Metropolitan Bank Holding Corp.

Welcome to the Metropolitan Bank 2021 Fourth Quarter and Year-End Results Conference Call. Hosting the call today from Metropolitan Bank are Mark DeFazio, President and Chief Executive Officer, and Greg Segrist, 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 one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. 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 earning release and investor presentation, copies of which are available at mcbankny.com. Today's presentation may include forward-looking statements that are subject to certain 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 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, Brittany, very much for that introduction. Good morning and welcome to MCB's first public earnings release. For those of you who are familiar with MCB, thank you for participating. And for those of you who are being introduced to MCB for the first time, welcome. Greg and I will likely spend just a few extra minutes today talking about the performance of MCB in 2021 and also some corporate events that we think is worthy to note. But going forward, we hope that these type of calls could be more strategic in nature and generate a conversation around strategy, direction, opportunities, challenges, et cetera. With that being said, let's start the meeting. As a 22-year-old company that has been profitable for the last 21 and a half years of operations, we have dealt with many challenges. And I'm proud to say we continue to be well prepared, which paves the way for continued sustained performance. For those of you who are familiar with MCB, And for those of you who are not familiar with MCB, you should continue to consider us as two companies in one. First, MCB is a well-diversified, core-funded, organic growth company that strives to be a top-performing middle-market commercial bank. And second, our global payments group, known as GPG, is a well-established banking-as-a-service provider to the fintech industry, whose goal is to materially disrupt and transform the retail banking industry. MCB is very fortunate to have had such a first mover advantage in collaborating with FinTechs. We established banking as a service more than a decade ago. And some could say, and have said, we were a bit early. But it's rewarding to see that the industry is catching up to MCB. For those of you who are not familiar with our quarterly investor presentation, I encourage you to go online and retrieve it. It will give you a very granular look into exactly MCB as a franchise. I will now touch on just a few full-year financial highlights, which I believe are in part the foundation of MCB's consistent, long-term, and sustainable performance. Revenue for 2021 grew 27.3%. non-interest expense year-over-year increased 17.2%. I point this out because it's important. As MCB has always been a growth company, we have always made significant investments in technology and human capital. What's really interesting and has been for the last few years, these investments turn into a return on investment very quickly these days. These investments today are really meant to sustain growth and the scalability and the efficiency of MCB. Our efficiency ratio dropped to 48.3% from 52.5% year over year. It's important to note that MCB is an exatic growth company. We do not purchase portfolios, loan portfolios, and we do an insignificant amount of loan participations with other banks. Total loans were up 19% year-over-year. Asset quality continues to be very strong. Although MCB has always been a growth company, we have been even more focused on the liability side of our balance sheet. A main business focus of MCB has always been to be a branch-like franchise. Deposits were up 68% or $2.6 billion year-over-year, of which DDA was up 112%. 1.9 billion total cost of funds for the year was 31 basis points and 28 basis points for the quarter scalable low cost funding provides significant protection in what we call margin management as far as banking as a service group GPG revenues were up year-over-year ninety four point three percent the number of new FinTech clients were eight added to the portfolio in 2021 versus six in 2020. Transaction volumes were 92.5 million in 2021, up 70% year over year. The dollar volume behind those transactions were 22.1 billion, up 212% year over year. This in and of itself gives you a sense of the type of market share early innings market share that FinTech is taking from commercial banking. GPG deposits growth year over year was 1.5 billion or 297%, 104 million net of crypto or 27%. Although MCB was early in regarding banking as a service, we are perfectly positioned to materially benefit from the market share that FinTech continues to take from the largest money-centered banks to the smallest community banks. We expect FinTech to continue to outspend traditional banks in research and development and client acquisition, and as a result, will drive meaningful financial benefits to MCB. Return on average tangible common equity for a full year was 15.2 percent, which was impacted by a successful follow-on common