Metropolitan Bank (MCB) Q3 2026 Earnings Call Transcript

DATE

Wednesday, Oct. 21, 2026

CALL PARTICIPANTS

• President and Chief Executive Officer - Mark DeFazio
• Executive Vice President and Chief Financial Officer - Daniel Dougherty

TAKEAWAYS

• Diluted EPS -- $2.58, representing an increase from $1.54 in the prior linked quarter driven by net interest income expansion.
• Net Interest Margin -- 4.36%, an increase of 28 basis points from the prior linked quarter reflecting higher yields on average loans and securities.
• Net Interest Income -- $97.6 million, up 7.9% sequentially driven by loan growth and lower total funding costs.
• Total Loans -- $7.5 billion, reflecting 10.6% growth from Dec. 31, 2025, as the company maintains pricing and underwriting discipline.
• Total Deposits -- $8.3 billion, an increase of 12.8% since year-end 2025 following growth in niche verticals.
• Non-performing Loans -- 0.95%, up from 0.91% in the prior linked quarter after a single commercial real estate loan was placed on non-accrual status.
• Efficiency Ratio -- 49.2%, falling below the 50% threshold as management diligently managed operating expenses.
• Net Charge-offs -- 18 basis points, a level management indicated is in line with the long-term trend toward normalization.
• Quarterly Dividend -- $0.40 per share, a 14% increase approved by the board of directors reflecting confidence in the earnings trajectory.
• Loan Originations -- Almost $1 billion, though net growth was moderated by almost $800 million in payoffs, paydowns, and prepayments.
• Loan Pipeline -- $700 million in signed term sheets and $600 million under review, with current pipeline pricing at 7.03%.
• Securities Portfolio -- $1.5 billion, an increase of 36.7% from the prior linked quarter due to the deployment of excess cash into T-bills.
• Non-interest-bearing Deposits -- $1.8 billion, representing a 12% increase sequentially driven by the EB-5 vertical.
• Cost of Deposits -- 2.49%, an 8 basis point sequential decline resulting from changes in the product mix.
• Cost of Funds -- 2.50%, compared to 2.57% in the prior linked quarter as funding efforts outpaced loan growth.
• Non-interest Income -- $3.0 million, an increase of 15% from the prior linked quarter due to higher service charges on deposit accounts.
• Non-interest Expense -- $49.5 million, a decrease of $2.3 million from the prior linked quarter following lower professional fees and technology costs.
• Stock Repurchases -- $10 million in Sept. at a weighted average price of 109% of estimated year-end book value.
• Total Risk-based Capital Ratio -- 13.9%, which remains well above regulatory minimum requirements for the company.
• CRE Loan Concentration -- 301.1% of total risk-based capital, a reduction from 376.3% a year ago following a public equity offering.
• Effective Tax Rate -- 29.5%, which declined from 31.1% in the prior linked quarter after the initiation of an energy tax credit purchase program.
• Average Loan Yield -- 7.27%, an increase from 7.18% in the prior linked quarter as higher-yielding credits entered the portfolio.

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RISKS

• DeFazio stated, "Each 25 basis points would typically be about five basis points in compression," when discussing the impact of potential rate hikes on the net interest margin.
• Dougherty indicated a headwind from swaps, stating, "I have got $1 billion worth of swaps that are going to roll off in April and August next year."
• Management identified expense pressure in specific fees, with Dougherty stating, "I estimate the increase to be on the order of about 25% higher" for deposit-related program fees in the fourth quarter.

SUMMARY

Metropolitan Bank Holding Corp. (NYSE:MCB) reported results driven by net interest margin expansion and deposit growth within specific niche verticals. Management indicated that funding efforts outpaced loan originations, allowing for the deployment of excess cash into short-term T-bills. The company is executing a multiyear strategic plan that includes digital transformation through artificial intelligence and an expansion of its payments platform into the gaming industry. Management stated that credit performance is reverting to long-term averages despite the addition of a single non-accrual commercial real estate loan.

• Management expects the payments platform to be live in the first quarter of 2027 with two gaming operators currently in the testing phase.
• The EB-5 vertical contributed approximately 75% of the deposit growth during the third quarter, though management expects this pace to decelerate.
• The company is expanding its physical presence with new branches planned for North Carolina, Connecticut, and Queens, New York, through early 2027.
• Dougherty stated, "Our funding platform continues to outperform, and we continue to deliver on our significant planned loan growth."
• Management expects fee income to experience a meaningful uplift in the second half of 2027 driven by new payments and HUD-related activities.
• The company's AI initiative currently employs six full-time employees, with plans to report on the return on this investment starting next year.

