Welcome to Metropolitan Commercial Bank’s first quarter 2023 earnings call. Hosting the call today from Metropolitan Commercial Bank are Mark Defazio, President and Chief Executive Officer, and Greg Sigrist, 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 remarks following the prepared remarks. If you would like to ask a question at that time, please press star, one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star, two. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require Operator assistance, please press star, zero. 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. 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 welcome to MCB’s first quarter earnings call, and thank you for accommodating a call a few days earlier than usual. Many have heard me say for some time now that the next crisis in banking would be about liquidity. MCB was well prepared when this recently became obvious across the industry. For nearly 24 years now, MCB has maintained a steady hand at managing liquidity and interest rate risk. That is evident when looking at our diversified loan and deposit verticals, the expansion of our net interest margin as interest rates rose dramatically off of record lows, and the strength of our liquidity position currently. Our client base and financial positions are strong and growing. Core deposits grew in the first quarter net of expected outflows. Greg will take you through our key metrics around our liquidity position shortly. MCB’s current financial position did not happen by accident. We have worked very hard since our founding to build a strong and diversified funding base which is the underpinning of our disciplined approach to margin management. We were well positioned as rates rose dramatically in 2022 and we continue to be well positioned for the rate environment to correct downward. The commercial bank’s performance and credit quality remain strong. While net loan growth in the quarter was modest, we remain focused on pricing in this volatile rate environment. If we cannot lend at spreads that are within our disciplined approach to margin management, we will remain patient. We stand ready, however, to support our clients as there continues to be quality opportunities across our lending verticals. I am very confident that net loan growth will be strong in 2023 and beyond. We have added a slide in our first quarter 2023 IR deck that provides additional…

Thank you Mark, and good morning everyone. MCB reported strong first quarter results, including a return on average tangible common equity of 17.4%. Importantly, core deposits were up by $69 million in the quarter on the strength of new account volumes across our retail deposit franchise, and that includes deposits with loan customers, the majority of which occurred since the middle of March. The increase in core deposits is net of a modest decline in global payment deposits from non-bank financial service companies given normal flows at the end of the quarter and expected outflows from bankruptcy trustees. Crypto-related deposits also declined as expected to $278 million at March 31. Included in this balance is $218 million related to the remaining active exchanges, which are subject to our announced wind down, with the remaining balance largely representing commercial operating accounts for a variety of companies. At March 31, insured deposits were 71% of total deposits and MCB had $3.1 billion combined in cash on deposit with the Federal Reserve Bank of New York and in readily available secured funding capacity, which represents 208% of uninsured deposits. Our available collateralized off balance sheet liquidity includes facilities with the FHLB, FRB, and securities repo facilities. To provide some context, MCB has had actionable repurchase contracts in place for quite some time now and has active collateral monitoring and posting programs supporting the FHLB and FRB facilities. All facilities are subject to periodic testing. As Mark has said, we have been and remain well prepared. We did utilize Fed fund purchases and, to a much lesser degree, FHLB advances during the quarter with balances a bit elevated at quarter end, reflecting the timing of normal deposit flows right at quarter end. As we have said, we will use these wholesale funding sources in…

Thank you. The floor is now open for questions. [Operator instructions] Thank you. Our first question is coming from Chris O’Connell with KBW. Chris O’Connell: Morning. I was hoping to start off on the credit side and see if you guys could give some color around the uptick in CRE NPLs.

Yes, sure. Not too much color I can give there. It’s one particular loan that we are very comfortable with. We’re adequately collateralized and we have a very strong recourse behind the loan. I can’t get into details - we started litigation around this one particular loan, but we have very, very little risk of loss here on this one. Chris O’Connell: Okay, got it. Can you guys give what the specific reserve is assigned against that?

Again, given that we’re well collateralized with a personal guarantee on it, we went through the ringer, Chris, but we did not put up a reserve on it, just given the collateralization levels. Chris O’Connell: Okay, got it. Can you guys give any color around maybe just the industry or the market in general that the loan is in, or the latest LTV?

