Metropolitan Bank Holding Corp. (MCB) Earnings Call Transcript & Summary

Welcome to Metropolitan Commercial Bank First Quarter 2022 Earnings Call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer; and Mark Sigrist, Executive Vice President and Chief Financial Officer. Today's call is being recorded. [Operator Instructions] 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, Britney. Good morning, all, and welcome to MCB's first quarter earnings call. Greg and I will go through some brief information, and then hopefully get into a robust Q&A. Notwithstanding that MCB ended 2022 on a solid footing and thinking that we were closing in on the final chapter of COVID, we were abruptly faced with an Omicron variant, geopolitical risk due to the war breaking out in Ukraine, Fed tightening and on track with the highest inflationary numbers we've seen in years. Who those unprepared for these challenges, this could be fatal. After 2 decades of operations, the one thing that stands out in my mind is the consistent and readiness of MCB has demonstrated in each disruptive events that has occurred over these years. MCB's resilience during these times continued to not only protect its balance sheet, but grow through it, continuing to drive profitability and shareholder value. What I find most interesting in this quarter, as we faced the challenges I noted earlier is how strategic this quarter was for MCB and its clients, deploying excess liquidity. Our historical obsession, as I say, with the liability side of our balance sheet continues to pay dividends. The robust and scalable low-cost deposit verticals embedded into our business model affords us the ability to manage our margin and to deploy excess liquidity into higher earning assets. Our business strategy is no different than our clients, whose business plan is to leverage their equity and liquidity to drive targeted returns for their shareholders. Now for a few highlights of our combined liquidity initiatives. In the quarter, MCB deployed $390 million into loans. We maintained our target of 15% of assets and investments. $25 million of a 6.25% sub debt was redeemed on March 15th, which eliminates a drag on NIM and net interest income going forward. Just some highlights for client initiatives. A global crypto exchange client acquired a company for $260 million in cash. MCB is already seeing the benefits of this acquisition, as we integrated into that acquired company, which will start its operations with MCB support this quarter. Healthcare-related clients closed $322 million of acquisitions of skilled nursing homes and assisted living facilities. MCB is in the process of integrating with most of those facilities, establishing a deposit relationship, which will add significantly to our low-cost deposit base going forward. CRE and retail also had approximately $50 million in outflows due to strategic acquisitions, reduction of debt and normal operating investments. As a commercial bank, MCB's clients are very active in building generational wealth. MCB's business thesis has always been to assist clients in building and sustaining this wealth, therefore, embedding our client base to do business with for years to come. It should also be noted that MCB had new deposit inflows of $190 million, primarily from a Commercial Bank, of which $100 million was non-interest-bearing and $90 million was interest-bearing. Now for some general highlights for the franchise. Total revenues were up 39%. Non-interest expense was up 21%. Our efficiency ratio dropped to 45.6% from 52.1%. This clearly shows our long-term focus on leveraging our investments to drive positive operating leverage quickly. Total loans were up $884 million or 27%. Total deposits were up $1.5 billion or 34%, including DDAs, which were up $1 billion or 47%. For our Global Payments Group, revenues were up 68% from the first quarter of 2021. First quarter '22 transaction volumes were $28.5 million, up 74% from the first quarter 2021, while dollar volume transactions was up 147% to just over $8 billion. We remain focused on enhancing what we believe is the best-in-class consumer compliance foundation upon, which our Banking-as-a-Service business is built. And with that, continues to increase our [ roster ] of high-quality growing fintech partners. I'm also very pleased to note that our return on average tangible common equity for the first quarter was 14%, which is remarkable given the fact that this is just the second quarter since our successful $175 million capital raise in September 2021. And before I turn it over to Greg, I'll mention, as I mentioned in the first quarter, the end of the -- end of the last quarter that we had some expansion initiatives. Since we signed our lease in our Florida loan production office, I'm pleased to announce that retail deposits are up $10 million. CRE has -- commercial real estate has closed $14 million in loans. We have a pipeline of approximately $38 million, and C&I has closed $231 million of loans located in Florida. Now I'll turn it over to Greg.

