This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Good day and welcome to Metropolitan Commercial Bank's first quarter 2024 earnings call. Hosting the call 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 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 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. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin.
spk04: Thank you. Good morning, and thank you for joining our first quarter earnings call. The first quarter of 2024 was very productive for MCB. Our first quarter results were a strong start for the company. During the quarter, we carefully grew the balance sheet while maintaining our price discipline, credit standards, and with a continued sharp focus on liquidity and interest rate risk management. We were also able to grow core deposits well in excess of our loan growth. our two major initiatives planned for 2024 the wind down of the gpg business and the digital transformation project have begun in earnest and are proceeding on time and on budget while we remain focused on the continuation and expansion of our profitable and disciplined commercial bank growth strategy in the first quarter we reported an earnings per share of a dollar 46 which was reported by strong I'm sorry, which was supported by strong growth in net interest income and continued excellent credit performance. In the meantime, the successful completion of our other initiatives remain a high priority. The economy continues to display strong fundamentals and impressive resilience. The evident strength of the economy provides us with an optimistic outlook for loan growth and credit performance. The outlook for monetary policy has changed dramatically over the last several months. Rather than expectations of significant easing throughout 2024, the market is now pricing in less than 50 basis points of easing in the back half of the year. I am pleased to report we saw a four basis point NIM expansion in the first quarter. Even with the change in the outlook of monetary policy, we continue to expect further margin expansion as the year progresses. asset quality remains strong we have not identified any broad based negative trends in any loan product 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 also as our performance is supported by the exclusive focus on relationship-based commercial banking and high-quality commercial clients and sponsors in industry segments that we know exceptionally well. Finally, I am pleased to report that the two loans totaling approximately $21 million that were classified as non-performing loans at 1231 last year are now current, have substantial funded interest reserves, and the related workouts also include targeted and aggressive amortization requirements throughout this year. I will now turn the call over to Dan Daugherty.
spk00: Dan Daugherty Thank you, Mark. Good morning and thanks again for joining our first quarter earnings call. First quarter loan growth. Over $94 million was funded entirely by core deposit growth of more than $340 million, excluding additional growth in the VAS vertical. As mentioned in the CRETS release, multiple deposit verticals contributed to the core deposit growth. As a result of our deposit growth, our end of period and average balance of cash parked at the Fed was substantially elevated. Despite the outsized cash position and the current rate environment, we were able to increase the net interest margin by four basis points in the first quarter. Our loan pricing and repricing discipline was the main driver of our ability to expand the NIM. We expect to see some additional 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 5 to 10 basis points of additional uplift. Put another way, we forecast a fourth quarter NIM in the range of 3.45 to 3.5%. Focusing on lending, it is noteworthy that our quarterly loan growth was net of more than $225 million in payoffs and paydowns. Continued focus on economic loan pricing resulted in a weighted average coupon, net of deferred fees, which are typically 15 to 25 basis points per year, of 8.47% on first quarter new loan originations and draws, versus a December 23 portfolio coupon of 6.92%. Loan growth is expected to accelerate as the year progresses. We continue to plan on loan growth of between 600 and 800 million for the year. Our loan pipelines, especially on the CNI side, are growing after a slower than expected start to the year. Importantly, our plan assumes that we're able to fund all of that planned loan growth with deposits. As Martin mentioned, asset quality remains strong with no identifiable negative trends in the portfolio. The provision in the first quarter was generally in line with the increase in loan footings, offset somewhat by improvements in the macroeconomic variables that underlie our first quarter CECL model forecast. Non-interest income increased by approximately 70% from the linked quarter, as fees associated with letter of credit activity and deposit service charges more than offset a small decline in BAS revenue. The uptick in deposit fees is expected to be sustainable, while the increase in letter of credit fees is more aligned with borrower behavior. The decline in BAS revenue will accelerate as the wind-down project proceeds throughout the year. We expect BAS revenue to total $8 million to $10 million and total non-interest income to foot to $19 million to $21 million for the year on non-interest expenses. Non-interest expenses totaled $41.9 million in the first quarter. Importantly, expenses related to the digital transformation project totaled $1.8 million, and an additional $3.1 million reflects remediation work and severance payments associated with the GPG wind down. There was also an increase in core operating expenses compared to the fourth quarter. This was primarily due to seasonally elevated employer tax payments. Our $12 million digital transformation budget remains unchanged, and we continue to expect to complete the project in 2025. We currently expect about $8 to $9 million of the project to be expensed in 2024, including what has already been recorded for the first quarter. Non-interest expenses for the full year, including the digital transformation investment, are expected to total in the range of $160 to $163 million. The effective tax rate for the quarter was approximately 33 percent. The tax rate was negatively impacted by discrete items that came through in the quarter, primarily related to the conversion of employee stock-based awards. Going forward, we expect the effective tax rate to be in the range of 31 to 32 percent, excluding discrete items. Finally, please refer to the updated investor deck, which can be accessed from our website, for a walk-down from reported earnings to non-GAAP core earnings. As well, the deck now includes slides that provide details about the bank's multifamily and office loan portfolios. I will now turn the call back to our operator.
