C.H. Robinson Worldwide Q1 2023 Earnings Call Transcript

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April 19, 2023

There are 5 speakers on the call.

Operator

Welcome to Metropolitan Commercial Bank's First 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 McEnchie, 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 remarks following the prepared remarks. A presentation, copies of which are available at mcbankny.com.

Operator

Today's presentation may include forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Medi Calculation, 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 DiFazio, President and Chief Executive Officer. You may begin.

Speaker 1

Thank you. Good morning, and welcome to MCB's Q1 earnings call, and thank you for accommodating a call a few days earlier MCB was well prepared when the recently when this recently became obvious across the industry. For nearly 24 years now, MCB has maintained a steady hand at managing liquidity and interest rate risk. That is evident when looking at our diversified loan and deposit verticals, the expansion of our net interest margin as interest rates rose dramatically off of record lows and the strength of our liquidity position currently. Our client base and financial positions are strong and growing.

Speaker 1

Core deposits grew in the 1st quarter net of expected outflows. Greg will take you through key metrics around our liquidity position shortly. NCB's current financial position did not happen by accident. We have worked very hard since our founding to build a strong and diversified funding base, The commercial bank's performance and credit quality remains strong. While net loan growth in the quarter was modest, We remain focused on pricing in this volatile rate environment.

Speaker 1

If we cannot lend at spreads that are within our disciplined approach to margin management, We have added a slide in our Q1 2023 IR deck that provides additional details on our office exposure, with loans collateralized within Manhattan, office buildings representing just 37% of the office vertical. Substantially, all of the Manhattan office loans were originated in the last 12 months. Our global payments business service companies engaged in both retail and commercial oriented activities. MCB does not extend credit to the Global Payments clients or to their customers. We are excited to accelerate our entrance into the EB5 Medtronic, we were very fortunate to recruit a fantastic and experienced team and are confident this will be an additional pillar Metro space.

Speaker 1

The exit materially started years ago by not growing the business and ring fencing the deposits, allowing for a smooth transition off balance sheet and we expect to complete our exit by the end of the second quarter. The past quarter was a very telling one for the banking industry. Management teams in this industry that were well prepared for a shock to liquidity and interest rates demonstrated their resilience as a going concern. For middle market growth companies can be money centered banks is materially misplaced. Middle market companies with revenue of $400,000,000 or less rely Heavily on true commercial banks, not money centered banks or converted thrifts.

Speaker 1

Coming out of this non systemic mini bank crisis, in my opinion, I believe we will see the true value of a well funded diversified commercial bank like MCB. Our Q1 operating performance demonstrates the resilience and sustainability of our business. We have effectively managed through a challenging environment and are in a strong position to support our clients with enhanced resilience and strong capital levels.

Speaker 2

Net income and earnings per share. Earnings on average tangible common equity of 17.4%. Importantly, core deposits were up by 69,000,000 MediGas Holdings and the quarter on the strength of new account volumes across our retail deposit franchise and that includes deposits with loan customers, the majority of which occurred since the middle of March. The increase in core deposits is net of a modest decline in global payment deposits from non bank financial service companies given normal flows at the end of the quarter and expected outflows from bankruptcy trustees. Crypto related deposits also declined as expected to $278,000,000 at March 31.

Speaker 2

Included in this balance is $218,000,000 related to the remaining active exchanges, which are subject to our announced wind down, With the remaining balance largely representing commercial operating accounts for a variety of companies. At March 31, Insured deposits were 71% of total deposits and MCB had $3,100,000,000 combined net cash on deposit with the Federal Reserve Bank of New York and in readily available secured funding capacity, which represents 208% of uninsured deposits. Our available collateralized off balance sheet liquidity includes facilities with the FHLB, FRB and securities repo facilities. Active collateral monitoring and posting programs supporting the FHLB and FRB facilities. All facilities are subject to periodic testing.

