UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File No. 001-38282
Metropolitan Bank Holding Corp.
(Exact Name of Registrant as Specified in Its Charter)
New York
13-4042724
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
99 Park Avenue, New York, New York
10016
(Address of Principal Executive Offices)
(Zip Code)
(212) 659-0600
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
MCB
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☒
There were 11,192,936 shares of the Registrant’s common stock, par value $0.01 per share, outstanding as of July 31, 2024.
Table of Contents
METROPOLITAN BANK HOLDING CORP.
Form 10-Q
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition
6
Consolidated Statements of Operations
7
Consolidated Statements of Comprehensive Income
8
Consolidated Statements of Changes in Stockholders’ Equity
9
Consolidated Statements of Cash Flows
10
Notes to Unaudited Consolidated Financial Statements
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
42
Item 4. Controls and Procedures
44
PART II. OTHER INFORMATION
45
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
46
Signatures
47
2
GLOSSARY OF COMMON TERMS AND ACRONYMS
ACL
Allowance for credit losses
FHLB
Federal Home Loan Bank
AFS
Available-for-sale
FHLBNY
Federal Home Loan Bank of New York
ALCO
Asset Liability Committee
FRB
Federal Reserve Bank
ALLL
Allowance for loan and lease losses
FRBNY
Federal Reserve Bank of New York
AOCI
Accumulated other comprehensive income
FX
Foreign exchange
ASC
Accounting Standards Codification
GAAP
U.S. Generally accepted accounting principles
ASU
Accounting Standards Update
GPG
Global Payments Group
Bank
Metropolitan Commercial Bank
HTM
Held-to-maturity
BHC Act
Bank Holding Company Act of 1956, as amended
IRR
Interest rate risk
BSA
Bank Secrecy Act
ISO
Incentive stock option
C&I
Commercial and industrial
JOBS Act
The Jumpstart Our Business Startups Act
CARES Act
Coronavirus Aid, Relief, and Economic Security Act
LIBOR
London Inter-Bank Offered Rate
CECL
Current Expected Credit Loss
LTV
Loan-to-value
CFPB
Consumer Financial Protection Bureau
MBS
Mortgage-backed securities
Company
NYSDFS
New York State Department of Financial Services
Coronavirus
COVID-19
OCC
Office of the Comptroller of the Currency
CRA
Community Reinvestment Act
OTTI
Other-than-temporary impairment
CRE
Commercial real estate
PPP
Paycheck Protection Program
CRE Guidance
Commercial Real Estate Lending, Sound Risk Management Practices
PRSU
Performance restricted share units
DIF
Deposit Insurance Fund
ROU
Right of use
EB-5 Program
EB-5 Immigrant Investor Program
SEC
U.S. Securities and Exchange Commission
EGC
Emerging Growth Company
SOFR
Secured Overnight Financing Rate
EVE
Economic value of equity
TDR
Troubled debt restructuring
FASB
Financial Accounting Standards Board
USD
U.S. dollar
FDIC
Federal Deposit Insurance Corporation
3
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which may be identified by the use of such words as “may,” “believe,” “expect,” “anticipate,” “consider,” “should,” “plan,” “estimate,” “predict,” “continue,” “probable,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, results of operations and business of Metropolitan Bank Holding Corp. (the “Company”) and its wholly-owned subsidiary Metropolitan Commercial Bank (the “Bank”), and the Company’s strategies, plans, objectives, expectations and intentions, and other statements contained in this Quarterly Report on Form 10-Q that are not historical facts. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that are difficult to predict and are generally beyond our control and that may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Factors that may cause actual results to differ from those results expressed or implied include those factors listed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2024 and in this Quarterly Report on Form 10-Q. In addition, these factors include but are not limited to:
4
The Company’s ability to predict results or the actual effects of its plans or strategies is inherently uncertain. As such, forward-looking statements can be affected by inaccurate assumptions made, or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect conditions only as of the date of this filing. Forward-looking statements speak only as of the date of this document. The Company undertakes no obligation (and expressly disclaims) to publicly release the results of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements, except as may be required by law.
5
METROPOLITAN BANK HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (unaudited)
(in thousands, except share data)
June 30,
December 31,
2024
2023
Assets
Cash and due from banks
$
18,152
31,973
Overnight deposits
226,510
237,492
Total cash and cash equivalents
244,662
269,465
Investment securities available-for-sale, at fair value
504,748
461,207
Investment securities held-to-maturity (estimated fair value of $382.6 million and $404.3 million at June 30, 2024 and December 31, 2023, respectively)
449,368
468,860
Equity investment securities, at fair value
2,122
2,123
Total securities
956,238
932,190
Other investments
26,584
38,966
Loans, net of deferred fees and costs
5,838,892
5,624,797
(60,008)
(57,965)
Net loans
5,778,884
5,566,832
Receivable from global payments business, net
90,626
87,648
Other assets
168,597
172,571
Total assets
7,265,591
7,067,672
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing demand deposits
1,883,176
1,837,874
Interest-bearing deposits
4,286,486
3,899,418
Total deposits
6,169,662
5,737,292
Federal funds purchased
—
99,000
Federal Home Loan Bank of New York advances
150,000
440,000
Trust preferred securities
20,620
Secured and other borrowings
107,514
7,585
Prepaid third-party debit cardholder balances
22,631
10,178
Other liabilities
102,760
93,976
Total liabilities
6,573,187
6,408,651
Common stock, $0.01 par value, 25,000,000 shares authorized, 11,192,936 and 11,062,729 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively
112
111
Additional paid in capital
395,520
395,871
Retained earnings
348,977
315,975
Accumulated other comprehensive income (loss), net of tax
(52,205)
(52,936)
Total stockholders’ equity
692,404
659,021
Total liabilities and stockholders’ equity
See accompanying notes to unaudited consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)
Three months ended June 30,
Six months ended June 30,
Interest and dividend income
Loans, including fees
104,595
80,516
206,976
156,476
Securities
5,493
4,683
10,637
9,178
5,167
3,086
9,321
5,570
Other interest and dividends
506
693
1,162
1,017
Total interest income
115,761
88,978
228,096
172,241
Interest expense
50,555
27,403
97,441
49,776
Borrowed funds
3,287
7,461
8,648
9,487
380
363
759
Total interest expense
54,222
35,227
106,848
59,956
Net interest income
61,539
53,751
121,248
112,285
Provision for credit losses
1,538
4,305
2,066
4,951
Net interest income after provision for credit losses
60,001
49,446
119,182
107,334
Non-interest income
Service charges on deposit accounts
2,094
1,481
3,957
2,937
Global Payments Group revenue
3,686
5,731
7,755
10,581
Other income
359
643
1,431
1,311
Total non-interest income
6,139
7,855
13,143
14,829
Non-interest expense
Compensation and benefits
18,532
15,288
38,359
31,543
Bank premises and equipment
2,322
2,287
4,665
4,631
Professional fees
6,916
4,973
12,888
9,160
Technology costs
3,043
1,482
6,054
2,795
Licensing fees
3,180
3,014
6,456
5,676
FDIC assessments
2,925
1,640
5,850
4,454
Regulatory settlement reserve
(2,500)
Other expenses
5,339
3,758
9,885
7,708
Total non-interest expense
42,257
32,442
84,157
63,467
Net income before income tax expense
23,883
24,859
48,168
58,696
Income tax expense
7,084
9,298
15,166
18,059
Net income
16,799
15,561
33,002
40,637
Earnings per common share
Basic earnings
1.50
1.39
2.96
3.65
Diluted earnings
1.37
3.59
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(in thousands)
Three months ended
Six months ended
Net Income
Other comprehensive income (loss):
Securities available-for-sale:
Unrealized gain (loss) arising during the period
146
(6,733)
(4,342)
1,500
Tax effect
(43)
2,058
1,879
(456)
Net of tax
103
(4,675)
(2,463)
1,044
Cash flow hedges:
932
6,777
7,019
5,771
Reclassification adjustment for gains included in net income
(1,262)
(1,218)
(2,513)
(2,453)
(1,673)
(1,312)
(985)
(218)
3,886
3,194
2,333
Total other comprehensive income (loss)
(115)
(789)
731
3,377
Comprehensive Income (Loss)
16,684
14,772
33,733
44,014
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
Common
Additional
Retained
AOCI (Loss),
Stock
Paid-in Capital
Earnings
Net
Total
Shares
Amount
Three Months Ended
Balance at April 1, 2024
11,191,958
393,341
332,178
(52,090)
673,541
Issuance of common stock under stock compensation plans
1,470
Employee and non-employee stock-based compensation
2,200
Redemption of common stock for exercise of stock options and tax withholdings for restricted stock vesting
(492)
(21)
Other comprehensive income (loss)
Balance at June 30, 2024
11,192,936
Balance at April 1, 2023
11,211,274
394,124
263,783
(50,132)
607,887
(220,200)
(2)
(3,962)
(3,964)
2,580
Balance at June 30, 2023
10,991,074
110
392,742
279,344
(50,921)
621,275
Six Months Ended
Balance at January 1, 2024
11,062,729
216,743
1
4,126
(86,536)
(4,477)
Balance at January 1, 2023
10,949,965
109
389,276
240,810
(54,298)
575,897
Cumulative effect of changes in accounting principle
(2,103)
64,990
4,802
(23,881)
(1,336)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Cash flows from operating activities
Adjustments to reconcile net income to net cash:
Net depreciation, amortization, and accretion
(5,737)
4,014
Stock-based compensation
Other, net
(18)
Net change in:
Receivable from global payments, net
(2,978)
686
Third-party debit cardholder balances
12,453
193
6,571
(15,187)
10,748
5,613
Net cash provided by (used in) operating activities
60,252
45,691
Cash flows from investing activities
Loan originations, purchases and payments, net
(206,900)
(311,594)
Redemptions of FRB and FHLB Stock
37,768
110,451
Purchases of FRB and FHLB Stock
(25,386)
(116,381)
Purchase of securities available-for-sale
(72,810)
Purchase of securities held-for-investment
(24,595)
Proceeds from paydowns and maturities of securities available-for-sale
25,115
21,061
Proceeds from paydowns and maturities of securities held-to-maturity
19,200
19,366
Purchase of premises and equipment, net
(864)
(1,888)
Net cash provided by (used in) investing activities
(223,877)
(303,580)
Cash flows from financing activities
Proceeds from (repayments of) federal funds purchased
(99,000)
93,000
Proceeds from (repayments of) FHLB advances, net
(290,000)
100,000
Redemption of common stock for tax withholdings for restricted stock vesting
Proceeds from (repayments of) secured and other borrowings, net
99,929
(70)
Net increase (decrease) in deposits
432,370
10,653
Net cash provided by (used in) financing activities
138,822
202,247
Increase (decrease) in cash and cash equivalents
(24,803)
(55,642)
Cash and cash equivalents at the beginning of the period
257,418
Cash and cash equivalents at the end of the period
201,776
Supplemental information
Cash paid for:
Interest
104,866
60,032
Income Taxes
19,415
22,377
NOTE 1 — ORGANIZATION
Metropolitan Bank Holding Corp., a New York corporation (the “Company”), is a bank holding company whose principal activity is the ownership and management of Metropolitan Commercial Bank (the “Bank”), its wholly-owned subsidiary. The Company’s primary market is the New York metropolitan area. The Company provides a broad range of business, commercial and retail banking products and services to small businesses, middle-market enterprises, public entities and affluent individuals. See the “Glossary of Common Terms and Acronyms” for the definition of certain terms and acronyms used throughout this Form 10-Q.
