Metropolitan Bank - Earnings Call - Q3 2025

Executive Summary

• EPS of $0.67 declined sharply versus $1.76 in Q2 due to a $23.9M provision for credit losses tied to a single out-of-market CRE multifamily relationship; core earnings power remained solid with net interest income up 5% QoQ and 18.5% YoY.
• Net interest margin expanded for the eighth consecutive quarter to 3.88% (+5bps QoQ), supported by lower cost of funds and disciplined pricing; deposits grew 4.1% QoQ and loans grew 2.6% QoQ.
• Management initiated capital return actions: first common dividend ($0.15) and a board-approved $50M repurchase plan in Q3; liquidity coverage of uninsured deposits stood at 190% and capital ratios remained “well capitalized”.
• Guidance points to NIM expansion in Q4 (3.90%–3.95%) and >3.80% for 2025; focus on cost discipline amid ongoing digital transformation (Q4 one-time ~$3M; tail < $2M in Q1’26).
• Stock narrative catalyst: visible margin expansion and deposit diversification versus credit provisioning outlier; management “cautiously optimistic” on loan workout reversal timing (Q4 or Q1’26).

What Went Well and What Went Wrong

• What Went Well

  • “Eighth consecutive quarter of margin expansion” to NIM 3.88%, with total cost of deposits down to 2.98% and total cost of funds at 3.05%.
  • Strong balance sheet growth: loans +$168.9M QoQ to $6.8B; deposits +$281.5M QoQ to $7.1B; liquidity coverage of uninsured deposits at 190%.
  • Strategic execution and platform upgrade progressing; CEO: “MBiM technology investment coming to completion in Q1 2026… expected to contribute to strong EPS growth”.

• What Went Wrong

  • Provisioning spike: $23.9M total (including $18.7M specific reserve) drove EPS compression; NPL ratio increased to 1.20% from 0.60% QoQ.
  • Non-interest expense rose $2.7M QoQ to $45.8M, mainly technology (+$1.6M), compensation (+$1.4M), and licensing (+$0.9M) despite lower FDIC assessments (-$1.0M).
  • Non-interest income muted at $2.5M; YoY decline reflects absence of prior Banking-as-a-Service revenues.

Transcript

Operator (participant)

Welcome to Metropolitan Commercial Bank's third quarter 2025 earnings call. Hosting the call today from 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. 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. 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 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 CEO)

Thank you. Good morning, and thank you all for joining our third quarter earnings call. In aggregate, MCB's results this quarter reflect how our strategic position fuels our performance, highlighted by strong balance sheet growth funded by core deposits. Importantly, our continued growth strategy is underpinned by our unwavering commitment to risk management in all of its forms. In the third quarter, loan growth was approximately $170 million, or 2.6%. Year-to-date, we have grown the loan book by approximately $750 million, or more than 12%. Total loan originations year-to-date were $1.4 billion. As well, core deposits were up approximately $280 million, or 4.1% in the quarter. Year-to-date, we have grown deposits by over $1 billion, or 18%. That is without the acquisition of any teams. Our strategic funding initiatives include the maintenance and development of existing deposit verticals, as well as the identified verticals.

In addition, we are moving forward with new branch openings in strategic markets well known to MCB in Lakewood, New Jersey, Miami, and West Palm Beach, Florida. The third quarter marked our eighth consecutive quarter of margin expansion. The net interest margin increased five basis points to 3.88%, up from 3.83% in the prior quarter. Our financial highlights of the third quarter include board-approved $50 million share repurchase program and the payment of our first common stock dividend. These actions reflect our unwavering commitment to provide our shareholders with a meaningful return of their investment. We will utilize these capital management tools with a level of discipline that is appropriate and necessary for a growth company such as ours. We continue to move forward with our new franchise-wide technology stack. We anticipate full integration to be completed by the end of the first quarter.