The LTV is in the low 70s, and it’s an out-of-market deal. Actually, it’s public record - we started a lawsuit on it. It’s a foreclosure in Kansas City, Kansas--in Mission, Kansas. It’s public record, so--yes.

But beyond that, if the question is, is it indicative of other credits in the portfolio, no. This is a bespoke loan and issue we’re working through. Chris O’Connell: All right, got it. Just more broadly on the credit side, given the current market environment, it looks like originations were prudently downward. I guess which areas are you pulling back from or more cautious on at this point in the cycle, and what are the areas or lending segments that you’re most comfortable with at this point?

Well Chris, we did have over $200 million of new originations in the quarter, so that’s fairly robust. What we tried to point out is our portfolio is pristine and of high quality - that’s why the refinancing of the portfolio is very viable. As many banks are concerned about rollover risk, as you can see a good part of the loans came due this quarter, that we chose to either not refinance because of rate, or they were just meant to get paid off for whatever structural reason. We’re not any more careful than we have been. We’ve been very cautious about lending - it’s a core competency of ours. We’re not any more concerned today. We have elevated concerns about certain industries of course, but as you saw in the office building slide and my commentary, most of the office building loans that we made were in 2022 in Manhattan, so it’s not that we’re not concerned about the office building market but there are really good opportunities out there to support clients today. We are going to continue to stay a well diversified company when it comes to our asset classes that we lend to.

Yes, and I think the other dynamic too is just loan pricing, Chris. We started to have this conversation last quarter - we’ve been very much sticking to our discipline around margin management, so the other part of this conversation is making sure we’re getting compensated for the risk we’re taking. I think that’s the other side of this equation, is making sure we’re getting paid on the loan spread, so that’s been part of the dynamic too. We’ve stuck to our guns. I think in Mark’s comments, he also made the point - I mean, we still see quality across all of our lending verticals. It’s really just a matter of being patient and being there to support our clients on the quality projects they’re working on. Chris O’Connell: Got it, appreciate the color there. As you’re looking at the rest of the year and your origination pipeline, I know typically the bogey has been double-digit loan growth. Is that still the case for 2023, or is this more of a tepid year? Just any color around how you’re thinking about loan growth for the remainder of the year.

You know, looking at the pipeline and looking at the opportunities in markets that are correcting, like the one we’re working through today, opportunities do present themselves, so I would not be surprised if we end the year in mid-teens net loan growth, as I wouldn’t be surprised if we ended up with a 10% loan growth. It’s all about quality. It’s going to be about quality and pricing, so that’s been our core competency for a career, never mind just the last 23 years. Chris O’Connell: Great. I appreciate the comments around the update on the crypto exit expected for 2Q. Any thoughts around exactly how that plays out with the flows on the balance sheet? I mean, it’s $200 million-plus coming out of the deposit side. I guess you guys have AFS and cash kind of available there, as well as the ability to increase borrowings or bring on new deposits. Any thoughts around exactly how that plays out on the balance sheet and where we’re at from a starting point in 3Q?

Yes, I would--for context, I’d just let you know that the majority of what’s left in the crypto exchanges, the $218 million is related to FBO balances, so that will be subject to a bin transfer, so from a timing perspective, other than just flows during the quarter which can be up or down, I think that will be a one-time event. During the quarter, we would expect other funding initiatives to really start to kick in, and that includes EB5 and some others that we can probably start talking about here in the near term. To the extent those new initiatives and just normal--the existing deposit vertical flows put us in a position where we need to borrow, we would borrow short term; but again, when you look out over a slightly longer horizon, and I think we’re talking a quarter if not even just a month or two into the third quarter, I would expect core deposits to more than fill that gap.

