Executive Summary / Key Takeaways

• Metropolitan Bank (MCB) has successfully completed its exit from the legacy BaaS business, resolving associated regulatory matters and allowing a sharpened focus on its core, relationship-based commercial banking franchise.
• The bank demonstrated strong operational execution by effectively replacing deposit runoff from the BaaS exit through robust growth in diversified verticals like Municipal, EB-5, HOA, and lending customers, contributing to significant overall deposit growth in Q1 2025.
• Disciplined loan growth, particularly in CRE and C&I, combined with effective deposit gathering and pricing strategies, has driven six consecutive quarters of Net Interest Margin (NIM) expansion, with management guiding for further increases in 2025.
• MCB is investing significantly in a new technology stack, a strategic initiative expected to be completed by the end of 2025, aimed at supporting future growth, enhancing resiliency, and improving operational efficiency, positioning the bank competitively.
• Despite a recent increase in non-performing loans due to a single credit, overall asset quality remains strong, and management is confident in resolving existing workouts, while capital levels comfortably exceed regulatory requirements, supporting potential future capital return initiatives like dividends and share repurchases.

Setting the Scene: A Focused Commercial Bank's Evolution

Metropolitan Bank Holding Corp. (MCB), through its subsidiary Metropolitan Commercial Bank, operates as a relationship-driven commercial bank primarily serving the dynamic New York metropolitan area. Since its incorporation in 1997 and the bank's founding in 1999, MCB has cultivated a niche focusing on small businesses, middle-market enterprises, public entities, and affluent individuals. Its strategy centers on providing a broad range of banking products and specialized services, leveraging a branch-light model supported by targeted deposit-gathering initiatives.

Within the competitive landscape, MCB positions itself distinctly against both large national institutions like JPMorgan Chase (JPM) and Bank of America (BAC), and regional peers such as Citizens Financial Group (CFG) and PNC Financial Services Group (PNC). While larger banks benefit from immense scale, vast branch networks, and extensive technological infrastructure, MCB differentiates through its deep local market knowledge, specialized lending expertise (particularly in CRE and C&I), and a high-touch, relationship-based service model. This focus allows MCB to achieve superior customer loyalty and often better net interest margins in its niche segments compared to the broader, less personalized offerings of national players. For instance, MCB's Q1 2025 Net Interest Margin (NIM) of 3.68% compares favorably to typical margins in similar segments for larger banks. However, MCB's smaller scale implies higher operating costs per transaction compared to the automated efficiency of national banks, and it lags in the speed of technological innovation seen at the largest institutions. Regional peers like CFG and PNC offer a broader regional footprint, but MCB's specialized verticals provide a unique value proposition in specific markets.

A key foundational strength for MCB's future is its ongoing investment in a new, franchise-wide technology stack. This is not a single, core differentiated technology in the manufacturing sense, but rather a strategic overhaul of the bank's operational backbone. The multi-year project, with a budget of $12 million to $13 million and expected completion by the end of 2025, aims to support and scale the bank's diversified commercial operations. Specific initiatives include a major infrastructure update involving network redesign and data center expansion to enhance resiliency, and data security and governance initiatives aligned with current regulatory expectations. The strategic intent is to build a modern, secure, and scalable platform that can handle future growth and improve operational efficiency, thereby strengthening MCB's competitive position against rivals with more advanced digital capabilities and paving the way for operational leverage once the investment phase concludes.

Strategic Evolution and Operational Execution

MCB's recent history has been significantly shaped by the strategic decision to exit the Global Payments Group (GPG) BaaS business. Initially a complementary segment, challenges arose during the pandemic due to third-party misuse of a prepaid debit card product, leading to regulatory scrutiny and investigations. Recognizing the associated risks and distractions, MCB initiated a multi-year wind-down process, successfully completing the exit in 2024. This move has stabilized the bank's non-interest income profile by removing the volatility associated with the BaaS segment and allowed management to concentrate fully on the core commercial bank.

