Metropolitan Bank Holding Corp.

Commercial Bank's fourth quarter and full year 2024 earnings call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer, and Daniel 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 and investor presentation. It is now my pleasure to turn the floor over to Mark DeBasio, President and Chief Executive Officer. You may begin.

Thank you. Good morning, and thank you for joining our fourth quarter earnings call. MCB concluded the year with a very strong fourth quarter performance, generating net income of $21.4 million or $1.88 per share. Our quarterly net interest income increased 16.9% versus the fourth quarter 2023, and our annual net interest income increased 13.6% versus full year 2023. During the year, we had two major initiatives underway, with one reaching its conclusion and the other still in full swing. I am pleased to report that MCB successfully exited the Bass business, which had been a complementary business to the commercial bank for the past 22 years. The exit of such a technologically integrated business took two years, and I am pleased to report that there are only a few minor operational tasks remaining. MCB demonstrated one of its core strengths through the timely and economic replacement of the associated deposit runoff. Even as we exited the BAS business, we increased total deposits by over 245 million last year, and by $705 million since the end of 2022. We are confident that NCB will continue to expand its market share in its highly diversified deposit verticals, as well as adding additional verticals that will fully replace and exceed the deposit balances that were associated with the wind down of the Bass business. NCB not only managed its NIM higher during the fourth quarter, but we continue to expect further NIM expansion through 2025. The second initiative, which remains in flight, is our investment in our franchise-wide new technology stack. As planned, we continue to expect the full integration to be completed by the end of this year. we are already seeing a return on investment within our payments platform. We are confident that the new technologies will support and scale MCB's diversified and growing commercial bank for years to come. While managing these initiatives, MCB continued its sustained growth strategy. We continue to carefully manage asset quality, optimize profitability, while further solidifying our banking presence not only in New York but in several other complementary markets. We still stay laser-focused in 2025 and beyond, working to capture additional market share through traditional channels while positioning ourselves to take advantage of potential strategic opportunities to increase shareholder value. For the fourth quarter and full year 2024, adjusted ROTC was 12.3% and 12.2%, respectively. We remain confident that through the course of the next 12 to 18 months, we will achieve a mid-teens ROTC supported by a robust core NIM, which should approach 3.75% or 3.8%. Of course, these factors results are subject to market conditions that are beyond our control. ASSA 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 very 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 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 we know well. Finally, I would like to thank all of our employees and the board of directors whose dedication and effort continue to provide the foundation for NCB's commitment to deliver value-added services to our customers, and by extension, to our shareholders. Thank you, and I will now turn it over to Dan Daugherty.

