Welcome to the Metropolitan Commercial Bank Third 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. 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 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 DeFazio, President and Chief Executive Officer. You may begin.

Thank you, Ashley. Good morning, and thank you all for joining our third quarter MCB earnings call. MCB delivered another strong core financial performance in the third quarter. Our results are underpinned by our commercial banking franchise and our commitment to excellent customer service. During the third quarter, we posted strong top line growth with significant NIM expansion. The outlook for monetary policy indicates that we are at the beginning of an easing cycle. While the pace and depth of that cycle is unknown, any further easing will benefit from the bank's earnings momentum. During the quarter, we thoughtfully grew the balance sheet while maintaining our price discipline on both loans and deposits. As well, we upheld our credit standards and continue to operate with a sharp focus on liquidity and interest rate risk management. Looking forward, we expect continued growth in our loan book supported by our branch light deposit gathering initiatives. The bank reported earnings per share of $1.08. The reported figure includes $12.6 million or $0.78 per share in charges. Both charges included $2.6 million in pretax expenses associated primarily with the digital transformation investment and regulatory remediation. The balance of the charges was a result of the bank's posting a pretax $10 million reserve related to a pending settlement with a state attorney general. The settlement relates to a fintech relationship that was terminated in 2020. We gave a lot of thought as to whether we should litigate this matter. We determined that the cost of litigation and the continued distraction was not worth it, even with a likely positive outcome. Currently, related legal fees run hundreds of thousands of dollars per month, and we are not even in litigation. As I said in the first quarter of 2024, this is the year we put all unfortunate and costly matters behind us. For the third quarter and year-to-date, our adjusted ROTCE was 12% and 12.1%, respectively. We remain confident that through the course of the next 12 months to 18 months, we will once again achieve a mid-teens ROTCE and a NIM approaching 3.75%. Of course, these forecasted results are subject to market conditions that are beyond our control. Please review our investor deck for a detailed walk down of GAAP versus adjusted financial performance. The wind down of the GPG business is proceeding as scheduled. We remain committed to completing the exit by year end and confident in our ability to more than offset the deposit runoff with a diverse range of deposit verticals. Asset 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 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 diversification. 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. I will now turn the call over to our CFO, Dan Dougherty.

