Metropolitan Bank Holding Corp.

Welcome to the Metropolitan Commercial Bank second quarter 2022 earnings call. Hosting the call today from Metropolitan Commercial Bank are 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 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 touchtone phone. 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 0. During today's presentation, reference will be made to the company's earnings release and investor presentation. copies of which are made available at ncbankny.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. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin.

Good morning and welcome to MCB's second quarter earnings call. MCB celebrated its 23rd anniversary in June, and I am pleased to announce at this time record quarterly earnings and return on average tangible common equity of 16.7%. Our business thesis to assist clients in building and sustaining generational wealth has been the foundation of our growth and success. That focus is evident in our long history of strong credit quality, low charge-offs, and the strength of our long-term financial performance. Our liquidity position remains strong. We have a proven track record on efficiently funding balance sheet growth. We have also maintained our pricing discipline, as is evident in our NIM expansion. It should be noted that along with dealing with a higher rate environment, we have already we are already preparing for and when the Fed will reverse its course by lifting out, by reversing its course by lifting out floors on floating rate loans along with resetting rates on automatic renewals. MCB has a solid track record of not breaching its floors. Loan floors have historically been an instrumental strategy for us in managing NIM when rates decline to near zero. I would like I would like to also remind all investors that MCB's internal policy is to limit the use of crypto-related deposits to 50% of the total available for investment or lending. However, as we've stated many times over the past few years, due to the volatility in this asset class, MCB has maintained 100% of crypto-related deposits in our Federal Reserve account. We are comfortable with our liquidity position and our proven ability to efficiently source funding to maintain loan growth and our investment strategy. Again, as a branch-wide franchise, we have spent 23 years focused on the liability side of the balance sheet to not only fund the growth of the bank, but to protect against economic and industry disruptions. Now for some financial highlights as compared to where we were a year ago. Operating leverage continues to be sustainable with revenues up 44%. Non-interest expense up 21% and our efficiency ratio dropped to 42.2% from 50.3%. Total loans were $926 million or 27%. Total deposits were up 890 million or 17%, including DDAs, which were up 676 million or 24%. For our global payments group, revenues were up 36% from the second quarter of 2021. Second quarter 2022, transaction volumes were 29.1 million, up 29% from the second quarter of 2021. while the dollar volume of transactions was up 47% to just over $8 billion. MCB, together with its partners, is well positioned to build out a scalable and profitable digital retail platform within a commercial bank. Choosing the right clients to work with, along with working closely with our regulatory partners, is essential in delivering 21st century efficient financial services, which is available to all consumers. Lastly, I do want to touch briefly on Voyager. As I know, this is on many of your minds. It's unfortunate that Voyager found themselves in a situation that required them to file Chapter 11. I have been very clear for several years now that NCB has pivoted away from actively growing our crypto business with the caveat that we were well positioned to benefit from volatility without putting the bank at undue risk. The primary service MCB is providing Voyager's exchange platform is an omnibus account in which all Voyager's customers' funds are held. Funds from digital asset trades settle in this account in local USD currency. The funds are segregated from the corporate funds and offer the benefit of Voyager's customers, which is why we also refer to this as an FBO account. As a result of the bankruptcy, the funds are temporarily stayed from being released in the normal course of business. On July 14th, Voyager filed a motion in court asking the judge to lift the stay on these funds. I am hopeful that the judge will agree to the order, thereby allowing the funds to be released upon request to Voyager's customers seeking withdrawal from their funds. MCB held $455 million in Voyager-related deposits in the FBO account at June 30th, including $356 million of $356 billion in the FBO account balances. The FBO balance is currently at $272 million. We have a reserve account which holds $24 million and general corporate funds of $70 million. Voyager is optimistic that they will come out of bankruptcy and continue with their growth plan. Notwithstanding the strategy of recovery, Voyager represents less than 3% of GPG's revenue or roughly one-quarter of 1 percent of total MCB revenue, which is clearly de minimis to MCB. I will now turn this call over to Greg.

Thank you, Mark, and good morning, everyone. The loan growth we've seen in the first half of 2022 has certainly laid the foundation for our earnings expansion, with net income of $23.2 million, or $2.07 of fully diluted earnings per share, and EPS up 22.5 percent from the first quarter. Let me take you through a few of the key drivers. The commercial banking momentum we saw to start the year certainly carried over into the second quarter with net loan growth of $253.7 million, or 6.2%, bringing year-to-date net loan growth to 17.2%. Loan originations were a record $513 million in the quarter, up 5% from a strong first quarter and up 93% from a year ago. Volumes are strong across our verticals. Credit quality remains strong with no charge-offs to date in 2022 and not performing loans effectively at zero. The credit provision was driven by the strength of our loan production. Turning to deposits, I would like to give you some color on flows for the quarter. Retail deposits, including those with loan customers, increased $175.6 million on the strength of our client engagement during what has obviously been an interesting rate environment. The growth in this vertical speaks volumes on the strength of our customer base especially when you consider the muted impact to this point on deposit betas. We also saw strong inflows of $64 million related to our GBG debit card programs and $143.8 million from digital currency-related customers. These inflows were partially offset by $51.2 million in outflows related to bankruptcy trustees and specialty deposits, which have generally been expected given the nature of these deposits. as well as 93.1 million in outflows from property managers as some customers diversified their longer term cash reserves into higher yielding treasury products. Our liquidity position remains robust with 19% of total assets in overnight deposits and total on balance sheet liquidity at nearly 34% of total assets. When excluding 50% of crypto related deposits as discussed, total on balance sheet liquidity remains strong at 26% of total assets. Net interest margin was up 56 basis points in the quarter to 3.27%, due in large part to the deployment of liquidity into loans and securities and, to a lesser extent, the benefit of higher rates. A substantial portion of loans subject to floors have lifted off their respective floors, with $408 million remaining to lift off at June 30th. Of those loans, 70% will lift off by the time their reference rates increase 50 basis points with another 20 percent lifting off by the time rates are up 100 basis points. So the majority of those loans will lift off with next week's expected rate increase. Transaction volumes were up modestly quarter over quarter in our global payments business. GPG revenue was down slightly in the quarter, given a higher level of non-transactional revenues recorded in the first quarter. And as a reminder, you know, these types of revenues include onboarding fees for new programs, FX revenues, and certain expense reimbursements. Non-interest expense continues to be well managed as we have focused on driving a return on investments made previously, particularly in human capital and technology. Other expense did increase in the quarter, driven almost entirely by CRA qualifying grants and charitable contributions. We were quite pleased to be able to fund a number of initiatives in the quarter. Touching on taxes briefly, we would expect the effective tax rate for the balance of the year to be in the range of 31% to 32%, excluding the impact of discrete items recognized in the first quarter. Our capital levels remain very strong, with all capital ratios significantly above well-capitalized levels. Our Tier 1 leverage ratio was 9.2% at June 30th. Overall, we've had a strong first half of the year, reflecting the sustained growth and performance across our businesses. I will now turn the call back to our operator for Q&A.