EDGAR 10-K Filing

Company CIK: 1476034
Filing Year: 2021
Filename: 1476034_10-K_2021_0001558370-21-002554.json

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ITEM 1. BUSINESS
Item 1. Business
The Company is a bank holding company headquartered in New York, New York and registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Through its wholly owned bank subsidiary, Metropolitan Commercial Bank, a New York state chartered 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 affluent individuals primarily in the New York metropolitan area. The Company’s founding members, including the Chief Executive Officer, Mark DeFazio, recognized a need in the New York metropolitan area for a solutions-oriented, relationship bank focused on middle market companies and real estate entrepreneurs whose financial needs are often overlooked by larger financial institutions. The Bank was established in 1999 with the goal of helping these under-served clients build and sustain wealth. Its motto, “The Entrepreneurial Bank,” is a reflection of the Bank’s aspiration to develop a middle-market bank that shares the same entrepreneurial spirit of its clients. By combining the high-tech service and relationship-based focus of a community bank with an extensive suite of financial products and services, Metropolitan is well-positioned to continue to capitalize on the significant growth opportunities available in the New York metropolitan area.
In addition to traditional commercial banking products, the Bank offers corporate cash management and retail banking services and, through its Global Payments Group (“global payments business”), provides global payments infrastructure to its FinTech partners, which includes serving as an issuing bank for third-party debit card programs nationwide. The Bank 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. As of December 31, 2020, the Company’s assets, loans, deposits and stockholders’ equity totaled $4.33 billion, $3.14 billion, $3.82 billion and $340.8 million, respectively.
As a bank holding company, the Company is subject to the supervision of the Board of Governors of the Federal Reserve System (“FRB”). The Company is required to file with the FRB reports and other information regarding its business operations and the business operations of its subsidiaries. As a state-chartered bank that is a member of the FRB, the Bank is subject to Federal Deposit Insurance Corporation (“FDIC”) regulations as well as primary supervision, periodic examination and regulation by the New York State Department of Financial Services (“NYSDFS”) as the state regulator and by the FRB as its primary federal regulator.
Amendments to the SEC’s Smaller Reporting Company Definition
On June 28, 2018, the Securities Exchange Commission (“SEC”) adopted amendments to its regulations that raise the thresholds by which entities would be defined as a smaller reporting company (“SRC”), which permits reduced disclosure and later filing deadlines. The amendments to the SRC definition became effective on September 10, 2018. Under the new definition of SRC, a company with less than $250 million of public float will be eligible to provide reduced disclosures. Additionally, companies with less than $100 million in annual revenues and either no public float or a public float that is less than $700 million will also be eligible to provide reduced disclosures. A reporting company will determine whether it qualifies as an SRC annually as of the last business day of its second fiscal quarter. A company must reflect its SRC status in its Form 10-Q for the first fiscal quarter of the next year.
The Company qualified as an SRC for the 2020 fiscal year due to having a public float of less than $250 million as of June 30, 2020 and has elected to take advantage of certain exemptions allowed as an EGC and SRC. In addition, the Company has elected to use the extended transition period for complying with new or revised accounting standards as permitted by the JOBS Act.
Available Information
The SEC maintains an internet site, www.sec.gov, that contains the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments thereto, and other reports electronically filed
with the SEC. The Company makes these documents filed with the SEC available free of charge through the Company’s website, www.mcbankny.com, by clicking the Investor Relations tab and selecting “Annual Reports & SEC Filings.” Information included on the Company’s website is not part of this Annual Report on Form 10-K.
Market Area
The Bank’s primary market consists primarily of the New York metropolitan area, specifically Manhattan and the outer boroughs, and Nassau County. This market is well-diversified and represents the largest market for middle market businesses in the country (defined as businesses with annual revenue of $5 million to $200 million). Middle-market businesses have changed in type, but not in substance, with respect to banking needs in recent decades following a commercial trend out of manufacturing and into services. This has been to the advantage of the middle-market business in the New York metropolitan area, which has continued to grow at a better than average pace relative to other metropolitan regions in the United States. In addition, the Bank’s global payments group issues prepaid debit cards to debit card program managers nationwide and administers global payment settlements for its FinTech partners globally.
The Bank operates six banking centers strategically located within close proximity to target clients. There are four banking centers in Manhattan, one in Brooklyn, New York, and one in Great Neck, Long Island. The 99 Park Avenue banking center, adjacent to the Company headquarters, is located at the center of one of the largest markets for bank deposits in the New York Metropolitan Statistical Area due to the abundance of corporate and high net worth clients. The Manhattan banking centers are centrally located in the heart of neighborhoods strongly identified with specific business sectors, with which the Bank has strong existing relationships. The Brooklyn banking center is in the active Boro Park neighborhood, which is home to many small- and medium-sized businesses, and where several important existing lending clients live and work. The banking center in Great Neck, Long Island represents a natural extension of the Bank’s efforts to establish a physical footprint in areas where many of its existing and prospective commercial clients are located, and also serves as a central hub for philanthropic and community events.
Competitors
The bank and non-bank financial services industry in the Bank’s markets and surrounding areas is highly competitive. The Bank competes with a wide range of regional and national banks located in its market areas as well as non-bank commercial finance companies on a nationwide basis. The Bank faces competition in both lending and attracting funds as well as merchant processing services from commercial banks, savings associations, credit unions, consumer finance companies, pension trusts, mutual funds, insurance companies, mortgage bankers and brokers, brokerage and investment banking firms, non-bank lenders, government agencies and certain other non-financial institutions. Many of these competitors have higher lending limits and more assets, capital and resources than the Bank, and may be able to conduct more intensive and broader-based promotional efforts to reach both commercial and individual customers. Competition for deposit products can depend heavily on pricing because of the ease with which customers can transfer deposits from one institution to another.
The Bank’s primary market consists of the New York metropolitan area, specifically Manhattan and the outer boroughs, and Nassau County. The Bank’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 (“FIRE”), technology companies and construction. The services industry accounts for the largest employment sector across the two primary market area counties, while wholesale/retail trade accounts for the second largest employment sector in Nassau and New York Counties. FIRE is the third largest employment sector in New York County.
Accessibility, tailored product offerings, disciplined underwriting and differentiated execution create a unique opportunity for the Bank to distinguish itself in the market of its target clients, which the Bank views as under-served by today’s global financial services industry. Establishing banking centers in close proximity to a “critical mass” of its clients has advanced the Bank’s ability to retain and grow deposits, provided opportunities to deepen client relationships, and enhance franchise value.
Business Strategy
The Bank’s strategy is to continue to build a relationship-oriented commercial bank through organically growing its existing client relationships and developing new long-term clients. The Bank focuses on New York metropolitan area middle-market businesses with annual revenue of $200 million or less and New York metropolitan area real estate entrepreneurs with a net worth of $5 million or more. The Bank originates and services commercial real estate (“CRE”) and Commercial and Industrial (“C&I”) loans of generally between $2 million and $20 million, which it believes is an under-served segment of the market. Management believes that the Bank is positioned in a market area offering significant growth opportunities. As it grows, the Bank plans to continue its success in converting many of its lending clients into full retail relationships.
The Bank differentiates itself in the marketplace by offering excellent service, competitive products, innovative solutions, access to senior management, and an ability to make lending decisions in a timely manner combined with certainty of execution. The Bank’s lending team has developed industry expertise that enables it to better understand its clients’ businesses and differentiates it from other banks in the market.
On-going relationships and tailored products
Management believes that the focus on servicing all aspects of the clients’ businesses, including cash management and lending solutions, positions the Bank to be able to provide a host of services designed to meet clients’ current and future needs. The Bank has the flexibility and commitment to create solutions tailored to the needs of each client. For example, the Bank entered the healthcare lending space in 2001 and built out processes, procedures, and customized infrastructure to support its clients in this industry. Management intends to continue leveraging the quality of its team, existing relationships and its client-centered approach to further grow its tailored banking solutions, build deeper relationships and increase penetration in its market area. Additionally, the Bank is always working to expand its team by attracting and developing individuals that embody its spirit as “The Entrepreneurial Bank.” This ensures that it continues to meet its high standard of excellence, which drives relationships and loan growth.
Strong deposit franchise
The strength of the Bank’s deposit franchise comes from its long-standing relationships with clients and the strong ties it has in its market area. The Bank provides commercial clients with convenient solutions such as remote deposit capture, business online banking and various other retail services and products. The Bank has also developed a diversified funding strategy, which affords it the opportunity to be less reliant on branches. Deposit funding is provided by the following deposit verticals:
1) Borrowing clients - the Bank generates significant deposits from its borrowing clients. The Bank provides commercial clients with convenient solutions such as remote deposit capture, business online banking and various other retail services and products. The Bank expects to continue its success of converting lending clients into full retail clients and strategically expand its retail presence.
2) Non-borrowing retail clients - these customers, located primarily in the New York City metropolitan area, need an efficient technology interface and the personal service of an experienced banker who can assist them in managing their day to day operations. Management believes that not every potential client of the Bank is in need of extensions of credit; instead, these clients require a bank that can assist in making them make them more efficient and competitive.
3) Global payments business - the Bank is an active issuer of debit cards for third-party debit card programs and administers domestic and international digital payments settlements for its FinTech clients. Additionally, the Bank provides digital currency customers with a suite of cash management solutions; although, it does not have any digital assets or liabilities on its statement of financial condition. It is expected that the global payments business will continue to be a diverse source of low-cost deposits as the Bank continues to add new clients.
4) Corporate cash management clients - the Bank provides corporate cash management services to clients who are in possession of or have discretion over large deposits such as, but not limited to, property management companies, title companies and bankruptcy trustees.
Products and Services
The Bank provides a comprehensive set of commercial and retail banking products and services customized to meet the needs of its clients. The Bank offers a broad range of lending products, primarily CRE and C&I loans.
Lending Products
The Bank’s CRE products include acquisition loans, loans to refinance or return borrower equity on income producing properties, renovation loans, loans on owner-occupied properties and construction loans. The Bank lends against a variety of asset classes, including multi-family, mixed use, retail, office, hospitality and warehouse.
The Bank’s C&I products consist primarily of working capital lines of credit secured by business assets, self-liquidating term loans generally made for acquisition of equipment and other long-lived company assets, trade finance and letters of credit. The majority of C&I loans carry the personal guarantee of the principals of the borrowing entity.
Commercial Real Estate
Non-owner-occupied CRE comprises the largest component of the Bank’s real estate loan portfolio. These mortgage loans are secured by mixed-use properties, office buildings, commercial condominium units, retail properties, hotels and warehouses. In underwriting these loans, the Bank generally relies on the income that is to be generated by the property as the primary means of repayment. However, the personal guarantee of the principals will frequently be required as a credit enhancement, particularly when the collateral property is in transition (i.e., under renovation and/or in the lease-up stage). A Phase I Environmental Report is generally required for all new CRE loans.
Loans are generally written for terms of three to five years, although loans with longer terms are occasionally written. Interest rates may be fixed or floating, and repayment schedules are generally based on a 25- to 30-year amortization schedule although interest only loans are also offered.
Factors considered in the underwriting include: the stability of the projected cash flows from the real estate based on operating history, tenancy, and current rental market conditions; development and property management experience of the principals; financial wherewithal of the principals, including an analysis of global cash flows; and credit history of the principals. Maximum loan to value ratios range from 50% to 75%, depending on the property type. The minimum debt coverage ratio is 1.20x, with higher coverage required for hospitality and special use properties.
At December 31, 2020, $596.1 million, or 25.7% of the Bank’s real estate loan portfolio consisted of loans to the healthcare industry, of which $593.0 million, or 99.5%, of these loans were made to nursing and residential care facilities. These loans are made to borrowers with strong cash flows and the Bank generally obtains the personal guarantee of high net worth sponsors. The Bank has lenders who are well experienced in lending to the healthcare industry, and particularly to skilled nursing homes. They generally originate loans with very experienced operators who typically have over 1,000 beds under management. In addition to being secured by real estate, these loans are also secured by the assets of the operating company, and in almost all cases the credit facilities are personally guaranteed by principals of the company, who are typically high net worth individuals. The Bank also originates term loans to standalone medical facilities such as radiology and dialysis centers and medical practices, which are secured by the assets of the company and the personal guaranties of the physicians within the practice.
Multi-family
The multi-family loan portfolio consists of loans secured by multi-tenanted residential properties located in the New York City or the greater New York area. In underwriting multi-family loans, the Bank employs the same underwriting standards and procedures as are employed for non-owner occupied CRE.
During the second quarter of 2019, new and onerous rent regulations were signed into law by the State of New York. These new laws mostly impact rent stabilized units in the New York City boroughs. The new laws limit rent increases for rent stabilized multi-family properties, which may make it difficult for owners of these properties to offset increasing property expenses and generate excess cash flows. If expense growth exceeds revenue growth, the property may not generate sufficient cash flows to cover debt service.
The Bank analyzed its portfolio of stabilized multi-family loans, including free market or combinations of rent controlled and free market multi-family properties, to determine if any of the business plans of the properties could be adversely affected by the new regulations in a way that the Bank’s underwritten debt service coverage levels could be meaningfully lower than those which might ultimately be achieved. The Bank has concluded that the new New York City rent regulations had a very modest impact since the Bank’s multi-family loans are underwritten to current cash flows. The weighted average debt coverage ratio on rent-regulated stabilized multi-family properties was 1.8x at December 31, 2020. The properties had an average loan-to-value of 44.5% at December 31, 2020, which provides a cushion against potential declines in value.
Construction Loans
Construction lending involves additional risks when compared to permanent loans. These risks include completion risk, which is impacted by unanticipated delays and/or cost overruns, and market risk, i.e., the risk that market rental rates and/or market sales prices may decline before the project is completed. Therefore, only on a very selective basis will the Bank originate construction loans. These loans are both extensive renovation loans as well as ground-up construction. In all cases the owner/developer will have extensive construction experience, sufficient equity in the transaction (maximum loan to cost of 65%) and personal recourse on the loan. The Bank has established limits for construction lending as a percentage of risk-based capital.
Commercial and Industrial Loans
C&I credit facilities are made to a wide range of industries. The principals of the companies have extensive experience in acquiring and operating their business. The industries include retail, wholesale and importers and exporters of a wide range of products. The loans are secured by the assets of the company including accounts receivable, inventory and equipment and, in almost all cases, are personally guaranteed. Collateral may also include owner-occupied real estate. The Bank targets companies that have $200 million of revenues or less.
The Bank’s lines of credit are generally renewed on an annual basis, and its term loans typically have terms of two to five years. The credit facilities may be made with either fixed or floating rates.
C&I loans are subject to risk factors that are unique to each business. In underwriting these loans, the Bank seeks to gain an understanding of each client’s business in order to accurately assess the reliability of the company’s cash flows. The Bank prefers to lend to borrowers who are well capitalized, and have an established track record in their business, with predictable growth and cash flows.
At December 31, 2020, $218.7 million, or 37.0% of the Bank’s commercial and industrial loan portfolio consisted of loans to the healthcare industry, of which $103.5 million, or 47.3%, of these loans were made to nursing and residential care facilities. These loans are made to borrowers with strong cash flows and the Bank generally obtains the personal guarantee of high net worth sponsors. Within the C&I lending group, the Bank has lenders who are well experienced in lending to the healthcare industry, and particularly to skilled nursing homes. They generally originate loans with very experienced operators who typically have over 1,000 beds under management. In all cases these loans are secured by the assets of the operating company, and in almost all cases the credit facilities are personally guaranteed by principals of the company, who are typically high net worth individuals. The Bank also originates term loans to standalone medical facilities such as radiology and dialysis centers and medical practices, which are secured by the assets of the company and the personal guaranties of the physicians within the practice.
Consumer Loans
The Bank purchases consumer loans nationwide through a physician-focused finance company. The loans are made only to healthcare professionals who meet specific credit criteria, and all loans are independently underwritten by the Bank. The Bank also purchased consumer loans from a regional bank that offers student loan refinancing to individuals who are no longer students, but are now employed in their chosen professions. These individuals must also meet high credit standards and the Bank independently re-underwrites these loans. At December 31, 2020, consumer loans comprised 1.5% of the Bank’s loan portfolio. Beginning in 2019, the Bank had decided to no longer purchase or originate consumer loans; however, this may change in the future.
Deposit Products and Services
The Bank’s retail products and services are similar to those of mid-to-large competitive banks in its market, and include, but are not limited to, online banking, mobile banking, ACH, and remote deposit capture. The Bank has and will continue to make investments in technology to meet the needs of its customers.
Global Payments Business
The Bank administers domestic and international digital payment settlements on behalf of its FinTech clients, provides cash management solutions to its digital currency clients and serves as an issuing bank for third-party debit card programs nationwide. The Bank acts as the depository institution for the processing of credit and debit card payments made to various businesses. The Bank has designed products that enable clients to process electronic payments more easily and to better manage their risk of loss. These client accounts are a source of demand deposits and fee income. The Bank maintains a robust risk management program that is designed to ensure safe and sound operations in compliance with applicable laws, rules and guidance around its global payments products.