Dan Daugherty Thank you, Mark, and good morning, everyone. As Mark said, we finished the year with a strong performance in the fourth quarter. Quarter over quarter, the net interest margin increased by four basis points to 3.66%. However, similar to the third quarter, that performance included an outsized amount of deferred loan fee accretion. On a normalized basis, I estimate that the fourth quarter NIM was approximately 3.55%, which compares favorably with the normalized results from the prior quarter. I'll cover full-year 2025 forward guidance for the NIM and other financial metrics a little later. For now, however, I would like to note that the fourth quarter offloading of approximately $680 million of low-cost GPG deposits was was very much weighted toward the back end of the period. As a result, for the quarter, the average balance of wholesale funding was $350 million, while the December 31 balance was $450 million. Despite this headwind, I expect to print a first quarter NIM that is approximately five basis points above the normalized margin of the fourth quarter. Loan growth in the quarter was $137 million. The weighted average coupon on our new volume originations of approximately $300 million was 7.8%. Looking forward, the weighted average coupon of first quarter maturities totaling about $605 million is 6.59%. And for the second quarter, the weighted average coupon of maturities totaling about $360 million is 7.25%. The portion of our maturities that are renewed has been running at approximately 90%. Our loan pipelines are currently very full, as some anticipated December closings were pushed into this year. We continue to monitor and manage loan pricing in a manner that will support further loan expansions. Primarily as a result of the completion of the GPG exit, total deposits decreased by approximately $285 million in the fourth quarter. Interest-bearing deposits increased by approximately $160 million, while non-interest-bearing deposits declined by about $445 million. The municipal ED-5 and retail deposit verticals experienced the bulk of the growth in the quarter. For the year, deposits were up more than $900 million net of GPG outflows. Importantly, the outlook for growth across our deposit vertical stack, especially EB-5, HOA, muni, and 1031 title escrow verticals is robust. As Mark mentioned, as the quality remains strong, there's no identifiable negative trends within the portfolio. The provision in the fourth quarter was aligned with loan growth. Non-interest income for the fourth quarter was $4.4 million. The link quarter decline of $1.9 million was primarily related to the decline in GPG income. GPG-related revenue was approximately $2.1 million in the quarter, a decline of $1.4 million versus the third quarter. No GPG revenue was contemplated going forward. Non-interest expenses totaled $38.2 million in the fourth quarter, a decline of about 6.2% from the third quarter, excluding the impact of the settlement reserve established in the third quarter. Again, excluding the impact of the settlement reserve, non-interest expenses increased about $4.2 million from the fourth quarter of 2023. For the fourth quarter, expenses related to the digital transformation initiative and other one-time costs totaled approximately $900,000. For the year, operating expenses totaled $164.1 million, again excluding the $9.5 million settlement reserve. The effective tax rate for the quarter was approximately 31.7%. In our investor deck, we have a walk-down of GAAP versus adjusted financial performance, and we recommend you take a look at that. 2025 guidance, a couple of highlights for 2025. First of all, we're expecting to be at or near a core RODSI of 13% by the fourth quarter of 2025. Our planned loan growth is 9% to 11% versus year-end 2024. The funding assumption for that loan growth is generally generic deposit growth priced at Fed funds minus $100,000. The full year end is expected to be 3.7% to 3.75%, and we are assuming a 125 basis point rate cut in July in that forecast. We expect non-interest income growth of 5% to 6% over the $10.5 million in non-GPG fee income recorded for 2024. Finally, we expect annual non-interest expenses of $175 million to $177 million Allow me to walk you through the main drivers of the increased OpEx forecast. Our non-interest expense guidance for 2025 includes approximately $11 million in one-time costs related to our digital transformation project and other new IT initiatives slated for completion this year. The expected expense related to the modern banking motion initiative is $7 million. This is approximately $1.5 to $2 million more than previous guidance because of timing. Essentially, work that was originally planned to be completed in 2024 that has, in effect, been pushed into this year. We also forecast other IT project expenses of $3.5 to $4 million. The two main initiatives driving these new one-time expenses are First, a major infrastructure update with a complete redesign of our network and expansion of our data centers, allowing for greater capacity and enhanced resiliency. And second, data security and data governance initiatives. These initiatives are primarily related to the continuing implementation of state-of-the-art security tools and a data governance framework aligned with current regulatory expectations. Further, another noteworthy non-interest expense item is what is in effect an increase in licensing expense. We will see a total increase of about $4 million annually as quarterly income accretion of approximately $1.25 million from the gain on a cap that was extinguished in August 2022 will cease in February. It's noteworthy that this is an adjustment that was not contemplated in any of my previous guidance. On the comp and benefits line for 2025, the consensus for the year-over-year increase for comp and benefits equates to about 4.3%. Our actual experience year-over-year is expected to be closer to 10% as we continue to build a management team and staff that is prepared to support a much larger institution. The effective tax rate is expected to be between 31% and 32%. At this time, I will turn the call back to our operator for questions and answers.

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 voice your questions that you pick up your handset to provide optimal sound quality. Thank you. Our first question comes from Chris O'Connell with KPW. Please go ahead.

So I just wanted to make sure I heard right. Do you say that the new originations coming on in the fourth quarter are coming on at a 780 yield?

Correct. Okay, great. And we continue to manage the spread towards that sort of level. So kind of expecting all else being equal, that that's a reasonable, you know, kind of 750 to 775 is probably a reasonable place for forward-looking originations.

Okay, great. And then, you know, as far as, you know, the – just because it's a little bit difficult to parcel out with the GPG exit, isolating the impact just from the rates with the Fed cuts this quarter. How are you guys thinking about the quarterly benefit from a single 25 basis point cut on the margin on a go-forward basis now?

Each 25 basis point rate cut equates to about, Let's just use five basis points per 25 basis point cut. It might be a little more. Let's use five as a placeholder.

Okay, great. And then, you know, you guys talked about, you know, the verticals you guys had gone on the deposit side and some new opportunities, you know, and additional verticals perhaps over the course of 2025, you know, to help replace, you know, the recent GPG runoff over time. Can you just expand upon, you know, the opportunities that you're seeing there, you know, maybe, you know, where the largest ones are and if there are new initiatives going on, just any color around, you know, what those might be? Well, Chris, I think we've demonstrated already that, you know, we still have a lot of runway with the existing deposit verticals across the franchise. And we do a good job in our investor deck of, you to take a look and see what all of them are. We're always working on new initiatives and new opportunities that are really for now at this point, 2026 and 2027, we're very confident that we will fund our loan growth through core deposits and we will replace GPG remaining deposits in 2025 with just our existing So, more to come on new things in those sense in profiling them here. But right now, we're focused on 2026 and 2027 as far as new initiatives. Got it. You know, and for the, you know, deposit cost, I was wondering if you did have the interest-bearing deposit stock number for December?

I don't have that, Chris, but I'll be happy to get that for you. I don't have a spot base. For the quarter, it's 3.15 for the quarter, but I don't have it as December.

All right. And then just on the expense side, you know, with the additional, you know, build over the course of, you know, 2021, So should we be thinking of, I guess, just trying to think about, you know, where the run rate ends up as we're going into 2026? I mean, if you take off the, you know, one-time expenses of $11 million, you know, is that, you know, $41 million, you know, on a quarterly basis kind of a good exit run rate for the expenses into 2026? Yeah.

