Metropolitan Bank Holding Corp.

Welcome to Metropolitan Commercial Bank's second 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 questions following their 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, and good morning, and thank you for joining our second quarter earnings call. The first six months of this year was a very interesting but disruptive time. Bank management teams were challenged to prove how prepared they were to manage their business and balance sheet in a sustained high-rate environment. It's clear there is no quick fix to this problem if you came into the year unprepared. Thin and compressing margins will continue to plague many banks for years to come. For those banks like MCB who prepared for such an environment and have the capital, core funding strategies, and growth opportunities will continue to secure more organic market share, driving material shareholder value. I believe that identifying these well-prepared banks will be easier than in the past, and the focus will be on true fundamentals and a strategy to produce sustainable shareholder value. I am pleased with MCB's second quarter as well as year-to-date results. We continue to achieve critical objectives, including but not limited to demonstrating margin stability, driving lower-cost funding, reducing the reliance on higher cost borrowings, bringing our crypto deposits to zero, sustained loan growth with very attractive loan yields. Margin compression has been a core challenge for the industry since the start of rate hikes. What has been evident in MCB's fundamentals is that we have absorbed a portion of this compression by managing a diversified earning assets balance sheet that allowed us to maintain lending spreads as well as various deposit verticals that continue to drive lower-cost core funding. It is important to recognize that MCB caused more margin compression than we would have experienced to date by deciding to offload 100% of crypto deposits. In 2022, MCB moved off balance sheet a total of $754 million in zero-cost deposits from their peak at June 30th. And year-to-date, June 30th, 2023, we moved off an additional $436 million of crypto-related deposits now at zero. The final exit decision was the right decision. And what it demonstrates is that MCB was prepared from a risk management perspective, as well as having the ability to absorb the temporary margin compression that came with replacing these deposits. Looking forward with the addition of lower cost deposits that are coming in from the new verticals, we have announced in the second quarter, along with the many diversified core deposit verticals we already have embedded into the franchise, we are very close to at an inflection point where NIM compression from replacing crypto deposits with borrowings will transition to expanding net interest margin as we efficiently replace those borrowed funds with lower cost deposits and maintain our discipline on low pricing. I am confident about the future of MCB, and I believe executable opportunities for MCB will continue to emerge from the disruption the industry will continue to experience. I will now turn the call over to Greg, who will share some specific results with you.

Thank you, Mark, and good morning, everyone. While the second quarter was a turbulent one for the industry, MCB had a very strong quarter for deposit and loan growth, which is evident in our June 30th balance sheet. In the quarter, MCB's deposit verticals grew $377 million, or nearly 8%, as we successfully expanded our existing deposit verticals, thanks to the dedication and hard work of the MCB team in what was a very challenging time for the industry. Net inflows were particularly strong for retail deposits, including those with loan customers, which collectively were up nearly 13% in the quarter, reflecting growth from both existing and new customers. Crypto deposits were substantially reduced by $220 million in the quarter. What remained at quarter end was $58 million of corporate and reserve deposits with crypto-related companies, which we expect to be fully transitioned away from MCB within the next few weeks. While borrowings were utilized to manage those expected outflows, growth of our deposit verticals has allowed us to reduce borrowings from an average balance of $568 million during the second quarter to $443 million at the end of June. We expect to further reduce borrowings over the balance of the year. We also had a very strong quarter for lending with loan growth in the quarter of $297 million or 6% on $425 million of loan production. Notably, Loan pay down and payoff activity occurred largely early in the second quarter, while loan closings generally occurred late in the quarter. Combined, this had an obvious muting effect on net interest income in the quarter. New loan production came in at an average yield of 8.19% versus the portfolio rate for the first quarter of 6.34%, as we have stayed focused on our pricing discipline. While we did see 42 basis points of net interest margin compression in the quarter, Replacing non-interest-bearing crypto deposits with borrowing did drive half of that compression. The remainder of the compression came from the impact of rising short-term market rates on deposit costs only partially offset by increasing asset yields. The lag in asset yield uplift was magnified by the timing of loan closings in the quarter. Through the industry's recent turbulence, MCB has emerged with a well-positioned balance sheet thanks to the success of our historical funding strategies and strong capital levels, which demonstrates the strength and stability of the franchise. Asset quality remains strong. Loan growth drove the majority of the second quarter credit provision, with the remainder being driven by macroeconomic factors in our CECL model. Our global payments business also performed quite well in the quarter, with revenues from non-bank financial service companies up 21% from the first quarter of 2023, as our partners continue to hit their stride. Within that growth, we are particularly pleased to see corporate disbursement client revenues up 27% in the quarter. Overall, non-interest expenses remained very well managed, but I do want to give Collar on a few items. The decline in compensation of benefits largely reflects the first quarter seasonality in employer taxes. Looking ahead, we do expect to continue our investment in human capital and technology. We do expect professional fees to revert back to historical levels. While legal fees were elevated, outside counsel engagement on open matters wound down in the second quarter. We've also been making investments in several corporate initiatives, including strategic planning, and technology consultants, which will begin winding down in the third quarter. Collectively, we would expect approximately $2 million to drop out of the run rate for professional fees in the third quarter of 2023. Lastly, there was a discrete item in the quarter that increased income tax expense by $1.7 million. We will see a discrete tax benefit of $1.7 million in the third quarter on the conversion of stock awards that have already occurred. we would expect the effective tax rate to be in the range of 31 to 32% excluding discrete items. And I will now turn the call back to Shelby for Q&A.