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

KNOXVILLE, Tenn., July 24, 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 six months ended June 30, 2023.

The Company also announced today that its Board of Directors declared a quarterly cash dividend of $0.16 per common share, our eleventh consecutive quarterly dividend.  The dividend is payable on September 1, 2023 to shareholders of record as of the close of business on August 7, 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 six months ended June 30, 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 from the sale of fixed assets, the provision for credit losses, the provision for (recovery of) 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 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 second quarter of 2023 was another operationally challenging quarter as short term interest rates continued to rise, putting a strain on our net interest margin and earnings.  We are pleased that our yield on taxable loans increased 94 bp from 4.34% in the second quarter of 2022 to 5.28% in the second quarter of 2023, with recent average production yields of approximately 8%.  However, the rate paid on interest bearing liabilities increased 345 bp from 0.48% to 3.93% over the same period.  We continue to experience very low levels of loan charge-offs and our allowance coverage of nonperforming loans was nearly 20 to 1 at June 30, 2023.  From an asset quality perspective, our non-performing assets to total assets remained at historical lows of 0.04% at June 30, 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 deposit relationships, including certificates of deposit which have grown nearly $280 million since June 30, 2022.  Finally, we believe that our June 30, 2023 liquidity remains strong with available funding sources well in excess of our level of uninsured deposits.

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 market share. We expect to consolidate approximately 8,300 sf of leased space with an annual cost of $170 thousand into this building.
• We continue to make repairs and improvements to our newest financial center at 9950 Kingston Pike in Knoxville. In addition to providing a more visible and strategic location, we also expect to consolidate approximately 8,900 sf of space that we currently lease with an annual cost of $210 thousand into this office once renovations are complete. This building is expected to be operational later in the third quarter of 2023."

Net Interest Income

Net interest income decreased $4.5 million, or 36.3%, from $12.3 million for the three months ended June 30, 2022 to $7.8 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 $229.4 million, or 16.8%, from $1.361 billion to $1.591 billion, driven primarily by increases in loans.
• Average net interest-earning assets declined $75.3 million, or 18.6%, from $404.3 million to $329.0 million, due primarily to a $53.3 million decrease in noninterest bearing deposits and a $27.7 million increase in noninterest earning assets – primarily higher levels of fixed assets discussed below.
• The average rate paid on interest-bearing liabilities increased 345 bp from 0.48% to 3.93%, while the average rate earned on interest-earning assets increased 111 bp from 4.10% to 5.21%, resulting in a decrease in tax-equivalent net interest margin from 3.76% to 2.09%. 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 rate certificates of deposit and the Company's cost of wholesale funding rising significantly.
• The Company did not recognize any PPP loan origination fees, net of the amortization of deferred PPP loan costs, through net interest income during the three months ended June 30, 2023 and 2022, respectively. No net PPP loan origination fees remain to be recognized as of June 30, 2023.

Net interest income decreased $6.7 million, or 28.1%, from $24.0 million for the six months ended June 30, 2022 to $17.2 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 $242.9 million, or 18.1%, from $1.337 billion to $1.580 billion, driven primarily by increases in loans.
• Average net interest-earning assets declined $63.8 million, or 16.1%, from $397.2 million to $333.4 million, due primarily to a $37.7 million decrease in noninterest bearing deposits and a $28.8 million increase in noninterest earning assets - primarily higher levels of fixed assets discussed below.
• The average rate paid on interest-bearing liabilities increased 309 bp from 0.42% to 3.51%, while the average rate earned on interest-earning assets increased 106 bp from 4.03% to 5.09%, resulting in a decrease in tax-equivalent net interest margin from 3.74% to 2.32%. 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 rate certificates of deposit and the Company's cost of wholesale funding rising significantly.
• The Company recognized approximately $0 and $0.2 million of PPP loan origination fees, net of the amortization of deferred PPP loan costs, through net interest income during the six months ended June 30, 2023 and 2022, respectively. No net PPP loan origination fees remain to be recognized as of June 30, 2023.

Rate Sensitivity

The Company has the following loans and funding subject to repricing of short-term interest rates:

The Federal Reserve has increased the Federal Funds interest rate by 500 bp since December 31, 2021.  Since that time, the Company has experienced the following impacts on its loan yields and deposit costs:

Provision For Credit Losses

A provision for (recovery of) credit losses of ($0.6) million and $0.5 million was recognized for the three months ended June 30, 2023 and 2022, respectively.  The recovery of credit losses recognized during the three months ended June 30, 2023 was primarily the result of an improvement in projected economic factors (GDP, unemployment and housing prices) over the next 12 months, offset by additional provision expense related to loan growth.

A provision for credit losses of $26 thousand and $1.1 million was recognized for the six months ended June 30, 2023 and 2022, respectively.  The minimal provision recognized during the six months ended June 30, 2023 was primarily the result of an improvement in the projected economic factors noted above over the next 12 months, 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 improved to $0.6 million in the second quarter of 2023 from ($0.1) million in the same quarter of 2022.  This increase was primarily due to a decline in unrealized losses on equity securities as a result of an improvement in interest rate market conditions.  The Company also recognized higher levels of swap fees during the first quarter of 2023 due to increased demand by customers for floating rate loans.  The Bank receives a fee for delivering the swap to a third party, but does not maintain contractual risk for the swap.