We are confident that these new technologies will support and scale with MCB's diversified and growing commercial bank for years to come. I am equally excited about the launch of MCB's AI strategy. The hiring of MCB's first AI director last quarter was a great start. We will approach AI reasonably, and we will align ourselves with the regulatory expectations, and we'll identify and prioritize use cases that advance MCB's franchise value overall. Our asset quality remains very strong, with no broad-based negative trends identified in any loan segment, geography, or sector impacting our portfolio. We actively engage with our customers to gather insights on current and expected market stress. The feedback to date has not indicated any specific areas of concern.

Importantly, our thorough analysis of the Medicaid and Medicare features of the recently passed "one big beautiful bill" indicates that the proposed cutbacks will not affect our borrowers in any material way. Our third quarter provision expense was $23.9 million. $18.7 million of that provision is related to three loans extended to a single borrower group in 2021 and 2022. The specific reserve is a clear outlier, considering that over a 26-year operating history, we have experienced minimal actual credit losses. I will discuss the ongoing workout during Q&A. The balance of the provision of $5.2 million was driven by adverse movements in the forecast and macroeconomic factors underpinning our CECL model, and of course, the loan growth. As we look to the future, despite recent market volatility, favorable tailwinds for the banking industry are building, and we are well positioned to benefit from them.

Loan growth remains solid, and we are diligently managing and expanding our deposit funding opportunities. We remain committed to managing asset quality and optimizing profitability while further solidifying our presence in New York and complementary markets. Our focus for 2025 and beyond is to capture additional market share through traditional channels and strategically position ourselves to seize opportunities that enhance shareholder value. At this time, I would like to extend my gratitude to all of our employees and the Board of Directors for their dedication and hard work, which drive our continued success. Lastly, I want to thank our clients for their engagement, loyalty, and continued support. I will now turn over the call to our CFO, Daniel Dougherty.

Daniel Dougherty (EVP and CFO)

Thanks, Mark. Good morning, everyone. MCB's strong performance in 2025 continued in the third quarter. I'll begin with a few comments on the balance sheet. As Mark said, we grew the loan book by approximately $170 million, or 2.6% in the quarter. Year to date, we're up more than 12%. Importantly, our underwriting standards and loan pricing parameters have not all been altered to achieve our growth results and goals. Total originations and draws were approximately $583 million, or at a weighted average coupon, net of fees, of 7.27% in the quarter. The new volume origination mix was about 70% fixed and 30% float, which is in line with our current modeling assumptions.

While the coupon delta between new volume originations and backbook maturities has narrowed, it is noteworthy that we still have more than $1 billion of upcoming loan maturities with a WACC of about 4.65%, including $365 million that will roll off by the end of 2026. Our loan pipelines remain strong. We project between $100 million and $200 million of additional loan growth for the remainder of the year, and our first quarter 2026 pipeline is shaping up to deliver continued robust growth. Recent headlines have raised concern about non-depository lending. Our NDFI book totals to about $350 million, or about 5% of the loan portfolio. Our channel checks on this portfolio have not identified any credit issues or stress in the portfolio. All credits within that portfolio are currently rated pass. In the third quarter, we grew deposits by about $280 million, or approximately 4%.

Clearly, the depth and diversity of our deposit funding model is a strength of MCB. Quarter-over-quarter, the cost of interest-bearing deposits declined by 9 basis points. As you all know, late in the third quarter, the FOMC did reduce the target Fed funds rate by 25 basis points from 4.5% to 4.25%. As our balance sheet remains modestly liability-sensitive and about one-third of our indexed deposits reprice on the first business day of the month following a rate change, the benefits of the mid-September reduction in short-term rates will become much more apparent in the fourth quarter. We have $1 billion of hedged indexed deposits, which display positive carry down to a Fed funds effective rate of approximately 3.5%. In our forecast model, we're using a generic funding rate of the Fed funds target rate -50-75 basis points.

