Metropolitan Bank Holding Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results. Metropolitan Commercial Bank serves the New York metropolitan area and provides commercial and retail banking, commercial real estate (CRE) and commercial and industrial (C&I) lending, and banking-as-a-service through its Global Payments Group.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $70.1m | $45.0m | $180.2m | $124.2m |
| Net interest income | $63.3m | $40.8m | $165.3m | $112.2m |
| Net interest margin | 3.85% | 2.70% | 3.29% | 2.81% |
| Non-interest income | $5.8m | $5.9m | $20.2m | $16.6m |
| Provision for loan losses | $2.0m | $0.5m | $7.8m | $3.3m |
| Non-interest expense | $31.2m | $22.0m | $82.1m | $64.0m |
| Net income | $25.0m | $16.2m | $67.2m | $41.7m |
| Diluted earnings per share | $2.23 | $1.77 | $5.98 | $4.76 |
- Quarterly net income increased 54% year over year; nine-month net income increased 61%. Management attributed the gains primarily to higher net interest income.
- Net interest margin expanded as loan and overnight-deposit yields and average balances rose; higher funding costs partly offset the improvement. Q3 cost of funds was 0.45%, versus 0.31% a year earlier.
- Global Payments Group revenue was $4.1m in Q3 and $15.0m for the nine months, up from $3.9m and $11.2m, respectively, in 2021. Management cited higher client transaction volumes.
Financial position, cash flow and liquidity
- At September 30, total assets were $6.42bn, down 9.8% from December 31, 2021. Total loans, net of deferred fees and costs, were $4.62bn, up 23.7%; net loans after the allowance were $4.57bn. Growth was mainly in CRE and C&I loans.
- Total deposits were $5.73bn, down 10.9% from year-end. Noninterest-bearing deposits fell $610.7m, largely due to digital-currency-business outflows; retail deposits and fintech BaaS deposits partly offset the decline. Noninterest-bearing deposits were 53.4% of deposits, compared with 57.0% at year-end.
- Cash and cash equivalents were $708.8m, down from $2.36bn. For the nine months, operating cash flow was $74.4m, investing cash flow was negative $989.5m, and financing cash flow was negative $735.5m; cash declined $1.65bn. The filing attributes the cash reduction mainly to deploying liquidity into loans and securities and deposit outflows.
- Available-for-sale and held-to-maturity securities totaled $944.6m at carrying value. AFS securities had $89.7m of gross unrealized losses; HTM securities had $72.5m of unrecognized losses. The company attributed the declines primarily to interest-rate changes, reported no impairment, and said it did not intend or expect to be required to sell before recovery.
- Stockholders’ equity was $582.2m. Accumulated other comprehensive loss was $53.8m, versus $7.5m at year-end, mainly reflecting AFS securities losses. The company remained “well capitalized”; the Bank’s CET1 ratio was 13.1% and total risk-based capital ratio was 14.0%.
- The company redeemed $25.0m of 6.25% subordinated notes in March; no subordinated debt remained at quarter-end. Trust preferred securities were $20.6m and secured borrowings were $26.9m.
- Uninsured deposits totaled $2.2bn. Available borrowing capacity was $909.4m at the FHLB and $109.3m at the FRBNY; no borrowings from either were outstanding at quarter-end.
Material changes and asset quality
- Loans grew $885.4m from year-end, while the allowance for loan losses rose to $42.5m from $34.7m. The allowance was 0.92% of loans, versus 0.93% at year-end; the nine-month provision increase primarily reflected loan growth.
- Nonaccrual loans fell to $24,000 from $10.0m at year-end, primarily after repayment of a CRE loan. No loan charge-offs were recorded in Q3 2022; nine-month net recoveries were $5,000.
- CRE represented a substantial concentration: the MD&A reported CRE at 79.18% of total loans, and skilled nursing facility CRE exposure at $1.11bn, or 24.03% of loans. Non-owner-occupied CRE was 343.3% of risk-based capital.
- Non-interest expense increased $9.2m in Q3, primarily from higher professional fees, including elevated legal fees, and increased compensation and staffing.
Outlook, risks and unusual items
- The filing provides no numerical earnings or growth guidance. Management describes continued organic growth opportunities in lending, deposits and payments, while noting that actual results are uncertain.
- Federal Reserve and New York State investigations remain ongoing regarding a prepaid debit card program operated through a former independent program manager. Unauthorized accounts and government-benefit payments were associated with the program. The bank ceased accepting new accounts in July 2020 and exited the relationship; investigations could result in enforcement actions, civil penalties or remedial measures.
- The company terminated its $300m LIBOR-linked interest-rate cap in Q3. It expects to release $12.7m of unrecognized value from accumulated other comprehensive income as credits to licensing-fee expense through March 2025.
- Interest-rate sensitivity modeling estimated that a sustained parallel 200-basis-point increase would raise one-year net interest income 5.06%, while a 200-basis-point decrease would reduce it 7.38%. The filing cautions that these simulations depend on assumptions and are not forecasts.
- Other cited risks include deposit flows and digital-currency exposure, credit deterioration, interest-rate and securities-value changes, economic conditions, fintech-partner and technology risks, cybersecurity, regulation, and litigation. Management said disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Investor facts to verify
- Whether digital-currency-related deposit outflows continue and how uninsured-deposit concentration affects funding stability and costs.
- Developments, potential financial exposure and any required remediation arising from the prepaid-card regulatory investigations.
- CRE and skilled-nursing concentrations, borrower performance, collateral values, and the adequacy of the loan-loss allowance as the portfolio expands.
- The degree to which higher rates sustain net interest margin while increasing deposit costs and unrealized securities losses.
- Execution of loan growth and Global Payments Group expansion, including expense trends and the expected timing of the interest-rate-cap benefit.