Mountain Commerce Bancorp, Inc. Announces Fourth Quarter 2022 Results And Quarterly Cash Dividend

KNOXVILLE, Tenn., Jan. 23, 2023 /PRNewswire/ -- Mountain Commerce Bancorp, Inc. (the "Company") (OTCQX: MCBI), the holding company for Mountain Commerce Bank (the "Bank"), today announced earnings and related data as of and for the three and twelve months ended December 31, 2022.

The Company also announced today that its Board of Directors declared a quarterly cash dividend of $0.16 per common share, our ninth consecutive quarterly dividend. The dividend is payable on March 1, 2023 to shareholders of record as of the close of business on February 6, 2023.

Highlights

The following tables highlight the trends that the Company believes are most relevant to understanding the performance of the Company as of and for the three and twelve months ended December 31, 2022.  As further detailed in Appendix A and Appendix C to this press release, adjusted results (which are non-GAAP financial measures), reflect adjustments for realized and unrealized investment gains and losses, PPP fee accretion (net of the amortization of PPP deferred loan costs and one-time PPP bonuses), gains and losses from the sale of REO, the provision for (recovery of) loan losses, the provision for (recovery of) unfunded loan commitments, and the impact of a fraudulent wire loss incurred in the second quarter of 2022.  See Appendix B to this press release for more information on our tax equivalent net interest margin.  All financial information in this press release is unaudited.

Five Quarter Trends

Management Commentary

William E. "Bill" Edwards, III, President and Chief Executive Officer of the Company, commented as follows:

"The fourth quarter of 2022 proved to be a challenging quarter, as a significant increase in funding costs put a strain on our net interest margin and earnings.  While we are pleased that our yield on taxable loans increased 55 bp from 4.36% in the fourth quarter of 2021 to 4.91% in the fourth quarter of 2022, the rate paid on interest bearing liabilities increased 179 bp from 0.35% to 2.14% over the same periods.  As a result, our net interest margin declined from 3.66% in the fourth quarter of 2021 to 3.15% in the same period of 2022.  Despite this, our annualized adjusted return on average assets (non-GAAP) remained above 1% at 1.09% for the fourth quarter of 2022, and our annualized adjusted return on average equity (non-GAAP) remained at nearly 15% for the same quarter.  We continue to experience very low levels of loan charge-offs and our allowance coverage of nonperforming loans was nearly 10 to 1 at December 31, 2022.  From an asset quality perspective, our non-performing assets to total assets remained at historical lows at 0.08% at December 31, 2022, with no properties in real estate owned.  Looking forward, we will work hard to remain disciplined on loan pricing, and will continue to prioritize the value of lower cost deposits.  While the coming year looks to be challenging because of the projected rate environment and intense competition in our markets, we remain committed to our aim of delivering the strong returns our shareholders have come to expect.

Additionally, we continue to work diligently on several projects located across our markets, including the following:

• We are excited to announce that our new 25,000 sf operations center in Gray, TN was completed in January, 2023 and is now being occupied. This is a significant upgrade from our prior 10,000 sf leased space in Johnson City, TN and will support the future growth of the Company for years to come.
• The construction of a new 23,000 sf Johnson City combined financial/corporate center is underway with an expected completion date of mid-2024. This location, which has significant I-26 visibility, will be a major upgrade from our existing 3,000 sf branch, and we believe will aid in our efforts to substantially grow our Johnson City and TriCities market share. We estimate this project will cost approximately $19.5 million, of which less than $1 million has been incurred.
• We continue to make repairs and improvements to our newest financial center at 9950 Kingston Pike in Knoxville. In addition to providing a much needed additional financial center, we also expect to consolidate approximately 9,000 sf of space that we currently lease into this building. This building is expected to be operational during the third quarter of 2023."

Net Interest Income

Net interest income decreased $0.2 million, or 1.3%, from $11.7 million for the three months ended December 31, 2021 to $11.5 million for the same period in 2022.  The decrease between the periods was primarily the net result of the following factors:

• Average interest-earning assets grew $196.3 million, or 15.0%, from $1.312 billion to $1.508 billion, driven primarily by increases in loans.
• Average net interest-earning assets declined $49.7 million, or 11.4%, from $434.0 million to $384.4 million, due primarily to a $52.7 million increase in noninterest earning assets including fixed assets and deferred tax assets.
• The average rate paid on interest-bearing liabilities increased 179 bp from 0.35% to 2.14%, while the average rate earned on interest-earning assets increased 85 bp from 3.90% to 4.75%, resulting in a decrease in tax-equivalent net interest margin from 3.66% to 3.15%.
• The Company recognized approximately $13 thousand and $0.6 million of PPP loan origination fees, net of the amortization of deferred PPP loan costs, through net interest income during the three months ended December 31, 2022 and 2021, respectively. No net PPP loan origination fees remain to be recognized as of December 31, 2022.

