Mountain Commerce Bancorp, Inc. Announces Fourth Quarter 2023 Results And Quarterly Cash Dividend

KNOXVILLE, Tenn., Jan. 22, 2024 /PRNewswire/ -- Mountain Commerce Bancorp, Inc. (the "Company") (OTCQX: MCBI), the holding company for Mountain Commerce Bank (the "Bank"), today announced results and related data as of and for the three and twelve months ended December 31, 2023.

The Company also announced today that its Board of Directors declared a quarterly cash dividend of $0.08 per common share, its thirteenth consecutive quarterly dividend.  The dividend is payable on March 1, 2024 to shareholders of record as of the close of business on February 5, 2024.

Management Commentary

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

"We took several steps during the fourth quarter of 2023 that we believe will improve our future earnings including executing a $10.0 million securities and a $50.0 million borrowings restructuring, as discussed in further detail below.  These restructurings are expected to improve earnings beginning in the first quarter of 2024.  In addition, we continue to consolidate several of our leased locations into buildings that we own which should result in lease expense savings throughout 2024.  We are pleased that our average yield on taxable loans increased 76 bp from 4.75% in the fourth quarter of 2022 to 5.51% in the fourth quarter of 2023.  However, the average rate paid on interest bearing liabilities increased 215 bp from 2.14% to 4.29% over the same period.  We continue to experience very low levels of loan charge-offs and our allowance coverage of nonperforming loans was approximately 8 to 1 at December 31, 2023.  From an asset quality perspective, our non-performing assets to total assets remained low at 0.09% at December 31, 2023, with no properties in real estate owned.  We continue to remain disciplined on loan quality and pricing, and intend to prioritize the value of maintaining and growing our retail deposit base, with retail certificates of deposit growing $213.0 million since December 31, 2022.  Our December 31, 2023 liquidity remains strong with available funding sources in excess of our level of uninsured and uncollateralized deposits. 

I'm pleased that we have continued a common stock dividend this quarter despite the near-term negative impact of the securities restructuring.  While returning capital to shareholders through dividends and other methods is something we've done over the last several years, I've always believed that growing tangible book value and accreting capital to support our planned growth should be a key element of our effort to increase shareholder value.  Our board has always evaluated, and will continue to evaluate, our dividend paying capacity with these key goals in mind as we seek to strike an appropriate balance between returning capital to shareholders and growing tangible book value and capital over the long-term.

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

• The construction of our Johnson City financial center continues with an expected completion date of mid-2024. This location, which has significant I-26 visibility, will be a major upgrade from our single existing branch in this market, and we believe the opening of this location will aid in our efforts to substantially grow our Johnson City and TriCities deposit market share. We expect to consolidate approximately 8,300 sf of leased space with an annual cost of $170 thousand into this building.
• We finalized repairs and improvements on our newest financial center in West Knoxville which opened for business on October 30, 2023. In addition to providing a more visible and strategic geographic location, we also consolidated approximately 8,900 sf of space that we formerly leased with an annual cost of $210 thousand into this building."

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, 2023.  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 fixed assets, the provision for credit losses, the provision for unfunded loan commitments, and the impact of a fraudulent wire loss incurred in the second quarter of 2022 and a recovery associated with that loss in the first quarter of 2023.  See Appendix B to this press release for more information on the Company's tax equivalent net interest margin.  All financial information in this press release is unaudited.

Five Quarter Trends

Net Interest Income

Net interest income decreased $4.0 million, or 34.5%, from $11.5 million for the three months ended December 31, 2022 to $7.6 million for the same period in 2023.  The decrease between the periods was primarily the net result of the following factors:

• Average interest-earning assets grew $114.1 million, or 7.6%, from $1.508 billion to $1.622 billion, driven primarily by increases in loans.
• Average net interest-earning assets declined $97.9 million, or 25.5%, from $384.4 million to $286.4 million, due primarily to a $77.1 million decrease in noninterest bearing deposits and a $25.3 million increase in noninterest earning assets – primarily higher levels of fixed assets discussed below.
• The average rate paid on interest-bearing liabilities increased 215 bp from 2.14% to 4.29%, while the average rate earned on interest-earning assets increased 76 bp from 4.75% to 5.51%, resulting in a decrease in tax-equivalent net interest margin from 3.15% to 1.98%. The increase in the average rate paid on interest-bearing liabilities was due to the rising rate environment and competitive funding pressures in our markets, which resulted in customers seeking higher rates on certificates of deposit and other interest-bearing accounts and the Company's cost of wholesale funding rising significantly.

