Metropolitan Bank Holding Corp.

Welcome to Metropolitan Commercial Bank's second quarter 2024 earnings call. Hosting the call today 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 risk 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 and investor presentations. 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 all for joining our second quarter earnings call. MTB's solid second quarter financial performance was indicative of the strength of our core commercial banking franchise. During the quarter, we thoughtfully grew the balance sheet while maintaining and with a continued sharp focus on liquidity and interest rate risk management. I am pleased to report we saw a four basis points of NIM expansion in the second quarter. This marks our third consecutive quarter of NIM expansion. Our two major strategic initiatives, the wind down of the GPG business and the digital transformation project, are proceeding on time and on budget. we remain keenly focused on the successful completion of these important initiatives. Also, NCB remains focused on the continuation and expansion of our profitable and intentional commercial bank growth strategy. In the second quarter, we reported earnings per share of $1.50, including $0.34 net impact of the GPG wind-down, regulatory remediation, and digital transformation expenses. Profitability was supported by strong growth in net interest income and continued excellent credit performance. As the quality remains strong, we have not identified any broad-based negative trends in any loan product segment, 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. Our performance is also supported by our exclusive focus on relationship-based commercial banking with high-quality commercial clients and sponsors in industry segments that we know exceptionally well. As I mentioned on the first quarter earnings call, we had two loans totaling approximately $21 million that were characterized as non-performing as March 31. reporting date that are now current and have funded interest reserves. I will now turn the call over to our CFO, Dan Talley. Good morning, everyone, and again, thanks for joining our earnings call. As Mark mentioned, the net interest margin increased by four basis points to 3.44% in the second quarter, adding to the four basis point increase that we saw in the first quarter, as well as a nine basis point increase that we saw in the fourth quarter of 23. Our loan repricing, loan pricing and repricing discipline are the main drivers of our ability to expand the net demand. We expect to see some additional modest uplifts in the margin throughout the remainder of the year. In our updated forecast model, we have considered a single 25 basis point rate cut in September. In that scenario, we expect to see approximately three to five basis points of additional uplift. In other words, we forecast a four-quarter yield in the range of 3.47% to 3.50%. Focusing on lending, we grew the loan growth by approximately $120 million in the second quarter. It is noteworthy that our quarterly loan growth was net more than $240 million in payoffs and paydowns. in the quarter. Loan price in the quarter was led by an increase of 48 million in C-9 and an increase of 105 million in CRE, offset somewhat by $28 million decline in multifamily loans. Our continued focus on economic loan pricing resulted in a weighted average coupon of 8.81% on second quarter new loan originations and draws. That coupon does not include deferred fees, which are typically 15 to 25 basis points per year. The coupon on loan payouts in the quarter was approximately 7.88%. The weighted average coupon on upcoming loan returns for the balance of 2024 is closer to 7.5%. In the quarter, deposits declined by approximately $68 million, primarily as a result of a wind-down related decline of $50 million in GPG deposits. As well, we experienced a temporary $80 million decline in borrower deposits, partially offset by an increase of $70 million in property manager deposits. To date, we are up about 320 million net of GBG flows. Importantly, we intend to maintain our discipline in what continues to be an extremely competitive deposit gathering environment. Accordingly, we are adopting guidance on loan growth for the full year 2024, which is some We currently forecast loan growth for approximately $500 to $600 million for the year. We believe this more conservative approach will further enhance our ability to maintain great discipline on lending and, importantly, will also provide some relief on the funding side of the equation. As Mark mentioned, that's a quarter being strong with no identifiable negative trends within the portfolio. The provision in the second quarter was generally in line with the increase in loan footings. Non-interest income included in uptick in deposit fees from the first quarter, which as previously mentioned, is expected to be sustainable. This increases more than offset by declines in letter of credit fees and GPG revenue. For the full year 2024, we currently forecast BAS revenue to total $9 to $11 million. Our total non-interest income expectation for 2024 higher than our previous guidance. We now expect it to flip to $20 to $22 million for the year. Non-interest expenses totaled $42.3 million in the second quarter. Expenses related to the digital transformation project totaled $1.7 million, and an additional $3.8 million reflects regulatory remediation work and costs associated with the GPG-1 guidance. Q2 Regulatory Remediation Cost came at approximately $2 million higher than expected. We have made arrangements for the GPG client to recoup that $2 million overage in the third quarter and further to pass through a significant portion of any future remediation expenses that are later than previously anticipated. For the following year, 2024, our guidance remains total managed expense of $161 to $163 Further, I expect the go-forward clean run rate for an artist's expense will be around $149 to $152 million. Of course, please keep in mind that this estimate is certainly subject to adjustment as we move through the 2025 planning season. Our $12 to $13 million digital transformation budget remains unchanged. We continue to expect to complete the project in 2025. Approximately $8 million to $9 million of the project will be expensed in 2024, inclusive of the $3.5 million that has been reported through June. To date, we have executed the vast majority of the underlying major contracts. The effective tax rate for the quarter was approximately 30%. Going forward, we expect the effective tax rate to be in the range of 31% to 32%, excluding discrete items. Please refer to the updated investor deck, which can be accessed at our website, for a walk-down from reported earnings to non-GAAP core earnings. Year-to-date, the one-time charges related to our digital project, regulatory remediation, and BAS exit total $10.4 million or $7.1 million after tax. I will now turn the call back to our operator for Q&A.

Thank you. The floor is now open for questions. At this time, if you have a question or comment, 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. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Thank you. Our first question will come from Alex Lau with JP Morgan. Please go ahead.