Metropolitan Bank Holding Corp. (MCB) is a well-established financial institution that has demonstrated its ability to adapt and thrive in the ever-changing banking industry. With a rich history spanning over two decades, the company has crafted a unique business model that has allowed it to navigate various economic cycles and emerge as a respected player in the New York metropolitan area.

Company Overview

Metropolitan Bank Holding Corp. (MCB) is a bank holding company headquartered in New York, New York. Through its wholly owned bank subsidiary, Metropolitan Commercial Bank, the Company provides a broad range of business, commercial and retail banking products and services to small businesses, middle-market enterprises, public entities and individuals primarily in the New York metropolitan area. Founded in 1999, MCB has developed into a relationship-led commercial banking franchise focused on serving the needs of middle market businesses in the New York metropolitan area and select other markets. Over the years, the company has grown both organically and through strategic acquisitions, expanding its footprint and diversifying its loan portfolio.

The company's primary lending products are commercial real estate loans, including multi-family loans, and commercial and industrial loans. Substantially all loans are secured by specific items of collateral including business and consumer assets, and commercial and residential real estate. MCB's primary deposit products are checking, savings, and term deposit accounts, all of which are insured by the FDIC. Throughout its history, MCB has faced some challenges, including investigations by governmental entities concerning a prepaid debit card product program that was offered by its global payments business. The Company ceased accepting new accounts from this program manager in 2020 and exited the relationship later that year. MCB has cooperated with the investigations and entered into separate resolutions with its banking regulators related to this matter.

Business Strategy

One of the defining features of Metropolitan Bank Holding Corp. is its laser-focused approach to commercial and industrial (C&I) lending and commercial real estate (CRE) financing. As of September 30, 2024, the company's loan portfolio was predominantly composed of CRE loans, including multi-family mortgages, and C&I loans, accounting for 80.3% and 18.2% of the total loan book, respectively. This industry specialization has allowed the company to develop deep expertise and cultivate strong relationships within its target markets.

Financials

The company's financial performance has been characterized by a robust net interest margin (NIM), which stood at 3.62% as of the third quarter of 2024, compared to 3.27% in the same period of the prior year. This expansion in NIM can be attributed to the company's disciplined approach to loan pricing, strategic funding management, and effective deployment of its interest-earning assets.

For the most recent fiscal year (2023), MCB reported revenue of $250.74 million, net income of $77.27 million, operating cash flow of $42.43 million, and free cash flow of $36.68 million. In the most recent quarter (Q3 2024), the company generated revenue of $71.52 million, net income of $12.27 million, operating cash flow of $4.80 million, and free cash flow of $5.67 million. Year-over-year, revenue increased by 6.0%, while net income decreased by 44.4% compared to Q3 2023. The decline in net income was primarily due to a $10 million regulatory reserve recorded in Q3 2024 and higher operating expenses related to the company's digital transformation initiative.

MCB's interest income increased 22.6% to $120.45 million in Q3 2024 compared to $97.90 million in Q3 2023. This was primarily due to a $606.2 million increase in the average balance of loans and a 72 basis point increase in the yield on loans, reflecting higher market interest rates and disciplined loan pricing. However, interest expense also rose 24.6% to $55.22 million in Q3 2024 from $44.34 million in Q3 2023, due to an $851 million increase in the average balance of interest-bearing deposits and a 36 basis point rise in the total cost of funds.

Balance Sheet Strength

Metropolitan Bank Holding Corp. has also demonstrated a commitment to maintaining a strong balance sheet and prudent risk management practices. As of September 30, 2024, the company's total assets stood at $7.40 billion, with a Tier 1 leverage ratio of 10.6% and a Common Equity Tier 1 ratio of 11.9%, well above the regulatory requirements for well-capitalized institutions.

The company's liquidity position remains strong, with a debt-to-equity ratio of 0.36, cash and cash equivalents of $318.48 million, and an available credit line of $3.1 billion in cash on deposit with the Federal Reserve Bank of New York and available secured wholesale funding borrowing capacity as of September 30, 2024. The current ratio and quick ratio both stood at 1.11 as of the same date.