Thank you, Mark. The momentum has certainly carried over into the first quarter of 2022, with net income of $19.2 million or $1.69 of fully diluted earnings per share. Let me take you through a few of the key drivers this quarter. We had a remarkable start to the year for lending. Loan originations were $490 million in the quarter, up 19% from a strong fourth quarter and 107% from a year ago. Volumes were strong across our verticals and particularly so for CRE skilled nursing. Net loan growth was $390 million or 10.4% in the quarter. The pipeline does remain robust across all verticals. Credit quality is very strong. And as a reminder, there was one non-accrual CRE loan of approximately $9.9 million that paid off in full in January. That leaves non-performing loans at a nominal level. With net charge-offs effectively 0, the credit provision was driven by the strength of our loan production in the quarter. Mark has already touched on the impact that strategic investments being made by our clients had on deposit flows in the quarter. I will just note though that GPG related deposits, which were elevated at year-end, did come down later in the quarter, given those strategic moves. However, average GPG deposits were up 15% from the fourth quarter. Our deposit base remains a well-diversified mix of core deposits. The total cost of deposits declined 2 basis points in the quarter to 23 basis points, with selective repricing of certain deposits earlier in the quarter. Total cost of funds remained steady at 28 basis points, but that does include the impact of deferred issuance costs recognized when we redeemed the subordinated debt. Importantly, our liquidity position remains strong with overnight deposits at 21% of total assets. Net interest margin in the quarter did increase 12 basis points to 2.71% due in large part to the deployment of liquidity into loans and securities. And as you would have seen in our investor deck, 45% of the loan portfolio is floating rate. And of that, 75% are subject to floors. 60% of the loans subject to floors will lift off by the time the rates are up 100 basis points, with the remainder lifting off ratably by the time rates are up an additional 100 basis points to 200 basis points up. With our loan growth, liquidity position and asset sensitivity, our balance sheet is very well positioned to benefit from rising rates and drive long-term shareholder value. Non-interest income was up 5.2% in the quarter on the strength of banking-as-a-service revenues from our Global Payments business, which were up 6.9%. Expenses were well managed in the quarter. As expected, we did see seasonal impact of employer taxes and benefits. As we've mentioned in the past, we do expect to continue making investments, particularly in human capital and remain quite focused on maintaining positive operating leverage, as we do so. Our effective tax rate of 27% in the quarter included onetime tax benefits totaling $1.2 million, including the impact of vesting date, fair values of employee stock-based comp, which were significantly higher than grant date fair values. We would expect the effective tax rate for the full year, excluding the impact of discrete items to be in the range of 31% to 32%. Our capital levels remain very strong with all capital ratios significantly above well-capitalized levels. Our Tier 1 leverage ratio was 8.6% at March 31st. Overall, the year is off to a great start, reflecting the sustained growth and performance across our businesses. And I will now turn the call back to our operator for Q&A.

The floor is now open for questions. [Operator Instructions] We will take our first question from Chris O'Connell with KBW.

Nice quarter. I just wanted to start off with some of the deposit flows that you guys mentioned regarding the client acquisition and now onboarding that new client in the second quarter. Is that going to impact or recapture some of the deposits loss this quarter immediately? Or is that going to be more of a ramp up over time?

I would say in that specific case, Chris, and good morning, would be over time, we're integrating with that acquired company. The company will go live. It's a new exchange for cryptocurrency. So we expect to see deposit flows coming back, and of course, fee income as well coming into the bank over the next 3 quarters.

And so on the GPG fees related to that, should we expect any pullback next quarter from the loss of the deposits coming over the course of the first quarter? Or is it kind of still a pretty good trajectory from the 1Q run rate levels?

Yes. If I understand what you mean by pullback, clients leveraging their liquidity for strategic purposes, whether it be an acquisition or a technology build, has no immediate impact on revenue. So GPG should continue to drive revenue, as we predict. It's core business. All of its clients are doing well, and they're expanding their franchises. So the investment of liquidity has no direct correlation with the current revenue, if that's what you're asking.

And then on the loan growth this quarter, I mean really strong. Can you talk a little bit about the Florida C&I deposit growth seem particularly strong and just some of the other drivers? And does this change your loan growth outlook for the year given the strong start to the first quarter? Or would you expect a little bit more moderation in the coming quarters?

No, working backwards there. Looking at our current pipeline, I can't suggest that it's going to level off. We're out there working. We're in different markets. So I would expect to have robust loan originations and strong asset quality for the rest of the year.

Yes. The only thing I would add, I mean, at some point, you are going to see some payoffs happen, I agree with Mark. I mean I think the pipeline is really robust. I think I wouldn't -- I wouldn't keep the first quarter trajectory in place for the balance of the year. I think that over the balance of the year, there will be some moderation, but it's still going to be a very strong growth year for us.

And then on the cash side, it looks like a lot of the loans being funded or the cash pull down came pretty late in the quarter given the average balance. Can you just talk a little bit about the -- I know that the NIM longer term maybe hard to project, but between the sub debt redemption and the late quarter cash pull down what you guys are seeing for the NIM in 2Q?

Yes. Chris, as you know, we don't give guidance on the NIM itself, but you hit on a couple of the key drivers. Obviously, repaying the sub debt that takes away a bit of a drag, which is really helpful. Converting the liquidity in the first quarter into loans, obviously, we're not going to see the full benefit of that until the second quarter. So as we continue to really deploy on to loan side, you're going to expect to see some pretty healthy expansion on the -- of NIM just on the loan side. I think the big driver over the balance of the year there and maybe it's the question mark is the rate environment. We do have a pretty healthy part of the loan portfolio is floating. So you're going to see some uplift from that as well. And obviously, over time, you're going to have repricings in both the securities portfolio and the loan portfolio. So I mean, I think you're going to see margin expansion from here, and you should be able -- with the inputs you've got to kind of model that out.