The Company’s primary lending products are CRE loans (including multi-family loans) and C&I loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flows from the operations of businesses.
The Company’s primary deposit products are checking, savings, and term deposit accounts, all of which are insured by the FDIC up to the maximum amounts allowed by law. The Company and the Bank are subject to the regulations of certain state and federal agencies and, accordingly, are periodically examined by those regulatory authorities. The Company’s business is affected by state and federal legislation and regulations.
NOTE 2 — BASIS OF PRESENTATION
The accounting and reporting policies of the Company conform with GAAP and predominant practices within the U.S. banking industry. The Unaudited Consolidated Financial Statements (“unaudited financial statements”) include the accounts of the Company and the Bank. All intercompany balances and transactions have been eliminated. The unaudited financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q, Article 8 of Regulation S-X and predominant practices within the U.S. banking industry. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The unaudited financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. In preparing the interim unaudited financial statements in conformity with GAAP, management has made estimates and assumptions based on available information. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods, and actual results could differ from those estimated. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, inflation and its related effects and changes in the financial condition of borrowers.
Some items in the prior year financial statements may have been reclassified to conform to the current presentation. Reclassification had no effect on prior year net income or stockholders’ equity.
The results of operations for the three and six months ended June 30, 2024 and 2023 are not necessarily indicative of the results of operations that may be expected for the entire fiscal year or for any other period.
The unaudited financial statements presented in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the SEC.
NOTE 3 — SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASC 326”), which requires the measurement of all expected credit losses for financial assets held at amortized cost to be based on historical experience, current condition, and reasonable and supportable forecasts. ASC 326 requires that financial institutions and other organizations will use forward-looking information to better inform their credit loss estimates. This guidance also amends the accounting for credit losses on AFS debt securities and purchased financial assets with credit deterioration. The Company adopted this guidance effective January 1, 2023 using a modified retrospective approach. Upon adoption, the
Company recorded a cumulative effect adjustment that increased the allowance for credit losses for loans and loan commitments by $3.0 million, increased deferred tax assets by $777,000 and decreased retained earnings by $2.1 million, net of tax.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The Company adopted this guidance effective January 1, 2023, which did not have a material impact on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (ASC 848): Deferral of Sunset Date of Topic 848, which deferred the sunset date of ASC 848 from December 31, 2022, to December 31, 2024 because the current relief in ASC 848 did not cover the June 30, 2023 cessation date for the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR. The Company’s LIBOR-based financial instruments included loans and trust preferred securities. The required transition has been implemented successfully and LIBOR is no longer offered to clients as a floating rate loan index. The trust preferred securities have transitioned to SOFR.
NOTE 4 — INVESTMENT SECURITIES
The following tables summarize the amortized cost and fair value of AFS and HTM debt securities and equity investments and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses recognized in earnings (in thousands):
Gross
Unrealized/
Amortized
Unrecognized
At June 30, 2024
Cost
Gains
Losses
Fair Value
Available-for-Sale Securities:
U.S. Government agency securities
67,998
(5,837)
62,161
U.S. State and Municipal securities
11,419
(1,929)
9,490
Residential MBS
458,207
494
(71,926)
386,775
Commercial MBS
46,217
12
(2,891)
43,338
Asset-backed securities
3,032
(48)
2,984
Total securities available-for-sale
586,873
(82,631)
Held-to-Maturity Securities:
U.S. Treasury securities
29,916
(1,098)
28,818
15,445
(1,891)
13,554
395,928
(62,732)
333,196
8,079
(1,057)
7,022
Total securities held-to-maturity
(66,778)
382,590
Equity Investments:
CRA Mutual Fund
2,441
(319)
Total equity investment securities
At December 31, 2023
67,997
(6,222)
61,775
11,496
(1,797)
9,699
419,331
1,198
(68,609)
351,920
36,879
71
(2,366)
34,584
(58)
3,229
538,990
1,269
(79,052)
29,895
(1,412)
28,483
15,569
(1,574)
13,995
415,306
(60,556)
354,750
8,090
(1,066)
7,024
(64,608)
404,252
2,410
(287)
There were no proceeds from sales or calls of AFS securities for the three and six months ended June 30, 2024 and 2023.
The tables below summarize, by contractual maturity, the amortized cost and fair value of debt securities. The tables do not include the effect of principal repayments or scheduled principal amortization. Equity securities, primarily investments in mutual funds, have been excluded from the table. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):
Held-to-Maturity
Available-for-Sale
Amortized Cost
Due within 1 year
20,015
19,466
After 1 year through 5 years
17,980
16,374
72,627
67,417
After 5 years through 10 years
980
913
19,087
17,441
After 10 years
410,393
345,837
495,159
419,890
Total Securities
37,984
35,507
65,822
60,757
1,112
22,163
21,174
429,764
367,701
451,005
379,276
At June 30, 2024, there was $783.1 million of securities pledged to support wholesale funding, and to a lesser extent certain other types of deposits, of which $170.8 million was encumbered. At December 31, 2023, there was $845.7 million of securities pledged to support wholesale funding, and to a lesser extent certain other types of deposits, of which $60.0 million was encumbered.
At June 30, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity. At June 30, 2024 and December 31,
13
2023, all of the residential MBS and commercial MBS held by the Company were issued by U.S. Government-sponsored entities and agencies.
Debt securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):
Less than 12 Months
12 Months or More
Estimated
49,607
(992)
273,061
(70,934)
322,668
10,307
(151)
23,583
(2,740)
33,890
59,914
(1,143)
371,279
(81,488)
431,193
292,970
10,873
(198)
13,322
(2,168)
24,195
380,995
(78,854)
391,868
Except for U.S. State and Municipal securities, the Company has a zero loss expectation for its HTM securities portfolio, and therefore has no ACL related to these securities. At June 30, 2024 and December 31, 2023, obligations of U.S. State and Municipal securities were rated investment grade and the associated ACL was immaterial.
AFS securities in unrealized loss positions are evaluated for impairment related to credit losses on a quarterly basis. The unrealized losses on AFS securities are primarily due to the changes in market interest rates subsequent to purchase. In addition, the Company does not intend, nor would it be required, to sell these investments until there is a full recovery of the unrealized loss, which may be at maturity. As a result, no ACL was recognized during the three and six months ended June 30, 2024.
14
NOTE 5 — LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans, net of deferred costs and fees, consist of the following (in thousands):
At
Real estate
Commercial
4,056,013
3,857,711
Construction
146,596
153,512
Multi-family
440,124
467,536
One-to four-family
92,431
94,704
Total real estate loans
4,735,164
4,573,463
1,105,294
1,051,463
Consumer
15,074
17,086
Total loans
5,855,532
5,642,012
Deferred fees, net of origination costs
(16,640)
(17,215)
Included in C&I loans at June 30, 2024 and December 31, 2023 were $38,000 and $54,000, respectively, of PPP loans. At June 30, 2024, $3.7 billion of loans were pledged to support wholesale funding, of which $264.3 million were encumbered. At December 31, 2023, $3.3 billion of loans were pledged to support wholesale funding, of which $548.6 million were encumbered.
