MetroCity Bankshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; financial statements are unaudited. MetroCity is an Atlanta-area community bank holding company operating through Metro City Bank, with 19 branches in seven states. Figures below are in U.S. dollars; financial amounts are shown in millions unless noted.
Financial performance and position
| Metric | Q3 / September 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $12.4m for Q3; $34.0m for nine months | $9.9m and $31.6m, respectively, in 2018 |
| Basic / diluted EPS | $0.51 / $0.50 for Q3; $1.40 / $1.39 for nine months | $0.41 / $0.40 for Q3; $1.31 / $1.29 for nine months in 2018 |
| Net interest income | $16.0m for Q3; $46.0m for nine months | $14.9m and $43.7m in 2018 |
| Net interest margin | 4.22% for Q3; 4.27% for nine months | 4.49% and 4.58% in 2018 |
| Assets / loans / deposits | $1,644.7m / $1,261.4m gross loans / $1,335.4m | Assets $1,432.7m, gross loans $1,145.7m and deposits $1,244.2m at December 31, 2018 |
| Cash and cash equivalents | $274.5m | $138.4m at December 31, 2018 |
| Borrowings | $60.0m FHLB advances; $3.2m other borrowings | No FHLB advances and $4.3m other borrowings at December 31, 2018 |
| Equity | $194.4m; book value per share $8.00 | $168.6m; book value per share $6.95 at December 31, 2018 |
Q3 net income rose 25.4% year over year; nine-month net income rose 7.8%. Nine-month interest income increased 16.2%, while interest expense increased 63.5%. Noninterest income grew 7.1% for the nine months, to $30.5m, and noninterest expense grew 7.4%, to $30.2m. Nine-month provision for loan losses was zero, versus $1.2m in 2018.
Q3 return on average assets was 3.07%, return on average equity was 26.44%, and the efficiency ratio was 37.66%. For the nine months, these were 2.98%, 25.81%, and 39.39%, respectively. The filing reports no separate operating cash flow margin.
Operating cash flow was $111.3m for the nine months, compared with cash used of $18.5m in 2018; investing activities used $116.1m and financing activities provided $140.9m. Cash and cash equivalents increased $136.1m. Management cites deposit growth and loan portfolio activity; operating cash flow includes substantial residential and SBA loan originations and sale proceeds.
At September 30, the allowance for loan losses was $6.85m, or 0.54% of gross loans. Nonperforming loans were $14.5m (1.15% of gross loans), compared with $9.0m (0.78%) at year-end 2018; nonperforming assets were $14.9m, or 0.91% of assets. The allowance covered 47.19% of nonperforming loans. The Bank’s total risk-based capital ratio was 19.34%, and it was categorized as well capitalized.
Material changes and management commentary
- Assets rose 14.8%, gross loans 10.1%, and deposits 7.3% from year-end. Loan growth included commercial real estate, commercial and industrial, and residential real estate lending. Residential real estate loans represented 58.2% of gross loans.
- Higher deposit costs weighed on margin: the nine-month cost of interest-bearing liabilities rose to 2.19% from 1.49%, while the yield on earning assets rose to 5.80% from 5.64%. Management attributed margin compression chiefly to rising funding costs, partly offset by growth in earning assets. CDs offered at higher rates were used to attract deposits.
- Nine-month noninterest income benefited from residential mortgage loan sale gains ($6.5m) and SBA loan sale gains ($4.3m), while mortgage servicing income declined 21.9% to $7.2m. The residential mortgage servicing portfolio grew to $1.12bn from $804.2m at year-end.
- Noninterest expense increased 7.4% year over year for the nine months, reflecting higher staffing, occupancy, and data-processing costs associated with growth and branch expansion; other operating expenses declined.
- Nonaccrual loans increased to $11.0m from $5.7m at year-end, including higher nonaccrual residential and construction and development balances. Management said the allowance was adequate but warned weaker economic or real estate conditions could increase problem loans and losses.
- The company adopted lease accounting in 2019, recording a $12.4m operating lease right-of-use asset and a $12.9m lease liability at September 30. It also effected a 2-for-1 stock split on August 30; reported share and per-share data reflect the split.
Liquidity, outlook, risks, and contingencies
Liquidity sources include operating cash flow, deposits, loan and securities cash flows, $398.4m of additional FHLB borrowing availability, $47.5m of unused unsecured federal funds lines, and a $10.0m unused Federal Reserve discount-window line. Deposits included no brokered deposits at September 30, versus $53.5m at year-end 2018. Management did not provide numerical earnings or growth guidance and cautioned that interim results are not necessarily indicative of full-year results.
Interest-rate simulations showed projected net interest income changes of +5.5% / -1.9% over 12 months and +6.9% / 0.0% over 24 months under the modeled +200 / -100 basis-point scenarios. Management cautions these are model estimates, not forecasts, and depend on assumptions including deposit behavior, loan prepayments, rates, and balance-sheet mix.
Key disclosed risks include real estate and borrower credit quality, loan concentration in real estate, funding-cost and interest-rate exposure, deposit concentration, mortgage banking and servicing performance, liquidity and capital needs, competition, growth execution, regulatory compliance, cybersecurity and operational risks. The company reported ordinary-course legal proceedings and said management did not expect them to have a material adverse effect. It reported no material change to previously disclosed risk factors and no material control weakness.
Subsequent event: the October 2019 IPO included 1,224,513 newly issued company shares at $13.50 per share, generating approximately $14.0m net proceeds; selling stockholders also sold shares. As of November 6, 2019, 25,529,891 shares were outstanding. A $0.11-per-share dividend declared October 16 was payable November 8 to holders of record November 1.
Most important facts for investors to verify
- Whether the increase in nonperforming loans and the 47.19% allowance-to-nonperforming-loans ratio signal further credit deterioration, especially in residential and construction lending.
- Whether deposit pricing and funding competition continue to pressure net interest margin and profitability.
- The sustainability and valuation sensitivity of mortgage and SBA loan-sale gains, servicing income, and servicing assets.
- How much of reported cash generation reflects recurring banking operations versus loan sales, balance-sheet changes, and other working-capital movements.
- Use of IPO proceeds, post-offering share count, deposit concentration, and continued availability of borrowing sources.