Metropolitan Bank Holding Corp.

Please stand by. Your meeting is about to begin. Welcome to Metropolitan Commercial Bank Fourth Quarter 2025 Earnings Call. remove yourself from desk, that you please pick up your handset to allow optimal sound quality. Lastly, if you 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 appears 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, and good morning, and thank you for joining our quarterly earnings report. We are pleased with our fourth quarter and full year 2025 performance. Sustained growth in net interest margin, net interest income, deposits, and loans, combined with continued improvement in our efficiency ratio, positioned us to close the year on a strong note. The momentum we generated in the fourth quarter sets a solid foundation for meaningful progress in 2026 and beyond. Our disciplined underwriting and our franchise-wide risk management culture continues to anchor our safety and soundness approach. For the year, we expanded our loan portfolio by approximately $775 million, representing a growth of nearly 13%. Total loan originations reached approximately $1.9 billion. Loan growth was funded by deposits, which increased by roughly 1.4 billion, or about 23%, supported by our strategic funding initiatives. These initiatives included deepening existing deposit verticals and identifying new opportunities to diversify and strengthen our funding base. In the fourth quarter, we opened a full-service branch in Lakewood, New Jersey, which is a conversion of an existing administrative office. Additionally, we expect to open two new branches in Florida in the first half of 2026, one in Miami and one in West Palm Beach, all of which will enhance our presence in these key growth markets. Asset quality remains solid with no broad-based negative trends across loan segments, geographies, or sectors. We continue to engage closely with our clients to assess evolving market conditions and feedback to date has not indicated any areas of concern. This is a reflection of our disciplined underwriting and proactive portfolio management. Looking ahead, we remain focused on managing asset quality, optimizing profitability, and expanding our presence in New York and other complementary markets. Our strategy for 2026 and beyond centers on capturing additional market share through traditional channels while positioning the franchise to capitalize on opportunities that enhance long-term shareholder value. Several new initiatives will enter the market in 2026, and we expect to see early returns in the form of low-cost deposits and growth in increased fee income. These efforts reflect our commitment to build a more diversified, efficient, and resilient institution. I want to express my sincere appreciation to our employees and directors for their dedication and contribution throughout the year. Their commitment to excellence has been instrumental in MCB's sustained performance and will continue to drive our success in the years ahead. I will now turn the call over to Dan Daugherty of CFR.

