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

Speaker 0

Welcome to Metropolitan Commercial Bank's Third Quarter twenty twenty five Earnings Call. Hosting the call today from Metropolitan Commercial Bank are Mark DiFazio, 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 DiFazio, President and Chief Executive Officer. You may begin.

Speaker 1

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 $170,000,000 or 2.6%.

Year to date, we have grown the loan book by approximately $750,000,000 or more than 12%. Total loan originations year to date were $1,400,000,000 As well core deposits were up approximately $280,000,000 or 4.1% in the quarter. Year to date, we have grown deposits by over 1,000,000,000 or 18 and that's without the acquisition of any teams. Our strategic funding initiatives include the maintenance and development of existing deposit verticals as well as the Identify 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 $50,000,000 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 us.

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 will 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 $23,900,000 $18,700,000 of that provision is related to three out of six extended to a single borrower group in 2021 and 2022. The specific reserve is a clear outlier considering that over operating history we have experienced minimum actual credit losses. I will discuss the ongoing workout during Q and A. The balance of the provision of 5,200,000.0 was driven by adverse movements in the forecasted macroeconomic factors underpinning our CECL model and of course the loan growth. As we look to the future deposit despite recent market volatility, favorable tailwinds for banking industry are building and we are well positioned to benefit from them.

Loan growth remains solid and we are diligently managing the 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, Dan Dougherty.

Speaker 2

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 $170,000,000 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 $583,000,000 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 back book maturities has narrowed, it is noteworthy that we still have more than $1,000,000,000 of upcoming loan maturities with a WACC of about 4.65%, including $365,000,000 that will run off roll off by the 2026.

Our loan pipelines remain strong. We project between 100,000,000 and $200,000,000 of additional loan growth for the remainder of the year, and our 01/2026 pipeline is shaping up to deliver continued robust growth. Recent headlines have raised concerned about non deposit contribution lending. Our NDFI book totals to about $350,000,000 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 $280,000,000 or approximately 4%. Clearly, the depth and diversity of our deposit funding model is a strength of NFCB. Quarter over quarter, the cost of interest bearing deposits declined by nine 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 onethree of our index deposits repriced 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 $1,000,000,000 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, minus 50 to 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 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 decline in 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 $275,000,000 in the third quarter. Based on current trends, I expect that the fourth quarter NIM will be between 3.93.95% and that our annual NIM this year will be north of 3.8. That forecast includes only one twenty five 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 earnings strength and momentum of the franchise. For the third quarter, net interest income was $77,300,000 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 closer to would have been approximately 1.95 and that estimate does not include the reversal of $675,000 or about $04 per share of interest income related to the new nonperforming loans. Our linked quarter noninterest income was $2,500,000 That's essentially unchanged from the prior period.

Noninterest expense was approximately $45,800,000 up $2,700,000 versus the prior quarter. The major movements in operating expenses quarter over quarter were as follows: an increase of about $1,400,000 in comp and benefits, primarily related to growth in headcount a 1,600,000 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 $2,500,000 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.

And then finally, we had a $1,000,000 decline in the FDIC assessment. On a go forward basis, the quarterly run rate for the FDIC assessment should begin at about $1,500,000 per quarter. And of course, this expense will scale with risk weighted asset growth through time. Fourth quarter operating expenses are expected to be approximately $46,000,000 inclusive of $3,000,000 in onetime digital project costs. Finally, the effective tax rate for the quarter was approximately 30%.

And as a housekeeping 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 and A.

Speaker 0

The floor is now opened for questions. Thank you. Our first question comes from Gregory Zengone with Piper Sandler. Please go ahead.

Speaker 3

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

Speaker 2

Good morning, Greg.

Speaker 3

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

Speaker 1

Geographies are Champaign, Illinois and a city in Ohio. These are basically vacant buildings that were going 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. But we're 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.

Speaker 3

Awesome. And then if there's any more detail you could provide on the $5,200,000 provision, I know you said it was forecasting related to the CECL model, but is there any more detail you could share with us?

Speaker 2

That's really just a feature of the CECL process, Craig. We rely on a third party vendor to provide the reasonable and supportable forecast for macroeconomic variables. Moody's is what we use. And as it turns out, Mark Zandi's forecast was a little negative on the CRE price index and his the model, our model is highly levered to that index. And so it's not aligned generally with our specific concerns, but that but those macroeconomic variables as forecasted by Moody's drive the result.

So $5,200,000 probably $3,500,000 of that is related to the MAC week, and I'm at variable forecast deterioration. And then the other part is growth.

Speaker 3

Awesome. And one more question for me. What's the bank's policy on insiders selling prior to earnings releases? Thanks.