The following tables present the activity in the ACL for funded loans by segment. The portfolio segments represent the categories that the Company uses to determine its ACL (in thousands):
Multi-
One-to four-
Three months ended June 30, 2024
family
Allowance for credit losses:
Beginning balance
36,704
10,937
1,712
8,171
521
493
58,538
Provision/(credit) for credit losses
1,780
345
(344)
(390)
48
1,486
Loans charged-off
(16)
Recoveries
Total ending allowance balance
38,484
11,282
1,759
7,827
131
525
60,008
Three months ended June 30, 2023
31,836
10,757
1,261
2,871
407
620
47,752
2,785
220
339
672
(45)
(29)
3,942
(44)
34,621
10,977
1,600
3,543
362
547
51,650
15
Six months ended June 30, 2024
35,635
11,207
1,765
8,215
663
480
57,965
2,848
75
(6)
(388)
(532)
62
2,059
Six months ended June 30, 2023
29,496
10,274
1,983
2,823
105
195
44,876
471
424
705
181
421
2,250
5,077
232
(807)
76
74
4,667
(143)
Net charge-offs for the three and six months ended June 30, 2024 were $16,000. Net charge-offs for the three and six months ended June 30, 2023 were $44,000 and $143,000, respectively.
The following tables present the activity in the ACL for unfunded loan commitments (in thousands):
Balance at the beginning of period
1,136
877
1,181
180
777
52
283
1,188
1,240
The following tables present the balance in the ACL and the recorded investment in loans by portfolio segment based on allowance measurement methodology (in thousands):
Individually assessed
2,800
5,002
206
8,008
Collectively assessed
8,482
2,825
319
52,000
Loans:
24,000
45,644
51,239
388
121,271
4,032,013
1,059,650
388,885
14,686
5,734,261
Total ending loan balance
16
64
5,066
3,213
416
52,899
40,955
6,934
20,939
104
68,932
3,816,756
1,044,529
446,597
16,982
5,573,080
The following tables present the recorded investment in non-accrual loans and loans past due 90 days and greater and still accruing, by class of loans (in thousands):
Loans Past Due
Non-accrual
90 Days and
Without an
Greater and
Still Accruing
Commercial & industrial
6,989
108
30,989
24
51,897
30,934
Interest income on non-accrual loans recognized on a cash basis for the three and six months ended June 30, 2024 and 2023 was immaterial.
17
The following tables present the aging of the recorded investment in past due loans by class of loans (in thousands):
90
30-59
60-89
Days and
Total Past
Current
Days
Greater
Due
Loans
4,893
28,893
4,027,120
6,998
1,098,296
2,071
605
2,676
89,755
216
7,189
669
31,097
38,955
5,816,577
3,833,711
20
18
6,973
1,044,490
612
94,092
17,062
632
52,548
5,589,464
Credit Quality Indicators
The Company aggregates loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Except for one-to four-family loans and consumer loans, the Company analyzes loans individually by classifying the loans as to credit risk ratings at least annually. For one-to four-family loans and consumer loans, the Company evaluates credit quality based on the aging status of the loan. An analysis is performed on a quarterly basis for loans classified as special mention, substandard or doubtful. The Company uses the following definitions for risk ratings. Loans not meeting these definitions are considered to be pass-rated loans.
Special Mention - Loans classified as special mention have a potential weakness that deserves management’s attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values highly questionable and improbable.
The following table presents loan balances by credit quality indicator and year of origination at June 30, 2024 and charge-offs for the six months ended June 30, 2024 (in thousands):
2019
2022
2021
2020
& Prior
Revolving
Pass
778,621
1,279,002
1,144,603
380,807
128,203
203,136
27,156
3,941,528
Special Mention
24,500
38,785
14,408
294
12,498
90,485
Substandard
1,303,502
1,207,388
395,215
128,497
215,634
45,227
45,221
32,701
23,447
105,362
83,324
74,430
61,207
23,424
37,863
3,275
30,300
104,730
82,146
45,000
3,619
9,646
34,166
145,914
116,860
201,757
79,865
19,999
14,270
445,731
1,024,396
19,754
15,500
35,254
7,644
20,968
4,747
12,285
124,504
242,479
84,612
473,516
Past due
Pass/Current
1,075,124
1,569,407
1,457,110
521,879
181,272
304,121
499,609
5,608,522
58,539
125,739
Substandard/Past due
75,268
25,686
1,601,551
1,590,917
561,973
181,566
317,007
527,394
Charge-offs
At June 30, 2024, there were $51.2 million and $24.0 million of collateral dependent Multi-family and CRE loans classified as substandard, respectively.
19
The following table presents loan balances by credit quality indicator and year of origination at December 31, 2023 and charge-offs for the year ended December 31, 2023 (in thousands):
2018
1,500,873
1,268,550
512,497
128,320
200,304
83,309
44,672
3,738,525
38,867
14,561
304
78,232
40,954
1,525,373
1,348,371
527,058
128,624
84,881
56,065
12,566
114,652
51,768
23,655
34,533
69,510
6,415
416,294
30,303
144,955
72,707
4,081
9,784
12,157
23,682
178,814
252,359
98,753
23,943
14,390
5,904
402,247
976,410
3,840
33,918
2,080
28,281
68,119
3,435
3,499
186,089
286,277
26,023
434,027
1,925,329
1,695,707
663,018
185,702
261,384
199,467
465,900
5,396,507
28,340
103,088
2,384
176,654
68,851
1,957,104
1,839,749
698,518
188,086
199,491
497,680
915
31
946
273
1,219
At December 31, 2023, there were $41.0 million and $20.9 million of CRE and Multi-family substandard classified collateral dependent loans, respectively.
The following tables show the amortized cost basis of modified loans to borrowers experiencing financial difficulty (in thousands):
Combination
Term
Modifications
Extension and
Interest Rate
as a % of
Reduction
Loan Class
0.4
%
48,224
3,015
11.6
52,971
55,986
11,736
1.1
59,960
62,975
The following table describes the types of modifications made to borrowers experiencing financial difficulty:
Weighted
Average
Rate
Extension
11-12 months
3.8%
2.9%
6-12 months
4.1%
All loans to borrowers experiencing financial difficulty that have been modified during the three and six months ended June 30, 2024, were in compliance with their modified terms. At June 30, 2024, there were no additional commitments to lend to borrowers experiencing financial difficulty whose loans have been modified. There were no modifications where the borrower was experiencing financial difficulty during the three and six months ended June 30, 2023.
NOTE 6 — BORROWINGS
Borrowings consisted of the following (in thousands):
Interest Expense
Federal funds purchased and securities sold under agreements to repurchase
1,584
151
2,953
2,330
5,877
6,719
6,534
Secured and other borrowings:
Secured borrowings
7,514
N.A.
Federal Reserve Bank term loan
1,214
2,295
N.A. – not applicable
21
The outstanding FHLBNY advances are short-term transactions and at June 30, 2024, had a weighted average interest rate of 5.49%.
Secured borrowings are loan participation agreements with counterparties where the transfer of the participation interest did not qualify for sale treatment under GAAP.
The Federal Reserve established the Bank Term Funding Program (“BTFP”) on March 12, 2023 as a funding source for eligible depository institutions. The BTFP provides short-term liquidity (up to one year) against the par value of certain high-quality collateral, such as U.S. Treasury securities. The BTFP ceased making new loans as scheduled on March 11, 2024. At June 30, 2024, the Company had a $100.0 million FRB term loan under the BTFP that matures in January 2025 and has an interest rate of 4.87%.
At June 30, 2024, the Company had cash on deposit with the Federal Reserve Bank of New York and available secured wholesale funding borrowing capacity of $3.4 billion.
NOTE 7 — EARNINGS PER SHARE
The Company uses the two-class method in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings. The factors used in the earnings per share calculation are as follows (in thousands, except per share data).
Basic
Net income per consolidated statements of income
Less: Earnings allocated to participating securities
(82)
(170)
Net income available to common stockholders
15,479
40,467
Weighted average common shares outstanding including participating securities
11,195,461
11,163,127
11,137,381
Less: Weighted average participating securities
(59,200)
(46,686)
Weighted average common shares outstanding
11,136,261
11,090,695
Basic earnings per common share
Diluted
Net income allocated to common stockholders
Weighted average common shares outstanding for basic earnings per common share
Add: Dilutive effects of assumed exercise of stock options
88,591
123,773
Add: Dilutive effects of assumed vesting of performance based restricted stock
53,553
56,682
Add: Dilutive effects of assumed vesting of restricted stock units
6,800
Average shares and dilutive potential common shares
11,199,736
11,278,405
11,271,150
Dilutive earnings per common share
22
For the three and six months ended June 30, 2024, 24,420 and 12,210 of performance restricted stock units were not considered in the calculation of diluted earnings per share as their inclusion would be anti-dilutive, respectively. For the six months ended June 30, 2024, 293,052 of restricted stock units were not considered in the calculation of diluted earnings per share as their inclusion would be anti-dilutive. There were no outstanding stock options and performance restricted stock units at June 30, 2024.
