MCB - NYSE

Welcome to Metropolitan Bank Holding Corp.'s second quarter 2025 earnings call. Hosting the call today from Metropolitan Bank Holding Corp. are Mark R. DeFazio, President and Chief Executive Officer, and Daniel F. Dougherty, 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. The floor will be open for your questions following the prepared remarks. Investor presentation copies 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 R. DeFazio, President and Chief Executive Officer. You may begin.

Thank you. Good morning, and thank you all for joining our second quarter earnings call. Our second quarter financial results further underscore the strength and stability of our business model. Following our strong first quarter, we continue to grow our loan portfolio funded by core deposits. In the second quarter, outstanding loans increased by $271 million or 4.3%, and core deposits were up $342 million or 5.3%. Additionally, we expanded our NIM by 15 basis points, up from 3.68% in the prior quarter, making this our seventh consecutive quarter of margin expansion. Despite the ongoing uncertainty caused by tariff headlines and market fluctuations, our outlook for further balance sheet growth remains very favorable. In May 2025, we successfully completed a $50 million share repurchase program at a significant discount to our book value per share. Last night, we announced a second $50 million share repurchase program, which we will execute in a disciplined manner. We also announced a dividend on our common stock, the first in our history as a publicly traded company. Although these initiatives are not the primary drivers of investment returns, they underscore our unwavering focus on creating long-term value for our shareholders. Our reported earnings per share for the second quarter was $1.76, a 21% increase from our first quarter results. In addition, we increased our tangible book value per share by more than 4%, reaching $68.44, making it our tenth consecutive quarter of book value accretion. Dan will provide further details on the quarterly earnings results shortly. We continue to invest in our franchise-wide new technology staff, although our timeline has shifted slightly. We now anticipate full integration to be completed by the end of the first quarter next year. We are confident that these new technologies will support and scale with MCB's diversified and growing commercial bank for years to come. Our asset quality remains excellent 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 market stress, including the impacts of tariffs on their businesses. So far, the feedback has not indicated any specific areas of concern. Our second quarter provision expense was $6.4 million, primarily reflecting our continued loan growth as well as adverse movements in the forecasted macroeconomic factors underpinning our CECL model. In addition, a $2.4 million reserve was posted for a single non-approval loan. We remain confident that a significant portion of loan workouts currently in flight will successfully be resolved in 2025. Our healthy credit metrics are a testament to MCB's disciplined, conservative underwriting, and portfolio management and diversity. Supported by our focus on relationship-based commercial banking and highly qualified commercial clients and sponsors in familiar industries and segments. We remain committed to managing asset quality and optimizing profitability while further solidifying our geographic presence in our key markets. Our focus for 2025 and beyond is to capture additional market share and strategically position ourselves to seize opportunities. I would like to extend my gratitude to all of our employees and our board of directors for their dedication and hard work, which drive our continued success. Lastly, I want to thank our customers for their engagement, loyalty, and support. I will now turn the call over to Daniel F. Dougherty, our CFO.

