Good day and welcome to Metropolitan Commercial Bank's First Quarter 2024 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. 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. Good morning and thank you for joining our first quarter earnings call. The first quarter of 2024 was very productive for MCB. Our first quarter results were a strong start for the company. During the quarter, we carefully grew the balance sheet while maintaining our price discipline, credit standards, and with a continued sharp focus on liquidity and interest rate risk management. We were also able to grow core deposits well in excess of our loan growth. Our two major initiatives planned for 2024, the wind down of the GPG business and the digital transformation project, have begun in earnest and are proceeding on time and on budget while we remained focused on the continuation and expansion of our profitable and disciplined commercial bank growth strategy. In the first quarter, we reported an earnings per share of $1.46, which was supported by strong growth in net interest income and continued excellent credit performance. In the meantime, the successful completion of our other initiatives remains a high priority. The economy continues to display strong fundamentals and impressive resilience. The evident strength of the economy provides us with an optimistic outlook for loan growth and credit performance. The outlook for monetary policy has changed dramatically over the last several months. Rather than expectations of significant easing throughout 2024, the market is now pricing in less than 50 basis points of easing in the back half of the year. I am pleased to report we saw a 4 basis point NIM expansion in the first quarter. Even with the change in the outlook of monetary policy, we continue to expect further margin expansion as the year progresses. Asset quality remains strong. We have not identified any broad-based negative trends in any loan product, geography, or sector that is impacting our portfolio. We believe that our healthy credit metrics are a direct result of MCB's pricing discipline, conservative underwriting, and portfolio diversity. Our performance is supported by the exclusive focus on relationship-based commercial banking and high-quality commercial clients and sponsors in industry segments that we know exceptionally well. Finally, I am pleased to report that the two loans totaling approximately $21 million that were classified as non-performing loans at 12/31 last year are now current, have substantial funded interest reserves, and the related workouts also include targeted and aggressive amortization requirements throughout this year. I will now turn the call over to Dan Dougherty.

Thank you, Mark. Good morning and thanks again for joining our first quarter earnings call. First quarter loan growth: over $94 million was funded entirely by core deposit growth of more than $340 million, excluding additional growth in the BaaS vertical. As mentioned in the press release, multiple deposit verticals contributed to the core deposit growth. As a result of our deposit growth, our end-of-period and average balance of cash parked at the Fed was substantially elevated. Despite the outsized cash position and the current rate environment, we were able to increase the net interest margin by 4 basis points in the first quarter. Our loan pricing and repricing discipline was the main driver of our ability to expand the NIM. We expect to see some additional uplift in the margin throughout the remainder of the year. In our updated forecast model, we have penciled in a single 25 basis point rate cut in September. In that scenario, we expect to see approximately 5 to 10 basis points of additional uplift. Put it another way, we forecast a fourth quarter NIM in the range of 3.45% to 3.5%. Focusing on lending, it is noteworthy that our quarterly loan growth was net of more than $225 million in payoffs and paydowns. Continued focus on economic loan pricing resulted in a weighted average coupon, net of deferred fees, which are typically 15 to 25 basis points per year, of 8.47% on first quarter new loan originations and draws versus a December 2023 portfolio coupon of 6.92%. Loan growth is expected to accelerate as the year progresses. We continue to plan on loan growth of between $600 million and $800 million for the year. Our loan pipelines, especially on the C&I side, are growing after a slower than expected start to the year. Importantly, our plan assumes that we are able to fund all of that planned loan growth with deposits. As Mark mentioned, asset quality remains strong with no identifiable negative trends in the portfolio. The provision in the first quarter was generally in line with the increase in loan footings, offset somewhat by improvements in the macroeconomic variables that underlie our first quarter CECL model forecast. Non-interest income increased by approximately 7% from the linked quarter as fees associated with letter of credit activity and deposit service charges more than offset a small decline in BaaS revenue. The uptick in deposit fees is expected to be sustainable while the increase in letter of credit fees is more aligned with borrower behavior. The decline in BaaS revenue will accelerate as the wind down project proceeds throughout the year. We expect BaaS revenue to total $8 million to $10 million and total non-interest income to total $19 million to $21 million for the year. Turning to non-interest expenses: non-interest expenses totaled $41.9 million in the first quarter. Importantly, expenses related to the digital transformation project totaled $1.8 million and an additional $3.1 million reflects remediation work and severance payments associated with the GPG wind down. There was also an increase in core operating expenses compared to the fourth quarter. This was primarily due to seasonally elevated employer tax payments. Our $12 million digital transformation budget remains unchanged and we continue to expect to complete the project in 2025. We currently expect about $8 million to $9 million of the project to be expensed in 2024, including what has already been recorded for the first quarter. Non-interest expenses for the full year, including the digital transformation investment, are expected to total in the range of $160 million to $163 million. The effective tax rate for the quarter was approximately 33%. The tax rate was negatively impacted by discrete items that came through in the quarter, primarily related to the conversion of employee stock-based awards. Going forward, we expect the effective tax rate to be in the range of 31% to 32%, excluding discrete items. 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 core earnings; the deck now includes slides that provide details about the bank's multifamily and office loan portfolios. I will now turn the call back to our operator.