NOTE 8 — STOCK COMPENSATION PLAN
Equity Incentive Plan
At June 30, 2024, the Company maintained three stock compensation plans, the 2022 Equity Incentive Plan (the “2022 EIP”), the 2019 Equity Incentive Plan (the “2019 EIP”) and the 2009 Equity Incentive Plan (the “2009 EIP”). The 2019 EIP expired on May 31, 2022 but has outstanding restricted stock awards subject to vesting schedules. The 2009 EIP has also expired but had outstanding stock options that were exercised in 2023.
The 2022 EIP was approved on May 31, 2022 by the stockholders of the Company. On May 29, 2024, the stockholders of the Company approved the amendment and restatement of the 2022 EIP increasing the number of shares of common stock that may be issued under the plan by 358,000. Under the 2022 EIP as amended, the remaining maximum number of shares of stock that may be delivered to participants in the form of restricted stock, restricted stock units and stock options, including ISOs and non-qualified stock options is 288,095 at June 30, 2024, subject to adjustment as set forth in the 2022 EIP, plus any awards that are forfeited under the 2019 EIP after March 15, 2022.
Stock Options
At June 30, 2024, no stock options were outstanding. There was no compensation cost related to stock options during the three and six months ended June 30, 2024. There was no unrecognized compensation cost related to stock options at June 30, 2024 and December 31, 2023.
Restricted Stock Awards and Restricted Stock Units
The Company issued restricted stock awards and restricted stock units under the 2022 EIP, 2019 EIP and the 2009 EIP (collectively, “restricted stock grants”) to certain key personnel. Each restricted stock grant vests based on the vesting schedule outlined in the restricted stock grant agreement. Restricted stock grants are subject to forfeiture if the holder is not employed by the Company on the vesting date.
In the first quarter of 2024 and 2023, 168,469 and 170,998 restricted stock grants were issued to certain key personnel, respectively. One-third of these shares vest each year for three years beginning on March 1, 2025 and March 1, 2024, respectively. Total compensation cost that has been charged against income for restricted stock grants was $1.8 million and $3.4 million for the three and six months ended June 30, 2024, respectively. Total compensation cost that has been charged against income for restricted stock grants was $1.6 million and $2.9 million for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, there was $10.8 million of total unrecognized compensation expense related to the restricted stock awards. The cost is expected to be recognized over a weighted-average period of 1.98 years.
In January 2024, 27,500 restricted shares were granted to members of the Board of Directors. These shares vest in January 2025. In January 2023, 27,500 restricted shares were granted to members of the Board of Directors. These shares vested in January 2024. Total expense for the awards granted to members of the Board of Directors was $337,000 and $674,000 for the three and six months ended June 30, 2024, respectively. Total expense for the awards granted to members of the Board of Directors was $388,000 and $777,000 for the three and six months ended June 30, 2023, respectively. As of June 30, 2024, total unrecognized expense for these awards was $682,000.
23
The following table summarizes the changes in the Company’s restricted stock grants:
June 30, 2024
Weighted Average
Grant Date
Number of
per Share
Outstanding, beginning of period
233,852
63.98
Granted
195,969
42.28
Forfeited
(10,026)
58.26
Vested
(126,743)
49.72
Outstanding at end of period
293,052
55.83
Performance-Based Stock Units
During the second quarter of 2022, the Company established a long-term incentive award program under the 2022 EIP. Under the program, 73,260 PRSUs were awarded in the second quarter of 2024, which vest over a three-year period beginning in June 2025 if certain performance criteria are met. The weighted average service inception date fair value of the outstanding awarded shares was $3.0 million. Total compensation cost that has been charged against income for these PRSUs was $90,000 for the three and six months ended June 30, 2024.
During the second quarter of 2021, the Company established a long-term incentive award program under the 2019 EIP. Under the program, 90,000 PRSUs were awarded. During the second quarter of 2022, 20,800 PRSUs were forfeited and reissued pursuant to the 2022 EIP. The weighted average service inception date fair value of the outstanding awarded shares was $6.0 million. At the beginning of 2024, 2023, and 2022, 30,800, 29,200 and 30,000 PRSUs, respectively, vested as all performance criteria were met. All 90,000 vested shares were delivered in the first quarter of 2024. Total compensation cost that has been charged against income for these PRSUs was $0 for the three and six months ended June 30, 2024. Total compensation cost that has been charged against income for these PRSUs was $544,000 and $1.1 million for the three and six months ended June 30, 2023.
NOTE 9 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses fair value measurements to record fair value adjustments to certain assets and derivative contracts, and to determine fair value disclosures. Other than derivative contracts, the Company did not have any liabilities that were measured at fair value at June 30, 2024 and December 31, 2023. AFS securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets or liabilities on a non-recurring basis, such as certain loans where the carrying value is based on the fair value of the underlying collateral. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.
Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own judgments about the assumptions that market participants would use in pricing an asset or liability.
Assets and Liabilities Measured on a Recurring Basis
Assets measured on a recurring basis are limited to the Company’s AFS securities portfolio, equity investments, and derivative contracts. The AFS portfolio is carried at estimated fair value with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity. Equity investments are carried at estimated fair value with changes in fair value reported as “unrealized gain/(loss)” on the statements of operations. Outstanding derivative contracts designated as cash flow hedges are carried at estimated fair value with changes in fair value reported as accumulated other comprehensive income or loss in shareholders’ equity. Outstanding derivatives not designated as hedges are carried at estimated fair value with changes in fair value reported as non-interest income. The fair values for substantially all of these assets are obtained monthly from an independent nationally recognized pricing service. On a quarterly basis, the Company assesses the reasonableness of the fair values obtained for the AFS portfolio by reference to a second independent nationally recognized pricing service. Based on the nature of these securities, the Company’s independent pricing service provides prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available for the majority of securities in the Company’s portfolio. Various modeling techniques are used to determine pricing for the Company’s MBS, including option pricing and discounted cash flow models. The inputs to these models include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. On an annual basis, the Company obtains the models, inputs and assumptions utilized by its pricing service and reviews them for reasonableness. Other than derivative contracts, the Company does not have any liabilities that were measured at fair value on a recurring basis.
Assets measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurement using:
Quoted Prices
in Active
Significant
Markets
Other
Carrying
For Identical
Observable
Unobservable
Assets (Level 1)
Inputs (Level 2)
Inputs (Level 3)
Residential mortgage securities
Commercial mortgage securities
Derivative assets
4,266
Derivative liabilities
596
2,687
6,037
25
There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2024 and 2023.
Assets and Liabilities Not Measured on a Recurring Basis
The Company has engaged independent pricing service providers to provide the fair values of its financial assets and liabilities not measured at fair value. These providers follow FASB’s exit pricing guidelines, as required by ASC 820 Fair Value Measurement, when calculating the fair market value. Cash and cash equivalents include cash and due from banks and overnight deposits. The estimated fair values of cash and cash equivalents are assumed to equal their carrying values, as these financial instruments are either due on demand or have short-term maturities. For securities and the disability fund, if quoted market prices are not available for a specific security, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. These pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. The estimated fair value of loans are measured at amortized cost using an exit price notion. Ownership in equity securities of the FRB and FHLB is generally restricted and there is no established liquid market for their resale. The fair values of deposit liabilities with no stated maturity (i.e., money market and savings deposits, and non-interest-bearing demand deposits) are equal to the carrying amounts payable on demand. Time deposits are valued using a replacement cost of funds approach. Trust preferred securities are valued using a replacement cost of funds approach. For all other assets and liabilities it is assumed that the carrying value equals their current fair value.
There were no material assets measured at fair value on a non-recurring basis at June 30, 2024 and December 31, 2023.
Carrying amounts and estimated fair values of financial instruments not carried at fair value were as follows (in thousands):
Fair Value Measurement Using:
Total Fair
Value
Financial Assets:
Securities held-to-maturity
Loans, net
5,666,246
FRB Stock
11,410
FHLB Stock
13,176
Disability Fund
Time deposits at banks
498
Accrued interest receivable
2,205
28,098
Financial Liabilities:
Non-interest-bearing demand deposits
Money market and savings deposits
4,255,989
Time deposits
30,497
29,819
Trust preferred securities payable
20,003
Prepaid debit cardholder balances
Accrued interest payable
3,876
699
392
99,869
107,383
26
5,474,238
25,558
31,948
2,007
29,941
3,864,018
35,400
35,011
20,007
1,894
1,028
475
391
27
NOTE 10 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in Accumulated Other Comprehensive Income (Loss) balances, net of tax effects at the dates indicated (in thousands):
Accumulated
Cash Flow
Comprehensive
Hedge
Income (Loss)
(57,251)
5,161
Unrealized gain (loss) arising during the period, net of tax
656
Reclassification adjustment for gain included in net income, net of tax
(874)
Other comprehensive income (loss), net of tax
(57,148)
4,943
(56,114)
5,982
4,702
(816)
(60,789)
9,868
(54,685)
1,749
4,935
2,472
(1,741)
(61,833)
7,535
4,007
5,051
(1,674)
The following table presents the tax effects allocated to each component of Accumulated Other Comprehensive Income (Loss) at the dates indicated (in thousands):
Tax
Component
Unrealized gain (loss) on AFS Securities
(82,125)
24,977
Unrealized gain (loss) on Cash Flow Hedges
7,080
(2,137)
Total ending other comprehensive income (loss)
(75,045)
22,840
(77,783)
23,098
2,574
(825)
(75,209)
22,273
28
The following table shows the amounts reclassified out of AOCI for the realized gain on cash flow hedges (in thousands):
Affected line item in
the Consolidated Statements
of Operations
Realized gain (loss) on cash flow hedges
1,262
1,218
2,513
2,453
Income tax (expense) benefit
(402)
(772)
(779)
Total reclassifications, net of income tax
874
816
1,741
1,674
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance-sheet risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Company’s exposure to credit loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The following off-balance-sheet financial instruments, whose contract amounts represent credit risk, are outstanding (in thousands):
Fixed
Variable
Unused loan commitments
58,964
482,003
67,418
527,730
Standby and commercial letters of credit
41,718
59,532
100,682
126,950
A commitment to extend credit is a legally binding agreement to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally expire within two years. At June 30, 2024, the Company’s fixed rate loan commitments had interest rates ranging from 3.0% to 9.5% and the Company’s variable rate loan commitments had interest rates ranging from 6.0% to 12.5%. At December 31, 2023, the Company’s fixed rate loan commitments had interest rates ranging from 3.0% to 9.5% and the Company’s variable rate loan commitments had interest rates ranging from 6.0% to 12.5%. The amount of collateral obtained, if any, by the Company upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include mortgages on commercial and residential real estate, security interests in business assets, equipment, deposit accounts with the Company or other financial institutions and securities.
