Metropolitan Bank Holding Corp.

Welcome to the Metropolitan Commercial Bank's third quarter 2022 earnings call. Hosting the call today for 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 one on your touchtone phone. 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 need 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 mcbankny.com. 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, Katie. And good morning and welcome to MCB's third quarter earnings call. I am pleased with MCB's strong and sustained performance as evidenced by a 17.1% return on average tangible common equity in this quarter, powered by the strength of our sustained loan growth and min expansion. Amid a backdrop of raising interest rates and increasing economic uncertainty, the MCB team has remained engaged with our clients, and that commitment shows in our financial performance. We set out over 23 years ago to build a branch-like commercial bank. In doing so, managing the funding side of our balance sheet by adding optionality has been a cornerstone of successful net interest margin management. Fast forward, MCB remains focused on the management and the development of a diversified, lower cost funding base while looking out two years or more to expand our funding strategies to support the balance sheet growth we have seen over the past 20 years the third quarter was no exception we saw total deposit growth apart from expected crypto related deposit outflows as we were able to source lower cost deposits that will more than offset outflows from depositors seeking treasury rates or looking to substantially reprice existing arrangements. This highlights the pricing discipline that underpins our margin management. Margin management is reflected in our ability to drive top line growth in net interest income with high quality loan growth funded by lower cost and scalable deposit verticals. We have had success moving our new loan production yields up during this unprecedented rate environment, along with raising floor rates that will provide net interest margin and net interest income protection when rates reverse. I would like to spend a moment on our global payments business. As a reminder, we provide basic retail banking services to our digital currency clients. which we often refer to as being crypto-related businesses. For sake of absolute clarity, the services we provide do not include custody or lending against any digital assets, nor are we involved in any stablecoin issuances. Further, as many of you have heard me say, we have not onboarded a new digital currency client since 2019. Revenues from this sector currently represents roughly 2% of NCB's total revenues or 13% of our total deposits. We remain strategically focused on spending our banking as a service offerings to fintechs who are well positioned to continue taking retail market share from banks of all sizes. I am pleased to report that banking as a service revenues of 2.5 million in the third quarter are up 21% over the prior year quarter. Our ability to scale banking as a service related deposits over time is clearly a differentiator for us as well. Now turning to a few third quarter highlights as compared to the prior year. Total loans were up $1 billion or 28%. Total deposits were up $274 million or 5%, including DDAs, which were up $254 million or 9%. Net interest income of $63.3 million was up 55%. Return on average assets was 1.51% as compared to 109 a year ago. As mentioned, return on average tangible common equity was 17.1% in the quarter, and our efficiency ratio improved to 45.1% from 47.1%. I will now turn it over to Greg for more comments. Thank you, Mark, and good morning, everyone. We reported strong third quarter net income of $25 million, or $2.23 of fully diluted earnings per share. Loan growth and NIM expansion led net interest income higher in the third quarter, with NII increasing 15% to $63.3 million as compared to the prior quarter. Let me take you through a few of the key drivers this quarter. Commercial bank performance remained strong, with net loan growth of $242.1 million, or 5.5%, bringing year-to-date net loan growth of 23.7%. Though down from a record second quarter, loan originations remained strong at $424 million, bringing total originations for the first nine months of 2022 to $1.4 billion. Credit quality remains pristine, with no charge-offs to date and non-performing loans effectively at zero. The provision in the quarter was in line with loan growth. As expected, crypto-related deposits were down $486 million, led by the effort to promptly return funds to Voyager customers once approved by the bankruptcy court. This was our second consecutive quarter of measurable inflows of retail deposits, including those with loan customers, with an increase of $151 million in the third quarter. Credit goes to our retail and commercial lending teams for the sustained client engagement. We also saw strong inflows of $162 million related to our FinTech Banking of the Service clients. The inflows I mentioned more than offset the expected outflows from deposit categories seeking higher yields, which is consistent with our disciplined approach to deposit pricing and margin management. Non-interest-bearing deposits remained robust at 53% of total deposits. Net interest margin was up 58 basis points in the quarter to 3.85%. Asset yields benefited from rising rates as well as deployment of liquidity into loans, with interest-earning asset yields increasing 76 basis points to 4.26%. Importantly, the total cost of funds increased a modest 20 basis points while remaining low at 45 basis points given our patience and ability to hold deposit betas low to this point in the cycle. We do expect to see NIM expansion into next year on the strength of our pricing discipline on both sides of the balance sheet and given the funding options available to us. While being mindful of the current interest rate forecast, we are looking further down the field to position for an eventual decline in rates. We have increased asset duration gradually over the past several quarters. For securities, duration has naturally extended with rising rates. For loans, we have taken on a bit more duration, which is evidenced by a modest decline in the floating rate portion of the portfolio to 41% at September 30th as compared to 44% to begin the quarter. This also shows in our net interest income sensitivity modeling, which has come in a bit this quarter, particularly in the rates down scenarios highlighted in our IR deck. We've had continued success in moving floors up on new origination floating rate loans, where the majority of loans are subject to floors. These structural benefits are important elements of our margin management, which provides stability as rates continue to move up and will provide a significant level of NIM protection when the rates inevitably begin to move back down. GPG revenues were down 1.1 million quarter-over-quarter, given the expected decline in crypto-related GPR card volumes. Partially offsetting this decline were fintech banking-as-a-service revenues, which were up 312,000, or 14%, in the quarter, on an 11% increase in related transaction volumes. Overall, expenses continue to be well managed as we are building for scale with a focus on generating near-term returns on the investments we make. This has been clearly evident in human capital, where compensation and benefits has continued to scale along with MCV's growth and profitability, reflecting the continued investments being made, particularly in control and infrastructure functions. Apart from our core run rate, professional fees did increase in the quarter. The primary driver was legal fees, which were elevated by approximately $4 million, with outside counsel engagement focused on Voyager's bankruptcy proceedings as well as other matters. We do expect legal fees to moderate back to historic levels as we move through the fourth quarter with our expected first quarter run rate for legal fees in line with historic trends. 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 discrete items recognized in the first quarter. Our capital levels remain strong, with all capital ratios significantly above well-capitalized levels. And I will now turn the call back to our operator for Q&A.

Thank you. The floor is now open for questions. At this time, if you would like to ask 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 questions, that you please pick up your handset to provide optimal sound quality. We will pause for just a moment to allow questions to queue. Thank you. Our first question will come from Chris O'Connell with KBW. Your line is now open.