Speaker 2

A much lesser degree FHLB advances during the quarter, with balances a bit elevated at quarter end reflecting the timing of normal deposit flows right at quarter end. As we have said, we will use these wholesale funding sources in advance of executing strategic core deposit initiatives. The pace and magnitude of interest rate increases have been a headwind as it does take some time for the 175 basis points of rate increases since September 30 basis points in the quarter and at 183 basis points remain low, particularly given we are Branchlight franchise. Metzendorf and the Company's financial results will be in the range of $2,500,000,000 to $2,500,000,000 to $2,500,000,000 to $2,500,000,000 to $2,500,000,000 to $2,500,000,000 to $2,500,000,000 Turning from a moment to loans, We maintained a prudent approach to lending in the quarter. We did have robust loan origination volumes of $265,000,000 which was partially offset by net payoff net income paydowns of $254,000,000 which when combined with credit metrics remain strong demonstrates the resilience of our loan portfolio.

Speaker 2

The impact of adopting CECL effective January 1 was, as expected, muted with a day one increase in the allowance for loan losses of approximately $2,300,000 As you know, this increase went directly to retained earnings net of taxes. Changes in the macroeconomic environment drove most of the credit provision for the Q1. Operating expenses continue to be well managed. There were a number of discrete items in the quarter that impacted expenses. Compensation and benefits did include the seasonal first quarter increase related to employer taxes of approximately $800,000 While professional fees did moderate in the quarter, legal fees remained a bit elevated.

Speaker 2

Net interest expense and there was also a true up of approximately $1,500,000 that is not expected to recur. We were also able to release 2,500,000 next quarter related to the conversion of employee stock based awards and the revision to the regulatory settlement reserve. Going forward, we would expect the effective tax rate to be in net income was $0.31 to $0.32 excluding discrete items. Our capital levels remained strong, particularly with the 17.4% ROA TCE this quarter, which further strengthened our capital base. Lastly, it should be clear given the strength of our liquidity position and held maturity securities, we would remain well capitalized across all measures of regulatory capital.

Speaker 1

I will now turn the

Speaker 2

call back to our operator for Q and A.

Operator

That you pick up your handset to provide optimal sound quality. Thank you. Our first question is coming from Chris O'Connell with KBW.

Speaker 3

Good morning.

Speaker 1

Good morning, Chris.

Speaker 3

I was hoping to start off

Speaker 1

Yes, sure. Not too much color I can give there. It's one particular loan that we're Details, we started litigation around this one particular loan, but we have very, very little risk of loss here on this loan.

Speaker 3

Okay, got it. And can you guys give the what the specific reserve is assigned against that?

Speaker 2

Again, given that we're well collateralized with a personal guarantee on it, we went through the ringer, Chris, but we did not put up a reserve on it just given the collateralization levels.

Speaker 3

Okay, got it. And can you guys give any color around maybe just the industry or the market In general that the loan is in or the latest LTV?

Speaker 1

The LTV is in the low 70s and it's an out of market deal. Yes, and

Speaker 2

actually it's public record.

Speaker 1

We started a record, we started a lawsuit on it. It's a foreclosure in Kansas City, Kansas, in Mission, Kansas. It's public record. So yes, but beyond that, if the

Speaker 2

question is, is it indicative of other credits in the portfolio? No, this is a bespoke

Speaker 3

All right, got it. And just more broadly on the credit side, I mean, given the current market environment, it looks like originations were prudently downward. And I guess, which areas are you pulling back metrics and uncertainties and what are the areas or lending segments that you're most comfortable with at this point?

Speaker 1

Well, Chris, we did have over $200,000,000 of new originations in the quarter, so that's fairly robust. What we tried to point out is our portfolio is pristine and of high quality. That's Meant to get paid off for whatever structural reason. So we're not any more careful than we have been. We've been very cautious about lending.

Speaker 1

It's a core competency of ours. We're not any more concerned today. We have elevated concerns about certain industries, of course. But as you saw in the office building slide and my commentary, Most of the office buildings loans that we made in were in 2022 in Manhattan. So It's not that we're not concerned about the office building market, but there are really good opportunities out there to support clients today.

Speaker 1

So, we are going to continue to stay a well diversified company when it comes to our asset classes that we'd like to. Yes.

