Metropolitan Commercial Bank (MCB) Q3 2026 Earnings Call: 4.36% NIM and Deposit Growth

Key Takeaways

• Metropolitan Commercial Bank reported a Q3 2026 net interest margin of 4.36%, up 28 basis points sequentially. Excluding elevated prepayment penalties and deferred fee recognition, management estimated normalized NIM at 4.20%–4.25%.
• Loans increased by approximately $205 million, or 2.8%, during the quarter and by $724 million, or 10.6%, year to date. Management maintained its goal of close to $1 billion in 2026 loan growth.
• Deposits grew by approximately $589 million quarter over quarter. Noninterest-bearing deposits rose by about $200 million, while interest-bearing deposits increased by roughly $388 million.
• Credit quality showed signs of normalization. Net charge-offs were 18 basis points, and nonperforming loans remained below 1% of total loans.
• The quarterly dividend was raised 14% to $0.40 per share. MCB also repurchased approximately $10 million of shares in September and retained $40 million of buyback capacity.
• Management expects AI initiatives and the payments platform to support efficiency and revenue growth over time, with a meaningful fee-income contribution from payments, HUD and other initiatives targeted for the second half of 2027.

Key Financial Data

Business and Operating Performance

MCB continued to expand its loan portfolio while maintaining pricing and underwriting discipline. The bank had approximately $700 million of signed term sheets, with another $600 million awaiting signature or under review. New loan volume was being priced at coupons of roughly 7%.

Deposit gathering outpaced loan growth. The EB-5 vertical generated 75% of Q3 deposit growth, while the HOA, trustee and retail verticals also recorded increases. Management said an application cutoff contributed to the unusually strong EB-5 quarter, meaning the same growth rate may not repeat.

Excess liquidity was invested in a $400 million laddered portfolio of short-term Treasury bills. Management said these investments could roll off to support future balance-sheet funding needs.

The retail network expanded in the Western U.S., Florida and New Jersey. Additional branches in North Carolina, Connecticut and Flushing, Queens were planned for later in 2026 or early 2027.

MCB’s payments platform also advanced. Two gaming operators had signed up for integration and testing, which management expected to begin within 30 to 45 days. The company hopes to go live with those operators in Q1 2027. A third operator agreed to proceed but was expected to begin the process in Q1 2027 because of its own competing priorities.

Management Guidance

• Management expects Q4 2026 NIM of approximately 4.15%–4.20%, assuming one additional 25-basis-point Federal Reserve rate increase in December. Each 25-basis-point increase would typically create about 5 basis points of NIM compression.
• Full-year 2026 net interest income growth is forecast at more than 20%.
• Loan growth is expected to finish 2026 close to $1 billion, supported by the existing pipeline and deposit funding.
• Deposit-related fee expense is expected to be approximately 25% higher in Q4 than in Q3 because trustee and EB-5 deposit balances increased and the fees are indexed to short-term interest rates.
• Management expects fee-income initiatives involving payments, HUD and other activities to produce a meaningful uplift beginning in the second half of 2027.
• The company expects to begin assessing and reporting returns on its AI investment during 2027. Management also hopes 2027 expense growth will be lower than in 2026, excluding potential benefits from AI.

Risks and Watch Items

MCB remains slightly liability-sensitive. Its 2027 forecast assumes an effective deposit beta of 65%, rising to approximately 75% when excluding the impact of swaps.

Approximately $1 billion of swaps are scheduled to mature in April and August 2027, creating a potential margin headwind. Management also expects noninterest-bearing deposit growth to decelerate after the particularly strong Q3 contribution from EB-5.

Deposit competition remains present, although management described the pressure as limited and concentrated in specific subsets of certain verticals. The bank is also investing in AI, branches and operational capacity before the full financial returns from those initiatives are visible.

Analyst Q&A Highlights

Management said seasonal municipal deposits should return in Q4 and expects deposit gathering to continue exceeding loan growth. The $400 million short-term investment portfolio provides additional flexibility to fund balance-sheet expansion.