INDUSTRY GLOSSARY

• C&I: Commercial and industrial loans made to businesses for working capital or capital expenditures rather than real estate.
• EB-5: The Immigrant Investor Program, a federal initiative that allows foreign nationals to obtain U.S. permanent residency by investing in domestic businesses.
• HOA: Homeowners associations, organizations that manage residential communities and require specialized fiduciary banking services.
• HUD: The U.S. Department of Housing and Urban Development, which oversees federal programs for housing and community development.
• NIM: Net interest margin, a metric that measures the difference between interest income generated and interest paid out relative to the amount of interest-earning assets.

Full Conference Call Transcript

Operator: Thank you for your continued patience. Your meeting will begin shortly. If at any time you need assistance, please press star zero and a member of our team will be happy to assist. Thank you for your continued patience. Your meeting will begin shortly. If at any time you need assistance, please press star zero and a member of our team will be happy to assist. Please stand by. Your meeting is about to begin. Welcome to Metropolitan Commercial Bank third quarter 2026 earnings call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer, and Daniel Dougherty, 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 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.

Mark DeFazio: Thank you. Good morning, and thank you for joining MCB's third quarter 2026 earnings call. We delivered another strong quarter, highlighted by diluted earnings per share of $2.58, continued balance sheet growth, and further expansion of our net interest margin to 4.36%. These results reflected disciplined execution across the franchise and demonstrated the earnings power of our commercial business model. Net interest income increased nearly 8% from the prior quarter and more than 25% from a year ago, driven by a combination of quality of loan growth, lower funding costs. Our total cost of funds continued to decline, contributing to meaningful margin expansion and improved profitability. Loans grew to $7.5 billion, up 11% year-to-date.

While deposits increased to $8.3 billion, up nearly 13% since year-end. Importantly, this growth was achieved while maintaining disciplined underwriting standards, NIM management, strong liquidity, and robust capital levels. Credit quality remains sound, with non-performing loans below 1% of total loans, and both the company and the bank continue to maintain capital ratios well above regulatory requirements. Reflecting on our confidence in Metropolitan's performance, earnings trajectory, and long-term outlook, our board approved an increase in the quarterly dividend of 14% to $0.40 per share. Looking ahead, we are very optimistic about 2027. We believe it has the potential to be a transformative year for MCB.

Alongside the continued strength and momentum of our core commercial banking franchise, we expect our enterprise-wide AI initiatives and the rollout of our payments platform to become meaningful drivers of future earnings and efficiency. These investments are designed to enhance the client experience, improve productivity, strengthen operating leverage, and expand our revenue opportunities. We believe they position MCB for continued success and long-term value creation for our shareholders. As always, our strategy remains straightforward: disciplined growth, prudent risk management, a tech-focused, strong capital generation, and a relentless focus on serving our clients. The financial performance we continue to deliver and the investments we are making give us the confidence in our ability to continue creating value for shareholders.

I would like to thank our employees and directors for their dedication and commitment, our clients for their trust, and especially our shareholders for their continued support. With that, I will turn the call over to our Chief Financial Officer to review the quarter in greater detail.

Daniel Dougherty: Thank you, Mark. Good morning, everyone, and thanks for joining the call. I am very pleased to report a very strong third quarter for MCB. We printed a low teens ROIC, an impressive NIM of 4.36%, and an efficiency ratio below 50%. Our funding platform continues to outperform, and we continue to deliver on our significant planned loan growth. Our operating expenses are well managed, and for the first time, we realized a benefit from an investment tax credit. Importantly, the bank's credit performance reflected a definite trend toward normalization. Now, let's walk through third quarter balance sheet and income statement activities. In the third quarter, we grew the loan book by about $205 million or 2.8%.

Year-to-date, loan growth has been about $724 million or 10.6%. The pace of loan growth continues to be aligned with our guidance of $1 billion in growth for the year. What is truly remarkable about our continued loan growth is that we are simultaneously and intentionally allowing for healthy payoffs, and importantly, we are not chasing any deals that do not meet our price and underwriting discipline. During the quarter, we originated loans totaling almost $1 billion, while payoffs, paydowns and prepayments totaled almost $800 million. The takeaway, we are being very selective about the credits that we are funding for the portfolio. Looking forward a bit, our loan pipeline is robust.

We currently have signed term sheets of about $700 million with another $600 million out for signature or under review. Our pipeline pricing construct is still driving new volume coupons of approximately 7.03%. Remaining on the asset side of the balance sheet, our securities portfolio grew noticeably in the third quarter. The growth in the securities book is primarily related to the purchase of $400 million in short-term investments. As I will discuss below, our deposit gathering efforts have been outpacing our loan growth. As such, we invested excess cash into a laddered portfolio of T-bills. Now let's move on to MCB's deposit gathering efforts. Quarter-over-quarter deposit balances were up about $589 million.

