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DATE

  • Friday, July 18, 2025 at 9 a.m. ET

CALL PARTICIPANTS

  • President and Chief Executive Officer — Mark R. DeFazio
  • Executive Vice President and Chief Financial Officer — Daniel F. Dougherty

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TAKEAWAYS

  • Loan Growth: Outstanding loans increased by $271 million, or 4.3%, in Q2 2025. This sequential growth was funded by core deposits.
  • Deposit Growth: Core deposits rose by $342 million, or 5.3%, in Q2 2025, with growth concentrated in the municipal vertical and several other verticals contributing.
  • Net Interest Margin (NIM): NIM expanded by 15 basis points to 3.83% in Q2 2025, marking the seventh consecutive quarter of margin expansion.
  • Share Repurchase: Completed a $50 million share repurchase program at a significant discount to book value in Q2 2025; announced an additional $50 million repurchase authorization.
  • Dividend Initiation: Declared the first dividend on common stock in the company’s public history.
  • Earnings per Share (EPS): Reported EPS of $1.76 for Q2 2025, an increase of 21% compared to the previous quarter.
  • Tangible Book Value per Share: Increased book value per share by 4% to $68.44 in Q2 2025, achieving ten consecutive quarters of book value accretion.
  • Total Revenue: Total revenue was $76.3 million, reflecting 12.7% growth from $67.7 million in Q2 2024.
  • Net Income: Net income of $18.8 million increased 12% year over year.
  • Net Interest Income: Net interest income increased, driven by higher average loans and lower funding costs.
  • Provision Expense: Provision for credit losses was $6.4 million, includes a $2.4 million reserve on a single non-performing loan.
  • Non-Interest Income: Non-interest income fell by $1 million, mainly due to prior quarter recognition of $800,000 in BAS program fees.
  • Operating Expense: Operating expenses were $43.1 million, included a $1.4 million one-time IT project cost and offsetting declines in compensation benefits and professional fees.
  • Outlook for Operating Expenses: Projected quarterly average operating expenses of $45 million to $46 million for the remainder of 2025, inclusive of digital transformation costs.
  • Loan Origination Coupon: Originations and draws of approximately $570 million in new loans carried a weighted average coupon of 7.72%.
  • Floating Rate Origination Mix: Floating rate loans accounted for approximately 50% of new originations.
  • Loan Growth Forecast: Management projects loan growth may exceed 12% for the full year 2025.
  • NIM Guidance: Estimated full-year NIM to be approximately 3.80%, five basis points above earlier guidance for 2025.
  • Funding Cost Trend: Cost of interest-bearing deposits declined by 13 basis points, while total deposit costs fell by seven basis points quarter over quarter.
  • Wholesale Funding: The average balance of relatively expensive wholesale funding fell by $100 million, aided by deposit growth.
  • Hedging Activity: Executed a $500 million pay-fixed OIS swap at 3.52% in April 2025.
  • Tax Rate: The effective tax rate for Q2 2025 was approximately 30%, with guidance to remain stable for the rest of the year.
  • Asset Quality: No broad-based negative trends in asset quality were noted across any loan segment, geography, or sector.
  • Digital Transformation Timeline: Completion of full integration is now anticipated by the end of the first quarter of 2026, with extension not expected to increase overall project budget.
  • Capital Actions: Near-term capital raises are unlikely, but management regularly re-evaluates opportunities.
  • Deposit Funding Model: Management expects core deposits to fund most future loan growth, highlighting the franchise’s depth and diversity.
  • Buyback Pacing: CFO Daniel F. Dougherty said, "Given where the stock is trading today, yes. Indeed. We would not aggressively enter the market. ... We may do a little bit, but really very little at this juncture."
  • Business Mix Outlook: Anticipates ending 2025 with a healthy and balanced mix of commercial & industrial (C&I), healthcare, and commercial real estate (CRE) originations.
  • Deposit Vertical Expansion: Ongoing expansion of new markets in various states is expected to support further municipal deposit growth, with additional contribution expected from EV5, title, and 1031 verticals.

SUMMARY

Metropolitan Bank (MCB 2.07%) delivered notable sequential growth in both its loan and core deposit portfolios, Management’s introduction of the company’s inaugural dividend and continued share repurchase authorizations reflects a reinforced commitment to returning capital. The digital transformation project timeline was extended, though management stated that total projected costs will not increase. Management reported no material changes in asset quality, stating explicitly that no broad-based negative trends exist across portfolios. The company’s guidance on funding, margin, and expenses remains constructive, with core deposits expected to support ongoing loan origination, and specific hedging actions taken to optimize funding costs.

