Metropolitan Bank Holding Corp. (NYSE:MCB) Q1 2023 Earnings Call Transcript April 19, 2023
Metropolitan Bank Holding Corp. beats earnings expectations. Reported EPS is $2.25, expectations were $1.78.
Operator Welcome to Metropolitan Commercial Bank’s first quarter 2023 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 remarks following the prepared remarks. If you would like to ask a question at that time, please press star, one on your telephone keypad. 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 require 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.Mark Defazio 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 our key metrics around our liquidity position shortly.MCB’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, through our 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 EB5 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 to a shock to liquidity and interest rates demonstrated their resilience as a going concern. No one gets 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 from middle market growth companies can be money center banks is materially misplaced.
Middle market companies with revenue of $400 million or less rely heavily on true commercial banks, not money center 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 MCB.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.Greg Sigrist Thank you Mark, and good morning everyone.MCB 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 31. 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 31, 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. 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.
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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 30 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-light 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 EB5.Turning for a moment to loans, we maintained a prudent approach to lending the quarter.
We did have robust loan origination volumes of $265 million which was partially offset by net payoff and pay downs of $254 million, which when combined with credit metrics that remain strong demonstrates the resilience of our loan portfolio.The impact of adopting CECL effective January 1 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.
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Question-and-Answer Session
Operator: Thank you. The floor is now open for questions. [Operator instructions]Thank you. Our first question is coming from Chris O’Connell with KBW.Chris O’Connell Morning. I was hoping to start off on the credit side and see if you guys could give some color around the uptick in CRE NPLs. Mark Defazio Yes, sure. Not too much color I can give there.
It’s one particular loan that we are very comfortable with. We’re adequately collateralized and we have a very strong recourse behind the loan. I can’t get into details – we started litigation around this one particular loan, but we have very, very little risk of loss here on this one.Chris O’Connell Okay, got it. Can you guys give what the specific reserve is assigned against that?Greg Sigrist Again, given that we’re well collateralized with a personal guarantee on it, we went through the ringer, Chris, but we did not put up a reserve on it, just given the collateralization levels.Chris O’Connell Okay, got it. Can you guys give any color around maybe just the industry or the market in general that the loan is in, or the latest LTV?Mark Defazio The LTV is in the low 70s, and it’s an out-of-market deal.
Actually, it’s public record – we started a lawsuit on it. It’s a foreclosure in Kansas City, Kansas–in Mission, Kansas. It’s public record, so–yes. Greg Sigrist But beyond that, if the question is, is it indicative of other credits in the portfolio, no. This is a bespoke loan and issue we’re working through.Chris O’Connell All right, got it.Just more broadly on the credit side, given the current market environment, it looks like originations were prudently downward. I guess which areas are you pulling back from or more cautious on at this point in the cycle, and what are the areas or lending segments that you’re most comfortable with at this point?Mark Defazio Well Chris, we did have over $200 million of new originations in the quarter, so that’s fairly robust.
What we tried to point out is our portfolio is pristine and of high quality – that’s why the refinancing of the portfolio is very viable. As many banks are concerned about rollover risk, as you can see a good part of the loans came due this quarter, that we chose to either not refinance because of rate, or they were just meant to get paid off for whatever structural reason.We’re not any more careful than we have been. We’ve been very cautious about lending – it’s a core competency of ours. We’re not any more concerned today. We have elevated concerns about certain industries of course, but as you saw in the office building slide and my commentary, most of the office building loans that we made were in 2022 in Manhattan, so it’s not that we’re not concerned about the office building market but there are really good opportunities out there to support clients today.We are going to continue to stay a well diversified company when it comes to our asset classes that we lend to.Greg Sigrist Yes, and I think the other dynamic too is just loan pricing, Chris.
