Business context and reporting period
Metropolitan Bank Holding Corp. is a New York bank holding company whose wholly owned Metropolitan Commercial Bank operates primarily in the New York metropolitan area. Its principal lending businesses are commercial real estate and commercial and industrial lending. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Amounts below are in millions of dollars unless noted.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest and dividend income | $16.4 | $11.3 | $42.9 | $32.2 |
| Net interest income | $14.0 | $9.8 | $36.5 | $27.6 |
| Provision for loan losses | $1.2 | $0.2 | $3.6 | $2.0 |
| Non-interest income | $2.2 | $1.3 | $5.1 | $4.1 |
| Non-interest expense | $8.6 | $8.4 | $23.0 | $21.3 |
| Net income | $3.8 | $1.5 | $9.0 | $5.0 |
| Diluted EPS | $0.82 | $(0.52) | $1.94 | $0.45 |
Net interest margin was 3.62% in Q3 and 3.57% for the first nine months, compared with 3.56% and 3.52%, respectively, in 2016. The efficiency ratio improved to 53.04% for Q3 and 55.26% year to date, from 75.65% and 67.14%. Return on average assets and equity was 0.94% and 13.14% in Q3; year-to-date returns were 0.84% and 10.59%.
Financial position, funding and liquidity
At September 30, 2017, total assets were $1,723.7, net loans $1,365.8, deposits $1,488.6 and stockholders’ equity $119.0. Cash and due from banks was $267.1, versus $82.9 at year-end 2016. Deposits rose 49.8% from year-end, led by noninterest-bearing demand deposits, up $422.9 to $826.3. Gross loans increased 30.9% to $1,381.6; commercial real estate loans were $736.5 and commercial and industrial loans $346.7.
Borrowed funds were $43.8 at quarter-end, down from $78.4 at year-end; trust preferred securities were $20.6 and subordinated debt, net of issuance costs, was $24.5. The company issued $25.0 of 6.25% subordinated notes in March 2017, maturing in 2027. Available borrowing capacity was reported as $261.5 from the Federal Home Loan Bank, subject to additional collateral, and $93.8 at the Federal Reserve discount window.
For the first nine months, operating cash flow was $24.1, investing cash outflow $324.6 and financing cash inflow $484.7; cash increased $184.2 to $267.1. Financing inflows included $494.9 of net deposit growth, partly offset by net repayments of FHLB advances. Management reported the Bank exceeded applicable regulatory capital requirements and was “well capitalized”; its September 30 ratios included a 9.32% Tier 1 leverage ratio, 10.77% common equity tier 1 ratio and 11.85% total risk-based capital ratio.
Material changes versus comparable periods
- Q3 net income rose to $3.8 from $1.5; nine-month net income rose to $9.0 from $5.0. The 2016 Q3 basic EPS loss also reflected $3.4 of preferred dividends, unlike 2017.
- Net interest income increased 42.2% in Q3 and 32.1% year to date, primarily due to growth in average interest-earning assets, especially loans. Higher funding costs partly offset that growth.
- Loan-loss provision increased to $1.2 in Q3 and $3.6 year to date. The allowance was $15.1, or 1.09% of gross loans, compared with 1.12% at year-end 2016. Nonperforming loans increased to $7.1, or 0.51% of loans, from $3.7, or 0.35%.
- Noninterest income grew, particularly service charges on deposit accounts. Year-to-date noninterest expense rose 7.7%, including higher professional fees, premises costs, compensation and processing fees.
- After the reporting period, the company completed an IPO in November 2017, selling 3.565 million shares including the overallotment and receiving approximately $115 million in net proceeds. Management said proceeds would initially increase liquidity and capital and could support loan growth; higher equity was expected to weigh on return on equity.
Outlook, risks and unusual items
The filing provides no specific earnings, revenue or margin guidance. Management describes growth in loans and core deposits as priorities and identifies interest rates, credit performance, competition, deposit growth and costs among key uncertainties. Its interest-rate simulation estimated a 13.1% increase in one-year net interest income under a 200-basis-point rise and a 4.5% decrease under a 100-basis-point decline; management cautions these model estimates depend on uncertain assumptions and are not forecasts.
Credit risks include rapid loan growth, commercial lending exposure, collateral and real-estate values, and the possibility that the allowance may not cover actual losses. The filing reports $14.8 of impaired loans, including $7.7 of accruing troubled debt restructurings; no new TDR modifications or payment defaults on modified loans were reported for the periods shown. Management attributed the increase in nonperforming loans mainly to residential real estate, including one large, well-collateralized one-to-four-family loan. It also cited a December 2016 $5.1 taxi-medallion charge-off, leaving $3.7 of taxi-medallion exposure at September 30, 2017.
A cryptocurrency exchange was a notable deposit customer. During Q3 it maintained average balances of $108 in a corporate noninterest-bearing account and approximately $137 in a separate settlement account. The filing says settlement funds were held overnight at the Federal Reserve and not used for general funding; at quarter-end, the two accounts represented roughly 7% and 9% of total deposits, respectively. Management stated the settlement account did not present material income or liquidity risk. The company also disclosed ordinary-course pending and threatened legal matters, which management did not expect to be material.
The filing states disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter. It also checked “No” for having filed all required reports during the preceding 12 months. As an emerging growth company, it elected delayed adoption dates for new accounting standards; management was evaluating the expected effects of the revenue, lease and credit-loss standards, and could not yet quantify the expected allowance impact of the credit-loss standard.
Important facts for investors to verify
- Whether deposit growth—especially the large exchange-related balances—is durable, concentrated, and available as a stable funding source; confirm the distinct treatment of settlement funds.
- Whether rapid loan growth and the rise in nonperforming and impaired loans are matched by appropriate underwriting, collateral values and allowance coverage.
- How the IPO proceeds are deployed, and the resulting effects on loan growth, capital ratios, liquidity and return on equity.
- Whether higher deposit and borrowing costs, including the subordinated notes, pressure net interest margin as rates and competition change.
- The timing and magnitude of future credit-loss accounting effects, which the company had not quantified.
- The basis for the “No” response regarding prior-period SEC reporting and any implications for the company’s reporting history.