Net interest income decreased $15.7 million, or 32.3%, from $48.5 million for the twelve months ended December 31, 2022 to $32.8 million for the same period in 2023.  The decrease between the periods was primarily the net result of the following factors:

• Average interest-earning assets grew $192.2 million, or 13.6%, from $1.409 billion to $1.601 billion, driven primarily by increases in loans.
• Average net interest-earning assets declined $78.3 million, or 19.7%, from $397.8 million to $319.5 million, due primarily to a $55.8 million decrease in noninterest bearing deposits and a $26.2 million increase in noninterest earning assets - primarily higher levels of fixed assets discussed below.
• The average rate paid on interest-bearing liabilities increased 281 bp from 1.05% to 3.86%, while the average rate earned on interest-earning assets increased 94 bp from 4.32% to 5.26%, resulting in a decrease in tax-equivalent net interest margin from 3.57% to 2.17%. The increase in the average rate paid on interest-bearing liabilities was due to the rising rate environment and competitive funding pressures in our markets, which resulted in customers seeking higher rates on certificates of deposit and other interest-bearing accounts and the Company's cost of wholesale funding rising significantly.

Rate Sensitivity

The Company has the following loans and funding subject to repricing of short-term (90 days or less) interest rates:

The Federal Reserve has increased the Federal Funds interest rate by 525 bp since December 31, 2021.  Since that time, the Company has experienced the following cumulative impacts on its loan yields and deposit costs:

Effective October 1, 2023, the Company entered into a $150 million notional amount pay-fixed swap with a term of 3 years whereby the Company pays a fixed rate of 4.69% and receives the SOFR Compound rate. This swap has been accounted for as a fair value hedge of fixed-rate loans and should improve the Company's exposure to interest rates in a rising rate environment.

Provision For Credit Losses

A provision for credit losses of $1.4 million and $0.2 million was recognized for the three months ended December 31, 2023 and 2022, respectively.  The provision for credit losses recognized in the fourth quarter of 2023 was impacted by the following:

• $0.4 million complete charge-off of an unsecured loan subject to a repayment plan
• $0.3 million reserve established for a loan collateralized by lake lots and originated in 2007.
• $0.7 million reserve established for a loan collateralized by business assets and guaranteed by borrowers with ability to repay.

A provision for credit losses on loans of $1.0 million and $2.2 million was recognized for the twelve months ended December 31, 2023 and 2022, respectively.  Though negatively impacted by the charge-off and reserves noted above, the 2023 provision was favorably impacted by an improvement in projected economic factors (GDP, unemployment and housing prices) and a reduction in the reserve for unfunded commitments, offset by additional provision expense related to loan growth.

The Company continues to experience historically low levels of problem assets and charge-offs. 

The Company adopted 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 following summarizes the impact of the adoption of ASU 2016-13:

Noninterest Income

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

Noninterest income declined to $0.0 million in the fourth quarter of 2023 from $0.3 million in the same quarter of 2022.  The following factors had an impact on noninterest income during these periods:

• An increase of $0.3 million in realized losses on the sale of investment securities available for sale. During the fourth quarter of 2023, the Company executed a securities restructuring whereby approximately $7.0 million of securities available for sale with a then current book yield of 2.8% and a duration of 5.0 years were sold at a loss of $0.7 million and replaced with floating-rate government agency securities with a then current book yield of 6.5% and a duration of zero. This transaction resulted in a projected earn back period 2.5 years.
• Realized and unrealized gains on equity securities declined by $0.2 million from the fourth quarter of 2022 as a result of a decline in market conditions.
• The Company recognized a $0.2 million increase in swap fees during the fourth quarter of 2023 due to increased demand by customers for fixed rate loans. The Bank receives a fee for delivering the swap to a third party, but does not maintain a contractual obligation for the swap other than in the event of a default.