spk05: At this time, we will open the floor for questions. If you would like to ask a question at this 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. Again, we do ask that you pick up your handset to provide optimal sound quality. Thank you. Our first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.
spk02: Hey, guys. Good morning. Nice quarter.
spk04: Thank you, Mark. Good morning. Good morning.
spk02: First question I had, just to clarify, we still should expect about 300 million of B2C deposits running off in the second quarter. Is that right?
spk00: Approximately, yeah. That's a good estimate. Towards the end of the second quarter especially, yes.
spk02: Okay. And should we assume that your deposit pipelines continue to be strong given, you know, the success you had in the first quarter?
spk04: The answer is yes, but the timing of these new relationships and deepening some of them could be a bit different. But to Dan's point, at the end of the year, we are confident that we will not only replace those deposits, but we will have funded our loan growth. So from a quarter-by-quarter basis, timing could be slightly off, but on an annualized basis, we are still in line with our projections.
spk02: Okay. And then in the past, you all had indicated that you were talking to some teams from neighboring banks. I haven't seen any announcements from you all. Is that still in process? Is it likely that you'll hire some of those deposit teams in coming quarters?
spk04: You know, it's an interesting question. We've met with several, and so far for a lot of different reasons from cultural fit to pricing to loan expectations to support clients. This is a whole host of of parts of that conversation. And so far, you know, we've never built this franchise based on teams for a lot of different reasons. But we did speak to several teams, but we have not made a decision on any one. But I would put a low probability on that happening in 2024.
spk02: Mark, do you think some of these teams are getting unrealistic deals from other banks or other banks are paying too much to bring these teams on?
spk04: Well, I don't know what they negotiated. Perhaps they're better negotiators than me. But when I look at the three biggest hurdles, all nice people, by the way, coming into the bank, but culturally it's a very difficult fit. They're used to working in teams. They're not integrated with the company. It's sort of out of character for what we've built here as a commercial bank. The kind of integration we have here, the kind of culture, not only works for our staff, but it also works for our clients. Our clients expect that kind of relationship banking. So that's the problem, number one. Number two, on the way in, even if you think that the cost of those deposits are affordable today or efficient, you've got to dig in a little deeper and look at total compensation expectations. And what I found most problematic is the implication of loan expectations. A lot of these deposit teams represent a lot of real estate owners in multifamily. And although we have multifamily on the balance sheet, it will never be a primary asset class at MCB. It is a low profitable business. So I don't want to set anybody up for failure, encourage them to come here. We attempt to integrate them and then find out We can't replace the loans as they mature out of their existing banks in multifamily. So there's a few other conversation points. All nice people. I wish them well. But so far, it has not been a good fit for MCB for a lot of reasons.
spk02: Okay. And last question, Dan, the guidance you gave was super helpful. The one thing you didn't give guidance on was the provision based on your projection for 600 to 800 million alone growth and assuming no real changes to the economic model. What does that kind of spit out in terms of provisioning for the year?
spk00: We should see about 1% of growth as our provision level. So I'm, you know, thinking six to eight, maybe a little bit more, but I think six to eight is a good context for the provision for the remainder of the year. Thank you.
spk05: Thank you. Our next question will come from Christopher O'Connell with KBW. Please go ahead. Hey, good morning. Morning, Chris. Good morning, Chris.
spk03: So just wanted to start off on the expense side, appreciate the guidance there and the guidance around the digital transformation costs as well. For the guide of the 160 to 163. That includes, you know, the core OPEX plus the digital transformation. Does that include the GPG wind down in regulatory remediation costs?
spk00: Yes, it does, Chris.
spk03: Okay, got it. And can you just walk us through what exactly the regulatory remediation costs relate to and how much of the GPG wind down and regulatory remediation costs remain, if any, over the course of the year?
spk04: It really is made up of legal and professional fees, consulting fees. As you all know, we have two public consent orders out there, which are expensive, to unwind and get removed. We're confident that we can satisfy the expectations throughout this year. But consultants are very expensive today. Regulators expect independent validations done by third parties. You need lawyers to look at every document you send to regulators today. It's an expensive and unfortunate expense, but we expect it to run off at the end of this year and not be in a 2025 run rate. Can't really allocate that. We're very precise on the budget for the technology integration, but regulatory expenses and legal fees and consultant fees is somewhat of a moving target. We think we gave you worst-case scenario in Dan's projections.