Yes, and Chris, if you look historically, we had much higher crypto balances on balance sheet even in the last 12 months, and we replaced them efficiently with core funding, so our core funding is up today notwithstanding the reduction in crypto just over the last quarter. We have no concerns about replacing the remaining balances of crypto in core funding.

Yes. Chris O’Connell: Got it. On that point, could you just talk a little bit more about the EB5 team you’ve brought on and just that overall business line, and maybe what you see the long term deposit opportunity is there?

Well, I’ll work backwards. I want to be a bit cautious on what our projections could be. We had stood up our own EB5 group here - it was a modest start, and with the disruption at Signature Bank, we were fortunate to recruit the team from Signature Bank, and anybody w ho had paid attention to Signature knows that that team was considered the best in class in the country in developing the EB5 business. We’re fortunate they’re here, they’re working with us, and why it’s a natural for us and why we wanted to do this even on our own, they are now clearly going to accelerate our market share is because of our exposure to commercial real estate. This is just another part of the offering. To date, they’ve been here for just a couple of weeks, and we’ve already introduced them to two very large developers and one deal has already been agreed to, which would be substantial in deposits regarding EB5 coming through MCB, so it’s a natural for us to again deepen relationships. We have relationships with some of the largest developers in the country, and clearly because of the size of our bank, we could never provide construction financing for those deals, but today we can play a meaningful role in the construction or the capital stack as it relates to very large construction loans happening around the country. We have a seat at the table with the best developers in New York and across the country, so this is a natural expansion for us and it came at a very good time, and the team is a pleasure to work with. Chris O’Connell: Great, and for those deposits related to that segment, what do you expect those to come on at in terms of pricing?

Pricing is low, let’s put it that way. We’ll give you some more color. Pricing is very low on those deposits. Chris O’Connell: Great. Then just in general, how are you guys thinking about overall deposit pricing going forward, and I guess post the crypto exit, do you guys have a sense as to maybe where a NIM range would be following that exit?

Well you know, working backwards, we’re more focused on NIM and, frankly, more on net interest income, Chris, as you know, and just dropping the economics to the bottom line. I think as we kind of work through the transition with the rest of crypto, I think if we have to go out and borrow funds short term, which I think is 50/50 at best, I think, but if we did, I would see some modest NIM contraction, which means just a slight uptick in cost of funds as we went into the wholesale market short term. When you look out over a couple--you know, to the end of the year and you look a slightly longer horizon, just quarter on quarter, I think we get back to the same NIM level we’re at, frankly. The question marks are really going to be around short term rates - you know, are we looking at one more increase or not. Obviously that would be a headwind to us, given we are modestly liability sensitive; but again, I think that’d be a modest impact. I’m not really seeing any significant pressure, rate pressure on the rest of the deposit base. We continue to model out at a 70% deposit beta on interest-bearing deposits, which I think through the cycle so far, that’s been a fairly conservative assumption. I think it still is particularly as we get to the tail end here, so hopefully that gives you some context on how we’re thinking about it. Chris O’Connell: Yes, that’s helpful. Then just on the expense run rate going forward, I know the professional or legal fees were a bit elevated here and you had the one-time CECL unfunded commitment within other expenses. I guess just backing that out and looking ahead, how are you guys thinking about the operating expense range on a go-forward basis?

Yes, two things. The CECL impact for the off-balance sheet commitments, that actually went to retained earnings, not to the other expense, Chris. I know that other expenses were slightly elevated in the quarter, and that’s frankly just a combination of a lot of little stuff. I think there’s just some one-off stuff in the quarter and that settles back down. But you know, we’re always more focused on return on tangible common equity, which again in the quarter at 17.4% was very, very strong. We’re going to continue to invest in the business - that’s the wild card for us. This is just about a run rate and maintaining what we’ve got. I would tell you that the efficiency ratio would stay in a range in the mid 40s. For us, though, we’re standing up an EB5 team, we’ve got some other initiatives we’re standing up that are going to impact that run rate, but as we always say, they’re going to have some immediate returns to them. To me, the operating expenses, we’re going to try to keep them in that efficiency ratio in that mid-40 range as we kind of work through these things, because we feel like we can continue to self fund the investments as we work through standing up any new programs. Chris O’Connell: Got it, and last one from me, given your capital position and kind of overall balance sheet liquidity, as well as where the stock’s trading on valuation, have you guys considered a share repurchase plan, and any color or thoughts around whether that is being considered?

