Q3 2022 Metropolitan Bank Holding Corp Earnings Call
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Welcome to the Metropolitan commercial banks third quarter 2022 earnings call hosting the call today from Metropolitan Commercial Bank, our Mark Defazio, President and Chief Executive Officer, and Greg cigarettes Exec.
Executive Vice President and Chief Financial Officer.
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During today's presentation reference will be made to the company's earnings release and investor presentation copies of which are available at M. C Bank and why Dot 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.
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 Katie and good morning, and welcome to MTBC third quarter earnings call.
I am pleased with MTB strong and sustained performance as evidenced by a 17, 1% return on average tangible common equity this quarter.
Powered by the strength of our sustained loan growth and NIM expansion.
Made a backdrop of raising interest rates and increasing economic uncertainty the MTB team.
It has remained engaged with our clients and that commitment shows.
Our financial performance.
We set out over 23 years ago to build a branch light commercial bank in doing so.
Managing the funding side of our balance sheet by adding Optionality has been a cornerstone of successful net interest margin management.
Fast forward MTB remains focused on the management and the development of a diversified.
Our funding base, while looking out two years or more to expand our funding strategies to support the balance sheet growth, we have seen over the past 20 years.
The third quarter was no exception, we saw total deposit growth apart from expected crypto related deposit outflows.
As we were able to source lower cost deposits.
Were more than offset outflows from the positive seeking treasury rates to looking to substantially replace existing arrangements.
This highlights the pricing discipline that underpins our margin management.
Margin management is reflected in our ability to drive topline growth in net interest income with high quality loan growth.
Funded by lower cost and scalable deposit verticals.
We have had success moving our new loan production yields up during this unprecedented rate environment, along with raising floor rates.
We'll provide net interest margin and net interest income protection when rates reverse.
I'd like to spend a moment on our global payments business.
As a reminder, we provide basic retail banking services to our digital currency points, which we often referred to as being crypto related businesses.
For sake of absolute clarity the services, we provide do not include custody, we're lending against any digital assets more are we involved in any stable coin issuances.
Further as many of you have heard me say, we have not on boarded a new digital currency clients since 2019.
Revenues from this sector currently represents roughly 2%.
Mtb's total revenues, while 13% of total deposits.
We remain strategically focused on spending our banking as a service offerings to fintech well position to continue taking retail market share from banks of all sizes.
I am pleased to report that banking as a service revenues of $2 5 million in the third quarter are up 21% over the prior year quarter.
Our ability to scale banking as a service related deposits overtime is truly a differentiator for us as well.
Now turning to a few third quarter highlights as compared to the prior year.
Total loans were up 1 billion, 28% total deposits were up $274 million or 5%, including D D A's, which were up $254 million or 9%.
Net interest income of $63 3 million was up 55%.
Return on average assets was 151% as compared to 109 a year ago.
As mentioned return on average tangible common equity was 17, 1% in the quarter.
And our efficiency ratio improved to 45, 1% from 47, 1%.
I'll now turn it over to Greg for more comments.
Thank you Mark and good morning, everyone.
We reported strong third quarter net income of $25 million or $2 23 of fully diluted earnings per share loan growth and NIM expansion led net interest income higher in the third quarter with NII, increasing 15% to $63 $3 million as compared to the prior quarter.
Let me take you through a few of the key drivers this quarter.
Commercial bank performance remained strong with net loan growth of $242 $1 million or five 5% brings.
Bringing year to date net loan growth of 23, 7%.
Down from a record second quarter loan originations remained strong at $424 million, bringing total originations for the first nine months of 2022 to $1 4 billion.
Credit quality remains pristine with no charge offs to date and nonperforming loans effectively at zero the provision in the quarter was in line with loan growth.
As expected crypto related deposits were down $486 million led by the effort to promptly returned funds to Voyager customers once approved by the bankruptcy court.
This was our second consecutive quarter of measurable inflows of retail deposits, including those with loan customers with an increase of $151 million in the third quarter.
