Metropolitan Bank Holding Corp.

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Welcome to the Metropolitan Commercial Bank first quarter 2026 earnings call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer, and Daniel Doherty, Executive Vice President and Chief Financial Officer. Today's call is being recorded. During today's presentation, reference will be made to the company's earning release and investor presentation, copies of which are available at mcbankny.com. Today's presentation may include forward-looking statements that are subject to risk 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, Chief Executive Officer, Thank you, Angela. Good morning, and thank you all for joining our call. We entered the year with momentum, meaningful visibility into our growth outlook. A substantial portion of our expected loan and deposit growth is already in the pipeline and expected to be realized in the first half of the year, with the balance building steadily into the back half. The visibility reflects signed client commitments, active onboarding activity, and longstanding relationships rather than speculative assumptions. Our iGaming payments and HUD platform are no longer conceptual. They are in integration stage. We have a line of sight into implementation timelines and client onboarding activity, which will allow us to provide increasingly specific guidance around when these initiatives will translate into meaningful balance sheet growth, fee income, and a broader client engagement. With new investors joining us following the successful capital raise, this is an important moment to restate what defines the MCB business model. This is not a new strategy or a pivot. This is a continuation and acceleration of a longstanding plan that has been executed consistently over many years. MCB is led by an experienced management team with a demonstrated track record of delivering on growth initiatives. Our performance reflects disciplined execution, not opportunistic expansion, and our results speak to the depth and experience across the organization. Our growth profile is unmatched among peers, both within the New York City market and nationally. This outperformance is not limited to a single cycle or initiative. It is evident across multiple years of economic environments, underscoring the durability of our model. The initiatives driving our growth today were developed over many years and required extensive upfront investments, particularly in technology, infrastructure, and risk management. Those investments are now largely complete. As a result, today's growth reflects execution on a well-planned strategy, not aggressive stretch targets or growth for the sake of growth. The magnitude of our growth opportunity is a direct result of the investment we've made in technology and talent, which are now fully embedded in the organization. MCB is positioned to comfortably support a substantially larger balance sheet while continuing to meet the evolving needs of a sophisticated commercial client. I would like to express my sincere appreciation to our employees, directors, and clients for their continued dedication and contributions. Their commitment to excellence has been instrumental to MCB's sustained performance and will remain a key driver of our success in the years ahead. I will now turn our call over to our CFO, Daniel Dougherty.