Noninterest income remained consistent at $1.2 million for the twelve months ended December 31, 2023 and 2022.  The following factors had an impact on noninterest income during these periods:

• Realized and unrealized losses on equity securities improved by $0.2 million from the year ended December 31, 2022 as a result of an improvement in market conditions.
• The Company incurred a $0.3 increase in loss on sale of fixed assets from the sale of the Company's former legacy bank headquarters building in Erwin, TN during the third quarter of 2023.
• The Company recognized a $0.5 million increase in swap fees during 2023 due to increased demand by customers for fixed rate loans. The Bank receives a fee for delivering the swap to a third party, but does not maintain a contractual obligation for the swap other than in the event of a default.
• The Company recognized a $0.5 million decrease in distributions from limited partnerships, which tend to have an unpredictable level of distributions.

Noninterest Expense

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

Noninterest expense declined $0.3 million, or 4.3%, from $6.7 million in the fourth quarter of 2022 to $6.4 million in the same period of 2023. The following factors had an impact on changes in noninterest expense during these periods:

• Compensation and employee benefits decreased $0.5 million, or 12.1%, due primarily to a decrease in incentive accruals and a decline in FTE employees from 116 to 113, offset by merit increases and an increase in benefit costs.
• FDIC insurance increased $0.1 million due to a scheduled 2 bp increase in the assessment rate and an increase in the Company's deposit balances.
• Professional fees increased $0.1 million due to increased CECL and AML/BSA compliance costs.
• Other noninterest expense declined $0.2 million due to a reclass of the provision for unfunded commitments from noninterest expense to the provision for credit losses.

Noninterest expense increased $0.7 million, or 2.8%, from $23.6 million in the year ended December 31, 2022 to $24.3 million in the same period of 2023. The following factors had an impact on changes in noninterest expense during these periods:

• Compensation and employee benefits decreased $0.1 million, or 1.2%, due primarily to a decrease in incentive accruals and a decline in FTE employees from 116 to 113, offset by merit increases and an increase in benefit costs.
• Occupancy and furniture and equipment expense increased $0.8 million due to lease and furniture expense associated with the Company's new Brentwood financial center, as well as additional depreciation and furniture expense associated with the Company's new operations center and West Knoxville financial center. The Company should benefit from lower lease expense in future quarters due to the staggered closure schedule of certain leased office space that is being replaced by the new facilities.
• Data processing increased $0.2 million due to an 8.5% increase in the size of the Company's balance sheet.
• FDIC insurance increased $0.5 million due to a scheduled 2 bp increase in the assessment rate and an increase in the Company's deposit balances.
• Professional fees increased $0.4 million due to increased CECL and AML/BSA compliance costs.
• Other noninterest expense declined $1.3 million as 2022 included a $0.8 million loss associated with a fraudulent wire, offset by a $0.1 million recovery during 2023, and the reclassification of the provision for unfunded commitments from noninterest expense to the provision for credit losses.

Income Taxes

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

The Company's negative effective tax rate during the three months ended December 31, 2023 reflects the impact of a true up of the Company's state tax provision due to lower reported earnings.  The decrease in the Company's effective tax rate for the full year 2023 compared to 2022 is due to a decline in the Company's effective state tax rate resulting from tax credits on certain loans.  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 $137.7 million, or 8.6%, from $1.600 billion at December 31, 2022 to $1.738 billion at December 31, 2023.  The change was primarily driven by the following factors:

• Available for sale investment security balances decreased $7.2 million, or 5.2%, primarily due to principal paydowns.

