Metropolitan Bank Holding Corp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Metropolitan Commercial Bank serves the New York metropolitan area, with lending concentrated in commercial real estate, multifamily and commercial and industrial loans. Comparisons below are with Q2 and H1 2019, or with December 31, 2019 for balance-sheet figures.
Financial performance and position
| Metric | Q2 2020 | H1 2020 | Comparison |
|---|---|---|---|
| Interest income | $34.2 million | $70.3 million | Up 11.0% and 21.6%, respectively |
| Net interest income | $30.2 million | $59.1 million | Up 31.5% and 35.9% |
| Provision for loan losses | $1.8 million | $6.6 million | Q2 was $2.0 million; H1 2019 was an $81,000 credit |
| Noninterest income | $5.7 million | $10.0 million | Includes securities-sale gains of $2.3 million and $3.3 million |
| Noninterest expense | $18.3 million | $37.8 million | Up 24.2% and 37.9% |
| Net income | $10.8 million | $16.9 million | Versus $6.1 million and $14.6 million; diluted EPS was $1.28 and $2.00 |
| Net interest margin | 3.19% | 3.29% | Down 28 basis points versus comparable 2019 periods |
At June 30, total assets were $3.97 billion, net loans $2.86 billion, deposits $3.39 billion and stockholders’ equity $317.2 million. Gross loans were $2.90 billion, up 8.2% from year-end. The allowance for loan losses was $32.5 million, or 1.12% of gross loans, versus $26.3 million, or 0.98%, at year-end.
Cash and cash equivalents were $822.7 million, or 20.7% of assets, up from $389.2 million at year-end. Available-for-sale securities were $189.4 million. Additional borrowing capacity was $352.1 million at the FHLB and $107.7 million at the Federal Reserve. H1 cash flow was $41.8 million from operations, negative $170.7 million from investing and positive $562.4 million from financing; cash increased $433.5 million.
Outstanding funding included $104.0 million of FHLB advances, $20.6 million of trust preferred securities, $24.6 million of subordinated debt and $41.9 million of secured borrowings. The Company and Bank reported that they met applicable well-capitalized requirements. At June 30, Company ratios included an 8.6% tier 1 leverage ratio and 12.7% total risk-based capital ratio; Bank ratios were 9.2% and 12.6%, respectively.
Material changes versus comparable periods
- Q2 net income rose to $10.8 million from $6.1 million, primarily on higher net interest income and noninterest income, partly offset by higher expenses and taxes. H1 net income increased to $16.9 million from $14.6 million.
- Deposit growth of $604.0 million drove much of the increase in cash; deposits rose 21.6% from year-end. Noninterest-bearing deposits increased $436.0 million.
- Net interest margin declined despite lower funding costs, as asset yields fell and more funds were held in low-yield overnight deposits. The average overnight-deposit yield in Q2 was 0.19%, versus 2.49% a year earlier.
- H1 loan production was $330.0 million, down from $571.9 million in H1 2019; management said it was more selective and focused on higher-yielding loans. CRE growth more than offset declines in some other loan categories.
- Noninterest expense growth reflected higher staffing and compensation, deposit-related licensing fees, technology costs and headquarters rent and renovation costs. Q2 compensation included approximately $245,000 of nonrecurring accelerated stock compensation and severance. H1 premises expense included $575,000 of accelerated leasehold-improvement amortization.
Outlook, risks and unusual items
- COVID-19 and credit: The Bank recorded $3.1 million of H1 provision related to COVID-19, including $544,000 associated with one impaired $5.4 million transportation-sector C&I loan. Management cautioned that the full effects may emerge as deferrals end and repayment schedules resume, and that further allowance adjustments may be required.
- Loan modifications: As of June 30, 300 loans totaling $527.6 million had COVID-related modifications. By July 31, 116 loans totaling $91.0 million had returned to repayment status. The filing notes that deferred payments are expected to be repaid during 2021 for specified modification arrangements.
- Concentration and asset quality: CRE represented 79.1% of total loans; healthcare was 26.1%, including $649.6 million in skilled nursing facility loans. Nonperforming loans were $8.4 million, or 0.29% of loans, versus $4.5 million, or 0.17%, at year-end. Management reported no significant COVID-19 impact to skilled nursing loans as of the filing date, while emphasizing uncertainty.
- Interest-rate and funding risks: Federal Reserve rate cuts reduced asset yields and net interest margin. The Bank’s modeled scenarios show sensitivity to interest-rate changes; management cautioned that the models depend on uncertain assumptions. The Company entered a $300 million notional interest-rate cap designated as a cash-flow hedge. Debt instruments referencing LIBOR may be affected by the transition to a replacement rate.
- Other items: The Company recorded $3.3 million of H1 gains from available-for-sale securities sales. Goodwill impairment testing found no impairment at June 30. Management said pending and threatened legal matters were not expected to have a material effect. No specific earnings or financial guidance was provided.
- The Company expected quarterly rent expense to decline by approximately $195,000 beginning August 2020 after vacating its former headquarters space.
Important facts for investors to verify
- Whether modified borrowers resume scheduled payments and whether further COVID-related allowance increases or credit deterioration occur.
- Trends in nonperforming loans, charge-offs and reserve coverage, particularly in CRE, healthcare, hospitality and transportation exposures.
- Deposit composition and stability, including corporate cash-management deposits, which were $1.47 billion, or 43.4% of deposits, at June 30.
- Whether asset yields, funding costs and net interest margin stabilize as the large cash balance is deployed or retained.
- How much reported earnings benefited from securities-sale gains and whether higher operating costs persist.
- Liquidity and capital headroom, and the actual effects of rate changes and LIBOR transition on hedges and debt costs.