Metropolitan Bank Holding Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results. The company is a New York bank holding company operating Metropolitan Commercial Bank, focused on commercial and retail banking in the New York metropolitan area.
Financial performance and condition
- Income and earnings: Interest income was $18.6 million and non-interest income was $5.4 million. Net interest income was $16.5 million, up 52.6% from $10.8 million in Q1 2017. Net income rose to $6.3 million from $2.5 million. Basic EPS was $0.77 versus $0.55; diluted EPS was $0.75 versus $0.55.
- Margins and efficiency: Net interest margin was 3.67%, up 7 basis points year over year; net interest spread was 2.84%, down 32 basis points. The reported efficiency ratio improved to 51.48% from 60.16%. Return on average assets was 1.35% versus 0.83%, and return on average common equity was 10.47% versus 9.68%.
- Expenses and credit costs: Non-interest expense increased 55.3% to $11.2 million. Provision for loan losses rose to $1.5 million from $0.6 million. Net charge-offs were $104,000; the allowance for loan losses was $16.3 million, or 1.07% of loans.
- Balance sheet growth: Total assets were $1.97 billion at March 31, up $209.0 million from year-end 2017. Gross loans increased $107.0 million to $1.53 billion; deposits rose $212.8 million to $1.62 billion. Noninterest-bearing demand deposits were $1.01 billion.
- Cash flow and liquidity: Cash and cash equivalents were $371.0 million, versus $261.2 million at year-end. Quarterly operating cash flow was $27.2 million, investing cash outflow was $121.0 million, and financing cash inflow was $203.5 million, principally reflecting deposit growth. Available borrowing capacity was reported as $253.8 million at the FHLB, subject to additional collateral, and $172.7 million at the Federal Reserve discount window.
- Debt and capital: Period-end FHLB advances were $33.0 million; trust preferred securities payable were $20.6 million; subordinated debt, net of issuance costs, was $24.5 million. The Bank exceeded regulatory capital requirements and was considered well capitalized; its total risk-based capital ratio was 18.8% and Tier 1 leverage ratio was 14.6%.
- Credit quality: Non-accrual loans were $85,000, down from $3.4 million at year-end; accruing loans over 90 days past due were nil. Accruing troubled debt restructurings were approximately $2.7 million. Special-mention loans totaled $8.3 million, with $1.2 million classified substandard.
Changes versus comparable periods
- Compared with Q1 2017, interest income increased 49.7%, net interest income rose 52.6%, and non-interest income increased 331.9%. Management attributed fee growth principally to cash-management and digital-currency-related activity.
- Non-interest expense increased 55.3%, including higher compensation, professional fees, and data-processing costs. Interest expense rose 31.2%; higher deposit pricing and a full quarter of interest on subordinated notes contributed.
- Average interest-earning assets grew to $1.82 billion from $1.24 billion, led by higher average loan balances. Average loan yield increased to 4.71% from 4.52%; cost of interest-bearing liabilities rose to 1.31% from 0.93%.
- The year-over-year EPS comparison is affected by the larger share base following the November 2017 IPO: weighted-average basic shares were 8.12 million versus 4.54 million in Q1 2017.
- From December 31, 2017 to March 31, 2018, total deposits rose 15.2%, while cash increased by $109.7 million and net loans by $104.9 million. Non-performing assets declined primarily after a residential real-estate loan returned to accrual status.
Outlook, risks, and unusual items
- The filing provides no numerical earnings or growth guidance. Management described continued focus on core deposits and loan growth; it cautioned that Q1 results are not necessarily indicative of full-year results.
- Management cited borrower repayment and credit-market conditions, economic changes, liquidity and funding changes, technology execution, and control effectiveness among factors that could affect results. The allowance estimate is judgmental and may change with economic conditions, collateral values, or borrower cash flows.
- Digital-currency-related corporate accounts were $100.8 million and settlement accounts were $281.2 million—together about 23.6% of deposits. Management said settlement balances are not used for funding and do not, in its view, pose material liquidity risk. The filing also links digital-currency business growth to fee income.
- Modeled one-year net interest income increased 14.70% under a 200-basis-point rate rise and decreased 7.59% under a 100-basis-point decline. These are scenario estimates, not forecasts; management noted material assumptions and uncertainty.
- Commitments included $115.5 million of loan commitments and $24.7 million of standby letters of credit. Management said pending or threatened legal proceedings were not expected to have a material aggregate effect. The filing reported no material change in risk factors from the 2017 Form 10-K.
- The company expected to implement software and test models for the future expected-credit-loss standard; it could not yet estimate the effect, though it expects a one-time cumulative allowance adjustment upon adoption. Other accounting standards discussed were generally expected to have no material impact or remained under evaluation.
Important facts for investors to verify
- Whether growth in digital-currency-related fees and deposits is sustainable, and the stability and liquidity characteristics of those deposits—especially settlement balances.
- Loan growth composition and underwriting, including the rapid increase in consumer loans, and the trend in special-mention and substandard credits, TDRs, and allowance coverage.
- Whether higher deposit and borrowing costs pressure net interest margin as interest rates and funding competition change.
- Whether operating expenses grow more slowly than revenue, given the quarter’s substantial increases in compensation, compliance-related professional fees, and processing costs.
- The potential allowance impact and implementation readiness for the expected-credit-loss accounting standard, as well as the assumptions behind interest-rate sensitivity models.