MetroCity Bankshares(MCBS) - 2022 Q4 - Annual Report

Part I Business MetroCity Bankshares, Inc. is a bank holding company with $3.43 billion in assets, focusing on diversified lending and banking services for small- to medium-sized businesses and individuals, primarily in Asian-American communities, across 19 branches Company Snapshot (as of December 31, 2022) | Metric | Value | | :--- | :--- | | Total Assets | $3.43 billion | | Total Loans | $3.06 billion | | Total Deposits | $2.67 billion | | Total Shareholders' Equity | $349.4 million | | Full-Service Branches | 19 | - The company operates as a full-service commercial bank with a strategic focus on delivering personalized services to small- to medium-sized businesses and individuals within multi-ethnic communities, predominantly Asian-American, in metropolitan markets across the Eastern U.S. and Texas[20] Lending Activities Loan Portfolio Composition (in thousands) | Loan Category | Dec 31, 2022 Amount | % of Total | Dec 31, 2021 Amount | % of Total | | :--- | :--- | :--- | :--- | :--- | | Construction and Development | $47,779 | 1.6% | $38,857 | 1.6% | | Commercial Real Estate | $657,246 | 21.4% | $520,488 | 20.7% | | Commercial and Industrial | $53,173 | 1.7% | $73,072 | 2.9% | | Residential Real Estate | $2,306,915 | 75.3% | $1,879,012 | 74.8% | | Consumer and other | $216 | — | $79 | — | | Gross loans | $3,065,329 | 100.0% | $2,511,508 | 100.0% | - The bank maintains a significant portfolio of Small Business Administration (SBA) loans. As of December 31, 2022, the commercial real estate SBA portfolio totaled $269.8 million, and the commercial and industrial SBA portfolio was $34.5 million (including PPP loans)[38][39][40] - Residential real estate loans constitute the largest portion of the portfolio, growing to $2.31 billion (75.3% of total loans) at year-end 2022 from $1.88 billion (74.8%) at year-end 2021. The bank primarily originates non-conforming residential mortgage loans[44] Deposits Deposit Profile (as of December 31, 2022) | Metric | Value | | :--- | :--- | | Total Deposits | $2.67 billion | | Demand Deposit Accounts | $761.7 million (28.6% of total) | | Core Deposits | $2.06 billion (77.2% of total) | | Weighted Average Deposit Cost | 0.97% | - The bank utilizes brokered deposits as a funding source, which increased to $523.7 million as of December 31, 2022, from $425.1 million a year prior[55] - Deposit concentration is notable, with the fifteen largest depositor relationships (excluding brokered deposits) accounting for $535.0 million, or 20.1% of total deposits, as of December 31, 2022[56] Human Capital Resources - As of December 31, 2022, the company had approximately 216 full-time equivalent employees, none of whom are represented by a collective bargaining unit[64] Employee Diversity (as of December 31, 2022) | Category | Female | Persons of Color | | :--- | :--- | :--- | | All Employees (216 total) | 80.1% | 96.8% | | Management (46 total) | 67.4% | 93.5% | Regulation and Supervision - The Company is a registered bank holding company supervised by the Federal Reserve, while the Bank is a Georgia state-chartered bank supervised by the FDIC and the GA DBF. Regulations are primarily for the protection of depositors and the financial system[72][73][106] - To be considered "well-capitalized," the Bank must maintain minimum capital ratios, including 6.5% CET1, 8.0% Tier 1, 10.0% Total capital to risk-weighted assets, and a 5.0% leverage ratio. The Bank was well-capitalized as of December 31, 2022[91][94][99] - The Company will adopt the Current Expected Credit Losses (CECL) accounting standard in the first quarter of 2023, which will require recognizing the full amount of expected credit losses for the lifetime of financial assets[98] - Dividend payments from the Bank to the Company are subject to restrictions by the Georgia Department of Banking & Finance (GA DBF) and the FDIC, generally limiting dividends to current and recent retained earnings and requiring the maintenance of adequate capital[101][102] Risk Factors The company faces significant business risks from economic downturns, competition, and real estate loan concentration, alongside regulatory risks from extensive oversight and stock-related risks concerning dividend policy and market perception Risks Related to Our Business - The business is sensitive to general economic conditions, with unfavorable markets potentially leading to credit quality deterioration and reduced demand for products[132] - A significant portion of the loan portfolio (98.3% at year-end 2022) is comprised of real estate loans, exposing the company to risks from negative changes in real estate values and liquidity[147] - The SBA lending program is an important part of the business and is dependent on the U.S. federal government. Changes to the program or loss of SBA Preferred Lender status could adversely affect financial results[149] - The company's marketing focuses on Asian-American communities, making it more susceptible to economic conditions that disproportionately affect this demographic[166] - The transition away from LIBOR to alternative reference rates like SOFR presents risks, although as of December 31, 2022, the company only had six loans tied to LIBOR with balances totaling $23.9 million[187][188] Risks Related to Legislative and Regulatory Events - The company operates in a highly regulated environment, and changes in laws or adverse findings from regulatory examinations could increase costs, restrict activities, and