Metropolitan Bank Holding Corp. (NYSE:MCB) Q4 2022 Earnings Call Transcript

Metropolitan Bank Holding Corp. (NYSE:MCB) Q4 2022 Earnings Call Transcript January 20, 2023

Operator: Welcome to Metropolitan Commercial Bank’s Fourth Quarter and Full Year 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. 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.

Mark DeFazio: Thank you, and good morning, and welcome to MCB’s fourth quarter earnings call. On an operating basis, MCB had a record year with adjusted net income of $94.4 million, up from $38.4 million in 2021, and adjusted efficiency ratio of 44.5% versus 48.2% in 2021. Our fourth quarter net interest margin of 4.05% versus 2.59% in the prior year quarter. The commercial bank along with our banking-as-a-service initiatives saw growth along all lines of business contributing to our operating results. While 2022 was a challenging year for our industry, we worked through rising interest rates, increased cost of funds, fierce competition for deposit, a material correction in the digital asset industry and, with that, increased regulatory scrutiny.

Our early intuition that we should pivot away from crypto — the crypto industry has served us well. Our minimum exposure coming into 2022 allowed us to efficiently replace the deposits we have foregone to-date, along with generate efficient liquidity to sustain loan growth. As we previously announced, we will fully exit the industry in 2023 with minimal impact to earnings and liquidity. We are also very close to bringing closure to ongoing investigation from the DFS and the New York Fed regarding a fintech client MCB banked in 2020. As a result of the investigation, MCB has reserved $35 million toward a joint settlement. MCB’s decision to settle was a conscious effort to move forward with the business of MCB and reduce our professional fees to a more normalized run rate.

There were lessons learned here throughout the experience and we have implemented improved oversight of consumer compliance for our banking-as-a-service business. This was an unfortunate situation that occurred during an unprecedented time. On balance, we successfully covered tremendous ground in 2022 and are entering 2023 in a strong position to support our clients with enhanced resilience and strong capital levels. Our operating performance in 2022 continues to demonstrate the strength and sustainability of our business along with the dedication and execution of the MCB’s employees and clients. We have effectively managed through the challenging environment are in a good position to support our clients with enhanced resilience and strong capital levels.

Now, for a few financial highlights for 2022. Loans increased $1.1 billion or 30%. Net interest income of $229.2 million was up 46%. Total revenues were up 42% to $255.8 million. Net interest margin improved to 3.49% from 2.77% in ’21. And return on tangible common equity from operations remained very strong at 16.6%. And our efficiency ratio improved to 44.5% from 48.3%. I will now turn the call over to Greg Sigrist.

Greg Sigrist: Thank you, Mark, and good morning, everyone. MCB’s core business continued to scale as it reported adjusted fourth quarter net income of $27.3 million or diluted EPS of $2.44. Reported net income inclusive of the regulatory settlement was a $7.7 million loss with a $0.71 loss per common share. Turning to key drivers in the quarter. The Commercial Bank posted a strong quarter with net loan growth of $223.2 million or 4.8% on loan originations of $411 million. We saw growth across all loan verticals. Loan yields increased to 5.98% from 5.3% in the prior linked quarter. The credit environment remains benign with no charge-offs in 2022, and non-performing loans effectively at zero. The provision in the quarter was in line with loan growth.

I do want to spend a moment on deposits. We have successfully managed the transition to a leaner, more efficient balance sheet. As certain core deposit clients looking for higher yields have moved into treasuries or other money market investments, we have onboarded efficient, lower cost deposits. This is evidenced in the fourth quarter with outflows from bankruptcy trustees and property managers being offset by strong inflows from retail deposits, up $178 million in the quarter, and fintech banking-as-a-service deposits, which were up $40 million in the quarter. As expected, digital asset related deposits were down in the quarter by $268 million to $494 million at year-end. Of that remaining $494 million deposit balance, $326 million or 6% of total deposits are related to MCB’s four active institutional crypto asset related clients, which are subject to wind down in 2023.

To support a more efficient balance sheet, particularly as deposits related to these active crypto clients wind down, we may, at times, utilize FHLB advances for other funding sources in advance of executing on strategic core deposit initiatives. We did have $250 million of FHLB advances and Fed funds purchased at year-end, which in part reflects the strategy, but it’s also reflective of the timing of normal client cash flows around year-end. While deposit competition has increased, we remain thoughtful and patient both on pricing of existing deposits as well on execution on funding alternatives. Our pricing discipline is evident in the success we have had in moving our new production loan yields up, raising loan floors and in our net interest margin of 4.05% in the fourth quarter, which is up from 3.85% in the prior linked quarter.