Corporate Cash Management Deposit Accounts
The Bank’s entrepreneurial approach has encouraged management to find alternatives to traditional retail bank services, such as corporate cash management deposit accounts. These accounts belong to clients who are in possession of or have discretion over large deposits such as, but not limited to, property management companies, title companies and bankruptcy trustees. The accounts provide a significant source of deposits. At December 31, 2020, deposits in these accounts amounted to $1.61 billion, which was 42.2% of total deposits. These accounts included money market accounts, demand accounts and other interest-bearing transaction accounts.
Asset Quality
Non-Performing Assets
Non-performing assets consist of non-accrual loans, non-accrual troubled debt restructurings (“TDRs”), loans past due 90 days and still accruing and other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure. Past due status on all loans is based on the contractual terms of the loan. It is generally the Bank’s policy that a loan 90 days past due be placed on non-accrual status unless factors exist that would eliminate the need to place a loan in this status. A loan may also be designated as non-accrual at any time if payment of principal or interest in full is not expected due to deterioration in the financial condition of the borrower. At the time loans are placed on non-accrual status, the accrual of interest is discontinued, and previously accrued interest is reversed. Payments received on non-accrual loans are generally applied to principal. Loans are considered for return to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Bank expects to receive all of its original principal and interest.
Troubled Debt Restructurings
The Bank works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. In that regard, the Bank modifies the terms of certain loans to maximize their collectability. Loans
for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs under current accounting guidance. Modifications generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued interest.
Impaired Loans
A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect both the principal and interest due under the contractual terms of the loan agreement.
The majority of the Bank’s impaired loans are secured and measured for impairment based on collateral valuations. It is the Bank’s policy to obtain updated appraisals by independent third parties on loans secured by real estate at the time a loan is determined to be impaired. An impairment measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off. In determining the amount of any specific allocation or charge-off, the Bank will make adjustments to reflect the estimated costs to sell the collateral. Upon receipt and review of the updated appraisal, an additional measurement is performed to determine if any adjustments are necessary to reflect the proper provisioning or charge-off. Impaired loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require any additional allocation or recognition of additional charge-offs. Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s knowledge of the client and client’s business. If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.
Allowance for Loan Losses
The Allowance for Loan Losses (“ALLL”) is established based on management’s evaluation of the probable incurred losses inherent in the Bank’s portfolio in accordance with Generally Accepted Accounting Principles (“GAAP”) and is comprised of both specific valuation allowances and general valuation allowances.
Specific valuation allowances are established based on management’s analysis of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, delinquent or unpaid property taxes, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be impaired and is placed on non-accrual status, all future payments received are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from sale of the collateral.
The general component of ALLL covers non-impaired loans and is based on historical loss experience adjusted for current qualitative factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling two-year history of net losses. For unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Bank over the most recent two years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; (2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; (3) changes in the trends in the type and volume and in terms of loans; (4) changes in the experience, ability, and depth of lending management and other relevant staff; (5) changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; (6) changes in the quality of the Bank’s loan review system; (7) changes in the value of underlying collateral for collateral-dependent loans; (8) the
existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (9) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.
The ALLL is increased through a provision for loan losses that is charged to operations. Loans are charged off against the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely. Management’s evaluation of the adequacy of the allowance for loan losses is performed on a quarterly basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
In June 2016, the FASB issued Accounting Standard Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current conditions, and reasonable and supportable forecasts. This Accounting Standard Update will be effective January 1, 2023 for the Company. See “Risk Factors - Risks Related to Accounting Matters - The FASB issued an accounting standard update that will result in a significant change in how the Company recognizes credit losses, which may have a material impact on its financial condition or results of operations.”
The Bank controls credit risk both through disciplined underwriting of each transaction, as well as active credit management processes and procedures to manage risk and minimize loss throughout the life of a transaction. It seeks to maintain a broadly diversified loan portfolio in terms of type of customer, type of loan product, geographic area and industries in which business customers are engaged. The Bank has developed tailored underwriting criteria and credit management processes for each of the various loan product types it offers customers.
Credit Risk Management
Underwriting
In evaluating each potential loan relationship, the Bank adheres to a disciplined underwriting evaluation process including but not limited to the following:
● understanding the customer’s financial condition and ability to repay the loan;
● verifying that the primary and secondary sources of repayment are adequate in relation to the amount and structure of the loan;
● observing appropriate loan to value guidelines for collateral-secured loans;
● identifying the customer’s level of experience in their business;
● identifying macroeconomic and industry level trends;
● maintaining targeted levels of diversification for the loan portfolio, both as to type of borrower and geographic location of collateral; and
● ensuring that each loan is properly documented with perfected liens on collateral.
Credit Risk Management for Lending Products
Credit Risk Management strategies for specific lending products are outlined in the “Lending Products” section above.
Loan Approval Authority
The Bank’s lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by its Board of Directors and management. The Bank has established several levels of lending authority that have been delegated by the Board of Directors to the Loan Committee and other personnel in accordance with the Lending Authority in the Commercial Loan Policy. Authority limits are based on the individual loan size and the total exposure of the borrower and are conditioned on the loan conforming to the policies contained in the Commercial Loan Policy. All loans over $7.5 million go to Loan Committee for approval. The Loan Committee is comprised of Board members and does not include members of management. There are four Board members who are permanent members of the Loan Committee; and a minimum of two other Board members rotate quarterly. Loans less than $7.5 million are approved by management subject to individual officer approval limits. Any loan policy exceptions are fully disclosed to the approving authority.
Loans to One Borrower
In accordance with loans-to-one-borrower regulations promulgated by the NYSDFS, the Bank is generally limited to lending no more than 15% of its capital stock, surplus fund and undivided profits to any one borrower or borrowing entity. This limit may be increased by an additional 10% for loans secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of funds outstanding. To qualify for this additional 10%, the Bank must perfect a security interest in the collateral and the collateral must have a market value at all times of at least 100% of the loan amount that exceeds 15% of the Bank’s capital stock, surplus fund and undivided profits. At December 31, 2020, the Bank’s regulatory limit on loans-to-one borrower was $61.5 million.
Management understands the importance of concentration risk and continuously monitors the Bank’s loan portfolio to ensure that risk is balanced between such factors as loan type, industry, geography, collateral, structure, maturity and risk rating, among other things. The Bank’s Commercial Loan Policy establishes detailed concentration limits and sub-limits by loan type and geography.
Ongoing Credit Risk Management
In addition to the underwriting process described above, the Bank performs ongoing risk monitoring and reviews processes for all credit exposures. Although it grades and classifies its loans internally, the Bank has an independent third-party firm perform regular loan reviews to confirm loan classifications. The Bank strives to identify potential problem loans early in an effort to aggressively seek resolution of these situations before the loans create a loss, record any necessary charge-offs promptly and maintain adequate allowance levels for probable loan losses incurred in the loan portfolio.
In general, whenever a particular loan or overall borrower relationship is downgraded to pass-watch, special mention or substandard based on one or more standard loan grading factors, the Bank’s credit officers engage in active evaluation of the asset to determine the appropriate resolution strategy. Management and the Board of Directors regularly review the status of the watch list and classified assets portfolio as well as the larger credits in the portfolio.
Investments
The Bank’s investment objectives are primarily to provide and maintain liquidity, establish an acceptable level of interest rate risk and safely invest excess funds when demand for loans is weak. Subject to these primary objectives, the Bank also seeks to generate a favorable return. The Board of Directors has the overall responsibility for the investment portfolio, including approval of the Investment Policy. The Asset Liability Committee (“ALCO”) and management are responsible for implementation of the Bank’s investment policy and monitoring its investment performance. The ALCO reviews the status of its investment portfolio quarterly.
The Bank has legal authority to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of various government-sponsored agencies, mortgage-backed and municipal government
securities, deposits at the Federal Home Loan Bank of New York (“FHLBNY”), certificates of deposit of federally insured institutions, investment grade corporate bonds and investment grade money market mutual funds. It is also required to maintain an investment in FHLBNY stock, which investment is based primarily on the level of its FHLBNY borrowings. Additionally, the Bank is required to maintain an investment in Federal Reserve Bank of New York (“FRBNY”) stock equal to six percent of its capital and surplus.
The large majority of its investments are classified as available-for-sale (“AFS”) and can be used to collateralize FHLBNY borrowings, FRB borrowings, public funds deposits or other borrowings. At December 31, 2020, the investment portfolio consisted primarily of residential and commercial mortgage-backed securities, U.S. Government Agency securities, and CRA mutual funds.
In the first quarter of 2020, the Company entered into an interest rate cap derivative contract as a part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate cap does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the derivative contract. The interest rate subject to the cap is 30-day LIBOR.
Sources of Funds
Deposits
Deposits have traditionally been the Bank’s primary source of funds for use in lending and investment activities. The Bank generates deposits from prepaid third-party debit card programs, digital currency customers, its cash management platform offered to bankruptcy trustees, property management companies and others, local businesses, individuals through client referrals and other relationships and through its retail branch network. The Bank believes that it has a very stable deposit base as it successfully encourages its business borrowers to maintain their operating banking relationship with it. The Bank’s deposit strategy primarily focuses on developing borrowing and other service-oriented relationships with customers rather than competing with other institutions on rate. It has established deposit concentration thresholds to avoid the possibility of dependence on any single depositor base for funds.
Borrowings
The Bank maintains diverse funding sources including borrowing lines at the FHLB and the FRB discount window. The Bank utilizes advances from the FHLB to supplement its funding sources. The FHLB provides a central credit facility primarily for its member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances collateralized by the security of such stock and certain of its whole first mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the full faith and credit of the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness. The FRB discount window is maintained primarily for contingency funding sources.
As of December 31, 2020, the Bank did not have any borrowings from the FHLB or the FRB.
Human Capital Resources
As of December 31, 2020, the Company employed 189 individuals, nearly all of whom are full-time employees. This marks an increase of 19 employees, or approximately 10%, from December 31, 2019. Headcount growth to support our expanding businesses occurred in the Company’s Lending and Global Payments business lines as well as in the Operations, Technology and Risk Management groups. The Company employs a business model that combines high-touch service, new technologies and the relationship-based focus of a community bank with an extensive suite of banking and innovative financial services to businesses and individuals embracing the digital banking era.
Talent Acquisition and Retention. Management seeks to hire, develop, promote and retain well-qualified employees who are aligned with the Company’s business model and community. The Company’s selection and promotion processes are without bias and include the active recruitment of minorities and women; approximately 50% of employees are women and 50% are minorities. The New York City labor market is very competitive. To attract and retain talent, the Company offers a competitive, performance-based compensation program and a benefits plan that includes health care coverage, retirement benefits, life and disability insurance, wellness programs, paid time off and leave policies, including paid maternity/paternity leave.
Training and Development. The Company encourages and supports the growth and development of its employees and, whenever possible, seeks to fill positions by promotion and transfer from within the organization. The training and development of employees is a priority. All employees are required to do a minimum of 6.5 hours of compliance and technical training annually. Departments average an additional two hours per employee in additional training. The Company provides in-house training to employees on topics including leadership and professional development, cybersecurity, risk and compliance and technology.
Safety, Health and Welfare. The safety, health and wellness of our employees is a top priority. During the COVID-19 pandemic, the Bank continued to responsibly serve the needs of its customers while prioritizing the health and safety of employees. The Company identified the potential threat of COVID-19 in February 2020, activated its Pandemic Plan in March 2020, and had a fully remote workforce for its corporate office by early April 2020 as COVID-19 began to affect New York City, the Bank’s primary market. In September 2020, the Bank implemented its Return-to-Work Plan by bringing staff back incrementally subject to the recommended health protocols, with the objective of full return to premises in March 2021. The Pandemic Plan and Return-to-Work Plan incorporate guidance from the regulatory and health communities, defined by the Bank’s Business Continuity Response Team and the actions to be taken from the business lines up through the Board of Directors.
The Bank’s actions ensured the Bank’s uninterrupted operational effectiveness, while safeguarding the health and safety of customers and employees. The Bank’s branch network continues to serve the local community and its online platforms facilitate alternate methods for its customers to meet their financial needs. While COVID-19 has resulted in widespread disruption to the lives and businesses of the Bank’s customers and employees, the Bank’s Pandemic Plan has enabled the Bank to remain focused on assisting customers and ensuring that the Bank remains fully operational.
Subsidiaries
Metropolitan Commercial Bank is the sole subsidiary of Metropolitan Bank Holding Corp. and there are no subsidiaries of Metropolitan Commercial Bank.
Federal, State and Local Taxation
The following is a general description of material tax matters and does not purport to be a comprehensive review of the tax rules applicable to the Company.
For federal income tax purposes, the Company files a consolidated income tax return on a calendar year basis using the accrual method of accounting. The Company is subject to federal income taxation in the same manner as other corporations. For its 2020 taxable year, the Bank is subject to a maximum Federal income rate of 21%.
State and Local Taxation
The Company is subject to New York State and New York City income taxes on a consolidated basis.
REGULATION
General
The Bank is a commercial bank organized under the laws of the state of New York. It is a member of the Federal Reserve System and its deposits are insured under the Deposit Insurance Fund (“DIF”) of the FDIC up to applicable legal limits. The lending, investment, deposit-taking, and other business authority of the Bank is governed primarily by state and federal law and regulations and the Bank is prohibited from engaging in any operations not authorized by such laws and regulations. The Bank is subject to extensive regulation, supervision and examination by, and the enforcement authority of, the NYSDFS and FRB, and to a lesser extent by the FDIC, as its deposit insurer. The Bank is also subject to federal financial consumer protection and fair lending laws and regulations of the Consumer Financial Protection Bureau (“CFPB”), though, because it has less than $10 billion in total consolidated assets, the FRB and NYSDFS are responsible for examining and supervising the Bank’s compliance with these laws. The regulatory structure establishes a comprehensive framework of activities in which a state member bank may engage and is primarily intended for the protection of depositors, customers and the DIF. The regulatory structure gives the regulatory agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
The Company is a bank holding company, due to its control of the Bank, and is therefore subject to the requirements of the BHCA, and regulation and supervision by the FRB. The Company files reports with and is subject to periodic examination by the FRB.
Any change in the applicable laws and regulations could have a material adverse impact on the Company and the Bank and their operations and the Company’s stockholders.
On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”) was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Wall Street and Consumer Protection Act (“Dodd-Frank Act”). While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for banks and their holding companies.
In addition, the Economic Growth Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
What follows is a summary of some of the laws and regulations applicable to the Bank and the Company. The summary is not intended to be exhaustive and is qualified in its entirety by reference to the actual laws and regulations.
Regulations of the Bank
Loans and Investments
State commercial banks have authority to originate and purchase any type of loan, including commercial, commercial real estate, residential mortgages or consumer loans. Aggregate loans by a state commercial bank to any single borrower or group of related borrowers are generally limited to 15% of the Bank’s capital stock, surplus fund and undivided profits, plus an additional 10% if secured by specified readily marketable collateral.
Federal and state law and regulations limit the Bank’s investment authority. Generally, a state member bank is prohibited from investing in corporate equity securities for its own account other than the equity securities of companies through which the bank conducts its business. Under federal and state regulations, a New York state member bank may invest in investment securities for its own account up to specified limits depending upon the type of security. “Investment securities” are generally defined as marketable obligations that are investment grade and not predominantly
speculative in nature. The NYSDFS classifies investment securities into five different types and, depending on its type, a state commercial bank may have the authority to deal in and underwrite the security. The NYSDFS has also permitted New York state member banks to purchase certain non-investment securities that can be reclassified and underwritten as loans.
Lending Standards and Guidance
The federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are secured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate. Under these regulations, all insured depository institutions, such as the Bank, must adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the federal bank regulators’ Interagency Guidelines for Real Estate Lending Policies that have been adopted.
The FDIC, the Office of the Comptroller of the Currency (“OCC”) and the FRB have also jointly issued the “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). The CRE Guidance, which addresses land development, construction, and certain multi-family loans, as well as commercial real estate loans, does not establish specific lending limits but rather reinforces and enhances these agencies’ existing regulations and guidelines for such lending and portfolio management. Specifically, the CRE Guidance provides that a bank has a concentration in CRE lending if (1) total reported loans for construction, land development, and other land represent 100% or more of total risk-based capital; or (2) total reported loans secured by multi-family properties, non-farm non-residential properties (excluding those that are owner-occupied), and loans for construction, land development, and other land represent 300% or more of total risk-based capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices that address key elements, including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.
Federal Deposit Insurance
Deposit accounts at the Bank are insured up to applicable legal limits by the FDIC’s DIF. Effective July 22, 2010, the Dodd-Frank Act permanently raised the deposit insurance available on all deposit accounts to $250,000.
Under the FDIC’s risk-based assessment system, insured depository institutions were assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s rate depended upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Institutions deemed less risky pay lower FDIC assessments. The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured depository institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity. Effective July 1, 2016, the FDIC adopted changes that eliminated the risk categories and base assessments for most banks on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure over three years. In conjunction with the DIF reserve ratio achieving 1.5%, the assessment range (inclusive of possible adjustments) was also reduced for small institutions to a range of 1.5 to 30 basis points of total assets less tangible equity.
