Metropolitan Bank Holding Corp.

Welcome to the Metropolitan Commercial Bank's first quarter 2025 earnings call. Hosting the call today for Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer, and Dan Daughtry, Executive Vice President and Chief Financial Officer. Today's call is being recorded. At this time, all participants are 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 do pick up your handset to allow optimal sound quality. Lastly, should you 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 presentation. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin.

Thank you, Katie. Good morning, and thank you all for joining our first quarter earnings call. While we hear the word uncertainty more and more frequently in the popular press, we at MCB are well prepared to deal with whatever comes next. MCB operates from a position of strength and robust levels of liquidity, capital, and earnings. Our strength is a reflection of our staunch and enduring commitment to safe and sound banking practices. We will continue to maintain our discipline and we are prepared to support our clients and communities throughout the ups and downs of the economy. Our performance in the first quarter of the year was impressive. We grew loans by $308 million or 5.1%. We are especially proud of our deposit growth of $465 million or 7.8%. I want to point out that neither of those growth percentages are annualized. Along with outsized balance sheet growth, we were able to expand our NIM by two basis points to 3.68% from 3.66% in the prior quarter. This marks our sixth consecutive quarter of margin expansion. In March, we bought back more than 228,000 shares of MCB, or $12.9 million, which equates to more than 2% of the outstanding shares at year-end 2024. We continued to execute on the authorization, and as of mid-April, we were at the halfway point toward completion of the approved buyback. The timing has been financially fortuitous as the average price paid to book ratio has been just north of 80% of tangible book value at March 31. Our reported earnings per share was $1.45, and during the first quarter, we increased our tangible book value per share by more than 2.3% to $65.80. This marks our ninth consecutive quarter of book value accretion. Dan will provide details on the quarterly earnings per share in a few moments. Our investment in franchise-wide new technology stack continues. As planned, we expect the full integration to be completed by the end of this year. We are confident that the new technologies will support and scale with MCB's diversified and growing commercial bank for years to come. Asset quality remains strong. We have not identified any broad-based negative trends in any loan segment, geography, or sector that is impacting our portfolio. We have actively reached out to our clients to gather intelligence about current market stress and the impacts tariffs may have on their businesses. So far, the feedback we have received does not indicate any specific areas of concern. First quarter provision expense of $4.5 million supported our continued loan growth as well as a $1 million specific reserve for a $2 million unsecured line of credit. We remain confident that a meaningful portion of the loan 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 pipeline, 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 well. We continue to carefully manage asset quality and optimize profitability while further solidifying our banking presence not only in New York but in several other complementary markets. We 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. I would like to thank our employees and our board of directors whose dedication and efforts are the engine that drives our continued success. Last but surely not least, I would like to thank our clients for their engagement, continued loyalty, and support. I will now turn the call over to Dan Doherty, our CFO.

Thank you, Mark, and good morning, everyone. As Mark said, we started the year with a strong performance in the first quarter. I'll start with a few comments on the balance sheet. As Mark mentioned, we grew loans by over $300 million. Total originations and draws of approximately $490 million were at a weighted average coupon, or WAC, net of fees of about 7.84%. Payoffs and paydowns totaled approximately $185 million at a WAC of 7.44%. Positive delta in the WAC between new volume loans and payoffs, combined with a 40 basis point increase in renewal coupons from 693 to 731, are the primary drivers of our ability to support and grow the net interest margin. Looking forward to the second quarter, the WAC of approximately 590 million of pending maturities is 7.38%. Importantly, we have not loosened our credit standards or revised our underwriting processes in any way to pursue loan growth. Next, let's talk about our deposit experience in the first quarter. In the quarter, we grew deposits by about $465 million. Every deposit vertical contributed to the linked quarter growth. The top three growth contributors in rank order were municipal, EB-5, and lending customers. quarter over quarter, the cost of interest-bearing deposits and the cost of total deposits declined by 32 basis points and six basis points respectively. The decline in linked quarter deposit costs reflects the fourth quarter reductions in the Fed Fund's target rate offset noticeably by the deposit mix shift between interest-bearing and DDA, which was primarily related to the GPG exit in the fourth quarter of last year. It is worth noting that the first quarter increase in deposits was also net of $35 million in GPG deposit outflows. The GPG deposit outflows are primarily related to the return of reserve balances and check clearing. Our NIM was 3.68% in the first quarter. You'll recall that prior period NIM guidance for the first quarter was 3.60% versus a normalized fourth quarter NIM of 3.55%. Loan and deposit pricing discipline combined with the full effect of the two fourth quarter 2024 rate cuts supported the NIMO performance. Now let's move on to our income statement and related performance measures. Net income was $16.3 million, down $5 million versus the prior period. Diluted earnings per share was $1.45, down $0.43 versus the prior period. The first item of note here is that while the reported results are well below the prior period results, they are very much in line with our forecast and expectations, which of course acknowledge the exit from the BAMS business last year. Notable items affecting the first quarter results include the following. So first of all, our net interest income was flat quarter over quarter. There are two notable factors affecting the net interest income. The first item is the aforementioned repositioning of the deposit base in the fourth quarter of 2024. In that period, we offloaded approximately $600 million of deposits with an average cost of 1.5%, thus creating an approximate $1.5 to $2 million headwind. While quarterly loan growth was $300 million, the timing of loan cash flows resulted in average loan growth of only $175 million. And we'll see how that affects the provisioning on that affects this on the next item here. The provision in this first quarter was $4.5 million. The elevated provision was primarily the result of loan growth. However, we did reserve an additional $1 million versus a non-performing $2 million unsecured line of credit. And again, the headwind resulting from that provisioning was a little more than $1 million. Linked quarter, non-interest income was down $763,000, primarily because of the absence of GPG fee income, offset somewhat by the one-time income recognition of about $800,000 of BAS-related program fees. Now onto non-interest expense. Non-interest expense was $42.7 million, up $4.5 million versus the prior quarter. The increase versus the prior period was primarily related to a seasonal increase of approximately $1.5 million in comp and benefits, notably FICA and 401 , an increase of approximately $1.3 million in professional fees, an increase of approximately $1.2 million in other expenses, and the settlement reversal that was recognized in the fourth quarter of 2024 were approximately $500,000. I would say that approximately 1.5 million of the OPEX increases that I just pointed out are either seasonal in nature or one-time. Notably, in the first quarter, expenses related to the digital transformation project were de minimis. As a result, The $11 million of IT project-related expenses baked into the 2025 budget are expected to be recognized over the remaining three quarters of 2025. Finally, the effective tax rate for the quarter was approximately 30%. I'll now provide an update to 2025 guidance. A couple of highlights there. Our planned loan growth is a bit higher than prior guidance. I'm going to cuff that at 10% to 12%. The funding assumption is generally generic deposit growth priced at Fed funds minus 80 to 85. Again, this is a little more conservative than previous guidance as a result of our expectations for growth concentrated in relatively higher cost deposit verticals. The full year NIM is still expected to be 370 to 3.75%. Underlying those forecasts, the NIM forecasts, is we continue to run our model with one 25 basis point rate cut in July. Additional rate cuts are expected to benefit the NIM at about plus 5 bps for each 25 basis point rate cut. Of course, that depends on timing. And then, finally, it goes without saying that our forecast does not contemplate the possibility of a material downshift in U.S. economic conditions. or material changes in customer behavior. As well, the outlook for the macroeconomic variables that underlie our allowance for credit loss may result in increased provisioning in future quarters. I will now turn the call back to our operator for Q&A.