Metropolitan Bank Holding Corp. (NYSE: MCB) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results include Metropolitan Commercial Bank. The company provides commercial, retail and relationship banking, as well as payment services, primarily in the New York metropolitan area.
Financial performance and position
- Q2 earnings: Net income was $15.6 million, down from $23.2 million a year earlier; diluted EPS was $1.37 versus $2.07. For the first half, net income was $40.6 million versus $42.2 million and diluted EPS was $3.59 versus $3.76.
- Net interest income and margin: Q2 net interest income was $53.8 million, compared with $55.3 million; net interest margin was 3.44%, up from 3.27%. First-half net interest income was $112.3 million versus $101.9 million; margin was 3.65% versus 3.00%.
- Income and expenses: Q2 interest income increased to $89.0 million from $59.2 million, but interest expense rose to $35.2 million from $3.9 million. Non-interest income was $7.9 million versus $7.0 million, while non-interest expense rose to $32.4 million from $26.3 million. The filing attributes expense growth in part to compensation and professional fees.
- Credit costs and asset quality: Q2 provision for credit losses was $4.3 million versus $2.4 million; first-half provision was $5.0 million versus $5.8 million. Loans were $5.15 billion, up 6.4% from year-end 2022. The loan allowance was $51.7 million, or 1.00% of loans. Nonperforming loans were $24.0 million (0.47% of loans), primarily one fully secured CRE loan; the allowance was 215% of nonperforming loans. First-half net charge-offs were $143,000.
- Balance sheet: Total assets were $6.52 billion, up 4.1% from December 31, 2022. Deposits were $5.29 billion, nearly unchanged. Cash and cash equivalents were $201.8 million, down from $257.4 million; stockholders’ equity was $621.3 million.
- Funding and liquidity: At quarter-end, federal funds purchased were $243 million and FHLB advances were $200 million; both were generally overnight transactions. The company reported $3.5 billion of available secured wholesale funding capacity, up from $1.1 billion at year-end, and said it was eligible for the Bank Term Funding Program. Estimated uninsured deposits were $1.5 billion. Noninterest-bearing deposits fell to 32.7% of deposits from 45.9% at year-end.
- Capital: The company and bank met applicable regulatory requirements to be considered well capitalized. The bank’s CET1 ratio was 11.9% and total risk-based capital ratio was 12.9% at June 30.
- Cash flow: First-half operating cash flow was $45.7 million, investing cash outflow was $303.6 million, and financing cash inflow was $202.2 million. Cash and cash equivalents decreased by $55.6 million over the period.
Changes versus comparable periods
- Q2 net income declined despite higher interest income, as sharply higher deposit and borrowing costs, increased provision, professional fees and a discrete tax item weighed on results. First-half net income was also lower year over year, while net interest income and margin improved.
- The final exit from the crypto-related deposit vertical reduced digital-currency business deposits by $435.7 million from year-end. Retail deposits increased, while noninterest-bearing demand deposits declined by $691.8 million. The company used more wholesale borrowing to support funding needs.
- Loans grew $309.0 million from year-end, led by CRE and C&I. The allowance increased partly because the company adopted CECL on January 1, 2023, recording a $2.1 million after-tax reduction to retained earnings.
- Available-for-sale securities had $87.7 million of gross unrealized losses at June 30, primarily attributed to market interest-rate changes. The filing states the company did not intend, and did not expect to be required, to sell these securities before recovery.
Outlook, commentary and risks
- The filing gives no specific earnings or financial guidance. Management cites interest rates, deposit flows and uninsured-deposit levels, loan demand, credit quality, economic conditions, and costs as uncertainties affecting future results.
- Interest-rate simulations estimate that an immediate, sustained 200-basis-point rate increase would reduce one-year net interest income by 8.87% and economic value of equity by 13.16%; these are model estimates, not forecasts.
- Federal Reserve and New York State investigations remain ongoing concerning a prepaid debit-card program through a former third-party manager. The company had accrued $35 million in late 2022 for anticipated settlement losses and expenses and reversed $2.5 million in Q1 2023. Resolution terms and timing remain uncertain; public enforcement or related matters could be materially adverse.
- The company rescinded a purported $7.5 million executive loan and related stock-option exercise after concluding the 2023 and prior 2021 executive loans were likely impermissible under applicable law or regulation. The 2021 loan was repaid in full; Q2 results included a discrete tax item related to the rescission.
- Management reported effective disclosure controls as of June 30, 2023 and no material change in internal control over financial reporting during the quarter. The filing identifies industry deposit disruptions, including those following bank failures in March 2023, as a risk.
Important facts for investors to verify
- Progress and final costs of the FRB and NYSDFS investigations, including whether the existing reserve is adequate.
- Deposit stability, uninsured-deposit trends, funding costs and reliance on overnight borrowings after the crypto-related business exit.
- Performance and risk concentration in CRE lending, including the nonperforming loan and substandard CRE exposures, and adequacy of the credit allowance.
- Interest-rate sensitivity and the effect of further changes in deposit pricing and funding costs on net interest margin and earnings.
- Market-value losses on securities, liquidity capacity and the assumptions underlying management’s recovery and sale expectations.