The FDIC may adjust its assessment scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment. No insured depository institution may pay a dividend if in default of the federal deposit insurance assessment.
The FDIC may terminate deposit insurance upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Bank does not know of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance.
Capitalization
The FRB regulations require state member banks, such as the Bank, to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets and a Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
The capital standards require the maintenance of a common equity Tier 1 capital ratio, Tier 1 capital ratio and total capital to risk-weighted assets ratio of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital. Common equity Tier 1 capital consists primarily of common stockholders’ equity and related surplus, plus retained earnings, less any amounts of goodwill, other intangible assets, and other items required to be deducted. Tier 1 capital consists primarily of common equity Tier 1 and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus Additional Tier 1 capital) and Tier 2 capital. Tier 2 capital primarily includes capital instruments and related surplus meeting specified requirements and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan losses limited to a maximum of 1.25% of risk-weighted assets. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, a bank’s assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests), are multiplied by a risk weight factor assigned by the regulations based on perceived risks inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans or are on non-accrual status and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The Bank’s capital conservation buffer was at 2.5% of risk-weighted assets at December 31, 2020.
As a result of the Economic Growth Act, banking regulatory agencies adopted a revised definition of “well capitalized” for financial institutions and holding companies with assets of less than $10 billion and that are not determined to be ineligible by their primary federal regulator due to their risk profile (a “Qualifying Community Bank”). The new definition expanded the ways that a Qualifying Community Bank may meet its capital requirements and be deemed “well capitalized.” The new rule establishes a community bank leverage ratio (“CBLR”) equal to the tangible equity capital divided by the average total consolidated assets. Regulators have established the CBLR to be set at 8.5% through calendar year 2021 and 9% thereafter. The Coronavirus Aid, Relief, and Economic Security Act, signed into law in response to the Novel Coronavirus pandemic, temporarily reduced the CBLR to 8%.
A Qualifying Community Bank that maintains a leverage ratio greater than 9% is considered to be well capitalized and to have met generally applicable leverage capital requirements, generally applicable risk-based capital requirements, and any other capital or leverage requirements to which such financial institution or holding company is subject.
The Bank did not elect into the CBLR framework and at December 31, 2020, the Bank’s capital exceeded all applicable requirements.
Safety and Soundness Standards
Each federal banking agency, including the FRB, has adopted guidelines establishing general standards relating to, among other things, internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and information security standards. In general, the guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired, and require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal stockholder. The FDIC also has issued guidance on risks banks may face from third-party relationships (e.g., relationships under which the third-party provides services to the bank). The guidance generally requires the Bank to perform adequate due diligence on the third-party, appropriately document the relationship, and perform adequate oversight and auditing, in order to the limit the risks to the Bank.
Prompt Corrective Regulatory Action
Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
State member banks that have insufficient capital are subject to certain mandatory and discretionary supervisory measures. For example, a bank that is “undercapitalized” (i.e., fails to comply with any regulatory capital requirement) is subject to growth, capital distribution (including dividend) and other limitations, and is required to submit a capital restoration plan; a holding company that controls such a bank is required to guarantee that the bank complies with the restoration plan. If an undercapitalized institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” A “significantly undercapitalized” bank is subject to additional restrictions. State member banks deemed by the FRB to be “critically undercapitalized” also may not make any payment of principal or interest on certain subordinated debt, extend credit for a highly leveraged transaction, or enter into any material transactions outside the ordinary course of business after 60 days of obtaining such status, and are subject to the appointment of a receiver or conservator within 270 days after obtaining such status.
The final rule that increased regulatory capital standards also adjusted the prompt corrective action tiers as of January 1, 2015 to conform to the new capital standards. The various categories now incorporate the newly adopted common equity Tier 1 capital requirement, an increase in the Tier 1 to risk-based assets requirement and other changes. Under the revised prompt corrective action requirements, insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (1) a common equity Tier 1 risk-based capital ratio of 6.5%; (2) a Tier 1 risk-based capital ratio of 8%; (3) a total risk-based capital ratio of 10% and (4) a Tier 1 leverage ratio of 5%.
Dividends
Under federal and state law and applicable regulations, a state member bank may generally declare a dividend, without approval from the NYSDFS or FRB, in an amount equal to its year-to-date net income plus the prior two years’ net income that is still available for dividend. Dividends exceeding those amounts require application to and approval by the NYSDFS or FRB. To pay a cash dividend, a state member bank must also maintain an adequate capital conservation buffer under the new capital rules discussed above.
Incentive Compensation Guidance
The FRB, OCC, FDIC and other federal banking agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations, including state member banks and bank holding
companies, do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor, which for the Bank and the Company is the FRB, may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, provisions of the Basel III regime described above limit discretionary bonus payments to bank and bank holding company executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. The scope and content of the banking regulators’ policies on incentive compensation are likely to continue evolving.
Transactions with Affiliates and Insiders
Sections 23A and 23B of the Federal Reserve Act govern transactions between an insured depository institution and its affiliates, which includes the Company. The FRB has adopted Regulation W, which implements and interprets Sections 23A and 23B, in part by codifying prior FRB interpretations.
An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary of a bank that is not also a depository institution or a “financial subsidiary” under federal law is not treated as an affiliate of the bank for the purposes of Sections 23A and 23B; however, the FRB has the discretion to treat subsidiaries of a bank as affiliates on a case-by-case basis. Section 23A limits the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus. There is an aggregate limit of 20% of the bank’s capital stock and surplus for such transactions with all affiliates. The term “covered transaction” includes, among other things, the making of a loan to an affiliate, a purchase of assets from an affiliate, the issuance of a guarantee on behalf of an affiliate and the acceptance of securities of an affiliate as collateral for a loan. All such transactions are required to be on terms and conditions that are consistent with safe and sound banking practices and no transaction may involve the acquisition of any “low quality asset” from an affiliate unless certain conditions are satisfied. Certain covered transactions, such as loans to or guarantees on behalf of an affiliate, must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amount, depending upon the type of collateral. In addition, Section 23B requires that any covered transaction (and specified other transactions) between a bank and an affiliate must be on terms and conditions that are substantially the same, or at least as favorable, to the bank, as those that would be provided to a non-affiliate.
A bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an “insider”) and certain entities affiliated with any such person (an insider’s “related interest”) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the FRB’s Regulation O. The aggregate amount of a bank’s loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to state member banks. Aggregate loans by a bank to its insiders and insiders’ related interests may not exceed 15% of the bank’s unimpaired capital and unimpaired surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, such as education loans and certain residential mortgages, a bank’s loans to its executive officers may not exceed the greater of $25,000 or 2.5% of the bank’s unimpaired capital and unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any loan to an insider or a related interest of an insider be approved in advance by a majority of the board of directors of the bank, with any interested director not participating in the voting, if the loan, when aggregated with any existing loans to that insider or the insider’s related interests, would exceed the higher of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those that are prevailing at the time for comparable transactions with other persons and must not involve more than a normal risk of repayment. An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.
Enforcement
The NYSDFS and the FRB have extensive enforcement authority over state member banks to correct unsafe or unsound practices and violations of law or regulation. Such authority includes the issuance of cease and desist orders, assessment of civil money penalties and removal of officers and directors. The FRB may also appoint a conservator or receiver for a state member bank under specified circumstances, such as where (i) the bank’s assets are less than its obligations to creditors, (ii) the bank is likely to be unable to pay its obligations or meet depositors’ demands in the normal course of business, or (iii) a substantial dissipation of bank assets or earnings has occurred due to a violation of law of regulation or unsafe or unsound practices. Separately, the Superintendent of the NYSDFS also has the authority to appoint a receiver or liquidator of any state-chartered bank under specified circumstances, including where (i) the bank is conducting its business in an unauthorized or unsafe manner, (ii) the bank has suspended payment of its obligations, or (iii) the bank cannot with safety and expediency continue to do business.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain reserves at the FRB against its transaction accounts, including checking and Negotiable Order of Withdrawal (“NOW”) accounts. The regulations currently require that banks maintain average daily reserves of 3% on aggregate transaction accounts over $16.3 million and up to $124.2 million and 10% against that portion of total transaction accounts in excess of $124.2 million. The first $16.3 million of otherwise reservable balances are exempted from the reserve requirements. The Bank is in compliance with these requirements. The requirements are adjusted annually by the FRB and the FRB began paying interest on reserves in 2008.
Examinations and Assessments
The Bank is required to file periodic reports with and is subject to periodic examination by the NYSDFS and FRB. Federal and state regulations generally require periodic on-site examinations for all depository institutions. The Bank is required to pay an annual assessment to the NYSDFS and FRB to fund the agencies’ operations.
Community Reinvestment Act and Fair Lending Laws
Federal Regulation
Under the CRA, the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FRB to assess its record of meeting the credit needs of its community and to take that record into account in its evaluation of certain applications by the Bank. For example, the regulations specify that a bank’s CRA performance will be considered in its expansion (e.g., branching or merger) proposals and may be the basis for approving, denying or conditioning the approval of an application. As of the date of its most recent FRB examination during 2019, the Bank was rated “Satisfactory” with respect to its CRA compliance.
New York State Regulation
The Bank is also subject to provisions of the New York State Banking Law that impose continuing and affirmative obligations upon a banking institution organized in New York State to serve the credit needs of its local community. Such obligations are substantially similar to those imposed by the CRA. The latest New York State CRA rating received by the Bank is “Satisfactory.”
USA PATRIOT Act and Money Laundering
The Bank is subject to the Bank Secrecy Act (“BSA”), which incorporates several laws, including the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or
the USA PATRIOT Act and related regulations. The USA PATRIOT Act gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the BSA, Title III of the USA PATRIOT Act implemented measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
Among other things, Title III of the USA PATRIOT Act and the related regulations require:
● Establishment of anti-money laundering compliance programs that includes policies, procedures, and internal controls; the designation of a BSA officer; a training program; and independent testing;
● Filing of certain reports to Financial Crimes Enforcement Network and law enforcement that are designated to assist in the detection and prevention of money laundering and terrorist financing activities;
● Establishment of a program specifying procedures for obtaining and maintaining certain records from customers seeking to open new accounts, including verifying the identity of customers;
● In certain circumstances, compliance with enhanced due diligence policies, procedures and controls designed to detect and report money-laundering, terrorist financing and other suspicious activity;
● Monitoring account activity for suspicious transactions; and
● A heightened level of review for certain high-risk customers or accounts.
The USA PATRIOT Act also includes prohibitions on correspondent accounts for foreign shell banks and requires compliance with record keeping obligations with respect to correspondent accounts of foreign banks.
The bank regulatory agencies have increased the regulatory scrutiny of the BSA and anti-money laundering programs maintained by financial institutions. Significant penalties and fines, as well as other supervisory orders may be imposed on a financial institution for non-compliance with these requirements. In addition, for financial institutions engaging in a merger transaction, federal bank regulatory agencies must consider the effectiveness of the financial institution’s efforts to combat money laundering activities.
The Bank has adopted policies and procedures to comply with these requirements.
Privacy Laws
The Bank is subject to a variety of federal and state privacy laws, which govern the collection, safeguarding, sharing and use of customer information, and require that financial institutions have in place policies regarding information privacy and security. For example, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and practices for sharing nonpublic information with third parties, provide advance notice of any changes to the policies and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties. It also requires banks to safeguard personal information of consumer customers. Some state laws also protect the privacy of information of state residents and require adequate security for such data, and certain state laws may, in some circumstances, require the Bank to notify affected individuals of security breaches of computer databases that contain their personal information. These laws may also require the Bank to notify law enforcement, regulators or consumer reporting agencies in the event of a data breach, as well as businesses and governmental agencies that own data.
Third-Party Debit Card Products and Merchant Services
The Bank is also subject to the rules of Visa, Mastercard and other payment networks in which it participates. If the Bank fails to comply with such rules, the networks could impose fines or require it to stop providing merchant services for cards under such network’s brand or routed through such network.
Consumer Finance Regulations
The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. In this regard, the CFPB has several rules that implement various provisions of the Dodd-Frank Act that were specifically identified as being enforced by the CFPB. While the Bank is subject to the CFPB regulations, because it has less than $10 billion in total consolidated assets, the FRB and the NYSDFS are responsible for examining and supervising the Bank’s compliance with these consumer financial laws and regulations. In addition, the Bank is subject to certain state laws and regulations designed to protect consumers.
Other Regulations
The Bank’s operations are also subject to federal laws applicable to credit transactions, such as:
● The Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
● The Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
● The Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
● The Equal Credit Opportunity Act and other fair lending laws, prohibiting discrimination on the basis of race, religion, sex and other prohibited factors in extending credit;
● The Fair Credit Reporting Act, governing the use of credit reports on consumers and the provision of information to credit reporting agencies;
● Unfair or Deceptive Acts or Practices laws and regulations;
● The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
● The Coronavirus Aid, Relief and Economic Security Act; and
● The rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The operations of the Bank are further subject to the:
● The Truth in Savings Act, which specifies disclosure requirements with respect to deposit accounts;
● The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
● The Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
● The Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and
● State unclaimed property or escheatment laws; and
● Cybersecurity regulations, including but not limited to those implemented by NYSDFS.
Holding Company Regulation
The Company, as a bank holding company controlling the Bank, is subject to regulation and supervision by the FRB under the BHCA. The Company is periodically examined by and required to submit reports to the FRB and must comply with the FRB’s rules and regulations. Among other things, the FRB has authority to restrict activities by a bank holding company that are deemed to pose a serious risk to the subsidiary bank.
The FRB has historically imposed consolidated capital adequacy guidelines for bank holding companies structured similar, but not identical, to those of state member banks. The Dodd-Frank Act directed the FRB to issue consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Consolidated regulatory capital requirements identical to those applicable to the subsidiary banks applied to bank holding companies as of January 1, 2015. The Company is subject to the consolidated holding company capital requirements.
The policy of the FRB is that a bank holding company must serve as a source of financial and managerial strength to its subsidiary banks by providing capital and other support in times of distress. The Dodd-Frank Act codified the source of strength policy.
Under the prompt corrective action provisions of federal law, a bank holding company parent of an undercapitalized subsidiary bank is required to guarantee, within specified limits, the capital restoration plan that is required of an undercapitalized bank. If an undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement an accepted plan, the FRB may prohibit the bank holding company parent of the undercapitalized bank from paying dividends or making any other capital distribution.
As a bank holding company, the Company is required to obtain the prior approval of the FRB to acquire direct or indirect ownership or control of more than 5% of a class of voting securities of any additional bank or bank holding company, to acquire all or substantially all of the assets of any additional bank or bank holding company or merging or consolidating with any other bank holding company. In evaluating acquisition applications, the FRB evaluates factors such as the financial condition, management resources and future prospects of the parties, the convenience and needs of the communities involved and competitive factors. In addition, bank holding companies may generally only engage in activities that are closely related to banking as determined by the FRB. Bank holding companies that meet certain criteria may opt to become a financial holding company and thereby engage in a broader array of financial activities.
FRB policy is that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past two years is sufficient to fund the dividends and the prospective rate of earnings retention is consistent with the company’s capital needs, asset quality and overall financial condition. In addition, FRB guidance sets forth the supervisory expectation that bank holding companies will inform and consult with FRB staff in advance of issuing a dividend that exceeds earnings for the quarter and should inform the FRB and should eliminate, defer or significantly reduce dividends if (i) net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends, (ii) prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition,
or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
A bank holding company that is not well capitalized or well managed, or that is subject to any unresolved supervisory issues, is required to give the FRB prior written notice of any repurchase or redemption of its outstanding equity securities if the gross consideration for repurchase or redemption, when combined with the net consideration paid for all such repurchases or redemptions during the preceding 12 months, will be equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a repurchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice or violate a law or regulation. However, FRB guidance generally provides for bank holding company consultation with FRB staff prior to engaging in a repurchase or redemption of a bank holding company’s stock, even if a formal written notice is not required.
The above FRB requirements may restrict a bank holding company’s ability to pay dividends to stockholders or engage in repurchases or redemptions of its shares.
Acquisition of Control of the Company
Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as the Company unless the FRB has prior written notice and has not issued a notice disapproving the proposed acquisition. In evaluating such notices, the FRB takes into consideration such factors as the financial resources, competence, experience and integrity of the acquirer, the future prospects the bank holding company involved and its subsidiary bank and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the company’s directors, or a determination by the regulator that the acquirer has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttable presumption of control under the regulations under certain circumstances including where, is the case with the Company, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
Federal Securities Laws
Metropolitan Bank Holding Corp. is a reporting company subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an Emerging Growth Company (“EGC”). The Company qualifies as an EGC under the JOBS Act.
An EGC may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An EGC also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting and can provide reduced disclosure regarding executive compensation. Finally, an EGC may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an EGC.