Thank you, Mark. Good morning, everyone. And again, thanks for joining our call. This morning, we will cover the strong results of the fourth quarter and conclude with 2026 guidance focused on the continuation and, importantly, the leveraging of the foundational financial strength evidenced in our fourth quarter results. Let's begin with a few comments on the balance sheet. The loan book was essentially flat in the fourth quarter. However, we did achieve our annual target growth. In 2025, the loan book increased by $776 million, or about 13%. The reason for the limited loan growth in the fourth quarter was related to prepayments for approximately $317 million, which is about $150 million above the trailing three-quarter run rate. Fourth quarter total originations and draws were approximately $599 million, were printed at a weighted average coupon or WAC, net of fees of 7.28%. The new volume origination mix was in line with historical performance at about 70% fixed and 30% float. Over the next six months, we have about 1.1 billion inventories with a WAC of 6.94%. we assume that we will retain about 75% to 80% of those cash flows. In our forecast model, we assume that renewals will reprice at about 25 to 50 basis points below our new volume origination rates. As the Treasury curve three years in and out has not moved very much since the Fed began its most recent easing campaign, our loan spread guidance, price guidance, continues to drive coupons well above 7%. Our loan pipelines remain strong. I will provide 2026 guidance for loan growth and other related metrics at the end of this narrative. In the fourth quarter, we grew deposits by $304 million or approximately 4.3%. As noted in the press release for the year, deposits grew by $1.4 billion or about 23%. On a spot basis, quarter over quarter, the cost of interest-bearing deposits declined by 43 basis points. As our balance sheet remains modestly liability-sensitive and more than $2 billion of our indexed deposits reprice on the first business day of the month following a rate change, the benefit of the mid-December reduction in the Fed Fund's target rate will only become apparent in the first quarter. We have $1 billion of hedged index deposits, which display positive carry down to a Fed funds effective rate of approximately 3.50%. In our forecast model, we're using a generic cost of funds of the Fed funds target rate minus 50 basis points. Comments on the net interest margin. The margin was 4.1% in the fourth quarter, up 22 basis points from the prior quarter. As you know, the Fed began the recent easing campaign mid-September last year. Over the course of the 75 basis point easing cycle to date, our deposit beta for unhedged interest-bearing deposits has been about 75%. We expect that we will be able to replicate this performance for the next 50 basis points of rate cuts at the minimum. Supported by our deposit growth, we were able to pay off all wholesale funding, a total of $450 million, during the course of 2025. Now let's move on to some high-level comments on our income statement. Our methodical balance sheet growth and NIM expansion continue to drive impressive top-line results. For the fourth quarter, net interest income was $85.3 million, up more than 10% on a linked quarter basis, and up almost 20% for the year. Now let's talk briefly about the diluted EPS print of $2.77. As mentioned previously, we experienced elevated loan prepayments in the fourth quarter. As such, our prepaid penalty and deferred fee income was about $1.7 million above our normal run rate. In addition, in the fourth quarter, we sold bonds and realized a gain of about $675,000. As well, in the quarter, we had an insurance claim recovery related to a discontinued business line and a compensation accrual adjustment that totaled to about $2 million. All told, I estimate that non-core credits footed to about $4.6 million or about $0.30 per share. Our fourth quarter NIM adjusted for above normal prepayment penalty and fee income was approximately 4.02%. Our fourth quarter ROTC adjusted for all of the income items that I just listed was just north of 14%. Our non-interest income for the fourth quarter was $3.1 million. I touched on the securities gain earlier. We do not expect to recognize further gains going forward. We do, however, continue to seek new business initiatives, as Mark mentioned, to drive growth in non-interest income. Non-interest expense for the quarter was $44.4 million, down $1.4 million versus the prior quarter. The major movements in operating expenses quarter over quarter were as follows. A decrease of $1.3 million in common benefits, primarily related to a reduction in the bonus accrual and restricted stock expense. A decline in professional fees of $649,000, primarily related to a reduction in legal and other fees. As mentioned, a portion of the decline in legal fees was related to the receipt of an insurance claim. And finally, a $668,000 increase in technology costs. The primary driver of this increase was related to the digital transformation project. In the aggregate for the fourth quarter, digital project costs were about $3.1 million. The effective tax rate for the quarter was about 30%. Now let's take a look at what we are laser focused on today, the outlook for 2026. To start, some thoughts on our interest rate assumptions and the balance sheet. We have penciled in two 25 basis point rate cuts, one in June and one in September. Clearly, the timing of our rate cut assumptions reduces their financial impact on our forecast. Similar to 2025, we expect to grow loans by about $800 million, or approximately 12%. We expect to the new volume loan mix be consistent with recent experience. We expect to fund all planned loan growth with deposits. The securities portfolio will be maintained at about 10% to 12% of balance sheet footings. Now some thoughts on earnings and other financial metrics. We expect the NIM to expand modestly over the course of 2026. The number and timing of additional rate cuts are a primary driver of new performance. As well, the slope of the yield curve is an important variable. In our forecast model, we do assume some modest loan spread tightening throughout the year as a reflection of our loan growth demand. Based on our current forecast, we expect to print an annual MIM of about 4.10% for the year. Importantly, we expect that our business model, we believe that our business model is well equipped to defend or even expand the MIM with or without additional rate cuts. As for the provision, I think that the current consensus is generally aligned with our thinking. I do note that we are progressing through the workout process on many of the credits for which we booked specific reserves in 2025. The final disposition of these credits could result in allowance adjustments that are outside of our business as usual planning. or non-interest income, I suggest a 5% to 10% growth assumption is reasonable. We do aspire, as I mentioned, to rebuild the fee income line through time, generally in line with our 2024 results as a benchmark. Now some thoughts on the outlook for operating expenses. We expect the annual operating expense line to total to about $189 million to $191 million. The OPEX forecast includes a number of unique items. The first item relates to the Modern Banking in Motion project. Our annual expense guidance includes $3 million of first quarter spend, primarily related to the extension of the timeline for conversion. The second item relates to the premises expense line item. In 2026, we will be expanding our real estate footprint, both at our New York City headquarters and in West Palm Beach, Florida. The associated new expense run rate is about $2.2 million annually. Due to timing, the increase for 2026 will total to about $1 million. Finally, our plan includes growth and deposit verticals that are expensed below the line. The annual run rate of these fees is expected to increase by about $6 million in 2026. Putting this all together, our forecasted ROTC approach is 16% by the fourth quarter of 2026. Finally, before we open the floor for questions, I want to mention that MCB is hosting an investor day at our headquarters in Newark on Tuesday, March 3rd. In addition to Mark and myself, a number of our other senior leaders will be presenting. More information is posted on the events page of our investor relations website. A limited number of seats are still available for in-person attendance. If you have questions or would like to attend in person, please contact our investor relations team at ir.ncbankny.com. I will now turn the call back to our operator for questions.

