Metropolitan Bank Holding Corp. quarterly report, Q3 FY2019

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Metropolitan Bank Holding Corp. — Q3 2019 Form 10-Q

Business context and period. The company is a New York bank holding company operating Metropolitan Commercial Bank, focused on the New York metropolitan area. The unaudited report covers the three and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in millions unless noted.

Financial performance and position

  • Q3 earnings: Net interest income was $26.1, up 42.0% from $18.4 a year earlier. Net income was $7.7, up 8.0% from $7.1; diluted EPS was $0.90 versus $0.85.
  • Nine-month earnings: Net interest income was $69.6 versus $52.3; net income was $22.3 versus $19.3; diluted EPS was $2.63 versus $2.31.
  • Revenue and costs: Q3 total interest income rose to $35.5 from $21.9, while interest expense rose to $9.4 from $3.6. Non-interest income was $2.7 versus $2.0 and non-interest expense was $15.5 versus $10.4. For the first nine months, non-interest income declined to $7.8 from $10.0 and expense increased to $42.9 from $31.9.
  • Margins: Net interest margin was 3.26% in Q3, down from 3.76%; nine-month margin was 3.47% versus 3.70%. Management attributed margin pressure to higher deposit funding costs, a flatter/inverted yield curve, and increased balances in securities and overnight deposits relative to loans.
  • Balance-sheet growth: Assets were $3.24 billion, up from $2.18 billion. Gross loans were $2.50 billion versus $1.87 billion; commercial real estate loans were $1.51 billion, 60.2% of loans. Total deposits increased to $2.71 billion from $1.66 billion, including $1.26 billion of specialty deposits, or 46.5% of total deposits.
  • Liquidity and funding: Cash and cash equivalents were $435.4 versus $233.0. Available-for-sale securities were $250.7, of which $223.8 was pledged to secure deposits. FHLB advances declined to $144.0 from $185.0. The Bank reported additional FHLB borrowing capacity of $296.5 and an available Federal Reserve discount-window line of $99.6; no Federal Reserve borrowings were outstanding.
  • Debt and capital: Other reported debt included $20.6 of trust preferred securities and $24.6 of subordinated debt. Stockholders’ equity was $291.0 versus $264.5. The Bank reported it met “well-capitalized” requirements; its September 30 ratios included 10.3% Tier 1 leverage, 12.2% common equity Tier 1, and 13.1% total risk-based capital.
  • Cash flow: For the nine months, operating activities provided $50.5; investing activities used $851.6, principally reflecting loan growth and securities purchases; financing activities provided $1,003.6, principally deposit growth and net FHLB repayments. Cash increased $202.5.

Material changes and management commentary

  • Loan production rose to $839.7 for the first nine months from $528.2 a year earlier. Management cited expansion of existing relationships, particularly in skilled nursing facilities, and new relationships.
  • Deposit growth funded loan expansion and allowed the Bank to reduce FHLB advances. Specialty deposits grew substantially; management noted these accounts serve clients with discretion over large balances and involve third-party software costs.
  • Technology expense included specialty-deposit licensing fees of $2.9 in Q3 and $5.7 for the nine-month period. Compensation costs also increased with higher staffing levels.
  • Non-performing loans and assets rose to $4.7, or 0.15% of assets, from $0.3 at year-end 2018. Nonaccrual loans were $4.0; loans over 90 days past due and still accruing were $0.7. Management cited a $2.4 one-to-four-family loan and two taxi medallion loans totaling $1.0. The allowance for loan losses was $24.4, or 0.98% of loans, versus $18.9, or 1.02%.
  • Nine-month net recoveries were $3.6 and included $4.2 of recoveries on previously charged-off taxi medallion loans. Q3 recorded a $2.0 provision, compared with a $0.5 provision credit in Q3 2018, which included a $1.5 taxi-loan recovery.

Outlook, risks and contingencies

  • The filing provides no specific earnings or growth guidance. Management cautions that interim results are not necessarily indicative of full-year results.
  • Interest-rate simulation estimated that a 200-basis-point increase would reduce projected one-year net interest income by 7.77%; a 100-basis-point decrease would increase it by 5.55%. The economic-value-of-equity model estimated a 0.91% decline under a 200-basis-point increase and a 29.38% decline under a 400-basis-point increase. Management cautions these models depend on uncertain assumptions and are not forecasts.
  • Key disclosed risks include competition, interest-rate and deposit-flow changes, loan demand and real-estate values, credit quality and allowance estimates, regulatory and accounting changes, technology and cybersecurity events, and broader economic conditions. Commercial real estate loans were 390.6% of risk-based capital, up from 312.4% at year-end.
  • The company took possession of expanded headquarters space in Q3 and began renovations. Management expected additional rent expense of approximately $0.6 in Q4 2019 and anticipated vacating the former space, with lower rent expense, likely in Q1 2020.
  • Management said pending or threatened legal matters were not expected to have a material aggregate effect. The company adopted revenue-recognition guidance in 2019, recording a $0.117 opening retained-earnings adjustment; it expected to implement the expected-credit-loss standard in 2023, with the impact not yet determined.

Important facts for investors to verify

  1. Reconcile the filing’s Q3 loan-production figures: one MD&A passage reports $267.7, while the provision discussion reports $252.7.
  2. Assess the scale, stability, pricing and concentration of specialty deposits, including their 46.5% share of deposits and associated technology costs.
  3. Monitor the deterioration in reported non-performing loans, the allowance relative to rapid loan growth, and further developments in taxi medallion and other criticized credits.
  4. Evaluate continued net-interest-margin compression as deposit costs rise, including the company’s sensitivity to different rate scenarios.
  5. Review commercial real estate concentration, pledged securities, available borrowing capacity, and the eventual impact of the new expected-credit-loss standard.