Speaker 2

And I think the other dynamic too is just loan pricing, Chris. I mean, we started having this conversation last quarter. We've been Very much sticking to our disciplines around margin management. So the other part of this conversation is making sure we're getting compensated for the risk we're taking. And I think that's the other side of Metechanical Wealth Advisors, making sure we're getting paid on the loan spread.

Speaker 2

So that's been part of the dynamic too and we stuck to our guns. And I think in Mark's comments, he also made the point, we still see quality across all of our lending verticals. It's really just a matter of being patient and being there to support our clients on the quality projects they're working on.

Speaker 3

Got it. Appreciate the color there. And so as you're looking at the rest of the year and your origination pipelines, I know typically the bogey has been double digit loan growth. Is that still the case for 2023 or is this More of a type of year, just any color around kind of how you're thinking about loan growth for the remainder of the year?

Speaker 1

Looking at the pipeline and looking at the opportunities in markets that are correcting like We're working through today, opportunities to present themselves. So I would not be surprised if we end the year in mid teens net loan growth. As if I wouldn't be surprised if we ended up with a 10% loan growth. It's all about quality. It's going to be about quality and pricing.

Speaker 1

So that's been our core competency for a career, never mind just the last 23 years.

Speaker 3

Great. And I appreciate the comments around the update on the crypto exit expected for 2Q. And any thoughts around exactly how that plays out with the flows on the balance sheet? I mean, it's $200,000,000 plus coming out of the deposit side. I guess, you guys have AFS and cash kind of available there as well as the ability to increase borrowings or bring on new deposits.

Speaker 3

Just Any thoughts around exactly kind of how that plays out in the balance sheet and kind of where we're at from a starting point in 3Q?

Speaker 2

Yes. I would for context, I mean, I'd let you know that the majority of what's left in the crypto, the gas exchanges, the 218,000,000 net interest expense related to FBO balances, so that will be subject to a BIN transfer. So from a timing perspective, other than just flows during the quarter, which can be We can probably start talking about here in the near term. To the extent those new initiatives and just normal the existing deposit vertical flows Put us in a position where we need to borrow, we would borrow short term. But again, when you look out over a slightly longer horizon, and I think we're talking a quarter or even if not much of a month or 2 into the Q3, I would expect core deposits to more than fill that gap.

Speaker 1

Yes. And Chris, if you look historically, We had much higher crypto balances on balance sheet even in the last 12 months and we replaced them efficiently with core funding. So our core funding is up today notwithstanding the reduction in crypto just over the last quarter. So We have no concerns about replacing the remaining balances of crypto in core funding. Yes.

Speaker 3

Got it. And on that point, could you just talk a little bit more about the EB-five team you brought on and just That overall business line and maybe what you see the long term deposit opportunity is there?

Speaker 1

Well, I'll work backwards. I just I want to be a bit cautious on what our projections could be. We had stood up our own EB5 group here. It was a modest start. Anybody who had paid attention to Signature knows that that team was and considered the best in class in the country, in developing, in the EB5 business.

Speaker 1

So we're fortunate to hear they're working with us and why it's a natural for us Because of our exposure to commercial real estate, this is just another product offering. To date, they've been here just for a couple of weeks and we've already introduced them to 2 very large developers And one deal has already been agreed to, which would be substantial in deposits regarding EB5 developers in the country and clearly because of size of our bank, we could never provide construction financing for those deals, but today we can play a meaningful role in the construction or the capital stack for This is a natural expansion for us and it came at a very good time and the team is a pleasure to work with.

Speaker 3

Great. And for those deposits related to that segment, like what do you expect those to

Speaker 1

Pricing is low. Let's put it that way. We'll give you some more color. The pricing is very low on those deposits.

Speaker 3

Great. And then just in general, how are you guys thinking about overall deposit pricing going forward? And I guess post the Crypto exit, do you guys have a sense as to maybe where a NIM range would be Following that exit?