The following summarizes the composition of the Company's available for sale investment securities portfolio (at fair value) as of December 31, 2023 and December 31, 2022:

Non-agency MBS/CMO have an average credit-enhancement of approximately 37% as of December 31, 2023.  Municipal securities are generally rated AA or higher. 

• The Company does not have any securities classified as held-to-maturity.
• Loans receivable increased $136.0 million, or 10.3%, from $1.317 billion at December 31, 2022 to $1.453 billion at December 31, 2023. Increases over that period in other construction, home equity, residential, multi-family, and owner and non-owner occupied commercial loans, offset a reduction in residential construction, farmland, commercial & industrial, PPP and consumer loans.

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

The following summarizes the industry components of the Company's non-owner occupied commercial real estate loans as of December 31, 2023:

• Premises and equipment increased $19.5 million, or 59.1%, during the year ended December 31, 2023 primarily due to costs incurred for the construction of the new 23,000 sf Johnson City combined financial/corporate center as well as improvement costs on the financial center in West Knoxville which approximated the following:

• Total deposits increased $125.5 million, or 9.3%, from $1.346 billion at December 31, 2022 to $1.472 billion at December 31, 2023. An increase in retail and wholesale time deposits offset decreases in non-interest bearing transaction, NOW and money market and savings accounts. The Company believes that the shift in product mix out of non-interest bearing transaction, money market and savings accounts and into retail time deposits is primarily a result of the higher interest rates that the Company has offered on retail time deposits. During the fourth quarter of 2023, the Company replaced $52 million of FHLB short-term borrowings at a rate of 5.4% with $49 million of 3 year wholesale time deposits at 4.50%.

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

The following summarizes the composition of wholesale time deposits as of December 31, 2023:

• FHLB borrowings decreased $5.0 million from December 31, 2022 and consisted of the following at September 30, 2023:

• Total equity increased $5.5 million, or 4.7%, from $117.3 million at December 31, 2022 to $122.8 million at December 31, 2023. The following summarizes the components of the change in total shareholders' equity and tangible book value per share for the year ended December 31, 2023:

The Company's tangible equity to tangible assets ratio declined to 7.07% at December 31, 2023 from 7.33% at December 31, 2022, primarily as the result of a decline in net income combined with continued asset growth and dividends.  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, 2023, with the Bank maintaining a regulatory leverage ratio of 9.45% at December 31, 2023.

Share Repurchases

The Company has an active authorization to repurchase up to $5 million of shares through March 31, 2024.  The following summarizes share repurchase activity during 2023:

Asset Quality

Non-performing loans to total loans increased slightly from 0.10% at December 31, 2022 to 0.11% at December 31, 2023.  Non-performing assets to total assets increased slightly from 0.08% at December 31, 2022 to 0.09% at December 31, 2023.  Other real estate owned balances remained at $0 at both December 31, 2022 and December 31, 2023.  Net charge-offs of $0.5 million were recognized during the year ended December 31, 2023, compared to $89 thousand during the year ended December 31, 2022.  The allowance for credit losses to total loans declined to 0.90% at December 31, 2023 compared to 0.96% at December 31, 2022, primarily as a result of an improvement in projected economic factors.  Coverage of non-performing loans by the allowance for credit losses was greater than 8 to 1 at December 31, 2023. 

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 noninterest expense to average assets 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 book 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 and challenging economic conditions, resulting in significant increases in credit 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 and other challenging economic conditions on our customers and their businesses; (vi) the ability to grow and retain lower-cost core deposits, including during times when uncertainty exists in the financial services sector; (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, or increase the rates we pay on deposits to levels that cause our net interest margin to further decline;  (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) risks of expansion into new geographic or product markets; (xii) the possibility of increased compliance and operational costs as a result of increased regulatory oversight; (xiii) our inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (xiv) the ineffectiveness of our hedging strategies, or the unexpected counterparty failure or failure of the underlying hedges; (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 credit 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, Bearden / Knoxville, West 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.