Metrocity Bankshares, Inc. annual report, FY2021

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Business context and reporting period

MetroCity Bankshares, Inc. filed this Form 10-K for the fiscal year ended December 31, 2021. It operates Metro City Bank, a Georgia-chartered commercial bank with 19 branches across seven states, focused on small and midsized businesses and individuals, particularly in Asian-American communities. The filing reports full-year results; it does not provide a clear standalone fourth-quarter income statement.

Financial performance and position

  • Profit and revenue: Net income was $61.7 million, up 69.5% from $36.4 million in 2020. Diluted EPS was $2.39 versus $1.41. Net interest income plus noninterest income totaled about $138.0 million, compared with $93.3 million in 2020.
  • Net interest and margins: Net interest income rose 57.5% to $104.2 million. Net interest margin increased 27 basis points to 4.45%; interest-earning asset yield declined 26 basis points to 4.65%, while the cost of interest-bearing liabilities fell 86 basis points to 0.29%.
  • Noninterest items and expenses: Noninterest income rose 24.2% to $33.8 million, led by mortgage origination fees and SBA loan-sale gains. Noninterest expense increased 17.8% to $48.4 million, including higher salaries, loan-related costs, and FDIC premiums. Provision for loan losses was $6.9 million versus $3.5 million.
  • Assets and loans: Total assets grew 63.7% to $3.11 billion. Gross loans increased 53.6% to $2.51 billion; residential real estate loans rose 92.8% to $1.88 billion and represented 74.8% of gross loans. Total shareholders’ equity was $290.2 million, up from $244.8 million.
  • Credit quality: Nonperforming loans declined to $11.8 million from $13.1 million; nonperforming assets were $15.4 million, or 0.50% of assets. The allowance for loan losses was $17.0 million, 0.67% of gross loans, versus $10.1 million and 0.62% in 2020. Net charge-offs were $112,000.
  • Deposits, debt and liquidity: Deposits rose 52.9% to $2.26 billion; reported total deposit cost was 0.21%. Brokered deposits increased to $425.1 million, or 18.8% of deposits, from $164.3 million. FHLB advances rose to $500.0 million from $110.0 million. Cash and cash equivalents were $441.3 million. Net loans were 110.7% of deposits, within the company’s 125% limit. Additional FHLB borrowing availability was $326.9 million.
  • Cash flow: Operating cash flow was $65.4 million; investing cash flow was negative $930.6 million, mainly reflecting loan growth and BOLI purchases; financing cash flow was positive $1.16 billion, principally from deposit growth and FHLB advances. Cash and cash equivalents increased $290.7 million.
  • Capital and returns: The Bank was well capitalized: CET1 was 16.17%, total risk-based capital 17.18%, and Tier 1 leverage 9.11%. Return on average assets was 2.51% and return on average equity 23.55%. The company declared $0.46 per share in dividends and repurchased $5.5 million of stock during 2021.

Material changes versus 2020

  • Growth in residential mortgage loans held for investment drove much of the balance-sheet expansion: the company originated $1.20 billion of residential mortgages and sold none in 2021, compared with $484.2 million originated and $92.7 million sold in 2020.
  • Net interest income benefited from larger average loan balances and sharply lower deposit costs. PPP loan fee income was $5.4 million, versus $1.7 million in 2020; outstanding PPP loans fell to $31.0 million from $92.4 million.
  • Mortgage-related revenue shifted: residential mortgage loan-sale gains fell to zero, while other mortgage origination fees increased with higher volume. Mortgage servicing income was an expense of $564,000, compared with $1.3 million of income in 2020; the serviced residential mortgage portfolio declined to $608.2 million from $961.7 million.
  • Nonperforming loans improved, but the allowance and provision increased amid rapid loan growth and continued COVID-19 uncertainty. Residential real estate’s share of gross loans increased from 59.6% to 74.8%.
  • Funding expanded materially, including a $390 million increase in year-end FHLB advances and a $260.8 million increase in brokered deposits.

Outlook, risks and unusual items

  • Management gave no specific earnings or growth guidance. It expected the Federal Reserve to raise rates more than once in the next 12 months, while warning that rates, inflation, deposit competition and borrower repayment capacity could affect results. Its rate model showed net interest income declining 3.6% under a 200-basis-point rising-rate scenario over 12 months and 8.7% over 24 months; model results are not forecasts.
  • COVID-19 remained a source of uncertainty, including variant, economic recovery, inflation, supply-chain and labor risks. At year-end, two non-SBA commercial borrowers with $8.1 million outstanding and four SBA loans with $6.5 million gross balances had approved payment deferrals. Hotel and restaurant exposures were $165.9 million and $39.5 million, respectively; the filing identifies $279.3 million, or 11.1% of loans, in sectors most sensitive to the pandemic.
  • Real estate concentration is a key exposure: 97.1% of gross loans had real property as primary or secondary collateral. The large residential mortgage portfolio consists mainly of nonconforming loans, and the decision to retain 2021 production increases balance-sheet and interest-rate exposure.
  • Other risks include reliance on brokered and large depositor relationships, CRE and SBA credit risk, competition, cyber and third-party system risks, and regulatory requirements. Only six loans totaling $24.4 million were LIBOR-linked at year-end. CECL adoption is planned for January 1, 2023; management was still developing its expected-loss model.
  • The company entered four interest-rate swaps with $200 million aggregate notional and a $50 million interest-rate cap in 2021. After year-end, the Bank signed a letter of intent to sell $115.5 million of residential mortgage loans with servicing retained, with closing expected by the end of March 2022.
  • Management said pending ordinary-course legal matters were not expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements. Management found disclosure controls and internal control over financial reporting effective; the auditor did not attest to internal controls because the company was an emerging growth company.

Important facts for investors to verify

  1. Whether rapid loan growth and the 74.8% residential real estate concentration are matched by appropriate underwriting, collateral values and allowance coverage.
  2. How the retained mortgage production affects future net interest margin, liquidity and mortgage-related fee income, including the outcome of the planned $115.5 million loan sale.
  3. The stability and cost of funding as brokered deposits and FHLB advances increase, and the concentration of deposits among large customer relationships.
  4. Future credit performance in hotels, restaurants and other COVID-sensitive sectors, including loans under deferral or rated Special Mention.
  5. The effect of changing interest rates on modeled earnings and equity sensitivity, and the company’s transition away from LIBOR and preparation for CECL.
  6. Whether consolidated risk-based capital requirements apply to the holding company in 2022 after assets exceeded $3 billion in the fourth quarter of 2021.