MetroCity Bankshares, Inc. — Q3 2021 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2021. The company operates Metro City Bank, a community bank with 19 branches in seven states. It focuses on small and midsized businesses and individuals, with substantial residential mortgage and SBA lending and servicing activity. Unless noted, amounts below are in U.S. dollars.
Financial performance and condition
- Quarterly earnings: Net income was $16.9 million, up 79.9% from $9.4 million in Q3 2020. Basic and diluted EPS were both $0.66, compared with $0.37 and $0.36, respectively.
- Nine-month earnings: Net income was $44.3 million, up 64.3% from $26.9 million. Basic EPS was $1.73 versus $1.05; diluted EPS was $1.71 versus $1.05.
- Interest income and margin: Q3 net interest income rose to $28.2 million from $15.9 million; nine-month net interest income rose to $74.5 million from $47.7 million. Net interest margin was 4.57% for Q3 and 4.59% for the nine months, versus 3.97% and 4.08% in the comparable 2020 periods. Management attributed improvement principally to loan growth and lower deposit funding costs.
- Other income and costs: Noninterest income was $9.5 million in Q3, up 19.7%, and $26.3 million for nine months, up 24.9%. Noninterest expense increased 29.2% in Q3 to $13.1 million and 19.6% for nine months to $35.9 million, including higher loan-related commissions and mortgage, real-estate-owned, operating and customer-service expenses. The reported efficiency ratio was 34.76% for Q3 and 35.61% year to date, improved from 42.46% and 43.66%.
- Credit provision and asset quality: Provision for loan losses was $2.6 million in Q3 and $6.4 million for nine months, versus $1.5 million and $2.5 million. The allowance was $16.4 million, or 0.69% of gross loans, versus $10.1 million and 0.64% at year-end 2020. Nonperforming loans were $8.7 million (0.37% of gross loans), down from $13.1 million (0.80%); nonperforming assets were $13.1 million. Net charge-offs were low: $73,000 for nine months.
- Balance sheet and funding: Total assets were $2.75 billion, up 44.9% from year-end 2020. Gross loans were $2.37 billion, up 44.9%, with residential real estate representing 72.6% of the portfolio. Deposits increased 42.7% to $2.11 billion; noninterest-bearing deposits were 30.3%. Brokered deposits rose to $423.7 million, or 20.1% of deposits, from $162.9 million, or 11.0%. FHLB advances increased to $300 million from $110 million.
- Liquidity and cash flow: Cash and cash equivalents were $253.3 million, up from $150.7 million at year-end. For nine months, operating cash flow was $54.9 million, investing cash outflow was $760.4 million—principally reflecting $732.2 million of net loan growth—and financing cash inflow was $808.1 million, chiefly from deposit growth and FHLB advances. Available sources included $456.1 million of additional FHLB borrowing capacity, $47.5 million in unused correspondent-bank lines and $10 million at the Federal Reserve discount window.
- Capital and shareholder returns: Bank regulatory capital ratios remained above well-capitalized thresholds: total risk-based capital was 17.03%, Tier 1 risk-based capital and CET1 were each 16.00%, and Tier 1 leverage was 9.96%. The company repurchased 310,809 shares for $5.5 million in the first nine months. It paid $0.32 per share in dividends during that period and declared a further $0.14 per share dividend in October.
Material changes versus comparable periods
- Loan growth, especially residential mortgages, was the principal driver of higher interest income and total assets. Residential loans increased 76.4% from year-end 2020; commercial and industrial loans declined 40.2%.
- Deposit costs fell: the nine-month average cost of interest-bearing deposits declined to 0.30% from 1.41%, contributing to higher net interest margin. Deposit balances also grew substantially, including increased brokered funding.
- Mortgage originations reached $959.0 million for nine months, versus $289.3 million a year earlier. The company retained residential mortgage loans for investment rather than selling them; there were no residential mortgage loan sales in the 2021 periods reported.
- Mortgage servicing income shifted to a $659,000 net expense for nine months, from $1.4 million of income, while SBA loan sale gains increased to $8.1 million from $4.8 million.
- Common equity to assets declined to 10.04% from 13.63% at September 30, 2020, and the leverage ratio declined to 10.34% from 13.44%, alongside significant balance-sheet growth.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, growth or margin guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- COVID-19 remained an uncertainty, including variants and the pace of economic recovery. At September 30, approved payment deferrals included $8.1 million of non-SBA commercial loans, $2.5 million of residential mortgages and six SBA loans with $11.7 million gross balances ($2.9 million unguaranteed). Management reported no deferred loans delinquent or on nonaccrual status; deferrals had declined from year-end 2020.
- Management identified $247.9 million, or 10.5% of loans, in sectors considered particularly pandemic-sensitive, including $128.3 million in hotels and $41.4 million in restaurants. It cited real-estate concentration, borrower repayment capacity, collateral values, funding costs, interest rates, deposit concentration, brokered funding and liquidity as risks.
- Interest-rate models showed projected net interest income sensitivity at September 30 of -1.20% under a +200-basis-point ramp and -0.90% under a -100-basis-point ramp over 12 months; over 24 months, the modeled changes were -6.10% and -11.00%. These are simulations, not forecasts, and depend on assumptions.
- The company entered two $50 million interest-rate swaps designated as cash-flow hedges; their aggregate fair value was a $200,000 liability at September 30. The company also expects to adopt CECL on January 1, 2023 and was preparing an expected-credit-loss model.
- Management said outstanding legal matters were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether rapid loan growth—particularly in residential mortgages—and the 72.6% residential portfolio concentration remain consistent with prudent underwriting and adequate reserves.
- Whether credit quality and the allowance remain adequate as COVID-related accommodations expire and pandemic-sensitive borrowers are monitored.
- How the higher brokered-deposit share and increased FHLB borrowings affect funding stability, costs and liquidity.
- Whether reported earnings and margins are sustainable given loan-sale and servicing income changes, rising operating expenses and modeled interest-rate sensitivity.
- Whether regulatory capital remains comfortably above requirements as assets grow, and how repurchases and dividends affect capital and liquidity.