On credit, management said larger nonaccrual exposures largely involve legacy loans that have progressed through restructuring or legal processes. MCB expects some recoveries in Q4 2026, while remaining balances would amortize under negotiated settlement agreements.

Regarding the $10 billion asset threshold, management said MCB’s current expense structure is already positioned to support a bank of that scale. It did not link the payments platform’s fee growth directly to threshold-related costs.

Management also indicated that share repurchases could continue while it considers the stock attractively priced. MCB repurchased approximately $10 million of shares in September at about 109% of estimated 2026 year-end book value and had $40 million remaining under its authorization.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Welcome to Metropolitan Commercial Bank Third Quarter 2026 Earnings Call.

[audio gap]

Mark DeFazio

[audio gap] was achieved while maintaining disciplined underwriting standards, NIM management, strong liquidity and robust capital levels. Credit quality remains sound, with nonperforming loans below 1% of total loans and both the company and the bank continued 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 MTB. 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 revenue opportunities. We believe they position MTB 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.

Daniel Dougherty

Thank you, Mark. Good morning, everyone, and thanks for joining the call. I'm very pleased to report a very strong third quarter for MCV. We printed a low-teen 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 the benefit from an investment tax credits.

Importantly, 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're 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 [ outfro ] 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 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. So now let's move on to the MCB's deposit gathering efforts.

Quarter-over-quarter, deposit balances were up about $589 million. Our noninterest-bearing deposits increased by about $200 million or more than 12% and our interest-bearing deposits increased by about $388 million or more than 6%. Growth in the E5 vertical drove the lion's share and 75% of the increase in deposits during Q3. However, the HOA, trustee and retail verticals were 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 to funding all 2026 and future loan growth with deposits remains unchanged.

As well, we are continually seeking new niche funding verticals. The 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, up 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 have been around 4.20% to 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, but for now, let's stick to Fed funds.

To begin, on September 16, 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 the hike in December and another in March 2027. Our assumptions are slightly more conservative than the futures market, which currently prices in 3 hikes by September '27. In 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% 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% and resulted 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 am very comfortable with our reserves for both performing and nonperforming credits. We do not detect any emerging systemic issues within the loan book. For the quarter, our noninterest 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, noninterest 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 EB5 deposits. We have seen a material uptick in these deposit balances -- importantly -- and please note that the fees are 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 in the pipeline we were higher 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 Flush and Queens are planned for opening later this year or early 2027. These investments in operational scale and efficiency and human capital which appear as experiences 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 turn.

And finally, I note on stock buybacks. During September, we repurchased about $10 million of MCB shares at a weighted average price of about 109% and 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 curve 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. [Operator Instructions] First question today comes from Feddie Strickland with Hovde Group.

Question-and-Answer Session

Feddie Strickland

And just wanted to start on the deposit growth, really strong growth this quarter, particularly from EB5. Just wanted to clarify that there's no particular single driver there or anything that could reverse in future quarters, right? That's just simply the deposit pipeline materializing.

Mark DeFazio

Well, I think there's 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 oversized 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. And then just switching gears to the margin. I mean I appreciate the detail on what the normalized rate was there and the guidance for the fourth quarter. I had a similar thinking about the high schedule here. I mean if we see another hike in March, I mean what is the trajectory for the margin as far as you can see it through '27 in general? I mean do you think we can eat 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.

Mark DeFazio

I would say that best case scenario is maintaining typically, it's kind of linear in both directions, each 25 basis points would typically be about 5 basis points in compression. But again, so I would say that the best case scenario is to maintain that 4.15% kind of 4.15%, 4.20% NIM guidance. We'll have more on that down the road.

Feddie Strickland

Understood. And just on the credit side, great to see the charge-offs kind of come back down to a little bit lower levels here. But could you talk through some of the bigger nonaccrual credits 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's possible recoveries on any of these.

Daniel Dougherty

Yes. Yes. Freddie, as I mentioned in the past, we expect to experience some recoveries in the fourth quarter. we're seasoning some of the restructured loans. So -- and on the loans that you're all 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 some rejudgment or we have the foreclosure in sight.

