MetroCity Bankshares, Inc. — Q2 2023 Form 10-Q
Business context and period. Community banking holding company operating through Metro City Bank, with 20 branches in seven states. This unaudited report covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are in U.S. dollars unless noted.
Financial performance and condition
| Metric | Q2 / June 30, 2023 | Comparable period / prior date |
|---|---|---|
| Interest income | $47.5 million | Q2 2022: $33.0 million |
| Net interest income | $25.0 million | Q2 2022: $30.2 million |
| Net interest margin | 3.10% | Q2 2022: 4.26% |
| Net income | $13.1 million; diluted EPS $0.51 | Q2 2022: $16.1 million; diluted EPS $0.63 |
| Six-month net income | $28.8 million; diluted EPS $1.13 | Six months 2022: $35.5 million; diluted EPS $1.38 |
| Noninterest income / expense | Q2: $4.8 million / $11.5 million | Q2 2022: $4.7 million / $13.1 million |
| Cash and cash equivalents | $262.7 million | December 31, 2022: $179.5 million |
| Total assets | $3.48 billion | December 31, 2022: $3.43 billion |
| Loans, net of allowance | $3.00 billion | December 31, 2022: $3.04 billion |
| Deposits | $2.70 billion | December 31, 2022: $2.67 billion |
| FHLB advances | $325.0 million | December 31, 2022: $375.0 million |
| Shareholders’ equity | $373.2 million | December 31, 2022: $349.4 million |
- Earnings and margins: Q2 net income fell 18.6% year over year; first-half net income fell 18.8%. For the first half, net interest income decreased $9.7 million to $51.2 million. Higher loan yields and average loan balances lifted interest income, but sharply higher deposit and borrowing costs more than offset the increase. Q2 cost of deposits was 3.88%, versus 0.55% a year earlier.
- Cash flow: First-half operating cash flow was $72.7 million, down from $145.7 million in 2022. Investing activities provided $38.5 million, compared with $363.0 million used in 2022; financing activities used $28.0 million. Cash and cash equivalents increased $83.2 million during the half.
- Credit and asset quality: The allowance for credit losses (ACL) was $18.1 million, or 0.60% of gross loans. Nonperforming loans were $22.6 million (0.75% of gross loans), versus $20.2 million at year-end; nonperforming assets were $23.6 million. Six-month net charge-offs were $434,000.
- Liquidity and capital: Deposits increased 1.2% from year-end. Uninsured deposits were 30.7% of deposits, down from 32.5%; brokered deposits were $498.1 million, or 18.5%. Reported additional borrowing capacity was approximately $1.19 billion across the FHLB, Federal Reserve Discount Window and correspondent-bank lines. The Bank was reported well capitalized; its CET1 ratio was 16.66% and total risk-based capital ratio was 17.56%.
- Other items: First-half other comprehensive income was $7.6 million, including gains on cash-flow hedges. Interest-rate derivatives had a reported fair value of $39.3 million at June 30. The company declared a subsequent $0.18-per-share dividend on July 19, payable August 11, 2023.
Material changes versus comparable periods
- Q2 interest income rose 43.8% year over year, but interest expense increased $19.7 million to $22.5 million. Net interest margin contracted 116 basis points.
- First-half net interest income declined 15.9%, despite a 43.8% increase in interest income, as deposit and borrowing costs rose substantially. First-half deposit cost was 3.69%, versus 0.41% in 2022.
- Mortgage production and related fee income fell considerably: first-half mortgage originations were $116.2 million versus $489.9 million. No residential mortgage loans were sold in the first half of 2023.
- First-half SBA loan sales increased to $66.8 million from $22.9 million, and SBA servicing income improved. Lower noninterest expense partly offset weaker net interest income and fee income.
- Gross loans declined 1.2% from year-end, including lower commercial real estate and residential real estate balances. Residential real estate loans remained 75.6% of gross loans.
Outlook, commentary, risks and contingencies
- No specific earnings, margin, growth or other financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Management described liquidity and capital as robust amid 2023 banking-sector volatility and reported proactive client outreach and funding actions. Its interest-rate simulations estimated that a gradual 200-basis-point increase would raise net interest income 1.9% over 12 months and 20.5% over 24 months; these are model scenarios, not forecasts, and depend on assumptions.
- Key stated risks include rising funding costs and deposit competition, interest-rate and liquidity exposure, economic weakness, real-estate and borrower credit risks, and the concentration of loans in real estate. Uninsured and brokered deposits, market confidence, and reliance on wholesale funding are also relevant considerations.
- The company adopted CECL on January 1, 2023. Adoption increased the loan ACL by $5.1 million, established a $239,000 allowance for unfunded commitments, and reduced retained earnings by $3.8 million net of deferred tax effects. Management notes that CECL estimates may increase earnings volatility.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting identified during the quarter.
Important facts for investors to verify
- Whether deposit pricing and funding mix stabilize enough to arrest further net interest margin compression.
- Deposit retention, uninsured and brokered deposit levels, and the actual availability and cost of contingent borrowing capacity.
- Trends in delinquencies, nonaccrual loans, nonperforming assets, charge-offs and CECL allowance assumptions, particularly in the real-estate-heavy loan portfolio.
- Whether mortgage and SBA production, loan sales, servicing valuations and related fee income recover or remain volatile.
- The assumptions and sensitivity underlying management’s interest-rate and liquidity scenarios, and any subsequent changes in capital, liquidity or credit quality.