negatively impact financial performance[191][192] - The Federal Reserve requires the company to act as a "source of strength" for the Bank, potentially requiring capital injections into the subsidiary if it experiences financial distress[196] - Failure to comply with the Bank Secrecy Act and other anti-money laundering regulations could result in significant fines, regulatory actions, and reputational damage[197] Risks Related to Our Common Stock - As of December 31, 2022, directors and their affiliates collectively owned 31.5% of the Company, potentially allowing them to influence corporate actions without the consent of other shareholders[200] - The company's dividend policy is not guaranteed and may change. Dividend payments are also restricted by banking regulations and depend on the Bank's ability to distribute earnings to the holding company[208][209] - The company is an "emerging growth company" under the JOBS Act, which allows for reduced regulatory and reporting requirements that may make its common stock less attractive to some investors[212] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[215] Properties The company owns its Atlanta headquarters and leases 18 additional full-service branches across seven states - The Company's headquarters is located at 5114 Buford Highway NE, Atlanta, GA, which is owned by Metro City Bank[216] - The company operates 18 additional full-service branches, all of which are leased[216] Legal Proceedings The company is involved in ordinary course legal actions, none of which are expected to materially adversely affect its financial position or operations - The company is involved in legal actions from time to time in the ordinary course of business, but management does not currently anticipate any material adverse effects from these proceedings[217] Mine Safety Disclosures This item is not applicable to the company - Not applicable[218] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "MCBS", with 174 shareholders of record, a quarterly dividend policy, and a share repurchase program active in Q4 2022 - The company's common stock is listed on the Nasdaq Global Select Market under the symbol "MCBS". As of March 3, 2023, there were 25,143,675 shares outstanding held by approximately 174 shareholders of record[220][221] - The company has a policy of paying quarterly dividends, having done so for the past nine years. Future dividends are subject to board discretion and regulatory restrictions[222][223] Share Repurchases (Q4 2022) | Period | Total Shares Repurchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 2022 | 56,807 | $20.94 | | November 2022 | 38,303 | $21.80 | | December 2022 | 105,598 | $21.61 | | Total Q4 2022 | 200,708 | $21.40 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased to $62.6 million in 2022, driven by higher net interest income and lower loan loss provision, despite reduced noninterest income, while assets grew to $3.43 billion, loans to $3.07 billion, and deposits to $2.67 billion, with net interest margin declining to 3.95% Results of Operations Net Income and Earnings Per Share | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Income | $62.6 million | $61.7 million | $36.4 million | | Basic EPS | $2.46 | $2.41 | $1.42 | | Diluted EPS | $2.44 | $2.39 | $1.41 | - Net interest income increased by 14.8% to $119.6 million in 2022, primarily due to a $661.4 million increase in average loans. However, the net interest margin decreased by 50 basis points to 3.95% as the cost of interest-bearing liabilities rose more significantly than the yield on earning assets[247][250] - A credit provision for loan losses of $2.8 million was recorded in 2022, compared to a $6.9 million provision expense in 2021. The 2022 credit was due to the release of reserves previously allocated for COVID-19 uncertainties[263] - Total noninterest income decreased by 43.2% to $19.2 million in 2022, largely due to an $8.9 million (81.1%) drop in gain on sale of SBA loans and a $4.1 million (69.0%) decrease in SBA servicing income[267][272][274] - Total noninterest expense increased by 4.0% to $50.4 million in 2022, driven by higher FDIC insurance premiums, professional fees, and other operating expenses[285][289] Financial Condition - Total assets increased by 10.3% to $3.43 billion at December 31, 2022, primarily driven by a $550.6 million increase in loans held for investment[298] - Gross loans grew 22.1% to $3.07 billion in 2022, with significant increases in residential real estate (+$427.9 million) and commercial real estate (+$136.8 million)[300] - Nonperforming loans increased to $20.2 million (0.66% of gross loans) at year-end 2022, up from $11.8 million (0.47% of gross loans) at year-end 2021[326][328] - The allowance for loan losses (ALL) decreased to $13.9 million at year-end 2022 from $16.9 million in 2021. The ALL as a percentage of gross loans was 0.45% in 2022, down from 0.67% in 2021[333][337] - Total deposits grew by 17.8% to $2.67 billion in 2022. Brokered deposits increased to $523.7 million, representing 19.6% of total deposits[353][355] Capital Requirements Bank Capital Ratios (as of December 31, 2022) | Ratio | Actual | Well-Capitalized Minimum | | :--- | :--- | :--- | | Total Capital (to Risk Weighted Assets) | 16.61% | 10.00% | | Tier 1 Capital (to Risk Weighted Assets) | 15.93% | 8.00% | | Common Equity Tier 1 (CET1) | 15.93% | 6.50% | | Tier 1 Capital (to Average Assets) | 9.54% | 5.00% | - Both the Company and the Bank exceeded all regulatory capital requirements and