Earnings Call Transcript - MCB Q4 2024

Operator, Operator

Welcome to Metropolitan Commercial Bank's Fourth Quarter and Full Year 2024 Earnings Call. Hosting the call today for Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer; and Daniel Dougherty, Executive Vice President and Chief Financial Officer. Today's call is being recorded. 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.

Mark DeFazio, President and Chief Executive Officer

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 BaaS 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 BaaS business, we increased total deposits by over $245 million last year and by $705 million since the end of 2022. We are confident that MCB 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 BaaS business. MCB 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 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 ROTCE 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 ROTCE supported by a robust core NIM, which should approach 3.75% or 3.8%. Of course, these forecasts are subject to market conditions that are beyond our control. 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 nonperforming 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 MCB'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 Dougherty.

Daniel Dougherty, Executive Vice President and Chief Financial Officer

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 4 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 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 5 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 NIM expansion. 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 noninterest-bearing deposits declined by about $445 million. The municipal, EB-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, asset quality remains strong with no identifiable negative trends within the portfolio. The provision in the fourth quarter was aligned with loan growth. Noninterest income for the fourth quarter was $4.4 million. The linked 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 is contemplated going forward. Noninterest 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, noninterest 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. 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 ROTCE 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. The full year NIM 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 noninterest income growth of 5% to 6% over the $10.5 million in non-GPG fee income recorded for 2024. Finally, we expect annual noninterest expenses of $175 million to $177 million. Allow me to walk you through the main drivers of the increased OpEx forecast. Our noninterest 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 and Motion initiative is $7 million. This is approximately $1.5 million 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 million 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, 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 secure tools and a data governance framework aligned with current regulatory expectations. Further, another noteworthy noninterest expense item is an effective 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 compensation and benefits line for 2025, the consensus for the year-over-year increase 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.

Operator, Operator

Our first question comes from Chris O'Connell with KBW.

Chris O'Connell, Analyst

So I just wanted to make sure I heard right. Do you say that the new originations coming on in the fourth quarter were coming on at 7.8% yields?

Daniel Dougherty, Executive Vice President and Chief Financial Officer

Correct. And we continue to manage the spread towards that level. All else being equal, expecting 7.50% to 7.75% is probably a reasonable place for forward-looking originations.

Chris O'Connell, Analyst

Okay. Great. And then since it's a little bit difficult to parcel out with the GPG exit isolating the impact just from the rates with the Fed cuts this quarter, how are you thinking about the quarterly benefit from a single 25 basis point cut on the margin on a go-forward basis now?

Daniel Dougherty, Executive Vice President and Chief Financial Officer

Each 25 basis point rate cut equates to about 5 basis points of margin improvement. It might be a little more, but let's use 5 as a placeholder.

Chris O'Connell, Analyst

Okay. Great. And then you guys talked about the verticals that you have on the deposit side and some new opportunities in additional verticals perhaps over the course of 2025 to help replace the recent GPG runoff over time. Can you expand upon the opportunities that you're seeing there, maybe where the largest ones are and if there are new initiatives going on? Any color around what those might be?

Mark DeFazio, President and Chief Executive Officer

Well, Chris, I think we've demonstrated already that we still have a lot of runway with the existing deposit verticals across the franchise. We do a good job in our investor deck for you to take a look and see what all of them are. We're always working on new initiatives and new opportunities that are really, for now, at this point, 2026 and 2027. We're very confident that we will fund our loan growth through core deposits, and we will replace GPG remaining deposits in 2025 with just our existing initiatives. So more to come on new things and no sense in profiling them here. But right now, we're focused on 2026 and 2027 as far as new initiatives.

Chris O'Connell, Analyst

Got it. And for the deposit costs, I was wondering if you did have the interest-bearing deposit spot number for December?

Daniel Dougherty, Executive Vice President and Chief Financial Officer

I don't have that, Chris, but I'll be happy to get that for you. For the quarter, the interest-bearing deposit rate is 3.15%, but I don't have the December spot rate.

Chris O'Connell, Analyst

All right. And then on the expense side, with the additional build over the course of 2025, should we be thinking of, if you take off the one-time expenses of $11 million, is that $41 million on a quarterly basis a good exit run rate for expenses into 2026?

Daniel Dougherty, Executive Vice President and Chief Financial Officer

I'm hoping that's a little bit high. But again, you start with, call it, 175 and you back off 10, you have 165. I think that we've got scope to go a little bit lower than that. The plan going forward is going to be very much focused on managing OpEx in totality at about a 5% growth run rate. Once we get all these one-timers behind us, that's the plan going forward.

