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spk00: 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 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 and investor presentations. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin.
spk02: Thank you. Good morning, and thank you all for joining our second quarter earnings call. MTB'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 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, NCB 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. 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 had two loans totaling approximately $21 million that were characterized as non-performing as March 31. reporting date that are now current and have funded interest reserves. I will now turn the call over to our CFO, Dan Talley. 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 the 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 23. Our loan repricing, loan pricing and repricing discipline are the main drivers of our ability to expand the net demand. We expect to see some additional modest uplifts in the margin throughout the remainder of the year. In our updated forecast model, we have considered a single 25 basis point rate cut in September. In that scenario, we expect to see approximately three to five basis points of additional uplift. In other words, we forecast a four-quarter yield in the range of 3.47% to 3.50%. Focusing on lending, we grew the loan growth 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 price in the quarter was led by an increase of 48 million in C-9 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 loan payouts in the quarter was approximately 7.88%. The weighted average coupon on upcoming loan returns 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. To date, we are up about 320 million net of GBG 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 some We currently forecast loan growth for approximately $500 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, will also provide some relief on the funding side of the equation. As Mark mentioned, that's a quarter being strong with no identifiable negative trends within the portfolio. The provision in the second quarter was generally in line with the increase in loan footings. Non-interest income included in uptick in deposit fees from the first quarter, which as previously mentioned, is expected to be sustainable. This increases more than offset by declines in letter of credit fees and GPG revenue. For the full year 2024, we currently forecast BAS revenue to total $9 to $11 million. Our total non-interest income expectation for 2024 higher than our previous guidance. We now expect it to flip to $20 to $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-1 guidance. Q2 Regulatory Remediation Cost came at approximately $2 million higher than expected. We have made arrangements for the GPG client to recoup that $2 million overage in the third quarter and further to pass through a significant portion of any future remediation expenses that are later than previously anticipated. For the following year, 2024, our guidance remains total managed expense of $161 to $163 Further, I expect the go-forward clean run rate for an artist's expense will be around $149 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 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 expensed 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 discrete items. Please refer to the updated investor deck, which can be accessed at 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 BAS exit total $10.4 million or $7.1 million after tax. I will now turn the call back to our operator for Q&A.
spk00: Thank you. The floor is now open for 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, that you pick up your handset to provide optimal sound quality. Thank you. Our first question will come from Alex Lau with JP Morgan. Please go ahead.
spk01: Hey, good morning. Morning, Alex. Good morning. 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?
spk02: 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 first quarter.
spk01: 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?
spk02: 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 vending customers, EB5s, and HOA and meetings as well. So with that, I expect that the replacement funding should come with approximately a forehand, I was my guess. But again, it's very dependent on how that mix comes out.
spk01: Got it. And do you expect much wholesale borrowing in the near term in anticipation of the outflow deposits?
spk02: Our plan is to replace all of the outflow with deposits, but we are fully prepared to use wholesale as necessary.
spk01: 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?
spk02: It's really, Alex, this is Mark. It's more as a result of pricing. We're here. We believe in 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 here. 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.
spk01: Thank you. Just one last one from me. What is the latest update on your progress on the regulatory remediation process?
spk02: 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 and will surely come to an end by the end of this year.
spk01: Great. Thanks for taking my questions.
spk00: Thank you. Thanks, Adam. Thank you. Our next question will come from Christopher O'Connell with KPW. Please go ahead.
spk02: All right. 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 balance is around 1.5%. Got it. And so as far as, you know, the NIM guide up, you know, three to five bits 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? That is correct. Got it. So depending on if you have to dip into short-term borrowings temporarily for a quarter or so a year, that probably results in just either, you know, a flatter NIMS trajectory or kind of just a modest uptick into the year end, depending on, you know, how much Fed funds cuts we get. 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 that our timing variance is in the far it 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're 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 instability over the last two years. While we have a materially decreased 800 million is a low point compared to where we were two years ago with the entire GPG deposit base. So So this is not a heavy lift. We may come in and out of wholesale funding for a short period of time, but instability is very much in line with our expectations. Great. And I think you guys said on the last quarter, but it's still true that, you know, each Fed funds cut that we get here is about, you know, a 5 to 10 basis point lift in the margin. Uh, each 25 basis points results in, yeah, I would say four to eight, not five to 10, four to eight basis points. Got it. So you guys only have one cut in the NIM guidance, correct? So if there's an additional, there could be, can you get upside there? You already do upside there without a guide. That's correct. And it looks like, um, You guys had, you know, a good chunk of the multifamily portfolio kind of come due this past quarter, and some of it may have been rent regulated. You just talk about, you know, how you guys, you know, handled that, what you guys are seeing, just any additional colors to, you know, how those loans were, you know, performing recently. when they came due and whether you guys, you know, refinanced them yourselves or whether they went elsewhere? No, 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, 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, can take on 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 continue to be refinanced by us. But those were payoffs. Great. And 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's set to come due in the second half of the year? 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 met their next milestone, or we would consider refinancing them. So that's all in flight, but it's just normal communication between our lenders and our sponsors. 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 annual merit increases? Yeah, that's, you know, when we're behind the three projects that are in flight here, that's kind of the clean one 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 projects. I'm not going to repeat them again. I'm tired of saying it when those are behind us. 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 it kind of loosely assuming some, you know, annual merit creases in that number for growth or is it prior to that? No, no, that's inclusive, Chris. Absolutely. Okay. Got it. That's helpful. Great. Thanks for taking my questions.
spk00: Thank you. Thank you. Our next question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.
spk02: Hey, guys. Good morning. Happy Friday. Thank you. We woke up to an interesting Friday. Thank you very much. You're welcome. Well, let me start by following up with that question on expenses. Just to clarify, the $161 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? Yes, it does, Mark. Okay. And then I'm curious. Where do 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 they sort of flattish or maybe up a little bit from where they are today? 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 it's an additional growth into year end here. So another, maybe another, you know, 200 perhaps. Okay. Great. And then was curious on that, that one multi-family 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? 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. reserves, meaningful reserves for the rest of the year and into 25. So there is a real bit of action playing right now for these properties to get sold. And, yeah, this is not something that's so unique in our business. It happens. It's unfortunate, but it did happen. 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? Yeah, thank you. I was going to end with that. Yeah, we had a big FISERG as 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 unfortunately payrolls. 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 airing school. 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.
spk01: Thank you.
spk02: Thanks, Mark.
spk00: 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.
spk02: 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 it. We have a very clear line of sight into 2025 and we're excited about getting back to historical performance standards here at MTB 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.
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.
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