Credit goes to our retail and commercial lending teams for the sustained client engagement.
We also saw strong inflows of $162 million related to our Fintech banking as a service clients.
The info as I mentioned more than offset the expected outflows from deposit categories seeking higher yields which is consistent with our disciplined approach to deposit pricing and margin management.
Noninterest bearing deposits remained robust at 53% of total deposits.
Net interest margin was up 58 basis points in the quarter to 385%.
Asset yields benefited from rising rates as well as deployment of liquidity into loans with interest, earning asset yields increasing 76 basis points to 426%.
Importantly, the total cost of funds increased a modest 20 basis points, while remaining low at 45 basis points, given our patients and ability to hold deposit betas low to this point in the cycle.
We do expect to see NIM expansion into next year on the strength of our pricing discipline on both sides of the balance sheet and given the funding options available to us.
While being mindful of the current interest rate forecast, we are looking further down the field to positioning for an eventual decline in rates.
We have increased asset duration gradually over the past several quarters.
For Securities duration is naturally extended with rising rates for.
For loans, we have taken out a bit more duration, which is evidenced by a modest decline in the floating rate portion of the portfolio to 41% at September 30, as compared to 44% to begin the quarter.
This also shows in our net interest income sensitivity modeling, which has come in a bit this quarter, particularly in the rates down scenarios highlighted in our IR deck.
We've had continued success in moving floors up on new origination floating rate loans with the majority of loans are subject to floors.
The structural benefits are important elements of our margin management, which provides stability as rates continue to move up and will provide a significant level of NIM protection when rates inevitably begin to move back down.
<unk> revenues were down $1 1 million quarter over quarter.
Given the expected decline in crypto related GTR card volumes.
Partially offsetting this decline were fintech banking as a service revenues, which were up 312000 or 14% in the quarter.
On an 11% increase in related transaction volumes.
Overall expenses continue to be well managed as we are building for scale with a focus on generating near term returns on the investments we make.
This has been clearly evident in human capital, where compensation and benefits has continued to scale, along with <unk> growth and profitability, reflecting the continued investments being made particularly in control and infrastructure functions.
Apart from our core run rate.
<unk> did increase in the quarter.
The primary driver was legal fees, which were elevated by approximately $4 million with outside counsel engagement focused on voyages bankruptcy proceedings as well as other matters we.
We do expect legal fees to moderate back to historic levels as we move through the fourth quarter with our expected first quarter run rate for legal fees in line with historic trends.
Touching on taxes briefly we would expect the effective tax rate for the balance of the year to be in the range of 31% to 32% excluding discrete items recognized in the first quarter.
Our capital levels remain 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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Thank you our first question will come from Chris O'connell with <unk> W. Your line is now open.
Good morning.
Hey, good morning, Chris.
So just wanted to start out with.
With the legal or professional fees being elevated.
Can you guys give any additional color around the issue or how.
How do you think the trajectory will be between now and 123.
As Greg mentioned this is multiples are as Greg mentioned, we think.
Legal fees will start to normalize through the fourth quarter, and we hopefully will be behind it.
Starting in the first quarter in.
In 2003.
Voyager.
As everyone knows was a bankruptcy. So we had to represent ourselves there and we also have one other matter.
It's a 2020 matter, which we're working through as well. So we expect these two matters hopefully will be behind us by the end of this year and we'll be back to normal normal trends as it relates to professional fees.
Okay got it and then.
<unk>.
Just on the on the rest of the expenses.
There is a disclosure.
Around locking in gains.
Offsetting licensing fees.
Going forward.
Any idea given that offset.
Or were those licensing fees trends trend in the fourth quarter given the.
The recent rate hikes.
Yes, theres only a portion of that line, which is licensing fees that subject.
Any sort of rate.
Variability in it we've substantially hedged that rate risk out with the interest rate cap that we disclosed Chris So I think what you're really going to see in the fourth quarter should largely be in line with third quarter.
