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.