Q2 2023 Metropolitan Bank Holding Corp Earnings Call
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Welcome to Metropolitan Commercial Bank second quarter 2023 earnings call hosting the call today for Metropolitan Commercial Bank, our 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 opened for your questions. Following their prepared remarks, if you would like to ask a question at that time. Please press star one on your telephone keypad.
If at any point. Your question has been answered you may remove yourself from the queue by pressing star two.
We ask that you. Please pick up your handset to allow optimal sound quality lastly, if you should require operator assistance. Please press star zero.
During today's presentation reference will be made to the company's earnings release and investor presentation copies of which are available at M. C Bank N y dotcom.
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.
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 quite disruptive time.
Management teams would challenge to prove how prepared they work 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 MTB, 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 Mtbc's second quarter as well as year to date results.
We continued to achieve critical objectives, including but not limited to demonstrating margin stability.
Driving lower cost funding.
Reducing the reliance on higher cost borrowings.
Bringing all 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 MTBE as 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.
As well as various deposit verticals that continue to drive lower cost core funding.
It is important to recognize that M. C. B caused more margin compression than we would have experienced to date by deciding to offload 100% of crypto deposits.
In 2022 M C be moved off balance sheet, a total of $754 million in zero cost deposits from their peak at June 30 and year to date.
June 30th 2023, we moved off an additional $436 million of crypto related deposits now at zero.
Final exit decision was the right decision.
What it demonstrates is that M C b 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 below 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.
Well, 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 that the future I am confident about the future of MTB and I believe execute executable opportunities for M. C. B will emerge 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.
Thank you Mark and good morning, everyone.
While the second quarter was a turbulent one for the industry FCB had a very strong quarter for deposit and loan growth, which is evidenced in our June 30 balance sheet in the quarter MTBE as deposit verticals grew $377 million for nearly 8% as we successfully expanded our existing deposit verticals. Thanks to the dedication and hard work.
The M C b team and 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 scripted.
Crypto deposits were substantially reduced by $220 million in the quarter, but remained at quarter end was $58 million of corporate and reserve.
Posits with crypto related companies, which we expect to be fully transitioned away from M. C. B 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.
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 up $297 million or 6% on $425 million of loan production.
Notably loan pay down or pay off 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, one 9% versus the portfolio rate for the first quarter of $6 three 4% 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 noninterest bearing crypto deposits with barring 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 M. C. B 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 remained strong.
Loan growth drove the majority of the second quarter credit provision with the remainder being driven by macroeconomic factors in our CFO model.
Our global payments business also performed quite well in the quarter with revenues from Nonbank financial service companies up 21% from the first quarter of 2023 as our partners continue to hit their stride.
Within that growth, we're particularly pleased to see corporate disbursement client revenues up 27% in the quarter.
Overall.
Noninterest expenses remained very well managed but I do want to give color on a few items.
The decline in compensation and benefits largely reflects the first quarter seasonality and employer taxes. Looking ahead, we do continue or do you 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.
Slide Council engagement on open matters wound it 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.
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.
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.
Going forward, we would expect the effective tax rate to be in the range of 31% to 32% excluding discrete items.
I will now turn the call back to Shelby for Q&A.
Yeah.
Yeah.
The floor is now open for your questions.
This time, if you have a question or comment please press star one on your telephone keypad.
At any point. Your question has been answered you may remove yourself from the queue by pressing star two.
Again, we do ask that while you pose your question you pick up your handset to provide optimal sound quality.
And we will take our first question from Alex <unk> with J P. Morgan.
Hi, good morning.
Good morning, Alex.
Greg last quarter, you mentioned you thought the NIM could get back to the one two level call. It 380 390 range is it fair to assume that you know with NIM expanding for the next quarter or two quarters, we could see that move back to that level or has that exit rate change. Thanks.
Yeah.
I think as possible Alex I mean, obviously the balance sheet is still slightly liability sensitive so that rates would be a bit of a headwind going forward. I mean, if we have 25 bps next week, that's one conversation.
To me, it's really the uplift is going to come from a combination of.
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 million to $25 million a quarter of investment securities, which are rolling off at a very low rate, putting those into 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 I think <unk> point, though in his prepared remarks, we are at that inflection point I I really think if we haven't hit that floor.
We'll hit that floor early in the third quarter and with the.
The build and the low cost deposits I think we get back up to that the prior rate pretty pretty quickly, but this is a marathon not a sprint for us. So we're looking to do it over a couple of quarters.
Yeah.
