Metropolitan Bank Holding Corp.

Welcome to Metropolitan Commercial Bank's second quarter 2025 earnings call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer, and Dan Doherty, 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 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star 0. During today's presentation, reference will be made to the company's earnings release and investor presentation, copy piece 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-gap measures that appear in the earnings release and investor presentation. It is now my pleasure to turn the floor over to Mark Devazio, President and Chief Executive Officer. You may begin.

Thank you. Good morning, and thank you all for joining our second quarter earnings call. Our second quarter financial results further underscore the strength and stability of our business model. Following our strong first quarter, we continued to grow our loan portfolio funded by core deposits. In the second quarter, outstanding loans increased by $271 million, or 4.3%, and core deposits were up $342 million, or 5.3%. Additionally, we expanded our NIM by 15 basis points to 3.83%, up from 3.68% in prior quarter. making this our seventh consecutive quarter of margin expansion. Despite the ongoing uncertainty caused by tariff headlines and market fluctuations, our outlook for further balance sheet growth remains very favorable. In May of 2025, we successfully completed a $50 million share repurchase program at a significant discount to our book value per share. Last night, we announced a second 50 million share repurchase program, which we will execute in a disciplined manner. We also announced a dividend on our common stock, the first in our history as a publicly traded company. Although these initiatives are not the primary drivers of investment returns, they underscore our unwavering focus on creating long-term value for our shareholders. Our reported earnings per share for the second quarter was $1.76, or 21% increase from our first quarter results. In addition, we increased our tangible book value per share by more than 4%, reaching $68.44, making it our 10th consecutive quarter of book value accretion. Dan will provide further details on the quarterly earnings results shortly. We continue to invest in our franchise-wide new technology stack. Although our timeline has shifted slightly, we now anticipate full integration to be completed by the end of the first quarter next year. We are confident that these new technologies will support and scale with MCB's diversified and growing commercial bank for years to come. Our asset quality remains excellent 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 market stress, including the impacts of tariffs on their businesses. And so far, the feedback has not indicated any specific areas of concern. Our second quarter provision expense was $6.4 million, primarily reflecting our continued loan growth as well as adverse movements in the forecasted macroeconomic factors underpinning our CECL model. In addition, a $2.4 million reserve was posted for a single non-accrual loan. We remain confident that a significant portion of loan workouts currently in flight will successfully be resolved in 2025. Our healthy credit metrics are a testament to MCP's discipline, conservative underwriting, and portfolio management and diversity, supported by our focus on relationship-based commercial banking and highly qualified commercial clients and sponsors in familiar industries and segments. We remain committed to managing asset quality and optimizing profitability while further solidifying our geographic presence in our key markets. Our focus for 2025 and beyond is to capture additional market share and strategically position ourselves to seize opportunities that enhance shareholder value. I would like to extend my gratitude to all of our employees, our board of directors, for their dedication and hard work, which drive our continued success. Lastly, I want to thank our customers and their engagement, loyalty, and support. I will now turn the call over to Dan Daugherty, our CFO.