Thank you. Our first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hi, guys. Good morning. Nice quarter.

Thank you, Mark. Good morning.

First question I had, just to clarify, we still should expect about $300 million of B2C deposits running off in the second quarter. Is that right?

Approximately, yes. That's a good estimate. Towards the end of the second quarter, especially, yes.

Okay. And should we assume that your deposit pipelines continue to be strong, given the success you had in the first quarter?

The answer is yes, but the timing of these new relationships and deepening some of them could be a bit different. But to Dan's point, at the end of the year, we are confident that we will not only replace those deposits, but we will have funded our loan growth. So, from a quarter-by-quarter basis, the timing could be slightly off, but on an annualized basis, we are still in line with our projections.

Okay. And then in the past, you all had indicated that you were talking to some teams from neighboring banks. I haven't seen any announcements from you all. Is that still in process? Is it likely that you'll hire some of those deposit teams in coming quarters?

It's an interesting question. We've met with several, and none of them are really a good fit so far for a lot of different reasons, from cultural fit to pricing to loan expectations to client support. This is a whole host of parts of that conversation. So far, we've never built this franchise based on acquiring teams for a lot of different reasons, and while we did speak to several teams, we have not made a decision on anyone. I would put a low probability on that happening in 2024.

Mark, do you think some of these teams are getting unrealistic deals from other banks, or other banks are paying too much to bring these teams on?

Well, I don't know what they negotiated. Perhaps they're better negotiated than me. But when I look at the three biggest hurdles — all nice people, by the way, coming into the bank, but culturally, it's a very difficult fit. They're used to working in teams and not integrated with the company. It's out of character for what we've built here as a commercial bank. The kind of integration we have here and the kind of culture not only works for our staff, but it also works for our clients. Our clients expect that kind of relationship banking. That's the first issue. Second, even if you think the cost of those deposits is affordable today, you have to dig in a little deeper and look at total compensation expectations. What I found most problematic is the implication of loan expectations. A lot of these deposit teams represent many real estate owners in multifamily. Although we have multifamily on the balance sheet, it will never be a primary asset class at MCB; it is a low-profitability business. I don't want to set anybody up for failure, encourage them to come here, attempt to integrate them, and then find out we can't replace the loans as they mature out of their existing banks in multifamily. So there are a few other conversation points. All nice people; I wish them well. But so far, it has not been a good fit for MCB for a lot of reasons.

Okay. And last question. Dan, the guidance you gave was super helpful. The one thing you didn't give guidance on was the provision. Based on your projection for $600 million to $800 million loan growth, assuming no real changes to the economic model, what does that spit out in terms of provisioning for the year?

We should see about 1% of growth as our provision level. So I'm thinking six to eight, maybe a little bit more. But I think six to eight is a good context for the provision for the remainder of the year.

Thank you.

Thank you. Our next question will come from Christopher O'Connell with KBW. Please go ahead.

Hi, good morning.

Good morning, Chris.

Good morning, Chris.

So just wanted to start off on the expense side, appreciate the guidance there and the guidance around the digital transformation costs as well. For the guide of the $160 to $163 million, that includes the core op-ex plus the digital transformation. Does that include the GPG wind down and regulatory remediation costs?

Yes, it does, Chris.

Okay. Got it. And can you just walk us through what exactly the regulatory remediation costs relate to? And how much of the GPG wind down and regulatory remediation costs remain, if any, over the course of the year?

