Metropolitan Bank Holding Corp.

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 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, 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.

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%. 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 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 investments. 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 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, quote, 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 out of extended to a single borrower group in 2021 and 22. The specific reserve, is a clear outlier considering that over 26-year operating history, we have experienced minimum actual credit losses. I will discuss the ongoing workout during Q&A. The balance of the provision of 5.2 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, 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 Doherty. 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 of approximately $583 million were at a weighted average coupon, net of fees of 7.27% and a 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 billion of upcoming loan maturities with a WAC 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 and $200 million of additional loan growth for the remainder of the year, And our one first quarter 26 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 NCB. 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 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 index deposits, which display positive carry down to a Fed Funds effective rate of approximately 3.5 percent. 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 percent 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 percent, up five base 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 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 Fund's 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 percent on a linked quarter basis, and up more than 18 percent versus the same quarter last year. Diluted APS for the third quarter reported at 67 cents. On a normalized basis, adjusting primarily for the Q3-specific provisioning, I estimate diluted APS would have been closer to, would have been approximately $1.95, And that estimate does not include the reversal of $675,000, or about four cents 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 and 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. And then 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. And, of course, 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%. And 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.