MetroCity Bankshares (MCBS) Q3 2026 earnings review
Tax credits lift MetroCity profit, while pre-tax earnings fall
MetroCity Bankshares, a community bank operating across eight states, posted higher bottom-line profit only because a one-time tax credit offset a drop in pre-tax earnings. Reported net income rose 10% from last quarter to $24 million after a $4 million tax credit cut its tax bill in half. Before taxes, profit fell 9% by our math as the bank sold fewer small business loans and its lending spread narrowed slightly.
| Loans, excluding the First IC acquisition | +0.4% from a year ago by our math (reported: +34%) |
|---|---|
| Net income | $24.3M +10% from last quarter (+41% from a year ago) |
| Profit before taxes | $28.0M -9% from last quarter by our math |
| Net interest margin | 4.07% down from 4.11% last quarter |
⚖️ Verdict: 🔴 Bearish
The story got worse because core earnings slipped and the loan book continued to shrink after last year's acquisition of First IC Bank. Stripping out the loans bought at closing, underlying loans grew 0.4% from a year ago by our math, and total loans have dropped by $98 million since December. On the bright side, customers added $45 million to checking accounts that pay no interest, and problem loans fell by more than a quarter.
The question now is whether the bank can grow its loan portfolio and cut duplicate branch costs enough to replace this quarter's tax benefit. Either loan balances turn upward and recent branch closures trim staff costs, or pre-tax earnings keep sliding as the post-merger boost fades. Fourth-quarter loan balances and the tax rate will tell.
🐂 Bull Case
Interest-Free Checking Accounts Lifted Total Deposits
MetroCity gathers deposits across 27 branches in eight states to fund its real estate and small business loans. Total deposits rose by $72.7 million, or 2.1%, from last quarter to $3.56 billion. Customers added $45.3 million to checking accounts that pay no interest, lifting those free balances to 23.3% of all deposits, up from 22.4% in the second quarter.
This shift matters because free checking accounts keep funding costs down when interest rates change. That helped the Atlanta lender hold its overall funding cost steady at 3.36% of interest-bearing liabilities and pay down average borrowings by $34.8 million. When we strip out the $877.4 million of deposits bought with First IC Bank in late 2025, underlying deposits sit 0.3% below a year ago by our math.
What to watch: the share of deposits that pay no interest in the fourth quarter. A further rise above 23.3% would help the bank defend its lending spread even if loan yields keep slipping.
Problem Loans Fell as Past-Due Accounts Cleared
Nonperforming loans — loans where borrowers have stopped paying or fallen 90 days behind — dropped by $6.4 million, or 28.4%, from last quarter to $16.1 million. That reduced problem loans to 0.41% of the loan book, down from 0.57% in June. Most of the improvement came as $4.0 million of loans that were 90 days overdue in the second quarter cleared off the list.
Foreclosed property rose by $3.2 million to $4.5 million, "including $3.4 million of branches taken out of service" after the First IC acquisition rather than defaulted borrower properties, MetroCity said. Because actual problem loans shrank while the reserve for bad loans stayed at 0.65% of total loans, the reserve now covers 159.8% of nonperforming loans, up from 114.6% last quarter.
What to watch: loans 90 days past due and nonaccrual loans in the fourth-quarter report. Staying near 0.41% of total loans would show that the acquired First IC book carries clean credit quality.
🐻 Bear Case
A One-Time Tax Credit Drove the Profit Increase
MetroCity led its release with net income of $24.3 million, up 9.8% from last quarter and 40.7% from a year ago. That headline increase came from the tax line rather than banking operations. Income tax expense fell by $4.8 million from the second quarter, "including a $4.0 million tax credit benefit" from the "utilization of tax credits during the current period", the company said.
- Effective tax rate: 13.1%, down from 27.7% last quarter and 27.6% a year ago
- Profit before taxes: $28.0 million, down 8.7% from $30.6 million last quarter by our math
- Net income without the $4.0 million tax credit: $20.3 million, down 8.3% from last quarter by our math
- Income taxes receivable in other assets: drove a $36.4 million balance-sheet increase while awaiting collection
This distinction matters because tax credits do not repeat on a predictable schedule, while the bank's pre-tax earnings shrank on lower lending income, smaller loan-loss recoveries and weaker fee revenue. Even before taxes and credit-loss recoveries, core operating profit fell 6.5% from the second quarter to $27.9 million by our math.
What to watch: the effective tax rate in the fourth quarter. A return toward the 27.7% second-quarter rate would lower reported profit per share unless lending and fee revenue rebound.