We repriced approximately 80% of our unhedged interest-bearing deposits by a full 25 basis points after the Fed rate move. As Mark DeFazio mentioned, our net interest margin in the quarter was 3.88%, up five basis points from the prior quarter. For the fourth quarter, we expect modest further expansion of the NIM due to a declining cost of funds supported by expected further monetary policy easing and continued repricing of the loan book. As well, supported by our continued deposit growth, the average balance of relatively expensive wholesale funding declined by about $275 million in the third quarter. Based on current trends, I expect that the fourth quarter NIM will be between 3.90% and 3.95% and that our annual NIM this year will be north of 3.80%. That forecast includes only one 25 basis point fourth quarter rate cut in December.

As a reminder, each 25 basis point cut in the Fed funds target rate will, all else being equal, drive about five basis points of NIM expansion annually. Now let's move on to some high-level comments on our income statement. I'd like to start by emphasizing the continued earning strength and momentum of the franchise. For the third quarter, net interest income was $77.3 million, up 5% on a linked quarter basis and up more than 18% versus the same quarter last year. Diluted EPS for the third quarter reported at $0.67. On a normalized basis, adjusting primarily for the Q3 specific provisioning, I estimate diluted EPS would have been approximately $1.95, and that estimate does not include the reversal of $675,000 or about $0.04 per share of interest income related to the new non-performing loans. Our linked quarter non-interest income was $2.5 million.

That's essentially unchanged from the prior period. Non-interest expense was approximately $45.8 million, up $2.7 million versus the prior quarter. The major movements in operating expenses quarter over quarter were as follows: an increase of about $1.4 million in comp and benefits, primarily related to growth in headcount, a $1.6 million increase in technology costs. The primary driver of this increase was a $900,000 increase related to the digital transformation project. In the aggregate for the third quarter, digital project costs were about $2.5 million. Another OpEx item was an $890,000 increase in licensing. That's due primarily to increases in a deposit vertical that leverages third-party software. Finally, we had a $1 million decline in the FDIC assessment. On a go-forward basis, the quarterly run rate for the FDIC assessment should begin at about $1.5 million per quarter. This expense will scale with risk-weighted asset growth through time.

Fourth quarter operating expenses are expected to be approximately $46 million, inclusive of $3 million in one-time digital project costs. Finally, the effective tax rate for the quarter was approximately 30%. As a housekeeping note, detailed guidance for next year will be provided after we report fourth quarter earnings in January. I'll now turn the call back to the operator for Q&A.

Operator (participant)

The floor is now open for questions. At this time, if you have a question or comment, 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. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Thank you. Our first question comes from Gregory Zingone with Piper Sandler. Please go ahead.

Gregory Zingone (Research Analyst)

Hey, good morning, guys. I'm stepping in for Mark this morning.

Daniel Dougherty (EVP and CFO)

Morning, Greg.

Gregory Zingone (Research Analyst)

Could we start, if you can give some additional details on that one CRE multifamily relationship? Metrics like debt service coverage, LTV, size, and geography would be appreciated.

Mark DeFazio (President and CEO)

The geographies are Champaign, Illinois, and a city in Ohio. These are basically vacant buildings that were going to be renovated and then stabilized. It's a complicated story around the situation of why they didn't finish, why the renovations didn't get done, and why the properties didn't get stabilized. We are at a point now where we are working through a restructuring with the client and cautiously optimistic that a material part of this specific reserve will be reversed in either the fourth quarter or the first quarter of next year.

Gregory Zingone (Research Analyst)

Awesome. Thanks. If there's any more detail you could provide on the $5.2 million provision, I know you said it was forecast and related to the CECL model, but is there any more detail you could share with us?

Daniel Dougherty (EVP and CFO)

That's really just a feature of the CECL process, Greg. We rely on a third-party vendor to provide the reasonable and supportable forecast from macroeconomic variables. Moody's is who we use. As it turns out, Mark Zandi's forecast was a little negative on the CRE price index, and the model, our model is highly levered to that index. It's not aligned generally with our specific concerns, but those macroeconomic variables, as forecasted by Moody's, drive the result. $5.2 million, probably $3.5 million of that is related to the macroeconomic variable forecast deterioration, and the other part is growth.