A company loses EGC status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.05 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a
“large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
The Company is likely to lose its EGC status on December 31, 2022 since that would the last day of the fiscal year of the Company following the fifth anniversary of the date of the first sale of the common equity securities of the Company pursuant to an effective registration statement under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 is intended to improve corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Company has policies, procedures and systems designed to comply with these regulations, and it reviews and document such policies, procedures and systems to ensure continued compliance with these regulations.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
The Company’s operations and financial results are subject to various risks and uncertainties, including but not limited to those described below, which could adversely affect its business, financial condition, results of
operations, cash flows and the trading price of its common stock.
Risks Related to the COVD-19 Outbreak
The economic impact of the COVID-19 outbreak could adversely affect the Company’s financial condition and results of operations.
The Novel Coronavirus (“COVID-19”) pandemic has caused significant economic dislocation in the United States as many state and local governments have placed restrictions on businesses and residents. This has resulted in a slow-down in economic activity and a related increase in unemployment; and the stock markets have been highly volatile, and the value of bank stocks has been significantly impacted. In response to the COVID-19 outbreak, the Federal Reserve reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed legislation to provide relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of COVID-19 has caused the Bank to modify its business practices, including employee travel, implementing social-distancing protocols and requiring face coverings in public areas of Company facilities, and placing limitations on physical participation in meetings, events and conferences. The Bank may take further actions that may be required by government authorities or that the Bank determines are in the best interests of its employees, customers and business partners.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on the Bank. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated resulting in a meaningful increase in economic activity. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Bank could be subject to any of the following risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations:
● demand for the Bank’s products and services may decline, making it difficult to grow assets and income;
● if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charge-offs and reduced income;
● collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
● due to recent legislation and government action limiting foreclosure of real property and reduced governmental capacity to effect business transactions and property transfers, the Bank may have more difficulty taking possession of collateral supporting its loans, which may negatively impact its ability to minimize losses, which could adversely impact its financial results;
● access to collateral for existing loans and new loan production may be difficult as a result of COVID-19 making it difficult to obtain, on a timely basis, appraisals on the collateral;
● the Bank’s allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect its net income;
● the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Bank;
● as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on the Bank’s assets may decline to a greater extent than the decline in its cost of interest-bearing liabilities, reducing its net interest margin and spread and reducing net income;
● if legislation is enacted or governmental or regulatory action is enacted limiting the amount of ATM fees or surcharges that the Bank may receive or on its ability to charge overdraft or other fees, it could adversely impact the Bank’s financial results;
● the Bank’s cyber security risks are increased as the result of an increased use of the Bank’s online banking platform and an increase in the number of employees working remotely;
● the Bank relies on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on it; and
● Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.
Moreover, the Company’s future success and profitability substantially depends on the skills of its employees, including executive directors and officers, many of whom have held their positions with the Company for many years. The unanticipated loss or unavailability of key employees and/or a large number of employees due to the outbreak could harm the Company’s ability to operate or execute its business strategy. The Company may not be successful in finding and integrating suitable replacements in the event of such employee loss or unavailability.
Risks Related to Lending Activities
A substantial portion of the Bank’s loan portfolio consists of CRE, multi-family real estate loans and commercial loans, which have a higher degree of risk than other types of loans.
CRE, multi-family real estate and commercial loans are often larger and involve greater risks than other types of loans since payments on such loans are often dependent on the successful operation or development of the property or business involved. Accordingly, a downturn in the real estate market and/or a challenging business and economic environment may increase the Bank’s risk related to CRE, multi-family real estate and commercial loans. If the cash flows from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Further, due to the larger average size of such loans and that they are secured by collateral that is generally less readily-marketable as compared with other loan types, losses incurred on a small number of such loans could have a material adverse impact on the Bank’s financial condition and results of operations.
In addition, CRE loan concentration is an area that has experienced heightened regulatory focus. Under CRE guidance issued by banking regulators, banks with holdings of CRE, land development, construction, and certain multi-family loans in excess of certain thresholds must employ heightened risk management practices. These loans are also subject to written policies that establish certain limits and standards. Such compliance requirements imposed on the Company’s CRE, multi-family or construction lending and the potential limits to the generation of these types of loans could have material adverse effect on its financial condition and results of operations.
Because the Bank intends to continue to increase its commercial loans, its credit risk may increase.
The Bank intends to increase its portfolio of commercial loans, including working capital lines of credit, equipment financing, healthcare and medical receivables, documentary letters of credit and standby letters of credit. These loans
generally have more risk than one- to four-family residential mortgage loans and commercial loans secured by real estate. Since repayment of commercial loans depends on the successful management and operation of borrowers’ businesses, repayment of such loans can be affected by adverse conditions in the local and national economy. In addition, commercial loans generally have a larger average size as compared with other loans such as residential loans, and the collateral for commercial loans is generally less readily-marketable. The Bank’s plans to increase its portfolio of these loans could result in increased credit risk in the portfolio. An adverse development with respect to one loan or one credit relationship can expose the Bank to significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential mortgage loan or a commercial real estate loan.
If the allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease.
Loan customers may not repay their loans according to the terms of their loans, and the collateral securing the payment of their loans may be insufficient to assure repayment. The Bank may experience significant credit losses, which could have a material adverse effect on its operating results. Various assumptions and judgments about the collectability of the loan portfolio are made, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of many loans. In determining the amount of the allowance for loan losses, management reviews the quality of its loan portfolio and its loss and delinquency experience and evaluates industry trends and economic conditions.
The determination of the appropriate level of allowance is subject to judgment and requires the Bank to make significant estimates of current credit risks and future trends, all of which are subject to material changes. If assumptions prove to be incorrect, the allowance for loan losses may not cover losses in the loan portfolio at the date of the financial statements. Significant additions to the allowance would materially decrease net income. In addition, federal and state regulators periodically review the allowance for loan losses, the policies and procedures the Bank uses to determine the level of the allowance and the value attributed to non-performing loans or to real estate acquired through foreclosure. Such regulatory agencies may require an increase in the allowance for loan losses or the Bank to recognize loan charge-offs. Any significant increase in allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a material adverse effect on the results of operations and financial condition. See “Risk Factors - Risk Factors - The FASB issued an accounting standard update that will result in a significant change in how the Company recognizes credit losses, which may have a material impact on its financial condition or results of operations.”
The performance of the Bank’s multi-family and mixed-use loans could be adversely impacted by regulation.
Multi-family and mixed-use loans generally involve a greater risk than one- to-four family residential loans because of legislation and government regulations involving rent control and rent stabilization, which are outside the control of the borrower or the Bank, and could impair the value of the security for the loan or the future cash flows of such properties. On June 14, 2019, the State of New York enacted legislation increasing restrictions on rent increases in a rent-regulated apartment building, including, among other provisions, (i) repealing the “vacancy bonus” and “longevity bonus,” which allowed a property owner to raise rents as much as 20% each time a rental unit became vacant, (ii) eliminating high-rent vacancy deregulation and high-income deregulation, which allowed a rental unit to be removed from rent stabilization once it crossed a statutory high-rent threshold and became vacant, or the tenant’s income exceeded the statutory amount in the preceding two years, and (iii) eliminating an exception that allowed a property owner who offered preferential rents to tenants to raise the rent to the full legal rent upon renewal. The legislation still permits a property owner to charge up to the full legal rent once the tenant vacates. As a result, it is possible that rental income on certain rent-regulated properties might not rise sufficiently over time to satisfy increases in the loan rate at repricing or increases in overhead expenses (e.g., utilities, taxes, etc.). At December 31, 2020, the Bank has $187.2 million of rent-regulated stabilized multi-family loans, which had a weighted-average loan-to-value of 44.5%, a weighted average debt coverage ratio of 1.8x and a weighted average debt yield of 12.2%.
Additionally, in order to provide meaningful support to homeowners struggling financially as a result of the COVID-19, several federal, state and local agencies have placed moratoriums on evictions and foreclosures within their respective jurisdictions.
As a result of these legislative and regulatory actions as well as previously existing laws and regulations, it is possible that, if the cash flows from a collateral property is reduced (e.g., if leases are not obtained or renewed; or rental income cannot be collected and a non-paying tenant cannot be replaced), a borrower’s ability to repay a loan and the value of the security for the loan may be impaired. Therefore, it may be more difficult to identify impaired multi-family and mixed-use loans before they become problematic than residential loans.
The Bank could be subject to environmental risks and associated costs on its foreclosed real estate assets, which could materially and adversely affect it.
A material portion of the Bank’s loan portfolio is comprised of loans collateralized by real estate. There is a risk that hazardous or toxic waste could be discovered on the properties that secure these loans. If the Bank acquires such properties as a result of foreclosure, it could be held responsible for the cost of cleaning up or removing this waste, and this cost could exceed the value of the underlying properties and materially and adversely affect the Bank’s financial condition and results of operation.
Risks Related to Economic Conditions
A downturn in economic conditions could cause deterioration in credit quality, which could depress net income and growth.
The Bank’s principal economic risk is the creditworthiness of its borrowers, which is affected by the strength of the relevant business market segment, local market conditions, and general economic conditions. The Bank’s loan portfolio includes many real estate secured loans, demand for which may decrease during economic downturns as a result of, among other things, an increase in unemployment, a decrease in real estate values and a slowdown in housing. If negative economic conditions develop in the New York market or the United States, the Bank could experience higher delinquencies and loan charge-offs, which would adversely affect its net income and financial condition. Furthermore, to the extent that real estate collateral is obtained through foreclosure, the costs of holding and marketing real estate collateral, as well as the ultimate values obtained from disposition, could reduce earnings and adversely affect the Bank’s financial condition.
The Bank’s business and operations may be adversely affected by weak economic conditions.
The Bank’s business and operations, which primarily consist of lending money to customers, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, growth and profitability from the Bank’s lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium and long-term fiscal outlook of the federal government, and future tax rates is a concern for businesses, consumers and investors in the United States.
The Bank’s business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond the Bank’s control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on the business, financial condition, results of operations and prospects of the Bank.
A substantial majority of the Bank’s loans and operations are in New York, and therefore its business is particularly vulnerable to a downturn in the New York City economy.
The Bank is a community banking institution that provides banking services to the local communities in the market areas in which it operates, and therefore, its ability to diversify its economic risks is limited by its own local markets and economies. A large portion of the Bank’s business is concentrated in New York, and in New York City in particular. A significant decline in local economic conditions, caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, unemployment or other factors beyond the Bank’s control, would likely cause an increase in the rates of delinquencies, defaults, foreclosures, bankruptcies and losses in its loan portfolio.
As a result, a downturn in the local economy, generally and the real estate market specifically, could significantly reduce the Bank’s profitability and growth and adversely affect its financial condition.
Risks Related to Market Interest Rates
Interest rate shifts may reduce net interest income and otherwise negatively impact the Bank’s financial condition and results of operations.
The majority of the Company’s banking assets are monetary in nature and subject to risk from changes in interest rates. The Bank’s earnings and cash flows depend, to a great extent, upon the level of its net interest income (the difference between the interest income earned on loans, investments, other interest earning assets, and the interest paid on interest bearing liabilities, such as deposits and borrowings). Changes in interest rates can increase or decrease net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.
When interest bearing liabilities mature or reprice more quickly, or to a greater degree, than interest earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest earning assets mature or reprice more quickly, or to a greater degree, than interest bearing liabilities, falling interest rates could reduce net interest income. Additionally, an increase in interest rates may, among other things, reduce the demand for loans and the Bank’s ability to originate loans and decrease loan repayment rates. A decrease in the general level of interest rates may affect the Bank through, among other things, increased prepayments on its loan portfolio and increased competition for deposits. Accordingly, changes in the level of market interest rates affect the Bank’s net yield on interest earning assets, loan origination volume and overall results.
The Bank’s securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand.
Risk Related to the Bank’s Operations
A failure in the Bank’s operational systems or infrastructure, or those of third parties, could impair the Bank’s liquidity, disrupt its businesses, result in the unauthorized disclosure of confidential information, damage its reputation and cause financial losses.
The Bank’s operations rely on its computer systems, networks and third-party providers for the secure processing, storage and transmission of confidential and other sensitive customer information. The Bank’s business, and in particular, the debit card and cash management solutions business, is dependent on its ability to process and monitor, on a daily basis, a large number of transactions, many of which are highly complex, across numerous and diverse markets. These transactions, as well as the information technology services provided to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards. Due to the breadth and geographical reach of the Bank’s client base, developing and maintaining its operational systems and infrastructure is challenging, particularly as a result of rapidly evolving legal and regulatory requirements and technological shifts. This is further exacerbated by the increased cybersecurity risks that exist during the COVID-19 pandemic.
Although the Bank takes protective measures to maintain the confidentiality, integrity and availability of information, its computer systems, software and networks may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other events that could have an adverse security impact. Furthermore, the Bank may not be able to ensure that all of its clients, suppliers, counterparties and other third parties have appropriate controls in place to protect themselves from cyber-attacks or to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. Given the increasingly high volume of transactions, certain errors may be repeated or compounded before they can be discovered and rectified. In addition, the increasing reliance on technology systems and networks and the occurrence and potential adverse impact of attacks on such systems and networks, both generally and in the financial services industry, have enhanced government and
regulatory scrutiny of the measures taken by companies to protect against cyber-security threats. As these threats and government and regulatory oversight of associated risks continue to evolve, the Company may be required to expend additional resources to enhance or expand upon the security measures it currently maintains. Although the Bank has developed, and continues to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-attacks, a breach of its systems or those of processors could result in: losses to the Bank and its customers; loss of business and/or customers; damage to its reputation; the incurrence of additional expenses (including the cost of notification to consumers, credit monitoring and forensics, and fees and fines imposed by the card networks); disruption to its business; an inability to grow its online services or other businesses; additional regulatory scrutiny or penalties, or the exposure to civil litigation and possible financial liability - any of which could have a material adverse effect on the Bank’s business, financial condition and results of operations.
The Bank faces risks related to its operational, technological and organizational infrastructure.
The Bank’s ability to grow and compete is dependent on its ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure as it expands. Similar to other large corporations, operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees or outside persons and exposure to external events. In addition, the Bank is heavily dependent on the strength and capability of its technology systems, which are used both to interface with customers and manage internal financial and other systems. The Bank’s ability to develop and deliver new products that meet the needs of its existing customers and attract new ones depends on the functionality of its technology systems.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The Bank’s future success will depend in part upon its ability to address the needs of its clients by using technology to provide products and services that will satisfy client demands for convenience as well as to provide secure electronic environments and create additional efficiencies in its operations as it continues to grow and expand its market area. The Bank continuously monitors its operational and technological capabilities and makes modifications and improvements when it believes it will be cost effective to do so. Many of the Bank’s larger competitors have substantially greater resources to invest in operational and technological infrastructure. As a result, competitors may be able to offer more convenient products than the Bank, which would put it at a competitive disadvantage.
The Bank also outsources some of its operational and technological infrastructure, including modifications and improvements to these systems, to third parties. If these third-party service providers experience difficulties, fail to comply with banking regulations or terminate their services and if the Bank is unable to replace them with other service providers, its operations could be interrupted. If an interruption were to continue for a significant period of time, its business, financial condition and results of operations could be adversely affected, perhaps materially. Even if the Bank were able to replace the third-party providers, it may be at a higher cost, which could adversely affect its business, financial condition and results of operations.
The Bank is subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject the Bank to financial losses or regulatory sanctions and have a material adverse impact on its reputation. Misconduct by its employees could include concealing unauthorized activities, engaging in improper or unauthorized activities on behalf of customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions the Bank takes to prevent and detect this activity may not be effective in all cases. Employee errors could also subject the Bank to financial claims for negligence.
The Bank maintains a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors and customer or employee fraud. If internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse impact on the Bank’s business, financial condition and results of operations.
The Bank relies heavily on its executive management team and other key employees and could be adversely affected by the unexpected loss of their services.
The Bank’s success depends in large part on the performance of its key personnel, as well as on its ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute its business plan may be lengthy. The Bank may not be successful in retaining its key employees, and the unexpected loss of services of one or more of key personnel could have a material adverse effect on its business because of their skills, knowledge of primary markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel. If the services of any key personnel should become unavailable for any reason, the Bank may not be able to identify and hire qualified persons on acceptable terms, or at all, which could have a material adverse effect on the business, financial condition, results of operations and future prospects of the Bank.
If the Bank’s enterprise risk management framework is not effective at mitigating interest rate risk, market risk and strategic risk, it could suffer unexpected losses and its results of operations could be materially adversely affected.
The Bank’s enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder value. The Bank has established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which it is subject, including credit, liquidity, operational, regulatory compliance and reputational risks. However, as with any risk management framework, there are inherent limitations to these risk management strategies as there may exist, or develop in the future, risks that have not been appropriately anticipated or identified. If the Bank’s risk management framework proves ineffective, it could suffer unexpected losses and its business and results of operations could be materially adversely affected.
A lack of liquidity could adversely affect the Company’s financial condition and results of operations.
