Metropolitan Bank Holding Corp. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results include Metropolitan Commercial Bank, serving the New York metropolitan area. The Bank focuses primarily on commercial real estate and commercial and industrial lending, alongside consumer and prepaid-card businesses.
Financial performance
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2017 period.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Interest income | $20.0 | $14.0 | $38.6 | $26.5 |
| Net interest income | $17.4 | $11.8 | $33.8 | $22.5 |
| Provision for loan losses | $1.3 | $1.8 | $2.7 | $2.4 |
| Non-interest income | $2.6 | $1.6 | $8.0 | $2.8 |
| Non-interest expense | $10.3 | $7.1 | $21.5 | $14.4 |
| Net income | $5.9 | $2.7 | $12.2 | $5.2 |
| Diluted earnings per share | $0.70 | $0.57 | $1.46 | $1.12 |
| Net interest margin | 3.59% | 3.44% | 3.63% | 3.50% |
Management attributed higher net interest income mainly to loan growth and higher loan and overnight-deposit yields. Average loan yields rose to 4.71% in both 2018 periods; average overnight-deposit yields were 1.81% for Q2 and 1.71% for the six months. Funding costs also increased: the average cost of interest-bearing liabilities was 1.46% in Q2 versus 1.18%, and 1.39% for the six months versus 1.06%.
Non-interest expense growth reflected higher compensation, staffing, data-processing and wire-transfer costs. Compensation and benefits increased by $1.8 million in Q2 and $3.6 million in the six-month comparison. Management reported 21 additional full-time equivalent employees as a principal Q2 driver.
Financial condition, cash flow and capital
- Assets and loans: Total assets were $1.924 billion at June 30, up $164.6 million from December 31, 2017. Gross loans reached $1.602 billion, up $180.7 million; net loans were $1.582 billion. Consumer loans grew 93.5% and multifamily loans 22.8% from year-end.
- Deposits and liquidity: Deposits totaled $1.540 billion, up $136.1 million from year-end. Cash and cash equivalents were $251.1 million, down from $263.2 million; available-for-sale securities were $29.0 million. The Bank had $63.0 million in FHLB advances and reported additional FHLB borrowing capacity of $244.7 million, subject to additional collateral, plus a $141.5 million FRB discount-window line.
- Cash flows: For the six months, operating activities provided $32.2 million, investing activities used $201.1 million and financing activities provided $156.8 million. Cash and cash equivalents decreased by $12.1 million to $251.1 million.
- Credit quality: The allowance for loan losses was $17.5 million, or 1.09% of loans, versus $14.9 million, or 1.05%, at year-end. Six-month net charge-offs were $171,000. Non-accrual loans fell to $192,000 from $3.4 million at year-end; there were no loans 90 days past due and still accruing. Accruing troubled debt restructurings totaled $2.6 million.
- Debt and equity: Stockholders’ equity was $249.6 million, up from $236.9 million at year-end. Debt included $63.0 million of FHLB advances, $20.6 million of trust preferred securities and $24.5 million of subordinated debt, net of issuance costs. The subordinated notes carry a 6.25% coupon and mature in 2027.
- Regulatory capital: The Bank met the filing’s “well capitalized” standards. At June 30, its Tier 1 leverage, common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios were 14.5%, 17.0%, 17.0% and 18.1%, respectively.
Material changes, outlook and risks
Net income increased $3.2 million in Q2 and $7.0 million for the first six months. Growth in net interest income and non-interest income was partly offset by higher operating expenses; six-month results also included higher income tax expense. Q2 prepaid debit-card income included a $500,000 early-termination fee. Six-month other service charges and fees included a $2.1 million increase in foreign-currency conversion fees, largely associated with digital-currency-industry customers; management said those fees declined $2.2 million sequentially from Q1.
Digital-currency-related corporate deposits were $89.4 million and settlement-account deposits were $232.2 million at June 30. The Bank said settlement funds were held primarily in overnight deposits at the Federal Reserve and were not being leveraged into other interest-earning assets under its current policy. Management said it may consider changing that policy. Average non-interest-bearing deposits supported the margin, but rising market rates could affect funding costs and asset values. The filing provides no earnings or growth guidance; management cautions that interim results are not necessarily indicative of full-year results.
Management identified uncertainty in loan-loss estimates, collateral values and economic conditions as potential sources of material allowance changes. The filing also cites competition, deposit flows, loan demand, real-estate values, regulation, technology, cyberattacks and broader economic conditions as risks. The Bank’s interest-rate simulation estimated that a 200-basis-point increase would raise one-year net interest income by 9.36%, while a 100-basis-point decrease would lower it by 5.05%; the filing stresses that these model estimates rely on uncertain assumptions and are not forecasts. Management said pending or threatened legal matters were not expected to have a material aggregate effect. It reported effective disclosure controls and no material change in risk factors from the 2017 Form 10-K.
The company had elected delayed adoption dates for certain accounting standards. Management was evaluating the expected-credit-loss standard, effective for the company in 2021, and could not yet determine its impact; it expected a one-time cumulative adjustment to the allowance when adopted. The company also adopted share-based-payment guidance in Q2, recognizing a $62,000 income-tax benefit for the six months.
Key investor verification points
- Assess the durability and concentration of digital-currency-related deposits and transaction-fee income, including the sequential decline in foreign-currency conversion fees.
- Track deposit pricing and mix, especially as interest rates change, and whether the Bank alters its policy for settlement-account funds.
- Evaluate whether rapid loan growth, particularly in consumer and multifamily lending, is matched by underwriting quality and an adequate allowance.
- Monitor expense growth against revenue growth, including staffing, wire-transfer and data-processing costs.
- Review liquidity and capital alongside undrawn credit commitments, borrowing capacity and the assumptions underlying interest-rate sensitivity estimates.