That rate cap, the $12 7 million.
You referenced in the earnings release that will come in the P&L in that line over the remaining balance of the hedge period, which I think was in that 28 to 30 month period, it's probably down to closer to 25 months at this point in time.
So we will see some continued.
Protection from that as it comes into income.
Okay great.
And then on the.
On the.
Loan growth side.
Uh huh.
The balance sheet.
Obviously, another strong quarter of growth just any update on what youre hearing from your customers.
As far as demand.
And then any areas that you are more aggressive on are pulling back on at this point in the cycle.
No we're very fortunate as a commercial bank and as you see the level of diversification we have.
Our loan portfolio, our clients are very active in this market looking for opportunities.
And we're not pulling back on any asset class at the moment and we're just a bit more careful and certain decisions, we make regarding certain asset classes, but no. We see very little headwinds ahead of us.
Looking forward to continuing to support our commercial clients.
Okay, great and any any push back on.
The.
The substantial change in origination origination rates over the past couple of quarters given given.
The upward move in rates in.
Any pushback on that or the raising of the floors.
I wouldn't call. It pushback I mean, obviously there is a conversation, but one of the things I think we benefit from again being a commercial bank and having significant optionality of diversification on the commercial loan side. So our clients are very high network individuals and we're assisting them in generating significant internal rate of <unk>.
Turns on their investments so they acknowledged that fund funding cost are going up and therefore.
Loan yields talk the rise and.
Someone told me once it's not a cost ammonia so close to not having it so they still see our funding as very strategic and their ability to generate generational wealth. So.
Yes, there was a discussion about it but I wouldn't suggest in any way it's a headwind.
Great.
And then I may have missed it but I know in the past you guys have assumed roughly a 70% beta in the interest rate sensitivity tables.
Changed as you've seen the magnitude and the pace of rate hikes.
What you guys are seeing in <unk>.
Q and then conversations so far.
<unk> as two.
When you get to that data over the course of the cycle and I guess like what Youre seeing in the near term in terms of betas on the deposit side.
Just a first to confirm we for our interest bearing deposits, we do run our NII sensitivities with a 70% beta early in the cycle, we talked about how that might be a bit conservative.
To this point, our betas have remained low I think trying to triangulate when we hit the 70%, though Chris it's more to us to make sure. We do have not only funding options on the table right now, but a pretty robust pipeline of deposit opportunities. We're looking at.
I still think we're going to stay inside of that what I still think is a fairly conservative 70% beta.
Because again to Mark's point I think it is a key theme this quarter just the Optionality, we have as we kind of think about managing the balance sheet in the margin.
Got it.
Some of your commentary I mean, it's safe to assume at least for the next couple of quarters.
So.
Fairly positive NIM trends going forward so.
Yeah and play it back in other way I mean, even if that deposit beta on interest bearing deposits does trend into the 50 to 60 or slightly higher range I still think we're going to continue to see.
Some uplift on them just again, given our discipline disciplines and what we're able to do on the asset side of the sheet as well combined with just our overall deposit pricing initiatives.
Great.
Last one for me.
Just any update you can give on where you think the $1 $6 million.
Of.
<unk> really didnt digital currency business.
762 remaining of the digital currency related deposits.
Lens that you've seen so far in <unk>.
Or kind of the outlook that you see on that.
Near term.
As it relates to the crypto deposits.
I think we were a bit stable at this point we're seeing.
A bit a bit tick up in crypto related transactions, but we play such a small role in that space in any event. So the transaction volumes and therefore, the revenues generated from it won't be significant either way up or down and on the deposit side I think they've been stable.
Well the volatility last quarter came from Voyager, which is obviously a bankruptcy that speaks for itself but.
<unk>.
Excluding crypto, we continue to see expansion there, we see our banking as a service.
Business continuing to grow remember that business is a retail business, it's a retail digital bank within the commercial bank. So.