Noninterest income improved to $0.8 million for the six months ended June 30, 2023 from $0.4 million in the same period of 2022.  This increase was primarily due to a decline in unrealized losses on equity securities as a result of an improvement in interest rate market conditions.  The Company also recognized higher levels of swap fees during the six month ended June 30, 2023 due to increased demand by customers for floating rate loans.  Offsetting these increases was a $0.4 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 increased $0.2 million, or 3.4%, from $5.9 million in the second quarter of 2022 to $6.1 million in the same period of 2023.  Compensation and employee benefits increased $0.5 million, or 18%, in the second quarter of 2023 compared to the same period in 2022 due primarily to an increase in employee headcount from 110 to 115 associated with the opening of the Company's new Brentwood financial center, as well as merit raises and increases in benefit costs.  Occupancy expense increased $0.2 million in the second quarter of 2023 compared to the second quarter of 2022 due to lease expense on the Company's new Brentwood financial center, as well as additional expense associated with the Company's new operations 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 facilities currently under construction.  FDIC insurance increased $0.2 million in the second quarter of 2023 compared to the same period of 2022 due to a scheduled 2 bp increase in the assessment rate.  Other noninterest expense for the second quarter of 2022 included a $0.8 million loss associated with a fraudulent wire loss.

Noninterest expense increased $0.9 million, or 7.7%, from $11.3 million in the first six months of 2022 to $12.2 million in the same period of 2023.  Compensation and employee benefits increased $0.5 million, or 8.9%, in the first six months of 2023 compared to the same period in 2022 due primarily to an increase in employee headcount from 108 to 115 associated with the opening of the Company's new Brentwood financial center, as well as merit raises and increases in benefit costs.  Occupancy and furniture and equipment expense increased $0.6 million in the six months ended June 30, 2023, compared to the same period of 2022, due to lease and furniture expense associated with the Company's new Brentwood financial center, as well as additional expense associated with the Company's new operations 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 facilities currently under construction.  FDIC insurance increased $0.3 million in the first six months of 2023 compared to the same period of 2022 due to a scheduled 2 bp increase in the assessment rate.  Professional fees increased $0.2 million over the same periods as the Company has engaged a national accounting firm for its internal audit function and incurred additional audit expenses in conjunction with a required internal control audit.  Other noninterest expense for the first six months of 2022 included a $0.8 million loss associated with a fraudulent wire loss, offset by a $0.1 million recovery during the first six months of 2023.

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 and six months ended June 30, 2023 decreased compared to the same periods in the prior years due to a decline in the Company's effective state tax rate 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 $118.6 million, or 7.4%, from $1.600 billion at December 31, 2022 to $1.719 billion at June 30, 2023.  The change was primarily driven by the following factors:

• Available for sale investment security balances decreased 3.3 million, or 2.4%.

The following summarizes the composition of the Company's available for sale investment securities portfolio (at fair value) as of June 30, 2023 and December 31, 2022:

Non-agency MBS/CMO's have an average credit-enhancement of approximately 37% as of June 30, 2023.  Municipal securities are generally rated AA or higher. 

• The Company does not have any securities classified as held-to-maturity.
• Loans receivable increased $87.2 million, or 6.6%, from $1.317 billion at December 31, 2022 to $1.404 billion at June 30, 2023. Increases in residential and other construction, residential, multi-family and owner and non-owner occupied commercial offset a reduction in PPP and commercial and industrial 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 June 30, 2023:

• Premises and equipment increased $8.5 million, or 25.8%, during the six months ended June 30, 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 recently purchased financial center in West Knoxville. As of June 30, 2023, approximately $7.9 million out of a total estimated cost of $23.0 million had been incurred related to the costs of the Johnson City and West Knoxville building projects.
• Total deposits increased $71.4 million, or 5.3%, from $1.346 billion at December 31, 2022 to $1.418 billion at June 30, 2023. The primary drivers of this increase were a $16.8 million, or 5.5%, increase in noninterest-bearing deposits, a $175.7 million, or 97.8%, increase in retail time deposits (primarily one year or less), and a $32.0 million, or 17.7%, increase in wholesale time deposits. Offsetting these increases was a $54.3 million decrease in NOW and money market accounts and a $98.9 million decrease in savings accounts. Wholesale time deposits consist primarily of brokered certificates of deposit with a maximum maturity of one year or less. The Company believes that the shift in product mix out of 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.

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

• FHLB borrowings increased $35.0 million from December 31, 2022 and consisted of the following at June 30, 2023:

• Total equity increased $3.7 million, or 3.1%, from $117.3 million at December 31, 2022 to $120.9 million at June 30, 2023.  The following summarizes the components of the change in total shareholders' equity and tangible book value per share for the six months ended June 30, 2023:

The Company's tangible equity to tangible assets ratio declined to 7.04% at June 30, 2023 from 7.33% at December 31, 2022, primarily as the result of a decline in net income combined with continued asset growth.  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 June 30, 2023, with the Bank maintaining a regulatory leverage ratio of 9.72% at June 30, 2023.

Asset Quality

Non-performing loans to total loans decreased from 0.10% at December 31, 2022 to 0.04% at June 30, 2023.  Non-performing assets to total assets decreased from 0.08% at December 31, 2022 to 0.04% at June 30, 2023.  Other real estate owned balances remained at $0 at both December 31, 2022 and June 30, 2023.  Net charge-offs of $49 thousand were recognized during the six months ended June 30, 2023, compared to $89 thousand during the full year 2022.  The allowance for credit losses to total loans declined to 0.85% at June 30, 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 nearly 20 to 1 at June 30, 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, 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 on our customers and their businesses; (vi) the ability to grow and retain low-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;  (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) 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; (xv) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (xvi) inadequate allowance for credit losses; (xvii) results of regulatory examinations; (xviii) 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; (xix) 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; (xx) approval of the declaration of any dividend by our Board of Directors; (xxi) loss of key personnel; and (xxii) 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.