I’ll start and Mark can fill in the gaps. We’ve absolutely considered it and had that discussion with the board over the balance of the quarter. If we were a much more mature bank that couldn’t grow loans the way we could and couldn’t grow organically the way we could, I think we would give a lot more consideration to it. The reality is we are at an inflection point, I think across the industry. We really feel confident in our business model and in our ability to continue to organically grow our businesses, so it just seems a bit counterintuitive. We appreciate and understand where the share price is. We think that’s going to right-size itself as we continue to execute on our business plan, but we still feel that the highest and best use of our capital is supporting the growth of our businesses, which will drive more shareholder value as we go through time. Chris O’Connell: Great, thanks for taking my questions.

You’re welcome. Thank you for asking.

We’ll take our next question from Alex Lau with JP Morgan.

Hi, good morning. Could you talk about what you saw in terms of deposit flows in the month of March following the closing of SVB and Signature? Were you opening accounts given that you’re in the same market as Signature, or were you seeing clients move funds out to diversify for deposit insurance? Thanks.

We actually--unfortunately, we were opening up accounts starting as early as the Wednesday before the weekend when the announcement happened, so we had opened up hundreds and hundreds of accounts primarily coming from Signature Bank, a little bit coming from First Republic as well. Remember, in many ways, Signature and MCB share a lot of the same clients as it relates to commercial real estate and commercial lending, so we already had a relationship, I would say, with about 80% of the clients that moved accounts over. Yes, we didn’t see any from the commercial bank. I’m sure we had some, but it doesn’t resonate to me that we had any major outflows from the commercial bank at all.

Yes, to Mark’s point, we really started opening up the accounts, I think the Wednesday was the March 8, and as we kind of rolled through to Friday and then into Monday the 13th, we saw net deposit growth really every day as we went through that following week. It was really--frankly for us, it was a business as usual footing the entire time. We clearly were sensitive to the potential impacts to liquidity that you can’t predict, but we probably at the margin lost a couple of deposits here and there, two or three, pulled some corporate uninsured deposits out, but that was more than offset by the inflows from what we saw, the new account openings we saw. Again, I kind of embedded it in my comments, but when you think about where we were beginning to middle of March versus where we ended March, and you look at our retail and the deposits with--you know, retail deposits with our loan customers, a lot of that growth really came from March 8 to the end of the month.

One other thing, Alex, you should know that during that period of time, it was an extraordinary effort because the type of accounts that we were opening were real operating accounts that needed a whole suite of financial services, not just a reserve account or a single--you know, one operating account. We’ve now expanded and deepened the relationships substantially with a lot of clients within their franchise from a commercial perspective.

Yes, and when you go through a dislocation, a liquidity issue across the industry that we have, you really figure out whether or not you’ve got a quality deposit franchise, especially as a commercial bank, and we feel really, really comfortable with the relationships we’ve got. I think as you kind of see what happened to our deposit base during the quarter and then particularly in March, to me it just signifies the strength of our deposit franchise, which is fantastic.

Thanks, that’s great color. As a follow-up on the EB5 team news, are you active in adding any more talent that may be available from market disruption?

I mean, we’re a growth company so we’re always looking for talent. We historically have--we haven’t really benefited from something like this before, but we’re always out there, people are reaching out to us, and of course we would keep an open mind to it, but you know, it’s not a focus of ours. We don’t believe in poaching, but if there’s a disruption or if there’s an opportunity, we’d surely consider it.