A critical operational achievement during this transition has been the successful management and replacement of the deposit runoff associated with the GPG exit. MCB has effectively leveraged its diversified deposit verticals, including Municipal, EB-5, Homeowners Association (HOA), 1031 exchange, and lending customer deposits. This strategy has proven highly effective, resulting in a significant increase in total deposits by $466.3 million, or 7.8%, in the first quarter of 2025 alone, following growth of over $245 million in 2024 and $705 million since the end of 2022. Management expresses strong confidence in the continued runway within these existing verticals to fund future loan growth, highlighting the organic nature of this deposit gathering approach for their branch-light model.

Concurrently, MCB has pursued disciplined loan growth, primarily in its core CRE and C&I segments. Total loans, net, increased by $308.0 million, or 5.1%, in Q1 2025. This growth is a direct result of management's commitment to maintaining pricing discipline and conservative underwriting standards, even as they turn down deals that don't meet their risk-reward criteria. The weighted average coupon on new loan originations and the repricing of existing loans have contributed positively to the bank's interest income, supporting NIM expansion.

Financial Performance and Profitability Drivers

MCB's strategic focus and operational execution are reflected in its recent financial performance. For the first quarter of 2025, the bank reported net income of $16.4 million, or $1.45 per diluted common share. While slightly down from the robust $21.4 million in Q4 2024 (which included some non-recurring items), it represented a modest increase from $16.2 million in Q1 2024.

The primary driver of this performance has been the consistent expansion of Net Interest Income (NII) and Net Interest Margin (NIM). NII increased by $7.3 million to $66.952 million in Q1 2025 compared to Q1 2024. This growth, coupled with effective balance sheet management, resulted in a NIM of 3.68% for the quarter, marking the sixth consecutive quarter of margin expansion. The improvement was fueled by an increase in the average balance of higher-yielding loans and a decrease in the total cost of funds by 11 basis points, partially offset by a decrease in lower-yielding overnight deposits and an increase in the average balance of interest-bearing deposits.

Non-interest income experienced a decrease of $3.4 million in Q1 2025 compared to Q1 2024, primarily due to the absence of revenue from the exited GPG business. This highlights the shift towards a more traditional, core banking revenue profile. Non-interest expense saw a modest increase of $822,000 in Q1 2025, driven mainly by higher compensation and benefits costs associated with increased employee count and deposit-related fees, partially offset by reductions in professional fees, licensing fees, and technology costs. It is important to note that significant, largely one-time expenses related to the digital transformation project and regulatory remediation (including a $10 million settlement reserve booked in Q3 2024 related to a past fintech relationship) have impacted expense levels in prior periods and will continue to influence them in 2025 as the technology investment is expensed.

Profitability, as measured by adjusted Return on Tangible Common Equity (ROTCE), stood at 12.3% in Q4 2024 and 12% in Q3 2024. Management has set a clear target to achieve a mid-teens ROTCE within the next 12 to 18 months, supported by a robust core NIM approaching 3.75% or 3.8%.

Asset Quality and Risk Management

MCB maintains a strong focus on asset quality, which is a critical component of its conservative operating philosophy. At March 31, 2025, key asset quality metrics included non-performing loans of $34.5 million (0.54% of total loans) and an Allowance for Credit Losses (ACL) of $67.8 million (1.07% of total loans). While non-performing loans increased slightly from $32.6 million at December 31, 2024, this was primarily attributed to a single unsecured C&I loan.

The provision for credit losses in Q1 2025 was $4.5 million, an increase from $528,000 in Q1 2024. This increase was primarily driven by the period's loan growth and the specific provision taken against the aforementioned unsecured C&I loan. The ACL is determined using models and economic forecasts, supplemented by qualitative adjustments to account for portfolio-specific risks and forecast uncertainty. A hypothetical sensitivity analysis indicated that adverse changes in macroeconomic forecasts could result in a material increase in the ACL, highlighting the inherent judgment in this estimate.

