MetroCity Bankshares, Inc.  (NASDAQ: MCBS), holding company for Metro City Bank, today reported net income of $9.4 million, or $0.36 per diluted share, for the third quarter of 2020, compared to $7.7 million, or $0.30 per diluted share, for the second quarter of 2020, and $12.4 million, or $0.50 per diluted share, for the third quarter of 2019.

Third Quarter 2020 Highlights:

• Annualized return on average assets was 2.20%, compared to 1.89% for the second quarter of 2020 and 3.07% for the third quarter of 2019.
• Annualized return on average equity was 16.22%, compared to 13.92% for the second quarter of 2020 and 26.44% for the third quarter of 2019.
• Efficiency ratio of 42.5%, compared to 45.6% for the second quarter of 2020 and 37.7% for the third quarter of 2019.
• Total loans increased by $94.9 million, or 7.0%, to $1.46 billion from the previous quarter.
• Annualized net charge-off to average loans for the quarter was 0.00%, compared to 0.01% for the second quarter of 2020 and a net recovery ratio of 0.11% for the third quarter of 2019.

COVID-19 Pandemic

The Company prioritizes the health and safety of its employees and customers, and has taken protective measures such as implementing remote work arrangements to the fullest extent possible and by adjusting banking center hours and operational measures to promote social distancing, and it will continue to do so throughout the duration of the pandemic. At the same time, the Company continues to closely monitor the effects of the COVID-19 pandemic on our loan and deposit customers, and is assessing the risks in our loan portfolio and working with our customers to reduce the pandemic's impact on them while minimizing losses for the Company. In addition, the Company remains focused on improving shareholder value, managing credit exposure, monitoring expenses, enhancing the customer experience and supporting the communities it serves.

We have implemented loan programs to allow customers who are experiencing hardships from the COVID-19 pandemic to defer loan principal and interest payments for up to six months. The Small Business Administration (SBA) also guaranteed the principal and interest payments of all our SBA loan customers for six months through the end of September 2020. As of September 30, 2020, we had 24 non-SBA commercial customers with outstanding loan balances totaling $82.5 million who were approved for a second round of payment deferrals. This is a significant decline from the first round of payment deferrals that were granted to our non-SBA commercial customers (89 non-SBA commercial customers with outstanding balances totaling $157.5 million as of June 30, 2020). Included in the second round of non-SBA payment deferrals were 15 loans totaling $61.5 million with a weighted average loan-to-value ("LTV") of 54.6% in the hotel industry and only one loan totaling $495,000 in the restaurant industry, which are two industries heavily impacted by the COVID-19 pandemic. As of September 30, 2020, the Company had 50 loans totaling $122.9 million in the hotel industry and 116 loans totaling $35.6 million in the restaurant industry.

As a preferred SBA lender, we participated in the SBA Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act to help provide loans to our business customers in need. As of September 30, 2020, the Company had approved and funded over 1,800 PPP loans totaling $96.9 million. The PPP loans were funded with our current cash balances. As of October 22, 2020, none of our PPP loans had been granted a loan forgiveness by the SBA.

As of September 30, 2020, our residential real estate loan portfolio made up 56.7% of our total loan portfolio and had a weighted average amortized LTV of approximately 55.8%. As of September 30, 2020, only 1.7% of our residential mortgages had been granted a second hardship payment deferral covering principal and interest payments for up to three months. This is a significant decrease from the first round of payment deferrals granted during the second quarter of 2020, which made up 19.2% of our residential mortgage balances as of June 30, 2020.

Based on the Company's capital levels, conservative underwriting policies, low loan-to-value ratios, and strong liquidity position, management expects to be able to assist the Company's customers and communities during these difficult times, manage the economic risks and uncertainties associated with the COVID-19 pandemic and remain adequately capitalized.

Results of Operations

Net Income

Net income was $9.4 million for the third quarter of 2020, an increase of $1.7 million, or 21.3%, from $7.7 million for the second quarter of 2020. This increase was primarily due to the increase in noninterest income of $2.5 million, partially offset by the increase in provision for loan losses of $389,000 and the increase in noninterest expense of $426,000 while net interest income remained flat. Net income decreased $3.0 million, or 24.0%, in the third quarter of 2020 compared to net income of $12.4 million for the third quarter of 2019. This decrease was primarily due to the decrease in noninterest income of $3.0 million and a $1.5 million increase in provision for loan losses, partially offset by the decrease in provision for income taxes of $1.5 while net interest income and noninterest expense remained flat.