Thank you, Mark, and good morning, everyone. As Mark said, our strong performance in 2025 continued in the second quarter. I'll start with a few remarks on the balance sheet. As Mark mentioned, we grew the loan book by approximately $270 million in the quarter. Total originations and draws of approximately $570 million were at a weighted average coupon, or WAC, net of fees of 7.72%. We had an uptick in floating rate loan originations, which approached 50% of new volume in the quarter. Because of the relatively short duration of our loan portfolio, we continue to diligently focus on the repricing of the back book. Upcoming third quarter maturities of approximately $500 million carry a WAC of 7.47%. Importantly, we have not loosened our credit standards or revised underwriting processes in any way to pursue loan growth. Our pipelines remain strong, and we project that we may achieve loan growth of more than 12% for the year. Also in the second quarter, we grew deposits by about $340 million. Linked quarter deposit growth was concentrated in the municipal, trustee, and lending verticals. though a few other verticals contributed as well. The depth and diversity of our deposit funding model is a true strength of MCB. We continue to forecast that core deposit growth will fund the vast majority of any further loan growth this year and beyond. Quarter over quarter, the cost of interest-sparing deposits and the cost of total deposits declined by 13 basis points and 7 basis points respectively. The decline in the cost of interest-bearing deposits was driven by mixed change, as well as hedging activity. In April, we executed a $500 million pay-fixed OIS swap at 3.52 percent versus Fed funds' indexed deposits. In our forecast model, we are using the Fed funds minus 75 basis points funding target rate. As Mark noted previously, our NIM was 3.8 3% in the quarter, up 15 basis points from the prior period. We expect modest further expansion of the NIM as the yield of the loan book increases and funding costs decline through time. With outsized deposit growth, the average balance of relatively expensive wholesale funding declined by about $100 million in the second quarter. Previous guidance targeted an annual NIM of approximately 3.75%. Based on current trends, I expect that the annual NIM this year will be about five basis points higher, or approximately 3.80%. Importantly, that forecast includes only one 25 basis point rate cut in October. As a reminder, each 25 basis point cut in the Fed Fund's target rate will, all else being equal, drive about five basis points of NIM expansion annually. Now let's move on to the income statement and certain related performance measures. I would like to highlight a couple of metrics that I find noteworthy. The first item is, as Mark mentioned, the 4% increase in our book value per share from $65.80 to $68.44. In the second quarter, we also grew total revenue by 8% from $70.5 million to $76.2 million. Net income in the second quarter was 18.8 million, or up 2.4 million, or more than 15% versus the prior period. Diluted earnings per share was $1.76, up 31 cents, or approximately 21% versus the prior period. Other income statement highlights include the following. Net interest income increased $6.7 million, or about 10% quarter over quarter, driven by an increase in average loans, and a decline in the cost of funds. As Mark mentioned, the loan loss provision increased by $1.9 million from $4.5 million to $6.4 million. The elevated provision was the result of loan growth and negative changes in the outlook for macroeconomic factors that underlie our CECL model. As well, as Mark mentioned, we did hang up a reserve of $2.4 million on a single non-performing loan. Second quarter non-interest income was down $1 million primarily because of the one-time income recognition of about $800,000 of BAS program fees in the prior period. Non-interest expense was $43.1 million, essentially flat versus the prior quarter. The major movements quarter over quarter in the optics category were A seasonal decline of approximately $1.5 million in comp and benefits, primarily related to payroll taxes and employee benefits, reflected in the first quarter. A $1.4 million decline in professional fees, including declines in legal and consulting. I expect a portion of this decline to be persistent. A $1.4 million increase in one-time IT project costs. Going forward, one-time IT costs for the remainder of 2025 are expected to foot to $8 to $9 million. Further, a $1 million increase in licensing due to the completion of accretion related to a LIBOR cap extinguishing that was previously mentioned in guidance. And finally, a $770,000 increase in other expenses, which included one-time charges of approximately $200,000. Taken together, we expect operating expenses to average approximately $45 to $46 million per quarter for the remainder of 2025. The effective tax rate for the quarter was approximately 30%. We expect the tax rate to remain consistent at approximately 30% for the remainder of the year. I'll now hand the mic back to Mark for a closing statement.

Our results continue to show the foundational strength and stability of our diversified commercial bank model, which is predicated on MCB's focused business strategy. Our strategic plan features strong credit underwriting, core funding, disciplined risk management, and leveraging of our market standing. We are well positioned to continue to show prudent growth, whatever the state of the economy is. As always, we are here to support our clients while delivering appropriate returns to our shareholders. I will now turn the call back to the operator for our Q&A session.

The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. Again, we do ask that while you poise your question that you pick up your handset to provide optimal sound quality. Thank you. Our first question is coming from Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open.

Nice quarter. Thank you, Mark. Thanks, Mark. First question, with the announcement of the dividend and the buyback, which is great yesterday, I'm curious, would it be fair to say that you don't plan to raise capital near term, as I think you alluded to on your first quarter call?

Likely you're correct there, Mark, but we're reevaluating opportunities all the time. But the answer is likely yes. Answering that question right now, the answer is yes.

Okay. And then secondly, you guys have done an amazing job of growing loans and deposits. I'm curious if there are plans out there similar to ramp fee-based revenues, either organically or through some kind of fee-based acquisition.

Oh, absolutely. It's top of mind. You recall we had significant fee income coming out of our GPG business, which we exited last year. So we are very focused on replacing the low-cost deposits that we had with GPG alongside of the non-interest income. So we have a few strategic opportunities that we're working on, more to come in 2026, but we're very confident we can replace that. Okay.

And then it looked like this quarter your loan originations were skewed to commercial real estate, I think 90% of originations. Do you think the mix going forward is likely to have a little higher concentration of CNI or evolve a little bit?