Thanks, Mark. Good morning, everyone, and thanks for joining the call. The press release does a good job summarizing the highlights of the quarter, but I would like to take a moment to emphasize the impressive ROTC print of 15.6% and the successful follow-on equity raise, which was executed in March under challenging market conditions. Thanks to everyone that participated. With that said, let's begin with a few comments on the evolution of the balance sheet during the first quarter. The loan book increased by about $235 million. Pace of loan growth is in line with our guidance of $1 billion in net growth for 2026. First quarter, total originations and draws of approximately $524 million were printed at a weighted average coupon net of fees of about 7.24%. Payoffs and paydowns totaled approximately $287 million at a WAC of 7.37%. loan spread guidance continues to drive new volume coupons well above 7%. Looking forward, our current loan pipelines remain very strong, with loan opportunities at various stages of underwriting totaling more than $1.2 billion. To add some additional context, the portion of the current pipeline represented by signed term sheets totals to more than $700 million. On the deposit side, our deposit growth continues to outpace our loan growth. In the first quarter, we grew deposits by about $363 million, or approximately 5%. Over the course of the first quarter, our cost of deposits dropped by 15 basis points. The decline was primarily driven by the two late 2025 rate cuts made by the FOMC. The deposit verticals driving the bulk of the increase in deposits in the quarter were municipals, EB-5, and HOAs. The outlook for continued deposit growth in our existing verticals remains strong, and our intent to continue funding all 2026 loan growth with deposits remains unchanged. As a normal course of business, we continuously seek new deposit opportunities. We currently have a couple of programs, namely our payments and HUD initiatives, that are currently in the execution phase. Both of these initiatives are expected to become meaningful contributors to our deposit funding platform soon. Our net interest margin was 4.08 in the first quarter, down two basis points from the prior quarter. However, on a normalized basis, quarter over quarter, the NIM increased by about 10 basis points. a performance very much aligned with our recent guidance that each 25 basis point reduction in the Fed Fund's target rate should drive about five basis points of mean expansion. Specifically, as discussed on the The fourth quarter earnings call, the fourth quarter NIM of 4.10% was influenced higher by late year loan prepayments that drove above normal prepayment penalty and deferred fee income, resulting in a normalized NIM of about 4.02%. Looking at this quarter, we carried a cash balance well above normal. This was a result of deposit growth and excessive loan growth, the previously mentioned year-end 2025 loan prepayments, and the capital raise. After conservatively adjusting for the outside cash position, the first quarter normalized in the end print was about 4.12%. Now let's move on to some high-level comments on our income statement. Our first quarter interest income was down by about $2.5 million compared to the prior quarter. There were three primary drivers of this result, the first being the day account decline quarter over quarter, the elevated December loan payoffs as previously mentioned, and to a lesser extent, the impact of rate resets that occurred late in the fourth quarter on floating rate loans. Importantly, on the other side of the ledger, interest expense was down by about $3 million, resulting in a flattish top line performance overall. Going forward, it is our expectation that top-line growth will resume according to plan with at least 20% net interest income growth for the full year. We expect that the NIM will press higher over the course of the year toward 415 to 4.20% as the year progresses. Importantly, our expanding NIM forecast is not reliant on rate cuts. In fact, we have removed all rate cut assumptions from our current 2026 forecast model. On the allowance for credit losses, a confluence of events drove the reduction in the allowance in Q1. The primary drivers of the change were the charge-off of three loans totaling $12.3 million, a provision release of $2.6 million as we made enhancements to our ACL framework, and improvements in the forecast for certain underlying macroeconomic variables. The three loans charged off this quarter included two unsecured personal loans and one out-of-market CRE loan. Using all channels available to us, we are actively seeking recoveries on each of these loans. We continue to work diligently toward the resolution of the credits that make up our NPL portfolio. Our core non-interest income continues to be relatively flat. However, we remain optimistic that our new initiatives related to payments and HUD activity will drive the meaningful uplift in fee income beginning in the back half of this year. Non-interest expense was $46.4 million, up $2 million versus the prior quarter. The major movements in operating expenses quarter over quarter were an increase of $3.8 million in comp and benefits primarily related to an increase in the bonus accrual and restricted stock expense of about $3 million, and seasonal increases in FICA and other payroll-related expenses of about $1.1 million. As well, we saw a $1.8 million decrease in technology costs. The primary driver of this decrease was related to a delay in the completion of the digital transformation project. In total, for the first quarter, digital project costs were about $1 million. With the modern banking in motion conversion now expected to take place in May, we have penciled in about $2 million of related expenses to be recognized in the second quarter. I will now turn the call back to our operator for Q&A.

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 star 2. Again, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality. We'll pause for just a moment. And once again, that is star 1 if you'd like to ask a question.

first question comes from timura braziller with ubs your line is now open please go ahead hi good morning good morning uh looking at the deposit growth uh pretty impressive this quarter um maybe just give us a little bit more color to the the drivers there in the accelerating growth rates more recently is this the deposit engine kind of catching up to some of the the lending activities um is this something else and just yeah maybe give us a little bit of color on on what's been driving that growth and as you look through the rest of the year uh kind of the projection on the deposit side yeah so when you when you look at the tremendous market fashion when you look at the slide in our investor deck showing you all the different deposit verticals

We differentiate the deposits that are coming in from commercial clients or our retail platform versus specialty deposits. So this year, as Dan mentioned, HOAs, EB-5, and munis sit in our specialty deposit opportunities. So they're not driven by loan or commercial activity. They're driven by a very focused team of SMEs who are very experienced in these markets, and they continue to drive opportunity for the bank. And we continue to expand into different geographies, allowing us to better serve HOAs and municipalities as well.