Net Interest Income and Net Interest Margin

Interest income totaled $18.1 million for the third quarter of 2020, a decrease of $952,000, or 5.0%, from the previous quarter, primarily due to a 64 basis points decrease in the yield on average loans. We recognized no PPP loan fee income during the third quarter of 2020 compared to $1.2 million recognized during the second quarter of 2020 as we reevaluated the estimated life of our PPP loan fee amortization period, extending it from 9 months to 24 months due to the uncertainty of the PPP loan forgiveness process. As compared to the third quarter of 2019, interest income decreased by $3.8 million, or 17.2%, primarily due to a 117 basis points decrease in the yield on average loans.

Interest expense totaled $2.2 million for the third quarter of 2020, a decrease of $1.0 million, or 32.3%, from the previous quarter, primarily due to a 44 basis points decrease in deposit costs coupled with a $34.0 million decrease in average balances for total interest-bearing deposits. As compared to the third quarter of 2019, interest expense decreased by $3.7 million, or 63.0%, primarily due to a 135 basis points decrease in deposit costs coupled with a $270.1 million decrease in average time deposit balances.

The net interest margin for the third quarter of 2020 was 3.97% compared to 4.09% for the previous quarter, a decrease of 12 basis points. The cost of interest-bearing liabilities for the third quarter of 2020 decreased by 41 basis points to 0.91% compared with the previous quarter, while the yield on interest-earning assets for the third quarter of 2020 decreased by 42 basis points to 4.51% from 4.93% for the previous quarter. Average earning assets increased by $42.4 million from the previous quarter, primarily due to an increase in average loans of $76.9 million, offset by a $34.3 million decrease in average interest-earning cash accounts. Average interest-bearing liabilities decreased by $32.5 million from the previous quarter as average interest-bearing deposits decreased by $34.0 million and average borrowings increased by only $1.5 million. The inclusion of PPP loan average balances had a 36 basis points impact on the yield on average loans and a 25 basis points impact on the net interest margin.

As compared to the same period a year ago, the net interest margin for the third quarter of 2020 decreased by 25 basis points to 3.97% from 4.22%, primarily due to a 132 basis point decrease in the cost of interest-bearing liabilities of $954.7 million and a decrease of 127 basis points in the yield on average interest-earning assets of $1.60 billion. Average earning assets increased by $95.4 million from the third quarter of 2019, primarily due to an increase of $25.0 million in securities purchased under agreements to resell and a $77.2 million increase in average loans. Average interest-bearing liabilities decreased by $101.9 million from the third quarter of 2019, primarily driven by a decrease in average interest-bearing deposits of $149.4 million, offset by an increase in average borrowings of $47.5 million.

Noninterest Income

Noninterest income for the third quarter of 2020 was $8.0 million, an increase of $2.5 million, or 44.8%, from the second quarter of 2020, primarily due to a $1.7 million fair value adjustment gain on our SBA servicing asset and higher mortgage loan fees as mortgage volume significantly increased during the quarter. We also recorded a $89,000 fair value impairment charge on our mortgage servicing asset. These servicing asset adjustments had a $0.05 per share impact on our diluted earnings per share for the quarter.

Compared to the same period a year ago, noninterest income for the quarter decreased by $3.0 million, or 27.6%, primarily due to the decrease in mortgage loan fees, mortgage servicing income and gains earned from the sales of mortgage loans. Mortgage loan originations totaled $120.3 million during the third quarter of 2020 compared to $163.5 million during the third quarter of 2019. There were no mortgage loan sales during the third quarter of 2020 compared to mortgage loan sales of $152.5 million during the same period a year ago.

Noninterest Expense

Noninterest expense for the third quarter of 2020 totaled $10.2 million, an increase of $426,000, or 4.4%, from $9.7 million for the second quarter of 2020. The increase was primarily attributable to higher salaries and employee benefits. Noninterest expense remained flat compared to the third quarter of 2019.

The Company's efficiency ratio was 42.5% in the third quarter of 2020 compared with 45.6% and 37.7% for the second quarter of 2020 and third quarter of 2019, respectively. For the nine months ended September 30, 2020, the efficiency ratio was 43.7% compared with 39.4% for the same period in 2019.

Income Tax Expense

The Company's effective tax rate for the third quarter of 2020 was 23.7%, compared to 26.7% for the second quarter of 2020 and 26.5% for the third quarter of 2019. The decrease in the effective tax rate for the third quarter of 2020 was due to Georgia state tax credits recognized during the quarter.

