Business context and reporting period
MetroCity Bankshares, Inc. is a Georgia-based bank holding company operating through Metro City Bank, with 19 branches across seven states. Its principal business is community banking, particularly lending to small and mid-sized businesses and individuals. This unaudited Form 10-Q covers the quarter ended March 31, 2020; income and cash-flow comparisons are for the three months ended March 31, 2019.
Financial performance and condition
| Metric | Q1 2020 | Comparison |
|---|---|---|
| Net interest income | $15.9 million | Up 7.5% from $14.8 million in Q1 2019 |
| Net interest margin | 4.19% | Down 13 basis points from 4.32% in Q1 2019 |
| Noninterest income | $7.5 million | Up 1.0% from $7.4 million |
| Noninterest expense | $10.0 million | Down 0.1% from $10.1 million |
| Net income | $9.8 million | Up 12.4% from $8.7 million |
| Diluted earnings per share | $0.38 | Compared with $0.36 |
| Net cash from operating activities | $107.9 million | Compared with $67.7 million used in Q1 2019 |
Reported return on average assets was 2.44%, return on average equity was 18.21%, and the efficiency ratio was 42.91%. The filing reports no separate profit-margin measure.
At March 31, 2020, total assets were $1.60 billion, down 1.7% from year-end 2019; loans held for investment were $1.262 billion, up $100.4 million (8.6%); and deposits were $1.243 billion, down $64.5 million (4.9%). Cash and cash equivalents were $207.6 million. Shareholders’ equity was $223.7 million.
FHLB advances increased to $80.0 million from $60.0 million at year-end. Other borrowings were $3.1 million. The Bank had $410.8 million of additional FHLB borrowing availability, $47.5 million in unused correspondent-bank federal funds lines, and $10.0 million available at the Federal Reserve discount window. Management reported the Bank was well-capitalized; its total risk-based capital ratio was 20.86% and its CET1 ratio was 20.17%.
The allowance for loan losses was $6.9 million, or 0.54% of gross loans, with no loan-loss provision in the quarter. Net recoveries were $20,000. Nonperforming loans were $13.9 million (1.10% of gross loans), and nonperforming assets were $14.3 million (0.89% of assets).
Material changes versus the prior comparable period
- Net income rose principally as lower deposit interest expense and higher loan balances supported net interest income. The yield on average earning assets fell to 5.42% from 5.80%; the cost of interest-bearing deposits fell to 1.86% from 2.11%.
- Residential mortgage loan-sale gains increased to $2.5 million from $938,000. This was partly offset by lower mortgage and SBA servicing income.
- Mortgage servicing income included an $884,000 fair-value impairment charge, attributed partly to faster prepayments; no such charge was recorded in Q1 2019. SBA servicing rights recorded a $589,000 fair-value decline.
- Residential real estate loans grew $82.6 million in the quarter and represented 58.1% of the loan portfolio. The gross-loans-to-deposits ratio rose to 101.67% from 88.97% at year-end.
- Cash and due from banks declined $69.5 million, and loans held for sale fell from $85.8 million to zero, partly reflecting mortgage loan sales and portfolio growth. Operating cash flow was positive, while investing and financing activities used $129.4 million and $47.3 million, respectively.
Outlook, management commentary, risks and contingencies
The filing provides no quantified earnings or financial guidance. Management said COVID-19’s effects on borrowers, credit quality, liquidity and the economy remained uncertain, and future credit-loss provisions could be required. The company increased qualitative allowance factors for pandemic-related uncertainty but did not record a provision in Q1.
As of May 11, 2020, 88 non-SBA commercial customers with $151.2 million in balances had been approved for three-month deferrals; approved residential mortgage deferrals totaled $145.5 million, or 19.8% of the portfolio. The SBA guaranteed principal and interest payments on SBA loans for six months. By May 11, the company had closed or received SBA approval for more than 1,650 PPP loans totaling over $94.3 million. These are post-quarter figures.
Key risks include pandemic-driven borrower distress, particularly in hospitality, restaurants, retail and energy; the company’s real-estate concentration; collateral-value declines; deposit outflows and liquidity demands; lower interest rates and pressure on net interest income; and operational, cybersecurity, litigation and SBA-guaranty risks related to PPP participation. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. The Bank’s capital ratios could nevertheless be adversely affected by a prolonged downturn.
The company declared a $0.11-per-share dividend on April 15, 2020, payable May 8, 2020. It noted that future dividends depend on results, capital, regulation and other factors. The filing also states that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Track subsequent-quarter loan losses, allowance levels and any COVID-related provision, especially given the large volume of approved payment deferrals and the residential real-estate concentration.
- Monitor deposits, cash, borrowing levels and available liquidity as PPP lending and customer payment relief affect funding needs.
- Assess whether lower rates, deposit repricing and loan growth sustain net interest income and margin.
- Review future mortgage and SBA servicing-asset valuations, prepayment assumptions and impairment charges.
- Confirm PPP loan performance, SBA guaranty coverage and any litigation, regulatory or funding consequences.