Net interest income increased $4.9 million, or 11.3%, from $43.6 million for the year ended December 31, 2021 to $48.5 million for the same period in 2022.  The increase between the periods was primarily the net result of the following factors:

• Average interest-earning assets grew $215.3 million, or 18.0%, from $1.194 billion to $1.409 billion, driven by increases in loans and investment securities.
• Average net interest-earning assets grew $28.6 million, or 7.7%, from $369.2 million to $397.8 million, funded by increases in noninterest bearing deposits and shareholders' equity and offset by a $32.9 million increase in noninterest earning assets including fixed assets and deferred tax assets.
• The average rate paid on interest-bearing liabilities increased 58 bp from 0.47% to 1.05%, while the average rate earned on interest-earning assets increased 26 bp from 4.06% to 4.32%, resulting in a decrease in tax-equivalent net interest margin from 3.74% to 3.57%.
• The Company recognized approximately $0.3 million and $3.2 million of PPP loan origination fees, net of the amortization of deferred PPP loan costs, through net interest income during the year ended December 31, 2022 and 2021, respectively.

Rate Sensitivity

The Company has the following loans and deposits subject to regular repricing:

The Federal Reserve has increased the Federal Funds interest rate by 425 bp since December 31, 2021.  Since that time, the Company has experienced the following impacts on its loan yields and deposit costs:

Provision For Loan Losses

A provision for loan losses of $0.2 million and $2.2 million was recognized for the three and twelve months ended December 31, 2022, respectively, primarily as a result of continued loan growth.  A provision (recovery) of loan losses of $0.7 million and ($2.6 million) was recognized during the three and twelve months ended December 31, 2021.  The Company continues to experience historically low levels of problem assets and charge-offs.  The Company will adopt the provisions of Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2023.  The Company has completed a preliminary estimate of the impact of adoption and does not expect a material adjustment to the Company's Allowance for Loan Losses at December 31, 2022.

Noninterest Income

The following summarizes changes in the Company's noninterest income for the periods indicated:

Noninterest income declined to $0.3 million in the fourth quarter of 2022 from $0.6 million in the same quarter of 2021.  This decrease was due primarily to approximately $0.4 million of realized losses on the sale of investment securities available for sale.  The Company conducted a loss trade in December 2022 in which $6.7 million of municipal securities were sold at a $0.4 million loss, with the proceeds reinvested in shorter duration and higher yielding securities.  This decline in noninterest income was partially offset by a $0.1 million increase in unrealized gains on equity securities (primarily bank preferred stock) as a result of a decline in interest rates.

Noninterest income declined to $1.2 million during the year ended December 31, 2022 from $2.6 million during the same period of 2021.  This decrease was due primarily to approximately $1.1 million of unrealized losses on equity securities (primarily bank preferred stock) during 2022 as a result of an increase in interest rates and not due to credit concerns.  Additionally, the Company incurred $0.6 million of realized losses on the sale of investment securities available for sale during 2022, the majority of which resulted from the December 2022 loss trade described above.  Gain on sale of loans declined $0.3 million during 2022 due to the rising rate environment which contributed to a decrease in residential mortgage loan volumes.  These declines in noninterest income were partially offset by an increase of $0.5 million in distributions from certain of the Company's investments in limited partnerships, which tend to have significant distributions towards the end of their life.

Noninterest Expense

The following summarizes changes in the Company's noninterest expense for the periods indicated:

Noninterest expense increased $1.1 million, or 20.7%, from $5.5 million in the fourth quarter of 2021 to $6.7 million in the same period of 2022.  This increase was primarily due to a $0.5 million, or 15.2%, increase in compensation and benefits, as a result of an increase in employee headcount and incentive compensation expense.  Full time equivalent employees increased from 102 at December 31, 2021 to 116 at December 31, 2022, including an increase of 1 new Relationship Manager.  The Company has also recognized higher levels of incentive compensation expense with increased levels of growth and profitability.  Occupancy expense increased $0.2 million over the same periods due to lease expense on the Company's new Brentwood financial center, as well as additional expenses associated with the Company's new Operations Center and Knoxville (9950 Kingston Pike) financial center.  Professional fees have increased $0.1 million over the same periods as the Company has engaged a national firm for its internal audit function and incurred additional audit and advisory expenses in conjunction with its implementation of a required internal control audit and change in accounting for credit loss reserves.