spk03: And just do you have any ballpark as to like the total dollar amount of those costs throughout 2024? Not caught in the guide.
spk04: Well, if you just back out, well, you know how much we're spending in the digital transformation, back out, take that off of what the guidance Dan just gave you gives you the ballpark of the exit fees and professional fees, the GPG exit costs and the professional fees. But we'd rather give you a worst-case scenario than to try and allocate it.
spk03: I guess what I'm getting at is, you know, when you back out, the digital transformation costs and, you know, the rest of, you know, these one-time costs, you know, as you're getting to 4Q24, 1Q25, do you have a sense of what the core kind of underlying expense run rate will shake out at?
spk00: It's a really good question, Chris, and I've been noodling on that for quite some time. I come up with around 148 to 150. as a range of core expenses by the time we get to 25. Now, again, that estimate is very dependent on the timing and success of our remediation project, remediation requirements, but I think that's a good placeholder.
spk03: No, yeah, that's super helpful. Thank you. You know, just, you know, as far as, you know, really appreciate the color on the multifamily and office slides in the deck. It looks to me that there's on the rent regulated side and on the office side, you know, no non-performers right now from what I could tell. You know, how are you guys feeling about, you know, the maturities there? in those two buckets over the course of 2024? Do you guys have a good look into those borrowers and those credits? It looks a little bit lighter on the rent-regulated multifamily side, but about roughly a third, give or take, of the office kind of matures this year.
spk04: Yeah, I would expect that, with the exception of the credits that we want to keep, And we reprice and keep it because we have a high retention rate here. The rest of them will get paid off. Out of the over $200 million in the first quarter, some of it was multifamily as well and perhaps some office. So, yeah, we do not expect to be in a rollover situation where one cannot be refinanced or we would not be interested in refinancing the credit.
spk00: I would add further that our credit team has looked at each. If it's maturing in 2024, we've already been in touch with the customers. And we, again, we don't detect anything negative trends out there that are material nature to bring it to your attention. Great.
spk03: And just, you know, the timing of the GPG deposit, you know, roll off, you know, I know you guys covered Q2. But just given that there was actually kind of surprisingly growth this quarter in that category, how are you guys thinking about the timing of the rest of that roll-off into the back half of the year? Is it going to be more weighted toward Q3 or Q4, or is it pretty even across those two quarters?
spk04: I think based on our schedule, what we call B to C, by the end of the summer, by August, that should be complete. And then in the third and fourth quarter, the B2B deposit should be complete. But I would extend the B2C to the end of the summer to August.
spk03: Was the growth this quarter in B2C or B2B or a mix?
spk00: It was a mix, actually. Great.
spk03: All right, that's all I have for now. Thanks for taking our questions.
spk05: Thank you. Our next question comes from Alex Lau with JP Morgan. Please go ahead.
spk01: Hi, good morning. Good morning, Alex. Hi, Alex. Staying on the GPG runoff schedule, what are your expectations for the quarterly pace of reduction in GPG fee income and expenses for the year?
spk00: So, you know, as you saw in the first quarter, we printed $4 million of fee income. I don't expect that the decline in the second quarter is going to be materially different than that. But then as you get into Q3 and Q4, it's going to accelerate rapidly. Again, $8 to $10 million is my forecast for the entirety of the year. But I think that's the best way to think about it.
spk01: Great, thank you. And on the $90 million increase in non-interest-bearing deposits this quarter, where did you see that come from in terms of deposit verticals? And looking ahead, where do you expect these balances to grow, if any?
spk00: A significant portion of that was from the BAS side. So some of it was from retail, but again, there was a good portion on the BAS side, and it becomes part of the forecasted outflows over the remainder of the year.
spk01: Great. Thank you. And then regarding the NPA that moved to current, were there any specific reserves, and do you expect any releases related to these loans?
spk04: Yeah, we're hoping that in the second quarter when we report, we could release those reserves. But we want it to season for a bit. It's prudent to just let it season there at least for a quarter. But as I said, we have substantial interest reserves now that go well beyond the first quarter. So, yeah, we'll take a hard look at that. But we're expecting it to get reversed in the second quarter.
spk01: Great. Thank you for answering my questions.
spk05: Thank you, Alex. Thank you. This does conclude the allotted time for questions. I would now like to turn the call back to Mark DeFazio for any additional or closing remarks.
spk04: Thank you. I do not have any specific remarks. I just want to thank everyone again for their continued support and the continued support of MCB. And we have an exciting franchise here with a great growth story that will just continue. So thank you again and enjoy the rest of your day and weekend. Thanks, everyone.
spk05: 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.
Disclaimer