Metrocity Bankshares, Inc. quarterly report, Q3 FY2020

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MetroCity Bankshares, Inc. — Q3 2020 Form 10-Q

Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. MetroCity operates a community bank with 19 branches across seven states, focused on small and mid-sized businesses and individuals. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial results and condition

  • Profit: Q3 net income was $9.4 million, down 24.0% from $12.4 million a year earlier; diluted EPS was $0.36 versus $0.50. Nine-month net income was $26.9 million, down 20.9% from $34.0 million; diluted EPS was $1.05 versus $1.39.
  • Interest income and margin: Q3 interest income was $18.1 million, down 17.2%; net interest income was $15.9 million, nearly flat year over year. Q3 net interest margin was 3.97%, down 25 basis points year over year. For nine months, net interest income was $47.7 million versus $46.0 million, while margin was 4.08% versus 4.27%.
  • Other income and expenses: Q3 noninterest income fell 27.6% to $8.0 million, mainly reflecting lower mortgage-related income and servicing income; SBA servicing income increased. Nine-month noninterest income fell 31.0% to $21.1 million. Noninterest expense was essentially unchanged at $10.2 million for Q3 and declined 0.5% to $30.0 million for nine months.
  • Credit costs and asset quality: The company recorded a $1.45 million Q3 provision and $2.51 million for nine months, compared with none in 2019. The allowance for loan losses was $9.3 million, or 0.64% of gross loans (0.68% excluding PPP loans). Nonperforming loans were $17.2 million, including $7.5 million of accruing troubled debt restructurings; nonperforming assets were 1.01% of total assets.
  • Balance sheet and liquidity: Total assets rose 6.6% from year-end to $1.74 billion. Gross loans increased 25.9% to $1.46 billion, including $96.9 million of PPP loans. Deposits rose 2.3% to $1.34 billion; noninterest-bearing deposits increased to 34.4% of deposits. Cash and cash equivalents were $126.5 million, down from $276.4 million at year-end. The company also held $40 million under resale agreements.
  • Cash flow: For the first nine months, operating activities provided $133.7 million, investing activities used $343.4 million, and financing activities provided $59.8 million. Cash and cash equivalents declined $149.9 million during the period.
  • Borrowings and capital: FHLB advances were $100 million, up from $60 million at year-end; other borrowings were $0.5 million. The bank reported a 20.52% total risk-based capital ratio and was categorized as well capitalized. FHLB borrowing capacity was $517.8 million, with $417.8 million of additional availability; unused correspondent-bank lines totaled $47.5 million.

Material changes versus comparable periods

  • Lower market rates reduced asset yields and interest income, while a sharp reduction in deposit costs helped hold quarterly net interest income nearly level. Management attributed the year-over-year margin decline to asset yields falling more than funding costs.
  • Loan balances grew substantially, notably residential real estate and commercial and industrial loans. PPP lending contributed $96.9 million to reported loans and supported customer deposits.
  • Mortgage-related income declined, including lower residential mortgage originations and no residential mortgage loan sales in Q3. SBA loan-sale gains and SBA servicing income increased.
  • The company increased its allowance and provision in response to COVID-19-related economic uncertainty. Q3 net charge-offs were minimal.

Outlook, commentary and risks

  • The filing gives no quantitative earnings or financial guidance. Management says COVID-19’s full impact is unknown and cannot yet be reasonably estimated; results for the interim periods are not necessarily indicative of full-year results.
  • As of September 30, 24 non-SBA commercial borrowers with $82.5 million in balances and residential borrowers with $14.5 million had been approved for a second round of deferrals. The commercial deferral balance had fallen from $157.5 million at June 30. Separately, 32 SBA loans totaling $41.6 million had recently received deferrals. COVID-related deferrals are excluded from reported past-due and nonperforming balances under the stated accounting treatment.
  • Hotels and restaurants were notable areas of exposure: hotel loans totaled $122.9 million and restaurant loans $35.6 million, together 10.8% of the loan portfolio. The company reported that 16.2% of the portfolio was in sectors it considered especially sensitive to the pandemic.
  • Management identified potential risks including further credit deterioration, collateral-value declines, additional loan-loss provisions, liquidity or capital pressure, and uncertainty around economic recovery and government support. Interest-rate sensitivity modeling showed projected net interest income increased 2.8% over 12 months under a +200-basis-point scenario and declined 4.9% over 24 months under a -100-basis-point scenario; these are simulations, not forecasts.
  • Management said outstanding legal proceedings were not expected to have a material adverse effect. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported. A $0.09-per-share dividend was declared October 21, payable November 13, 2020.

Key facts investors should verify

  1. Whether credit quality, deferral activity and the allowance remain adequate as pandemic-related borrower relief expires; deferrals are excluded from reported delinquency measures.
  2. Performance and concentration of hotel, restaurant, commercial real estate and residential mortgage exposures, including collateral values and loan-to-value assumptions.
  3. How PPP balances, forgiveness timing and associated fees affect loan growth, income and deposits.
  4. Whether reduced mortgage production and servicing income persist, and whether SBA servicing-asset fair-value gains are sustainable.
  5. Liquidity and funding trends, including the decline in cash, growth in FHLB advances and use of brokered deposits.
  6. Reported figures and definitions when comparing periods: the filing’s selected-data table shows nine-month net interest income of $47.962 million, while the consolidated income statement and MD&A report $47.692 million.