Metropolitan Bank Holding Corp.

The 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 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 remarks following the prepared remarks. If you would like to ask a question at that time, 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. 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 available at mcbankny.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.

Thank you. Good morning and welcome to MCB's first quarter earnings call. And thank you for accommodating a call a few days earlier than usual. Many have heard me say for some time now that the next crisis in banking would be about liquidity. MCB was well prepared 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. Core deposits grew in the first 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, which is the underpinning of our disciplined approach to margin management. We were well positioned as rates rose dramatically in 2022, and we continue to be well positioned for the rate environment to correct downward. The commercial bank's performance and credit quality remain strong. While net loan growth in the quarter was modest, we remain focused on pricing in this volatile rate environment. If we cannot lend at spreads that are within our disciplined approach to margin management, we will remain patient. We stand ready, however, to support our clients as there continues to be quality opportunities across our lending verticals. I am very confident that net loan growth will be strong in 2023 and beyond. We have added a slide in our first quarter 2023 IR deck that provides additional details on our office exposure, which is modest at 7% of our total loan portfolio. As you can see, the office portfolio is well diversified geographically 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 continues to grow prudently with revenues up 12% in the quarter. As a reminder, throughout global payments business, MCB provides basic banking services, including deposit accounts and payment rail access to non-bank financial 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 EB-5 space. We were very fortunate to recruit a fantastic and experienced team and are confident this will be an additional pillar strengthening our low-cost core funding. We are very pleased with the progress we made this quarter in exiting our crypto space. 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. I think if you look closely enough, no one should be surprised at what caused the failure of a few banks. Management teams in this industry that were well prepared for a shock to liquidity and interest rates demonstrated their resilience as a going concern. No one gets the pleasure out of disruption, but it does give some the opportunity to stand out. In my opinion, the unfortunate conversation regarding uninsured deposits will abate over time. The thought that the preferred flight to safety for middle market growth companies can be money-centered banks is materially misplaced. Middle market companies with revenue of $400 million or less rely heavily on true commercial banks, not money-centered banks or converted thrifts. 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 NCB. Our first quarter 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. I will now turn the call over to Greg.

Thank you, Mark, and good morning, everyone. MCV reported strong first quarter results, including a return on average tangible common equity of 17.4%. Importantly, core deposits were up by 69 million in 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 million at March 31st. Included in this balance is $218 million 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 31st, insured deposits were 71% of total deposits, and MCB had $3.1 billion combined in 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. And to provide some context, MCB has had actionable repurchase contracts in place for quite some time now and has active collateral monitoring and posting programs supporting the FHLB and FRB facilities. All facilities are subject to periodic testing. As Mark has said, we have been and remain well prepared We did utilize Fed Fund purchases and, to 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 30th of last year to work their way through the financials. Total cost of funds were up a more muted 66 basis points in the quarter and at 183 basis points remain low, particularly given we're a branch-like franchise. We were able to absorb much of the cost of funds impact through the increase in loan yields. Looking ahead, we do see the headwind from rates abating as short-term rates find their peak. We will also benefit as we execute our funding strategies, including new deposit verticals such as EB-5. Turning for a moment to loans, we maintained a prudent approach to lending in the quarter. We did have robust loan origination volumes of $265 million, which was partially offset by net payoff and paydowns of $254 million, when combined with credit metrics remain strong, demonstrates the resilience of our loan portfolio. The impact of adopting CECL effective January 1st was, as expected, muted with a day one increase in the allowance for loan losses of approximately $2.3 million. 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 first quarter. 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. We do see legal fees normalizing lower in the second quarter. FDIC assessments were elevated given the higher assessment rate, and there was also a true-up of approximately $1.5 million that is not expected to recur. We were also able to release $2.5 million of the settlement reserve, which reflects our best estimate given discussions during the quarter. The effective tax rate was positively impacted by discrete tax benefits that came through in the 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 the range of 31% to 32% excluding discrete items. Our capital levels remain strong, particularly with the 17.4% ROATCE this quarter, which further strengthened our capital base. Lastly, it should be clear given the strength of our liquidity position that we do not need to sell securities. However, if hypothetically we did sell our entire portfolio inclusive of available for sale, and held to maturity securities, we would remain well capitalized across all measures of regulatory capital. I will now turn the call back to our operator for Q&A.