I'm hoping that that's a little bit high, but, again, you start with call it 175, and you back off 10, you're at 165. I think that we've got scope to go a little bit lower than that, and the plan going forward is going to be very much focused on managing OPEX in totality at about a 5% growth run rate. So... That's very much, you know, once we get all these one-timers behind us, that's the plan going forward.

Okay. That's helpful. And then, you know, last one for me is just, you know, you guys gave a little bit of color around, you know, where the ROTC is headed over time and into the back, you know, end of 25. I was just wondering, you know,

what, you know, even if they're just loose, you know, type of credit assumptions, you know, perhaps are being made, you know, around there.

Credit assumptions? What do you mean? We don't, as Mark said, we don't detect any negative trends or credits that are deteriorating such that we expect them to go non-performing over the course of 2025. As such, we have no credit, you know, charge off assumptions within the forecast.

Okay, great. Appreciate the time.

Thank you. Thanks, Chris.

Thank you. And we will take our next question from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning. Morning. Good morning, Mark. Dan, just to clarify, so the $175 to $177 million of operating expenses, that includes the $11 million of charges you expect to take this year related to tech investments? That's correct. Okay. Okay, great. Secondly, and it looked like you had like 92 million of GPG deposits at the end of the year and obviously had a little bit of fee income in the fourth quarter. You're saying all of those deposits will be gone in the first quarter and there will be essentially zero fee income? That's correct. Okay. Great. I wondered – I'm sorry, go ahead.

I was going to say it would be wonderful if they stuck around because they're no-cost departments, but we are modeling them as out the door within the next 60 days, basically.

Okay. And next, I wondered if you could maybe give us an update on any major trends that you're seeing in the skilled nursing facility space, given the change in new administrations. Any thoughts there? Any comments on how it may impact that business?

We haven't seen or heard of any – we spend a lot of time with our operators. We've been spending a lot of time with them recently talking about their performance in 24, which has been extraordinary. Other than just feeling optimistic, generally speaking, no one's factoring in higher returns as a result of the new administration. No, it's more blocking and tackling and – grabbing more market share, and they're all excited about building and expanding their footprint. But nothing specifically tied to the new administration other than feeling good about it.

Great. Thank you.

Thank you. And we will take our next question from Thaddeus Strickland with Hovde Group. Please go ahead.

Hey, good morning. Just wanted to clarify on the margin guy, I think the way to think about that, I mean, you said the first quarter would be five basis points higher than the core normalized rate. So does that mean we expect the margin to go from kind of around 360 in the first quarter towards, you know, 370-ish by the end of the year, inclusive of one rate cut in a year? Am I understanding that correctly? Yeah.

All right, so two parts to the question. First quarter, five bits above normalized fourth quarter, so that gets you to the context of 3.6%. For the year, we figure 370 to 375, which means we end the year north of that, probably closer to 380. That's, again, one rate cut penciled in in July. Got it.

I just wanted to ask if you're seeing any different trends in occupancy, particularly in office. It seems like return to office has accelerated a little bit. I'm just curious if you're seeing that among your customers. Sure.

A little bit, but it's a broader discussion about, you know, the type of office building. If it's a Class A office building, is it in Midtown? Is it in Midtown South? Is it downtown? So the answer is yes, but it is different depending on the specific office building and its location. But the key leads are more positive now than they have been in recent quarters or recent months.

And just one last one for me. You know, it seems like you've been able to get pretty good yields on new loans, but is there anything different in terms of competitive pricing pressures, you know, EU insurance or anything like that, that could be moving yields a little bit lower or faster?

No, we don't really see any competitive pressures at all in continuing to grow our business, and it seems like a lot of banks are stuck in stagnation here trying to restructure their balance sheet. So, you know, we have a lot of wind in our sail, and we continue to service commercial clients who are looking to build wealth. So, no, we don't have those kind of competitive pressures.

I can add an anecdote there that on a weekly basis, I send out a pricing guidance to the lenders. And so far this year, I've had no one come to my office and say, we've got to do something about that. So, so far, so good. No obvious pressures that would cause us to tighten spreads at least for the time being.

All right, great. Thanks, Mark and Dan. Appreciate you taking my questions.

Thank you, Freddie.

Thank you, Freddie. Thank you. This concludes the allotted time for questions. I would now like to turn the call over to Mark DeFazio for any additional or closing remarks.

I just want to thank each and every one of you for your support and your continued confidence in management and the board. You know, after celebrating in 2024 25 years of operating, successful operating history, I'm feeling more optimistic today than ever. The opportunities are greater today than they've ever been. With new technologies coming into financial services, there's really an exciting time to be in banking. And I'm glad that we're not in stagnation and we're looking to grow. And that's as a result of properly managing our business over the last many years. So we are positioned very well to continue to take advantage of the dislocation in our sector and also continue to grab market share over the next couple of years. So thank you again and look forward to talking to each and every one of you at the next quarterly meeting.

This does conclude today's conference call and webcast. A webcast archive of this call can be found at www.mcbankny.com. Please disconnect your line at this time and have a wonderful day.