were considered "well-capitalized" as of December 31, 2022[365] Quantitative and Qualitative Disclosures About Market Risk The company manages primary interest rate risk via ALCO, using income simulations and EVE analysis, showing short-term liability sensitivity with a 1.60% net interest income decrease in a +200 bps ramp, and an 11.90% EVE decrease in a +200 bps shock - The company's primary source of market risk is identified as interest rate risk, arising from timing differences in repricing assets and liabilities, option risk, yield curve risk, and basis risk[371][373] Net Interest Income Sensitivity (as of Dec 31, 2022) | Rate Scenario (Ramp) | 12 Month Projection | 24 Month Projection | | :--- | :--- | :--- | | +200 bps | (1.60)% | 21.60% | | -100 bps | 2.50% | 12.90% | Economic Value of Equity (EVE) Sensitivity (as of Dec 31, 2022) | Rate Scenario (Shock) | EVE Change | | :--- | :--- | | +300 bps | (17.80)% | | +200 bps | (11.90)% | | +100 bps | (5.90)% | | -100 bps | 6.90% | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2022, including balance sheets, income statements, and cash flows, with an unqualified opinion from Crowe LLP - The report from the independent registered public accounting firm, Crowe LLP, states that the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the three years ended December 31, 2022, in conformity with U.S. GAAP[386] Consolidated Financial Statements Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $3,427,239 | $3,106,158 | | Cash and cash equivalents | $179,485 | $441,341 | | Loans, net | $3,041,801 | $2,488,118 | | Total Liabilities | $3,077,818 | $2,815,935 | | Total deposits | $2,666,838 | $2,263,020 | | FHLB advances | $375,000 | $500,000 | | Total Shareholders' Equity | $349,421 | $290,223 | Consolidated Income Statement Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Interest Income | $119,611 | $104,169 | $66,120 | | Provision for loan losses | $(2,767) | $6,929 | $3,467 | | Noninterest Income | $19,204 | $33,803 | $27,211 | | Noninterest Expense | $50,365 | $48,424 | $41,100 | | Net Income | $62,602 | $61,701 | $36,394 | Notes to Consolidated Financial Statements - The company will adopt the CECL accounting standard on January 1, 2023, and estimates the allowance for loan losses will increase by a range of $3 million to $6 million upon adoption. (Note 1)[481][482] - As of December 31, 2022, the company had $20.2 million in nonperforming loans, including $10.1 million in nonaccrual loans and $9.9 million in accruing troubled debt restructured loans. (Note 3)[326][328] - The company utilizes interest rate swaps and caps as cash flow hedges for its deposit accounts. As of December 31, 2022, the notional amount of swaps was $800.0 million and caps was $50.0 million, with an aggregate unrealized gain of $28.8 million. (Note 10)[538][539] - The company's effective tax rate increased to 31.4% in 2022 from 25.3% in 2021, partly due to a New York State tax examination settlement that resulted in $1.8 million of additional tax expense. (Note 11)[544][550] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[606] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes in Q4 2022 - Management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2022[607] - Based on an assessment using the COSO framework, management determined that the Company's internal control over financial reporting was effective as of December 31, 2022[609] - As an emerging growth company, this report does not include an attestation report from the registered public accounting firm regarding internal control over financial reporting[610] Other Information The company reports no other information for this item - None[614] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement - The required information is incorporated by reference from the Company's 2023 Annual Meeting of Shareholders proxy statement[616] Executive Compensation Information on executive compensation is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement - The required information is incorporated by reference from the Company's 2023 Annual Meeting of Shareholders proxy statement[617] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters This section details equity compensation plans as of December 31, 2022, with other security ownership information incorporated by reference from the 2023 proxy statement Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by shareholders | 240,000 | $12.70 | 1,545,831 | | Not approved by shareholders | — | — | — | | Total | 240,000 | $12.70 | 1,545,831 | - Additional information on security ownership is incorporated by reference from the Company's 2023 Annual Meeting of Shareholders proxy statement[619] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement - The required information is incorporated by reference from the Company's 2023 Annual Meeting of Shareholders proxy statement[620] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement - The required information is incorporated by reference from the Company's 2023 Annual Meeting of Shareholders proxy statement[622] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Annual Report on Form 10-K, including corporate governance documents and certifications - This section includes the list of financial statements filed with the report and a list of all exhibits, such as corporate governance documents, material contracts, and certifications required by the Sarbanes-Oxley Act[625][626][627] Form 10-K Summary The company reports no summary for this item - None[628]