Speaker 2

Well, working backwards, I mean, We're more focused on NIM and frankly more on net interest income, Chris, as you know, and just dropping the economics to the bottom line. I think as we kind of work through The transition with the rest of crypto, I think you're if we have to go out and borrow funds short term, which I think is fifty-fifty at best, I think. But if we did, I would see some modest NIM contraction, which means just a slight uptick in cost of funds as we went into the wholesale market short term. When you look out over a couple of to the end of the year and you look along slightly longer horizon just quarter on quarter, I think we get back to the same NIM level we're at frankly. The question marks are really going to be around short term rates.

Speaker 2

Are we looking at one more increase or not? Obviously, that would be a headwind to us given we are modestly liability sensitive, but again, I think that'd be a modest impact. I'm not really seeing any significant pressure, rate pressure on the rest of the deposit base. We continue to model out of the 70% deposit beta on interest bearing deposits, which I think through the cycle so far, that's been Fairly conservative assumption. I think it still is, particularly as we get to the tail end here.

Speaker 2

So hopefully that gives you some context on how we're thinking about it.

Speaker 3

Yes, that's helpful. And then just on the expense run rate going forward, I know the professional or legal fees were a bit elevated here. You had the one time CECL unfunded commitment within other expenses. I guess just kind of backing that out and looking ahead, How are you guys thinking about the operating expense range on a go forward basis?

Speaker 2

Yes. Well, 2 things. The CECL impact for the off balance sheet commitments that actually went to retained earnings not to the other expense, Chris. So I know that other expenses were slightly elevated in quarter and that's frankly just a combination of a lot of little stuff that I think there are just some one off stuff in the quarter that settles back down. But We're always more focused on return on tangible common equity, which again in the quarter at 17.4% was very, very strong.

Speaker 2

We're going to continue to invest in the business. That's the wildcard for us. This is just about a run rate and maintaining what we've got. I would tell you that our The efficiency ratio would stay in a range in the mid-40s. For us though, we're standing up the EB-five team.

Speaker 2

We've got some other initiatives that are standing up that are going to impact that run rate, but they're going to as we always say, they're going to have some immediate returns to them. So to me, the operating expenses, though, we're going to try and keep net efficiency ratio in that mid-forty percent range as we kind of work through these things because we feel like we can continue to self fund the investments as we work through Standing up any new programs.

Speaker 3

Got it. And last one for me. Given your capital position and kind of overall balance sheet liquidity as well as where the Stocks trading on valuation, have you guys considered a share repurchase plan? And any

Speaker 2

I'll start, Mark, and fill in the gaps. I mean, we've absolutely considered it and And had that discussion with the Board over the balance of the quarter. If we were a much more mature banks that couldn't grow loans the way we could and couldn't grow organically the way we could, I think we would give a lot more consideration to it. The reality is we are at an inflection point. I think across the industry, we really feel confident in our business model and in our ability to continue to organically grow our business.

Speaker 2

So it just seems a bit counterintuitive. We appreciate and understand where the share price is. We think that's going to right size itself as we continue to net debt to shareholders. But we still feel that the highest and best use of our capital is supporting the growth of our businesses, which will drive more shareholder value as we go through time.

Operator

And we'll take our next question from Alex Yao with JPMorgan.

Speaker 4

Hi, good morning. Hi, Alex.

Speaker 2

Good morning, Alex.

Speaker 4

Were you opening accounts given that you're in the same market as Signature or were you seeing clients move funds out to diversify for deposit insurance?

Speaker 1

We actually unfortunately, we were opening up accounts Starting as early as the Wednesday before the weekend when the announcement happened, so we had opened up hundreds and hundreds of accounts, Primarily coming from Signature Bank, a little bit coming from First Republic as well. And remember, in many ways, Signature and I and MCB share a lot of the same clients as it relates to commercial real estate Medi and Commercial Lending. So we already had a relationship, what I would say, with about 80% of The clients that moved accounts over. So yes, we didn't see any from the commercial bank, I don't I'm sure we had some, but it doesn't resonate to me that we had any major outflows from the commercial bank

Speaker 2

at all. To Mark's point, we really started opening up the accounts. I think the Wednesday was the March 8. And as we kind of roll through to Friday and then into the Monday 13th, we saw net deposit growth really every day as we went through that following week. And it was really frankly for us as a business as usual footing the entire time.