equity raise in late September 2021, which raised $163 million net of offering cost. Absent that capital raise, return on average tangible common equity would have been 17.1 percent. MCB has built an asset-sensitive balance sheet, which has proven to be bulletproof, as we say, over the past two decades in protecting against extreme prolonged interest rate environments. Therefore, being extremely comfortable with our asset quality, a higher rate environment will benefit MCB's already strong earnings franchise. I would like to add some corporate news in this initial call because I think it's important for our existing shareholders, the analyst community, and potentially new shareholders to fully understand everything that we're working on and not just the business lines. In 2020, we undertook a significant initiative in exploring new technology solutions to replace our core. We went through an RFI and more recently an RFP, and hopefully within the next few months, make a final decision. The outcome we expect to experience is a true digital transformation of MCB, delivering a fintech client experience to our commercial bank clients. and more efficient technology integration with GPG's clients. Much more to come on this in the future. We established a portfolio management office for GPG in Louisville, Kentucky. Louisville, Kentucky appears to be a great hub for the payment space. We are pending the opening of a loan production office in Lakewood, New Jersey. We have been in Lakewood, New Jersey for many years, and we have significant assets and deposits on the management. But with the increase in its population, the residential housing development, the commercial development, and the relocation of commercial businesses, we continue and therefore expect opportunities, profitable opportunities for MCB. NCB is relocating its Broadway Manhattan Financial Center to the northwest corner of 40th Street. I point this out because this particular branch will be a state-of-the-art technology-friendly experience for our retail clients. NCB has established a loan production office in Prickle, Miami, Florida. NCB has been doing business and we have significant assets and deposits under management in the state of Florida. However, We feel there is more opportunity for us in this state, and at the same time, we feel that with the increase in values there, it is time to be even more careful about the growth that we undertake in the state of Florida. So, having what we call boots on the ground is important for us to manage the risk as well. MCB absorbed a 50,000 square foot expansion of our corporate offices at 99 Park Avenue. These offices are state-of-the-art from a technology perspective and is centered around having clients visit our offices. I am pleased to report, notwithstanding COVID, client meetings are constant. We have successfully negotiated long-term favorable occupancy expense for three out of our six retail locations besides our corporate offices. This initiative was important to gain some control over the next decade in our non-interest expense. In closing, I can't be more pleased with the scalable and sustainable growth company that NCB has been for many years. I am proud of the fact we saw the transformation of banking seeding itself over a decade ago and prepared to work alongside of it as opposed to ignoring it. MCB is well prepared to continue the profitable, organic growth of the commercial bank while providing banking as a service to our FinTech industry. It continues to take market share. I will now turn the meeting over to Greg, who is our CFO. Thank you, Mark, and good morning, everyone. We finished the year strong with fourth quarter net income of $18.9 million, or $1.69 of fully delivered earnings per share. Our performance has accelerated as we continue to leverage the strength and growth of our balance sheet to drive net interest income. Additionally, client transaction volumes within our global payments business have continued to scale, leading to strong expansion of banking as a service revenues within that business. In the quarter, deposits were up $978 million, or 18%. Growth was primarily in non-interest bearing deposits, which represented 57% of total deposits at year end. Crypto-related deposits nearly doubled in the quarter to $1.5 billion. We also saw double-digit increases in retail and GPG's credit card-related deposits. Overall, the deposit base continues to be a well-diversified mix of core deposits. Total cost of funds declined three basis points in the quarter to 28 basis points with selective repricing of certain deposits. Loan originations were $411 million in the quarter, up from a strong third quarter of $313 million. Growth was broad-based across the portfolio, particularly in owner-occupied commercial real estate and C&I. The pipeline remained strong across the book. Looking ahead, we would expect 2022 loan growth to be consistent with our historic growth rates. There were a number of moving parts on the credit side this quarter, including the charge-off of a shared national credit that had been substantially reserved for in 2020, along with the