As Mark said, our strong performance in 2025 continued in the second quarter. I'll start with a few remarks on the balance sheet. As Mark mentioned, we grew the loan book by approximately $570 million, with total originations and draws at a weighted average coupon or WACC net of fees of 7.72%. We had an uptick in floating rate loan originations, which approached 50% of new volume in the quarter. Because of the relatively short duration of our loan portfolio, we continue to diligently focus on the repricing of the back book. Upcoming third quarter maturities of approximately $500 million carry an OAC of 7.47%. Importantly, we have not loosened our credit standards or revised underwriting processes in any way to pursue loan growth. Our pipelines remain strong, and we project that we may achieve loan growth of more than 12% for the year. Also in the second quarter, we grew deposits by about $340 million. Linked quarter deposit growth was concentrated in the municipal, though a few other verticals contributed as well. The depth and diversity of our deposit funding model is a true strength of MCB. We continue to forecast that core deposit growth will fund the vast majority of any further loan growth this year and beyond. Quarter over quarter, the cost of interest-bearing deposits and the cost of total deposits declined by 13 basis points and 7 basis points, respectively. The decline in the cost of interest-bearing deposits was driven by mix change as well as hedging activity. In April, we executed a $500 million pay fix OIS swap at 3.52% versus Fed funds index deposits. In our forecast model, we are using the Fed funds minus 75 basis points funding target rate. As Mark noted previously, our NIM was 3.83% in the quarter, up 15 basis points from the prior period. We expect modest further expansion of the NIM as the yield of the loan book increases and funding costs decline through time. With outsized deposit growth, the average balance of relatively expensive wholesale funding declined by about $100 million in the second quarter. Previous guidance targeted an annual NIM of approximately 3.75%. Based on current trends, I expect that the annual NIM this year will be about 5 basis points higher, or approximately 3.80%. Importantly, that forecast includes only one 25 basis point rate cut in October. As a reminder, each 25 basis point cut in the Fed funds target rate will, all else being equal, drive about 5 basis points of NIM expansion annually. Now let's move on to the income statement and certain related performance measures. I would like to highlight a couple of metrics that I find noteworthy. The first item is, as Mark mentioned, the 4% increase in our book value per share from $65.80 to $68.44. In the second quarter, we also grew total revenue by 8% from $70.5 million to $76.2 million. Net income in the second quarter was $18.8 million, up $2 million or more than 15% versus the prior period. Diluted earnings per share was $1.76, up 31 cents or approximately 21% versus the prior period. Other income statement highlights include the following: Net interest income increased $6.7 million, about 10% quarter over quarter, driven by an increase in average loans and a decline in the cost of funds. As Mark mentioned, the loan loss provision increased by $1.9 million from $4.5 million to $6.4 million. The elevated provision was the result of loan growth and negative changes in the outlook from macroeconomic factors that underlie our CECL model. As well as Mark mentioned, we did hang up a reserve of $2.4 million on a single non-performing loan. Second quarter non-interest income was down $1 million, primarily because of the one-time income recognition of about $800,000 of BAS program fees in the prior period. Non-interest expense was $43.1 million, essentially flat versus the prior quarter. The major movements quarter over quarter in the OpEx category were a seasonal decline of approximately $1.5 million in comp benefits, primarily related to payroll taxes and employee benefits reflected in the first quarter, a $1.4 million decline in professional fees including declines in legal and consulting, I expect a portion of this decline to be persistent. A $1.4 million increase in one-time IT project costs. Going forward, one-time IT costs for the remainder of 2025 are expected to foot to $8 million to $9 million. Further, a $1 million increase in licensing due to the completion of accretion related to the LIBOR cap extinguishment that was previously mentioned in guidance. And finally, a $770,000 increase in other expenses, which included one-time charges of approximately $200,000. Taken together, we expect operating expenses to average approximately $45 to $46 million per quarter for the remainder of 2025. The effective tax rate for the quarter was approximately 30%. We expect the tax rate to remain consistent at approximately 30% for the remainder of the year. I'll now hand the mic back to Mark for a closing statement.

Results continue to show the foundational strength and stability of our diversified commercial bank model, which is predicated on MCB's focused business strategy. Our strategic plan features strong credit underwriting, core funding, disciplined risk management, and leveraging of our market standing. We are well-positioned to continue to show prudent growth whatever the state of the economy is. As always, we are here to support our clients while delivering appropriate returns to our shareholders. We will now turn the call back to the operator for our Q&A session.

The floor is now open for questions. At this time, if you have a question or comment, please. Thank you. Our first question is coming from Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open.

Nice quarter.

Thank you, Mark.

First question, with the announcement of the dividend and the buyback, which is great yesterday, I'm curious, would it be fair to say that you don't plan to raise capital near term as I think you alluded to on your first quarter call?

Yeah. Likely, you're correct there, Mark. But, you know, we're reevaluating opportunities all the time. But the answer is likely yes.

Okay. Then secondly, you guys have done an amazing job of growing loans and deposits. I'm curious if there are plans out there similar to ramp fee-based revenues either organically or through some kind of fee-based acquisition.

Oh, absolutely. It's top of mind. You recall, we had significant fee income coming out of our GPG business, which we exited last year. So we are very focused on replacing, you know, the low-cost deposits that we had with GPG alongside of the non-interest income. So we have a few strategic opportunities that we're working on more to come in 2026, but we're very confident we can replace that.

Okay. And then it looked like this quarter, your loan originations were skewed commercial to commercial real estate, I think 90% of originations. Do you think the mix going forward is likely to have a little higher concentration of C&I or evolve a little bit?