Thank you. 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 the star 2. Again, we do ask that you will point your question that you pick up your handset to provide optimal sound quality. Thank you. Our first question is coming from Fetty Strickland with Hody Group. Please go ahead. Your line is open.

Hey, good morning. Just want to start on the loan mix. Appreciate the comments, opening comments, and good to see no minimum owner-occupied CRE the last couple quarters. But I'm just curious if we could start to see C&I start to grow again after a couple quarters of decline here.

I don't think so, Freddie. Core CNI, I don't think you're going to see grow substantially. You'll see CNI that has a medical implication to it. So we continue to expand our healthcare practices and how we lean into healthcare. But core CNI, I think we continue to manage that risk at our existing pace or slightly higher or even potentially slightly lower.

Understood. That's helpful. And just sort of along that same line, obviously, CRA concentrations come up a little bit just as you've done some repurchases and whatnot over the last couple of quarters, even as the owner-occupied has gone up. Do you expect that it'll be kind of stable from here just as you continue to grow owner-occupied CRA going forward?

Yeah, I think so. I think where our concentration increased to risk-based capital will be fairly stable going forward for sure.

And one last thing from me before I step back in the queue. I know you've opened some new branches in New Jersey and South Florida. It sounds like you got more on the pipeline there. And I was just curious how much of a contributor those were to the municipal deposit growth we've seen over the last couple quarters.

With New Jersey, yes, because they had a little bit of a head start with the branch, the administrative office being converted. Florida has really not yet contributed. We just converted the Miami office, and we're under construction in West Palm Beach. So I would expect significant contributions in the future from Florida and even more so from New Jersey as we go forward. All right. Great. Thanks, Mark. I'll step back in the queue. Thank you, Fred.

Thank you. Our next question comes from David Conrad of KBW. Please go ahead. Your line is open.

Yeah. Good morning. Um, just want to talk a little bit about asset quality. I know MPAs went up, you know, around 5 million, not, not, you know, pretty, pretty stable this quarter, but maybe talk about the two credits there and maybe just update us from, from last quarter on, on the bigger relationship. What, you know, any movement there, what's, what's happened with that relationship on MPAs?

Yeah, the, uh, the two, um, the, the two loans were in market, uh, multifamily loans that, uh, properties were up for sale. and we expect to have little or no loss associated upon the sale of those assets. As far as last quarter's specific reserves, we're still working through the workouts. I'm still cautiously optimistic. As I said last quarter, I think we'll have a resolution to those loans by the end of this quarter, and we are engaging with the owners. Workouts take time. You need to have patience and maturity, and And I think we're going to come out on the right end of this, hoping to report that in the first quarter.