The Company’s stand-by letters of credit amounted to $41.7 million and $59.5 million as of June 30, 2024 and December 31, 2023, respectively. The Company’s stand-by letters of credit are collateralized by interest-bearing accounts of $32.6 million and $36.2 million as of June 30, 2024 and December 31, 2023, respectively.
Legal and Regulatory Proceedings
There have been and continue to be ongoing investigations by governmental entities concerning a prepaid debit card product program that was offered by GPG. During the early stages of the COVID-19 pandemic, third parties used this prepaid debit card product to establish unauthorized accounts and to receive unauthorized government benefits payments, including unemployment insurance benefits payments made pursuant to the Coronavirus Aid, Relief, and Economic Security Act from many states. The Company ceased accepting new accounts from this program manager in July 2020 and exited its relationship with this program manager in August 2020. The Company has cooperated and continues to
29
cooperate in these investigations and continues to review this matter. In 2023, the Bank entered into separate consensual resolutions with each of the FRB and the NYSDFS with respect to their investigations, each of which investigations is now closed as a result of such orders.
In addition to the matters described above, the Company is subject to various other pending and threatened legal actions relating to the conduct of its business activities, as well as inquiries and investigations from regulators. While the future outcome of litigation or regulatory matters cannot be determined at this time, in the opinion of management, as of June 30, 2024, the aggregate liability, if any, arising out of any such other pending or threatened matters are not expected to be material to the Company’s financial condition, results of operations, and liquidity.
NOTE 12 — REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Company’s revenue from contracts with customers that are in the scope of ASC 606, Revenue from Contracts with Customers, are recognized in non-interest income. The following table presents the Company’s revenue from contracts with customers (in thousands):
Other service charges and fees
367
676
1,462
1,318
6,147
7,888
13,174
14,836
A description of the Company’s revenue streams accounted for under the accounting guidance is as follows:
The Company offers business and personal retail products and services, which include, but are not limited to, online banking, mobile banking, Automated Clearing House (“ACH”) transactions, and remote deposit capture. A standard deposit contract exists between the Company and all deposit clients. The Company earns fees from its deposit clients for transaction-based services (such as ATM use fees, stop payment charges, statement rendering, and ACH fees), account maintenance, and overdraft services. Transaction-based fees are recognized at the time the transaction is executed as that is the point in time the Company fulfills the client’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the client’s account balance.
Global payment group revenue
The Company offers corporate cash management and retail banking services and, through its global payments business, provides services to non-bank financial service companies. The Company earns initial set-up fees for these programs as well as fees for transactions processed. The Company receives transaction data at the end of each month for services rendered, at which time revenue is recognized. Additionally, service charges specific to GPG clients’ deposits are recognized within GPG revenue.
Other service charges
The primary component of other service charges relates to letter of credit fees and FX conversion fees. The Company outsources FX conversion for foreign currency transactions to correspondent banks. The Company earns a portion of an FX conversion fee that the client charges to process an FX conversion transaction. Revenue is recognized at the end of the month once the client has remitted the transaction information to the Company.
30
NOTE 13 — DERIVATIVES
On occasion, the Company enters into derivative contracts as a part of its asset liability management strategy to help manage its interest rate risk position. At June 30, 2024, these derivatives had a notional amount of $550.0 million and contractual maturities ranging from August 1, 2025 to March 23, 2026. The notional amount of the derivatives does not represent the amount exchanged by the parties. The derivatives were designated as cash flow hedges of certain deposit liabilities and borrowings of the Company. The hedges were determined to be highly effective during the three and six months ended June 30, 2024. The Company expects the hedges to remain highly effective during the remaining term of the derivatives.
In addition, the Company periodically enters into certain commercial loan interest rate swap agreements to provide commercial loan clients the ability to convert loans from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a client in addition to a swap agreement. This swap agreement effectively converts the client’s variable rate loan into a fixed rate loan. The Company then enters into a corresponding swap agreement with a third party to offset its exposure on the variable and fixed components of the client agreement. As the interest rate swap agreements with the clients and third parties are not designated as hedges, the instruments are marked to market in earnings. At June 30, 2024, these interest rate swaps have a notional amount of $69.0 million and a contractual maturity of August 15, 2028.
The following tables reflect the derivatives recorded on the balance sheet (in thousands):
Notional
Liabilities
Derivatives designated as hedges:
Interest rate swaps related to client deposits and borrowings
550,000
3,999
329
Derivatives not designated as hedges:
Interest rate swaps
69,000
267
700,000
1,530
4,880
1,157
The effect of cash flow hedge accounting on accumulated other comprehensive income is as follows (in thousands):
Interest rate swaps and caps related to client deposits and borrowings
Amount of gain (loss) recognized in OCI, net of tax
Amount of gain (loss) reclassified from OCI into income
Location of gain (loss) reclassified from OCI into income
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Background
The Company is a bank holding company headquartered in New York, New York and registered under the BHC Act. Through its wholly owned bank subsidiary, Metropolitan Commercial Bank (the “Bank”), a New York state chartered 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. See the “Glossary of Common Terms and Acronyms” for the definition of certain terms and acronyms used throughout this Form 10-Q.
The Company’s primary market includes the New York metropolitan area, specifically Manhattan and the outer boroughs, and Nassau County, New York. This market is well-diversified and represents a large market for middle market businesses (defined as businesses with annual revenue of $5 million to $400 million). The Company’s market area has a diversified economy typical of most urban population centers, with the majority of employment provided by services, wholesale/retail trade, finance/insurance/real estate, technology companies and construction. A relationship-led strategy has provided the Company with select opportunities in other U.S. markets, with a particular focus on South Florida.
The Company’s primary lending products are CRE, including multi-family loans, and C&I loans. Substantially all loans are secured by specific items of collateral including business and consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flows from operations of commercial enterprises. The Company’s primary deposit products are checking, savings, and term deposit accounts, all of which are insured by the FDIC under the maximum amounts allowed by law. The Company has developed various deposit gathering strategies, which generate the funding necessary to operate without a large branch network. These activities, together with six strategically located banking centers, generate a stable source of deposits and a diverse loan portfolio with attractive risk-adjusted yields.
The Company operates six banking centers strategically located within close proximity to target clients. The strength of the Company’s deposit franchise comes from its long-standing relationships with clients and the strong ties it has in its market area. The Company has also developed a diversified funding strategy, which enables it to be less reliant on branches. Deposit funding is provided by the following core deposit verticals: (i) borrowing clients; (ii) non-borrowing retail clients; (iii) corporate cash management clients; (iv) municipal and other local entities; (v) EB-5 Program accounts; and (vi) Title and Escrow and Charter School clients.
Critical Accounting Policies
Critical accounting estimates are necessary in the application of certain accounting policies and procedures and are particularly susceptible to significant change. Critical accounting policies are defined as those involving significant judgments and assumptions by management that could have a material impact on the carrying value of certain assets or on income under different assumptions or conditions. Management believes that the most critical accounting policy, which involves the most complex or subjective decisions or assessments, is the allowance for credit losses.
Allowance for Credit Losses
The ACL has been determined in accordance with GAAP. The Company is responsible for the timely and periodic determination of the amount of the ACL. Management believes that the ACL for loans and loan commitments is adequate to cover expected credit losses over the life of the loan portfolio. Although management evaluates available information to determine the adequacy of the ACL, the level of allowance is an estimate which is subject to significant judgment and short-term change. Because of uncertainties associated with local and national economic forecasts, the operating and regulatory environment, collateral values and future cash flows from the loan portfolio, it is possible that a material change could occur in the ACL. The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of uncertain economic conditions, the valuations determined from such estimates and appraisals may change. Accordingly, the Company may ultimately incur losses that vary from management’s current estimates. Adjustments to
the ACL will be reported in the period in which such adjustments become known and can be reasonably estimated. All loan losses are charged to the ACL when the loss actually occurs or when the collectability of principal is deemed to be unlikely. Recoveries are credited to the allowance at the time of recovery. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL. As a result of such examinations, the Company may need to recognize additions to the ACL based on the regulators’ observations.