Balance Sheet

Total Assets

Total assets were $1.74 billion at September 30, 2020, an increase of $18.1 million, or 1.1%, from $1.72 billion at June 30, 2020, and an increase of $95.1 million, or 5.8%, from $1.64 billion at September 30, 2019. The $18.1 million increase from the prior quarter was primarily due to increases in loans of $94.9 million and bank owned life insurance of $15.1 million, partially offset by a $99.1 million decrease in cash and due from banks. The $95.1 million increase from the prior year quarter was primarily due to increases in securities purchased under agreements to resell of $25.0 million, loans of $200.9 million, and bank owned life insurance of $15.5 million, partially offset by a $155.7 million decrease in cash and due from banks.

Loans

Loans held for investment at September 30, 2020, were $1.46 billion, an increase of $94.9 million, or 7.0%, compared to $1.36 billion at June 30, 2020, and an increase of $200.9 million, or 16.0%, compared to $1.26 billion at September 30, 2019. The increase from prior quarter was primarily due to a $75.8 million increase in residential mortgages, $18.6 million increase in commercial real estate loans and a $5.3 million increase in commercial and industrial loans. Included in commercial and industrial loans are PPP loans totaling $96.9 million as of September 30, 2020. There were no loans classified as held for sale at September 30, 2020, June 30, 2020 or September 30, 2019.

Deposits

Total deposits at September 30, 2020 were $1.34 billion, a decrease of $12.1 million, or 0.9%, compared to total deposits of $1.35 billion at June 30, 2020, and slight increase of $2.4 million, or 0.2%, compared to total deposits of $1.34 billion at September 30, 2019. The decrease from the prior quarter was primarily due to the $110.2 million decrease in time deposits, partially offset by a $82.0 million increase in money market accounts and an $11.5 million increase in noninterest bearing deposits. The increase in money market accounts was partially due to the addition of a $40.0 million brokered money market account during the quarter.

Noninterest bearing deposits were $460.7 million at September 30, 2020, compared to $449.2 million at June 30, 2020, and $311.2 million at September 30, 2019. Noninterest bearing deposits constituted 34.4% of total deposits at September 30, 2020, compared to 33.3% at June 30, 2020, and 23.3% at September 30, 2019. Interest bearing deposits were $877.1 million at September 30, 2020, compared to $900.7 million at June 30, 2020, and $1.0 billion at September 30, 2019. Interest bearing deposits constituted 65.6% of total deposits at September 30, 2020, compared to 66.7% at June 30, 2020, and 76.7% at September 30, 2019.

Asset Quality

The Company recorded provision for loan losses of $1.5 million during the third quarter of 2020. Annualized net charge-offs to average loans for the third quarter of 2020 was 0.00%, compared to 0.01% for the second quarter of 2020, and a net recovery of 0.11% for the third quarter of 2019. We continue to increase the qualitative factors in our allowance for loan losses calculation for the economic uncertainties caused by the COVID-19 pandemic resulting in the increased provision expense recorded during the quarter. The Company is not required to implement the provisions of the current expected credit losses accounting standard issued by the Financial Accounting Standards Board in the Accounting Standards Update No. 2016-13 until January 1, 2023, and is continuing to account for the allowance for loan losses under the incurred loss model.

Nonperforming assets totaled $17.5 million, or 1.01% of total assets, at September 30, 2020, an increase of $3.8 million from $13.7 million, or 0.79% of total assets, at June 30, 2020, and an increase of $2.6 million from $14.9 million, or 0.91% of total assets, at September 30, 2019. The increase during the quarter was primarily due to a $4.6 million increase in accruing troubled debt restructured loans, offset by a $605,000 decrease in nonaccrual loans and $141,000 decrease in other real estate owned.

Allowance for loan losses as a percentage of total loans was 0.64% at September 30, 2020, compared to 0.58% at June 30, 2020 and 0.54% at September 30, 2019. Excluding outstanding PPP loans of $96.9 million as of September 30, 2020, the allowance for loan losses as a percentage of total loans was 0.68%. Allowance for loan losses as a percentage of nonperforming loans was 54.24% at September 30, 2020, compared to 59.66% and 47.19% at June 30, 2020 and September 30, 2019, respectively.

About MetroCity Bankshares, Inc.

MetroCity Bankshares, Inc. is a Georgia corporation and a bank holding company for its wholly-owned banking subsidiary, Metro City Bank, which is headquartered in the Atlanta metropolitan area. Founded in 2006, Metro City Bank currently operates 19 full-service branch locations in multi-ethnic communities in Alabama, Florida, Georgia, New York, New Jersey, Texas and Virginia. To learn more about Metro City Bank, visit www.metrocitybank.bank.