Business context and reporting period
Metropolitan Bank Holding Corp. is a New York bank holding company operating Metropolitan Commercial Bank, which serves the New York metropolitan area. Its lending is primarily commercial real estate (CRE) and commercial and industrial (C&I) loans. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018.
Financial performance and condition
Amounts are in U.S. dollars; balance-sheet and cash-flow figures are rounded to millions.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $30.8m | $20.0m | $57.8m | $38.7m |
| Net interest income | $22.9m | $17.4m | $43.5m | $33.9m |
| Provision (credit) for loan losses | $2.0m | $1.3m | $(0.1)m | $2.7m |
| Non-interest income | $2.7m | $2.6m | $5.1m | $8.0m |
| Non-interest expense | $14.7m | $10.3m | $27.4m | $21.5m |
| Net income | $6.1m | $5.9m | $14.6m | $12.2m |
| Diluted earnings per share | $0.71 | $0.70 | $1.72 | $1.46 |
| Net interest margin | 3.47% | 3.59% | 3.57% | 3.63% |
- Growth and funding: Total assets were $2.96bn, up from $2.18bn at year-end. Loans were $2.34bn, up 25.2%; deposits were $2.38bn, up 43.1%. Cash and cash equivalents on the consolidated balance sheet totaled $433.4m, versus $233.0m at year-end. Securities totaled $137.1m, compared with $37.1m.
- Loan mix and credit: CRE loans reached $1.36bn, up $410.2m, and made up 58.1% of loans, versus 50.9% at year-end. The allowance for loan losses was $22.7m, or 0.97% of loans, versus $18.9m, or 1.02%. Nonperforming loans were $3.5m (0.15% of loans), compared with $0.3m at year-end. Six-month net recoveries of $3.9m included $4.2m recovered on previously charged-off taxi medallion loans.
- Liquidity, debt and capital: Deposits included $1.10bn noninterest-bearing and $1.27bn interest-bearing balances. Borrowings totaled $235.2m, including $190.0m of FHLB advances, $20.6m of trust preferred securities and $24.6m of subordinated debt. The Bank reported $190.4m of additional FHLB borrowing capacity and a $116.1m Federal Reserve discount-window line. The Bank met applicable well-capitalized requirements: leverage ratio 11.2%, CET1 12.5%, Tier 1 risk-based 12.5%, and total risk-based capital 13.4%.
- Cash flow: For the first six months, operating activities provided $23.5m, investing activities used $543.5m, and financing activities provided $720.5m. Financing included $715.6m of net deposit growth. Cash and cash equivalents increased $200.4m to $433.4m.
Material changes versus comparable periods
- Q2 net income increased $0.2m, or about 3%, year over year; six-month net income increased $2.4m, or about 20%.
- Net interest income rose with loan growth and higher asset yields, but margin declined as deposit and borrowing costs rose faster. Q2 interest-bearing deposit cost increased to 2.01% from 1.14%; net interest margin fell 12 basis points.
- Q2 non-interest expense rose $4.4m, including higher compensation and technology costs. Technology costs included $1.8m of software-interface licensing fees for specialty deposit products, versus $0.2m a year earlier.
- Six-month non-interest income fell $2.9m, mainly as wire fees and foreign-exchange fees associated with digital-currency customers declined from elevated prior-year levels. The six-month provision was a credit, primarily reflecting taxi-medallion recoveries, despite provision expense associated with loan growth.
Outlook, risks and unusual items
- No earnings or margin guidance is provided. Management describes loan and deposit growth initiatives and reports 2019 loan production of $571.9m for the first half, versus $390.6m in the prior-year period.
- Management expects to take possession of expanded headquarters space in Q3 2019 and renovate through Q4. It anticipates rent expense increasing by about $600,000 in each remaining quarter of 2019, then falling by about $195,000 per quarter after vacating the existing space, expected around Q1 2020.
- New York rent-regulation changes may constrain income and collateral values for rent-regulated multifamily and mixed-use properties. The Bank held $141.0m of rent-regulated multifamily loans; at origination, weighted-average LTV was 45% and debt-service coverage was 1.87.
- CRE loans equaled 372.5% of risk-based capital, versus 312.4% at year-end. The filing also identifies interest-rate, deposit-flow, credit-quality, economic, regulatory, competitive, technology and cyber risks. Management’s interest-rate simulation estimates a 6.68% decline in one-year net interest income under a 200-basis-point rate increase; these are model estimates, not forecasts.
- The Bank reported $182.5m in unused credit lines and $37.2m in standby letters of credit. Management said pending or threatened legal matters were not expected to have a material effect.
- The Company adopted revenue-recognition guidance in January 2019 and recorded a $117,000 reduction to opening retained earnings. It also recorded a $68,000 accounting adjustment related to equity-investment guidance.
Important facts for investors to verify
- Reconcile the cash balance: the consolidated balance sheet and cash-flow statement report $433.4m at June 30, while the liquidity discussion states $443.4m.
- Assess whether deposit growth and its funding cost can support continued loan growth without further net-interest-margin pressure.
- Review CRE concentration, the effect of New York rent regulation on the $141.0m rent-regulated multifamily portfolio, and the rise in nonperforming loans.
- Separate recurring credit costs from the unusual $4.2m taxi-medallion recovery when evaluating the six-month loan-loss credit and earnings.
- Monitor specialty-deposit technology costs, headquarters lease expenses, and the timing and effect of the expected accounting standard for credit losses; management said the future allowance impact was not yet determinable.