Got it. Then on the fintech-related deposits being down in the quarter after growing in 3Q and 4Q, you mentioned some outflows at the end of the quarter. How confident are you in growing this segment in 2023 on a year-over-year basis?

Yes, I’m very confident, and I think as Greg mentioned, a good part of that is normal outflows because, remember, those companies are in the payment space, so there’s that fund flow that we’re very used to and we understand the behaviors of those deposits. We expect those deposits to come back and I think you’ll see--I know you’ll see net growth out of the GPG deposits year-over-year.

Thanks, and do you think you can grow non-interest bearing deposits excluding crypto in the year, or is there still some balances that are at risk of moving to higher cost alternatives?

Yes to all of the above. We will continue to address some clients that want to go into treasuries, and there’s nothing we can do with that; but I think that conversation is abating quite a bit. We’re not having as much discussions about interest rates with clients of late, so that’s a good thing. Non-interest bearing accounts, we will definitely continue to grow because we’re a commercial bank, and as we grow the loan portfolio, you will be bringing on non-interest bearing operating accounts, so there’s no doubt. Again, as you know, we’re obsessed with net interest margin, so it’s not necessarily the cost of funds but it’s about NIM to drive top line net interest income. I think you’re going to see, starting in the second quarter and throughout the rest of the year, and of course we’re looking well beyond ’23 right now - ’23 is sort of baked into the cake. We’re really working on ’24 and ’25 right now in many different ways, so the answer is yes to all of the above.

Thank you. On the interest-bearing deposit cost for 1Q being above 3% now, what are the spot rates that you’re seeing for interest-bearing deposits?

Well, we typically don’t publish rate sheets, Alex. I’d rather not get into it. I think a lot of what we’ve done, though, is we are willing to pay up for incremental new deposits coming in from either existing customers or new relationships, which again we’re trying to stay well inside of effective Fed funds when we price anything of that nature. I think that’s also been influenced--actually, strike that last part. I’ll put a period after what I’d said previously.

Yes, so I’ll just expand a little bit. Similar to the loan pricing, we don’t have a history of putting out, like Greg suggested, like a rate sheet. Same thing on the liability side. We’re relationship oriented, we’re talking to clients all the time, and I guess you can say we negotiate rates on a client-by-client basis or on a transaction-by-transaction basis, actually on an account-by-account basis. It’s hard to say. There is no absolute rate that is set for money market, if that’s what you’re looking for.

Thanks. Then on expenses, the last quarter you mentioned there were about $2 million in legal fees, expected to moderate in 1Q levels; but you also mentioned that it’s still a little bit elevated. What is a good run rate for the professional fees line for 2Q? Thanks.

Yes, my crystal ball is a little broken just because as we stand up some of these new programs, it is going to add to those lines. I think with the legacy, both the Voyager bankruptcy as well as the work on the settlement, that’s really winding down. In the quarter, that was probably elevated by about a million dollars, Alex, so I think that as we kind of find that new normal in the second quarter, which is going to again include a bit of some new spin which I think going to be modest, if I was going to reduce or assume there was a million of just elevation in the quarter, that’s probably not far off.

But we do have some legal expense associated with setting up EB5 and so on.

Exactly.

Again, look well beyond--look at results and look at operating leverage and where we end at the end of the quarter as far as earnings and return on tangible common equity, is really at the end of the day what we strive for.

Thank you, and then on GPG fee income, saw some strong growth in the quarter to $4.9 million. Can you talk about the drivers of growth in the fintech segment quarter-over-quarter, and also can you grow this segment every quarter for the rest of the year or is this more of a volatile line item driven by volumes?

Well, just to address first the growth in the quarter, that’s really--it’s a broad-based increase across the client base, so it’s not one or two of our partners that are--you know, clients that are really driving that, it’s really much more broad-based than that. A lot of the fintechs that we’re working with and non-bank financial service companies are really hitting their stride, so that’s a bit more broad-based. Then the forward look, I don’t know, Mark - do you have any thoughts on that?

