Metropolitan Bank Holding Corp. (MCB) Q2 2026 Earnings Report, Transcript and Summary

Welcome to Metropolitan Commercial Bank second quarter 2026 earnings call. Hosting the call today for Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer, and Daniel Dougherty, Executive Vice President and Chief Financial Officer. Please note, 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 might 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.

Thank you. Good morning, and thank you for joining us. I am pleased with the continued progress across the franchise. Balance sheet growth remains consistent with our guidance. The lending pipeline is strong, and loan yields continue to hold. On the funding side, our deposit forecast remains on track, and we expect core funding to support balance sheet growth through the second half of 2026. Although our core operating trends remain strong, this quarter's earnings were impacted by several isolated items, primarily tied to legacy asset quality matters and investments we decided to move forward with. I want to address these directly and provide additional context before Dan reviews the financials in great detail. Asset quality. With respect to the Kansas City loan we have been speaking about for the last few years, the original loan balance was $24 million.

After posting a specific reserve of $2 million, the carrying balance was reduced to $22 million. We have reached a $27 million settlement, which includes full principal repayment, interest at the note rate, and a partial reimbursement of out-of-pocket expenses. We also expect a significant principal paydown by year-end, with the remaining balance being amortized over time and collateralized and supported by full recourse. We do expect a recovery with this particular loan. We also resolved the legacy out-of-market multifamily matter that we've been discussing also for the last two years. In the third quarter of 2025, we established a $20 million specific reserve for this credit. As I mentioned then, I was confident that we took the adequate amount of reserves and no further reserves would be needed. A full settlement has now been reached, and we charged off the prior specific reserve during the quarter.

The remaining $14 million loan balance provides for P&I payments, collateral, and full recourse. We will allow this credit to season before placing the restructured loan back on an accrual status. In connection with the high net worth client exposure associated with the matter I just mentioned, we recorded a $4 million charge-off during this quarter. We remain in active settlement discussions with the borrower. While we rejected a $2 million all-cash settlement offer, we are confident that a resolution will be reached by year-end, likely involving a substantial paydown and fully amortizing the remaining obligation. We also placed a new credit on non-performing status during the second quarter. This credit relates to a window and door manufacturer that had historically been stable and profitable but experienced execution challenges following an expansion of its business from its core Minnesota market into Texas.

The Minnesota company's core business remains mature and stable. We recorded a $10 million charge-off during this quarter. We are cautiously optimistic that the remaining $16 million term loan balance can be supported and repaid through the company's ongoing operations in Minnesota. Importantly, we view these matters as largely discrete and legacy in nature. Based on our current portfolio review and ongoing monitoring, we expect non-performing loan levels to normalize and remain in line with long-term historical levels going forward. I'll spend a minute on some non-interest expense and strategic investments. Dan will provide the details around non-interest expense as well as guidance for the remainder of 2026. I want to highlight the strategic investments we are making to position the company for future operating leverage and further profitability gains. We have launched an ambitious end-to-end artificial intelligence initiative across the organization.

To date, we have hired an AI lead officer, two AI analysts, and one AI engineer. We have also extended offers to two additional AI scientists and one additional engineer. Only two of the above hires were in our current run rate. Our objective is for MCB to be fully AI-enabled within 24 months. We expect to begin quantifying the return on investment by year-end and report progress in our quarterly investor presentation beginning in 2027. We recorded a $1.8 million loss in connection with an adverse ruling resulting from an administrative error. The matter has been submitted to our insurance company as well as pending appeal to reverse the outcome. Our payment platform initiative. We continue to make meaningful progress leveraging our payments platform and our extensive payment settlement experience. We are currently holding demonstrations with several well-established and emerging gaming operators.

The feedback to date has been positive. We expect to move into live testing by the end of the third quarter and be in the market during the fourth quarter. In 2026, we invested approximately $3.4 million in this initiative, which was not in our budget, and we expect a meaningful return on investment, which should become quantifiable in early 2027. Retail expansion. MCB expanded its government banking subject matter experts in New Jersey. We launched our West Coast expansion focusing on specialty deposits. We established a new branch location in West Palm Beach, Florida. None of this was in our non-interest expense run rate. These were opportunities that presented themselves to us. We have taken this opportunity in the past, and we can convert them to a good investment for long-term benefits to MCB.

