expected to be in that similar range moving forward?
spk01: Well, I think it is still a deposit, a growth vertical for us. I mean, this goes back and ties into your question on non-interest-bearing deposits. You know, it's the one vertical where it's a very active, you know, flows. You know, we see a fair amount of ins and outs in that vertical. Average balances for the quarter, I got to tell you, we're definitely above the spot at the end of the quarter. And again, those are non-interest-bearing flows that kind of came out as well near the end of the quarter. So, you know, it's absolutely a growth vertical over, as we think, longer term
spk04: Thanks for taking my questions.
spk01: You're welcome.
spk00: And we'll take our next question from Chris O'Connell with KBW.
spk02: Morning. Hey, Chris. Good morning. How are you, Chris? So just wanted to circle back on the GPG fee question. I think in the second quarter, about $1.5 million was identified as being crypto-related within the $5.7 million GPG fees. Does that fully fall out next quarter, or does some of that stick around? How should we be thinking about kind of, you know, the new baseline level starting in 3Q?
spk01: Yeah, having that business wound down by June 30th, you know, Chris, you'd expect that to go zero for the third quarter.
spk02: Okay, great. And then, you know, I appreciate the color on the loan-deposit ratio and the overall growth. You know, obviously you guys have had, you know, strong growth this quarter and now are getting, you know, the deposits to be able to, you know, effectively fund that going forward. I mean, how are you thinking about the level of balance sheet growth overall, you know, on the loan and deposit side into the second half of the year? You know, are the pipelines, you know, winding down a little bit or slowing given the broader economic environment? Or, yeah, you know, how do you think about the overall balance sheet growth as a whole?
spk03: Yeah, so the pipeline is still fairly robust. You know, times like this are very opportunistic also, you know, notwithstanding some of the obvious headwinds in various different industries or Real estate asset classes, our clients are very active across the franchise. They are very opportunistic. So I think we're finding the right deals to involve ourselves in. So I think historical, I think our balance sheet growth will be in line with what we have said in the beginning of the year, closer to historical trends. I think the second half of the year, they will be even more cost-funded than they were for this quarter. And as I said, as far as the funding, ultimately, we expect our borrowings to be at or even less than where we were when we came into the year in January. So we're really optimistic. Again, we're not growing for the sake of growing. If we're not getting the kind of net interest margin and the operating efficiencies by leveraging our capital, we just won't do it. But we clearly are demonstrating that stability.
spk02: Okay, got it. And you mentioned that, I mean, obviously the securities yield is still really low. It should migrate pretty substantially upward over time. I'm just trying to think about the timeline of how that occurs. If you could give any color around the monthly or quarterly portfolio cash flow and how quickly that can turn over, that'd be great.
spk01: Yeah, quarterly we're seeing somewhere between $20 and $25 million of principal cash flow coming off the portfolio, Chris. So it's still a fairly long – these interest rates are still a fairly long-duration book. At points in time, we've looked at maybe doing some restructuring around it. I don't see that being imminent. we might be opportunistic down the road as rates start to come back down in terms of rebalancing the portfolio. But, frankly, I don't see that in the near term. So, in the meantime, that cash flow coming off the portfolio is just going back into the pool to be deployed into lending at a much more attractive rate.
spk02: Okay. Yep. Makes sense. And, you know, I think you said in 3Q earlier, the professional fees should benefit about $2 million downward, but they're showing the overall expense growth. I mean, on a net basis, do you have an idea as to whether you think overall expenses will be up or down in the third quarter, just how you're thinking about kind of expense growth going forward, recognizing that you guys have hired a bunch of teams and you know, at different points throughout, you know, the past quarter or so. Just trying to, you know, see what the new starting point might be there.