Asset Quality

The company's asset quality metrics have also been impressive, with non-performing loans to total loans ratio of 0.53% as of September 30, 2024, down from 0.92% at the end of 2023. This favorable asset quality is a testament to the company's robust underwriting standards, diversified loan portfolio, and proactive credit risk management strategies.

Product Segments and Loan Portfolio

MCB's loan portfolio is primarily composed of commercial real estate (CRE) loans and commercial and industrial (C&I) loans. As of September 30, 2024, CRE loans, including owner-occupied properties, made up $4.17 billion, or 70.5%, of the total loan portfolio of $5.90 billion. C&I loans accounted for $1.07 billion, or 18.2%, of the total loan portfolio. The largest concentration within the loan portfolio was to the healthcare industry, comprising $2.10 billion, or 36.3% of total loans, including $2.00 billion in loans to skilled nursing facilities.

On the deposit side, total deposits grew 9.3% to $6.27 billion at September 30, 2024, from $5.74 billion at December 31, 2023, driven by broad-based increases across MCB's various deposit verticals. Non-interest-bearing demand deposits made up 28.4% of total deposits at September 30, 2024, down from 32.0% at December 31, 2023 as the deposit mix shifted more towards interest-bearing accounts.

In addition to its core lending and deposit products, MCB offers various other banking services, including global payments group (GPG) revenue, service charges on deposit accounts, and other fees. GPG revenue declined in 2024 as MCB announced plans to exit all GPG Banking-as-a-Service relationships. However, service charges on deposit accounts increased, helping to partially offset the decline in GPG revenue.

Resilience and Adaptability

Despite the challenges posed by the COVID-19 pandemic, Metropolitan Bank Holding Corp. has demonstrated its resilience and adaptability. The company swiftly implemented measures to support its clients, including participating in government-sponsored relief programs, while also maintaining a disciplined approach to risk management.

MCB has also been involved in several regulatory and legal issues in recent years. In 2023, the company entered into separate consensual resolutions with the Federal Reserve and the New York State Department of Financial Services related to investigations concerning a prepaid debit card program. In Q3 2024, the company recorded a $10 million regulatory reserve to resolve a state agency investigation connected to this matter. The company has stated that it expects to put all of these unfortunate and costly matters behind it in 2024.

Future Outlook and Guidance

Looking ahead, the company remains focused on executing its strategic initiatives, which include further strengthening its commercial banking franchise, enhancing its digital capabilities, and prudently managing its interest rate risk exposure. MCB is currently in the midst of a multi-year digital transformation project to enhance its capabilities and operating efficiencies. The company expects to complete this initiative by the end of 2025, which should help drive improved financial performance going forward.

For the remainder of 2024, MCB expects their net interest margin (NIM) to be approximately 3.45% to 3.50%. This expectation is driven by the 50 basis point reduction in the Fed funds rate, the replacement of $700 million in GPG deposits, and the repricing of $1.5 billion in prime and SOFR index loans. The company expects non-interest expenses to decline 1-3% quarter-over-quarter in the fourth quarter as professional fees decline, but are offset by higher compensation and benefits costs.

For the full year 2024, MCB revised their non-interest expense estimate to approximately $164-$166 million, net of the settlement reserve. The company expects loan growth of around $500 million for the full year 2024, with $200-$250 million of that in the fourth quarter.

Looking ahead to 2025, MCB expects loan growth in the range of 10-12%, non-interest income growth of 6-8% (excluding GPG), and flat operating expenses compared to the full year 2024 estimate. The company reiterated that their goal is to achieve a clean operating expense run rate in the low $150 million range, which is expected towards the end of 2025 into 2026.

MCB remains confident that through the next 12-18 months, they will once again achieve a mid-teens return on tangible common equity (ROTCE) and a NIM approaching 3.75%, subject to market conditions. For the third quarter and year-to-date of 2024, MCB's adjusted ROTCE was 12% and 12.1% respectively.

Conclusion

While the company faces various risks, such as regulatory changes, competition, and economic fluctuations, Metropolitan Bank Holding Corp.'s consistent financial performance, robust risk management practices, and strategic vision position it well to navigate the evolving banking landscape and deliver long-term value for its shareholders. The company's focus on its core commercial banking business, serving small to middle-market enterprises in its regional markets, coupled with its ongoing digital transformation efforts, should provide a solid foundation for future growth and profitability.