Metropolitan Bank Holding Corp. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Amounts are U.S. dollars; financial statement figures are generally in millions unless noted.
Business context
Metropolitan is a New York bank holding company operating through Metropolitan Commercial Bank, with five banking centers. It focuses on commercial real estate (CRE), commercial and industrial (C&I) lending, relationship banking and nationwide third-party debit-card issuing. The bank also provides cash-management services to cryptocurrency-related businesses.
Financial performance and condition
| Metric | FY 2017 / Dec. 31, 2017 | Prior comparable period |
|---|---|---|
| Total assets | $1,759.9 million | $1,220.3 million at year-end 2016 |
| Total loans | $1,421.0 million | $1,055.7 million at year-end 2016 |
| Total deposits | $1,404.4 million | $993.8 million at year-end 2016 |
| Net interest income | $52.1 million | $38.1 million; up 36.8% |
| Provision for loan losses | $7.1 million | $8.1 million |
| Noninterest income | $11.3 million | $5.4 million; up 108.4% |
| Noninterest expense | $32.7 million | $27.4 million; up 19.6% |
| Net income | $12.4 million | $5.0 million; up 146.7% |
| Net interest margin | 3.54% | 3.57% in 2016 |
| Efficiency ratio | 51.66% | 62.94% in 2016 |
| Cash and cash equivalents | $261.2 million | $82.9 million at year-end 2016 |
| Stockholders’ equity | $236.9 million | $109.5 million at year-end 2016 |
- Fourth quarter: Net income was $3.3 million, compared with $49,000 in Q4 2016. Q4 2017 net interest income was $15.6 million; noninterest income was $6.2 million and included a notable increase in fees. Income tax expense was $5.2 million.
- Cash flow: Operating activities provided $31.5 million; investing activities used $366.6 million, principally reflecting net loan growth; financing activities provided $513.5 million, including deposit growth and IPO proceeds. Cash rose by $178.3 million during the year.
- Funding and liquidity: Core deposits were $1,324.1 million, or 94.3% of deposits. Noninterest-bearing demand deposits were $812.5 million, or 57.9% of deposits. Available borrowing capacity was reported as $263.4 million from FHLBNY, subject to additional collateral, and $92.9 million at the Federal Reserve discount window.
- Debt: Year-end liabilities included $42.2 million of FHLB advances, $20.6 million of trust-preferred securities payable and $24.5 million of subordinated notes, net of issuance costs. The company issued $25 million of subordinated notes in March 2017 at 6.25%, maturing in 2027.
- Asset quality: Allowance for loan losses was $14.9 million, or 1.05% of loans, versus $11.8 million, or 1.12%, in 2016. Nonperforming loans were 0.24% of loans, down from 0.35%. Net charge-offs were $4.0 million, including a $3.7 million taxi-medallion charge-off; $1.2 million remained in that portfolio at year-end.
- Capital: The bank reported a 19.4% total risk-based capital ratio, 18.4% common equity Tier 1 ratio and 14.7% leverage ratio, and was classified as well capitalized. The company’s corresponding ratios were 19.9%, 15.3% and 13.7%.
Material changes versus 2016
- Loans grew 34.6% and deposits grew 41.3%; total assets rose 44.2%. Growth in loans and higher loan yields drove most of the increase in net interest income.
- Noninterest income more than doubled, principally from higher deposit service charges tied to ACH/wire activity and foreign-exchange conversion fees. Debit-card income also increased, to $3.4 million from $2.9 million.
- Interest expense increased 42.4%, including interest on the new subordinated notes; the average cost of interest-bearing deposits also rose.
- Net interest spread declined to 2.94% from 3.26%, while the reported net interest margin edged down to 3.54% from 3.57%.
- The November 2017 IPO generated approximately $115 million of net proceeds and was a major contributor to increased cash and equity. The company’s common stock began NYSE trading in November.
Outlook, commentary and risks
- Management describes its strategy as organic growth in New York through deeper client relationships, loan growth, core deposits and fee-based services. It expects its debit-card issuing business to remain a source of deposits and fee income. No quantified earnings or growth guidance is provided.
- The company recorded approximately $1.6 million of one-time tax expense from the Tax Cuts and Jobs Act’s reduction in the federal corporate tax rate; the reported 2017 effective tax rate was 47.55%.
- Cryptocurrency exposure is a material funding concentration: one exchange customer’s average 2017 corporate account balance was $77.9 million and average settlement account balance was $111.7 million. At year-end, those accounts represented about 6.8% and 15.9% of deposits, respectively. The bank says settlement funds are held in overnight funds and not used for general funding; it does not hold cryptocurrency or take cryptocurrency exchange-rate risk. It limits cryptocurrency-related activity to cash-management services and does not accept related wire transfers from non-U.S. entities.
- Management identifies risks from concentrated New York-area lending, CRE and C&I exposures, a relatively young loan book, interest-rate changes, deposit concentration, technology and cybersecurity, regulatory compliance, and continued growth. Consumer loans were 3.1% of loans; CRE was the largest portfolio segment.
- The company expects the new CECL credit-loss standard, effective for it after December 15, 2020, to affect its allowance and anticipates a one-time cumulative adjustment, but says the amount cannot yet be determined.
- The Federal Reserve’s most recent CRA rating was “Needs Improvement”; the New York State rating was “Satisfactory.” Management said pending or threatened ordinary-course legal matters were not expected to have a material adverse effect.
- The company had not declared common dividends and said it did not expect to pay them for the foreseeable future, anticipating retention of earnings to support growth. The financial statements received an unqualified audit opinion; the company did not include management’s ICFR report or auditor attestation under applicable newly public company and emerging-growth-company relief.
Most important facts for investors to verify
- Whether deposit growth is durable and diversified, particularly given the cryptocurrency-exchange customer’s significant share of deposits and the distinction between corporate and settlement balances.
- Whether rapid loan growth, CRE concentration and the relatively short seasoning of the portfolio are adequately reflected in underwriting, asset-quality trends and the loan-loss allowance.
- Whether growth in fee income and operating leverage can persist as expenses and deposit funding costs rise; review the drivers of the unusually strong Q4 noninterest income.
- How the 2017 IPO proceeds are deployed, and how subordinated debt costs, capital requirements and future CECL adoption affect returns and capital.
- The effect of the CRA “Needs Improvement” rating and ongoing regulatory, compliance, cybersecurity and third-party-service-provider risks.