Gregory Zingone (Research Analyst)

Awesome. Thanks. One more question from me. What's the bank's policy on insider selling prior to earnings releases? Thanks.

Mark DeFazio (President and CEO)

Obviously, when you're in a blackout period, it goes without saying. You can't sell. The comment that you guys made last night in your flash note, you would have noticed that the insider trading from officers are under a 10b5-1 agreement. They've been in place for some time. Nobody does insider trading here, and nobody would violate a blackout period.

Daniel Dougherty (EVP and CFO)

Let me further that. You may have noticed that we shifted our reporting date by a week. The 10b5-1 plans are set up to trade on the 20th, and we shifted our reporting date for a couple of reasons. One was the Columbus Day holiday, but the bigger reason was that my financial reporting team is very much involved in the ongoing digital project, and our loan servicing system dress rehearsal was last weekend. They've been putting in a tremendous amount of work to support that process. As such, we thought it was reasonable to shift our reporting date by a week, and that's why the trade date was before the earnings release. Again, all insiders that are selling stock are subject to 10b5-1 plans or blackout periods as required by the SEC.

Gregory Zingone (Research Analyst)

I appreciate the detail. Thanks, guys.

Operator (participant)

Our next question comes from Feddie Strickland with Hovde Group. Your line is open. Please go ahead.

Feddie Strickland (Director, Equity Research)

Hey, good morning, Mark and Dan. It's great to hear about CRE recovery on that new NTA. I was just wondering if you could provide a little more color on how many other CRE loans or kind of what % of the book is out of market today.

Daniel Dougherty (EVP and CFO)

I think we're going to have to dig for that one, Feddie. Hold on a second, Feddie. It's in our investor deck. Hold on. I can tell you that we have no other, beyond what was posted in the third quarter, no other immediate concerns about other CRE, whether in market or out of market at this jump gap. We're just trying to dig out that number.

Feddie Strickland (Director, Equity Research)

Actually, I think I found it.

Mark DeFazio (President and CEO)

Page 14 of the investor deck, you'll see a whole slide there. 19% is in Manhattan. If you look at a couple of the other boroughs, a good percentage of the portfolio is outside of the New York, the greater New York City area. If you go to page 14 of the investor deck.

Feddie Strickland (Director, Equity Research)

Are those relationships kind of just, it's the same borrowers that you know and work with in New York, but they're just doing some projects in other parts of the country?

Mark DeFazio (President and CEO)

Generally, that is always the case. We have followed, you know, there's been emerging markets over the last couple of decades, and we have followed New York owners and operators of not only commercial real estate, but of commercial businesses and in healthcare, expand their franchises outside of the New York area. You will never find MCB to show up, you know, on Main and Main somewhere and say we can be competitive. We generally follow very good sponsors who have the ability to expand outside of their original footprint.

Feddie Strickland (Director, Equity Research)

Got it. Appreciate that. Just switching gears to deposits, it looks like you had pretty strong growth across pretty much all the verticals aside from retail. As we look forward there, can you talk about where you see the most opportunities? Is it still that kind of EB-5 title and escrow bucket, or is it elsewhere?

Mark DeFazio (President and CEO)

You know, I think it's spread fairly evenly. That's how we approach it. That's one of the value propositions of continuing to be a core-funded institution. We have so many different diversified deposit verticals. We don't have to rely on any one of them to drive 10%, 15%, or even 20% balance sheet growth. We're very fortunate to be able to spread that challenge out throughout all of these categories. We're working on a number of other opportunities that we'll talk more about in early 2026. We expect all of them to continue to contribute.

Feddie Strickland (Director, Equity Research)

Got it. Just on the digital transformation side, I appreciate the color and what your expectations are there. Given that you expect it to wrap up in the first quarter of 2026, should we expect a little bit of a ramp in the digital transformation expenses in the first quarter, just given I think you still have about $11 million or so left in the budget? I think you said there's about $3 million covered next quarter.

