Metropolitan Bank Holding Corp. — Q3 2020 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and nine months ended September 30, 2020; balance-sheet comparisons are to December 31, 2019. The company is a bank holding company operating Metropolitan Commercial Bank, primarily in the New York metropolitan area. Its lending is concentrated in commercial real estate and commercial and industrial loans. Dollar amounts below are in millions unless noted.
Financial results and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest income | $35.9 | $35.5 | $106.2 | $93.3 |
| Net interest income | $32.3 | $26.1 | $91.5 | $69.6 |
| Provision for loan losses | $1.1 | $2.0 | $7.7 | $1.9 |
| Non-interest income | $3.6 | $2.7 | $13.6 | $7.8 |
| Non-interest expense | $18.9 | $15.5 | $56.7 | $42.9 |
| Net income | $10.8 | $7.7 | $27.7 | $22.3 |
| Diluted EPS | $1.27 | $0.90 | $3.27 | $2.63 |
| Net interest margin | 3.18% | 3.26% | 3.26% | 3.47% |
- At September 30, total assets were $4.00 billion; gross loans were $2.99 billion, up 11.8% from year-end 2019; deposits were $3.53 billion, up 26.4%. Stockholders’ equity was $328.6 million.
- Cash and cash equivalents were $767.9 million (19.2% of assets); available-for-sale securities were $182.3 million. Management reported $488.5 million of available FHLB borrowing capacity and a $131.1 million FRBNY credit line.
- The allowance for loan losses was $33.6 million, or 1.12% of total loans, compared with $26.3 million, or 0.98%, at year-end. Nine-month net charge-offs were $0.35 million; the comparable 2019 period had $3.6 million of net recoveries, including substantial taxi-medallion recoveries.
- Non-performing loans were $6.6 million, 0.22% of loans, versus $4.5 million and 0.17% at year-end. The company and bank reported that they met applicable “well-capitalized” standards; bank total risk-based capital was 12.9%.
- Debt included $20.6 million of trust preferred securities, $24.6 million of subordinated debt, and $32.2 million of secured borrowings. FHLB advances were zero, down from $144.0 million at year-end.
- Nine-month cash flows: operating activities provided $56.5 million; investing activities used $259.3 million; financing activities provided $581.5 million. Cash and cash equivalents increased $378.7 million to $767.9 million.
Material changes versus comparable periods
- Q3 net income rose $3.1 million year over year, mainly on higher net interest income and non-interest income, partly offset by higher operating expense and taxes. Nine-month net income rose $5.4 million.
- Net interest income grew, but net interest margin declined 8 basis points in Q3 and 21 basis points for the nine-month period. Lower market rates reduced asset yields; the larger balance of low-yield overnight deposits also weighed on margin. Lower deposit and borrowing costs partly offset those pressures.
- Nine-month non-interest income increased, including a $3.3 million gain on securities sales and higher prepaid debit-card income. Non-interest expense rose, including higher compensation, premises, licensing and technology costs.
- Deposit growth exceeded loan growth, increasing cash balances. Loans grew mainly in commercial real estate, construction, multifamily and C&I; management said it was more selective and loan production was lower than in 2019.
Outlook, commentary, risks and unusual items
- The filing gives no quantitative earnings or revenue guidance. Management emphasized uncertainty from COVID-19 and said further allowance increases may be needed as loan modifications expire and deferred payments resume. The allowance estimate is particularly sensitive to economic conditions, borrower performance, collateral values and forecasts.
- As of September 30, 107 loans totaling $329.9 million, or 11.0% of loans, had COVID-related modifications, down from $527.6 million, or 18.2%, at June 30. The filing says some deferred payments are scheduled for repayment during 2021. Management reported no significant COVID-related impact to skilled-nursing loan cash flows to date; healthcare exposures were 26.1% of total loans.
- Credit concentration is material: commercial real estate represented 77.6% of loans, and skilled-nursing real estate alone was 18.8%. One COVID-affected transportation C&I loan had a $3.5 million balance and a $2.6 million specific reserve. The company also cited possible deterioration in borrower finances, real-estate values and loan quality.
- Other stated risks include sustained low rates and pressure on margins, deposit-flow changes, cyber and third-party operational failures, and the LIBOR transition affecting floating-rate debt and trust preferred securities. Interest-rate simulations are estimates, not forecasts; the filing modeled a 4.92% increase in net interest income under a 200-basis-point rise and a 0.57% increase under a 100-basis-point decline.
- The company entered a $300 million notional interest-rate cap designated as a cash-flow hedge; its September 30 fair value was $0.7 million. Goodwill testing identified no impairment at quarter-end. Headquarters renovation was completed in Q3; the company vacated its former space in July, reducing rent expense beginning in August.
- Management considered pending legal proceedings immaterial to financial condition, results and liquidity. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How borrowers perform as the 107 COVID-modified loans return to regular payments, including the timing and collection of deferred amounts.
- Whether credit deterioration, commercial real-estate concentration or pandemic effects require additional loan-loss provisions, and how the $33.6 million allowance compares with subsequent loan performance.
- The source, stability and concentration of the $736.9 million deposit increase, including corporate cash-management and bankruptcy-trustee balances, and the cost of retaining those deposits.
- Whether loan growth and lower funding costs can offset reduced asset yields, elevated liquidity balances and continued net-interest-margin pressure.
- The effect of the $3.3 million securities-sale gain and other unusual or nonrecurring expense items when assessing underlying earnings.
- The company’s capital and liquidity under adverse scenarios, and the sensitivity of earnings and debt costs to rates and the LIBOR-to-replacement-rate transition.