Great. Thanks for that. um maybe looking at the the payment side um i i know you had said that those are no longer you know conceptual lifts can just maybe provide us an update on uh how some of those initial use cases are are playing out and then just remind us again of the type of cadence that we should expect from the increase in uh payment related revenues as you go through this year and maybe next

Yeah, so this is Mark again. I'll work backwards on that. I'll be in a better position to give you some good financial guidance perhaps in the next quarter. But we are in integration, which means that our technology is being developed and being integrated into the bank's platform in order to service iGaming clients. So we expect to be in testing. We will be inviting three operators. We haven't decided what operators we're going to approach yet. um in june through september time frame to come in and do testing perform testing on transactions we hope to be live in the end of the third fourth quarter um but i will i'll be able to give you better guidance on um its contribution um toward the second half of the year um we believe it to be meaningful the hud um uh you'll see it you'll see it you'll see a We have some background noise. We have our HUD underwriter on staff. We are actively meeting with all of our nursing home operators. We expect to start to report this quarter the pipeline of HUD-related applications, and then we'll be able to give you some guidance on the fee income and the deposit opportunities that come along with that as well.

Great, thanks. And then just last for me, the quarterly charge-offs, were those all driven by the loans identified last year and maybe similar line of questioning, just the link order decline in the reserve, the specific reserves that were tied to the loans charged off?

Yes and no. There was a total of three loans. We have discussed one particular loan which was roughly $4.5 million in the past. Actually, two out of the three loans we talked about in the past. One, the out-of-state commercial real estate loan we have not talked about in the past. Out of the $12 million, I'm fairly confident that will recover $7 to $8 million in this year. We are actively discussing a resolution with all three of these, and I expect a good outcome. And I consider a $7 to $8 million recovery a good outcome on these unsecured facilities.

Great. Thank you for the question. Thank you.

Thank you. And our next question comes from Teddy Strickland with Hufty. Your line is now open.

Hey, good morning, gentlemen. Just sticking with credit to start off here, just to clarify, that loan from the third quarter of 25, you're still working through that one, right? These were separate loans from that particular relationship, correct? Correct.

That's correct, and we expect that relationship to get resolved as well. Very soon we're getting to a legal proceeding in Mission, Kansas. We're highly engaged with a buyer for the property and the sponsor. We expect to have a full recovery not only with principal but interest at the regular rate and all legal fees there. So we're optimistic there. We'll get that resolved hopefully in the third quarter, second to third quarter.

Okay, great. In just a bigger picture then, I mean, it seems like you're on track for a pretty significant improvement in credit this year. Is there anything else on the horizon that's maybe coming up for resolution that could push NDA to assets even lower?

No, no, no. We are going to go back to our normal trends of criticizing classified loans, which historically over 27 years have been extremely low. We had a little bit of a speed bump with, I would say, on the inside of five credits that we've been talking about for the last year and a half. The system, you know, workouts are inefficient, costly, and timely, but I'm a patient person. I'm not looking and rushing to have an unsuccessful settlement, so they do linger a bit. But, no, these are the same five credits that we've been working on, and we will get to the final resolution of them this year for sure. Got it. Thanks. And, Fetty, I just want to make another point, which I'm sure you know about. We feel that we are adequately reserved for those loans at this time as well. So going forward with the resolution, we'll either resolve these loans and get paid off or have a recovery. But we do not expect any further reserves associated with those legacy loans. I just thought that was important to mention.

Appreciate that, Mark. And just, you know, switching gears to the margin, it sounds like you guys still expect a pretty good lift in the margin this year, even without rate cuts. Could you talk a little bit about the dynamics between, you know, maybe how much loan yields versus deposit costs are playing into that? It sounds like on the yield side, you got a little bit of a lift in cash going into loans. But I guess more specifically, what is the ability to lower deposit costs just as next shift over the course of the year?