Speaker 2

We clearly were sensitive to the potential impacts of liquidity that you can't predict. But we probably at the margin lost a couple of deposits here and there, 2 or 3, pulled some corporate uninsured deposits out, but that was more than offset by the inflows from what we saw, all the new account openings we saw. So again, I kind of embedded it in my comments, but when you think about where we were beginning the middle of March versus where we ended March and you look at our retail and the deposits with retail deposits with our loan customers, A lot of that growth really came from March 8 to the end of

Speaker 1

the month. And the one other thing, Alex, you should know that during that a period of time, it was an extraordinary effort because the type of accounts that we were opening were real operating accounts that needed a whole suite of financial services, not just a reserve account or a single one operating account. So We've now expanded and deepened the relationships substantially with a lot of clients Within their entire franchise from a commercial perspective.

Speaker 2

And when you go through a dislocation liquidity issue across the industry that we have, You really figure out whether or not you've got a quality deposit franchise, especially on the as a commercial bank. And we feel really, really comfortable with the relationships the franchise, which is fantastic.

Speaker 4

Thanks. That's great color. As a follow-up on the

Speaker 1

Well, I mean, we're a growth company, so we're always looking for talent. We historically have we haven't really benefited from something like this before. But we're always out there. People are reaching out to us and of course we would keep an open mind to it. But It's not a focus of us.

Speaker 1

We don't believe in poaching, but if there's a disruption or if there's An opportunity we surely consider

Speaker 4

it. Got it. And then on the FinTech related deposits being down in the quarter After growing in 3Q and 4Q, you mentioned some outflows at the end of the quarter. How confident are you in growing this segment

Speaker 1

Yes. I'm very confident. And I think as Greg mentioned, A good part of that is normal outflows because remember those companies are in the payment space. So there's that funds flow That we're very used to and we understand the behaviors of those deposits. So we expect those deposits to come back and I think you'll see I know you'll see net growth out of the GPG deposits year over year.

Speaker 4

Thanks. And do you think you can grow non interest bearing deposits excluding crypto in the year? Or is there still some balances that are

Speaker 1

Yes to all of the above. So we will continue to address Some clients that want to go into treasuries and that's there's nothing we can do with that. But I think that Conversation is abating quite a bit. We're not having as much discussions about interest rates with clients of late, so that's a good thing. Non interest bearing accounts, we will definitely continue to grow because we're a commercial bank So there's no doubt.

Speaker 1

Again, as you know, we're obsessed with net interest margin. So it's not Necessarily the cost of funds, but it's about NIM to drive top line net interest income. So, I think you're going to see next quarter. Starting in the Q2 and throughout the rest of the year and of course we're looking well beyond 'twenty three right now. 'twenty three is sort of baked into the cake.

Speaker 4

Thank you. And on the interest bearing deposit costs for 1Q being above 3% now, what are the spot rates

Speaker 2

We're trying to stay well inside of affected Fed funds when we price anything of that nature. I think that's also been influenced Actually, strike that last part. I'll put a period after what I said previously.

Speaker 1

Yes. So I'll just expand a little bit. Similar to the loan pricing, We don't have a history of putting out, like Greg suggested, like a rate sheet, same thing on the liability side. We are relationship oriented. We're talking to clients all the time.

Speaker 1

And I guess you can say we negotiate rates on a client by client basis or on a Metro. Transaction by transaction basis, actually on an account by account basis. So it's hard to say,

Speaker 2

there is

Speaker 1

no Absolute rate that is set for money market, if that's what you're looking for.

Speaker 4

Thanks. And then on expenses, last quarter you mentioned there were about $2,000,000 in legal fees metrics to moderate in 1Q levels, but you also mentioned that it's still a little bit elevated. What is a good run rate for the professional

Speaker 2

Yes. I mean, my crystal ball is a little broken just because as we stand up some of these new programs, It is going to add to those lines. So I think with the legacy, both the Voyager bankruptcy as well as The work on the settlement, that's really winding down. In the quarter, that was probably elevated by about $1,000,000 Alex. So I think that as we kind of find that new normal in the next quarter, which is going to again include a bit of some new spend, which I think is going to be modest.