Thank you, Mark. And once again, good morning, everyone and thanks for joining the call. To say that the third quarter was active at MCB is an understatement. The net interest margin increased by 18 basis points to 3.62%. While our loan pricing discipline and funding strategy continued to contribute to our outstanding NIM performance, this quarter's result requires additional explanation. Loan growth in the third quarter was a rather modest $68 million. What is not immediately evident in that growth metric is the underlying level of origination and payoff activity. We have originated loans totaling more than $450 million, while also experiencing payoffs and paydowns of approximately $400 million. Focusing on those payoffs and paydowns, the associated deferred fees and prepayment penalties that we recognized totaled $4.5 million. After we normalize that experience, we estimate that our NIM for the third quarter was approximately 3.5%. For the remainder of the year, we expect that our NIM will be approximately 3.45% to 3.5% again. The explanation for this expectation is driven by three main variables. The recently enacted 50 basis point reduction in the Fed funds rate, which we passed through to interest-bearing deposits at a beta of approximately 75% to 80% will be largely offset by the replacement of approximately $700 million of GPG deposits with a current cost of about 1.25%. We expect to use both core deposits and wholesale funding on a temporary basis to replace those GPG outflows. We have assumed a replacement rate of 4.25% in our fourth quarter forecast. It is noteworthy that while interest-bearing deposits totaled approximately $4.5 billion at September 30, the balance of deposits that were priced with Fed move was approximately $3.7 billion. The deposits not repriced include deposits swapped to fixed and deposits that already carry a very low coupon. In addition, the repricing of approximately $1.5 billion of prime and SOFR index loans will temper the near-term NIM performance. In our updated forecast model, we have penciled in a single 25 basis point rate cut in November. Looking forward to 2025, we have modeled an additional 425 basis point rate cuts effectively 125 basis point cut per quarter. As Mark mentioned, in that scenario and reflective of numerous other assumptions, we believe that our NIM can grow to 3.75% by the end of 2025. Let's focus on the loan book. The weighted average coupon on our new volume originations in the third quarter was 7.97%. A significant balance of floating rate loan payoffs in the quarter resulted in an elevated payoff coupon of 8.16%. Looking forward, the weighted average coupon of fourth quarter maturities totaling about $600 million is 7.4%. And for the first half of 2025, weighted average coupon of maturities totaling about $750 million is approximately 6.85%. And just to be clear on that one, looking at our maturities that are renewed, we typically retain about 80% to 85% of those loans. Year-to-date, the loan book has grown about $275 million, and we expect the year to end with total loan growth of about $500 million. Deposits increased by approximately $100 million in the quarter. Interest-bearing deposits increased by approximately $200 million, while non-interest-bearing deposits, primarily related to GPG, declined by about $100 million. The HOA and retail deposit verticals experienced the bulk of the growth in the quarter. Year-to-date, deposits are up more than $500 million net of GPG outflows. Importantly, the outlook for growth across our deposit vertical stack, especially in the EB-5, HOA, municipal and 1031 verticals is robust. As Mark mentioned previously, asset quality remained strong with no identifiable negative trends within the portfolio. The provision in the third quarter was impacted somewhat by the significant amount of origination and payoff activity in the quarter. Effectively, the duration of the loan book extended modestly as short-dated loans were replaced with new originations. In the ACL model, the added duration results in a modest uptick in the allowance rate. Non-interest income for the quarter was basically unchanged quarter-over-quarter at $6.2 million. GPG related revenue was approximately $3.5 million. As we wind down the GPG business, this revenue will turn to zero. Our total net interest income expectation for 2024 is $21 million to $22 million. Non-interest expenses totaled $51.3 million in the third quarter. As Mark mentioned, this quarter was impacted by a $10 million reserve booked to resolve an investigation within a state attorney general. Expenses related to the digital transformation investment were $1.9 million, and an additional $700,000 was related to regulatory remediation work and costs associated with the GPG wind down. For the fourth quarter, I expect non-interest expenses will decline about 1% to 3% quarter-over-quarter as reduction in professional fees will be largely offset by elevated comp and benefits as the build-out of our risk management and compliance teams has happened more quickly and at a greater cost than expected. Therefore, the revised full year estimate is approximately $164 million to $166 million, net of the settlement reserve. The effective tax rate for the quarter was approximately 30%, going forward, we expect the effective tax rate to be in the range of 31% to 32%, excluding discrete items. A note on early 2025 guidance, we expect loan growth to continue in the range of 10% to 12%. We expect non-interest income growth of 6% to 8%, excluding GPG's contribution, of course. Operating expenses are expected to be flat. Now importantly, my previous guidance for a clean OpEx run rate in the low $150s still stands. The timing of the achievement of that goal is expected to be toward the end of '25 into 2026. 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 adjusted earnings. Year-to-date, the accumulated one-time charges related to the settlement reserve, the digital project, regulatory remediation and BaaS exit totaled approximately $23 million or about $16 million after tax. I will now turn the call back over to the operator. Thank you.

Thank you. The floor is now open for your questions. Our first question is coming from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning. First question I have was sort of around the regulatory reserve. I guess, I was under the impression that this was behind us at this point. And so the $10 million reserve and the additional regulatory remediation costs kind of surprised me. I'm curious what prompted that? Was there a discussion with the regulators that you felt like you needed to put some additional reserves up or was there some sort of action that was required from the state?

Well, it really wasn't the bank regulators in this instance. This is linked to the exact same matter where we had the settlement with our banking regulators that go back to March of 2020. So we have been continuing to update our disclosures in our Qs and Ks and indicated that there is the likelihood of something still to be out there. It just took this amount of time to finally hopefully settle with a state attorney general and it turns out that the state that we're referencing happens to be the exact same state where this particular client operated. So it's not a new matter, Mark. This has been going on since March of 2020. Very slow walk in getting it behind us, and now we are very confident it is.

So you don't expect any additional regulatory costs beyond this quarter or any additional costs related to it, is that correct?

I do not.

Okay. Great. Second question is, I wondered if you have a goal in mind for the CRE to risk-based capital ratio, I think it was 353% in the most recent quarter. It feels like a lot of banks are walking down to the 300% regulatory guidance. Are you of that mindset as well or are you comfortable staying up north of that?