Hi, Freddie. This is Dan. The primary driver of the margin expansion is going to be repricing of the back book. You know, with this quarter, the maturing loan, the paid-off loans had a pretty high coupon. We've got a couple of tranches over the course of the next couple of quarters that are lower coupon papers. So as we replace that or renew that, we'll price it at higher coupons. Our ability to continue to reprice on the deposit side is going to be dependent on mix. So to the extent EB-5 continues its momentum, that will help drive down the cost of deposits. Of late, most of the, you know, two of the big contributors have been HOAs and government or munis. Those tend to be at the higher end of the coupon stack, if you will. But again, if the mix continues, kind of persists with EB-5 generating a noticeable contribution, that could help to drive down the cost of deposits as well.

And, Freddie, I'd add as well, looking into 27, I think the deposits that we expect coming from HUD and iGaming will definitely bring down our cost of funds immediately.

That's a significant opportunity.

Understood. That's helpful. And just one last one for me just on expenses. It sounds like it's fair to assume the expense growth quarter over quarter probably slows here a bit, just given your opening comments, Dan, and the 189 to 191 guide.

Yeah, we can stick to that guidance, Vinny. Perfect. I'll step back. Thanks for taking my question. Thank you.

Thank you. Our final question comes from David Conrad with KBW. Your line is now open.

Hey, good morning. A couple quick questions as follow-on from everyone else. and you've got the billion-dollar loan growth guide, how should we think about the cash on the balance sheet, you know, largely from the capital raise, working down throughout the year? So, like, how much of the billion might be funded by the cash, or is that kind of a two-year outlook? How should we work down the cash?

We should see the cash working down in parallel with loan growth. So... If you look at the average balance sheet, I think my average, I carried about, on average, about $600 million of cash. It is my goal and my expectation that we'll work that down through loan growth towards a normal cash position, which is closer to $200 million for this bank. And when I made the NIM adjustment, I was really conservative. I only adjusted for $100 million. I'm well north of that in excess cash right now. Again, as loan growth continues, we'll work down that cash balance. As we sit here today, I've got second quarter growth fully funded with cash for sure, and I've got a good start on quarters three and four as well.

Yeah, I guess qualitatively with that cash and your unique deposit channels, that should keep pressure off of other segments of deposits given that you have all this cash to fund loan growth?

Well, we're not sitting on our laurels. I am happy to carry an excess large cash position. I've got no problem with that. So far this quarter, the trend continues. Deposits are coming in faster than loan growth. I expect that to normalize a little this quarter because my pipeline on the loan side is significantly signed term sheets totaling more than $700 million right now. So, the pull through on that is TBD, obviously, but again, the deposit quote continues a pace, at a pace in excess of the loan growth. And I have no intention of slowing that down. I think the teams are intending to get out there and drive business.

And then the last one for me might be a little bit trickier in a way, but, you know, in the investor day, we talked about maybe a target of a 115 loan-to-reserve ratio. You know, I think you're at 116 now, but you also made some methodology changes and economic changes. So maybe refresh that data where we think, you know, all of Sequel, obviously, credit quality change, but also where you're thinking about a target reserve ratio.

You know, I think in the long run, the 115 is okay. It's going to take us a while to, once we work our way through all the remaining NPLs that are out there with reserves, that could come down a little bit. But through time, management's view on the reserve is that, you know, 100 to 115 basis points kind of makes sense. for a commercial banking franchise such as ours that's growing at the pace we're growing. All right.

Thank you. That's all I have. Appreciate it. Thank you.

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

Thank you. I'd just like to say once again, thank you to all of the investors that came in and invested in the more recent capital raise. And also, again, as I said many times, we don't take that commitment on your part lightly. And I'd like to thank all of our existing investors for their continued support and look forward to meeting all of the investors as the years go on at different roadshows. 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.