Good day and welcome to the Metropolitan Commercial Bank Fourth Quarter and Full Year 2023 Earnings Call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer, and Dan Dougherty, 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. During today's presentation, references 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. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin.

Thank you, Todd. Good morning, and thank you all for joining our fourth quarter earnings call. MCB's ability to manage through severe banking sector stress in 2023 while simultaneously exiting less material lines of business demonstrates the impressive strength and stability of MCB's franchise. We have been able to responsibly grow the balance sheet while maintaining our credit standards and with a continued sharp focus on liquidity and interest rate risk management. Importantly, the economy continues to display impressive resilience and calls for a steep recession have become less apparent over time. That said, 2023 was a challenging year for the banking industry, the effects of the most aggressive Fed tightening cycle in decades and an inverted yield curve created significant headwinds. Thankfully, experts predict that we have seen the end of the tightening cycle and many are convinced that an easing cycle is on the horizon. MCB, being modestly liability sensitive, will benefit from the monetary policy easing. Turning to recent results, I am pleased with MCB's performance in the fourth quarter and for year-end 2023. NIM inflected in the fourth quarter where we saw modest expansion ending what turned out to be only two quarters of compression. We expect NIM expansion to continue in 2024, supported by continued loan growth, originated at consistent spreads, and funded with core deposits from our growing roster of deposit verticals. Asset quality remains strong, with no identifiable broad negative trends in any loan product, geography, or sector. Looking forward, we are excited to formally announce that we have begun our core banking modernization initiative. We expect that this project will result in improved capabilities and efficiencies for both customer-facing and internal processes. Dan will provide financial details on the digital transformation project. I will now turn the call over to our CFO, Dan Dougherty.

Thank you, Mark, and good morning, everyone. I am pleased to join my first conference call as CFO of Metropolitan Bank, and I look forward to meeting with all of you at future conferences and investor events. As Mark mentioned, the operating environment continues to be quite challenging. However, despite rate-related headwinds, the changing dynamics of depositor behavior, and a material shift in the bank's funding profile, we have continued to deploy our capital prudently and profitably. For the year, earnings per share were $6.91, and our book value per share at year-end was $58.69. As we transition to 2024, we are optimistic about the path of the economy and the direction of short-term interest rates. Even though many challenges remain, we believe that 2024 earnings will show solid growth relative to 2023. Quarter over quarter, we saw an increase of $270 million in the loan book, growth of approximately 5%. Net interest income was up $3.4 million, or about 6.4%, driving an increase in the net interest margin of 9 basis points. Our ability to reach an inflection point in the NIM is remarkable when you consider that we offloaded $475 million in crypto-related DDA balances during the year. Loan growth was funded primarily by deposit growth of $215 million. The deposit verticals that contributed the most to that growth were municipals, loan customer deposits, and EB5 related deposits. The remainder of balance sheet growth during the year, which included increases in both cash and securities, was funded through wholesale channels. Liquidity risk management remains a key focus. At year-end, total secured borrowing capacity was approximately 200% of our estimate of uninsured deposits. Our loan pipelines remain strong. A continued focus on pricing discipline resulted in a weighted average coupon net of deferred fees of 8.7% on fourth quarter new loan originations versus a September loan portfolio yield of 6.73%. The loan book mix continues to shift towards fixed rate as the mix of recent originations has been more heavily weighted toward fixed. As well, recent payoffs have been weighted towards float. Now a few comments on credit. As Mark mentioned, asset quality remains strong with no identifiable negative trends within the portfolio. We did, however, provision $6.5 million in the fourth quarter. The increased provision was driven primarily by loan growth, as well as a specific reserve connected with outstandings to a single sponsor that went non-accrual in December. All of that offset somewhat by improvements in the macroeconomic variables that underlie our CECL model. Although we saw an increase in NPLs in the fourth quarter, we are confident that the ultimate risk of loss in the NPL book is minimal because of strong sponsor guarantees and collateral values that are generally well aligned with outstandings. Non-interest income was flat over the quarter at $6.5 million. Within the non-interest income bucket, GPG revenues were also flat at $4.2 million. Importantly, due to an evolving regulatory environment that has challenged the cost-benefit equation related to the business-to-consumer, or B2C, fintech business, the bank has decided to exit B2C. The plan is to complete the B2C exit over the course of this year. The implications of the B2C exit are focused on the GPG fee revenue outlook and the impact from the outflow of low-cost deposits. The overall fee revenue decline related to the B2C exit should equate to approximately 2% to 3% of the current consensus 2024 revenue forecast. The related deposit outflows, which will also occur over the course of the year, are expected to be immaterial to 2024 results. We remain committed to growing the GPG business line, especially as a source of low-cost funding, but for the time being, we think a focus on the business-to-business, or B2B, is appropriate. We do not plan on any specific headcount reduction as a result of the B2C exit. As opportunities present themselves, existing employees will work to support new deposit gathering initiatives. Now let's talk about non-interest expenses. After adjusting for the regulatory settlement reversal of $3 million in the third quarter, quarter-over-quarter non-interest expense was up approximately $3 million. The $1 million increase in fourth quarter comp and benefits reflects the timing of third quarter hires and some one-time charges related to placement fees and severance costs. We will continue to invest in human capital this year as we prepare for our continued approach toward $10 billion in balance sheet footings. The 2024 run rate for comp and benefits will reflect an increase to annualized fourth quarter expense of approximately 6% to 8%. Professional fees should trend down towards $4 million per quarter over the course of the year. And finally, in the aggregate, it is reasonable to assume that total core non-interest expense will increase in the 10% to 12% area versus normalized 2023 expenses. A few comments on the banking modernization project. One-time costs associated with the core banking modernization project are expected to total approximately $9.5 million in 2024. These expenses will be somewhat lumpy throughout the year. We will make best efforts to report core as well as project-related expenses each quarter. The modernization project is planned to be implemented over a roughly 24-month period. Approximately 80% of the total project spend is expected to occur in 2024. The returns on the project, which are measured largely through scalability, data mining capability, improved payment processing capabilities, and improved customer experience, will be evident as we integrate the new systems. I will now turn the call back to the operator for Q&A.