Well, our internal target is a bit higher than that, and those numbers do get reviewed. Those targets, I should say, do get reviewed by our regulators. And to-date, they've been very comfortable with the historical performance of the portfolio and the portfolio profile. Between our retained earnings, we tend to likely stay in that range of that 350% even with the kind of growth projection. So we don't ever anticipate getting to our policy limit. I would imagine we would probably run in place with a slight increase over time, but likely more run in place.

May I interject there, Mark, as well. So it's not really a target. It's a policy limit, right? So we have a policy limit that's north of that 350%. We have no plan to approach the policy limit. But by the same token, we've had no discussions with our regulators showing undue concern about us running slightly north of the 300%.

Okay. Great. And then, Dan, just a couple of modeling questions. Just to clarify your guidance. You expect the margin to be down sort of, call it, 12 basis points to 15 basis points in the fourth quarter. The last couple of quarters, your guidance has been a little low on where the margin is likely to fall out. What gives you confidence that the margin will be down that much in the fourth quarter?

Yeah. So remember that this reported NIM included an outsized experience related to deferred fee recognition as well as prepayment penalties. That made the reported quarter somewhat of an outlier. After normalizing those items, we estimate NIM around 3.5% for the quarter. I think my forecast is spot on, and I think we're going to end the year right around 3.50%. There is a headwind with the outflow of the GPG deposits, which have accumulated into the fourth quarter. But given my assumption set, I think we will stay with the normalized 3.5%. So I have a little bit of wiggle room, but at the end of the day 3.45% to 3.50% reflects a stable NIM. The 3.62% was an outlier because of those outsized penalties and fees.

And then do we think that all of the GPG revenues will be gone in the first quarter, there'll just be a little bit of residual?

In the fourth quarter, there will be some remaining revenue from GPG-related activities, but as we wind down their business, that revenue will decline rapidly.

I'm sorry, I meant by, say, the first quarter of next year, do we think all the GPG revenues will be pretty much out?

Yes, absolutely.

Okay. And then last question, I just kind of missed your comment on deposit flows for the fourth quarter.

Our weekly deposit meetings are suggestive of a very productive result during the fourth quarter. The EB-5 team has a really outstanding pipeline, expecting some pickup there. We continue to make progress under 1031 title and escrow technology implementations, which should contribute more in 2025. Further to our deposit verticals, HOAs and municipal deposits, which have been outstanding contributors year-to-date, are expected to further contribute in the fourth quarter. So my expectation for replacing those GPG deposits is that it's about 50-50: we'll probably need to use $300 million to $400 million of wholesale funding, but I think I can put the rest back on in core deposits. And I think 4.25% is a very conservative estimation of what that replacement cost of money will be.

Great. Thank you.

You're welcome.

Thank you. We will take our next question from Chris O'Connell with KBW. Please go ahead.

Good morning.

Good morning, Chris.

Hey, Chris.

Hi. Did I hear right on the full year loan growth target of $500 million? That implies just shy of $250 million of net loan growth in the fourth quarter?

Correct. $200 million to $250 million.

Got it. And just maybe some color as to what type of loans those are and is it just a backup in the pipeline from the past couple of quarters? And then just what type of origination yields you guys are looking at?

Nothing different than historical. We tend to stick to the industries that we're very comfortable with. You'll probably see the majority of the closings will be in C&I and in health care with a good contribution of commercial real estate as well, but the majority will likely be in C&I and health care.

And any color on just the origination yields that you guys expect?

I don't expect a material deviation from what you saw in the third quarter. So certainly, between 7.5% and 8%.

Got it. Thanks. And then on just the one-time costs going forward, not on the digital initiative, but the regulatory. I get that the $10 million kind of puts an end any of the settlement charges, is there still going to be a smaller amount of regulatory remediation that we saw in the first half of the year for the next couple of quarters or do you expect that to fall off as well?

Yeah. I would think that you're going to see a continued drop. To be conservative, you might see some residual through the first half of next year, but hopefully you'll see a consistent drop in the first quarter and then a complete end to any outside expense clearly by June.

Okay. Great. And then on the expense guidance, the overall commentary going up from here, the early 2025 look, I think you said flat. Can you just confirm what that flat number is to?

Flat to full year 2024.

Is it $164 million to $166 million?