Speaker 1

Well, obviously, when you're in a blackout period, it goes without saying you can't sell. And the comment that you guys made last night in your flash note, you would have noticed that the insider trading from offices are under a 10 b one five agreement. So they've been in place for some time. So nobody does insider trading here, and nobody would violate a blackout period.

Speaker 2

Let me further that. You may have noticed that we shifted our reporting date by a week. So the 10b5-one plans are set up to trade on the twentieth, and that's we've 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.

So they've been putting in a tremendous amount of work to support that process. And 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. But again, all of all insiders that are selling stock are subject to 10b5-one plans or blackout periods as required by the SEC.

Speaker 0

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

Speaker 4

Hey, good morning, Mark and Dan. Great to hear when I see a recovery on that new NTA. Just wondering if you could provide a little more color on how many other CRE loans or kind of what percentage of the book is out of market today?

Speaker 2

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 juncture. We're just trying to figure out that number.

Speaker 4

Actually, I think I found it. Yes.

Speaker 1

Page 14 of Freddie, Page 14 of the investor deck, you have you'll see a whole slide there. So 19% is in Manhattan. And so if you look at a couple of the other boroughs, so 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 Day.

Speaker 4

And 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?

Speaker 1

Generally, that is always the case. We have followed 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 health care expand their franchises outside of the New York area. Yes, you'll never find MCB to show up on Main and Main somewhere and say we can be competitive. So we generally follow very good sponsors and who have the ability to expand outside of their original footprint.

Speaker 3

Got it. Appreciate that.

Speaker 4

And just switching gears to deposits. Looks like you had pretty strong growth across pretty much all of 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 easy five title and escrow bucket? Or is it elsewhere?

Speaker 1

I think it's spread fairly evenly. That's how we approach it. And that's one of the value propositions of continuing to be a core funded institution. We have so many different deposit verticals. We don't have to rely on any one of them to drive 10%, 15% or even 20% balance sheet growth.

So we're very fortunate to be able to spread that challenge out throughout all of these categories. And we're working on a number of other opportunities that we'll talk more about in early twenty twenty six. So we expect all of them to continue to contribute.

Speaker 4

Got it. Then 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 '6, 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 $11,000,000 or so left in the budget. And I think you said there's about $3,000,000 coming next quarter?

Speaker 2

Yes. You got that right, 3,000,000 in the fourth quarter, approximately $3,000,000 And then there will be a bit of a tail in the first quarter, but we're kind of managing through that number right now and have we'll have a lot more detail about that when we release fourth quarter. But to put it put a kind of pin in it, it's going to be less than $2,000,000 It should be, I think, well less than $2,000,000 it. In the first quarter

Speaker 4

I'll step back in the queue. Our

Speaker 0

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

Speaker 5

Hey, good morning. Just a follow-up question on credit here. Maybe I missed this. So what was the size of the credit? I know CRE and PAs went up around $41,000,000 quarter over quarter.

That a good proxy There for what this

Speaker 1

were three loans in particular. One was around $8,000,000 one was around 17,000,000 And I believe the third one the total was around 34,000,034

Speaker 2

million dollars

Speaker 5

Okay. So then I mean the allocated reserve is about 55% of that exposure, so pretty healthy provision.

Speaker 2

Very conservative.

Speaker 5

And then maybe I mean you talked about this qualitatively, but just maybe a little more details on trends on criticized and classifieds or past dues just outside of this relationship kind

Speaker 4

of the asset quality?

Speaker 2

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

Speaker 5

So then it sounds like this is my last question.

Speaker 4

It doesn't feel like

Speaker 5

this credit's going to deter any of your near term growth strategies or anything?

Speaker 1

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

Speaker 2

Impact on lending. Go I mentioned, Q4 is looking good. We're going to grow continue to grow right into year end. And we did a channel we've done channel checks in the pipeline. And even first quarter next year is shaping up to look very strong as well.

Speaker 5

Great. Thank you.

Speaker 0

And we do have a follow-up from Betty Strickland with Hovde. Your line is open. Please go ahead.

Speaker 4

Hey, just one more follow-up, just as we're thinking about appreciate the year end margin guide. And just looking at your interest rate sensitivities closures 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?

Speaker 2

Very much so, Freddie. Very much so. Yes. We continue to be liability sensitive slightly, modestly. My forecasting, yes, we pierce 4% when I look at that.

And I'm a bit

Speaker 1

less aggressive than the market in the outlook for cuts. But when we model in one this quarter and three next year, yes, indeed, we can get very close or above 4%. And Freddie, that's the base case. And we're working on working really hard here to replace GPG. As you know, we exited that business last year and 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.

So we're expecting to see some expansion by our own efforts, not just through the Fed.

Speaker 4

All right. Great. Thanks for the additional color.

Speaker 0

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

Speaker 1

Just like to say thank you for taking the time out this morning and your continued support of MCB. Thank you. Have a nice day.

Speaker 0

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