In all cases, our branch expansion is primarily driven by expanding our specialty deposit franchise. We are seeing deposit contributions already and expect a meaningful return on investment in a short period of time. Dan will address any additional one-time items in his financial review. Thank you.

Okay. Thanks, Mark. Good morning, everyone, and thanks for joining the call. I'm going to start with a few comments on the evolution of the balance sheet during the second quarter and year to date. In the second quarter, the loan book increased by about $282 million. It's important to highlight the timing of the second quarter growth as it had a noticeable impact on the income statement for the quarter. Loan growth came late in the quarter, such that the average balance change, approximately $103 million, was significantly less than the linked quarter change. Year to date, loan growth has been about $518 million. The pace of loan growth continues to be aligned with our guidance of $1 billion in growth for the year. We remain confident that the $1 billion goal remains achievable. Our loan pipeline is currently about $1 billion.

We have signed term sheets of more than $625 million and term sheets out for signature of more than $375 million. Importantly, we have not materially modified our credit standards in any way to support continued growth. Second quarter originations and draws of approximately $847 million were printed at a weighted average coupon of about 7.03%. Remember that deferred fees typically add about 25 basis points to the loan yield. Payoffs and paydowns totaled approximately $525 million at a WAC of 7.75%. The healthy payoff of some very high coupon adjustable-rate C&I loans drove the payoff WAC above recent experience. We don't expect that going forward. Our current loan spread guidance continues to drive new volume coupons well above 7%. It is noteworthy that increasing competition for loans was evident during the quarter.

We have seen new entrants in the market, which of course has the expected impact on pricing, structure, and covenants. We embrace the competition and expect to win our share through determination, discipline, and the certainty of execution that our customers rely on. Liability side of the balance sheet. Quarter-over-quarter, deposit balances were essentially flat. There's a couple reasons for that. We had late quarter deposit outflows related to muni deposit seasonality and the intentional offloading of a $100 million high-cost treasury relationship that caused the drop at the end of the quarter. On a spot basis, quarter-over-quarter, the cost of interest-bearing deposits declined by about four basis points. Importantly, funding for loan and securities growth in the quarter was sourced entirely from an oversized cash position at the FRB. Cash and due from banks declined by about $430 million in the quarter.

The seasonal outflows of muni deposit balances will be recouped over the next several months. The EB-5, HOA, and title and escrow verticals combined for over $200 million of growth in the quarter. Municipal deposit growth was about $100 million, offset by about $200 million in seasonal outflows. 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. Deposit competition is certainly a prevalent theme in our space. While we are not immune to such pressures, so far our exposure has been limited in scope and isolated to discrete subsets of certain verticals. Our reported net interest margin was 4.08% in the quarter, unchanged from the prior period. However, conservatively adjusting for excess cash held at the FRB, which was almost $750 million on average, the normalized NIM would have been above 4.15%.

Let's move on to some high-level comments on our income statement. Our second quarter interest income was up about $6 million or 4.5% compared to the first quarter. Once again, the back-loaded nature of our loan growth was a governor on the interest income expansion. Importantly, on the other side of the ledger, interest expense was up only about $1.4 million or 3%, resulting in exceptional unannualized top line growth of $4.5 million or 5.3%. Going forward, it is our expectation that top-line growth will continue with at least 20% net interest income growth forecast for the full year. We expect that the NIM will press higher toward 4.20% as the year progresses. Importantly, our expanding NIM forecast is not reliant on rate cut assumptions. We have no movement in the Fed funds target rate as the baseline assumption in our current 2026 forecast model.

Mark walked you through the credit details previously. I'm simply going to add that our ongoing surveillance does not indicate any systemic or out-of-the-ordinary credit stress across the loan book. Our non-interest income continues to be stable. We remain optimistic that our new initiatives related to payments and HUD activity will drive meaningful uplift in fee income beginning gradually later in the year and scaling up materially in 2027. Non-interest expense was $51.8 million, up $5.4 million versus the prior quarter. The elevated quarterly increase in OpEx included about $3.3 million in isolated or one-time expenses. The isolated expenses include the previously mentioned one-time legal accrual of $1.8 million. We also had elevated expense of about $650,000 related to comp and benefits and about $950,000 of one-time professional and legal fees.

Far more importantly, our commitment to investment in AI and the expansion of the branch network were significant drivers of the remaining quarter-over-quarter delta. Our AI team is currently 4 FTEs with three more hires in the pipeline. In addition, our retail expansion has accelerated. New initiatives in the Western U.S., Florida, and New Jersey are in flight with branches in North Carolina, Connecticut, and Flushing, Queens planned for opening later this year or early 2027. The retail expansion has included five new key hires so far. 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. For this quarter and next, the OpEx run rate should probably settle in at about $48.5 million per quarter.