Liquidity is essential to the Bank’s business. The Bank relies on its ability to generate deposits and effectively manage the repayment and maturity schedules of loans to ensure that there is adequate liquidity to fund its operations. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on liquidity. The Bank’s most important source of funds is deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff, which are strongly influenced by such external factors as the direction of interest rates, local and national economic conditions, the availability and attractiveness of alternative investments and competing deposits. Further, the demand for the deposit products offered may be reduced due to a variety of factors such as demographic patterns, changes in customer preferences, reductions in consumers’ disposable income or the monetary policy of the FRB, regulatory actions that decrease customer access to particular products. If customers move money out of bank deposits and into other investments such as money market funds, the Bank would lose a relatively low-cost source of funds, which would increase its funding costs and reduce net interest income. Any changes made to the rates offered on deposit products to remain competitive with other financial institutions may also adversely affect profitability and liquidity.
Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and borrowings from the FHLB of New York. The Bank also has an available line of credit with FRBNY discount window. The Bank also may borrow funds from third-party lenders, such as other financial institutions. The Bank’s access to funding sources in amounts adequate to finance or capitalize its activities, or on terms that are acceptable, could be impaired by factors that affect the Bank directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry, a decrease in the level of the Bank’s business activity as a result of a downturn in markets or by one or more adverse regulatory actions against the Bank.
Any decline in available funding could adversely impact the Bank’s ability to originate loans, invest in securities, meet expenses, or to fulfill obligations such as repaying borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on its liquidity, business, financial condition and results of operations.
Other Risks Related to the Bank’s Business
The Bank may be adversely impacted by the transition from LIBOR as a reference rate.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, which is expected to be extended to June 30, 2023. In the U.S., the Alternative Reference Rates Committee of the FRB and the FRBNY identified the Secured Overnight Financing Rate (“SOFR”) as an alternative U.S. dollar reference interest rate.
The Bank has a significant number of loans, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change the Bank’s market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with customers could adversely impact the Bank’s reputation or could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Bank is exposed to the risks of natural disasters and global market disruptions.
The Bank handles a substantial volume of customer and other financial transactions every day. Its financial, accounting, data processing, check processing, electronic funds transfer, loan processing, online and mobile banking, automated teller machines, backup or other operating or security systems and infrastructure may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond its control, including major physical infrastructure outages, natural disasters or events arising from local or larger scale political or social matters, including terrorist acts, pandemics, and cyber-attacks. Operational risk exposures could adversely impact the Company’s results of operations, liquidity and financial condition, and cause reputational harm.
Additionally, global markets may be adversely affected by natural disasters, the emergence of widespread health emergencies or pandemics, cyber-attacks or campaigns, military conflict, terrorism or other geopolitical events. Global market disruptions may affect the Bank’s business liquidity. Also, any sudden or prolonged market downturn in the United States or abroad, as a result of the above factors or otherwise could result in a decline in revenue and adversely affect the Company’s results of operations and financial condition, including capital and liquidity levels.
Risks Related to the Bank’s Global Payments Business
The Bank faces intense competition in the global payments industry.
The global payments industry is highly competitive, continuously changing, highly innovative, and increasingly subject to regulatory scrutiny and oversight. Many areas in which the Bank competes evolve rapidly with innovative and disruptive technologies, shifting user preferences and needs, price sensitivity of merchants and consumers, and frequent introductions of new products and services. Competition also may intensify as new competitors emerge, businesses enter into business combinations and partnerships, and established companies in other segments expand to become competitive with various aspects of our business.
The Bank competes with a wide range of businesses, some of which are larger operationally and/or financially, have larger customer bases, greater brand recognition, longer operating histories, a dominant or more secure position, broader geographic scope, volume, scale, resources, and market share than the Bank, or offer products and services that the Bank does not offer, which may provide them significant competitive advantages. Some competitors may also be subject to less burdensome regulatory requirements or may be smaller or younger companies that may be more agile and effective in responding quickly to user needs, technological innovations, and legal and regulatory changes. These competitors may devote greater resources to the development, promotion, and sale of products and services, and/or offer lower prices or more effectively offer their own innovative programs, products, and services. If the Bank is not able to differentiate its
products and services from those of its competitors, drive value for customers, or effectively and efficiently align its resources with its goals and objectives, the Bank may not be able to compete effectively in the market.
Changes in card network fees could impact operations.
Card networks periodically increase the fees (known as interchange fees) that are charged to acquirers and that the Bank charges to its merchants. It is possible that competitive pressures will result in the Bank absorbing a portion of such increases in the future, which would its increase costs, reduce profit margin and adversely affect its business and financial condition. In addition, the card networks require certain capital requirements. An increase in the required capital level would further limit the use of capital for other purposes.
The Bank’s business could suffer if there is a decline in the use of prepaid cards as a payment mechanism or if
there are adverse developments with respect to the prepaid financial services industry in general.
As the prepaid financial services industry evolves, consumers may find prepaid financial services to be less attractive than traditional or other financial services. If consumers do not continue or increase their usage of prepaid cards, including making changes in the way prepaid cards are loaded, the Bank’s operating revenues and prepaid card deposits may remain at current levels or decline. Any projected growth for the industry may not occur or may occur more slowly than estimated. If consumer acceptance of prepaid financial services does not continue to develop or develops more slowly than expected or if there is a shift in the mix of payment forms away from the Bank’s products and services, it could have a material adverse effect on the Bank’s financial position and results of operations.
Risks Related to Competitive Matters
The Bank operates in a highly competitive industry and faces significant competition from other financial
institutions and financial services providers, the result of which may decrease growth or profits.
The Bank’s market area contains not only a large number of community and regional banks, but also a significant presence of the country’s largest commercial banks and the growing presence of FinTech financial services companies. The Bank competes with other state and national financial institutions, savings and loan associations, savings banks, credit unions and other companies offering financial services. Some of these competitors have a longer history of successful operations nationally and in the New York market area, greater ties to businesses expansive banking relationships, more established depositor bases, fewer regulatory constraints, better technology, and lower cost structures than the Bank does. Competitors with greater resources may possess an advantage through their ability to maintain numerous banking locations in more convenient sites, conduct more extensive promotional and advertising campaigns, or operate a more developed technology platform. Due to their size, many competitors may offer a broader range of products and services, as well as better pricing for certain products and services than the Bank can offer. Further, increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect the Bank’s ability to market its products and services.
In addition, the Bank’s legally mandated lending limits are lower than those of certain of its competitors that have greater capital. Lower lending limits may discourage borrowers with lending needs that exceed these limits from doing business with the Bank. The Bank may try to serve such borrowers by selling loan participations to other financial institutions; however, this strategy may not succeed.
Risks Related to Business Strategy
The Bank may not be able to grow and if it does, it may have difficulty managing that growth.
The Bank’s ability to grow depends, in part, upon its ability to expand its market share, successfully attract deposits, and identify loan and investment opportunities as well as opportunities to generate fee-based income. The Bank may not be successful in increasing the volume of loans and deposits at acceptable levels and upon terms it finds acceptable. The Bank may also not be successful in expanding its operations organically or through strategic acquisitions while managing the costs and implementation risks associated with this growth strategy.
The Bank expects to grow the number of employees and customers and the scope of its operations, but it may not be able to sustain its historical rate of growth or continue to grow its business at all. Its success will depend upon the ability of its officers and key employees to continue to implement and improve operational and other systems, to manage multiple, concurrent customer relationships, and to hire, train and manage employees. In the event that the Bank is unable to perform all these tasks and meet these challenges effectively, including continuing its operations, and consequently its earnings, could be adversely impacted.
Risks Related to Accounting Matters
Changes in accounting standards could materially impact the Company’s financial statements.
From time to time, the FASB or the SEC may change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. In addition, the bodies that interpret the accounting standards (such as banking regulators, outside auditors or management) may change their interpretations or positions on how these standards should be applied. These changes may be beyond the Company’s control, can be hard to predict, and can materially impact how it records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in it needing to revise or restate prior period financial statements. For more information on changes in accounting standards, see Note 3 to the audited financial statements in this Form 10-K.
The FASB issued an accounting standard update that will result in a significant change in how the
Company recognizes credit losses, which may have a material impact on its financial condition or results of operations.
In June 2016, the FASB issued an accounting standard update, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL model, the Company will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity (“HTM”) debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the statement of financial condition and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, the Company expects that the adoption of the CECL model will materially affect how it determines allowance for loan losses and could require it to significantly increase the allowance. Moreover, the CECL model may create more volatility in the level of allowance for loan losses. If the Company is required to materially increase its level of allowance for loan losses for any reason, such increase could adversely affect its business, financial condition and results of operations.
The new CECL standard will become effective for the Company for fiscal years beginning January 1, 2023. The Company is currently evaluating the impact the CECL model will have on its accounting; however, it expects to recognize a one-time cumulative-effect adjustment to allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. The Company cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its financial condition or results of operations.
Risk Related to Laws and Regulation and Their Enforcement
The Company and the Bank’s business, financial condition, results of operations and future prospects could be adversely affected by the highly regulated environment and the laws and regulations that govern it.
The Company and the Bank are subject to extensive examination, supervision and comprehensive regulation by various federal and state agencies that govern almost all aspects of their operations. These laws and regulations are not intended to protect the Company’s stockholders. Rather, these laws and regulations are intended to protect customers,
depositors, the Deposit Insurance Fund and the overall financial stability of the U.S economy. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which the Company or the Bank can engage, limit the dividend or distributions that the Bank can pay to it, restrict the ability of institutions to guarantee its debt, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in capital than GAAP would require. Compliance with these laws and regulations is difficult and costly, and changes to these laws and regulations often impose additional compliance costs. Failure to comply with these laws and regulations could subject the Company or the Bank to restrictions on their business activities, fines and other penalties, the commencement of informal or formal enforcement actions against them, and other negative consequences, including reputational damage, any of which could adversely affect their business, financial condition, results of operations, capital base and the price of its securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive.
The Dodd-Frank Act, among other things, imposed higher capital requirements on bank holding companies and changed the rules regarding FDIC insurance premiums. Compliance with the Dodd-Frank Act and its implementing regulations has and will continue to result in additional operating and compliance costs that could have a material adverse effect on business, financial condition, results of operations and growth prospects of the Company.
Legislative and regulatory actions taken now or in the future may increase the Company’s costs and impact its business, governance structure, financial condition or results of operations.
Federal and state regulatory agencies frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted: could expose it to additional costs, including increased compliance costs; impact the profitability of the Company’s business activities; require more oversight; or change certain of its business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads. These changes may also require the Company to invest significant management attention and resources to make any necessary changes to operations and could have an adverse effect on its business, financial condition and results of operations.
Monetary policies and regulations of the FRB could adversely affect the business, financial condition and results of operations of the Company.
In addition to being affected by general economic conditions, the Company’s earnings and growth are affected by the policies of the FRB. An important function of the FRB is to regulate the money supply and credit conditions. Among the instruments used by the FRB to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the Company’s business, financial condition and results of operations cannot be predicted.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. Recently, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company’s headquarters are located at 99 Park Avenue, New York, New York. The Company has six banking centers - four are in Manhattan, New York, one is in Brooklyn, New York and one is in Long Island, New York. The Company believes that current facilities at its branches are adequate to meet its present and foreseeable needs. In April 2019, the Company executed a lease agreement to expand the space occupied at its headquarters at 99 Park Ave., New York, New York. The Company took possession of the new space during the third quarter of 2019 and commenced renovations. The Company vacated its existing space and moved into the new office in July 2020.
As of December 31, 2020, each of the Company’s offices and banking centers are leased.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
The Bank is subject to certain pending and threatened legal actions that arise out of the normal course of business. Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on its business. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to the business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), the Bank, like all banking organizations, is subject to heightened legal and regulatory compliance and litigation risk.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s shares of common stock are traded on the New York Stock Exchange under the symbol “MCB”. The approximate number of holders of record of the Company’s common stock as of March 4, 2021 was 95. The Company’s common stock began trading on the New York Stock Exchange on November 8, 2017. The Company has not declared any dividends to date.
The Company has not historically declared or paid cash dividends on its common stock and does not expect to pay dividends for the foreseeable future. Instead, the Company anticipates that its future earnings will be retained to support operations and to finance the growth and development of the business. Any future determination to pay dividends on the Company’s common stock will be made by its Board of Directors and will depend on a number of factors, including:
● historical and projected financial condition, liquidity and results of operations;
● the Company’s capital levels and requirements;
● statutory and regulatory prohibitions and other limitations;
● any contractual restriction on the Company’s ability to pay cash dividends, including pursuant to the terms of any of its credit agreements or other borrowing arrangements;
● business strategy;
● tax considerations;
● alternative use of funds, such as for any potential acquisitions;
● general economic conditions; and
● other factors deemed relevant by the Board of Directors.
There were no sales of unregistered securities or repurchases of shares of common stock during the year ended December 31, 2020.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Selected Financial Data for this item is not required. Information regarding the Company’s financial condition, results of operations and ratios can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-K.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
The Company is a bank holding company headquartered in New York, New York and registered under the Bank Holding Company Act. Through its wholly owned bank subsidiary, Metropolitan Commercial Bank, a New York state chartered 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 affluent individuals in the New York metropolitan area.
The Bank’s primary lending products are commercial real estate loans, multi-family loans and commercial and industrial 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 operations of businesses. The Bank’s primary deposit products are checking, savings, and term deposit accounts, and its deposit accounts are insured by the FDIC under the maximum amounts allowed by law. In addition to traditional commercial banking products, the Bank offers corporate cash management and retail banking services and, through its global payments business, provides global payments infrastructure to its FinTech partners, which includes serving as an issuing bank for third-party debit card programs nationwide. The Bank 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 is focused on organically growing and expanding its position in the New York metropolitan area. Through an experienced team of commercial relationship managers and its integrated, client-centric approach, the Bank has successfully demonstrated its ability to consistently grow market share by deepening existing client relationships and continually expanding its client base through referrals and seeking out alternatives to traditional retail banking products. The Bank has maintained a goal of converting many of its commercial lending clients into full retail relationship banking clients. Given the size of the market in which the Bank operates and its differentiated approach to client service, there is significant opportunity to continue its loan and deposit growth trajectory. By combining the high-tech service and relationship-based focus of a community bank with an extensive suite of financial products and services, Metropolitan is well-positioned to continue to capitalize on the significant growth opportunities available in the New York metropolitan area.
Recent Events
In April 2019, the Company executed a lease agreement to expand the space occupied at its headquarters at 99 Park Ave., New York, New York. The Company took possession of the new space during the third quarter of 2019 and commenced renovations, which were completed during the third quarter of 2020. When the Company took possession of
the new space, rent expense increased by $615,000 a quarter. The Company vacated its previous space in July 2020. As a result, beginning in August 2020, the Company has ceased rent payments on the former space resulting in a reduction of rent expense of approximately $195,000 per quarter.
The Novel Coronavirus: The Novel Coronavirus pandemic (“COVID-19”) has caused significant economic dislocation in the United States as many state and local governments have placed restrictions on businesses and residents. While many regions in the United States have started to reopen in phases, this process has been protracted, especially in New York City, the Company’s primary market area. This has resulted in a slow-down in economic activity and a related increase in unemployment. In response to the COVID-19 outbreak, the Federal Reserve reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and passed legislation that provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of COVID-19 has caused the Bank to modify its business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. See “Impact of COVID-19 on the Bank” in this Item 7 - Management’s Discussion and Analysis of Financial Conditions and Results of Operations for more information on the impact of COVID-19 on the Bank. See “Item 1A. Risk Factors” in this Report for further discussion on the risks to the Bank due to COVID-19.
Critical Accounting Policies
A summary of accounting policies is provided in Note 3 to the consolidated financial statements included in this report. 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 the Company’s most critical accounting policy, which involve the most complex or subjective decisions or assessments, is as follows:
Allowance for Loan Losses
The ALLL has been determined in accordance with GAAP. The Bank is responsible for the timely and periodic determination of the amount of the allowance required. Management believes that the ALLL is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in the Bank’s portfolio for which certain losses are probable but not specifically identifiable.
Although management evaluates available information to determine the adequacy of the ALLL, the level of allowance is an estimate which is subject to significant judgment and short-term change. Because of uncertainties associated with local economic, operating, regulatory and other conditions, the impact of the COVID-19 pandemic, collateral values and future cash flows of the loan portfolio, it is possible that a material change could occur in the ALLL in the near term. The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change. Accordingly, the Company may ultimately incur losses that vary from management’s current estimates. Adjustments to the ALLL will be reported in the period such adjustments become known or can be reasonably estimated. All loan losses are charged to the ALLL when the loss actually occurs or when the collectability of the principal is unlikely. Recoveries are credited to the allowance at the time of recovery. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Emerging Growth Company
Pursuant to the JOBS Act, an EGC is provided the option to adopt new or revised accounting standards that may be issued by the FASB or the SEC either (i) within the same periods as those otherwise applicable to non-EGCs or (ii) within the same time periods as private companies. The Company elected the option to utilize the delayed effective dates of recently issued accounting standards. As permitted by the JOBS Act, so long as it qualifies as an EGC, the Company will take advantage of some of the reduced regulatory and reporting requirements that are available to it, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
Recently Issued Accounting Standards
For a discussion of the impact of recently issued accounting standards, please see Note 3 to the Company’s consolidated financial statements.