In estimating the ACL, the Company relies on models and economic forecasts developed by external parties as the primary driver of the ACL. These external models and forecasts are based on nationwide data sets. Economic forecasts can change significantly over an economic cycle and have a significant level of uncertainty associated with them. The performance of these models is dependent on the variables used in the models being reasonable predictors for the loan portfolio’s performance. However, these variables may not capture all sources of risk within the portfolio. As a result, the Company reviews the results and makes qualitative adjustments to capture potential limitations of the external models as necessary. Such qualitative factors may include adjustments to better capture the imprecision associated with the economic forecasts, and the ability of the models to capture emerging risks within the portfolio that may not be represented in the data. These adjustments are evaluated through the Company’s review process and revised on a quarterly basis to account for changes in forecasts, facts and circumstances.
One of the more significant judgments involved in estimating the Company’s ACL relates to the macroeconomic forecasts used to estimate credit losses and the relative weightings applied to them. To illustrate the impact of changes in these forecasts to the Company’s ACL, the Company performed a hypothetical sensitivity analysis that decreased the weight on the baseline scenario by 33% and equally allocated the difference to increase the weights on the more optimistic and adverse scenarios. All else equal, the impact of this hypothetical forecast would result in a net increase of approximately $7.1 million, or 11.8%, in the Company’s total ACL for loans and loan commitments as of June 30, 2024. This hypothetical analysis is intended to illustrate the impact of adverse changes in the macroeconomic forecasts at a point in time and is not intended to reflect the full nature and extent of potential future change in the ACL. It is difficult to estimate how potential changes in any one of the quantitative inputs or qualitative factors might affect the overall ACL and the Company’s current assessments may not reflect the potential future impact of changes to those inputs or factors.
Discussion of Financial Condition
The Company had total assets of $7.3 billion at June 30, 2024, an increase of $197.9 million, or 2.8%, from December 31, 2023.
Total cash and cash equivalents were $244.7 million at June 30, 2024, a decrease of $24.8 million, or 9.2%, from December 31, 2023. The decrease primarily reflects the $214.1 million net deployment into loans and the $289.0 million decrease in wholesale funding, partially offset by the $432.4 million increase in deposits.
Investments
Total securities were $956.2 million at June 30, 2024, an increase of $24.0 million, or 2.6%, from December 31, 2023. The increase was primarily due to the purchase of $72.8 million of AFS securities, partially offset by the $44.3 million paydown and maturities of AFS and HTM securities.
Total loans, net of deferred fees and unamortized costs, were $5.8 billion at June 30, 2024, an increase of $214.1 million, or 3.8%, from December 31, 2023. The increase in total loans was due primarily to an increase of $198.4 million in CRE loans (including owner-occupied) and $53.8 million in C&I loans. At June 30, 2024, 80.2% of the CRE and C&I loan portfolio is concentrated in the New York Metropolitan Area (mainly New York City) and Florida.
33
As of June 30, 2024, total loans consisted primarily of CRE loans (including multi-family mortgage loans) and C&I loans. The Company’s commercial loan portfolio includes loans to the following industries (dollars in thousands):
% of Total
Balance
CRE (1)
Skilled Nursing Facilities
1,631,561
27.9
440,123
7.5
Office
377,308
6.5
Mixed use
412,066
7.1
Hospitality
343,981
5.9
Retail
294,644
5.0
Land
259,704
4.4
Warehouse / industrial
165,078
2.8
2.5
571,672
9.8
Total CRE
4,642,733
79.4
Finance & Insurance
265,929
4.6
257,969
Individuals
120,935
2.1
Healthcare
127,268
2.2
Services
71,343
1.2
Wholesale
58,113
1.0
Manufacturing
40,910
0.7
162,828
Total C&I
19.0
(1)CRE, not including one-to-four family loans
The largest concentration in the loan portfolio is to the healthcare industry, which amounted to $2.0 billion, or 34.5% of total loans, at June 30, 2024, including $1.9 billion in loans to skilled nursing facilities.
Asset Quality
Non-performing loans declined to $31.1 million at June 30, 2024 compared to $51.9 million at December 31, 2023 due to one multi-family loan relationship that was returned to accrual status. The table below sets forth key asset quality ratios (dollars in thousands):
At or for the
six months ended
year ended
Asset Quality Ratios
Non-performing loans
Non-performing loans to total loans
0.53
0.92
Allowance for credit losses to total loans
1.03
Non-performing loans to total assets
0.43
0.73
Allowance for credit losses to non-performing loans
193.0
111.7
Ratio of net charge-offs (recoveries) to average loans outstanding in aggregate
0.02
34
Allowance for Credit Losses – Loans and Loan Commitments
The ACL was $60.0 million at June 30, 2024, as compared to $58.0 million at December 31, 2023. The Company recorded a $2.1 million provision for credit losses for the six months ended June 30, 2024, which reflects loan growth and a provision related to a single C&I loan.
Total deposits were $6.2 billion at June 30, 2024, an increase of $432.4 million, or 7.5%, from December 31, 2023. The increase from December 31, 2023, was due primarily to broad based increases across most of the Company’s various deposit verticals. Non-interest-bearing demand deposits were 30.5% of total deposits at June 30, 2024, compared to 32.0% at December 31, 2023.
The table below summarizes the Company’s deposit composition by segment for the periods indicated (dollars in thousands):
DollarChange
PercentageChange
45,302
Money market
4,237,028
3,856,975
380,053
9.9
Savings accounts
18,961
7,043
11,918
169.2
(4,903)
(13.9)
At June 30, 2024, the aggregate estimated amount of FDIC uninsured deposits was $1.6 billion, and the aggregate estimated amount of uninsured time deposits was $17.7 million. The following table presents the scheduled maturities of time deposits greater than $250,000 (in thousands):
Three months or less
3,775
Over three months through six months
4,791
Over six months through one year
3,946
Over one year
5,179
17,691
Borrowings
To support the balance sheet, the Company may at times utilize FHLB advances or other funding sources. At June 30, 2024, the Company had $150.0 million of FHLBNY advances. At December 31, 2023, the Company had $99.0 million of Federal funds purchased and $440.0 million of FHLBNY advances.
At June 30, 2024, the Company had a $100.0 million FRB term loan under the Bank Term Funding Program (“BTFP”). The Federal Reserve established the BTFP on March 12, 2023, as a funding source for eligible depository institutions. Advances can no longer be requested under the program. The BTFP was created to provide short-term liquidity (up to one year) against the par value of certain high-quality collateral, such as U.S. Treasury securities.
Accumulated Other Comprehensive Income
Accumulated other comprehensive loss, net of tax, was $52.2 million at June 30, 2024, a decrease of $0.7 million from December 31, 2023. The decrease from December 31, 2023 was due to net unrealized gains on outstanding cash flow hedges, partially offset by an increase in unrealized losses on AFS securities due to changes in prevailing interest rates and the reclassification to net income of gains on a terminated cash flow hedge.
35
Results of Operations
Net income was $16.8 million for the second quarter of 2024, an increase of $1.2 million as compared to $15.6 million for the second quarter of 2023. This increase was due primarily to a $7.8 million increase in net interest income and a $2.8 decrease in the provision for credit losses, partially offset by a $9.8 million increase in non-interest expense.
Net income was $33.0 million for the six months ended June 30, 2024, a decrease of $7.6 million as compared to $40.6 million for the six months ended June 30, 2023. This decrease was due primarily to a $9.0 million increase in net interest income and a $2.9 million decrease in the provision for credit losses, partially offset by a $20.7 million increase in non-interest expense.
Net Interest Income Analysis
Net interest income is the difference between interest earned on assets and interest incurred on liabilities. The following table presents an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities. The table presents the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Yields and costs were derived by dividing income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. Average balances were derived from daily balances over the periods indicated. Interest income includes fees that management considers to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax-equivalent basis. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred loan origination fees and costs, and purchase discounts and premiums that are amortized or accreted to interest income.
36
June 30, 2023
Yield /
(dollars in thousands)
Rate (1)
Assets:
Interest-earning assets:
Loans (2)
5,754,283
7.31
4,921,887
6.54
Available-for-sale securities
589,825
3,353
2.29
520,322
2,068
1.59
Held-to-maturity securities
456,078
2,124
1.87
519,076
2,602
2.01
Equity investments
2,431
2.59
2,375
2.09
369,169
5.63
237,449
5.14
Other interest-earning assets
27,301
7.45
39,197
7.08
Total interest-earning assets
7,199,087
6.47
6,240,306
5.70
Non-interest-earning assets
182,234
162,326
(58,841)
(48,035)
7,322,480
6,354,597
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Money market and savings accounts
4,319,340
50,237
4.68
2,987,237
27,100
3.64
Certificates of deposit
37,084
318
3.45
45,925
303
2.65
Total interest-bearing deposits
4,356,424
4.67
3,033,162
3.62
287,104
3,667
588,281
7,824
5.32
Total interest-bearing liabilities
4,643,528
4.70
3,621,443
3.90
Non-interest-bearing liabilities:
Non-interest-bearing deposits
1,879,213
1,977,443
Other non-interest-bearing liabilities
119,675
139,341
6,642,416
5,738,227
Stockholders' equity
680,064
616,370
Total liabilities and equity
Net interest rate spread (3)
1.77
1.80
Net interest margin (4)
3.44
Total cost of deposits (5)
3.26
2.19
Total cost of funds (6)
3.34
2.52
(1)
Annualized.