The interest-earning asset yield increased 86 basis points to 5.12% in the quarter. Asset yields benefited from the impact of rising rates on floating rate loans and overnight deposits as well as increasing new production loan yields. Given the extent of rate increases since late September and as a result of our active management, total cost of funds has increased by 72 basis points, but remains at a low 1.17%, which is particularly notable in light of our branch-light model. We have also moved for much more neutral stance from an NII perspective, which will allow stability to the extent rates do continue to rise this year, but we are also well positioned for eventual rate cuts. For our Global Payments business, revenues were up $244,000 in the quarter to $4.3 million.

To give you more color, fintech banking-as-a-service revenues were up $569,000 to $3.1 million, while crypto-related revenues were down $324,000 to $1.2 million in the quarter. We’re very pleased to see the continued scaling of our banking-as-a-service revenues. Turning to operating expenses. Compensation and benefits were up modestly in the quarter, reflecting our continued investment in human capital, particularly into risk and infrastructure teams. Legal fees remained elevated by approximately $2.4 million in the quarter and $6.2 million for the full year, with outside counsel engagement focused on the regulatory matter as well as carry over on Voyager’s bankruptcy proceedings. We do expect legal fees to moderate back to historic levels during the fourth quarter — sorry, first quarter.

Despite the elevated legal fees, our adjusted efficiency ratio remained low at 45.1%. The effective tax rate was impacted by the regulatory settlement reserve as well as discrete tax items that came through in the quarter. This includes the impact of vesting date fair values of employee stock-based compensation and refined state apportionment rates. Going forward, we would expect the effective tax rate to be in the range of 31% to 32% excluding discrete items. Our capital levels remained very strong, with all capital ratios significantly above well capitalized levels. I will now turn the call back to our operator for Q&A.

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Q&A Session

Operator: Thank you. Our first question is from Alex Lau with J.P. Morgan.

Alex Lau: Hi, good morning.

Mark DeFazio: Good morning, Alex.

Alex Lau: I wanted to start off with the regulatory settlement reserve. Can you provide some additional color on that reserve? And can you just confirm that it was a fintech client and not a crypto-related client? And how does this change how you approach the business going forward? And as a follow-up, how do you think about the risk of needing additional regulatory reserves on top of that $35 million? Thanks.

Mark DeFazio: Okay. So, there was a lot there, so if I miss anything, just follow-up with that. So, working backwards, this is a specific fintech client. It was not a crypto client. We will announce the name of the client at some point. But this particular banking-as-a-service client is no longer and hasn’t been a client of the bank since the summer, I believe, of 2020. I think this made us a better bank. I think the regulators are good partners of ours, and I think they pointed out. You got to remember when this occurred — this occurred in March of 2020 as I reported, it was an extraordinary time under extraordinary circumstances, and we were trying to manage through an extraordinary initiative from the federal government as part of the CARES Act with unemployment benefits.

And this was a small amount of the level of fraud that actually took place regarding the $1 trillion that the government put out there regarding unemployment benefits. This was a virtually a rounding error; however, it did occur. Working with the regulators over the last several months, actually over the last two-and-a-half years on and off talking about this, I think they brought some really good insight and gave us some really good suggestions on how to improve our oversight. I think the regulators and MCB clearly realize that banking-as-a-service is going to stay and the way in which a retail banking is being done today is digitized, it is inclusive, and it’s very scalable. And I think working alongside the regulators going forward would only add to our ability to grow the business efficiently, and in a way that speaks to very safe and sound banking practices.

So, I don’t think it’s a headwind at all. I think it’s a positive, although painful, it’s a positive.

Alex Lau: Thanks, Mark. And moving on to the crypto business exit, can you talk about the sense of timing of the rundown of the crypto-related deposits for the four accounts? And could that come with potential security sales? Thanks.

Mark DeFazio: One, it will not come with any — we’ve not planned on any security sales at all, there should be no reason for that. And we are anticipating over the course of 2023 that these four clients will be off our balance sheet. Now, our — we’ll wind down relationship with them and the agreement we have in place. They seem to be making a lot of progress in talking to other banks. So, it could accelerate, but we’re planning that will be a smooth transition over the next two, two-and-a-half quarters.