Selected Financial Information
The following table includes selected financial information for the Company for the periods indicated:
At or for the year ended December 31,
Performance Ratios
Return on average assets
1.02
%
1.06
%
1.31
%
Return on average equity
12.31
10.66
10.18
Net interest spread (1)
2.83
2.55
2.74
Net interest margin (2)
3.26
3.46
3.70
Average interest-earning assets to average interest-bearing liabilities
189.28
179.97
245.30
Non-interest expense/average assets
1.93
2.11
2.23
Efficiency ratio
52.51
55.39
52.13
Average equity to average total asset ratio
8.30
9.93
12.86
Earnings per Share
Basic earnings per common share
$
4.76
$
3.63
$
3.12
Diluted earnings per common share
4.66
3.56
3.06
Asset Quality Ratios
Non-Performing loans to total loans
0.20
%
0.17
%
0.02
%
Allowance for loan losses to total loans
1.13
0.98
1.02
Non-performing loans to total assets
0.15
0.13
0.01
Allowance for loan losses to non-performing loans
554.19
584.73
NM
Allowance for loan losses to non-accrual loans
630.02
643.13
NM
Non-accrual loans to total loans
0.18
0.15
0.00
Ratio of net charge-offs (recoveries) to average loans outstanding in aggregate
0.01
(0.14)
0.06
Ratio of net charge-offs (recoveries) to average loans outstanding by loan segment:
Real Estate:
Commercial
-
-
0.01
Construction
-
-
-
Multi-Family
-
-
-
One-to-four family
-
-
-
Commercial and industrial
0.02
(0.86)
(0.37)
Consumer
0.43
0.45
0.42
Capital Ratios
Metropolitan Bank Holding Corp.
Tier 1 leverage ratio
8.46
%
9.42
%
13.72
%
Common equity tier 1
10.07
10.10
13.22
Total risk-based capital ratio
12.75
12.52
16.90
Tier 1 risk-based capital ratio
10.88
11.03
14.57
Metropolitan Commercial Bank:
Tier 1 leverage ratio
9.05
10.07
14.73
Common equity tier 1
11.63
11.79
15.63
Total risk-based capital ratio
12.73
12.73
16.66
Tier 1 risk-based capital ratio
11.63
11.79
15.63
(1) Determined by subtracting the weighted average cost of total interest-bearing liabilities from the weighted average yield on total interest-earning assets.
(2) Determined by dividing net interest income by total average interest-earning assets.
NM - Not Meaningful
Discussion of Financial Condition
Summary
The Company had total assets of $4.33 billion at December 31, 2020, an increase of 29.0% from December 31, 2019. Total loans before deferred fees increased to $3.14 billion at December 31, 2020, as compared to $2.67 billion at December 31, 2019. The increase from December 31, 2019 primarily included increases of $358.4 million in CRE loans (including multi-family and construction loans) and $142.9 million in C&I loans, partially offset by net paydowns and amortization of $11.3 million and $25.5 million in one- to four-family and consumer loans, respectively. For the year ended December 31, 2020, the Bank’s loan production was $687.2 million, as compared to $1.1 billion for the twelve months ended December 31, 2019.
Total cash and cash equivalents were $864.3 million at December 31, 2020, an increase of 122.1% from December 31, 2019. The increases in cash and cash equivalents reflect the strong growth in deposits of $1.03 billion that exceeded growth in loans of $464.1 million for the twelve months ended December 31, 2020. Total securities, primarily those classified as AFS, were $271.2 million at December 31, 2020, an increase of 12.6% from December 31, 2019.
Total deposits increased by $1.03 billion, or 36.8%, to $3.82 billion at December 31, 2020 from $2.79 billion at December 31, 2019. The year-to-date increase in deposits was due to increases of $624.6 million in non-interest-bearing deposits to $1.72 billion at December 31, 2020, as compared to $1.09 billion at December 31, 2019 and $403.2 million in interest-bearing deposits to $2.10 billion at December 31, 2020, as compared to $1.70 billion at December 31, 2019. The increase in deposits was primarily due to growth in U.S. bankruptcy trustee and property management accounts, as well as deposit growth in the Bank’s retail network. Non-interest-bearing deposits were 44.9% of total deposits at December 31, 2020, as compared to 39.1% at December 31, 2019.
In September 2020, the Bank fully paid down its Federal Home Loan Bank (“FHLB”) advances, a decrease of $144.0 million from December 31, 2019.
Total stockholders’ equity was $340.8 million at December 31, 2020, as compared to $299.1 million at December 31, 2019. The increase of $41.7 million was primarily due to net income of $39.5 million for the year ended December 31, 2020.
Investments
The following table sets forth the stated maturities and weighted average yields of investment securities, excluding equity securities, at December 31, 2020 (dollars in thousands). The table does not include the effect of prepayments or scheduled principal amortization. The weighted average yield for each group of securities was weighted by the par value of the securities in the group. The par values were as of December 31, 2020. Tax exempt-securities, if any, were presented on tax-equivalent basis.
More than One Year
More than Five
One Year or Less
to Five Years
to Ten Years
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Cost
Yield
Cost
Yield
Cost
Yield
Available-for-sale
Residential mortgage securities
$
-
-
%
$
2.37
%
$
21,170
1.28
%
Commercial mortgage securities
-
-
0.76
8,222
2.09
U.S. Government agency securities
-
-
37,997
0.52
-
-
Total securities available for sale
$
-
-
%
$
38,911
0.54
%
$
29,392
1.51
%
Held-to-maturity
Residential mortgage-backed securities
$
-
-
%
$
-
-
%
$
1,656
1.93
%
Total securities held to maturity
$
-
-
%
$
-
-
%
$
1,656
1.93
%
More than
Ten Years
Total
Weighted
Weighted
Amortized
Average
Amortized
Fair
Average
Cost
Yield
Cost
Value
Yield
Available-for-sale
Residential mortgage securities
$
170,465
1.11
%
$
192,163
$
194,688
1.13
%
Commercial mortgage securities
23,981
1.39
32,589
33,492
1.56
U.S. Government agency securities
-
-
37,997
37,916
0.52
Total securities available for sale
$
194,446
1.14
%
$
262,749
$
266,096
1.09
%
Held-to-maturity
Residential mortgage-backed securities
$
1,104
1.41
%
2,760
2,827
1.72
%
Total securities held to maturity
$
1,104
1.41
%
$
2,760
$
2,827
1.72
%
There were no securities pledged as collateral at December 31, 2020. There were $126.2 million of AFS securities pledged as collateral for certain deposits at December 31, 2019.
At December 31, 2020 and 2019, the Company’s securities portfolio primarily consisted of investment grade mortgage-backed securities and collateralized mortgage obligations issued by government agencies.
Other-Than-Temporary Impairment
Each reporting period, the Bank evaluates its AFS and HTM securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary. Other-than-temporary impairment (“OTTI”) is required to be recognized if: (1) the Bank intends to sell the security; (2) the Bank is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For impaired securities that the Bank intends to sell, or more likely than not will be required to sell, the full amount of the impairment is recognized as OTTI, resulting in a realized loss that is a charged to earnings through a reduction in noninterest income. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes.
The unrealized losses of securities at December 31, 2020 and 2019 are primarily due to the changes in market interest rates subsequent to purchase. The Bank does not consider these securities to be other-than-temporarily impaired since the decline in market value is attributable to changes in interest rates and not credit quality. In addition, the Bank does not intend to sell and does not believe that it is more likely than not that it will 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 impairment loss was recognized during the years ended December 31, 2020 or 2019.
Loans
Loans are the Bank’s primary interest-earning asset. The following tables set forth certain information about the loan portfolio and asset quality.
The following tables set forth certain information at December 31, 2020 regarding the dollar amount of loan contractual maturities during the periods indicated. The tables do not include any estimate of prepayments that significantly shorten the average loan life and may cause actual repayment experience to differ from that shown below (in thousands).
Commercial
One-to-four
Commercial
Consumer
Real Estate
Construction
Multi-family
family
and industrial
loans
Total
Amount due to Mature During the Year Ending:
One year or less
$
364,550
$
17,919
$
8,479
$
-
$
246,340
$
637,530
One to five years
1,410,005
94,371
409,780
2,532
330,067
7,923
2,254,678
Five through 15 years
112,950
-
14,980
62,088
15,093
38,266
243,377
Greater than 15 years
-
-
-
6,734
-
-
6,734
Total
$
1,887,505
$
112,290
$
433,239
$
71,354
$
591,500
$
46,431
$
3,142,319
The following table sets forth the dollar amount of loans at December 31, 2020 that are due after one year and have either fixed interest rates or floating interest rates (dollars in thousands):
At December 31, 2020
Fixed Rate Loans
% of Total Fixed Rate Loans
Floating Rate Loans
% of Total Floating Rate Loans
Total Loans
Real Estate:
Commercial
$
1,012,384
58.9
%
$
510,571
64.8
%
$
1,522,955
Construction
-
-
94,371
12.0
94,371
Multi-family
398,285
23.2
26,475
3.4
424,760
One-to-four family
65,100
3.8
6,254
0.8
71,354
Commercial and industrial
220,130
12.8
125,030
15.9
345,160
Consumer
21,488
1.3
24,701
3.1
46,189
Total
$
1,717,387
100.0
%
$
787,402
100.0
%
$
2,504,789
Asset Quality
Non-performing assets consist of non-accrual loans, non-accrual troubled debt restructurings (“TDRs”), and other real estate that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure. Past due status on all loans is based on the contractual terms of the loan. It is generally the Bank’s policy that a loan 90 days past due be placed on non-accrual status unless factors exist that would eliminate the need to place a loan in this status. A loan may also be designated as non-accrual at any time if payment of principal or interest in full is not expected due to deterioration in the financial condition of the borrower. At the time loans are placed on non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. All payments received on non-accrual loans are applied to principal. Loans are considered for return to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Company expects to receive all of its original principal and interest. In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept on non-accrual status until the entire principal balance has been recovered.
Non-accrual loans increased by $1.5 million to $5.6 million at December 31, 2020, as compared to $4.1 million at December 31, 2019, primarily due to the addition of one C&I loan, which was adversely affected by COVID-19, in the amount of $3.1 million, offset by a one-to-four family loan in the amount of $2.4 million, which was placed on non-accrual status in June 2019 and was taken off of non-accrual status following the borrower making current payments for six consecutive months since then. As of December 31, 2020, the Company had established a specific reserve of $2.8 million for the C&I loan.
Allowance for Loan Losses
The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans. The allowance is established based on management’s evaluation of the probable incurred losses inherent in the Company’s portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.
The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely. Management’s evaluation of the adequacy of the allowance for loan losses is performed on a quarterly basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans.
The following tables set forth the allowance for loan losses allocated by loan category for the periods indicated (dollars in thousands):
At December 31,
% of
% of
% of
Loans in
% of
Loans in
Allowance
Category
Allowance
Category
Allowance
to Total
to Total
Allowance
to Total
to Total
Amount
Allowance
Loans
Amount
Allowance
Loans
Real Estate:
Commercial
$
17,243
48.7
%
60.0
%
$
15,317
58.3
%
62.2
%
Construction
1,593
4.5
3.6
1.6
1.2
Multi-family
2,661
7.5
13.8
2,453
9.3
14.0
One-to-four family
0.6
2.3
1.0
3.1
Commercial and industrial
12,123
34.2
18.8
7,070
26.9
16.8
Consumer
1,581
4.5
1.5
2.9
2.7
Total
$
35,407
100.0
%
100.0
%
$
26,272
100.0
%
100.00
%
Deposits
The tables below summarize the Bank’s deposit composition by segment for the periods indicated, and the dollar and percent change from December 31, 2019 to December 31, 2020 and December 31, 2018 to December 31, 2019 (dollars in thousands):
At December 31,
Percentage
Percentage
of total
of total
balance
balance
Non-interest-bearing demand deposits
$
1,715,042
44.9
%
$
1,090,479
39.1
%
Money market
1,993,514
52.2
1,573,716
56.3
Savings accounts
17,895
0.5
16,204
0.6
Time deposits
92,062
2.4
110,375
4.0
Total
$
3,818,513
100.00
%
$
2,790,774
100.0
%
2020 vs.2019
2020 vs.2019
dollar
percentage
Change
Change
Non-interest-bearing demand deposits
$
624,563
57.3
%
Money market
419,798
26.7
Savings accounts
1,691
10.4
Time deposits
(18,313)
(16.6)
Total
$
1,027,739
36.8
%
The tables below summarize the Bank’s average balances and average interest rate paid, by segment, for the periods indicated (dollars in thousands):
At December 31,
Average Rate
Average Rate
Non-interest-bearing demand deposits
$
1,443,094
-
%
$
968,030
-
%
Money market
1,782,031
0.52
1,229,955
1.85
Savings accounts
16,077
0.29
18,141
0.66
Time deposits
98,483
1.85
109,952
2.46
Total
$
3,339,685
0.75
%
$
2,326,078
1.88
%
As of December 31, 2020, the aggregate amount of uninsured deposits (deposits in amounts greater than or equal to $250,000, which is the maximum amount for federal deposit insurance) was $3.33 billion. In addition, as of December 31, 2020, the aggregate amount of the Bank’s uninsured time deposits was $42.5 million. The following are scheduled maturities of time deposits greater than $250,000 as of December 31, 2020 (in thousands):
At December 31, 2020
Three months or less
$
3,379
Over three months through six months
10,445
Over six months through one year
8,818
Over one year
19,830
Total
$
42,472
Borrowings
FHLB Advances
At December 31, 2020, the Bank did not have any FHLB borrowings as all of the previous $144.0 million of advances matured in 2020. At December 31, 2020, the Bank had the ability to borrow a total of $499.8 million from the FHLB. It also had an available line of credit with the FRBNY discount window of $123.8 million.
Trust Preferred Securities Payable
On December 7, 2005, the Company established MetBank Capital Trust I, a Delaware statutory trust (“Trust I”). The Company received all of the common stock of Trust I in exchange for contributed capital of $310,000. Trust I issued $10 million of preferred capital securities to investors in a private transaction and invested the proceeds, combined with the proceeds from the sale of Trust I’s common capital securities, in the Company through the purchase of $10.3 million aggregate principal amount of Floating Rate Junior Subordinated Debentures (the “Debentures”) issued by the Company. The Debentures, the sole assets of Trust I, mature on December 9, 2035 and bear interest at a floating rate of 3-month LIBOR plus 1.85%. The Debentures became callable after five years. At December 31, 2020, the Debentures bore an interest rate of 2.09%.
On July 14, 2006, the Company established MetBank Capital Trust II, a Delaware statutory trust (“Trust II”). The Company received all of the common stock of Trust II in exchange for contributed capital of $310,000. Trust II issued $10 million of preferred capital securities to investors in a private transaction and invested the proceeds, combined with the proceeds from the sale of Trust II’s common capital securities, in the Company through the purchase of $10.3 million aggregate principal amount of Floating Rate Junior Subordinated Debentures (the “Debentures II”) issued by the Company. The Debentures II, the sole assets of Trust II, mature on October 7, 2036, and bear interest at a floating rate of 3-month LIBOR plus 2.00%. The Debentures II became callable after five years of issuance. At December 31, 2020, the Debentures II bore an interest rate of 2.24%.
Subordinated Notes Payable
On March 8, 2017, the Company issued $25 million of subordinated notes at 100% issue price to accredited institutional investors. The notes mature on March 15, 2027 and bear an interest rate of 6.25% per annum. The interests are paid semi-annually on March 15th and September 15th of each year through March 15, 2022 and quarterly thereafter on March 15th, June 15th, September 15th and December 15th of each year.
In accordance with the terms of the subordinated notes, the interest rate from March 15, 2022 to the maturity date will reset quarterly to an interest rate per annum equal to the then current 3-month LIBOR (not less than zero) plus 426 basis points, payable quarterly in arrears.
The Company may redeem the subordinated notes beginning with the interest payment date of March 15, 2022 and on any scheduled interest payment date thereafter. The subordinated notes may be redeemed in whole or in part, at a redemption price equal to 100% of the principal amount of the subordinated notes plus any accrued and unpaid interest.
The terms of the trust preferred securities and subordinated notes payable will be impacted by the transition from LIBOR to an alternative U.S. dollar reference interest rate, potentially the SOFR, in 2022. On November 30, 2020, announcement by LIBOR’s administrator, the ICE Benchmark Administration (IBA), signaled to the market that USD LIBOR for the most liquid maturities is now likely to continue to be published until June 30, 2023; however, no definitive announcement has been made on this delay. Management is currently evaluating the impact of the transition on the trust preferred securities payable.
Secured Borrowings
The Bank has loan participation agreements with counterparties. The Bank is generally the servicer for these loans. If the transfer of the participation interest does not qualify for sale treatment under current accounting guidance, the amount of the loan transferred is recorded as a secured borrowing. There were $37.0 million in secured borrowings as of December 31, 2020 and $43.0 million as of December 31, 2019.
Discussion of the Results of Operations for the year ended December 31, 2020
Net Income
Net income increased $9.4 million to $39.5 million for 2020, as compared to $30.1 million for 2019. This increase was primarily due to a $27.3 million increase in net interest income and a $6.4 million increase in non-interest income, offset by a $5.3 million increase in provision for loan losses, a $14.5 million increase in non-interest expense and a $4.5 million increase in income tax expense.
Net Interest Income Analysis
Net interest income is the difference between interest earned on assets and interest incurred on liabilities. The following presents an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities for the years ended December 31, 2020, 2019 and 2018 (dollars in thousands). 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 included fees that management considered 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
and therefore have a zero yield. 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.
Year ended December 31,
(dollars in thousands)
Average
Outstanding
Balance
Interest
Yield/Rate
Average
Outstanding
Balance
Interest
Yield/Rate
Average
Outstanding
Balance
Interest
Yield/Rate
Assets:
Interest-earning assets:
Loans (1)
$
2,888,180
$
136,497
4.73
%
$
2,304,158
$
117,124
5.08
%
$
1,604,624
$
77,342
4.82
%
Available-for-sale securities
192,472
3,108
1.59
%
142,135
3,579
2.52
%
28,482
2.13
%
Held-to-maturity securities
3,282
1.77
%
4,158
2.02
%
4,987
2.06
%
Equity investments
2,279
1.77
%
2,231
2.23
%
2,181
2.75
%
Overnight deposits
732,130
2,546
0.35
%
349,123
7,752
2.22
%
268,636
5,042
1.88
%
Other interest-earning assets
16,467
5.14
%
22,275
1,191
5.35
%
17,167
4.60
%
Total interest-earning assets
3,834,810
$
143,097
3.73
%
2,824,080
129,780
4.60
%
1,926,077
83,945
4.36
%
Non-interest-earning assets
59,584
45,144
43,206
Allowance for loan and lease losses
(31,381)
(22,265)
(17,301)
Total assets
$
3,863,013
$
2,846,959
$
1,951,982
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Money market and savings accounts
$
1,798,109
$
12,420
0.69
%
$
1,248,096
$
22,824
1.83
%
$
600,334
$
7,511
1.25
%
Certificates of deposit
98,483
1,824
1.85
%
109,952
2,709
2.46
%
87,966
1,592
1.81
%
Total interest-bearing deposits
1,896,592
14,244
0.75
%
1,358,048
25,533
1.88
%
688,300
9,103
1.32
%
Borrowed funds
129,460
3,932
2.99
%
211,145
6,637
3.10
%
96,905
3,614
3.68
%
Total interest-bearing liabilities
2,026,052
18,176
0.90
%
1,569,193
32,170
2.05
%
785,205
12,717
1.62
%
Non-interest-bearing liabilities:
Non-interest-bearing deposits
1,443,094
968,030
884,604
Other non-interest bearing liabilities
73,250
27,132
31,143
Total liabilities
3,542,396
2,564,355
1,700,952
Stockholders' Equity
320,617
282,604
251,030
Total liabilities and equity
$
3,863,013
$
2,846,959
$
1,951,982
Net interest income
$
124,921
$
97,610
$
71,228
Net interest rate spread (2)
2.83
%
2.55
2.74
Net interest-earning assets
$
1,808,758
$
1,254,887
$
1,140,872
Net interest margin (3)
3.26
%
3.46
3.70
(3) Amount includes deferred loan fees and non-performing loans.
(4) Determined by subtracting the weighted average cost of total interest-bearing liabilities from the weighted average yield on total interest-earning assets.
(5) Determined by dividing net interest income by total average interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume (in thousands).
At December 31,
2020 over 2019
2019 over 2018
Increase (Decrease)
Total
Increase (Decrease)
Total
Due to
Increase
Due to
Increase
Volume
Rate
(Decrease)
Volume
Rate
(Decrease)
Interest-earning assets:
Loans
$
28,054
$
(8,681)
$
19,373
$
35,353
$
4,429
$
39,782
Available-for-sale securities
1,063
(1,534)
(471)
2,843
2,971
Held-to-maturity securities
(16)
(9)
(25)
(18)
(2)
(20)
Equity investments
(10)
(9)
(11)
(10)
Overnight deposits
4,449
(9,655)
(5,206)
1,682
1,028
2,710
Other interest-earning assets
(300)
(45)
(345)
Total interest-earning assets
$
33,251
$
(19,934)
$
13,317
$
40,121
$
5,714
$
45,835
Interest-bearing liabilities:
Money market and savings accounts
$
7,463
$
(17,867)
$
(10,404)
$
10,725
$
4,588
$
15,313
Certificates of deposit
(262)
(623)
(885)
1,117
Total deposits
7,201
(18,490)
(11,289)
11,182
5,248
16,430
Borrowed funds
(2,473)
(232)
(2,705)
3,656
(633)
3,023
Total interest-bearing liabilities
4,728
(18,722)
(13,994)
14,838
4,615
19,453
Change in net interest income
$
28,523
$
(1,212)
$
27,311
$
25,283
$
1,099
$
26,382
Net interest margin decreased 20 basis points to 3.26% for the year ended December 31, 2020 from 3.46% for 2019. Total average interest-earning assets increased $1.01 billion to $3.83 billion for 2020, as compared to $2.82 billion for 2019. The total yield on average interest-earning assets decreased 87 basis points to 3.73% for 2020, as compared to 4.60% for 2019. Average interest-bearing liabilities increased by $456.9 billion to $2.03 billion for 2020, as compared to $1.57 billion for 2019. The cost of interest-bearing liabilities decreased 115 basis points to 0.90% for 2020, as compared to 2.05% for 2019. Non-interest-bearing deposits accounted for 42% of total funding for 2020, as compared to 38% for 2019.
The decreases in net interest margin for 2020, as compared to 2019 was due to significantly lower market interest rates as well as an increase in the level of liquid assets and securities on the balance sheet, which earn lower yields than the Bank’s loan portfolio. The Bank was successful in growing deposits by $1.03 billion in 2020, which exceeded net loan growth. As a result, the average balance of overnight deposits grew by $383.0 million to $732.1 million for 2020, as compared to $349.1 million for 2019. In addition, the average yield on overnight deposits was 0.35% for 2020, as compared to 2.22% for 2019, and the average balance of overnight deposits accounted for 19.1% and 12.4% of total average interest-earning assets for 2020 and 2019, respectively.
The decreases in yields on interest-earning assets and the cost of interest-bearing liabilities were primarily due to the several interest rate cuts by the Federal Reserve in 2019 and 2020. The Federal Reserve reduced interest rates three
times for a total of 75 basis points in the third and fourth quarters of 2019 and, in response to COVID-19, reduced interest rates by an additional 50 basis points on March 3, 2020 and 100 basis points on March 15, 2020.
Interest Income
Interest income increased $13.3 million to $143.1 million for 2020, as compared to $129.8 million for 2019. This increase was primarily due to increases of $19.4 million in interest income on loans, partially offset by a $5.2 million decrease in interest on overnight deposits. The increase in interest income on loans was due to a $584.0 million increase in the average balance of loans to $2.89 billion, partially offset by a 35 basis point decrease in the average yield to 4.73% for 2020, as compared to an average balance of $2.30 billion and an average yield of 5.08% on loans for 2019. The increase in the average balance of loans reflects the Bank’s continued growth. The decrease in interest on overnight deposits was due to a 187 basis point decrease in the average yield on overnight deposits to 0.35% for 2020, partially offset by an increase of $383.0 million in the average balance of overnight deposits to $732.1 million for 2020, as compared to an average balance of $349.1 million and average yield of 2.22% on overnight deposits for 2019.
Interest Expense
Interest expense decreased $14.0 million to $18.2 million for 2020, as compared to $32.2 million for 2019. This decrease was due primarily to a $11.3 million decrease in interest on deposits and a $2.4 million decrease in interest on borrowings. The decrease in interest expense on deposits was primarily due to a 113 basis point decrease in the average cost of deposits to 0.75%, partially offset by a $538.5 million increase in the average balance of interest-bearing deposits to $1.90 billion for 2020, as compared to an average balance of $1.36 billion and an average cost of 1.88% for 2019. The growth in the average balance of deposits was due primarily to the development of the Bank’s new corporate cash management product offered to bankruptcy trustees, property management companies and others who have control of or discretion over large cash positions.
Interest expense on borrowings decreased primarily due to a decrease in the average balance of borrowings of $81.7 million to $129.5 million for 2020, as compared to $211.1 million for 2019, as well as a decrease of 11 basis points in the average cost to 2.99%, as compared to 3.10% for 2019. The Bank had $144.0 million of FHLB advances mature during 2020.
Provision for Loan Losses
The provision for loan losses for 2020 was $9.5 million, as compared to $4.2 million for 2019. The increase in the provision reflected the economic conditions driven by COVID-19 as well as the loan growth during 2020. In the first quarter of 2020, the Bank recorded $3.1 million in additional provision due to the economic downturn resulting from COVID-19. The required provision for loan losses for 2019 was reduced due to $4.3 million of recoveries related primarily to the recovery of medallion loans previously charged-off in 2017 and 2016.
Non-Interest Income
Non-interest income increased by $6.4 million to $17.0 million for 2020, as compared to $10.6 million for 2019, primarily due to a $3.3 million gain on the sale of securities and an increase of $2.8 million in global payments revenue. The gain on securities sales was due to the sale of $108.1 million of available-for-sale securities, which were sold to realize gains as market rates decreased and prepayment speeds were anticipated to increase. The increase in global payments revenue reflects the growth in the global payments business.
Non-Interest Expense
Non-interest expense increased $14.5 million to $74.5 million for 2020 as compared to $60.0 million for 2019. The increase was primarily due to increases in compensation and benefits, licensing fees and technology costs, and Bank premises and equipment costs.
Compensation and benefits increased $8.6 million to $39.8 million for 2020 as compared to $31.2 million for 2019. This increase was due primarily to an increase in total compensation in line with year-on-year loan growth and revenue generation as well as the increase in the number of full-time employees to 189 for 2020, as compared to 167 for 2019.
Licensing fees and technology costs increased $2.0 million to $13.0 million for 2020 as compared to $11.0 million for 2019. This increase was primarily due to increases in licensing fees related to certain corporate cash management deposits and technology costs. Licensing fees amounted to $9.7 million for 2020, an increase of $1.2 million over 2019. Average corporate cash management deposits related to these licensing fees amounted to $773.4 million for 2020, as compared to $375.3 million for 2019, primarily due to an increase in U.S. Bankruptcy Trustee deposit accounts. Technology costs were $3.4 million for 2020, an increase of $861,000 over 2019. The increase in technology costs was due to the growth of the business and its technology needs.
Bank premises and equipment was $8.3 million for 2020, an increase of $1.8 million over 2019, primarily due to the Company taking possession of and renovating new headquarters space. In addition, the Bank accelerated the amortization of $575,000 of leasehold improvements related to the Bank’s prior space at its headquarters in the first quarter of 2020.
Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. 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.
The following is a table of off-balance sheet arrangements broken out by fixed and variable rate commitments for the periods indicated therein (in thousands):
At December 31,
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
Undrawn lines of credit
$
19,024
$
266,696
$
17,204
$
193,767
$
7,737
$
130,547
Letters of credit
34,264
-
47,743
-
34,351
-
$
53,288
$
266,696
$
64,947
$
193,767
$
42,088
$
130,547
The following is a maturity schedule for the Company’s off-balance sheet arrangements at December 31, 2020 (in thousands):
Total
2022 - 2023
2024 - 2025
thereafter
Undrawn lines of credit
$
285,720
$
154,017
$
114,641
$
15,837
$
1,225
Standby letters of credit
34,264
18,759
15,505
-
-
$
319,984
$
172,776
$
130,146
$
15,837
$
1,225
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Bank’s primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, mortgage prepayments and security sales are greatly influenced by general interest rates, economic conditions and competition.
The Bank regularly reviews the need to adjust investments in liquid assets based upon an assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of the ALCO program. Excess liquid assets are invested generally in interest earning deposits and short- and intermediate-term securities.
The Bank’s most liquid assets are cash and cash equivalents. The levels of these assets are dependent on operating, financing, lending and investing activities during any given period. At December 31, 2020 and 2019, cash and cash equivalents totaled $864.3 million and $389.2 million, respectively. Securities classified as AFS, which provide additional sources of liquidity, totaled $266.1 million at December 31, 2020 and $234.9 million at December 31, 2019. There were no securities pledged as collateral at December 31, 2020. There were $126.2 million of AFS securities pledged as collateral for certain deposits at December 31, 2019.
At December 31, 2020, the Bank did not have any borrowing from the FHLB and had the ability to borrow $499.8 million from the FHLB. The Bank also had an available line of credit with the FRBNY discount window of $123.8 million.
The Bank has no material commitments or demands that are likely to affect its liquidity other than set forth below. In the event loan demand were to increase faster than expected, or any unforeseen demand or commitment were to occur, the Company could access its borrowing capacity with the FHLB or obtain additional funds through brokered certificates of deposit.
Time deposits due within one year of December 31, 2020 totaled $51.3 million, or 1.3% of total deposits. Total time deposits were $92.1 million, or 2.4% of total deposits, at December 31, 2020.
The Bank’s primary investing activities are the origination and purchase of loans and the purchase of securities. During the year ended December 31, 2020, the Bank originated and purchased $687.2 million of loans and $234.4 million of securities. During the year ended December 31, 2019, the Bank originated and purchased $1.1 billion of loans and purchased $226.9 million of securities.
Financing activities consist primarily of activity in deposit accounts. Total deposits increased by $1.03 billion and $1.13 billion for the years ended December 31, 2020 and 2019, respectively. The Bank generates deposits from businesses and individuals through client referrals and other relationships and through its retail presence. The Bank has established deposit concentration thresholds to avoid the possibility of dependence on any single depositor base for funds.
The Bank has loan participation agreements with counterparties. The Bank is generally the servicer for these loans. If the transfer of the participation interest does not qualify for sale treatment under current accounting guidance, the amount of the loan transferred is recorded as a secured borrowing. There were $37.0 million in secured borrowings as of December 31, 2020 and $43.0 million as of December 31, 2019.
Regulation
The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. At December 31, 2020 and December 31, 2019, 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 and Bank’s capital ratios for the periods indicated:
At December 31,
Minimum
Ratio to be
“Well
Capitalized”
Minimum
Ratio
Required
for Capital
Adequacy
Purposes
The Company:
Tier 1 leverage ratio
8.5%
9.4%
N/A
4.0%
Common equity tier 1
10.1%
10.1%
N/A
4.5%
Tier 1 risk-based capital ratio
10.9%
11.0%
N/A
6.0%
Total risk-based capital ratio
12.7%
12.5%
N/A
8.0%
The Bank:
Tier 1 leverage ratio
9.0%
10.1%
5.0%
4.0%
Common equity tier 1
11.6%
11.8%
6.5%
4.5%
Tier 1 risk-based capital ratio
11.6%
11.8%
8.0%
6.0%
Total risk-based capital ratio
12.7%
12.7%
10.0%
8.0%
The banking regulatory agencies adopted a revised definition of “well capitalized” for financial institutions and holding companies with assets of less than $10 billion and that are not determined to be ineligible by their primary federal regulator due to their risk profile (a “Qualifying Community Bank”). The new definition expanded the ways that a Qualifying Community Bank may meet its capital requirements and be deemed “well capitalized.” The new rule establishes a community bank leverage ratio (“CBLR”) equal to the tangible equity capital divided by the average total consolidated assets. Regulators have established the CBLR to be set at 8.5% through calendar year 2021 and 9% thereafter. The CARES Act temporarily reduced the CBLR to 8%.
A Qualifying Community Bank that maintains a leverage ratio greater than 9% is considered to be well capitalized and to have met generally applicable leverage capital requirements, generally applicable risk-based capital requirements, and any other capital or leverage requirements to which such financial institution or holding company is subject.
The Bank did not elect into the CBLR framework and plans to continue to measure capital adequacy using the ratios in the table above. At December 31, 2020, the Bank’s capital exceeded all applicable requirements.
At both December 31, 2020 and December 31, 2019, total commercial real estate loans were 412.5% of risk-based capital.
Impact of COVID-19 on the Bank
Operational Readiness
The Company identified the potential threat of COVID-19 in February 2020, activated its Pandemic Plan in March 2020, and had a fully remote workforce for its corporate office by early April 2020 as COVID-19 began to affect New York City, the Bank’s primary market. The activation of the established Pandemic Plan allowed the Bank to react in a disciplined manner to a rapidly changing situation.
On September 7, 2020, the Bank implemented its Return-to-Work Plan, which allowed for up to 50% of employees to return to work. The Bank has made available, at no cost to employees, on-site COVID-19 testing on a two-week schedule. Based on the success of the on-site testing program, the Bank has revised its Return-to-Work Plan to allow up to 75% of employees to return to work as of January 11, 2021 and 100% of employees to return to work as of March 1, 2021. The Bank requires certain health protocols to be followed by all employees including, but not limited to, daily
temperature checks prior to entering the common workspace, daily health certifications by employees, office cleaning measures, social distancing practices and the use of face coverings in all common areas.
The Bank’s actions ensured, and continue to ensure, the Bank’s uninterrupted operational effectiveness, while safeguarding the health and safety of its customers and employees. The Pandemic Plan and Return-to-Work Plan incorporate guidance from the regulatory and health communities, as implemented and monitored by the Bank’s Business Continuity Response Team. The Bank’s branch network continues to serve the local community and its online platforms facilitate alternate methods for its customers to meet their financial needs. While COVID-19 has resulted in widespread disruption to the lives and businesses of the Bank’s customers and employees, the Bank’s Pandemic Plan has enabled the Bank to remain focused on assisting customers and ensuring that the Bank remains fully operational.
Financial Impact
Loan Portfolio and Deferrals
The Bank has taken several steps to assess the financial impact of COVID-19 on its business, including contacting customers to determine how their business was being affected and analyzing the impact of the virus on the different industries that the Bank serves.
Loan Portfolio: As of December 31, 2020, total loans consisted primarily of CRE, C&I and multi-family mortgage loans. At December 31, 2020, the Bank’s loan portfolio includes loans to the following industries (dollars in thousands):
At December 31, 2020
Balance
% of Total Loans
CRE (1)
Skilled Nursing Facilities
$
596,082
19.0%
Multi-family
433,239
13.8%
Retail
215,311
6.9%
Mixed use
203,544
6.5%
Office
179,219
5.7%
Hospitality
132,921
4.2%
Construction
112,290
3.6%
Other
446,898
14.2%
Total CRE
$
2,319,504
73.9%
C&I (2)
Healthcare
$
115,229
3.7%
Skilled Nursing Facilities
103,469
3.3%
Finance & Insurance
113,339
3.6%
Wholesale
43,594
1.4%
Manufacturing
14,904
0.5%
Transportation
11,378
0.4%
Retail
4,269
0.1%
Recreation & Restaurants
6,912
0.2%
Other
153,259
4.9%
Total C&I
$
566,353
17.9%
(1)
Commercial real estate, not including one-to-four family loans and participations
(2)
Net of premiums and overdraft adjustments
The largest concentration in the loan portfolio is to the healthcare industry, which amounted to $814.8 million, or 26.0% of total loans at December 31, 2020, including $699.6 million in loans to skilled nursing facilities (“SNF”). The
Bank has not noted any significant impact on SNF loans because of COVID-19 as the demand for nursing home beds remains strong.
Loan Deferrals: The Bank has been working with customers to address their needs during this pandemic. These deferrals were not considered TDRs under Section 4013 of the CARES Act. The following is a summary of loan modifications requested and in process as of December 31, 2020 (dollars in thousands):
CRE
C&I
1-4 Family
Consumer
Total
Type of Deferral
Balance
Number of Loans
Balance
Number of Loans
Balance
Number of Loans
Balance
Number of Loans
Balance
Number of Loans
Defer monthly principal payments
$ 121,395
$
-
-
$
-
-
$
-
-
$ 121,395
Full payment deferral
93,389
1,400
2,853
1,271
98,913
$ 214,784
$
1,400
$
2,853
$
1,271
$ 220,308
Loan deferrals were $220.3 million, or 7.0% of total loans, at December 31, 2020.
The following is a summary of the weighted average loan-to-value ratio (“LTV”) for CRE and 1-4 Family loan modifications requested and in process as of December 31, 2020 (dollars in thousands):
Industry
Total Deferrals
Weighted Average LTV
CRE:
Retail
$ 21,613
42.6%
Hospitality
75,839
50.8%
Office
12,339
28.1%
Mixed-Use
22,200
63.2%
Multifamily
53,912
15.7%
Warehouse
15,271
32.0%
Other
13,610
68.4%
Total CRE
214,784
40.9%
1-4 Family
Residential Real Estate
2,853
45.0%
Total
$ 217,637
41.0%
Allowance for Loan Losses: The Bank continues to assess the impact of the pandemic on its financial condition, including the determination of the allowance for loan losses. As part of that assessment, the Bank considers the effects of the impact of COVID-19 on macro-economic conditions such as unemployment rates and the gradual re-opening of all non-essential businesses. The Bank also analyzed the impact of COVID-19 on its primary market, which is the New York metropolitan area, as well as the impact on the Bank’s market sectors and its specific clients.
Based on current economic conditions, including the negative impact of COVID-19, and the Bank’s ALLL methodology, the total provision for loan losses for the year ended December 31, 2020 was $9.5 million.
However, this is a period of great uncertainty. The impact of COVID-19 is likely to be felt over the next several quarters particularly as the term of loan modifications expire and borrowers return to a normal debt service schedule as well as the commencement of a repayment schedule for payments that were deferred. As such, significant adjustments to the ALLL may be required as the full impact of COVID-19 on the Bank’s borrowers becomes known.
Goodwill: The Company performed an impairment assessment and determined that no impairment of goodwill existed as of December 31, 2020.
Liquidity: During periods of economic stress, such as during the COVID-19 pandemic, the Bank closely monitors deposit trends and the Bank’s liquidity position. At December 31, 2020, deposits totaled $3.82 billion, an increase of $1.03 billion from total deposits of $2.79 billion at December 31, 2019. On December 31, 2020, total cash and cash equivalents amounted to $864.3 million, or 20.0% of total assets, and securities available for sale amounted to $266.1 million, or 6.1% of total assets. In addition, the Bank has available borrowing capacity of $499.8 million from the FHLB and an available line of credit of $123.8 million with the FRBNY. Management believes that the Bank has ample liquidity to address the COVID-19 uncertainties and remains vigilant in assessing its potential liquidity needs during this period.
Capital: At December 31, 2020, the Company and the Bank were considered well-capitalized. See regulatory ratios under the “Regulation” section herein.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. 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 interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Board of Directors has oversight of the Bank’s asset and liability management function, which is managed by the Bank’s ALCO. The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to market interest rate changes, local and national market conditions and market interest rates. That group also reviews liquidity, capital, deposit mix, loan mix and investment positions.
Interest Rate Risk
As a financial institution, the Bank’s primary component of market risk is interest rate volatility. 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. Interest rate risk is the potential of 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 the balance sheet to minimize the inherent risk while at the same time maximizing income.
The Company manages its exposure to interest rates primarily by structuring its balance sheet in the ordinary course of business. The Bank generally originates fixed and floating rate loans with maturities of less than five years and the interest rate risk on these loans is offset by the cost of deposits, many of which generally pay interest based on a floating rate index. In the first quarter of 2020, the Bank entered into an interest rate cap derivative contract as part of its interest rate risk management strategy. The interest rate cap has a notional amount of $300 million and was designated as a cash flow hedge of certain deposits. The interest rate subject to the cap is 30-day LIBOR. Based upon the nature of operations, the Company is not subject to foreign exchange or commodity price risk and does not own any trading assets.
Net Interest Income At-Risk
The Bank analyzes its sensitivity to changes in interest rates through a net interest income simulation model. It 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. For modeling purposes, the Bank reclassifies licensing fees on corporate cash management deposits from non-interest expense to interest expense since these fees are indexed to certain market interest rates.
The table below shows the estimated impact on net interest income for the one-year period beginning December 31, 2020 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 interest rate risk 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 will differ from actual results. The following table indicates the sensitivity of projected annualized net interest income to the interest rate movements described above at December 31, 2020 (dollars in thousands):
At December 31, 2020
Change in Interest Rates
(basis points)
Net Interest Income
Year 1 Forecast
Year 1
Change from Level
$
159,725
25.24
%
148,435
16.39
137,444
7.77
129,823
1.79
-
127,535
-
127,783
0.19
Given the recent decreases in market interest rates, the Company did not model a 200 basis point decrease in interest rates at December 31, 2020.
The table above indicates that at December 31, 2020, in the event of a 200 basis point instantaneous increase in interest rates, the Company would experience an 7.77% increase in net interest income. In the event of a 100 basis point decrease in interest rates, it would experience a 0.19% increase in net interest income.
Economic Value of Equity Analysis
The Bank analyzes the sensitivity of its financial condition to changes in interest rates through an economic value of equity 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 interest rate risk as measured by the estimated changes in economic value of equity, resulting from an instantaneous and sustained parallel shift in the yield curve (+100, +200, +300 and +400 basis points and -100 basis points) at December 31, 2020 (dollars in thousands):
Estimated Increase (Decrease) in
EVE as a Percentage of Fair
EVE
Value of Assets (3)
Change in
Increase
Interest Rates
(Decrease)
(basis points) (1)
Estimated EVE (2)
Dollars
Percent
EVE Ratio (4)
(basis points)
+400
$
416,356
$
82,897
24.86
%
10.14
248.31
+300
398,807
65,348
19.60
9.57
192.02
+200
377,983
44,524
13.35
8.94
128.96
+100
356,446
22,987
6.89
8.30
64.60
-
333,459
-
-
7.65
-
232,784
(100,675)
(30.19)
5.33
(232.83)
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) EVE is the fair value of expected cash flows from assets, less the fair value of the expected cash flows arising from liabilities adjusted for the value of off-balance sheet contracts.
(3) Fair value of assets represents the amount at which an asset could be exchanged between knowledgeable and willing parties in an arms-length transaction.
(4) EVE Ratio represents EVE divided by the fair value of assets.
Given the recent decreases in market interest rates, the Company did not model a 200 basis point decrease in interest rates at December 31, 2020.
The table above indicates that at December 31, 2020, in the event of a 100 basis point decrease in interest rates, the Bank would experience a 30.19% decrease in its economic value of equity. In the event of a 200 basis points increase in interest rates, it would experience an increase of 13.35% in economic value of equity.
The preceding income simulation analysis does 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.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data included in this report have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
For the Company’s consolidated financial statements, see index on page 64.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure
a) Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2020. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
b) Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s system of internal control over financial reporting is designed under the supervision of management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with GAAP.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections on any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
As of December 31, 2020, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon its assessment, management believes that the Company’s internal control over financial reporting as of December 31, 2020 is effective using these criteria. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company (as an Emerging Growth Company) to provide only management’s report in this annual report.
c) Changes in Internal Control Over Financial Reporting
There were no significant changes made in the Company’s internal control over financial reporting during the fourth quarter of the year ended December 31, 2020 that had materially affected, or was reasonably likely to materially affect, the Company’s internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding the Company’s directors, executive officers and corporate governance is incorporated by reference to the Company’s definitive Proxy Statement for its 2021 Annual Meeting of Shareholders (the “Proxy Statement”) which will be filed with the SEC within 120 days of December 31, 2020. Specifically, the Company incorporates herein the information regarding its directors and executive officers included in the Proxy Statement under the headings “Proposal 1 - Election of Directors - Nominees and Continuing Directors,” “- Executive Officers Who Are Not Directors” and “- Delinquent Section 16(a)-Reports.”
Information regarding the Company’s corporate governance is incorporated herein by reference to the information in the Proxy Statement under the heading “Proposal 1 - Election of Directors - Committees of the Board of Directors - Audit Committee.” The Company has adopted a written Code of Ethics that applies to all directors, officers, including its Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer or Controller, or persons performing similar functions, and employees. The Code of Ethics is published on the Company’s website, www.mcbankny.com. The Company will provide to any person, without charge, upon request, a copy of such Code of Ethics. Such request should be made in writing to: Metropolitan Bank Holding Corp. 99 Park Ave, 12th Floor, New York, New York, 10016, attention: Investor Relations.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information regarding executive and director compensation and the Compensation Committee of the Company’s Board of Directors is incorporated herein by reference to the information in the Proxy Statement under the heading “Compensation Matters.”

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management is included under the heading “Stock Ownership” in the Proxy Statement and is incorporated herein by reference.
The following table shows information at December 31, 2020 for all equity compensation plans under which shares of the Company’s common stock may be issued:
Plan Category
Number of Securities To be Issued Upon Exercise of Outstanding Options and Restricted Stock Units
Weighted-Average Exercise Price of Outstanding Options and Restricted Stock Units
Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Number of Securities To be Issued Upon Exercise of Outstanding Options and Restricted Stock Units)
Equity Compensation Plans Approved By Security Holders
354,615
27.65
311,245
Equity Compensation Plans Not Approved by Security Holders
-
-
-
Total
354,615
27.65
311,245

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The “Transactions with Related Persons” and “Proposal 1 - Election of Directors - Board Independence” sections of the Company’s 2021 Proxy Statement are incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The “Proposal 2 - Ratification of Appointment of Independent Registered Public Accounting Firm” section of the Company’s 2021 Proxy Statement is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
Financial Statements
See index to Consolidated Financial Statements on page 64.
Financial Statement Schedules
Financial statement schedules have been omitted because they are not applicable or not required or the required information is shown in the Consolidated Financial Statements or Notes thereto under “Part II - Item 8. Financial Statements and Supplementary Data.”
Exhibits Required by Item 601 of SEC Regulation S-K
3.1
Certificate of Incorporation of Metropolitan Bank Holding Corp, as amended.(1)
3.2
Amended and Restated Bylaws of Metropolitan Bank Holding Corp.(2)
4.1
Form of Common Stock Certificate of Metropolitan Bank Holding Corp.(3)
4.2
Form of Class B Preferred Stock Certificate of Metropolitan Bank Holding Corp.(4)
4.3
Description of Securities of Metropolitan Bank Holding Corp.(5)
10.1
Registration Rights Agreement, dated June 21, 2016, between Metropolitan Bank Holding Corp. and Endicott Opportunity Partners IV, L.P.(6)
10.2
Amended and Restated Employment Agreement by and among Metropolitan Bank Holding Corp., Metropolitan Commercial Bank and Mark R. DeFazio(7)
10.3
Metropolitan Bank Holding Corp. 2009 Equity Incentive Plan(8)
10.4
First Amendment to 2009 Equity Incentive Plan(9)
10.5
Second Amendment to 2009 Equity Incentive Plan(10)
10.6
Metropolitan Commercial Bank Executive Annual Incentive Plan(11)
10.7
Form of Performance Restricted Share Unit Award Agreement(12)
10.8
Amendment One to Restricted Share Agreements between Metropolitan Bank Holding Corp and Grantee(13)
10.9
Form of Restricted Share Agreement(14)
10.10
Form of Stock Option Agreement(15)
10.11
Employment Agreement by and between Metropolitan Commercial Bank and Scott Lublin(16)
10.12
Metropolitan Bank Holding Corp. 2019 Equity Incentive Plan(17)
10.13
Change in Control Agreement between Metropolitan Bank Holding Corp., Metropolitan Commercial Bank and Nick Rosenberg(18)
10.14
Form of Restricted Stock Unit Award Agreement - 2019 Plan(19)
10.15
Form of Performance-Based Restricted Stock Award Agreement - 2019 Plan(20)
10.16
Form of Time-Based Restricted Stock Award Agreement - 2019 Plan(21)
10.17
Form of Incentive Stock Option Agreement - 2019 Plan(22)
10.18
Form of Non-Qualified Stock Option Agreement - 2019 Plan(23)
21.1
Subsidiaries of Registrant(24)
23.1
Consent of Independent Registered Public Accounting Firm
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Inline Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition as of December 31, 2020 and 2019, (ii) the Consolidated Statements of Operation for the years ended December 31, 2020 and 2019, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2020 and 2019 (iv) the Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019, and (vi) the notes to the Consolidated Financial Statements
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, has been formatted in Inline XBRL
(1) 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).
(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on October 25, 2017 (File No. 333-220805).
(3) Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 4, 2017 (File No. 333-220805).
(4) Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 4, 2017 (File No. 333-220805).
(5) Incorporated by reference to Exhibit 4.3 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2020 (File No. 001-38282).
(6) Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 4, 2017 (File No. 333-220805).
(7) Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-k filed with the Securities and Exchange Commission on January 8, 2020 (File No. 001-38282).
(8) Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 4, 2017 (File No. 333-220805).
(9) Incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2018 (File No. 001-38282).
(10) Incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2018 (File No. 001-38282).
(11) Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on October 25, 2017 (File No. 333-220805).
(12) Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 6, 2018 (File No. 001-38282).
(13) Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 6, 2018 (File No. 001-38282).
(14) Incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2018 (File No. 001-38282).
(15) Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2018 (File No. 001-38282).
(16) Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2018 (File No. 001-38282).
(17) Incorporated by reference to Appendix A to the proxy statement for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 17, 2019 (File No. 001-38282).
(18) Incorporated by reference to Exhibits 10.1 and 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 3, 2019 (File No. 001-38282).
(19) Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 26. 2019 (File No. 333-233465).
(20) Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 26. 2019 (File No. 333-233465).
(21) Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 26. 2019 (File No. 333-233465).
(22) Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 26. 2019 (File No. 333-233465).
(23) Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 26. 2019 (File No. 333-233465).
(24) Incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 4, 2017 (File No. 333-220805).