Finally, the Modern Banking in Motion core conversion was executed in May. Related second quarter expenses totaled about $1.1 million, and trailing expenses related to that conversion are expected to be minimal going forward. 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 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 David Konrad with KBW. Your line is now open.

Good morning.

Good morning, Dave.

Digging finally into your outlook for the next quarters. I guess maybe first on the cash balances, maybe how do you think that works down over the next two quarters? Maybe each quarter, how the NIM will progress.

Okay. You saw the cash balance normalized or come very close to a normalized balance at the end of the second quarter. I think there's a little bit of room to work that down further slightly, albeit slightly. Assuming the timing of deposit inflows and loan production are aligned, I don't anticipate using any wholesale funds at this point in time. Again, that depends on the timing of each of those cash flows. At the end of the day, I think that we're going to print north of 4.15% in the third quarter based on that normalization of the cash position as well as the late loan funding that we saw. We're going to press hard toward 4.20% in the fourth quarter.

Okay. Got it. Okay. Maybe with the expenses trending, how do you think the efficiency ratio might work out the next couple of quarters?

I don't see any dramatic movement in efficiency ratio.

Okay.

The top line should support it. The modest increase in the back half of the year. I don't expect any material movement there.

Got it. My last question, I think we talked about in the spring around a 15% exit ROTCE in 4Q 2027. Any changes in that as we stand right here?

Well, it was a little bit less than that after the capital raise, toward 13%. I think it was in the low teens.

No, we stand by those numbers.

Okay. Thank you.

Thanks, Dave.

Thank you. Our next question will come from Samuel Varga with UBS. Your line is now open.

Hey, good morning.

Good morning.

Just wanted to go back to the deposit trends a little bit. You noted the muni deposits bringing the balances down a little bit. Can you size a bit more specifically what that isolated muni seasonality impact was?

The seasonal movement in munis was $200 million. It all came really at the tail end of the quarter. You can see that in the average balance sheet. We expect those seasonal balances to come back to the bank over the next couple of months. We have continued to have great expectations for gaining traction in New Jersey. We had hired two salespeople in New Jersey that have a long history in state, and we're looking forward to them getting traction there. Continued success in New York, which we've seen tremendous uplift so far. Florida is on the come. As you mentioned, we've got these other two branches, Connecticut and North Carolina that we haven't penciled in any growth to date with those geographies.

Great. Thank you for that. Just as you touched on the branch footprint, and you noted that some of these decisions are more opportunistic. If we look out into mid- to late 2027, what does the branch footprint look like? How aggressive are you happy to be to build that out versus it being dependent on top line revenue growth?

Let me, this is Mark. Let me give you a little bit of color to make sure you understand when we talk about a branch network. We're not talking about a retail presence building out thousands of square feet in retail. We're talking about a small office space in an office building in a market where we file for a branch. This is not retail. The cost associated with operating on balance 1,000 square feet at about $30 a foot isn't a big investment on the part of the bank. The benefit of having a very lean retail operation is recruiting people with significant experience that are aligned with our specialty deposit vertical. We've done that in the past. We've done it now. We're doing it in the West Coast. We've done it here in New York and in New Jersey.

You've seen the contributions of the deposits each quarter. It's a very, very quick return on investment with a very, very low headwind as far as expenses associated with opening up those locations.

Great. Thank you for the color. I appreciate it.

Thank you. Our next question comes from Feddie Strickland with Hovde Group. Your line is now open.

Hey, good morning, Mark and Dan.

Hey.

Drilling back down on credit. Mark, really appreciate the color at the beginning of the call. It sounds like there's nothing really on a go-forward basis here from charge-offs. Just wanted to fully understand from a holistic view here, what could we expect in terms of the potential realm of recovery? I know you walked through some of the different moving pieces there, but just all in, what's the possibility for recoveries in future quarters?

Without giving any specific guidance, but I'll go out there and say that I would expect $7.5 million to $10 million of recoveries between now and the end of the year.

Okay. That's really helpful. I appreciate that. Beyond that, is there anything else in that kind of non-core C&I bucket that you're looking at a little bit more closely or it sounds like this was relatively isolated, but just wanted to check.