disposition of three additional shared national credits for a nominal loss. We tried to lay those out clearly in the earnings release for you. Additionally, there was one commercial real estate loan of approximately $10 million that was non-accrual at your end, which did subsequently pay off in January. That leaves non-performing loans at a nominal level going forward. It's also worth noting that the one $10 million loan on full payment deferral at year end did transition to principal-only deferral in January. So full payment deferrals are now behind us as well. We are moving into the new year with a very clean balance sheet and credit portfolio. Substantial progress was made in moving the securities portfolio closer to our target, which is 15% of total assets. We did add $334 million to the securities portfolio in the quarter, with most new purchases going into the health and maturity portfolio. Securities ended the quarter at 13.4% of total assets. While overnight deposits have had an impact on our net interest margin, loan yields did benefit this quarter from elevated loan payoff fees. Otherwise, loan yields would have remained around 465 basis points. Securities yields also moved up with the purchases in the latter part of the quarter. Combined with additional plan purchases, the securities portfolio yield should continue to benefit going forward. While a substantial excess liquidity has compressed net interest margin, we view that reservoir of liquidity as a significant driver of shareholder value. Importantly, net interest income was up 10% over the prior quarter. Looking ahead, we are well positioned to benefit from the deployment of our significant liquidity position into loans and securities not to mention the tailwind that a rising rate environment would provide given our overall asset sensitivity. On that point, I would direct you to page 15 in our investor deck for our estimated sensitivities as of December 31st. MCD's sensitivity to an up 100 basis point parallel rate shock is 7.7% for year one. This assumes a static balance sheet, which it never is in the real world, This scenario also assumes a conservative deposit beta of 70%. Now, if you believe the excess liquidity in the overall banking system will lead to lower deposit betas as rates begin to rise, a deposit beta of 20% would yield a 14.7% increase in year one in a up 100 basis point parallel rate shock scenario. Non-interest income was up considerably in the quarter with banking as a service revenues from GPG up 34% in the quarter on significantly higher transaction volumes. Our capital levels remain very strong, with all capital ratios significantly above well-capitalized levels. At year end, our Tier 1 leverage ratio was 8.5%, which does include the benefit from our common equity raise in September. With the successful capital raise behind us, we are focused on efficiently deploying that capital and our excess liquidity. with the goal of driving return on average tangible common equity at or above the mid-teens levels. And with fourth quarter ROATC of 13.9%, we are well on the way to that goal. Now, let me take a moment to highlight another area of focus for this year. The emerging growth company status that we've benefited from since our 2017 IPO will expire later this year, and we expect to become an SEC large accelerated filer. One significant byproduct of those changes will be that we will be required to adopt CECL in 2022, by the time we file our 10-K early next year. Significant progress has been made toward that adoption, though we still have a bit more work before we can begin running parallel with the incurred loss model in place today. Consequently, we do not yet have guidance to share on what CECL will mean to MCB. Having said that, we have a high-quality, shorter duration commercial portfolio that has had a limited level of net charge-offs across our 22-year history. We do not have longer duration or consumer-oriented portfolios that have typically been impacted the most by the adoption of CECL. We will come back to you in due course with the anticipated impact of the adoption. And I will now turn the call back to Mark. Thank you, Greg. As I mentioned at the beginning, MCB is two operating companies in one. we are confident that the commercial bank will continue to be a top performing institution, which will stay relevant as this industry continues to transform. Although we were very early with banking as a service business, FinTech is still in the very early innings and we feel that our in-place infrastructure, our industry knowledge, and our good working relationship with regulators will continue to materially benefit on the market share FinTech continues to take from the banks of all sizes. I would like now to turn the call over to our operator for Q&A.

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 the pound key. Again, we do ask that while you post your questions that you pick up your handset to allow optimal sound quality. Thank you. And we will take our first questions from Alex Lau with J.P. Morgan and Chris O'Connell with KPW. Both lines are open, and Alex, you may begin.