Noninterest expense increased $5.2 million, or 28.2%, from $18.4 million during the year ended December 31, 2021 to $23.6 million in the same period of 2022.  Compensation and benefits increased $2.6 million, or 24.7%, as a result of an increase in employee headcount and incentive compensation expense as described above.  Occupancy expenses increased $0.3 million over the same periods due to lease expense on the Company's new Brentwood financial center, as well as additional expenses associated with the Company's new Operations Center and Knoxville (9950 Kingston Pike) financial center.  Professional fees have increased $0.4 million over the same periods as the Company has engaged a national firm for its internal audit function and incurred additional audit and advisory expenses in conjunction with its implementation of a required internal control audit and change in accounting for credit loss reserves.  Other noninterest expense increased $1.1 million primarily due to a $0.8 million ($0.6 million net of insurance recovery) fraudulent wire loss incurred during the second quarter of 2022 and a $0.3 million increase in the reserve for unfunded commitments.

Income Taxes

The effective tax rates of the Company were as follows for the periods indicated:

The Company's effective tax rate during the three months ended December 31, 2022 increased to 23.24% from 16.30% in the same period of the prior year.  The Company's effective tax rate during the three months ended December 31, 2021 was favorably impacted by the receipt of a tax credit on a tax-exempt loan which lowered the Company's tax rate by approximately 3.7%.  The Company's marginal tax rate of 26.14% is favorably impacted by certain sources of non-taxable income including bank-owned life insurance (BOLI), tax-free loans, and investments in tax-free municipal securities. 

Balance Sheet

Total assets increased $265.1 million, or 19.9%, from $1.335 billion at December 31, 2021 to $1.600 billion at December 31, 2022.  The change was primarily driven by the following factors:

• Investments available for sale balances decreased $18.5 million, or 11.9%, due primarily to a decline in the fair value as a result of an increase in interest rates.

The following summarizes the composition of the Bank's investment securities available for sale portfolio (at fair value) as of December 31, 2022 and December 31, 2021:

Non-agency MBS/CMO's have an average credit-enhancement of approximately 35% as of December 31, 2022.  Municipal securities are generally rated AA or higher.

• Loans receivable increased $246.4 million, or 23.0%, from $1.071 billion at December 31, 2021 to $1.317 billion at December 31, 2022. Increases in construction, residential, multi-family, owner-occupied and non-owner occupied commercial and commercial & industrial loan categories offset a $12.8 million reduction in PPP loans.

The following summarizes changes in loan balances over the last five quarters:

• Premises and equipment increased $15.7 million, or 91.3%, during the year ended December 31, 2022 primarily due to the following:
• Costs incurred for an operations center that the Company constructed in Gray, TN. As of December 31, 2022, the Company has incurred approximately $10.0 million of the $11.0 million cost with respect to this facility. The operations center opened in January 2023 and replaces certain leased space the Company currently occupies in Johnson City, TN.
• The Company purchased an additional Knoxville financial center at 9950 Kingston Pike for approximately $8.5 million during the third quarter of 2022. Of this purchase price, approximately $2.5 million was allocated to land and not subject to depreciation. This facility is expected to be in use during the third quarter of 2023, following the completion of renovations
• Total deposits increased $238.6 million, or 21.5%, from $1.108 billion at December 31, 2021 to $1.346 billion at December 31, 2022. The primary drivers of this increase were a $87.1 million, or 37.2%, increase in NOW and money market balances, and a $94.8 million, or 111.7%, increase in retail time deposits (primarily 18 months maturity or less), as the Company has offered attractive interest rates on certain money market and time deposit products. Wholesale time deposits consist primarily of brokered certificates of deposit with a maximum maturity of three months or less.

The following summarizes changes in deposit balances over the last five quarters:

• FHLB borrowings increased $30.0 million from December 31, 2021 and consisted of the following at December 31, 2022:

• Total equity decreased $3.8 million, or 3.1%, from $121.1 million at December 31, 2021 to $117.3 million at December 31, 2022. The following summarizes the components of the change in total shareholders' equity and tangible book value per share for the year ended December 31, 2022:

The Company's tangible equity to tangible assets ratio declined to 7.33% at December 31, 2022 from 9.07% at December 31, 2021, primarily as a result of a decline in the value of investments available for sale triggered by the rising rate environment.  The Company continues to manage its equity levels through a combination of controlled growth, share repurchases and dividends.  The Company and Bank both remain well capitalized at December 31, 2022.