We started to have this conversation last quarter – we’ve been very much sticking to our discipline around margin management, so the other part of this conversation is making sure we’re getting compensated for the risk we’re taking. I think that’s the other side of this equation, is making sure we’re getting paid on the loan spread, so that’s been part of the dynamic too. We’ve stuck to our guns.I think in Mark’s comments, he also made the point – I mean, we still see quality across all of our lending verticals. It’s really just a matter of being patient and being there to support our clients on the quality projects they’re working on.Chris O’Connell Got it, appreciate the color there. As you’re looking at the rest of the year and your origination pipeline, I know typically the bogey has been double-digit loan growth.
Is that still the case for 2023, or is this more of a tepid year? Just any color around how you’re thinking about loan growth for the remainder of the year.Mark Defazio You know, looking at the pipeline and looking at the opportunities in markets that are correcting, like the one we’re working through today, opportunities do present themselves, so I would not be surprised if we end the year in mid-teens net loan growth, as I wouldn’t be surprised if we ended up with a 10% loan growth. It’s all about quality. It’s going to be about quality and pricing, so that’s been our core competency for a career, never mind just the last 23 years.Chris O’Connell Great. I appreciate the comments around the update on the crypto exit expected for 2Q.
Any thoughts around exactly how that plays out with the flows on the balance sheet? I mean, it’s $200 million-plus coming out of the deposit side. I guess you guys have AFS and cash kind of available there, as well as the ability to increase borrowings or bring on new deposits. Any thoughts around exactly how that plays out on the balance sheet and where we’re at from a starting point in 3Q?Greg Sigrist Yes, I would–for context, I’d just let you know that the majority of what’s left in the crypto exchanges, the $218 million is related to FBO balances, so that will be subject to a bin transfer, so from a timing perspective, other than just flows during the quarter which can be up or down, I think that will be a one-time event.During the quarter, we would expect other funding initiatives to really start to kick in, and that includes EB5 and some others that we can probably start talking about here in the near term.
To the extent those new initiatives and just normal–the existing deposit vertical flows put us in a position where we need to borrow, we would borrow short term; but again, when you look out over a slightly longer horizon, and I think we’re talking a quarter if not even just a month or two into the third quarter, I would expect core deposits to more than fill that gap.Mark Defazio Yes, and Chris, if you look historically, we had much higher crypto balances on balance sheet even in the last 12 months, and we replaced them efficiently with core funding, so our core funding is up today notwithstanding the reduction in crypto just over the last quarter. We have no concerns about replacing the remaining balances of crypto in core funding.Greg Sigrist Yes.Chris O’Connell Got it.
On that point, could you just talk a little bit more about the EB5 team you’ve brought on and just that overall business line, and maybe what you see the long term deposit opportunity is there?Mark Defazio Well, I’ll work backwards. I want to be a bit cautious on what our projections could be. We had stood up our own EB5 group here – it was a modest start, and with the disruption at Signature Bank, we were fortunate to recruit the team from Signature Bank, and anybody w ho had paid attention to Signature knows that that team was considered the best in class in the country in developing the EB5 business. We’re fortunate they’re here, they’re working with us, and why it’s a natural for us and why we wanted to do this even on our own, they are now clearly going to accelerate our market share is because of our exposure to commercial real estate.
This is just another part of the offering.To date, they’ve been here for just a couple of weeks, and we’ve already introduced them to two very large developers and one deal has already been agreed to, which would be substantial in deposits regarding EB5 coming through MCB, so it’s a natural for us to again deepen relationships. We have relationships with some of the largest developers in the country, and clearly because of the size of our bank, we could never provide construction financing for those deals, but today we can play a meaningful role in the construction or the capital stack as it relates to very large construction loans happening around the country. We have a seat at the table with the best developers in New York and across the country, so this is a natural expansion for us and it came at a very good time, and the team is a pleasure to work with.Chris O’Connell Great, and for those deposits related to that segment, what do you expect those to come on at in terms of pricing?Mark Defazio Pricing is low, let’s put it that way.
