MetroCity Bankshares, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results cover the company and its wholly owned bank subsidiary; the business operates primarily in community banking. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $15.8 | $15.2 | $31.8 | $30.1 |
| Provision for loan losses | $1.1 | $0 | $1.1 | $0 |
| Noninterest income | $5.5 | $12.1 | $13.1 | $19.5 |
| Noninterest expense | $9.7 | $9.9 | $19.9 | $20.0 |
| Net income | $7.7 | $13.0 | $17.6 | $21.7 |
| Diluted EPS | $0.30 | $0.53 | $0.68 | $0.89 |
| Net interest margin | 4.09% | 4.27% | 4.14% | 4.30% |
- Q2 net income fell 40.3% year over year; six-month net income fell 19.1%. Management attributed pressure to lower asset yields, reduced mortgage-related revenue, and the COVID-related loan-loss provision.
- Net interest income increased despite lower yields, mainly because deposit costs declined. Q2 average earning-asset yield was 4.93%, down from 5.83%; average deposit cost fell to 0.97% from 1.70%.
- Q2 noninterest income declined 54.5%. There were no residential mortgage loan sales or related sale gains in the quarter, and mortgage servicing income was lower. SBA servicing income increased.
- At June 30, total assets were $1.72 billion, loans held for investment were $1.36 billion, deposits were $1.35 billion, and shareholders’ equity was $229.4 million. Assets rose 5.5% from year-end 2019.
- Gross loans increased 17.8% from year-end to $1.37 billion. Residential real estate made up 55.2% of the portfolio; commercial real estate was 31.3%. Commercial and industrial loans included $96.1 million of PPP loans.
- Deposits rose 3.3% from year-end. Noninterest-bearing deposits increased to $449.2 million, or 33.3% of deposits, from $292.0 million, or 22.3%. Time deposits declined by $177.4 million.
- Cash and cash equivalents were $215.8 million, down from $276.4 million at year-end. The company also reported $40 million in securities purchased under resale agreements. FHLB advances totaled $80 million, up from $60 million; other borrowings were $3.1 million.
- For the first six months, operating cash flow was $115.2 million, investing cash flow was negative $232.7 million, and financing cash flow was positive $56.8 million. Cash and cash equivalents decreased by $60.6 million.
- The allowance for loan losses was $7.9 million, or 0.58% of gross loans (0.62% excluding PPP loans), versus $6.8 million and 0.59% at year-end. The provision reflected increased qualitative reserves amid COVID-19 uncertainty. Net charge-offs were low.
- The Bank was reported as well capitalized: June 30 total risk-based capital was 20.98%, Tier 1 risk-based capital 20.21%, and Tier 1 leverage 12.49%.
Material changes, outlook, and risks
- COVID-19 is the central uncertainty. The filing states its ultimate financial impact cannot be reasonably estimated. Management warned that further credit provisions, liquidity pressure, lower fee income, and reduced capital or dividends could result.
- At June 30, $157.5 million in non-SBA commercial loans and $145.3 million in residential mortgages had approved three-month payment deferrals. The filing excludes COVID-modified loans from certain past-due and nonperforming measures.
- Management identified $242.2 million, or 17.7% of loans, in sectors considered particularly sensitive to the pandemic. Hotel loans totaled $117.4 million and restaurant loans $38.6 million. The residential portfolio had a 57.8% weighted-average LTV; 19.2% had approved hardship deferrals.
- The SBA guaranteed principal and interest payments on SBA loans for six months through September 2020. The company had funded nearly 1,800 PPP loans totaling $96.1 million by June 30.
- Reported nonperforming loans were $13.2 million, down from $14.7 million at year-end; nonperforming assets were $13.7 million. These measures exclude COVID-19 deferrals, which may obscure emerging credit deterioration, as the filing cautions.
- Management said the allowance was adequate based on information available, but additional provisions may be needed. The company’s loan portfolio is concentrated in real estate, and management highlighted potential deterioration in borrowers, collateral values, and local economic conditions.
- Interest-rate sensitivity models showed estimated net interest income increasing 6.2% under a +200 basis-point scenario over 12 months and 1.6% under a -100 basis-point scenario; results depend on assumptions and are not forecasts.
- No specific earnings or financial guidance was provided. A $0.09-per-share dividend was declared July 15, 2020, payable August 7; future dividends depend on results, capital needs, regulation, and other factors. Q2 dividends paid were $0.11 per share.
- Management stated that ordinary-course legal matters were not expected to have a material adverse effect. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-related deferral borrowers resume payments and how credit quality changes when relief periods end, especially in hotel, restaurant, and real-estate exposures.
- Whether allowance levels and future credit provisions adequately reflect portfolio risks; review how COVID-modified loans are excluded from delinquency and nonperforming statistics.
- Whether PPP forgiveness, fee recognition, and deposit flows affect reported loan growth, funding costs, and future earnings.
- Whether mortgage production, loan-sale gains, and servicing-asset values recover or remain volatile; Q2 included no residential mortgage sales.
- Whether lower funding costs can continue to offset pressure on asset yields and net interest margin, and whether liquidity and capital remain adequate under prolonged economic stress.