Our non-interest-bearing deposits increased by about $200 million or more than 12%. Our interest-bearing deposits increased by about $388 million or more than 6%. Growth in the EB-5 vertical drove the lion's share, around 75%, of the increased deposits during Q3. However, the HOA, trustee, and retail verticals were all also solidly in the black. The third quarter deposit gathering results are emblematic of our strategic planning and balanced but flexible approach to funding. During Q3, municipal deposits were relatively flat as the seasonal outflows experienced in the prior period are not expected to return until this quarter. In the third quarter, the overall cost of our deposits was 2.49%, an 8 basis point decline from the prior period.

The primary driver of the decline in the cost of deposits was product mix. The outlook for continued deposit growth in our existing verticals remains strong, and our intent to continue funding all 2026 and future loan growth with deposits remains unchanged. As well, we are continually seeking new niche funding verticals. Deposit competition is certainly a prevalent theme in our space, and while we are not immune to such pressures, so far exposure has been limited in scope and isolated to discrete subsets of certain verticals. Let's move on to the net interest margin. Our reported net interest margin was a very robust 4.36% in the third quarter of 28 basis points from the prior period.

However, conservatively adjusting for elevated prepayment penalties and deferred fee recognition, primarily as a result of the previously mentioned paydown activity, the normalized NIM would've been around 4.20%-4.25%. I think before we discuss expectations for the fourth quarter, we need to discuss, at the very minimum, the outlook for the administered Fed funds target rate. Of course, our internal analytics need to ponder numerous other features of the yield environment. For now, let's stick with Fed funds. To begin, on September 16th, the FOMC raised the Fed funds target rate by 25 basis points. For a variety of reasons, the impact of that hike will not be apparent until this quarter.

As we update our forecast model, we are assuming a hike in December and another in March 2027. Our assumptions are slightly more conservative than the futures market, which currently prices in three hikes by September 27. Assuming a single hike in December, we forecast that our NIM will decline by about 5 basis points from the normalized indications noted previously. So we expect approximately 4.15%-4.20% for the fourth quarter. Now let's move on to some high-level comments on our income statement. Our third quarter interest income was up by about $6.3 million, or 4.4% compared to the prior quarter.

Importantly, on the other side of the ledger, interest expense was down by about $900,000, or almost 2%, resulting in exceptional unannualized top-line growth of $7.2 million or 7.9%. Going forward, it is our expectation that top-line growth will continue with more than 20% net interest income growth forecast for the full year. I am convinced that our credit performance has begun to revert to a level in line with our long-term performance. Our third quarter charge-offs were a very manageable 18 basis points. I'm very comfortable with our reserves for both performing and non-performing credits. We do not detect any emerging systemic issues within the loan book. For the quarter, our non-interest income increased by about $400,000, or 15%.

We remain optimistic that our new initiatives related to payments, HUD, and other activities will drive a meaningful uplift in fee income beginning in the back half of 2027. For the third quarter, non-interest expense was $49.5 million, down $2.3 million or 4.5% versus the prior quarter. Our efficiency ratio for the quarter was below 50%. We continue to diligently manage operating expenses. But as I've said previously, we are also actively investing in the franchise. An OpEx item that warrants review is deposit-related fees. These fees are associated with trustee and EB-5 deposits. We have seen a material uptick in these deposit balances. Importantly, please note that the fees for those balances are indexed to short-term interest rates.

As such, our forecast for this quarter is certainly above the Q3 result, and I estimate the increase to be on the order of about 25% higher. We continue to move forward with our investment in AI and the expansion of the branch network. The AI team is currently 6 FTEs with at least one more hire in the pipeline. We expect that through the course of next year, we will begin to frame and report on a return on the AI investment. Our retail expansion has accelerated. Our initiatives in the Western U.S. and branches in Florida and New Jersey are fully operational.

New branches in North Carolina, Connecticut, and Flushing, Queens are planned for opening later this year or early 2027. These investments in operational scale and efficiency and in human capital, which appear as expenses today, are critical pillars of our strategic plan and demonstrate our willingness to make targeted investments to enhance the value of our franchise. A quick comment on taxes. During Q3, we made an initial investment in energy tax credits. The tax credit initiative is expected to become a programmatic feature of our reported earnings. As we typically do, we are proceeding at a measured pace. We expect that by employing additional tax credit investments, our effective tax rate can and will be managed lower through time.

