MetroCity Bankshares, Inc. — 2019 Form 10-K
Business context and period. This filing reports the fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter report. MetroCity is a Georgia bank holding company operating Metro City Bank, with 19 branches across seven states and a focus on small and midsize businesses and individuals, particularly in Asian-American communities. The company completed its IPO in October 2019, receiving approximately $13.9 million in net proceeds, and effected a two-for-one stock split in August 2019.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets, year-end | $1.632 billion | $1.433 billion |
| Loans held for investment, gross | $1.163 billion | $1.146 billion |
| Loans held for sale | $85.8 million | $56.9 million |
| Total deposits, year-end | $1.307 billion | $1.244 billion |
| Net interest income | $61.0 million | $58.2 million |
| Noninterest income | $39.9 million | $37.6 million |
| Net income | $44.7 million | $41.3 million |
| Diluted earnings per share | $1.81 | $1.69 |
| Net interest margin | 4.15% | 4.48% |
| Return on average assets / equity | 2.87% / 24.23% | 3.01% / 27.95% |
| Allowance for loan losses | $6.8 million; 0.59% of loans | $6.6 million; 0.58% of loans |
Cash flow and liquidity. Operating cash flow was $32.2 million, compared with an outflow of $161.0 million in 2018; investing cash flow was an outflow of $18.3 million and financing cash flow was $124.1 million. Cash and cash equivalents rose to $276.4 million from $138.4 million. The filing attributes significant cash-flow variability to the origination and sale of mortgage loans held for sale. Net loans were 70.7% of assets and 88.3% of deposits, within the company’s stated limits. Core deposits were reported at 97.1% of deposits.
Debt and capital. Year-end borrowings included $60.0 million of Federal Home Loan Bank advances and $3.1 million of other borrowings; operating lease liabilities were $12.5 million. The Bank was well-capitalized: its CET1 ratio was 19.70%, total risk-based capital ratio 20.40%, and leverage ratio 11.74%. Shareholders’ equity was $216.7 million, versus $168.6 million in 2018.
Material changes versus 2018
- Net income increased 8.2%, supported by higher net interest income and noninterest income, and no loan-loss provision in 2019 versus $1.2 million in 2018.
- Net interest margin narrowed by 33 basis points as the cost of interest-bearing liabilities rose to 2.15% from 1.60%; deposit costs increased amid competition and promotional rates.
- Nonperforming loans increased to $14.7 million, or 1.26% of gross loans, from $9.0 million, or 0.78%. The increase included growth in nonaccrual residential and construction loans. Nonperforming assets were $15.1 million, or 0.93% of assets.
- Residential real estate loans remained the largest portfolio segment at 56.0% of loans; commercial real estate was 36.5%. Approximately 95.3% of gross loans were secured by real property.
- Deposits increased 5.1%; brokered deposits declined to zero from $53.5 million. FHLB advances rose from zero to $60.0 million.
- Mortgage-loan gains increased, while mortgage servicing income declined 22.5% to $9.3 million. Mortgage loans serviced for others grew to $1.17 billion.
Outlook, commentary, risks and unusual items
The filing provides no quantified earnings, revenue, margin or growth guidance. Management describes a strategy of organic growth through its branch network and relationship-based lending, while emphasizing disciplined underwriting, deposit gathering and cost control. Management says the allowance is adequate, but notes that credit quality and future losses may worsen if economic or real estate conditions weaken.
- Credit and concentration: The portfolio is heavily real-estate-secured and includes commercial real estate, hospitality and small-business exposures. Nonaccrual residential loans rose materially; the company reported their weighted-average LTV below 55%. The allowance covered 46.5% of nonperforming loans.
- Funding and rates: Deposit competition and rising funding costs pressured margin. Large business deposits can fluctuate; the filing also identifies reliance on brokered and wholesale funding as a liquidity risk, although no brokered deposits remained at year-end.
- Mortgage and SBA businesses: Loan-sale volumes, purchaser concentration, sale premiums, servicing-asset valuations, repurchase demands and SBA program or guarantee changes can affect revenue and liquidity. Servicing asset values depend on assumptions including prepayment speeds and discount rates.
- Other risks: The filing highlights geographic and customer-segment concentration, competition, interest-rate and LIBOR transition risk, regulatory and capital requirements, cybersecurity and third-party systems, and execution risks from growth or acquisitions. COVID-19 is identified as a potential risk to future performance; the filing does not quantify its impact.
- Unusual items and contingencies: Adoption of lease accounting added a $12.0 million right-of-use asset and $12.5 million lease liability at year-end. The company reported ordinary-course legal matters and did not expect them to have a material effect. It reported no material off-balance-sheet losses expected; commitments to extend credit and standby letters of credit totaled $69.5 million.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because the company was an emerging growth company.
Important facts for investors to verify
- Whether the increase in nonperforming loans and the 46.5% allowance coverage indicate a need for higher provisions, particularly under weaker economic conditions.
- Whether deposit costs stabilize and the reported margin sensitivity remains favorable; management’s 12-month simulation estimated net interest income up 5.00% under a +200-basis-point scenario and down 1.30% under a −100-basis-point scenario.
- Whether mortgage and SBA loan-sale volumes, premiums and servicing-asset assumptions are sustainable, and how concentrated the secondary-market counterparties are.
- How the $60.0 million of FHLB advances, deposit maturities and available borrowing capacity affect funding costs and liquidity.
- The future impact of COVID-19, CECL adoption (then scheduled for 2023), public-company costs, and any subsequent regulatory, credit or litigation developments.