It really is made up of legal and professional fees and consulting fees. As you all know, we have two public consent orders out there, which are expensive to unwind and get removed. We're confident that we can satisfy the expectations throughout this year. But consultants are very expensive today. Regulators expect independent validations done by third parties. You need lawyers to look at every document you send to regulators today. So it's an expensive and unfortunate expense that we expect to run off at the end of this year and not be in a 2025 run rate. We can't really allocate that precisely. We're very precise on the budget for the technology integration, but regulatory expenses, legal fees and consultant fees are somewhat of a moving target. We think we gave you a worst-case scenario in Dan's projections.

Got it. And do you have any ballpark as to the total dollar amount of those costs throughout 2024?

Not offhand. If you back out how much we're spending on the digital transformation from Dan's guidance, that gives you the ballpark of the exit fees and professional fees, the GPG exit costs and the professional fees. But we'd rather give you a worst-case scenario than try to allocate it precisely.

I guess what I'm getting at is when you back out the digital transformation costs and the rest of these one-time costs, as you're getting to 4Q '24, 1Q '25, do you have a sense of what the core underlying expense run rate will shake out at?

It's a really good question, Chris. I've been noodling on that for quite some time. I come up with around $148 million to $150 million as a range of core expenses by the time we get to 2025. Now again, that estimate is very dependent on the timing and success of our remediation project and remediation requirements, but I think that's a good placeholder.

No, yes, that's super helpful. Thank you. And then, just as far as, really appreciate the color on the multifamily and office side in the deck. It looks to me that on the rent-regulated side and on the office side, there are no non-performers right now from what I could tell. How are you guys feeling about the maturities in those two buckets over the course of 2024? Do you guys have a good look into those borrowers and those credits? It looks a little bit lighter on the rent-regulated multifamily side, but about roughly one-third, give or take, of the office kind of matures this year?

Yes, I would expect that, with the exception of the credits that we want to keep and reprice because we have a high retention rate here, the rest of them will get paid off. Out of the over $200 million in the first quarter, some of it was multifamily and perhaps some office. We do not expect to be in a rollover situation where one cannot be refinanced or we would not be interested in refinancing the credit.

I would add further that our credit team has looked at each loan maturing in 2024 and we've already been in touch with the customers. Again, we don't detect any negative trends of a material nature that would bring concern to your attention.

Great. And just the timing of the GPG deposit roll off — I know you guys covered Q2, but given that there was actually some growth this quarter in that category, how are you thinking about the timing of the rest of that roll off into the back half of the year? Is it going to be more weighted toward Q3 or Q4, or is it pretty even across those two quarters?

I think based on our schedule, what we call B2C, by the end of the summer, by August, that should be complete. Then in the third and fourth quarter, the B2B deposit wind down should be complete. But I would extend the B2C to the end of the summer to August.

Is the growth this quarter in B2C or B2B or a mix?

It was a mix, actually.

Great. All right. That's all I have for now. Thanks for taking our questions.

Thank you, Chris.

Thank you. Our next question comes from Alex Lau with JPMorgan. Please go ahead.

Hi. Good morning.

Good morning, Alex.

Hi, Alex.

Staying on the GPG runoff schedule, what are your expectations for the quarterly pace of reduction in GPG fee income and expenses for the year?

As you saw in the first quarter, we printed $4 million of fee income. I don't expect that the decline in the second quarter is going to be materially different than that. But then as you get into Q3 and Q4, it's going to accelerate rapidly. Again, $8 million to $10 million is my forecast for the entirety of the year.

Great. Thank you. On the $90 million increase in non-interest bearing deposits this quarter, where did you see that come from in terms of deposit verticals? And looking ahead, where do you expect these balances to grow, if any?

A significant portion of that was from the BaaS side. Some of it was from retail, but a good portion was on the BaaS side, and it becomes part of the forecasted outflows over the remainder of the year.

Great. Thank you. And then regarding the NPA that moved to current, were there any specific reserves, and do you expect any releases related to these loans?

Yes, we're hoping that in the second quarter when we report, we could release those reserves. But we wanted to season for a bit. It's prudent to let it season for at least a quarter. As I said, we have substantial interest reserves now that go well beyond the first quarter. We'll take a hard look at that and we're expecting the reserves to be reversed in the second quarter.

Great. Thank you for answering my questions.

Thank you, Alex.

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

Thank you. I do not have any specific remarks. I just want to thank everyone again for their continued support and the continued support of MCB. We're an exciting franchise here with a great growth story that will continue. Thank you again, and enjoy the rest of your day and weekend.

Thanks, everyone.

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.