So we're pretty confident we're going to realize some recoveries in 2027. I'm sorry, fourth quarter '26. And on any remaining balances on those loans, they'll be amortized subject to a settlement agreement that we've already negotiated on all -- I guess, in all cases.

Feddie Strickland

Got it. And just 1 last 1 for me and I'll step back. Just on expenses, I want to make sure I heard correctly that the deposit program fee expense line, I think you're supposed to go up by about 25% next quarter. And then as we think out into '27, I mean, is the low teens expense growth rate, still the idea here? Or how are you thinking about expenses? I know it's a little early to get in the '27 guidance, but just want to get a general picture after all these digital transformation investments and everything else.

Mark DeFazio

It's a little early for that, but I think that our ability to control expense growth going forward, is going to be -- we're going to be able to do that because we have -- we're pretty much ahead of the curve here. We've made great investments across the organization in bodies and in technology. So I think 2027 as we formulate the expense plan there, I'm hopeful that we can show a lower year-over-year growth in expenses, and that does not include any thoughts around what we -- the AI initiative.

So AI initiative is on the come, and we are hopeful -- ever hopeful that, that is going to show a great return on investment which will primarily show itself through the expense line.

Operator

Our next question comes from David Konrad with KBW.

David Konrad

Great. Dan, just want to dig in a little bit more on the NIM. I mean, I guess we understand that you're a little bit liability sensitive here, but yes, with the strong noninterest-bearing deposit growth, that's kind of funding a lot of your growth. So just maybe kind of assumption of what you're thinking about nonspring deposit growth and then also maybe the deposit betas that you're kind of thinking in the rate hike cycle.

Daniel Dougherty

So noninterest-bearing deposit growth this quarter was impressive, right? And that was largely driven by the EB5 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. They are slightly liability sensitive.

And 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. Another headwind to the forecast, but not insurmountable. And at the end -- so we have an effective beta within the current forecast model for 2027 of 65% and -- if you pull those swaps out of there, it's probably closer to 75%.

Operator

We'll go next to Timur Braziler with UBS.

Timur Braziler

Following up on that line of questioning, just in terms of deposit momentum into 4Q. I think there's some typical seasonality that happens kind of 1Q on the public fund side, and then E5 had a blowout quarter in 3Q, that likely slow as you just said in 4Q. 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 growing 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. And as I mentioned earlier, our plans for not only this quarter but for the future are that growth across our stack or the 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. And 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. And then I know this gets asked every quarter, but just any update on just the gaming initiative. And 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 2 not really related.

Mark DeFazio

Yes. 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 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 3 gaming operators in the queue for testing this quarter. I'm happy to report that we have 2 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. I would have been very satisfied with just 1 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 yes, we'll be in testing with 2 operators in the next 30 to 45 days.

Operator

Thank you. And we do have a follow-up coming from Feddie Strickland with Hovde Group.

Feddie Strickland

Just had 1 follow-up just on kind of lending outside of New York and Florida Exco nursing. Are you still originating new C&I and CRE kind of outside that footprint or not as much? Is that just on legacy stuff on the books?

Mark DeFazio

A little bit of both. Most of it is legacy. We're retaining some of that exposure. But -- we continue to look at opportunities where our clients -- clients that we know really well that are considering other emerging markets around the country. So 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. And then just 2 more follow-ups for me. One, I just wanted to ask on the fees. Were there any fee schedule changes driving the service charge line higher in noninterest income? Or is that just a product of a really strong deposit growth in the quarter.

Daniel Dougherty

Primarily as a result of the growth.

Feddie Strickland

Got it. And last 1 just on the repurchases. Is that something we can see continue from here? Or was that more of an opportunity to stick thing this quarter?

Daniel Dougherty

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 fill right now. So yes, I would expect that we will execute on further purchases going forward yes.

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. So in closing, I'd 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 reengagement of our payments platform is expected to be accretive to earnings, further diversifying our revenue streams and enhanced deposit liquidity over time. Thank you again. And again, we very much appreciate our shareholder 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.