Management remains confident in the overall health of the loan portfolio, reporting no broad-based negative trends across segments, geographies, or sectors. They are actively working on resolving existing loan workouts and are confident that a meaningful portion will be successfully resolved in 2025. This follows the successful resolution of two previously non-performing loans totaling approximately $21 million that returned to current status by Q2 2024.

Loan concentrations, particularly in the healthcare industry (38.9% of total loans, largely skilled nursing facilities) and non-owner-occupied CRE (367.0% of risk-based capital at March 31, 2025), are actively monitored. While the non-owner-occupied CRE concentration exceeds the 300% regulatory guidance, management notes that regulators have been comfortable with their historical performance and portfolio profile, and the bank does not intend to approach its higher internal policy limit. Management also reports positive performance from their skilled nursing facility portfolio operators.

Interest Rate Risk (IRR) is the bank's primary market risk exposure. Simulation analysis at March 31, 2025, indicated that a sustained 200 basis point upward shift in rates could decrease net interest income by 4.67% over one year, while a similar downward shift could increase it by 5.61%. EVE analysis showed a 5.66% decrease in EVE for a 200 basis point upward shift and a 1.95% increase for a 200 basis point downward shift. These analyses are subject to numerous assumptions but provide insight into the bank's rate sensitivity.

Outlook, Guidance, and Shareholder Return

Looking ahead, MCB is focused on leveraging its strengthened core franchise and technology investments to drive continued profitable growth. Management has provided concrete guidance for 2025, projecting loan growth of 10% to 12%. This growth is expected to be funded by continued expansion in their diversified deposit verticals, with a funding cost assumption reflecting the current deposit mix.

The outlook for Net Interest Margin remains positive, with full-year 2025 NIM expected to be between 3.7% and 3.75%. This forecast incorporates an assumption of one 25 basis point Federal Reserve rate cut in July, with management anticipating that additional rate cuts would further benefit the NIM. Non-interest income is expected to grow by 6% to 8% in 2025, excluding any past GPG contributions, reflecting growth in core fee-generating activities. Operating expenses are expected to be flat to 2024 levels, including the approximately $11 million in one-time costs related to the digital transformation project slated for completion this year. The strategic goal is to achieve a lower "clean run rate" for operating expenses in the low $150 million range towards the end of 2025 and into 2026, enabling future operating leverage.

MCB's strong capital position, comfortably exceeding regulatory requirements for being considered "well capitalized," supports initiatives aimed at enhancing shareholder return. In March 2025, the board approved a $50 million share repurchase program, under which the company repurchased 228,926 shares at an average cost of $55.80 per share in Q1 2025, just above tangible book value. Furthermore, the company's capital plan contemplates the declaration of a quarterly cash dividend as early as the third quarter of 2025, subject to board approval and market conditions. These actions signal management's confidence in the bank's financial strength and future earnings power.

Conclusion

Metropolitan Bank has successfully navigated a period of strategic transition, completing its exit from the legacy BaaS business and resolving associated regulatory matters. This divestiture has allowed MCB to sharpen its focus on its core, relationship-based commercial banking franchise, which continues to demonstrate fundamental strength. The bank's ability to drive robust deposit growth from diversified verticals, coupled with disciplined loan origination at attractive yields, has resulted in consistent NIM expansion and solid financial performance.

The ongoing investment in a new technology stack is a critical strategic move, positioning MCB for future scalability, enhanced resiliency, and improved efficiency, which will be essential in competing effectively in an increasingly digital banking landscape. Despite lacking proprietary, quantifiable technology differentiators, the strategic investment aims to build a competitive platform. While asset quality requires vigilant monitoring, particularly regarding concentrations and non-performing credits, current metrics remain sound, and management is actively addressing specific issues. With strong capital levels and a clear outlook for continued loan and deposit growth, MCB appears well-positioned to achieve its target of mid-teens ROTCE. The contemplation of a quarterly dividend further underscores the bank's confidence and commitment to delivering value to shareholders, making MCB a compelling consideration for investors seeking exposure to a focused, well-capitalized regional bank executing a clear post-transition growth strategy.