Chris O'Connell, Analyst

Okay. That's helpful. And then last one for me: you gave a little bit of color around where the ROTCE is headed over time and into the back end of 2025. I was just wondering what, even if they're just loose, the credit assumptions perhaps are being made around there?

Mark DeFazio, President and Chief Executive Officer

Credit assumptions?

Daniel Dougherty, Executive Vice President and Chief Financial Officer

We don't— as Mark said, we don't detect any negative trends or credits that are deteriorating such that we expect them to go non-performing over the course of 2025. As such, we have no credit charge-off assumptions within the forecast.

Operator, Operator

Our next question comes from Mark Fitzgibbon with Piper Sandler.

Mark Fitzgibbon, Analyst

Dan, just to clarify, so the $175 million to $177 million of operating expenses, that includes the $11 million of charges you expect to take this year related to tech investments?

Daniel Dougherty, Executive Vice President and Chief Financial Officer

That's correct.

Mark Fitzgibbon, Analyst

Secondly, it looked like you had about $92 million of GPG deposits at the end of the year and obviously had a little bit of fee income in the fourth quarter. You're saying all of those deposits will be gone in the first quarter and they'll be essentially zero fee income?

Daniel Dougherty, Executive Vice President and Chief Financial Officer

That's correct. It would be wonderful if they stuck around because they are low-cost deposits, but we are modeling them as out the door within the next 60 days, basically.

Mark Fitzgibbon, Analyst

Okay, great. I wondered— I'm sorry, go ahead.

Mark DeFazio, President and Chief Executive Officer

We haven't seen or heard of any negative trends. We spend a lot of time with our operators. We've been spending a lot of time with them recently talking about their performance in 2024, which has been extraordinary. Other than just feeling optimistic, generally speaking, no one is factoring in higher returns as a result of the new administration. Now it's more blocking and tackling and grabbing more market share, and they're all excited about building and expanding their footprint. But nothing specifically tied to the new administration other than feeling good about it.

Operator, Operator

Our next question comes from Feddie Strickland with Hovde Group.

Feddie Strickland, Analyst

Just wanted to clarify on the margin guide. I think the way to think about that: you said the first quarter would be 5 basis points higher than the core normalized rates. So does that mean we expect the margin to go from around 3.60 in the first quarter towards 3.70-ish by the end of the year, inclusive of one rate cut midyear? Am I understanding that correctly?

Daniel Dougherty, Executive Vice President and Chief Financial Officer

All right. Two parts to the question. First quarter, 5 basis points above the normalized fourth quarter, so that gets you to the context of about 3.6%. For the year, we forecast 3.70% to 3.75%, which means we should end the year north of that, probably closer to 3.80%. Again, that's with one rate cut penciled in for July.

Feddie Strickland, Analyst

Got it. And I wanted to ask if you're seeing any different trends in occupancy, particularly in office. It seems like return to office has accelerated a little bit. Are you seeing that among your customers?

Mark DeFazio, President and Chief Executive Officer

A little bit, but it's a broader discussion about the type of office building. If it's a Class A office building, whether it's in Midtown, Midtown South, or downtown, the experience varies. The answer is yes, but it is different depending on the specific office building and its location. The indicators are more positive now than they have been in recent quarters or months.

Feddie Strickland, Analyst

Got it. And one last question: you've been able to get pretty good yield on new loans. Do you see anything different in terms of competitive pricing pressures or any new entrants that could push yields lower or cause faster compression?

Mark DeFazio, President and Chief Executive Officer

No. We don't really see any competitive pressures that would prevent us from continuing to grow our business. A lot of banks are restructuring their balance sheets, and we have a lot of momentum. We continue to service commercial clients who are looking to build wealth, so we don't see pressures that would cause us to tighten spreads at this time.

Daniel Dougherty, Executive Vice President and Chief Financial Officer

I can add an anecdote: on a weekly basis, I set out pricing guidance to the lenders. So far this year, no one has come to me asking to change it. So far, so good—no obvious pressures that would cause us to tighten spreads, at least for the time being.

Operator, Operator

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

Mark DeFazio, President and Chief Executive Officer

I just want to thank each and every one of you for your support and your continued confidence in management and the Board. After celebrating in 2024, 25 years of successful operating history, I'm feeling more optimistic today than ever. The opportunities are greater today than they've ever been. With new technologies coming into financial services, there's really an exciting time to be in banking. I'm glad that we're not in stagnation; we are looking to grow, and that's a result of properly managing our business over the last many years. We are positioned very well to continue to take advantage of the dislocation in our sector and also continue to create market share over the next couple of years. So thank you again, and I look forward to talking to each of you at the next quarterly meeting.

Operator, Operator

This concludes 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.