And we will take our next question from Alex Lau with JPMorgan.

Can you expand on what drove the very strong loan originations in the quarter. In the press release, you touched on clients getting more active in business investments and acquisitions. Is this still a 1Q thing? Or do you think this will continue throughout the year?

I think it's going to continue throughout the year. This was really a very interesting quarter. You know, I sort of touched on everything that's going on around us as well. So it was a bit surreal in a sense of how active our clients were not only here in the New York area, but in other markets as well. Our lending teams and all professionals that are running these lending teams are just the best-in-class, and we are just very busy, and we're active. We're very engaged. We have wheels up in all the new cities. We're not working out of New York. We're not working out of our homes. We are actually on site looking at acquisitions, looking at strategic initiatives our clients are looking at. And I have to tell you, I just think it's our effort alongside of the strategic nature of the client base that we have. Remember, we are a commercial bank. So our clients are very active. They're here to build and sustain generation of wealth, and we just step up for it. And we're aligned -- all professionals are aligned 24/7 with helping them achieve that.

When you look at the deposit growth for the year, which deposit vertical are you most optimistic on driving growth?

I try not to think of it that way. GPG could explode because of just the sheer scale and conversion rate of our fintech partners. So I'm excited, optimistic, I guess, you could say about the possibilities of GPG just because of the nature of those clients. But on the other hand, our healthcare practice and our commercial lending group, and our general corporate finance or commercial lending group is really stepping up. And our retail teams are really doing well, as you saw. We brought in $190 million of core deposits, not including basically GPG this quarter. So I'm optimistic about all the verticals.

Yes. I think that really just shows the strength of our deposit franchise and the verticals. And yes, I agree with Mark.

On deposit betas, so what are your expectations for deposit betas for the year? And how does that compare to the last rising rate cycle?

Deposit betas, I think we're going to be fairly diligent here. I think -- we're a commercial bank again. So we're providing working capital for companies to run their businesses. So it doesn't bring a tremendous pressure to raise rates because these are operating cash flows that are coming in and out of the bank to run their businesses. So we were very diligent in the last cycle, which is a very long time ago when we were experiencing a higher rate environment. We don't expect a major increase in our liabilities, cost of liabilities, as a result of the rising rate. The one thing I will tell you is, we are well prepared and getting more prepared for a rate environment that is in the decline, as our lenders are moving floors up. So I think it's -- I think we're more focused on making sure that we're lifting our floors, as loan yields are rising, we're lifting our floors, more focused on that today than concerned about the cost of funds increasing.

On Slide 13, it shows how client transaction volumes have increased from a year ago, but down quarter-over-quarter. Can you give some color on what is driving this?

I think you have to remember, we entered the year with Omicron. So I think behind this, there's a lot of travel-related transactions, I think part of it. And I think it also goes back to just some of the geopolitical and inflationary points, Mark's already made. I don't think other than just those broad macro drivers, Alex, there's really any magic behind it. We continue to see strong revenues, though, so the mix matters, and which is -- so it's not just the quick fees, there's other stuff underneath the surface on it. I think what we're focused on is that longer-term trajectory because that's really what's going to prove out the thesis on fintech side.

And last one from me on securities to total assets. Your 15% target, are you maintaining this target for the rest of the year?

Yes. Absolutely intending to, Alex.

And we have a follow-up [ from Chris O'Connell ] with KBW.

Just wanted to follow-up on some of the deposit beta discussion. Can you just remind us of the dynamics around -- I know a portion of your deposits are tied to short-term rates and the balance of those deposits. And can you just remind us of the dynamics of how that flows through on the expense side of the income statement versus interest expense?

Well, I think the majority of our interest rate exposure, obviously flows through interest expense. I think if I'm understanding your question right, Chris, in terms of how it flows through, as rates rise, there is a very small component of our licensing fee expense that is tied to rising rates. But I think as you probably recall, there is a $300 million notional derivative that's in place on that. So you're going to see licensing fees subject to 1-month LIBOR up to the cap rate on that derivative, which is 125 basis points, but only up to that point.

So shouldn't see at least in the immediate next couple of quarters, a large pop in the licensing fee lights on?

No, you'll see it. Again, you have to assume that Fed is going to raise 50 basis points in May and another 50 in June, if you follow that market logic, you're going to see any of the pull-through effect in the second quarter. And then after that, the cash is going to kick in.

And we will take a follow-up from Alex Lau with JPMorgan.

No other questions from me.

And do we have any follow-ups from Chris O'Connell with KBW?

I'm all set. Thank you.

This concludes the allotted time for question. Mark DeFazio, for additional or closing remarks.

Thank you. Just want to say thank you again for your support and interest in MCB. And I look forward to speaking with any of you during the quarter and look forward to our next earnings release. Thank you very much, and have a nice weekend.

This does conclude today's conference call and webcast. A webcast archive of this call can be found at www.mcbankny.com. Please disconnect your line at this time, and have a wonderful day.