Finally, a note on stock buybacks. During September, we repurchased about $10 million of MCB shares at a weighted average price of about 109% of our estimated 2026 year-end book value. Buying shares north of book value is new to MCB. Our outlook for the earnings growth of our franchise gives us great confidence that additional buybacks make great sense. Our current buyback authorization has $40 million of available capacity. With that, I'll turn the call back to our operator.

Operator: Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Our first question today comes from Feddie Strickland with Hovde Group. Your line is now open.

Feddie Strickland: Hey, good morning, Mark and Dan. How are you guys doing?

Mark DeFazio: Great. Good morning. Hi, Feddie.

Feddie Strickland: Just wanted to start on the deposit growth. Really strong growth this quarter, particularly from EB-5. Just wanted to clarify that there's no particular single driver there or anything that could reverse in future quarters, right? That's just simply the deposit pipeline materializing?

Mark DeFazio: Well, I think there's a combination of things there. It is the accelerating momentum of the team. But indeed, there was a cutoff date for certain applications that certainly caused some of the outsize uptick. But the momentum that we have there, we fully expect that will continue. Perhaps not at the same pace, but we continue to expect more growth there.

Feddie Strickland: Got it. Just switching gears to the margin. I appreciate the detail on what the normalized rate was there and the guidance for the fourth quarter. I had a similar thinking about the hike schedule here. If we see that other hike in March, what is the trajectory for the margin as far as you can see it through 2027 in general? Do you think we can inch a little higher here just with new portfolio yields? Or do you think the pressure on deposit costs will drive a little bit of margin compression?

Mark DeFazio: I would say that best case scenario is maintaining. Typically, kind of linear in both directions. Each 25 basis points would typically be about five basis points in compression. But again, I would say that the best case scenario is to maintain that 415, 420 NIM guidance. We'll have more on that down the road.

Feddie Strickland: Understood. Just on the credit side, great to see the charge-offs kind of come back down to a little bit lower levels here. But could you talk through some of the bigger non-accrual credits that have come on over the past year? Maybe what the remaining major pieces are, what workout looks like both in terms of timing and also whether there's possible recoveries on any of these.

Mark DeFazio: Yeah, Feddie, as I mentioned in the past, we expect to experience some recoveries in the fourth quarter. We're seasoning some of the restructured loans. The loans that you're referring to are legacy loans that have been NPLs for quite a while that have now just been either fully negotiated through restructuring and/or gotten through the legal process. We have summary judgment or we have the foreclosure in sight. We're pretty confident we're going to realize some recoveries in fourth quarter 2026. On any remaining balances on those loans, they'll be amortized subject to a settlement agreement that we've already negotiated on, I guess, in all cases.

Feddie Strickland: Got it. Just one last one from me, and I'll step back. Just on expenses, I want to make sure I've heard correctly that the deposit program fee expense line, I think, is supposed to go up by about 25% next quarter. Then as we think out into 2027, is the low teens expense growth rate still the idea here, or how are you thinking about expenses? I know it's a little early to get into 2027 guidance, but just want to get a general picture after all these digital transformation investments and everything else.

Daniel Dougherty: It's a little early for that. I think that our ability to control expense growth going forward, we're going to be able to do that because we're pretty much ahead of the curve here. We've made great investments across the organization in bodies and in technology. I think 2027, as we formulate the expense plan there, I'm hopeful that we can show a lower year-over-year growth in expenses. That does not include any thoughts around the AI initiative. AI initiative is on the come, and we are ever hopeful that is going to show a great return on investment, which will primarily show itself through the expense line.

Feddie Strickland: Got it. Super helpful. Thank you both. I'll step back.

Mark DeFazio: Thanks, Feddie.

Operator: Thank you. Our next question comes from David Konrad with KBW. Your line is now open.

David Konrad: Great. Thanks. Dan, just wanted to dig in a little bit more on the NIM. I guess that we understand that you're a little bit liability sensitive here, yet with the strong non-interest bearing deposit growth, that's kind of funding a lot of your growth. Just maybe kind of assumption of what you're thinking about non-interest bearing deposit growth, and then also maybe the deposit betas that you're kind of thinking in the rate hike cycle.

Daniel Dougherty: Non-interest bearing deposit growth this quarter was impressive, right? That was largely-

David Konrad: Right driven by the EB-5 vertical. Repeating that quarter after quarter going forward, I think would be a challenge. I think they are going to see a little bit of a deceleration in the growth there. I think it is just reasonable to expect that.

Daniel Dougherty: We are slightly liability sensitive. Then at the end of the day, I have got $1 billion worth of swaps that are going to roll off in April and August next year. Another headwind to the forecast, but not insurmountable. We have an effective beta within the current forecast model for 2027 of 65%. If you pull those swaps out of there, it is probably closer to 75%.