Our first question comes from Mark Fitzgibbon of Piper Sandler. Please go ahead.

Hey, guys. Good morning.

Good morning, Mark.

Good morning, Mark.

First question I had for you, Dan, around the exit of the B2C business. Two questions related to that. First, what was sort of the impetus for exiting the business? And second, of the $781 million of GPG deposits, roughly how much of that is connected to B2C?

This is Mark. I'll take the first half of that. So, Mark, just to bring you up to date on this, MCB hasn't brought on a B2C client in GPG throughout all of ‘22 and all of ‘23. We just started socializing this and talking about it publicly. So we have not recognized any benefit from B2C business for the last two years. The reason for it is the economics. At this point, the regulatory expectation for that oversight is extraordinary, and it's costly. And we're just fortunate enough to have other options to choose to grow the bank. So we have decided that the economics to profit margins on that business used to be very substantial. They have served us well, and for everyone listening, we were in that business for two decades very successfully. So it has served the bank well. It just no longer has the risk-reward or the economics to support staying in the business. Dan, you want to take…

Yeah. So, Mark, the B2C deposits amount to about $250 million. Those will leave the bank. The plan is to exit the bank over the course of the 12 months of 2024.

Okay, great. And then can you share with us any thoughts on the pipeline in the B2B business, how that's looking right now or shaping up?

Yeah, it's strong. It's strong. It's diverse. And we also have acquiring, which we stood up in 2023, which we expect 2024 for it to start to contribute meaningfully in ‘24 as well. As far as the $250,000 in deposits, Mark, we have already demonstrated over the last 24 months, we had the likes of about $1.5 billion of crypto-related deposits that fully left the bank, and we replaced them very efficiently. So we would expect it to be a non-event on the $250 million. It will not happen in one moment. It will happen gradually over the year. And I don't think you'll end up noticing it at all.

Okay. And then just two modeling things. One on the margin, you mentioned the margin should rise throughout the course of 2024. Assuming you follow the forward curve, how much NIM expansion does that imply and also if you could share any color on the effective tax rate going forward? Thank you.

Our forecast includes two rate hikes for next year, expected to occur in the middle to late part of the year. We anticipate an expansion of net interest margin by 10 to 15 basis points, or actually 20 basis points over the course of the year based on our model.

Okay, great. And then the effective rate was low this quarter, sort of back to 31% and change, do you think is the more reasonable go-forward rate?

That's a good assumption, yes.

Thank you.

Thank you. Our next question comes from Nick Cucharale with Hovde Group. Please go ahead.

Good morning, everyone. How are you?

Good morning, Nick.

Good morning, Nick.

Just to follow up on the expense commentary, are the project-related expenses that you mentioned incorporated into the 10% to 12% projected growth rate?

They are not.

Now if you were to include those, what does the projected growth rate for ‘24 versus ‘23 look like?

I have to come back to you on that one, Nick. I don't have it handy in front of me. I could do quick math, but let me follow up with you on that.

No problem. No problem. On the deposit front, as you mentioned, nice growth in the municipal book. We had a similar dynamic in the year-ago quarter. Is this mainly due to seasonality or have you added significant new relationships into that vertical?

