Metropolitan Bank Holding Corp.

Good day and welcome to Metropolitan Commercial Bank's first quarter 2024 earnings call. Hosting the call from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer, and Dan Doherty, 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. 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 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. Good morning, and thank you for joining our first quarter earnings call. The first quarter of 2024 was very productive for MCB. Our first quarter results were a strong start for the company. During the quarter, we carefully grew the balance sheet while maintaining our price discipline, credit standards, and with a continued sharp focus on liquidity and interest rate risk management. We were also able to grow core deposits well in excess of our loan growth. our two major initiatives planned for 2024 the wind down of the gpg business and the digital transformation project have begun in earnest and are proceeding on time and on budget while we remain focused on the continuation and expansion of our profitable and disciplined commercial bank growth strategy in the first quarter we reported an earnings per share of a dollar 46 which was reported by strong I'm sorry, which was supported by strong growth in net interest income and continued excellent credit performance. In the meantime, the successful completion of our other initiatives remain a high priority. The economy continues to display strong fundamentals and impressive resilience. The evident strength of the economy provides us with an optimistic outlook for loan growth and credit performance. The outlook for monetary policy has changed dramatically over the last several months. Rather than expectations of significant easing throughout 2024, the market is now pricing in less than 50 basis points of easing in the back half of the year. I am pleased to report we saw a four basis point NIM expansion in the first quarter. Even with the change in the outlook of monetary policy, we continue to expect further margin expansion as the year progresses. asset quality remains strong we have not identified any broad based negative trends in any loan product geography or sector that is impacting our portfolio we believe that our healthy credit metrics are a direct result of mcb's pricing discipline conservative underwriting and portfolio diversity also as our performance is supported by the exclusive focus on relationship-based commercial banking and high-quality commercial clients and sponsors in industry segments that we know exceptionally well. Finally, I am pleased to report that the two loans totaling approximately $21 million that were classified as non-performing loans at 1231 last year are now current, have substantial funded interest reserves, and the related workouts also include targeted and aggressive amortization requirements throughout this year. I will now turn the call over to Dan Daugherty.

Dan Daugherty Thank you, Mark. Good morning and thanks again for joining our first quarter earnings call. First quarter loan growth. Over $94 million was funded entirely by core deposit growth of more than $340 million, excluding additional growth in the VAS vertical. As mentioned in the CRETS release, multiple deposit verticals contributed to the core deposit growth. As a result of our deposit growth, our end of period and average balance of cash parked at the Fed was substantially elevated. Despite the outsized cash position and the current rate environment, we were able to increase the net interest margin by four basis points in the first quarter. Our loan pricing and repricing discipline was the main driver of our ability to expand the NIM. We expect to see some additional uplift in the margin throughout the remainder of the year. In our updated forecast model, we have penciled in a single 25 basis point rate cut in September. In that scenario, we expect to see approximately 5 to 10 basis points of additional uplift. Put another way, we forecast a fourth quarter NIM in the range of 3.45 to 3.5%. Focusing on lending, it is noteworthy that our quarterly loan growth was net of more than $225 million in payoffs and paydowns. Continued focus on economic loan pricing resulted in a weighted average coupon, net of deferred fees, which are typically 15 to 25 basis points per year, of 8.47% on first quarter new loan originations and draws, versus a December 23 portfolio coupon of 6.92%. Loan growth is expected to accelerate as the year progresses. We continue to plan on loan growth of between 600 and 800 million for the year. Our loan pipelines, especially on the CNI side, are growing after a slower than expected start to the year. Importantly, our plan assumes that we're able to fund all of that planned loan growth with deposits. As Martin mentioned, asset quality remains strong with no identifiable negative trends in the portfolio. The provision in the first quarter was generally in line with the increase in loan footings, offset somewhat by improvements in the macroeconomic variables that underlie our first quarter CECL model forecast. Non-interest income increased by approximately 70% from the linked quarter, as fees associated with letter of credit activity and deposit service charges more than offset a small decline in BAS revenue. The uptick in deposit fees is expected to be sustainable, while the increase in letter of credit fees is more aligned with borrower behavior. The decline in BAS revenue will accelerate as the wind-down project proceeds throughout the year. We expect BAS revenue to total $8 million to $10 million and total non-interest income to foot to $19 million to $21 million for the year on non-interest expenses. Non-interest expenses totaled $41.9 million in the first quarter. Importantly, expenses related to the digital transformation project totaled $1.8 million, and an additional $3.1 million reflects remediation work and severance payments associated with the GPG wind down. There was also an increase in core operating expenses compared to the fourth quarter. This was primarily due to seasonally elevated employer tax payments. Our $12 million digital transformation budget remains unchanged, and we continue to expect to complete the project in 2025. We currently expect about $8 to $9 million of the project to be expensed in 2024, including what has already been recorded for the first quarter. Non-interest expenses for the full year, including the digital transformation investment, are expected to total in the range of $160 to $163 million. The effective tax rate for the quarter was approximately 33 percent. The tax rate was negatively impacted by discrete items that came through in the quarter, primarily related to the conversion of employee stock-based awards. Going forward, we expect the effective tax rate to be in the range of 31 to 32 percent, excluding discrete items. Finally, please refer to the updated investor deck, which can be accessed from our website, for a walk-down from reported earnings to non-GAAP core earnings. As well, the deck now includes slides that provide details about the bank's multifamily and office loan portfolios. I will now turn the call back to our operator.