I wanted to move on to deposits. So noninterest bearing deposits were down 400 million half of that coming from crypto related on the other half of the $400 million one.
Where did that come from in terms of deposit verticals and has this shown any signs of moderating.
Frankly, it was just normal flows in the quarter some of that was.
Coming from retail clients, especially commercial lending clients as they've deployed liquidity. So kind of came across a number of different verticals, Alex and it wasn't repricing wholesale repricing of DDA into interest bearing so it's really more of a timing issue I think some of that will come back in normal course, as DDA is again, but as I kind of parse through it I didn't really.
See any red flags or any any storylines to pull forward for you.
Thanks, and you mentioned you had good quarters on the retail end loan customer segments can you give us some colors in terms of the rates that you're paying on those balances that you brought on board.
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 one side of what our borrowing costs would be so if we're out with our borrowings at fed funds effective plus a spread we'd be well inside of that.
I think yes as part of that you would see just nationally in there not just to the growth in the quarter, but.
We certainly had a rates up in the first quarter and second quarter, you'll see you'll start to see continue to see a little bit of just pull through in our cost of funds or cost of deposits ended the third quarter, but again I think it's gonna be offset very well by what we're able to do on the loan pricing side.
Yeah.
Thanks, and you mentioned in the last few months you've added a couple of deposit.
Gathering teams the EV five 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.
The.
Type of costs are associated with these deposits. Thanks.
Yeah, Hi, Alex it's Marc Defazio, each each and every one of them.
We've 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 mentioned was at $10 31, entitled Escrow as well is really hitting their stride.
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 with as 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.
<unk> can assist us with going back to our traditional.
Funding strategy, which is very very very.
Very core and rely 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.
And then we were when we came into 2023, so we're optimistic and all in on the cost.
And Greg keep me honest here I think they will be well on the inside of it.
Total deposit costs today, yes, I agree with that.
Thanks for all the color there and then just one on loan growth you are 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.
Running above 100% level. Thanks.
I am comfortable at running above 100%, but I as as we have been talking six months was a disruptive six months and we've 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 stays south of 100%.
In the future and again I think we've had this conversation before if we 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.
But to also significantly reduced the borrowings balances over the next quarter or two so.
We're comfortable at a short term at a moment in time being closer to a 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 will come down to more historic level.
Thanks, and then just on the G. P. G group the fee income was up nicely in the quarter is there anything onetime in nature in that increase or was that mostly a transaction volume related.
It was mostly translation transaction related volumes I mean, there's always quarter on quarter, you might have a little bit of.
Contractual revenues peek into it might've been.
Little bit of that but frankly on balance it was really as transaction revenues Alex.
Thank you.
And then just last one for me on the G. P. G 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.
Well I think it is still.
Deposit growth vertical for us I mean, this goes back and ties into your question on noninterest bearing deposits.
The one vertical where it's a very active.
Flows, 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 end of the quarter and again those are noninterest bearing flows that kind of came out.
As well near the end of the quarter. So we know.
It's absolutely a growth vertical over as we think longer term.
Yeah.
Thanks for taking my questions.
And good luck on that.
And we will take our next question from Chris O'connell with K B W.
Good morning.
Hey, Chris Good morning, Chris.
Hi.
So just wanted to circle back on the <unk>.
<unk> question.
I think in the.
In the second quarter about $1 5 million result, quantified as being crypto related.
Within the.
$5 4 million in <unk> does that fully fall out next quarter or does some of that stick around how should we be thinking about kind of the new baseline level starting in <unk>.
Having that business wound down by June 30th Chris you'd expect that to go zero for the third quarter.
Okay great.
And then.
Hi.
I appreciate the color on the loan to deposit ratio in the overall growth.
See you guys have had strong growth this quarter.
And now we're getting the deposits to be able to effectively fund that going forward.
Are you thinking about the level of balance sheet growth overall on the loan and deposit side into the second half of the year are the pipelines.
Winding down a little bit or slowing given the broader economic environment.
<unk>.
How are you thinking about the overall balance sheet growth as a whole.
Yeah. So the pipeline is still fairly robust.
Times like this.
Oh very opportunistic also.
Notwithstanding some of the obvious headwinds in various different industries or.
Real estate asset classes, all 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 all 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 core 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 to <unk> net interest margin and the operating efficiencies by leveraging our capital we just won't do it but.
We clearly are demonstrating that stability.
Okay got it.
And you mentioned 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.
How that occurs.
If you could give any color around kind of the monthly or quarterly portfolio cash flow and how quickly that can kind of turnover.
