Metropolitan Bank Holding Corp. annual report, FY2019

Metropolitan Bank Holding Corp. (NYSE: MCB) — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report; selected quarterly results are also disclosed. The company operates through Metropolitan Commercial Bank, serving commercial and retail customers primarily in the New York metropolitan area.

Financial performance and condition

Metric	2019	2018
Total assets, year-end	$3.36 billion	$2.18 billion
Total loans, year-end	$2.68 billion	$1.87 billion
Total deposits, year-end	$2.79 billion	$1.66 billion
Net interest income	$97.6 million	$71.2 million
Net income	$30.1 million	$25.6 million
Diluted earnings per share	$3.56	$3.06
Cash flow from operating activities	$41.0 million	$27.1 million
Cash and cash equivalents, year-end	$391.2 million	$233.0 million

Net interest margin declined to 3.46% from 3.70%; net interest spread fell to 2.55% from 2.74%. Return on average assets decreased to 1.06% from 1.31%, while return on average equity increased to 10.66% from 10.18%. The efficiency ratio rose to 55.39% from 52.13%.
Net interest income increased $26.4 million, driven mainly by loan growth. Interest income rose $45.8 million, while interest expense increased $19.5 million as deposit balances and funding costs grew.
Non-interest income declined to $10.6 million from $12.2 million. Non-interest expense increased to $60.0 million from $43.5 million, including higher compensation and $8.5 million of technology licensing fees for bankruptcy-trustee deposit accounts, versus $1.0 million in 2018.
The provision for loan losses was $4.2 million, compared with $3.1 million. The 2019 allowance was $26.3 million, or 0.98% of loans, versus $18.9 million, or 1.02%.
Year-end non-performing assets were $4.5 million, or 0.13% of assets, compared with $0.3 million, or 0.01%, in 2018. The increase included a $2.4 million one-to-four-family loan and remaining taxi-medallion loans. The bank recorded $4.3 million of recoveries, primarily on previously charged-off taxi-medallion loans.
Deposits funded growth: loans increased 43.3% and deposits 68.1%. Cash flow from investing activities was negative $1.015 billion, primarily reflecting loan growth and securities purchases; financing activities provided $1.132 billion, chiefly from deposit growth.
Year-end borrowings included $144.0 million of FHLB advances, $20.6 million of trust preferred securities, $24.6 million of subordinated debt and $43.0 million of secured borrowings. FHLB advances were down from $185.0 million; secured borrowings were new in 2019.
Available liquidity included $234.9 million of available-for-sale securities, of which $126.2 million was pledged, $293.8 million of additional stated FHLB borrowing capacity, and a $99.2 million Federal Reserve discount-window line.
The bank reported 2019 regulatory capital ratios of 10.1% Tier 1 leverage, 11.8% common equity Tier 1, and 12.7% total risk-based capital. It said it met applicable requirements and was well capitalized; ratios were lower than in 2018.
Fourth-quarter 2019 net income was $7.9 million, versus $6.3 million in fourth-quarter 2018; diluted EPS was $0.93 versus $0.75.

Material changes and business developments

Loan production reached $1.1 billion, up from $830.4 million in 2018. The largest growth areas included commercial real estate and commercial and industrial lending; $330.0 million of production was related to skilled nursing facilities.
Commercial real estate loans represented 62.2% of loans at year-end, up from 50.9%. Healthcare-related loans were $478.2 million, or 22.9% of the real estate portfolio; most of that exposure was to nursing and residential care facilities.
Corporate cash-management deposits reached $1.28 billion, 46.0% of total deposits. Bankruptcy-trustee accounts alone grew to $865.8 million from $80.8 million. Digital-currency-related deposits were $104.2 million, or 3.7% of deposits; the bank stated deposits are U.S.-dollar denominated and it holds no digital assets or liabilities.
Interest-bearing deposits grew substantially, and their average cost increased to 1.88% from 1.32%. Non-interest-bearing deposits fell to 39.1% of year-end deposits from 48.1%.
Technology licensing expense tied to bankruptcy accounts rose sharply with account growth. Management also cited increased staffing and costs associated with expanding headquarters space.

Outlook, risks and unusual items

Management’s stated strategy is continued organic growth in the New York market, expanding commercial relationships and converting lending clients into broader banking relationships. The filing provides no numeric earnings, margin, loan-growth or deposit-growth guidance.
Management said the 2019 New York rent-regulation changes had a “very modest” impact on its stabilized multifamily portfolio; those loans had a 1.78x weighted-average debt-service coverage ratio and 46.2% weighted-average loan-to-value ratio at year-end. Future property cash flows and collateral values remain risks.
Key exposures include commercial real estate and business lending, healthcare and skilled-nursing concentrations, New York-area economic and property conditions, deposit concentration and competition, interest-rate changes, operational and cyber risks, third-party service providers, and regulatory and anti-money-laundering compliance.
Interest-rate modeling estimated net interest income would decline 8.21% under an immediate 200-basis-point increase and rise 6.41% under a 100-basis-point decrease. Economic value of equity was estimated to decline 13.38% under a 200-basis-point increase. These are model estimates, not forecasts.
The company identified LIBOR transition risk for loans and debt instruments, including subordinated obligations with rates linked to LIBOR. It was evaluating the transition. CECL implementation was scheduled for January 1, 2023; management expected a one-time allowance adjustment but could not estimate its size.
The company took possession of expanded headquarters space in 2019 and expected to move after renovations, likely in the second quarter of 2020. It reported $45.3 million in future minimum operating lease payments.
The company had not declared common-stock dividends and did not expect to do so in the foreseeable future. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

Whether rapid loan growth—especially in commercial real estate, healthcare and skilled-nursing lending—has been matched by underwriting quality, reserves and subsequent credit performance.
How the $1.28 billion corporate cash-management deposit base, including the fast-growing bankruptcy-trustee balances, behaves under stress and what the associated servicing and licensing costs mean for margins.
Whether deposit pricing continues to rise, and how interest-rate changes affect net interest margin and economic value beyond the filing’s model scenarios.
The recoverability and remaining exposure of taxi-medallion loans, the status of loans newly placed on non-accrual, and the adequacy of the allowance as CECL approaches.
Available unpledged liquidity and actual borrowing capacity, alongside the maturity and refinancing terms of FHLB advances, subordinated debt and LIBOR-linked obligations.