Metropolitan Bank Holding Corp. Common Stock, $0.01 par value per share 2026 Q3 Earnings Call

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.

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 70%. 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.