  • CFO Daniel F. Dougherty noted, "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%."
  • Management stated, "we have not loosened our credit standards or revised underwriting processes in any way to pursue loan growth."
  • President and CEO Mark R. DeFazio said, "you will 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."
  • The company acknowledged the loss of non-interest income from its exited GPG business but expressed confidence in pursuing new fee-based revenue opportunities in 2026.
  • Questions about legislative impacts on skilled nursing loan portfolios were addressed by stating, "there is no anticipation of cutting back resident payments to nursing homes" in current federal bills.

INDUSTRY GLOSSARY

  • NIM (Net Interest Margin): The difference between interest income generated by loans and the interest paid to depositors and creditors, expressed as a percentage of average earning assets.
  • Weighted Average Coupon (WACC): The average interest rate of new loan originations, net of fees, weighted by loan size.
  • OAC (Original Agreement Coupon): The stated interest rate of a loan at its origination, before any repricing.
  • BAS program: Refers to a now-concluded source of fee income, details not further specified by management beyond "BAS program fees."
  • OIS Swap (Overnight Index Swap): An interest rate derivative contract to exchange a fixed interest rate for a floating overnight rate, used here for hedging deposit costs.
  • CECL (Current Expected Credit Losses): An accounting standard that requires companies to estimate and report expected future credit losses on financial assets.
  • GPG (Global Payments Group): The company’s previously exited business line that generated significant fee income and low-cost deposits.
  • EV5: A specific deposit vertical or business unit mentioned by management; details not disclosed in the call.
  • 1031: Refers to exchange transactions under IRS Section 1031, typically for deferral of capital gains on qualifying real estate transfers, mentioned as a contributing deposit vertical.

Full Conference Call Transcript

Mark R. DeFazio: 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 discipline, 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 Dan Doherty, our CFO.

Daniel F. Dougherty: 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 total originations and draws of approximately $570 million were 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 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.

Mark R. DeFazio: 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.

Operator: 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.

Mark Fitzgibbon: Nice quarter.

Mark R. DeFazio: Thank you, Mark.

Mark Fitzgibbon: 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 do not plan to raise capital near term as I think you alluded to on your first quarter call?

Mark R. DeFazio: Yeah. Likely, you are correct there, Mark. But, you know, we are reevaluating opportunities all the time. But the answer is, like, yes.

Mark Fitzgibbon: 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.

Mark R. DeFazio: Oh, absolutely. It is 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 the non-interest income. So we have a few strategic opportunities that we are working on more to come in 2026, but we are very confident we can replace that.

Mark Fitzgibbon: 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?

Mark R. DeFazio: No. That is just timing of closings. I think you will 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.

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

Mark R. DeFazio: That is correct, Mark.

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

Mark R. DeFazio: Gotcha. Okay. Great. Thank you.

Mark Fitzgibbon: You are welcome.

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

Feddie Strickland: 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?

Daniel F. Dougherty: That is all in, Feddie.

Feddie Strickland: Okay. So core would be lower than that.

Daniel F. Dougherty: Yes. Indeed. And the one something I realized here is that when, you know, we shifted kinda 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 kinda hang out right in the middle of that range there. But that's all it.

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

Feddie Strickland: 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, you know, the stock's trading where it is today?

Daniel F. Dougherty: 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.

Feddie Strickland: 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 kinda what other verticals have the most near-term opportunities?

Mark R. DeFazio: 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 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.

Feddie Strickland: Great. That's it for me. Thanks, guys.

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

David Conrad: Just a couple follow-ups on the deposit. I thought it was really the key to the quarter.

Daniel F. Dougherty: You know, thus far in earning season, it feels from the industry that deposit

David Conrad: competition and pricing pressure is getting a little bit more intense.

Daniel F. Dougherty: 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

Mark R. DeFazio: 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.

David Conrad: 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.

David Conrad: Alright. Thank you. Appreciate it.

Operator: 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.

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

Operator: Discuss. Today's conference call and webcast. A webcast archive of this call will be found at www.mcbankny.com. Please disconnect your line at this time, and have a wonderful day. Welcome to Metropolitan Commercial Bank's second quarter 2025 earnings call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer.