Metropolitan Bank Holding Corp. (MCB) FY 2022 MD&A

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 BHC Act. Through its wholly owned bank subsidiary, Metropolitan Commercial Bank (the “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. In addition, the Global Payments Group is an established leader in BaaS to a myriad of domestic and international fintech companies. For an analysis of 2021 results compared with 2020 results, see Part II, Item 7., “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the annual report on Form 10-K for the year ended December 31, 2021 filed with the SEC.

40

Table of Contents

The Company’s primary lending products are CRE, including multi-family loans, and C&I loans. Substantially all loans are secured by specific items of collateral including business and consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flows from operations of commercial enterprises. The Company’s primary deposit products are checking, savings, and term deposit accounts, all of which are insured by the FDIC under the maximum amounts allowed by law. In addition to traditional commercial banking products, the Company offers corporate cash management and retail banking services and is an established leader in BaaS through its Global Payments Group (“global payments business”). The Global Payments Group provides global payments infrastructure to its fintech partners, which includes serving as an issuing bank for third-party debit card programs nationwide and providing other financial infrastructure, including cash settlement and custodian deposit services. The Company has developed various deposit gathering strategies, which generate the funding necessary to operate without a large branch network. These activities, together with six strategically located banking centers, generate a stable source of deposits and a diverse loan portfolio with attractive risk-adjusted yields.

The Company is focused on organically growing and expanding its position in the New York metropolitan area and growing its business outside of New York through growth of its New York-based customers and their businesses as they expand in other states. Through an experienced team of commercial relationship managers and its integrated, client-centric approach, the Company has grown market share by deepening existing client relationships and continually expanding its client base through referrals and the ability to offer alternatives to traditional retail banking products. The Company has converted many of its commercial lending clients into full retail relationship banking clients. Given the size of the market in which the Company operates and its differentiated approach to client service, there is significant opportunity to grow its loan and deposits. By combining the high-tech service and relationship-based focus of a community bank with an extensive suite of financial products and services, the Company is well-positioned to continue to capitalize on the significant growth opportunities available in the New York metropolitan area.

Recent Events

In January 2023, the Company announced that it will fully exit the digital currency business, commonly referred to as the crypto-asset related business. This decision followed a careful review by the Board of Directors and management and reflected recent developments in the crypto-asset industry, material changes in the regulatory environment regarding banks’ involvement in digital currency business, and a strategic assessment of the business case for the Company’s further involvement at this time. The Company expects minimal financial impact from the exit of this business. The Company has four active institutional crypto-asset related clients where the Company’s activities are limited to providing debit card, payment, and account services. The Company has no loans outstanding to any of these clients, does not hold crypto-assets on its balance sheet and does not market or sell crypto-assets to its customers. The process of closing out the Company’s relationships with these clients in an orderly fashion has commenced and is expected to be completed during 2023. This determination will not affect customers’ existing ability to send funds to, or receive funds from, crypto-asset companies they choose to do business with, or the Company’s service to customers that do not have crypto-asset related activity as a principal line of business.

There are ongoing investigations by federal and state governmental entities concerning a prepaid debit card product program that was offered by the Company through an independent program manager. These include investigations as to which the Company is a subject by the FRB and certain state authorities, including the NYSDFS. During the early stages of the COVID-19 pandemic, third parties used this prepaid debit card product to establish unauthorized accounts and to receive unauthorized government benefits payments, including unemployment insurance benefits payments made pursuant to the CARES Act from many states. The Company ceased accepting new accounts from this program manager in July of 2020 and has exited its relationship with this program manager. The Company is cooperating in these investigations and continues to review this matter. The foregoing could result in enforcement or other actions against the Company and the Bank including civil money penalties and remedial measures.

The Company is in discussions with the FRB and the NYSDFS with respect to consensual resolutions of their investigations. Although the Company is unable at this time to determine the final terms on which the FRB and NYSDFS investigations will be resolved or the timing of such resolutions, the Company accrued a charge of $35.0 million during the fourth quarter of 2022 to establish a reserve for what the Company believes is a reasonable estimate of the probable loss and expenses associated with the FRB and NYSDFS settlements. If final settlements with the FRB and the NYSDFS

41

Table of Contents

are not reached and the FRB and the NYSDFS bring public enforcement actions, such actions and their resolution, as well as any other matter arising out of the foregoing program, could have a materially adverse effect on the Company and the Bank’s assets, business, cash flows, financial condition, liquidity, prospects and/or results of operations.

In the third quarter of 2022, the Company terminated its interest rate cap and monetized the gain on the derivative. In 2020, the Company had 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 interest rate cap was designated as a cash flow hedge of certain deposit liabilities. The unrecognized value of $12.7 million at termination will be released from Accumulated other comprehensive income and recorded as a credit to Licensing fees expense through March 2025.

On March 15, 2022, the Company redeemed the entire $25.0 million principal balance, plus accrued interest, of its outstanding subordinated notes. The subordinated notes were scheduled to mature on March 15, 2027 and had an interest rate of 6.25% per annum.

Critical Accounting Policies

A summary of accounting policies is provided in Note 2 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 involves 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 Company is responsible for the timely and periodic determination of the amount of the ALLL. Management believes that the ALLL is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in the Company’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 and national economic, operating, regulatory and other conditions, the impact of the COVID-19 pandemic, collateral values and future cash flows from 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 in which such adjustments become known and 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 Company’s ALLL. As a result of such examinations, the Company may need to recognize additions to the ALLL based on the regulators’ judgments about information available to them at the time of such examination.

For further discussion of the ALLL, see “Business – Asset Quality – Allowance for Loan Losses.”

The Company adopted ASU No. 2016 13, Financial Instruments – Credit Losses (ASC 326) effective January 1, 2023, 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. 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.”

42

Table of Contents

Recently Issued Accounting Standards

For a discussion of the impact of recently issued accounting standards, please see “NOTE 3 - SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS” to the Company’s consolidated financial statements in this Form 10-K.

Selected Financial Information

The following table includes selected financial information for the Company for the periods indicated:

​

Discussion of Financial Condition

The Company had total assets of $6.3 billion at December 31, 2022, a decrease of 11.9% from December 31, 2021.

Total cash and cash equivalents were $257.4 million at December 31, 2022, a decrease of $2.1 billion, or 89.1%, from December 31, 2021. The decrease reflected the $1.1 billion deployment of cash into loans and securities and the $1.2 billion outflow of deposits.

Investments

Total securities were $958.2 million at December 31, 2022, an increase of 0.8% from December 31, 2021. The change reflects the $207.4 million purchase of AFS and HTM securities, which was partially offset by the $121.4 million paydown of AFS and HTM securities and the $76.9 million increase in unrealized losses on AFS securities reflecting the prevailing interest rate environment.

The following table sets forth the stated maturities and weighted average yields of investment securities, excluding equity securities, at December 31, 2022. 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 amortized cost of the securities in the group.  Tax-exempt securities, if any, were presented on a tax-equivalent basis, using a federal tax rate of 21%.

​

43

Table of Contents

There were $25.0 million and $0.0 securities pledged to the FRBNY discount window at December 31, 2022 and 2021, respectively.

At December 31, 2022 and 2021, 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 Company 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. OTTI is required to be recognized if: (1) the Company intends to sell the security; (2) it is more likely than not that the Company 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 Company 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 charged to earnings through a reduction in non-interest 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, 2022 and 2021 were primarily due to the changes in market interest rates subsequent to purchase. The Company does not consider these securities to be other-than-temporarily impaired since the decline in market value was attributable to changes in interest rates and not credit quality. In addition, the Company 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, 2022 or 2021.

44

Table of Contents

Loans

Loans are the Company’s primary interest-earning asset.

Loan Portfolio

Total loans, net of deferred fees and unamortized costs, were $4.8 billion at December 31, 2022, an increase of 29.7% from December 31, 2021. The increase primarily included increases of $895.1 million in CRE loans (including owner occupied) and $262.1 million in C&I loans. For the year ended December 31, 2022, the Company’s loan production was $1.8 billion, as compared to $1.2 billion for the year ended December 31, 2021. As of December 31, 2022, total loans consisted primarily of CRE, including multi-family mortgage loans, and C&I. At December 31, 2022, the Company’s loan portfolio includes loans to the following industries (dollars in thousands):

​

The largest concentration in the loan portfolio is to the healthcare industry, which amounted to $1.4 billion, or 29.7% of total loans, at December 31, 2022, including $1.3 billion in loans to skilled nursing facilities (“SNF”).

​

45

Table of Contents

The following table sets forth certain information at December 31, 2022 regarding the amount of contractual loan maturities during the periods indicated. The table does 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).

​

​

The following table sets forth the dollar amount of loans at December 31, 2022 that are due after one year and have either fixed interest rates or floating interest rates (dollars in thousands):

​

​

Asset Quality

Non-performing loans decreased to $24,000 at December 31, 2022 from $10.3 million at December 31, 2021, primarily due to the payoff of one CRE loan, which was adversely affected by COVID-19. The table below sets forth key asset quality ratios:

​

​

46

Table of Contents

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. In June 2016, the FASB issued an accounting standard update, “Financial Instruments – Credit Losses (ASC 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 CECL model. The Company adopted this guidance effective January 1, 2023. See “NOTE 3 ‒ SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS” to the Company’s consolidated financial statements in this Form 10-K.

The ALLL is increased through a provision for loan losses charged to operations. Loans are charged against the ALLL when management believes that the collectability of all or a portion of the principal is unlikely. Management’s evaluation of the adequacy of the ALLL is performed on a quarterly basis and takes into consideration such factors as general economic conditions, the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans.

The ALLL was $44.9 million at December 31, 2022, as compared to $34.7 million at December 31, 2021. The ratio of ALLL to total loans was 0.93% at December 31, 2022 and 2021. The increase in the ALLL was primarily due to loan growth.

The following table sets forth the ALLL allocated by loan category for the periods indicated (dollars in thousands):

​

Goodwill

The Company performed an impairment assessment and determined that no impairment of goodwill existed as of October 1, 2022. The Company changed its annual goodwill impairment testing date from December 31 to October 1 to better align with the timing of its annual planning process. See “NOTE 2 - BASIS OF PRESENTATION - Goodwill” to the Company’s consolidated financial statements in this Form 10-K.

Other Assets

Other assets were $148.3 million at December 31, 2022, an increase of $91.4 million from December 31, 2021. The increase was due primarily to the adoption of ASU 2016-02 Leases (ASC 842), and the recognition of deferred tax assets related to the unrealized losses on AFS securities. See “NOTE 3 - SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS” to the Company’s consolidated financial statements in this Form 10-K regarding the adoption of ASC 842.

47

Table of Contents

Deposits

Total deposits were $5.3 billion at December 31, 2022, a decrease of $1.2 billion, or 18.0%, from December 31, 2021. The decrease in deposits was primarily due to a decrease of $1.0 billion in digital currency business deposits and $789.7 million in bankruptcy trustee and property manager deposits, partially offset by an aggregate net increase of $658.3 million in all other deposit verticals. The decrease in digital currency business deposits reflects the Company’s decision to fully exit the crypto-asset related vertical in light of recent developments in the crypto-asset industry and material changes in the regulatory environment regarding banks’ involvement in crypto-asset related businesses. Non-interest-bearing demand deposits were 45.9% of total deposits at December 31, 2022, compared to 57.0% at December 31, 2021.

The tables below summarize the Company’s deposit composition by segment for the periods indicated, and the dollar and percent change from December 31, 2021 to December 31, 2022 (dollars in thousands):

​

​

​

The table below summarizes the Company’s average balances and average interest rate paid, by segment, for the periods indicated (dollars in thousands):

​

At December 31, 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.2 billion. In addition, as of December 31, 2022, the aggregate

48

Table of Contents

amount of the Company’s uninsured time deposits was $30.8 million. The following are scheduled maturities of time deposits greater than $250,000 as of December 31, 2022 (in thousands):

​

Borrowings

Federal Funds Purchased and FHLB Advances

To support a more efficient balance sheet, particularly related to the decrease in deposits related to the exit of the digital currency business, the Company may at times utilize FHLB advances or other funding sources. At December 31, 2022, the Company had $150.0 million of Federal funds purchased and $100.0 million of FHLBNY advances. At December 31, 2021, the Company had no Federal funds purchased and no FHLBNY advances. At December 31, 2022, the Company had available borrowing capacity of $984.4 million at the FHLBNY, and available borrowing capacity of $137.6 million at the FRBNY discount window.

Trust Preferred Securities Payable

On December 7, 2005, the Company established MetBank Capital Trust I, a Delaware statutory trust (“Trust I”). The Company owns all of the common stock of Trust I in exchange for contributed capital of $310,000. Trust I issued $10.0 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 three-month LIBOR plus 1.85%. The Debentures are callable at any time. At December 31, 2022, the Debentures bore an interest rate of 5.93%.

On July 14, 2006, the Company established MetBank Capital Trust II, a Delaware statutory trust (“Trust II”). The Company owns all of the common stock of Trust II in exchange for contributed capital of $310,000. Trust II issued $10.0 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 three-month LIBOR plus 2.00%. The Debentures II are callable at any time. At December 31, 2022, the Debentures II bore an interest rate of 6.08%.

The terms of the trust preferred securities will be impacted by the transition from LIBOR to an alternative U.S. dollar reference interest rate, potentially the SOFR, in 2023. The overnight and 1-, 3-, 6- and 12-month USD LIBOR settings will cease to be published or cease to be representative after June 30, 2023. All other LIBOR settings ceased to be published or to be representative as of December 31, 2021. Management is currently evaluating the impact of the transition on the trust preferred securities payable.

Subordinated Notes Payable

On March 15, 2022, the Company redeemed the entire $25.0 million principal balance, plus accrued interest, of its outstanding subordinated notes. The subordinated notes were scheduled to mature on March 15, 2027 and had an interest rate of 6.25% per annum.

49

Table of Contents

Secured Borrowings

The Company has loan participation agreements with counterparties. The Company is generally the servicer for these loans. If the transfer of the participation interest does not qualify for sale treatment under GAAP, the amount of the loan transferred is recorded as a secured borrowing. There were $7.7 million in secured borrowings as of December 31, 2022 and $32.5 million as of December 31, 2021.

Accumulated Other Comprehensive Income

Accumulated other comprehensive loss, net of tax, was $54.3 million, at December 31, 2022 an increase of $46.8 million from December 31, 2021. The increase was due to the prevailing interest rate environment, which increased the unrealized losses on AFS securities, partially offset by the increases in unrealized gains on cash flow hedges prior to their termination in the third quarter of 2022.

In 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 interest rate cap was designated as a cash flow hedge of certain deposit liabilities. In the third quarter of 2022, the Company terminated the interest rate cap and monetized the gain on the derivative. The unrecognized value of $12.7 million at termination will be released from Accumulated other comprehensive income and recorded as a credit to Licensing fees expense through March 2025.

Discussion of the Results of Operations for the year ended December 31, 2022

Net Income

Net income was $59.4 million for 2022 as compared to $60.6 million for 2021. The $1.2 million decrease primarily reflects a $35.0 million regulatory settlement reserve, a $11.4 million increase in compensation and benefits, a $7.7 million increase in professional fees, a $6.3 million increase in the provision for loan losses, and $8.5 million increase income tax expense, partially offset by a $72.2 million increase in net interest income.

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest earned on assets and interest incurred on liabilities. The following table presents an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities. The table presents the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Yields and costs were derived by dividing income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. Average balances were derived from daily balances over the periods indicated. Interest income included fees that management considers to be adjustments to yields. Yields on tax-exempt obligations were not computed on a tax-equivalent basis. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred loan origination fees and costs, and purchase discounts and premiums that are amortized or accreted to interest income.

​

50

Table of Contents

​

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). For purposes of

51

Table of Contents

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).

​

Net interest margin increased 72 basis points to 3.49% for 2022 from 2.77% for 2021 driven largely by the increase in the average balance of loans and the increase in loan and overnight deposit yields partially offset by the decrease in the average balance of overnight deposits and a higher cost of funds.

Total cost of funds for 2022 was 53 basis points compared to 31 basis points for 2021, which reflects the increase in prevailing interest rates and competition for deposits.

Interest Income

Interest income increased $87.5 million to $260.7 million for 2022, as compared to $173.3 million for 2021. The increase from the prior year was primarily due to the $1.4 billion increase in the average balance of loans and securities, and the 55 basis point and 91 basis point increases in average yield for loans and overnight deposits, respectively. The increase in average yields on loans and overnight deposits reflects the increase in prevailing interest rates on existing floating rate loans and overnight deposits, as well as higher yields on new loan production.

Interest Expense

Interest expense increased $15.3 million to $31.6 million for 2022, as compared to $16.3 million for 2021. The increase from the prior year was primarily due to the 52 basis point increases in average yield for money market and savings accounts, which reflects the increase in prevailing interest rates and competition for deposits.

Provision for Loan Losses

The provision for loan losses increased $6.3 million to $10.1 million for 2022, as compared to $3.8 million for 2021, which reflected loan growth.

Non-Interest Income

Non-interest income increased by $2.9 million to $26.6 million for 2022, as compared to $23.7 million for 2021. The increase was driven primarily by increases in Global Payments Group revenue from higher fintech BaaS transactions.

52

Table of Contents

Non-Interest Expense

Non-interest expense increased $61.4 million to $148.7 million for 2022 as compared to $87.3 million for 2021. The increase was driven by the $35.0 million regulatory settlement reserve and increases in compensation and benefits and professional fees. There are ongoing investigations by federal and state governmental entities concerning a prepaid debit card product program that was offered by the Company through an independent program manager. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Events.

Compensation and benefits increased $11.4 million to $57.3 million for 2022 as compared to $45.9 million for 2021. This increase was due primarily to an increase in total compensation in line with revenue growth and the increase in the number of full-time employees to 239 for 2022, as compared to 202 for 2021.

Professional fees increased $7.7 million to $14.4 million for 2022 as compared to $6.8 million for 2021, primarily due to an increase in legal fees related to regulatory matters.

​

Income Tax Expense

The effective tax rate for 2022 was 38.7% compared to 32.4% for 2021. The effective tax rate increased due to the $35.0 million regulatory settlement reserve, partially offset by other discrete tax items. The other discrete items related to the change in the geographical mix regarding state apportionment and a higher favorable deduction for the vesting of restricted stock awards in 2022 compared to the prior year.

​

Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its 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):

​

The following is a maturity schedule for the Company’s off-balance sheet arrangements at December 31, 2022 (in thousands):

​

Liquidity and Capital Resources

Liquidity is the ability to economically meet current and future financial obligations. The Company’s primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of securities and borrowings. While maturities and scheduled amortization of loans and securities and borrowings are predictable sources of funds, deposit flows,

53

Table of Contents

mortgage prepayments and security sales are greatly influenced by the general level of interest rates and changes thereto, economic conditions and competition.

The Company regularly reviews the need to adjust investments in liquid assets based upon its assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of its asset/liability program. Excess liquidity is generally invested in interest earning deposits and short- and intermediate-term securities.

The Company’s most liquid assets are cash and cash equivalents. The levels of these assets are dependent on the Company’s operating, financing, lending, and investing activities during any given period. At December 31, 2022 and 2021, cash and cash equivalents totaled $257.4 million and $2.4 billion, respectively. Securities classified as AFS, which provide additional sources of liquidity, totaled $445.7 million at December 31, 2022 and $566.6 million at December 31, 2021. There were $25.0 million and $0.0 securities pledged to the FRBNY discount window at December 31, 2022 and 2021, respectively.

At December 31, 2022, the Company had $150.0 million of Federal funds purchased and $100.0 million of FHLBNY advances. At December 31, 2022, the Company had available borrowing capacity of $984.4 million at the FHLBNY, and available borrowing capacity of $137.6 million at the FRBNY discount window.

The Company has no material commitments or demands that are likely to affect its liquidity other than as set forth below. In the event loan demand were to increase faster than expected, or any other unforeseen demand or commitment were to occur, the Company could access its borrowing capacity with the FHLB or obtain additional funds through alternative funding sources, including the brokered deposit market.

Time deposits due within one year as of December 31, 2022 totaled $37.6 million, or 0.7% of total deposits. Total time deposits were $52.1 million, or 1.0% of total deposits, at December 31, 2022.

The Company’s primary investing activities are the origination, and to a lesser extent, purchase of loans and securities. The Company originated $1.8 billion and $1.2 billion of loans during the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, the Company purchased $33.8 million and $173.6 million of AFS and HTM securities, respectively. During the year ended December 31, 2021, the Company purchased $484.8 million and $383.6 million of AFS and HTM securities, respectively.

Financing activities consist primarily of activity in deposit accounts. Total deposits decreased by $1.2 billion for the year ended December 31, 2022 and increased $2.6 billion during the year ended December 31, 2021. The Company generates deposits from businesses and individuals through client referrals and other relationships and through its retail presence. The Company has established deposit concentration thresholds to avoid the possibility of dependence on any single depositor base for funds.

The Company has loan participation agreements with counterparties. The Company is generally the servicer for these loans. If the transfer of the participation interest does not qualify for sale treatment under GAAP, the amount of the loan transferred is recorded as a secured borrowing. There were $7.7 million in secured borrowings as of December 31, 2022 and $32.5 million as of December 31, 2021.

Regulation

The Company and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. At December 31, 2022 and December 31, 2021, 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

54

Table of Contents

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:

(1) As of December 31, 2022, the capital conservation buffer for the Company and the Bank was 5.4% and 5.1%, respectively, which exceeded the minimum requirement of 2.5% required to be held by banking institutions.

As a result of the Economic Growth Act, banking regulatory agencies adopted a revised definition of “well capitalized” for eligible financial institutions and holding companies with assets of less than $10 billion (a “Qualifying Community Bank”). The rule establishes a 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, signed into law in response to the COVID-19 pandemic, temporarily reduced the CBLR to 8%. The Company did not elect to be governed by the CBLR framework and plans to continue to measure capital adequacy using the ratios in the table above. At December 31, 2022, the Company’s capital exceeded all applicable requirements.

At both December 31, 2022 and December 31, 2021, total CRE loans were 366.0% and 343.4% of the Bank’s risk-based capital, respectively.

​

55

Table of Contents

​