Asset Quality

Non-performing loans to total loans decreased from 0.17% at December 31, 2021 to 0.10% at December 31, 2022.  Non-performing assets to total assets decreased from 0.14% at December 31, 2021 to 0.08% at December 31, 2022.  Other real estate owned balances remained at $0 at both December 31, 2022 and 2021.  Net charge-offs of $89 thousand were recognized during the year ended December 31, 2022, compared to $164 thousand during 2021.  The allowance for loan losses to total loans was 0.96% at December 31, 2022 compared to 0.98% at December 31, 2021.  Coverage of non-performing loans by the allowance for loan losses was nearly 10 to 1 at December 31, 2022. 

Non-GAAP Financial Measures

Statements included in this press release include non-GAAP financial measures and should be read along with the accompanying tables in Appendix A and Appendix C, which provide a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures.  This press release and the accompanying tables discuss financial measures such as adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average equity, adjusted net interest margin (tax equivalent), and adjusted efficiency ratio, which are all non-GAAP financial measures. We also present in this press release and the accompanying tables pre-tax, pre-provision earnings, pre-tax, pre-provision return on average assets, and tangible book value per share excluding AOCI, which are also non-GAAP financial measures. We believe that such non-GAAP financial measures are useful because they enhance the ability of investors and management to evaluate and compare the Company's operating results from period to period in a meaningful manner.  Non-GAAP financial measures should not be considered as an alternative to any measure of performance calculated pursuant to GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies.  Investors should consider the Company's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company.  Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company's results or financial condition as reported under GAAP.

Forward-Looking Statements

This press release contains forward-looking statements. The words "expect," "intend," "should," "may," "could," "believe," "suspect," "anticipate," "seek," "plan," "estimate" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical fact may also be considered forward-looking. Such forward-looking statements involve known and unknown risks and uncertainties that include, without limitation, (i) deterioration in the financial condition of our borrowers, including as a result of persistent inflationary pressures, resulting in significant increases in loan losses and provisions for those losses; (ii) fluctuations or differences in interest rates on loans or deposits from those that we are modeling or anticipating, including as a result of our inability to better match deposit rates with the changes in the short-term rate environment, or that affect the yield curve; (iii) deterioration in the real estate market conditions in our market areas; (iv) the impact of increased competition with other financial institutions, including pricing pressures, and the resulting impact on our results, including as a result of compression to our net interest margin; (v) the deterioration of the economy in our market areas, including the negative impact of inflationary pressures on our customers and their businesses; (vi) the ability to grow and retain low-cost core deposits; (vii) our ability to meet our liquidity needs without having to liquidate investment securities that we own while those securities are in a unrealized loss position as a result of the rising rate environment;  (viii) significant downturns in the business of one or more large customers; (ix) effectiveness of our asset management activities in improving, resolving or liquidating lower quality assets; (x) our inability to maintain the historical, long-term growth rate of our loan portfolio; (xi) vaccines' efficacy against the COVID-19 virus, including new variants; (xii) risks of expansion into new geographic or product markets; (xiii) the possibility of increased compliance and operational costs as a result of increased regulatory oversight; (xiv) our inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (xv) changes in state or Federal regulations, policies, or legislation applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy; (xvi) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (xvii) inadequate allowance for loan losses; (xviii) results of regulatory examinations; (xix) the vulnerability of our network and online banking portals, and the systems of parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xx) the possibility of increased corporate or personal tax rates and the resulting reduction in our and our customers' businesses as a result of any such increases; (xxi) approval of the declaration of any dividend by our Board of Directors; (xxii) loss of key personnel; and (xxiii) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future obligatory litigation, examinations or other legal and/or regulatory actions.  These risks and uncertainties may cause our actual results or performance to be materially different from any future results or performance expressed or implied by such forward-looking statements. Our future operating results depend on a number of factors which were derived utilizing numerous assumptions that could cause actual results to differ materially from those projected in forward-looking statements.

About Mountain Commerce Bancorp, Inc. and Mountain Commerce Bank

Mountain Commerce Bancorp, Inc. is the holding company for Mountain Commerce Bank.  The Company's shares of common stock trade on the OTCQX under the symbol "MCBI".

Mountain Commerce Bank is a state-chartered financial institution headquartered in Knoxville, TN. The Bank traces its history back over a century and serves Middle and East Tennessee through 6 branches located in Brentwood, Erwin, Johnson City, Knoxville and Unicoi.  The Bank focuses on responsive relationship banking of small and medium-sized businesses, professionals, affluent individuals, and those who value the personal service and attention that only a community bank can offer.  For further information, please visit us at www.mcb.com.

SOURCE Mountain Commerce Bancorp, Inc.