Mostly new relationships, Nick.

Primarily driven by new relationships. That's right.

Wonderful. Loan growth was again strong and even in spite of strong deposit growth, it looks like you added more funding to support that rise. When do you anticipate you'll be able to drive down borrowings to levels that are more in line with your history?

The plan is from yesterday, but keep in mind that at the end of the year, our cash position was intentionally high. Those funds can leave the bank quickly, and I don't need to maintain such a high cash balance. I expect that we can bring this back toward the current minimum of about $300 million relatively quickly over the course of the year, as we're obligated to that amount due to swaps that will last until mid-2025. So, I believe this should occur fairly soon as we increase our deposit collection efforts.

But, Nick, year-over-year, if you look at the difference between core funding and net new loan growth, it was minimal. We didn't really rely at all, heavily at all, on wholesale funding to fund that growth.

Right. Right. Okay. And then lastly, another solid rise in the healthcare portfolio this quarter. Where are you comfortable bringing that book as an overall percentage of total loans?

We're studying that right now. We're having stress tests, as you know. As you know, we do stress testing of the entire portfolio twice a year. We're having a targeted stress test done on the healthcare. I have a sense of where that's going to come out, it would be very positive. We like the risk profile there. So we will announce some new numbers at some point, but we're going through that analysis now in the first quarter. But we do like the risk profile and the economics around healthcare. Remember, it's a very diversified portfolio. It's just not skilled nursing homes and assisted living facilities.

I appreciate the color, and thank you for taking my questions.

Thanks, Nick.

Thanks, Nick.

Thank you. Our next question comes from Chris O'Connell with KBW. Please go ahead.

Hey, good morning.

Good morning, Chris.

So, just wanted to circle back to the NIM guide of the 20 basis points and just confirm that's off of the 4Q23 to 4Q24 timeline numbers, not off of the annual NIM?

It's actually off the annual NIM.

So that's 20 basis points over 3.48%?

That's correct.

Great. And how much does that change, I guess, if there's no Fed cuts next year?

I don't have that handy. Happy to run the model and let you know.

One other way of looking at that too, Nick, is we have some very big deposit initiatives that should drive low-cost deposits throughout 2024. So we're not just relying on the Fed to give us some expansion here. We're driving it ourselves, as we have historically. And you saw in this year that just passed, we had only two quarters of compression with the kind of tightening that we face. So we're not relying on the Fed. The Fed has many more cuts predicted. We only have two in our projections, but it is not the underpinning of that margin expansion. It's our deposit initiatives.

The NIM forecast produced by my team is based on relatively conservative assumptions regarding core deposit growth. If anything, there should be potential for improvement, provided that the path of administered rates aligns generally with our previous discussions.

Great. And on the B2C exit, I appreciate all the color that you guys gave. As far as just the actual impact to the GPG fee line, do you have what that is, I guess, on an annual basis once the exit's complete? And then any sense of just, even if it's rough, the timing of how that would play out?

Again, the exit is going to happen during the course of 2024. The reason I couched it in terms of forecast revenue for next year is to emphasize the fact that it's a relatively small number. It's 2% to 3% of consensus right now for 2024. So you can do the math, I can do the math. Let's call it $5 million to $6 million is going to be the delta there.

Got it. Great. And then…

This is Chris.

Chris, it's important to remember that we haven't brought on a B2C client yet. GPG's revenues not only absorb the significant drop in crypto-related transaction revenues but also offset the absence of revenue from B2C by adding new B2B clients. The foundation of that business is solid. While it's unfortunate that we are losing some opportunities for various reasons, we are actively replacing them. We demonstrated this again in 2023.

Great. And just by the multifamily provision, how big was that credit? And can you give any color around the overall circumstances, what the total reserve to the loan size is? And just any other detail surrounding the credit?

It's multifamily outside of New York. I think it's Ohio and Louisiana. What we understand is a dispute between partners and the lack of willingness to put capital into the projects to bring them to be stabilized. So it's not something we haven't seen in our careers before. Considering the sponsorship behind it, we're a little bit surprised that considering how wealthy they are and how experienced they are in this asset class, that they would run the risk of litigation, but they are. But we are confident. We believe the risk of loss here is minimal. I actually believe the risk of loss here is zero.

Great. And do you have what the LTV or debt service coverage ratio was on the credit going in most recently?

The properties were in transition, so they had low occupancy. The strategy behind acquiring them at a high cap rate involved renovating and stabilizing them. Typically, in multifamily investments, the approach is to acquire, stabilize, renovate, and then benefit from lower rates and cap rates, allowing for refinancing or selling at a better return. While we expect rates to decrease, the renovations haven't been completed. Therefore, the debt service coverage is nearly irrelevant due to the guarantee and the overall cash flow of the guarantors, which supported the projects initially. The loan-to-value ratios were at 70%, which aligns with policy guidelines of 70% to 75%.