No. That's just timing of closings. I think you'll see at the end of the year pretty much a very healthy mix, a very balanced mix between C&I, which is inclusive of healthcare, and CRE as well.

Okay. And then just one clarification, Dan. I think you said of the $6.4 million provision this quarter, was it $2.4 million tied to a specific credit?

That is correct, Mark.

So it's not obviously not a new credit. It's an existing non-performing.

Gotcha. Okay. Great. Thank you.

You're welcome.

Thank you. And your next question comes from Feddie Strickland with Hovde Group. Please go ahead.

Hey, good morning, Mark and Dan. Just wanted to kick it off to clarify on the expense guide there. Dan, I think you said $45 million in the last two quarters of the year. Is that number all in, or does that exclude the digital transformation expenses?

That is all in, Feddie.

Okay. So core would be lower than that.

Yes. Indeed. And one thing I realized here is that when, you know, we shifted kind of the end date for the project by a quarter, and when as you do that, it changes some of the dynamics of the vendor payments. So it's a little bit elevated relative to what I previously guided to. I said $45 to $46. But I think we'll kind of hang out right in the middle of that range there. But that's all in.

But one other point I think we should mention is that the delay or the extension of time to fully implement this technology stack should not increase the overall budget that we projected.

I'll be sure that's helpful. Thanks. And shifting gears to the repurchase plan, I think you talked last quarter about a 9% or so TCE target given we're a little closer there today than we were before given all the buybacks and the balance sheet growth. Is it fair to say buybacks are probably pretty limited as long as the stock's trading where it is today?

Given where the stock is trading today, yes. Indeed. We would not aggressively enter the market. Our basic operating strategy for that is to, you know, to support the stock below current book. But we, you know, we may do a little bit, but really very little at this juncture.

Okay. And just one more from me. Just wanted to ask about deposit growth. Looks like a good bit came from the municipal deposit vertical. Do you still see a good bit of opportunity there going forward? And can you talk through kind of what other verticals have the most near-term opportunities?

Yeah. Yeah. We keep opening up new markets in different states. So we're very fortunate. We have a great team around municipalities. So they are grabbing market share around the country. So we do anticipate growth in that vertical. And again, you know, with all of the deposit verticals that we talk about and describe in our investor deck, we expect each and every one of them to continue to contribute. EV5 has a significant pipeline, as does the title in 1031 as well. So we're highly confident that we will continue to be, as we have been for 26 years, a core-funded institution.

Great. That's it for me. Thanks, guys.

Thank you. And your next question comes from David Conrad with KBW. Please go ahead.

Just a couple follow-ups on the deposit. I thought it was really the key to the quarter. You know, thus far in earning season, it feels from the industry that deposit competition and pricing pressure is getting a little bit more intense. Just wondering if you guys are seeing that, or do you think this municipal niche kind of helps shield you from some of the competitive factors?

I don't think it's just a municipal niche. I think you gotta look at all of the deposit verticals we have, which are, you know, I wouldn't say unique in any way, but we do execute really well on all of them. I think we're just not a team focused, as you've seen with our competitors since you brought up our competitors. You know, they have this acquisition of teams, and I think that creates a very competitive landscape to drive deposits considering you have significant overhead with all of those teams sitting in the bank. So I think they're creating, you know, a good amount of their own internal competitions there to drive deposits at almost any cost. We don't have that situation here. So I expect to continue to be a very lean franchise as it relates to deposit gathering.

Great. And then just shifting gears a little bit with the bill coming out of Washington and some concerns over Medicaid. Just wondering any impact or your thoughts on your skilled nursing loan portfolio?

You know, the way we see it and how our operators analyze it, you have to keep in mind that a good amount of the revenue coming into these skilled nursing home facilities and assisted living facilities is Medicaid. But these are resident-based patients or residents that are sitting in these nursing homes. So they're eligible for Medicaid. And when you read the bill closely, you can see that there is no anticipation of cutting back resident payments to nursing homes as we interpret it, especially for residents that are eligible to receive it. So these are, you know, occupants of nursing homes. So we don't expect that's where the cuts will come, for sure.

Alright. Thank you. Appreciate it.

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

Just once again, thank you for participating and believing in MCB. And thank you again for your support. Have a nice day and a nice weekend.