No, that's just timing of closings. I think you'll see at the end of the year pretty much a very healthy mix, a very balanced mix between CNI, which is inclusive of healthcare, and CRE as well. Okay.

Okay. And then just one clarification, Dan, I think you said of the $6.4 million provision this quarter, was it $2.4 million was tied to a specific credit?

That is correct, Mark. And it's obviously not a new credit. It's an existing non-performer. Gotcha. Okay, great. Thank you.

You're welcome.

Thank you. And your next question comes from Fetty Strickland with Hovde Group. Please go ahead.

Hey, good morning, Mark and Dan. Just wanted to kick it off to clarify on the expense guide there. Dan, I think you said $45 million in the last two quarters of the year. Is that number – is that all in, or does that exclude the digital transformation expenses?

That is all in, Fetty.

Okay. So core would be lower than that?

Yes, indeed. And something to realize here is that when we shifted kind of the end date for the project by a quarter, and as you do that, it changes some of the dynamics of the vendor payments. So it's a little bit elevated relative to what I previously guided to. I said 45 to 46. But I think we'll kind of hang out right in the middle of that range there. But that's all it.

But one other point I think we should mention that the delay or the extension of time to fully implement this technology stack should not increase the budget, overall budget that we projected.

Let me show you. That's helpful. Thanks. And shifting gears to the repurchase plan, I think you talked last quarter about a 9% or so TCE target. Given we're a little closer there today than we were before, given all the buybacks and the balance sheet growth, Is it fair to say buybacks are probably pretty limited as long as, you know, the stock's trading where it is today?

Even where the stock is trading today, yes, indeed. We would not aggressively enter the market. Our basic operating strategy for that is to, you know, to support the stock below current book. But we, you know, we may do a little bit, but really very little at this at this juncture.

And just one more from me. Just wanted to ask about the deposit. It looks like a good bit came from the municipal deposit vertical. Do you still see a good bit of opportunity there going forward? And can you talk through kind of what other verticals have the most near-term opportunities?

Yeah, yeah, we keep opening up new markets in different states. So we're very fortunate. We have a great team around municipalities. So they are grabbing market share around the country. So we do anticipate not only growth, but a lot of stability. in that vertical. And again, you know, with all of the deposit verticals that we talk about and we describe in our investor deck, we expect each and every one of them to continue to contribute. EB-5 has a significant pipeline, as does the title and 1031 as well. So, we're highly confident that we will continue to be, as we have been for 26 years, a co-funded institution.

Great. That's it for me. Thanks, guys.

Thank you. And your next question comes from David Conrad with KBW. Please go ahead.

Yeah, good morning. Just a couple follow-ups on the deposits. I thought it was really the key to the quarter. You know, thus far in earnings season, it just feels from the industry that deposit competition and pricing pressure is getting a little bit more intense. Just wonder if you guys are seeing that, or do you think this municipal niche kind of helps shield you from some of the competitive factors?

I don't think it's just the municipal niche. I think you've got to look at all of the deposit verticals we have, which are, you know, I wouldn't say unique in any way, but we do execute really well on all of them. I think we're just not a team-focused, as you've seen with our competitors, since you brought up our competitors. They have this acquisition of teams, and I think that creates a very competitive landscape to drive deposits, considering you have significant overhead with all of those teams sitting in the bank. So I think they're creating a good amount of their own. internal competitions there to drive deposits at almost any cost. We don't have that situation here. So I expect to continue to be a very lean franchise as it relates to deposit gathering.

Great. And then just shifting gears a little bit with the bill coming out of Washington, and some concerns over Medicaid. Just wondering any impact or your thoughts on your skilled nursing loan portfolio.

The way we see it and how our operators analyze it, you have to keep in mind that a good amount of the revenue coming into these skilled nursing home facilities and assisted living facilities is Medicaid. But these are resident-based patients. or residents that are sitting in these nursing homes. So they're eligible for Medicaid. And when you read the bill closer, very closely, you can see that there is no anticipation of cutting back resident payments to nursing homes as we interpret it, especially for residents that are eligible to receive it. So these are occupants of nursing homes. So we don't expect that's where the cuts will come for sure. Thank you.

Appreciate it.

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.

Just once again, thank you for participating and believing in MCB, and thank you again for your support. Have a nice day and a nice weekend. This does conclude.

today's conference call and webcast. A webcast archive of this call will be found at www.mcbankny.com. Please disconnect your line at this time and have a wonderful day.