Yes, I think that’s exactly right. These companies are spending a significant amount of money on client acquisition strategies, so the pipeline is full. These companies are becoming more mature in providing retail financial services, so they’re grabbing more market share. The market share is fairly sticky, their client base is sticky, so you’re starting to see some scale there and some operating efficiencies among those companies, which has to run through our franchise so we see the benefits of it. But at the moment, I think the most important thing Greg said to notice is that it’s not one client, it’s across that whole franchise. Many clients are building for scale, and we’re benefiting from it as well, but we like a slow and modest pace of growth there. We don’t mind it taking its time because that’s true retail banking, and it’s a marathon as opposed to hockey stick approach.

Thank you, and last one from me, in that GPG fee income line, there is about $1.3 million from the crypto related business also up in the quarter. When do you expect this amount to be reduced? I know you said you’re finishing up deposit runoff by the end of 2Q, but how much do you expect of that fee income to be in 2Q? Thanks.

I would expect--it’s hard to predict. It depends on the timing of when these relationships get transferred. I would imagine that would abate entirely between the second and third quarter.

Yes, I agree. It’s not going to be a gradual wind down on the revenue side, though, Alex. I think the revenue, the transaction volumes and the fees are going to be associated with the bin that holds the accounts, so it’s going to be an on-off switch, so whatever that revenue level is should be there up until the point that we actually transfer the bin.

Okay, great. Thanks for taking my questions.

You got it, Alex. Thank you.

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

Thank you. I would like to have--make a few additional comments, if you would allow. In the current turbulent banking environment, it’s not surprising to see uninformed speculation and people looking to profit from the turmoil. This has caused some significant volatility in our stock in recent weeks. In that context, I want to reiterate a few key facts that are important about MCB. Crypto - in the fall of 2017, MCB materially started its exit from banking crypto-related businesses, and this process continued through 2019. In 2019, we maintained a relationship with four crypto-related exchange companies and stated clearly many times that we would not be increasing our relationship with others. Over the course of our relationship with Voyager, MCB did not allow the use of consumer funds for corporate purposes. Through the bankruptcy of Voyager, MCB demonstrated that we clearly knew how to manage the risk associated with banking a crypto exchange. MCB safe kept consumer funds, maintained the integrity of pass-through FDIC insurance related to the FBO account representing consumer funds as well. Once the bankruptcy stay was lifted, MCB managed the efficient release of all consumer funds held at MCB. Voyager related balances today are at zero and all accounts are closed. MCB recouped $900,000 toward reimbursement of legal fees out of $1.2 million that we spent. Today, MCB has three of these crypto relationships left with an aggregate deposit balance of $218 million. We are winding these down and expect the related balances to be at or close to zero at the end of the second quarter. Because we clearly understood this business, we were able to execute an orderly exit without putting MCB’s balance sheet at risk, period. Liquidity and interest rate risk - MCB has demonstrated over the past two decades just how important it is to manage interest rate risk and liquidity risk. Developing diversified low cost deposit verticals enabled MCB to maintain its competitive edge in loan pricing while insulating adequate NIM. Through two decades of organic balance sheet growth, MCB has maintained its net interest margin with positive operating leverage, enabling year-over-year net income growth and therefore driving franchise value. Alongside of having a steadfast discipline on liquidity and interest rate risk is having a robust, readily available contingency funding plan. MCB has developed and expanded our contingency funding plan as our balance sheet expanded. We have proven that the preparedness and discipline is table stakes for sustainability and staying relevant. In the current environment, transparency is more important than ever. What I can offer to my shareholders and all stakeholders is that we will make ourselves available for questions. We are confident in the soundness and resilience of our business model and the rigor of our governance and risk management, and we are happy to talk to all of our shareholders and stakeholders at any time. Thank you for participating in this call. I will now turn the call back over to the Operator.

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.