Amount includes deferred loan fees and non-performing loans.
(3)
Determined by subtracting the annualized average cost of total interest-bearing liabilities from the annualized average yield on total interest-earning assets.
(4)
Determined by dividing annualized net interest income by total average interest-earning assets.
(5)
Determined by dividing annualized interest expense on deposits by total average interest-bearing and non-interest bearing deposits.
Determined by dividing annualized interest expense by the sum of total average interest-bearing liabilities and total average non-interest-bearing deposits.
37
Rate(1)
5,725,562
7.27
4,880,343
6.45
577,558
6,311
2.20
525,384
4,175
460,674
4,296
1.88
512,900
4,978
1.94
Equity investments - non-trading
2,423
2.53
2,368
333,580
5.62
222,765
4.97
30,365
7.69
29,733
6.84
7,130,162
6.43
6,173,493
5.61
182,635
157,338
(58,679)
(46,831)
7,254,118
6,284,000
4,209,403
96,848
4.63
2,914,160
49,129
3.40
35,674
593
49,399
647
2.64
4,245,077
4.62
2,963,559
3.39
362,246
9,407
5.22
389,360
10,180
5.23
4,607,323
4.66
3,352,919
3.61
1,857,290
2,183,000
115,974
143,573
6,580,587
5,679,492
673,531
604,508
3.42
3.21
1.95
3.32
2.18
Net interest margin for the second quarter of 2024 was 3.44% compared to 3.44% for the second quarter of 2023. Net interest margin for the six months ended June 30, 2024 was 3.42% compared to 3.65% for the six months ended June 30, 2023. The 23 basis point decrease was due primarily to the shift from non-interest bearing deposits to interest bearing deposits related to the exit from the crypto-related deposit vertical, and, moreover, the increase in the cost of funds, partially offset by loan growth and the increase in loan yields.
Interest Income
Interest income increased $26.8 million to $115.8 million for the second quarter of 2024 as compared to $89.0 million for the second quarter of 2023, primarily due to the increase in the average balance of loans and an increase in the yield on loans. The average balance of loans increased $832.4 million for the second quarter of 2024 as compared to the second quarter of 2023. The yield on loans increased 77 basis points for the second quarter of 2024 as compared to the second quarter of 2023 due to the increase in prevailing market interest rates and a disciplined approach to loan pricing.
Interest income increased $55.9 million to $228.1 million for the six months ended June 30, 2024 as compared to $172.2 million for the six months ended June 30, 2023, primarily due to the increase in the average balance of loans and an
38
increase in the yield for loans. The average balance of loans increased $845.2 million for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. The yield on loans increased 82 basis points for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023 due to the increase in prevailing market interest rates and a disciplined approach to loan pricing.
Interest expense increased $19.0 million to $54.2 million for the second quarter of 2024 as compared to $35.2 million for the second quarter of 2023 due primarily to the increase in the average balance of interest-bearing deposits and an increase in the cost of funds, partially offset by the decrease in the average balance of borrowed funds. The average balance of interest-bearing deposits increased $1.3 billion for the second quarter of 2024 as compared to the second quarter of 2023, which reflects deposit growth and the shift from non-interest bearing deposits to interest bearing deposits primarily related to the exit from the crypto-related deposit vertical in 2023. The total cost of funds for the second quarter of 2024 increased 82 basis points compared to the second quarter of 2023, which reflects the continued effects of high short-term interest rates, intense competition for deposits, and the shift from non-interest bearing deposits to interest bearing funding related to the exit from the crypto-related deposit vertical. The average balance of borrowed funds decreased $301.2 million for the second quarter of 2024 as compared to the second quarter of 2023, which reflects a disciplined approach to liquidity management.
Interest expense increased $46.9 million to $106.8 million for the six months ended June 30, 2024 as compared to $60.0 million for the six months ended June 30, 2023, due primarily to the increase in the average balance of interest-bearing deposits and an increase in the cost of funds. The average balance of interest-bearing deposits increased $1.3 billion for the six months ended June 30, 2024 as compared to the six month ended June 30, 2023, which reflects deposit growth and the shift from non-interest bearing deposits to interest bearing deposits primarily related to the exit from the crypto-related deposit vertical in 2023. The total cost of funds for the six months ended June 30, 2024 increased 114 basis points compared to the six months ended June 30, 2023, which reflects the continued effects of high short-term interest rates, intense competition for deposits, and the shift from non-interest bearing deposits to interest bearing funding.
Provision for Credit Losses – Loans and Loan Commitments
The provision for credit losses for the three and six months ended June 30, 2024 was $1.5 million and $2.1 million, respectively, which reflects loan growth and a provision related to a single C&I loan.
Non-Interest Income
Non-interest income decreased $1.7 million to $6.1 million for the second quarter of 2024, as compared to the second quarter of 2023 driven primarily by lower GPG revenue, partially offset by an increase in service charges on deposit accounts. At the beginning of 2024, the Company announced that it will exit all GPG Banking-as-a-Service relationships, which is expected to be completed during 2024. Non-interest income decreased $1.7 million to $13.1 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023 driven primarily by lower GPG revenue, partially offset by an increase in service charges on deposit accounts.
Non-Interest Expense
Non-interest expense increased $9.8 million to $42.3 million for the second quarter of 2024, compared to the second quarter of 2023 due primarily to an increase of $3.2 million in compensation and benefits related to the increase in number of employees, an increase of $1.9 million in professional fees primarily related to regulatory remediation costs, an increase of $1.6 million in technology costs primarily related to the digital transformation project, and an increase of $1.6 million in other expenses. At the beginning of 2024, the Company began implementing an innovative digital transformation project to improve its capabilities and efficiencies for both client facing and internal processes, which it expects to complete in 2025.
Non-interest expense increased $20.7 million to $84.2 million for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, due primarily to an increase of $6.8 million in compensation and benefits due to severance
39
expenses related to the GPG wind down and the increase in number of employees, an increase of $3.7 million in professional fees primarily related to regulatory remediation costs, an increase of $3.3 million in technology costs primarily related to the digital transformation project, and the $2.5 million reversal of the regulatory settlement reserve recorded in the first quarter of 2023.
Income Tax Expense
The estimated effective tax rate for the second quarter of 2024 was 29.7% as compared to 37.4% for the second quarter of 2023. The effective tax rate for the second quarter of 2023 includes an unfavorable discrete expense related to the rescission of stock awards. The effective tax rate for the six months ended June 30, 2024 was 31.5% compared to 30.8% for the six months ended June 30, 2023.
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit, which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Exposure to credit loss is represented by the contractual amount of the instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
At June 30, 2024, the Company had $541.0 million in unused loan commitments and $41.7 million in standby and commercial letters of credit. At December 31, 2023, the Company had $595.1 million in unused commitments and $59.5 million in standby and commercial letters of credit.
Liquidity and Capital Resources
Liquidity is the ability to economically meet current and future financial obligations. The Company’s primary sources of funds consist of deposit inflows, loan repayments and maturities, securities cash flows and borrowings. While maturities and scheduled amortization of loans and securities and borrowings are predictable sources of funds, deposit flows, mortgage prepayments and securities sales are greatly influenced by the general level of interest rates and changes thereto, economic conditions and competition.
The Company regularly reviews the need to adjust investments in liquid assets based upon its assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of its asset/liability program. Excess liquidity is generally invested in interest earning deposits and short- and intermediate-term securities.
The Company’s most liquid assets are cash and cash equivalents. The levels of these assets are dependent on its operating, financing, lending and investing activities during any given period. At June 30, 2024 and December 31, 2023, cash and cash equivalents totaled $244.7 million and $269.5 million, respectively. Securities, which provide an additional source of liquidity, totaled $956.2 million at June 30, 2024 and $932.2 million at December 31, 2023. At June 30, 2024, there were $783.1 million of securities pledged to support wholesale funding, and to a lesser extent certain other types of deposits, of which $170.8 million were encumbered. At December 31, 2023, there were $845.7 million of securities pledged to support wholesale funding, and to a lesser extent certain other types of deposits, of which $60.0 million were encumbered.
The Company’s primary investing activities are the origination of loans, and to a lesser extent, the purchase of loans and securities. For the three and six months ended June 30, 2024, the Company’s loan production was $290.8 million and $560.4 million as compared to $425.4 million and $690.8 million, respectively, for the three and six months ended June 30, 2023.
Financing activities consisted primarily of activity in deposit accounts and borrowings. The Company gathers deposits from businesses and individuals through client referrals and other relationships and through its retail presence. The Company has established deposit concentration thresholds to avoid the possibility of dependence on any single depositor
40
base for funds. Total deposits were $6.2 billion at June 30, 2024, an increase of $432.4 million, or 7.5%, from December 31, 2023.