The Loan Portfolio Has Shrunk Since the Merger
MetroCity bought First IC Corporation in December 2025, adding $993.0 million of loans at closing. That deal explains why total loans of $3.98 billion sit 33.8% above a year ago. When we strip out the loans bought at closing, underlying loans grew by $12.8 million, or 0.4%, from a year ago by our math. Since the merger quarter ended in December, the combined loan book has shrunk by $98.1 million.
Average gross loans fell by $56.2 million from the second quarter, with residential mortgages down $28.7 million at period end. Because the loan book contracted and average loan yields dipped five hundredths of a percentage point to 6.70%, net interest margin — the spread between what the bank earns on loans and pays on funding — slipped to 4.07% from 4.11% last quarter. The shrinking book also drove a $72,000 credit-loss recovery that "primarily reflected lower loan balances", MetroCity said.
What to watch: period-end gross loans held for investment next quarter. A fourth straight quarterly decline would keep pressure on net interest income even if lending spreads hold above 4%.
Lower Small Business Loan Sales Cut Fee Income
Alongside interest on loans, MetroCity earns fee income by originating and selling loans backed by the US Small Business Administration (SBA) and residential mortgages. Noninterest income fell 23.8% from last quarter and 29.0% from a year ago to $4.4 million. The bank sold $9.7 million of SBA loans this quarter, down 64.4% from $27.1 million in the second quarter, cutting sale gains from $1.5 million to $685,000.
Market interest rates also hurt fee income directly. The lender recorded $743,000 of paper losses on "a mutual fund holding high-quality fixed income securities, which supports affordable housing in the Company's markets", MetroCity said, as bond prices moved with interest rates. Meanwhile, the bank sold zero residential mortgages for a third straight quarter.
What to watch: SBA loan production, which dropped 44.9% from last quarter to $25.7 million. Because this quarter's originations feed next quarter's sales, fourth-quarter sale gains will likely stay muted unless originations rebound.
Higher Staff Costs Pushed Up the Efficiency Ratio
Banks measure cost control with the efficiency ratio — operating expenses as a percentage of net revenue, where a lower number means higher profitability. MetroCity's operating efficiency ratio, excluding one-offs from the First IC merger, rose to 41.57% from 39.54% last quarter and 37.85% a year ago. It has worsened in every quarter since the acquisition closed.
Total noninterest expense edged up 0.4% from last quarter to $20.0 million even as one-time merger costs dropped from $270,000 to $117,000. Salaries and employee benefits — the cost of paying branch and back-office staff — rose $405,000 to $11.7 million, reaching 24.5% of net revenue, up 1.7 percentage points from last quarter and 0.9 percentage points from a year ago by our math.
What to watch: salaries and employee benefits in the fourth quarter. With three branches recently taken out of service, investors will see whether staff and occupancy costs begin to fall.
💲 Other KPIs
Tangible book value per share — the bank's net worth per share excluding goodwill and intangible assets from acquisitions — rose 3.3% from last quarter and 2.8% from a year ago. The First IC deal diluted it from $17.46 to $16.50 in late 2025, so the lender has earned back the merger dilution in three quarters.
The common equity tier 1 ratio — core equity capital as a share of risk-weighted assets — rose 0.31 percentage points from 17.15% last quarter. It fell from 19.93% a year ago to 15.90% when the First IC acquisition added $1.0 billion of loans, and retained profit has rebuilt it by 1.56 percentage points over the past three quarters.
New residential mortgage originations increased 12.9% from $75.4 million in the second quarter, reversing three quarters of sequential declines. Production remains half of the $168.6 million originated a year ago, and the US lender kept all new mortgages on its balance sheet rather than selling them for fee gains.
❓ Key Questions
Will the effective tax rate return to 28% next quarter?
A $4.0 million tax credit cut the third-quarter tax rate from 27.7% to 13.1% and created a large tax receivable on the balance sheet. Management did not say whether more credits remain for the fourth quarter or if the rate will reset.
When will the combined loan book stop shrinking?
Gross loans held for investment have fallen by $98.1 million across the three quarters since the First IC acquisition closed, led by residential mortgage paydowns. Without loan growth, net interest income has declined for two straight quarters.
How much will closing three branches save in operating costs?
Foreclosed real estate now includes $3.4 million of branches taken out of service, and the branch count sits at 27, down from 30 in the first quarter. Management has not quantified the annual payroll and occupancy savings from these closures.
Why did small business loan originations drop 45% this quarter?
SBA loan production fell from $46.6 million in the second quarter to $25.7 million, and loan sales fell 64% to $9.7 million despite an 8.16% sale premium. It is unclear whether borrower demand slowed or the bank held back on lending.