It's in a marathon it takes a lot of time client acquisition.
It takes a bit of time, but once you have those clients as they are here for a while so we expect to see a continued steady increase.
Banking as a service business for the foreseeable future.
Great Thats, all I had I appreciate the time.
Okay.
Thank you. Our next question will come from Alex Alex Lau with J P. Morgan Your line is now open.
Hi, good morning, Mark and Greg.
Hey, Alex Good morning, Good morning, Alex.
In the past you've talked about growing loans in that mid teens range are you feeling confident continue in this historical loan growth range, given a more challenging deposit environment.
I look at it.
The answer is obviously, yes.
We take we manage our capital really efficiently here and we take it very serious.
Capital is precious to us so we're not going to grow for the sake of growing and if market conditions are such where it puts the kind of NIM compression that is not going to generate the kind of top line revenue that we expect to achieve.
<unk>, we would do less lending.
We haven't seen that headwind yet.
We are expecting as I mentioned earlier, our clients are very active in this market. We are in many different markets and we have a lot of optionality on the lending side.
So we will be in control of that but we are very conscious of our capital and preserving it and making sure we get the right operating leverage for.
We're generating returns so we will have to see and of course credit discipline and if market conditions are such we're talking about margin if market conditions.
Somewhat change where it puts a bit of a concern on asset quality of course, we'll be able to roll that back.
We're very opportunistic here, we don't have a ton of.
<unk> achieved in <unk>.
Rate of growth.
All about earnings.
That's helpful on the deposit side outside of the crypto related balances. There is some good growth in the Fintech deposits can you talk about what drove this growth in the quarter. What is the cost is on.
These types of deposits and in terms of just what youre seeing in the pipeline. How confident are you growing and growing these deposits in the near term.
We're confident we see a direct correlation between onboarding and integrating new.
Fintech companies.
They're executing on their business strategy in the form of the <unk>.
Client acquisition strategy. So we are seeing the benefit of that growth.
And we share in that so we expect deposits to continue to grow.
Steadily we expect to onboard.
New Fintech companies.
At a pace that we can manage the risk.
Because thats the cornerstone of this business is managing the operational risk.
And we expect it to continue.
Consumers are continuing to move more and more to a digital platform and the traditional banks are just not.
Filling that void and Fintech companies are and they need banking as a service provider like them to be to do that.
Thank you and on the property manager and bankruptcy trustee deposits continued to decline another quarter can you walk through what is driving this and do you expect these balances to continue declining or have we hit a floor.
It's hard to say that we have hit a floor and again Fortunately we have optionality. So we were able to more than outpace those outflows.
In those two cases.
You had.
We were competing with much higher yields and I think in a couple of cases, the clients were really looking to achieve more of a treasury rate return.
And we're just not going to pay up for the deposit. So unfortunately, we have the optionality to manage our margin and we're still very engaged with these clients.
We expect to do more business with those clients.
But.
They have.
Those that they've set out for themselves and you know we have it and we have discipline around.
Managing our cost of funds.
So Fortunately we have the optionality around our balance sheet debt provides us the ability to say no.
Thank you and then onto crypto deposits just to clarify on the $486 million outflow, how much of that was from Voyager and <unk>.
What was the risk from.
That is it.
It was around 70% was with Voyager to be candid and the rest would just I would characterize as normal flows.
In the crypto space.
Thank you and just a side question at what point would you be comfortable using a portion of those crypto related deposits to fund loans or Securities group.
No.
It's there we have a.
50%.
Pedro against those deposits already.
The ones that we do have on our balance sheet are fairly stable.
The.
So to the extent that they become useful in.
Less costly than other options, we would consider it but right now there is volatility still in the crypto space and.
And we've been able to drive lower cost low cost funds elsewhere. So.
It's just another.
Irwin all quicker to the extent we.
We feel comfortable enough with relying on those deposits to be around to fund longer term, earning assets.