Well, that window and door company is about as mainstream C&I that you can possibly get. This was again we have to take responsibility for it and it was an expansion of the company's ambitious plans. We could have stayed a little closer to it and paid attention to it and identified some of the weaknesses or the outcomes of that execution. It's really on us. All bad loans happen at the closing and or something happens to the company. Just keep in mind, we just celebrated 27 years of operating history here. For the first 25 years, nothing really comes to mind that I can speak of as far as losses. Maybe in 2016, there was an isolated taxi medallion matter that we recovered $0.90 on a dollar. The last two years, we have been talking about four credits.

This quarter we resolved all four credits. This is an isolated window and door company. If you lend as much money as we do each year, you're bound to have some noise in the numbers. I do really expect us to go back to very normal trends of performance here going forward. I'm going to add two things here. One is the window and door company was a private equity-backed deal. We did a total of three private equity-backed deals. This one went bad, one is performing, and one paid off. We have no further private equity-related exposure in our book. Further, we did a deep dive.

We looked carefully at every non-owner-occupied commercial real estate record out of market. I re-reviewed that this morning, and our conclusion is no, there is nothing further that evidences credit stress or concerns us greatly at this moment in time.

Got it. Thank you both for that. I really appreciate it. Just switching gears if I can, appreciate all the color on the margin. Dan, based on your commentary, is it fair to assume that that's more yield-driven at this point and we'll maybe see deposit costs relatively stable? Is it a little bit of both and maybe the really good core deposit growth can even move costs a little lower as well?

Like I said, deposit competition is pretty stiff right now. We're really starting to see that. It's particularly evident, as I mentioned, in subsets of our verticals, right? We're embarking on this New Jersey municipal deposit endeavor. To get folks' attention, you got to pay top of the market to get them involved. There's that kind of pressure that we're seeing. Beyond that, we're not seeing any additional pressure. Mix is going to be the main driver of our ability to drive deposit costs noticeably lower. That's to be determined, of course. The balance sheet makeup with the excess cash position was the real cause of our flat NIM performance in the quarter. When I say I did a conservative adjustment for cash, I was really conservative, and I got north of 4.15%.

I'm really confident that by the end of the year, 4.20% is in the cards as we continue to produce asset yields well north of 7%.

Just, Mark, can you talk a little bit more about the fee initiatives and iGaming piece and maybe how some of that's progressing along?

Yeah. It is progressing. As I mentioned in my notes, we are holding demonstrations of our payments platform with very established gaming operators here in the U.S. and new operators that are entering the market. So far it's been well-received. We expect to invite up to three operators in the end of the third quarter into live testing, and we expect to be live in the market by the end of the year. We expect to see contributions to the bank starting in the first quarter 2027. Remember, this is very much similar to our GPG business, although maybe the parties involved in the transactions are a bit different. Our role in settling payments here is fairly similar to what we're used to. You see the scale immediately. We call it internally click fees.

As payments are running through our platform, two things are correlated immediately. Fee income, as we call it, click fees, and deposits. They correlate. You will see trends building if we're successful in launching and we have testing done successfully and we launch in the fourth quarter. You will see non-interest income grow early in 2027. Then we can start modeling out because we will have entered into long-term agreements with certain operators. Then we can all start penciling out models or projections that I can be more comfortable with stating because it'll be contractual at that point. You'll know because a lot of these operators are in the market today, and you know the size and the market share of their business.

Allocating any percentage of their current transaction volumes through MCB's platform will be easy to calculate the kind of return on investment we expect to see. The HUD business, we expect to start disclosing a pipeline perhaps as early as the third and fourth quarter which will, again, you'll be able to then determine the fee income associated with that pipeline. It does take six to eight months, in some cases even longer, to close a HUD loan. The pipeline you'll be able to do the calculation on the return on sale of that loan into HUD. We'll be able to give you some better guidance toward the end of the year and clearly in 2027. As I said earlier, we were very pleased with the GPG contribution to MCB for over two decades.

We expect this to meaningfully surpass what GPG reached before we exited the business.

All right, great. Thanks for taking all my questions.

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

Thank you. In closing, I just want to stress I remain extremely confident in the strength of our growth strategy. The diversification of our business model is unique and the earnings power of the franchise. Our core banking business remains robust and profitable, and 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 and further diversify our revenue streams and enhance deposit liquidity over time. Thank you for spending time today. We appreciate it 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.