spk01: Yeah, and once you've normalized for that professional fee, the $2 million run rate, when you think about the rest of the lines, I think top end benefits is the one where you're absolutely going to continue to see the investments coming through from what we're doing with human capital, Chris. I think if you look at that and you kind of look at our trends over the last, historically, last, you know, call it six to eight quarters before this, that'll give you a pretty good idea how we're going to look there. I mean, I think the teams that have come on are going to take some time to ramp up, but I think that'll get reflected in that run rate as well. As you always hear us talk, too, we don't focus on the efficiency ratio. We're much more focused on driving ROTCE. and the expense base it takes to get there is just part of the sausage making. But, you know, I would tell you in the quarter, you know, the efficiency ratio is obviously elevated just given both the little bit of compression that happened on the net interest side combined with the elevated professional fees. You know, the first six months of the year, we're still right around 50% on the efficiency ratio. We do a very good job managing expenses. So I think the other lens you should look at is look through is, you know, over the next several quarters, we're going to continue to push that efficiency ratio back down toward the historic levels, which are more, you know, in that mid-40s, so call it 45 to 47 percent. That's what my goal would be.
spk02: Okay. Really helpful. And then as far as the, you know, the human capital you mentioned and You guys have obviously hired a bunch of teams and deposit related. How are you thinking about opportunities going forward? I know that you're always looking But is there any, you know, specific, you know, types of teams that you are seeing opportunities with or having discussions with? Have those opportunities kind of increased or decelerated over the past few weeks given, you know, the immediate opportunities that were present after the M&A destruction last quarter?
spk03: Yeah, you know, we're not out there seeking any new teams yet. Obviously, we're open to new opportunities, but I think, you know, our plate is fairly full right now, and we want to get the real value out of the new partners we've brought on and really give them the attention and time and resources to get into the market. These are not simple business lines. They are very much aligned alongside of our core competency. And that's something else that everyone should keep in mind. We're not the type of franchise to bolt on just teams for the sake of adding people or products. We try to leverage off of our core competencies. So what we announced in the first quarter was, is standing up quite well. I think you're going to see material contributions going forward. But our focus right now is to assist those teams in being as successful as they possibly can. So we're not interested in any other distractions, but obviously we're open to an opportunity if it falls in front of us.
spk02: Okay. Yep. I hear you. And On the credit side, I mean, everything was very clean this quarter. You know, not much movement around, you know, at all. And obviously, net charge off super low. I mean, how are you guys, what are you guys seeing within your portfolio? Is there any signs of stress anywhere that you're keeping a close eye on? As far as loan demand or, you know, desire to put on loans, is there? you know, any particular areas that you're seeing that are still attractive versus shying away from and anything that you're seeing, you know, from others in your local markets that are, I guess, concerning on the credit side.
spk03: Yeah. You know, Chris, it's not an all or nothing. MCB has always been in the market. And career-wise, I could probably speak to most of our more senior stakeholders on the lending side. We're always in the market. The question is finding the right spot. and with the right sponsor around what deal in real estate or what industry we want to support. So we're just very careful. We're just more careful than we are conservative. And are we paying more attention today as it relates to certain asset classes in real estate as opposed to an industry in the CNI side? Yeah, of course. But we've noticed that a long time ago. We've noticed some of those tea leaves as what you can call weaknesses and concerns. So it doesn't mean we exited those industries or those asset classes. It just means that we have to look at them a bit differently the lean on the side of being more careful. And clients understand that as well. There's a lot, there's scarcity value today to liquidity that's out there for a lot of different reasons. So we're filling that void as well. So the pipeline is full. We're very careful, very happy with our independent risk management process around managing the portfolio, stress testing the portfolio. I'm very pleased with that. It's fairly robust, as you know, and we continue to throw a lot of resources behind the risk management side of the business. So I'm opportunistic that we can continue to manage the portfolio and manage the new business we bring on well.
spk02: Great. Thanks for taking my questions.
spk01: Thank you, Chris.
spk00: This concludes the allotted time for questions. I would like to turn the call over to Mark DeFazio for any additional or closing remarks.
spk03: Thank you. I'd just like to take a moment to thank everyone. I would like to thank all of our investors who have hung in there with us during this challenging time, and for those who have increased their positions for their continued confidence in NCB. For the new shareholders that came in at a very attractive entry point, welcome to MCB. I would also like to thank our entire MCB team and our directors who continue to step up and recognize the challenges our industry face and what it takes to keep MCB a top-performing and relevant financial institution. Thank you again, and I look forward to our next call.
spk00: 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...
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