Metropolitan Bank Holding Corp.

Welcome to the Metropolitan Commercial Bank Third 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 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 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 presentation. It is now my pleasure to turn the floor to Mark DeFazio, President and Chief Executive Officer. You may begin.

Thank you, Ashley. Good morning, and thank you all for joining our third quarter MCB earnings call. MCB delivered another strong core financial performance in the third quarter. Our results are underpinned by our commercial banking franchise and our commitment to excellent customer service. During the third quarter, we posted strong top-line growth with significant NIM expansion. The outlook for monetary policy indicates that we are at the beginning of an easing cycle. While the pace and depth of that cycle is unknown, any further easing will benefit from the bank's earnings momentum. During the quarter, we thoughtfully grew the balance sheet while maintaining our price discipline on both loans and deposits. As well, we upheld our credit standards and continue to operate with a sharp focus on liquidity and interest rate risk management. Looking forward, we expect continued growth in our loan book, supported by our branch-light deposit gathering initiatives. The bank reported earnings per share of $1.08. The reported figure includes $12.6 million, or 78 cents per share, in charges. Those charges included $2.6 million in pre-tax expenses associated primarily with the digital transformation investment and regulatory remediation. The balance of the charges was a result of the banks posting a pre-tax $10 million reserve related to a pending settlement with a state attorney general. The settlement relates to a fintech relationship that was terminated in 2020. We gave a lot of thought as to whether we should litigate this matter. We determined that the cost of litigation and the continued distraction was not worth it, even with a likely positive outcome. Currently, related legal fees run hundreds of thousands of dollars per month, and we are not even in litigation. As I said in the first quarter of 2024, this is the year we put all unfortunate and costly matters behind us. For the third quarter and year to date, our adjusted ROTC was 12% and 12.1% respectively. We remain confident that through the course of the next 12 to 18 months, we will once again achieve a mid-teens ROTC and a NIM approaching 3.75%. Of course, these forecasted results are subject to market conditions that are beyond our control. Please review our investor deck for a detailed walk-down of GAAP versus adjusted financial performance. The wind-down of the GPG business is proceeding as scheduled. we remain committed to completing the exit by year-end and confident in our ability to more than offset the deposit runoff with a diverse range of deposit verticals. Asset 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 have no new non-performing credits, and we remain confident that the workouts that are currently in flight will be resolved successfully in 2025. We believe that our healthy credit metrics are a direct result of MCB's pricing discipline, conservative underwriting, and portfolio diversification. 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 well. I will now turn the call over to our CFO, Dan Daugherty. Thank you, Mark.

And once again, good morning, everyone, and thanks for joining the call. To say that the third quarter was active at MCB is an understatement. The net interest margin increased by 18 basis points to 3.62%. While our loan pricing discipline and funding strategy continue to contribute to our outstanding NIM performance, this quarter's result requires additional explanation. Loan growth in the third quarter was a rather modest $58 million. What is not immediately evident in that growth metric is the underlying level of origination and payoff activity. We originated loans totaling more than $450 million while also experiencing payoffs and paydowns of approximately $400 million. Focusing on those payoffs and paydowns, the associated deferred fees and prepaid penalties that we recognized totaled $4.5 million. After we normalized that experience, we estimate that our NIM for the third quarter was approximately 3.5%. For the remainder of the year, we expect that our NIM will be approximately 3.45% to 3.5% again. The explanation for this expectation is driven by three main variables. The recently enacted 50 basis point reduction in the Fed funds rate, which we passed through to interest bearing deposits at a beta of approximately 75 to 80%, will be largely offset by the replacement of approximately 700 million of GPG deposits with a current cost of about 1.25%. We expect to use both core deposits and wholesale funding on a temporary basis to replace those GPG outflows. we have assumed a replacement rate of 4.25% in our fourth quarter forecast. It is noteworthy that while interest-bearing deposits totaled approximately $4.5 billion at September 30, the balance of deposits that were priced with Fed move was approximately $3.7 billion. The deposits not repriced include deposits swapped to fixed and deposits that already carry a very low coupon. In addition, the repricing of approximately $1.5 billion of prime and SOFR index loans will temper the near-term new performance. In our updated forecast model, we have penciled in a single 25 basis point rate cut in November. Looking forward to 2025, we have modeled an additional four 25 basis point rate cuts, effectively one 25 basis point cut per quarter. As Mark mentioned, in that scenario, and reflective of numerous other assumptions, we believe that our NIM can grow to 3.75% by the end of 2025. Let's focus on the loan book. The weighted average coupon on our new volume originations in the third quarter was 7.97%. A significant balance of floating rate loan payoffs in the quarter resulted in an elevated payoff coupon of 8.16%. Looking forward, the weighted average coupon of fourth quarter maturities totaling about $600 million is 7.4%. And for the first half of 2025, the weighted average coupon of maturities totaling about $750 million is approximately 6.85%. And just to be clear on that one, looking at our maturities that are renewed, we typically retain about 80% to 85% of those loans. To date, the loan book has grown about $275 million, and we expect the year to end with total loan growth of about $500 million. Deposits increased by approximately $100 million in the quarter. Interest-bearing deposits increased by approximately $200 million, while non-interest-bearing deposits, primarily related to GPG, declined by about $100 million. The HOA and retail deposit verticals experienced the bulk of the growth in the quarter. Year-to-date deposits are up more than $500 million net of GPG outflows. Importantly, the outlook for growth across our deposit vertical stack, especially in the EB-5, HOA, municipal, and 1031 verticals is robust. As Mark mentioned previously, asset quality remains strong with no identifiable negative trends within the portfolio. The provision in the third quarter was impacted somewhat by the significant amount of origination and payoff activity in the quarter. Effectively, the duration of the loan book extended modestly as short-dated loans were replaced with new originations. In the ACL model, the added duration results in a modest uptick in the allowance rate. Non-interest income for the quarter was basically unchanged quarter over quarter at $6.2 million. GPG-related revenue was approximately $3.5 million. As we wind down the GPG business, this revenue will turn to zero. Our total net interest income expectation for 2024 is $21 to $22 million. Non-interest expenses totaled $51.3 million in the third quarter. As Mark mentioned, this quarter was impacted by a $10 million reserve booked to resolve an investigation with a state attorney general. Expenses related to the digital transformation investment were $1.9 million, and an additional $700,000 was related to regulatory remediation work and costs associated with the GPG wind down. For the fourth quarter, I expect non-interest expenses will decline about 1% to 3% quarter over quarter, as reduction in professional fees will be largely offset by elevated comp and benefits as the build out of our risk management and compliance teams has happened more quickly and at a greater cost than expected. Therefore, the revised full year estimate is approximately $164 million to $166 million net of the settlement reserve. 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. A note on early 2025 guidance. We expect loan growth to continue in the range of 10% to 12%. We expect non-interest income growth of 6% to 8%, excluding GPG's contribution, of course. Operating expenses are expected to be flat. Now, importantly, my previous guidance for a clean OpEx run rate in the low 150s still stands. The timing of the achievement of that goal is expected to be toward the end of 2025 into 2026. 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 adjusted earnings. Here today, the accumulated one-time charges related to the settlement reserve, the digital project, Regulatory remediation and BAS exit total approximately $23 million or about $16 million after tax. I will now turn the call back over to the operator. Thank you.