Great. Thank you. And then just a follow-up question on capital. I think your CT1 ratio is about 10-7 right now. Maybe walk us through your targets there in the range where you'd want that ratio to be as you grow the balance sheet, kind of double digits.

Yeah, David, when I think about that, I kind of focus on TCE. And we expect to see that kind of trend from the current high eights, 8.8 or so, to about low nines. And that's kind of where we feel comfortable running the institution. Okay, great. Thank you. You can back in to set one from there. Yeah, yeah. Yeah, perfect. Thank you.

Thank you. We will move next with Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open.

Hey, guys. Nice quarter. Thanks. First question I had, Dan, wondering if you could share with us when you expect the digital transformation cost to be fully done and that transformation to be completed. Is that in the first quarter?

The conversion is anticipated still in the first quarter. In fact, President's Day weekend. That's the big day. Okay, so when when that's complete, most of those, you know, that's when the explicit expense terminates, but you know, then the rent rate run rate going forward and take shape. And there's always trailing stuff. But that's when the end of that $3 million spin will be will be finalized.

Okay, great. And then I was curious, was there any interest recovery? I know you mentioned some prepayment penalty income in the fourth quarter, but any interest recovery and then I this quarter? No. Okay. And then I wondered if you could share with us which verticals really drove the demand deposit growth this quarter. I couldn't quite tell from the tables.

Total growth for the quarter, largest contributors were munis. And it really was across the board, really nice distribution. But munis are property managers. And then customers, both borrowing customers and new deposits were the biggies. And, of course, EB-5 pitched in a bit as well. So it really crossed the board. Muniz was the outstanding bit of his stuff.

Okay. And then lastly, maybe for Mark, Mark, your currency has improved somewhat. I know you still think it's inexpensive. Do you feel like M&A is more possible now and likely, given what's going on in the environment out there?

You know, at this point, we don't see a lot of value out there in the franchises that are in all markets. So we're going to stay very close to the vest here. We have some very exciting rollout of new opportunities that you'll read about, hopefully by the end of the first quarter. So we're going to just keep doing our blocking and tackling and materially outperform our peers here and let these other M&A transactions just sit out there and let them work themselves out. But for now, our head is down and we're focused on organic growth. Great. Thank you.

Thank you. We do have a follow-up from Sandy Strickland with Hokey Group. Please go ahead. Your line is open.

Hey, just one quick follow-up kind of along that same vein. I wanted to ask on overall growth strategy. Is something like a team lift out in a new geographic area a possibility, you know, abstaining any sort of M&A if you have the opportunity to bring on a good team in a new geography or an adjacent geography? Would that be something that's more likely?

Likely not. It's really not part of our cultural DNA here. We've been acquiring really good talent in the markets that we operate in without taking the risk the financial risk and the burden of teams and the cultural, you know, challenges of integrating. So we're not a big fan of the team lift outs. Doesn't say that if one presented itself that was, you know, unique and could fit in, we would consider it. But there's a lot of independent talent out there in the markets that we're in. So, so far it has worked for us for 27 years. I think we're going to stick to the, to the, to the growth strategy that we have. Great, thanks.

Thank you. And this concludes the allotted time for questions. I would like to turn the call over to Mark DeFascio for additional or closing remarks.

Thank you. Just want to end on suggesting that our results continue to show the foundational strength and stability of our business model. MTB's business strategy, which is based on strong underwriting, conservative risk management, and the leveraging of our market standing, positions us well to continue to deliver prudent growth and outstanding financial performance. We remain steadfast in our support of our clients and communities while achieving appropriate returns for our shareholders. Thank you again for attending the call, and we look forward to seeing and speaking to you at our investor day.

Thank you.

Thank you very much.

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.