Right.
Yes 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 light. If these interest rates, there's still a fairly long duration book.
We at points in time, we've looked at maybe doing some restructuring around it I don't see that being eminent we might be opportunistic down the road as rates start to come back down in terms of rebalancing the portfolio, but 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.
Okay.
Makes sense.
And.
Yes, I think you said for re queue.
The professional fees should benefit about 2 million Bucks downward.
But there is still going to be overall expense growth.
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 or just how youre thinking about kind of expense growth going forward.
Recognizing that you guys had hired a bunch of teams.
At different points throughout the past quarter or so.
Im just trying to.
So you see what the new starting point might be there.
Yeah, I know once you normalize for that professional fee.
Run rate when you think about the rest of the lines I think comp and 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 you know historically last call. It six to eight quarters before this that'll give you a pretty good idea of how we were gonna look there I think.
The teams that have come on are going to take some time to ramp up.
But I think that will get reflected in that run rate as well as you you always hear us talk to we don't we don't focus on the efficiency ratio. We're much more focused on driving Aro TCE and the expense base. It takes to get there. It's just part of the sausage, making but I would tell you in the quarter. The efficiency ratio was obviously elevated just given both to that a little bit of compression that happened on the net interest.
<unk> combined with the elevated professional fees for.
First six months of the year, we're still right around 50% on the efficiency ratio. We we do a very good job managing expenses. So I think the other lens you should look at is look through as you know over the next several quarters, where we're going to continue to push that efficiency ratio back down toward the historic levels, which are more in that mid <unk> mid <unk>, so call it 45% to 47% that's what Mike.
Good day.
Okay really helpful.
Yes.
And then.
As far as the human capital you mentioned in <unk>.
You guys have obviously hired a bunch of teams and deposit related.
How are you thinking about opportunities going forward I mean, I know that youre always looking.
But is there any specific.
Types of teams that you are seeing opportunities, where theyre, having discussions with.
Those opportunities increased or.
<unk> decelerated.
Over the past few weeks given the.
The immediate opportunities that would present after the M&A disruption last quarter.
Yes.
We're not we're not out there seeking any new teams.
Obviously, we're open to new opportunities, but I think.
Our plate is fairly full right now and we want to get the real value out of the new the.
New partners, we 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.
Our products, we try to leverage off of our core competencies. So what we've announced in the first quarter.
Handing up quite well I think you're going to see material contributions going forward, but our focus right now is to assist those teams and 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 if it falls in front of us.
Okay, Yes.
Area.
And.
On the credit side, I mean, everything looks very clean this quarter not much movement around.
And.
Obviously net charge offs 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 are keeping a close eye on.
As far as loan demand or.
Desire to put on loans is there any particular areas that are you seeing that are still attractive versus shying away from.
And.
Anything that you're seeing from others in your local markets that are I guess concerning on the credit side.
Yeah.
It's not an all or nothing M. C. B has always been in the market and Korea wise I could probably speak to most of our.
More senior stakeholders on the lending side, we're always in the market.
Question is finding the right spot.
And with the right sponsor around what deal in real estate of what industry, we want to support so.
We're just very careful with just more careful than we are conservative and are we paying more attention today.
It relates to certain asset classes in real estate as opposed to.
And industry.
On the C&I side, Yeah of course, but we've noticed that a long time ago. We've noticed some of those tea leaves us well you can call weaknesses and concerns. So doesn't mean, we exited those industries are those asset classes. It just means that we have to look at them a bit differently to lean on the side of being more careful.
And our 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.
Happy with our independent risk management process around managing the portfolio stress testing the portfolio.
Pleased with that it's fairly robust as you know and.
And we continue to throw a lot of resources behind the risk management side of the business.
I'm opportunistic that we can continue to manage the portfolio and manage the new business, we bring on well.
Great.
Alright, thanks for taking my questions.
Thank you Chris.
This concludes the allotted time for questions.
I'd now like to turn the call over to Mark <unk> for any additional or closing remarks.
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 MTB.
For the new shareholders that came in at a very attractive entry point welcome to MTB I would also like to thank our entire <unk> team and our directors, who continue to step up and recognize the challenges our industry face and what it takes to keep MCP are top performing and relevant financial institution.
Thank you again and I look forward to our next call.
Yes.
This does conclude today's conference call and webcast a webcast archive of this call can be found at Www Dot M. C Bank N Y dotcom. Please disconnect. Your line at this time and have a wonderful day.
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