David Konrad: Got it. Thank you. Appreciate it.

Daniel Dougherty: Welcome.

Operator: Thank you. We will go next to Timur Braziler with UBS. Your line is now open.

Timur Braziler: Hi, good morning. Following up on that line of questioning just in terms of deposit momentum into 4Q. I think there is some typical seasonality that happens kind of 4Q, 1Q on the public fund side. EB-5 had a blowout quarter in 3Q that likely slowed, as you just said, in 4Q. I guess in terms of broader balance sheet growth through the rest of the year and maybe early next year, does that moderate some or do you think you can still outgrow some of the seasonality over these next couple of quarters and grow on the balance sheet still?

Daniel Dougherty: No, I see the pace of balance sheet growth remaining according to plan. We fully expect to get to very close to $1 billion in loan growth for the year. Seasonal municipal deposits are expected to flow back in this quarter. As I mentioned earlier, our plans for not only this quarter but for the future are that growth across our stack or the vertical stack are going to fund loan growth going forward. Don't forget, I have got a big chunk of short-term investments on the balance sheet as well that I am fully prepared to roll off to fund deposit growth. That is $400 million. So I have got Q4 covered already.

As we continue to grow the deposit vertical experience, I do in fact expect that the pace of deposit gathering will exceed loan growth.

Timur Braziler: Okay, that is good color there. I know this gets asked every quarter, but just any update on just the gaming initiative? I am wondering, is there any overhang between consideration of crossing $10 billion in assets and the pickup on the fee side? Are you trying to kind of land the plane here with increase in fees kind of offsetting some of the $10 billion-related expenses? Or in your mind, are those two not really related?

Daniel Dougherty: Yeah, working backwards there. We don't see them related at all. Our run rate, we are pretty much well-positioned to be a $10 billion bank from an expense structure perspective. So, that is sort of in the run rate. As it relates to gaming, as I mentioned, I was prepared to mention on this call that we would have up to three gaming operators in the queue for testing this quarter. I am happy to report that we have two signed up. So we are starting the process of getting them integrated so we can start testing and hopefully be live in the first quarter of next year.

The third operator has agreed to go forward with us but because of competing priorities in their own organization, it looks like a first quarter. I would've been very satisfied with just one operator because our goal here is to show proof of concept coming out of the end of the year that our payments platform is really efficient and transformative to the gaming industry. We're excited about it and more to come on it. But yeah, we'll be in testing with two operators in the next 30 to 45 days.

Timur Braziler: Great. Thank you for that color.

Operator: Thank you. We do have a follow-up coming from Feddie Strickland with Hovde Group. Please proceed with your question.

Feddie Strickland: Hey, just had one follow-up just on kind of lending outside of New York and Florida, ex skilled nursing. Are you still originating new C&I, CRE kind of outside that footprint or not as much. Or is that just more legacy stuff on the books?

Daniel Dougherty: A little bit of both. Most of it's legacy. We're entertaining retaining some of that exposure. We continue to look at opportunities where our clients that we know really well that are considering other emerging markets around the country. The answer is yes, we will stay in those markets, but it's going to be driven by our relationship with existing clients primarily and their appetite to enter emerging markets that we can understand and follow our discipline around credit.

Feddie Strickland: Got it. Then just two more follow-ups from me. One, I just wanted to ask on the fees. Were there any fee schedule changes driving the service charge line higher in non-interest income or is that just a product of the really strong deposit growth in the quarter?

Daniel Dougherty: Primarily as a result of the growth.

Feddie Strickland: Got it. Last one just on the repurchases. Is that something we could see continue from here or was that more of an opportunistic thing this quarter?

Daniel Dougherty: I am committed to continue buying back the stock for as long as I think the shares are on sale, and I think they are very much on sale right now. Yes, I would expect that we will execute on further purchases going forward. Yes.

Feddie Strickland: All right. Got it. That is it. Thanks again.

Daniel Dougherty: Thanks, Feddie.

Operator: 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.

Mark DeFazio: Thank you. So in closing, I'd just like to say we remain confident in the strength of our growth strategy, the diversification of our commercial business model, and the earnings power of the franchise. Our core banking business remains robust and profitable. We are making targeted investments that we believe will enhance operating efficiency, expand revenue opportunities, and support long-term shareholder value. The re-engagement of our payments platform is expected to be accretive to earnings, further diversifying our revenue streams and enhance deposit liquidity over time. Thank you again, and again, we very much appreciate our shareholder support. Have a nice day.

Operator: 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.

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