Speaker 2

If I was going to reduce or assume there was $1,000,000 of this elevation in the quarter, that's probably

Speaker 1

But we do have some legal expense associated with setting up EB-five exactly and so on. So again, look well beyond Look at results and look at operating leverage and where we end at the end of the quarter as far as earnings and return on tangible common equity is really at the end of the day what we strive for.

Speaker 4

Thank you. And then on GPG fee income, saw some strong growth in the quarter to $4,900,000 Can you talk about the drivers of growth in the FinTech segment quarter over quarter? And also can you grow this segment every quarter for the rest of the year or is this more of a volatile

Speaker 2

And well, just to address first the growth in the quarter, I mean, that's really It's a broad based increase across the client base. So it's not 1 or 2 of our partners that are clients that are really driving that. It's really much more broad based Matt, a lot of the Fintechs that we're working with and non bank financial service companies are really hitting their stride. So that's a bit more broad based. And then the forward look, Mark, do you have any thoughts on that?

Speaker 1

Yes. I think that's exactly right. These companies are spending a Significant amount of money on client acquisition strategies. So, they're the pipeline is full. These companies are becoming more mature in providing retail financial services, so they're grabbing more market share.

Speaker 1

The market share is fairly sticky. Their client base is sticky. So you're starting to see some scale there and some real estate operating efficiencies among those companies, which have to run through our franchise. So We see the benefits of it. But at the moment, I think the most important thing Greg said to notice is that It's not one client, it's across that whole franchise.

Speaker 1

Many clients are building for scale and we're benefiting from it as well. But we like a slow and modest pace to growth there. We don't mind it taking its time because That's true retail banking and it's in a marathon as opposed to a hockey stick approach.

Speaker 4

Metro related business also up in the quarter. When do you expect this amount to be reduced? I know you said you're finishing up deposits

Speaker 1

I would expect it's hard to predict. It depends on the timing of when These relationships get transferred. So I would imagine that would abate entirely between the 2nd Q3.

Speaker 2

Yes, I agree. It's not going to be a gradual On the revenue side though, Alex, I think the revenue, the transaction volumes and the fees are going to be associated with the BINs that hold the accounts. So it's going to be an onoff switch. So whatever that revenue level is, should be there through the up into the point that we actually transfer the BIN.

Speaker 4

Okay, great. Thanks for taking my questions.

Speaker 2

You got it, Alex. Thank you.

Operator

This concludes the allotted time for questions. I would like to turn the call over to Mark DiFaggio for any additional or closing remarks.

Speaker 1

Thank you. And I would In the current turbulent banking environment, it's not surprising to see uninformed speculation and people looking to profit from the turmoil. This has caused some significant volatility in our stock in recent weeks. In the fall of 2017, MCB materially started its exit from banking crypto related businesses And this process continued through 2019. In 2019, we maintained a relationship with 4 crypto related exchange companies Safe kept consumer funds maintain the integrity of pass through FDIC insurance related to the FBO account NCB recouped $900,000 toward reimbursement of legal fees out of $1,200,000 that we spent.

Speaker 1

Today, MCB has 3 of these crypto relationships left with an aggregate deposit balance of 218,000,000 Because we clearly understood this business, we were able to execute an orderly exit without putting NCB's balance sheet at risk, period. Liquidity and interest rate risk. MCB has demonstrated over the past 2 decades just how important it is to manage interest rate risk and liquidity risk. Developing diversifiedlowcostdepositverticals enabled MCB to maintain its competitive edge net interest margin, while insulating adequate NIM. Through 2 decades of organic balance readily available contingency funding plan.

Speaker 1

MCB has developed and expanded our contingency funding plan as our balance sheet expanded. To my shareholders and all stakeholders is that we will make ourselves available for questions. We are confident in the all of our shareholders and stakeholders at any time. Thank you for participating in this call. I will now turn the call back over to the operator.

Operator

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.

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Earnings Conference Call
C.H. Robinson Worldwide Q1 2023
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