MetroCity Bankshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022 unless noted. MetroCity is a community bank holding company operating through Metro City Bank, with 20 branches across seven states and a focus on small and midsize businesses and individuals, including Asian-American communities.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $48.7 million | $38.3 million | $142.2 million | $103.3 million |
| Interest expense | $24.6 million | $8.5 million | $66.8 million | $12.6 million |
| Net interest income | $24.2 million | $29.8 million | $75.4 million | $90.7 million |
| Noninterest income | $2.9 million | $5.1 million | $13.7 million | $17.4 million |
| Noninterest expense | $11.8 million | $12.7 million | $34.0 million | $38.0 million |
| Net income | $11.4 million | $16.9 million | $40.3 million | $52.4 million |
| Diluted EPS | $0.45 | $0.66 | $1.58 | $2.04 |
| Net interest margin | 2.94% | 3.84% | 3.11% | 4.08% |
Net income declined 32.4% year over year in Q3 and 23.2% for the first nine months. Higher loan yields and loan balances lifted interest income, but deposit and borrowing costs rose faster: Q3 deposit cost was 4.05%, versus 1.48% a year earlier. Q3 efficiency ratio was 43.56%, compared with 36.37%.
Financial position, cash flow and capital
- At September 30, total assets were $3.51 billion; gross loans were $3.04 billion ($3.01 billion net of allowance and unearned income); deposits were $2.72 billion; shareholders’ equity was $384.7 million.
- Cash and cash equivalents were $282.1 million, up $102.6 million from year-end. For the first nine months, operating cash flow was $90.4 million, investing cash flow was $25.8 million, and financing cash flow was negative $13.6 million. Operating cash flow included a $46.5 million increase in other liabilities.
- FHLB advances were $325 million, down from $375 million at year-end; no other borrowings were outstanding. Available borrowing capacity was reported at approximately $1.21 billion across the FHLB, Federal Reserve Discount Window and correspondent-bank lines.
- Deposits increased 1.9%; noninterest-bearing deposits were 20.6% of deposits. Brokered deposits were $741.6 million, or 27.3% of deposits; uninsured deposits were 27.2%, down from 32.5% at year-end.
- The Bank was categorized as well capitalized. At September 30, its common equity Tier 1 ratio was 16.89% and total risk-based capital ratio was 17.77%; the consolidated ratios were 17.03% and 17.91%, respectively.
Material changes, outlook and risks
- Funding and margins: Management attributed margin compression principally to rising deposit costs. The filing describes elevated industry liquidity and deposit-confidence concerns and says the Company took proactive client-outreach and funding actions. All outstanding FHLB advances had call features after six months or one year.
- Loan quality: Nonperforming loans rose to $37.1 million, or 1.22% of gross loans, from $20.2 million, or 0.66%, at year-end. This included $22.0 million of accruing restructured loans and $15.1 million of nonaccrual loans. Nonperforming assets were $37.9 million, or 1.08% of assets. The allowance for credit losses was $17.7 million, or 0.58% of gross loans, and equaled 47.61% of nonperforming loans.
- CECL adoption: Effective January 1, 2023, CECL increased the loan allowance by $5.1 million and established an allowance for unfunded commitments; the net-of-tax cumulative adjustment reduced retained earnings by $3.8 million. Management cautioned that economic conditions and forecasts may increase provision and earnings volatility.
- Loan concentration and securities: Residential real estate represented 76.1% of gross loans. Available-for-sale securities had $4.1 million of unrealized losses; management attributed these to factors other than credit losses and said it did not expect or intend to sell the securities before recovery.
- Other income and expenses: Lower mortgage production and related fees contributed to lower noninterest income; no residential mortgage loans were sold in 2023. Lower salaries and other expenses partly offset reduced fee income. SBA servicing fair-value changes were volatile, including a $911,000 charge in Q3.
- Interest-rate exposure: The Company reported $800 million notional of cash-flow swaps and a $50 million interest-rate cap. Its modeled 12-month net interest income sensitivity to a 200-basis-point increase was +1.7% at September 30; results are model estimates, not forecasts.
- Capital returns and contingencies: The Company declared a $0.18-per-share dividend payable November 10, 2023. A repurchase program authorized up to 1 million shares through September 30, 2024; 38,689 shares were repurchased in Q3 at an average $19.69. Management said outstanding legal matters were not expected to have a material adverse effect. No specific quantitative earnings guidance was provided.
Important facts for investors to verify
- Whether deposit pricing, brokered-deposit reliance and the declining share of noninterest-bearing deposits continue to pressure net interest margin.
- The performance and collateral support of accruing restructured loans, nonaccrual residential loans and commercial real estate exposures, and the adequacy of the CECL allowance.
- Liquidity and funding resilience, including uninsured-deposit trends, callable FHLB advances and the availability of stated borrowing lines.
- The source and sustainability of operating cash flow, particularly the large increase in other liabilities, and the cash-flow effects of derivative collateral.
- Changes in loan concentration, mortgage and SBA production, servicing-asset valuations, and interest-rate sensitivity assumptions.