Metropolitan Bank Holding Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless otherwise stated.
Business context
The company operates Metropolitan Commercial Bank, serving businesses, individuals and public entities, primarily in the New York metropolitan area. Its main lending activities are commercial real estate (CRE), including multifamily, and commercial and industrial (C&I) lending. Its Global Payments Group provides services to non-bank financial companies, including third-party debit-card programs. The company continued its exit from the crypto-related deposit vertical.
Financial performance and condition
- Profit and revenue: Net income rose 31.8% year over year to $25.1 million from $19.0 million. Diluted EPS was $2.25 versus $1.69. Net interest income increased 25.5% to $58.5 million; total interest income was $83.3 million and interest expense was $24.7 million. Non-interest income declined to $7.0 million from $7.4 million.
- Margins and expenses: Net interest margin increased to 3.86% from 2.71%; net interest rate spread was 2.25% versus 2.32%. Deposit cost rose to 1.72% from 0.23%, and total cost of funds to 1.83% from 0.28%. Non-interest expense increased 26.0% to $31.0 million, including higher compensation, professional fees and FDIC assessments. The quarter included a $2.5 million reduction of the regulatory settlement reserve.
- Credit costs and loan quality: Provision for credit losses was $0.6 million, versus $3.4 million a year earlier. The allowance for credit losses (ACL) was $47.8 million, or 0.98% of total loans, compared with $44.9 million and 0.93% at year-end. Nonperforming loans were $24.0 million, up from $24,000, due to one fully secured CRE loan. Net charge-offs were $0.1 million.
- Balance sheet: Total assets were $6.31 billion, up 0.7% from year-end. Loans, net of deferred fees and costs, were $4.85 billion, up 0.2%. Total deposits declined 2.8% to $5.13 billion; noninterest-bearing deposits fell to 41.4% of deposits from 45.9%.
- Liquidity and funding: Cash and cash equivalents were $299.5 million, up from $257.4 million. Estimated uninsured deposits were $1.5 billion, down from $2.2 billion at year-end. The company reported $195 million of federal funds purchased and $200 million of FHLB advances; the FHLB advances outstanding at quarter-end matured April 3, 2023. Reported remaining secured funding capacity was $2.8 billion. Securities available-for-sale and equity investments totaled $446.3 million; $921.5 million of securities were pledged to support Federal Reserve borrowing capacity.
- Cash flow: Operating activities provided $39.0 million; investing activities provided $1.6 million and financing activities provided $1.5 million. Cash and cash equivalents increased $42.1 million during the quarter.
- Capital: The company and bank met applicable regulatory requirements to be considered well capitalized. At March 31, the company’s Tier 1 leverage, common equity Tier 1 and total risk-based capital ratios were 10.8%, 12.3% and 13.6%, respectively.
Material changes and management commentary
- Interest income increased substantially with higher loan balances and yields, while interest expense rose sharply as deposit rates and borrowing costs increased. Management attributed the improved net interest margin chiefly to loan growth and higher loan yields, partly offset by increased funding costs.
- Deposits decreased by $146.1 million, primarily reflecting a $215.4 million reduction in digital-currency business deposits, partly offset by $69.2 million of net growth in core deposit verticals. Loan production was $265.4 million, compared with $488.9 million in Q1 2022.
- The company adopted CECL on January 1, 2023. Adoption increased the loan ACL by $2.3 million and the unfunded-commitment ACL by $0.8 million, and reduced retained earnings by $2.1 million net of tax. Management’s hypothetical change in economic-scenario weightings would increase the total ACL for loans and commitments by approximately $4 million, or 8.4%; this is a sensitivity illustration, not guidance.
- Available-for-sale securities had $81.5 million of gross unrealized losses and held-to-maturity securities had $65.4 million of unrecognized losses at March 31. The filing attributes AFS losses primarily to market interest rates; the company reported no AFS credit-loss allowance and said it did not intend, nor expect to be required, to sell before recovery.
- Interest-rate simulations estimated that an immediate, sustained 200-basis-point increase would reduce one-year net interest income by 3.36% and economic value of equity by 10.86%. These are model estimates, not forecasts.
Outlook, risks and unusual items
- The filing provides no specific earnings, growth or margin guidance. Management discusses liquidity sources and interest-rate risk management but cautions that results depend on market conditions, deposit flows, loan demand and other uncertainties.
- Federal and state investigations continue concerning a prepaid debit-card program through a former independent program manager, which was used by third parties to establish unauthorized accounts and receive government benefits. The company had accrued $35 million in Q4 2022 for estimated probable settlement losses and expenses and reversed $2.5 million in Q1 2023. Settlement terms and timing remained uncertain; adverse enforcement outcomes could materially affect the company.
- The filing identifies potential industry-wide deposit outflows following March 2023 bank failures as a risk. Other cited risks include credit deterioration, CRE values, deposit competition, interest rates, regulatory costs, cybersecurity and technology disruptions, and the company’s relationships with non-bank financial clients.
- After quarter-end, the company and an executive rescinded a purported $7.5 million loan and related stock-option exercise after determining the transaction was likely impermissible under applicable law or regulation. The executive also repaid a prior $780,000 loan; the filing reports insider credit extensions of $0 as of May 3, 2023.
- Management concluded disclosure controls were effective as of March 31, 2023 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the prepaid-card investigations resolve, including final settlement amounts, timing and any required remedial measures.
- Deposit stability and mix: uninsured deposit levels, core deposit growth, and the continued runoff of crypto-related deposits.
- Progress in refinancing or replacing short-term borrowings, including the April 3, 2023 maturity of quarter-end FHLB advances, and continued access to pledged collateral and funding capacity.
- Developments in the $24 million nonperforming CRE loan, past-due multifamily loans, CRE concentrations and ACL assumptions.
- Changes in unrealized securities losses, liquidity needs and sensitivity to interest-rate movements.
- Any further disclosures concerning the rescinded executive loan and stock-option transaction.