Operator: Welcome to Metropolitan Commercial Bank Q3 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 Q3 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.
Mark DeFazio: 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.
Mark DeFazio: 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 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 Q3 for MCB. We printed a low teens ROTCE, 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 in tax credits. Importantly, the bank's credit performance reflected a definite trend toward normalization. Now let us walk through Q3 balance sheet and income statement activities. in Q3, 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.
Daniel Dougherty: 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%. Remaining on the asset side of the balance sheet, our securities portfolio grew noticeably in Q3. The growth in the securities book is primarily related to the purchase of $400 million in short-term investments.
Daniel Dougherty: 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 the 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 increase in deposits during Q3. However, the HOA, trustee, and retail verticals were all also solidly in the black. The Q3 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.
Daniel Dougherty: In Q3, 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 Q3 of 28 basis points from the prior period.
Daniel Dougherty: 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 have been around 4.20% to 4.25%. I think before we discuss expectations for Q4, 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, but for now, let's stick with Fed funds. To begin, on 16 September, 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.
Daniel Dougherty: Our assumptions are slightly more conservative than the futures market, which currently prices in 3 hikes by 27 September. 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% to 4.20% for Q4. Now let's move on to some high-level comments on our income statement. Our Q3 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.
Daniel Dougherty: I am convinced that our credit performance has begun to revert to a level in line with our long-term performance. Our Q3 charge-offs were a very manageable 18 basis points. I am 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 H2 2027. For Q3, 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 have said previously, we are also actively investing in the franchise.
Daniel Dougherty: 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, and 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 1 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 US and branches in Florida and New Jersey are fully operational.
Daniel Dougherty: 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. Now, 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. And finally, a note on stock buybacks.
Daniel Dougherty: 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?
Daniel Dougherty: Great. Good morning. Hi, Betty.
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 is no particular single driver there or anything that could reverse in future quarters, right? That is just simply the deposit pipeline materializing?
Daniel Dougherty: Well, I think there is 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 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 Q4. 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 eke 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?
Daniel Dougherty: I would say that best-case scenario is maintaining. Typically, it is kind of linear in both directions. Each 25 basis points would
Daniel Dougherty: Typically be about 5 basis points in compression. But again, I would say that the best-case scenario is to maintain that 415, 420 NIM guidance. We will have more on that down the road.
Feddie Strickland: Understood. On the credit side, great to see the charge-offs kind of come back down to a little bit lower level here. 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 is possibly recovery behind any of these.
Mark DeFazio: Yeah. Feddie, as I mentioned in the past, we expect to experience some recoveries in Q4. We are seasoning some of the restructured loans. The loans that you are 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, and we have summary judgment, or we have the foreclosure in sight. So we are pretty confident we are going to realize some recoveries in 2027. I am sorry, Q4 2026.
Mark DeFazio: On any remaining balances on those loans, they will be amortized subject to a settlement agreement that we have already negotiated on all, I guess, in all cases.
Feddie Strickland: Got it. Just one last one from me, and I will step back. Just on expenses, I want to make sure I have heard correctly that the deposit program fee expense line, I think, is supposed to go up by about 25% next quarter. As we think out into 2027, is the low teens expense growth rate still the idea here? How are you thinking about expenses? I know it is 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.
Mark DeFazio: It is a little early for that, but I think that our ability to control expense growth going forward, we are going to be able to do that because we are pretty much ahead of the curve here. We have made great investments across the organization in bodies and in technology. So I think 2027, as we formulate the expense plan there, I am hopeful that we can show a lower year-over-year growth in expenses. That does not include any thoughts around the AI initiative. So AI initiative is on the come, and we are ever hopeful that 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 will 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, but 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-
Daniel Dougherty: Right
Daniel Dougherty: driven by the EB-5 vertical. Repeating that quarter after quarter going forward, I think would be a challenge. I think they're going to see a little bit of a deceleration in the growth there. I think it's just reasonable to expect that.
Daniel Dougherty: We are slightly liability sensitive. Then at the end of the day, I've got $1 billion worth of swaps that are going to roll off in April and August next year. That's another headwind to the forecast, but not insurmountable. So we have an effective beta within the current forecast model for 2027 of 65%. If you pull those swaps out of there, it's probably closer to 75%.
David Konrad: Got it. Thank you. Appreciate it.
Daniel Dougherty: You're welcome.
Operator: Thank you. We'll 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 Q4. I think there is some typical seasonality that happens kind of Q4, Q1 on the public fund side, and then EB-5 had a blowout quarter in Q3 that likely slows, as you just said, in Q4. 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, our vertical stack, are going to fund loan growth going forward. Don't forget, I've got a big chunk of short-term investments on the balance sheet as well that I'm fully prepared to roll off to fund deposit growth. That's $400 million. So I've 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's good color there. I know this gets asked every quarter, but just any update on just the gaming initiative. I'm 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?
Mark DeFazio: Yeah. So working backwards there, so we don't see them related at all. Our run rate, we're pretty much well positioned to be a $10 billion bank from an expense structure perspective. So, that's 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'm 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.
Mark DeFazio: 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. So 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 and CRE kind of outside that footprint or not as much? Or is that just more legacy stuff on the books?
Mark DeFazio: 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. 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?
Mark DeFazio: 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?
Mark DeFazio: I am committed to continue buying back the stock for as long as I think the shares are on sale, and I think they're 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's it. Thanks again.
Mark DeFazio: 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. In closing, I would 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, 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, further diversifying our revenue streams and enhance deposit liquidity over time. Thank you again, and again, we very much appreciate our shareholders' 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.