At June 30, 2024, interest-bearing deposits were comprised of $4.2 billion of money market accounts and $30.5 million of time deposits. Time deposits due within one year of June 30, 2024 totaled $24.0 million, or 0.4%, of total deposits. At June 30, 2024, the aggregate estimated amount of FDIC uninsured deposits was $1.6 billion. At December 31, 2023, interest-bearing deposits were comprised of $3.9 billion of money market accounts and $35.4 million of time deposits. Time deposits due within one year of December 31, 2023 totaled $37.6 million, or 0.7%, of total deposits. Non-interest-bearing deposits were 30.5% of total deposits at June 30, 2024, as compared to 32.0% at December 31, 2023. At December 31, 2023, the aggregate estimated amount of FDIC uninsured deposits was $1.6 billion.
In the event loan demand were to increase faster than expected, or any other unforeseen demand or commitment were to occur, the Company could access its borrowing capacity with the FHLB or obtain additional funds through alternative funding sources, including the brokered deposit market. At June 30, 2024, the Company had $150.0 million of outstanding FHLBNY advances and a $100.0 million FRB term loan under the BTFP. The Company had $3.1 billion and $2.8 billion of available secured wholesale funding capacity at June 30, 2024 and December 31, 2023, respectively.
Regulation
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. At June 30, 2024 and December 31, 2023, the Company and the Bank met all applicable regulatory capital requirements to be considered “well capitalized” under regulatory guidelines. The Company and the Bank manage their capital to comply with their internal planning targets and regulatory capital standards administered by federal banking agencies. The Company and the Bank review capital levels on a monthly basis. Below is a table of the Company’s and Bank’s capital ratios for the periods indicated:
Minimum Ratio
Minimum
Required
Ratio to be
for Capital
Capital
“Well
Adequacy
Conservation
Capitalized”
Purposes
Buffer
The Company
Tier 1 leverage ratio
10.3
10.6
4.0
Common equity tier 1
11.7
11.5
4.5
Tier 1 risk-based capital ratio
12.1
11.8
6.0
Total risk-based capital ratio
13.0
12.8
8.0
The Bank
10.1
5.00
6.50
8.00
12.5
10.00
At June 30, 2024 and December 31, 2023, total non-owner-occupied CRE loans were 358.4% and 368.1% of risk-based capital, respectively.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The principal objective of the Company’s asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of IRR while maximizing net income and preserving adequate levels of liquidity and capital. The Board of Directors provides oversight of the Company’s asset and liability management function, which is managed by the Company’s ALCO. The ALCO has further assigned responsibility for the day-to-day management of IRR to the CFO, or his designee. The ALCO meets regularly to review, among other things, the sensitivity of earnings and the market value of assets and liabilities to market interest rate changes and local and national market conditions. That group also reviews liquidity, capital, deposit mix, loan mix and investment positions. Based upon the nature of its operations, the Company is not subject to FX or commodity price risk.
Interest Rate Risk
As a financial institution, the Company’s primary market risk exposure is IRR. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most assets and liabilities, and the fair value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. IRR is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values. The objective is to measure the effect on net interest income and to adjust, as deemed appropriate, the balance sheet to manage the inherent risk while at the same time maximizing income.
The Company manages its exposure to interest rates primarily by prudently structuring its balance sheet in the ordinary course of business. The Company generally originates fixed and floating rate loans with maturities of less than five years. The IRR on these loans is offset to some degree by the mix and structure of the deposit portfolio. On occasion, the Company enters into derivative contracts as a part of its asset liability management strategy to help manage its IRR position.
Net Interest Income At-Risk
The Company analyzes its net interest income sensitivity to changes in interest rates through a simulation model, which estimates what net interest income would be for a one-year period based on current interest rates, and then calculates what the net interest income would be for the same period under different interest rate assumptions.
The following table shows the estimated impact on net interest income for the one-year period beginning June 30, 2024 resulting from potential changes in interest rates, expressed in basis points. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on net interest income.
Although the net interest income table below provides an indication of the Company’s IRR exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest
rates on net interest income and may differ from actual results. The following table indicates the sensitivity of projected annualized net interest income to the interest rate movements described above (dollars in thousands):
Change in
Year 1
Change
Rates
Income Year 1
from
(basis points)
Forecast
Level
+400
218,082
(12.43)
+300
225,408
(9.49)
+200
232,745
(6.55)
+100
241,393
(3.07)
249,046
-100
255,588
2.63
-200
262,552
5.42
-300
270,148
8.47
-400
278,200
11.71
The table above indicates that at June 30, 2024, in the event of an instantaneous and sustained parallel upward shift of 200 basis points in interest rates, the Company would experience a 6.55% decrease in net interest income. In the event of an instantaneous and sustained parallel downward shift of 200 basis points in interest rates, it would experience a 5.42% increase in net interest income.
Economic Value of Equity Analysis
The Company also analyzes the sensitivity of its financial condition to changes in interest rates through an EVE model. This analysis measures the difference between predicted changes in the fair value of assets and predicted changes in the present value of liabilities assuming various changes in current interest rates. The table below represents an analysis of IRR as measured by the estimated changes in EVE, resulting from instantaneous and sustained parallel shifts in the yield curve (+100, +200, +300 and +400 basis points and -100, -200, -300 and -400 basis points) at June 30, 2024 (dollars in thousands):
Increase (Decrease) in
Interest Rates
(basis points) (1)
EVE (2)
Dollars
Percent
406,301
(166,608)
(29.08)
448,475
(124,434)
(21.72)
490,524
(82,385)
(14.38)
537,279
(35,630)
(6.22)
572,909
597,844
24,935
4.35
611,054
38,145
6.66
617,164
44,255
7.72
610,469
37,560
6.56
The table above indicates that at June 30, 2024, in the event of an immediate upward shift of 200 basis points in interest rates, the Company would experience a 14.38% decrease in its EVE. In the event of an immediate downward shift of 200 basis points in interest rates, the Company would experience a 6.66% increase in its EVE.
43
The preceding simulation analyses do not represent a forecast of actual results and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable-rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables will likely deviate from those assumed.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its Chief Executive Officer, who is the Company’s principal executive officer, and the Chief Financial Officer, who is the Company’s principal financial officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2024, pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2024. In addition, there have been no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is subject to various pending and threatened legal actions. There have been no material changes in the legal proceedings, if any, previously disclosed under Part I, Item 3 in our 2023 Form 10-K. While the future outcome of litigation or regulatory matters cannot be determined at this time, in the opinion of management, as of June 30, 2024, the aggregate liability, if any, arising out of any such pending or threatened legal actions are not expected to be material to the Company’s financial condition, results of operations, and liquidity.
ITEM 1A. RISK FACTORS
There are risks, many beyond our control, which could cause our results to differ significantly from management’s expectations. For a description of these risks, please see the risk factors included below and see the risk factors previously described in Part I, “Item 1A. Risk Factors” in our 2023 Form 10-K. There have been no material changes to our risk factors since the date of that filing. Any of the risks described in our 2023 Form 10-K could by itself or together with one or more other factors, materially and adversely affect our business, results of operations or financial condition. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, results of operations or financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Amendment of Bylaws
On July 31, 2024, our Board of Directors approved and adopted the Company’s Amended and Restated Bylaws (the “Bylaws”), which became effective immediately upon adoption. The Board of Directors approved an amendment to the Bylaws to update Article II, Section 16 regarding eligibility of individuals to be elected or appointed as a director. The amendment provides the Board of Directors discretion to approve the nomination for re-election of a director who will have attained the age of seventy-five (75) years on or prior to the date of his or her re-election if the Board of Directors determines that such nomination is in the best interest of the Company.
The preceding summary of the Bylaws does not purport to be complete and is qualified in its entirety by reference to the Amended and Restated Bylaws, a copy of which is included as Exhibit 3.3 to this report and incorporated by reference herein.
Rule 10b5-1 Trading Arrangement
On June 6, 2024, Nick Rosenberg, Executive Vice President and Chief Business Development Officer, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 8,250 shares of the Company’s common stock, commencing on September 16, 2024 and continuing until all shares are sold or September 16, 2025, whichever comes first.
ITEM 6. EXHIBITS
3.1
Certificate of Incorporation of Metropolitan Bank Holding Corp, as amended (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 4, 2017 (File No. 333-220805)).
3.2
Certificate of Amendment to the Certificate of Incorporation of Metropolitan Bank Holding Corp. (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-3 filed with the Securities and Exchange Commission on March 12, 2021 (File No. 333-254197)).
3.3
Amended and Restated Bylaws of Metropolitan Bank Holding Corp.
31.1
Certification of the Principal Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).
31.2
Certification of the Principal Financial Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Principal Executive Officer of the Company and the Principal Financial Officer of the Company.
101
INS XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
SCH XBRL Taxonomy Extension Schema
CAL XBRL Taxonomy Extension Calculation Linkbase
DEF XBRL Taxonomy Extension Definition Linkbase
LAB XBRL Taxonomy Extension Label Linkbase
PRE XBRL Taxonomy Extension Presentation Linkbase
The cover page from Metropolitan Bank Holding Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, formatted in Inline XBRL
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 2, 2024By: /s/ Mark R. DeFazio
Mark R. DeFazio
President and Chief Executive Officer
Date: August 2, 2024By:/s/ Daniel F. Dougherty
Daniel F. Dougherty
Executive Vice President and Chief Financial Officer