Mark I think I think those deposits are getting closer and closer to being fungible, along with the rest of the deposits. Although there is still some hesitation we have the optionality on the rest of the of the deposit verticals we have the other.
The strategies, we're working on and I think the other side of it as we continue to just just from an overall contingency funding plan perspective, just to increase our options. There you might've seen our FHA will be capacity ticked up as well you add it altogether I think we're getting closer and a little more comparable but we have options and I think that's the important part.
Thanks and on the.
The deposit environment can you just comment on what Youre seeing on the deposit competition front, how much you pressure youre seeing on the money market and savings deposits costs and what are the spot rates on those deposits.
Yes, I think as we move through this.
This rate environment, you've heard from every other bank that reported Alex I mean, I think there's definitely competition out there I think for a lot of folks who are starting to figure out anyone that wants to be indexed.
We have the deposit pricing index is probably there are some sensitivities I think in everyone's book. So we're seeing it I think in the money market side.
And we have a lot of longer term relationships that are also tightened with lending relationship. So a lot of the cases, where pricing both sides of the seat.
That's why I give credit to our retail and our commercial banking teams are just.
The steady engagement with the clients on at spot rates I know, you've probably seen some of the spot rates out there around $1 50, or so that's what we're kind of seeing on new money.
I think some of the competition rates, but again, we stayed focus on on the conversations with our clients and continuing to drive.
The margin management that we're known for.
Thanks, and then on Gpt's fee income you touched on this a little bit, but just to clarify the <unk>.
<unk> revenue was down a million do you expect more crypto related headwinds from here or is the fintech fee income side enough to grow this overall line from here.
Well I think it's hard to predict what's going to happen to the GPT I mean to the crypto side I mean, if we can.
As you know crypto winter continues for a period of time, we're not going to be completely dish ankles and what happens in the broader crypto space, but to marks earlier comment we're still a very small part player in that space. So you probably see some correlation to what goes on with broader trends there I think for us, though our banking as a service retail Fintech partners.
Are really starting to hit their stride I think that's the part of that business that we've continued to look to and we're starting to see the uplift now that we knew was going to start happening. So I think we will completely replace the crypto in the near term Microsoft bonds broken, but we are very excited about the what we see as a continuing trend there.
Thank you and last question for me on credit credit metrics were strong again. This quarter can you just talk about where you are keeping an eye. The closest in terms of asset class a market as we head into a potential recession.
You know Alex we will we were concerned about various asset classes, even before the pandemic.
Retail is under pressure hospitality was already under pressure.
Coming through the pandemic hospitality is recovering very nicely.
We see weakness is still in retail in some segments of retail.
More careful than we are conservative and we are fairly diversified and we understand the industries and the markets that we're in very well.
I think we have the best lending teams and credit analyst anywhere in New York today, I put them up against anybody of any size bank and after 23 years of having virtually no losses and having to kind of balance sheet growth. We continue to have I think being more careful and conservative as it has played well for us.
And we're dealing with very sophisticated clients, who are in the long game and we're not looking for quick profits to looking to build generational wealth. So they approach deals fairly carefully as well.
Some asset classes that we do like quite a bit obviously is health care that continues to serve us well, but across the portfolio.
The performance speaks for itself. So we're very fortunate again have that kind of optionality.
Thank you that's it for me.
Thank you.
To ask additional comments or questions. Please press star one at this time again that is star one if you would like to ask a question.
Yes.
Seeing no further questions. This does conclude the allotted time for questions I will now turn the call back over to Mark Defazio for any additional or closing remarks.
I just would like to end by saying. Thank you again to the shareholders who are hanging in there with us I know, it's a very difficult time out there in the market and.
We're working really hard for you and we appreciate your support thank you very much.
Yes.
Thank you. This does conclude today's conference call and webcast a web cast archive of this call can be found at Www Dot emcee bank and why Dot com. Please disconnect. Your lines at this time and have a wonderful day.
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