Daniel Dougherty (EVP and CFO)

Yeah, you got that right. $3 million in the fourth quarter, approximately $3 million. There will be a bit of a tail in the first quarter, but we're kind of managing through that number right now. We'll have a lot more detail about that when we release the fourth quarter. To put a kind of pin in it, it's going to be less than $2 million. It should be, I think, well less than $2 million.

Feddie Strickland (Director, Equity Research)

Got it.

Daniel Dougherty (EVP and CFO)

In the first quarter of 2026.

Feddie Strickland (Director, Equity Research)

I'm stepping back in the queue.

Daniel Dougherty (EVP and CFO)

Thanks.

Operator (participant)

Our next question comes from David Conrad with KBW. Please go ahead.

David Konrad (Managing Director and Equity Research Analyst)

Hey, good morning. Just a follow-up question on the credit here. Maybe I missed this, but what was the size of the credit? I know CRE and PAs went up around $41 million quarter over quarter. Is there a good proxy for what this is?

Mark DeFazio (President and CEO)

There were three loans in particular. One was around $8 million, one was around $17 million, and I believe the third one, the total was around $34 million.

$34 million.

David Konrad (Managing Director and Equity Research Analyst)

Okay. The allocated reserve is about 55% of that exposure, so pretty healthy provision.

Mark DeFazio (President and CEO)

Very good, very conservative.

David Konrad (Managing Director and Equity Research Analyst)

Okay. Maybe, I mean, you talked about this qualitatively, but just maybe a little more details on trends on criticizing classifieds or past dues, just outside of this relationship, kind of the asset quality.

Daniel Dougherty (EVP and CFO)

If you kind of strike this particular credit migration, this out-of-state multifamily, there are no other noticeable credit migration movements within our portfolio. Very, very much static quarter-over-quarter.

David Konrad (Managing Director and Equity Research Analyst)

So then it sounds like, this is my last question, it doesn't feel like this credit's going to deter any of your near-term growth strategies or anything.

Mark DeFazio (President and CEO)

No. This is an outlier that we'll work through, but we just felt it was prudent to take this specific reserve. Remember, it's not a charge-off. This is a specific reserve this quarter.

Daniel Dougherty (EVP and CFO)

Right. No impact on go-forward lending. As I mentioned, Q4 is looking good. We're going to grow, continue to grow right into year-end. We've done channel checks in the pipeline, and even first quarter next year is shaping up to look very strong as well.

David Konrad (Managing Director and Equity Research Analyst)

Great. Thank you.

Operator (participant)

We do have a follow-up from Feddie Strickland with Hovde Group. Your line is open. Please go ahead.

Feddie Strickland (Director, Equity Research)

Just one more follow-up. As we're thinking about, you know, I appreciate the year-end margin guide and just looking at your interest rate sensitivity disclosures and the likelihood of multiple cuts next year. I mean, is it feasible that we could see the margin really approach 4% here in 2026? If we get multiple cuts, do you think that that's something that's possible?

Daniel Dougherty (EVP and CFO)

Very much so, Feddie. Very much so. Yeah, if we continue to be liability-sensitive slightly, modestly. My forecasting, yeah, we pierce 4% when I look at that. I'm a bit less aggressive than the market in the outlook for cuts. When we model in one this quarter and three next year, yes, indeed, we can get very close or above 4%.

Mark DeFazio (President and CEO)

Feddie, that's the base case. We're working really hard here to replace GPG. As you know, we exited that business last year. We're working on other deposit opportunities that will drive lower cost of funds, which we're trying to control margin expansion here, not relying on the Fed exclusively. We're expecting to see some expansion by our own efforts, not just through the Fed.

Feddie Strickland (Director, Equity Research)

All right, great. Thanks for the additional color.

Operator (participant)

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

Mark DeFazio (President and CEO)

I'd just like to say thank you for taking the time out this morning and your continued support of Metropolitan Commercial Bank. Thank you. Have a nice day.

Operator (participant)

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.