Yes. And that is inclusive of the digital transformation costs through completion. That's a big driver for the movement towards my clean run-rate expectation of the low $150 millions. I'm going to draw $6 million to $8 million off the top there from those transformation costs. By then, the professional fees and all the associated expenses related to regulatory remediation will have dropped out as well. So again, towards the end of '25, certainly into '26, we should get a finally clean look at reported OpEx that we think we can produce some really strong operating leverage off of.

Okay. Got it. So if you guys are growing the balance sheet double-digit, a normalized kind of expense growth rate for you guys is, call it, high-single digit to low double-digit. Is that how we can think about the trajectory off the low 150s level as we exit '25-ish?

I think that's fair. High-single digits probably makes sense.

Okay. Great. Very helpful. And then, you did mention in the opening comments working out a few of the NPLs or NPAs and some positive movement on those into early '25. Just any color around what certain of those credits are that you guys have progressed on?

I said throughout 2025, the Kansas City matter is expected to come to a resolution in the first quarter, that's what we're told by our attorneys as far as the pending foreclosure. Some of the other matters are in flight and clients are working hard to liquidate some assets and pay us off in full. So I'm feeling really good about 2025; you will see movement in the first half for sure.

Great. And you guys feel like you're well reserved and you don't anticipate any additional charges with those resolutions?

Not at the moment. Another point to keep in mind is since these two or three items showed up more than 1.5 years ago, we haven't had any other deterioration. So I think that's important to recognize as well.

Last one: did I catch the number right? You said you moved rates on $3.7 billion of the interest-bearing balances and referenced a 75% to 80% beta. Is that beta referenced to the overall deposit base or just to that $3.7 billion?

No, that's the overall deposit base. I'll add a nuance: about $2 billion of our indexed deposits don't reprice contemporaneously with the rate cut; they reprice the first business day of the following month. So there's a slight differential there to keep in mind.

And what's the total amount of index deposits?

It's around $2 billion.

Okay. Great. Thanks, Mark. Thanks, Dan. Appreciate that.

You're welcome.

Thank you. We will take our final question from Feddie Strickland with Hovde Group. Please go ahead.

Hey, good morning. I just wanted to ask: I think last quarter you mentioned you made arrangements with the GPG client, there were $2 million or so in regulatory remediation costs. Was that rolled into the reserve this quarter or is that still something we could expect to see come down the pipeline?

No, it wasn't rolled into the reserve at all. It was a recapture of some expenses we had, and we got reimbursed. The agreement we have with this particular client who's leaving in early November is they're picking up 75% of all additional charges between now and their exit as well. So that's another reason why we'll see a significant decrease in some of these outside GPG exit-related costs as we materially pass these costs on to this particular client.

Got it. That's helpful. And then just wanted to shift gears for a second to the health care portfolio. I know there's some Florida exposure there. Did you have any customers who were adversely affected by the recent hurricanes, or is it kind of the normal course of business and they know how to handle those events?

We surveyed all of our clients and collateral positions throughout the state of Florida, especially on the West Coast, immediately after the storms. We were very fortunate—our clients experienced very minor damage that is not inconsistent with the normal weather-related issues the state sees annually. So we are pleased: they mostly dodged the bullet and there is no material impact to our portfolio from those hurricanes.

That's great to hear. Final question for me: was there any change to the overall digital transformation budget, and is there any particular service that's going to come online that could drive higher expenses in any particular quarter of 2025 as we model the remainder of that budget?

At the moment, I don't have any insight as to increasing the budget for the integration of any of these software service providers. Anything that we roll out, and there's been some press release on some of the software that we've rolled out already, will not and has not increased our operating cost.

Put another way, our operating cost post completion of the digital transformation will be quite aligned with our previous run rate for IT expense.

Understood. That's helpful. Thanks for taking my question.

You're welcome.

Thank you. And this concludes the allotted time for questions. I would like to turn the call over to Mark DeFazio for any additional or closing remarks.

I would just like to thank everybody for taking the time out this morning to listen in. We're very excited about 2025 and beyond. Dan and I make ourselves available to all investors and analysts; feel free to reach out to us if you have any specific questions or follow-ups. Thank you very much.

Thank you. This concludes today's conference call and webcast. A webcast archive of this call can be found at www.mcbankny.com. Please disconnect your lines at this time, and have a wonderful day.