Great. And just a last one on this. Do you know when it was originated?

I think on the inside of two years, 2022, ‘21/’22?

Great. And just, do you view this as a read-through to any other parts of the portfolio? And how are you guys seeing credit transform over the past quarter and kind of the outlook going forward? And does it impact any of your appetite for loan growth going forward?

No, just as I said in my prepared remarks, this isn't indicative of any trend or anything that's happening in the portfolio from an asset class perspective or geography. This is a one-off situation. Keep in mind, we do a fair amount of lending here. You will have NPLs from time to time. The question is, your underwriting will get tested when you have non-PLs. And you'll see throughout the course of the year how our underwriting did as a result of remediating this problem. I can tell you the clients are fully engaged now and they are talking to us. So I would expect this to get resolved one way or the other pretty soon.

Great. Thank you guys. Appreciate the time.

Thanks, Chris.

Thank you. Our next question comes from Alex Lau with JP Morgan.

Hi, good morning.

Good morning, Alex.

Good morning, Alex.

I wanted to start off with deposits. Which deposit verticals drove the increase in non-interest bearing deposits on a period-end basis? And what are your expectations for DDA growth outside of the B2C runoff in 2024?

The increase in DDA was primarily influenced by GPG clients. We have a conservative assumption in our model that we will see limited DDA growth in the future. It appears that non-interest bearing deposits are becoming increasingly rare in the current market. However, we do anticipate a small amount of growth in our projections.

Thank you. And also, thank you for the breakout of the $230 million in deposits from the new deposit initiatives. Can you talk about the opportunities for these deposit verticals to increase their contribution to the funding base this year?

I believe you will continue to see a steady increase. There are optimistic projections available, and I think they will keep playing a role. Our goal, as stated before and as we have historically done, is that our loan growth will be funded solely by core funding, and they will keep contributing. It's difficult to predict the exact amount in any given quarter or year, but our aim is to remain a core funded institution.

Thank you. And then a question on deposit costs. Given you're a higher payer on deposit costs, how do you think about the beta moving downwards as the Fed cuts the funds rate and the timing given your deposit mix? For example, do you have the mix of index deposits or how much is exception pricing? Thanks.

Our assumptions trend toward a very conservative 65%, inclusive of the derivatives that we have on the balance sheet. We take the derivatives off, it gets closer to 75%. I think we're pretty hopeful that in fact it will be higher than that as the short rates move down.

Thanks. And then just another follow-up on expenses. You mentioned the 10% to 12% growth on core non-interest expense. What is the normalized expense base you were referring to for 2023?

I believe I quoted that as Q4 annualized and then grossed up with the 10% to 12%.

And were there any project expenses in 2023 already? And on the project expenses as well, is there a sense of timing? Will it be more front-loaded or pretty spread out throughout the year?

There were some modest expenses in ‘23. 2024 is going to be quite lumpy. It's very difficult to say they will be spread out through the year, but it's going to be quite lumpy as these sub-projects, if you will, come online.

Okay, and then just another follow-up on the B2C fee income loss over ‘24. Was that $5 million to $6 million in exit run rate for 4Q ’24? Is that the full year impact versus consensus for full year ’24?

The $5 million to $6 million is for the entire year. Keep in mind that when evaluating the 2023 results, you need to exclude the cryptocurrency portion, as it won't be recurring. Additionally, the adjustment mentioned throughout the year is estimated to be around $5 million to $6 million. Moreover, as Mark highlighted, our B2B pipeline is robust. We are committed to expanding that segment of our business and are optimistic that it will keep growing, leading to a significant amount of low-cost funding.

Great. Thanks for taking my questions.

All right.

Thank you. And we do have a follow-up question from Chris O'Connell with KBW.

Yeah, I just wanted to confirm the expense guide. I had the Q4 annualized, so $37 million annualized, plus 6% to 8%, and then the 2023 normalized OpEx plus the 10% to 12%. Is that correct, not the Q4 annualized plus 10% to 12%?

It's overall the compensation and benefit is 68% off Q4. That's kind of a specific quote there. But overall, it's 10% to 12% off fourth quarter annualized.

Thank you.

You're welcome.

This does conclude the allotted time we have for questions. I will now turn the call back to Mark DeFazio for any additional or closing remarks.

I don't have any closing remarks other than thank you all for attending and your continued support of MCB.

Thanks everybody.

Thank you. 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.