Mountain Commerce Bancorp, Inc. Announces Third Quarter 2022 Results And Increase in Quarterly Cash Dividend

KNOXVILLE, Tenn., Oct. 24, 2022 /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 nine months ended September 30, 2022.

The Company also announced today that its Board of Directors declared a quarterly cash dividend of $0.16 per common share, representing a 3.2% increase from the $0.155 cash dividend per common share declared in the prior quarter and our seventh consecutive quarterly dividend increase.  The dividend is payable on December 1, 2022 to shareholders of record as of the close of business on November 7, 2022.

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 nine months ended September 30, 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, as further described below.  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.

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

"We are pleased to report another strong earnings quarter for the Company, which saw adjusted net income (non-GAAP) increase 19% from $5.0 million in the third quarter of 2021 to $6.0 million in the same quarter of 2022, while adjusted earnings per diluted share (non-GAAP) increased 19% from $0.81 to $0.96 over the same periods.  Our strong earnings, combined with prudent management of our capital, have helped increase our annualized adjusted return on average equity (non-GAAP) to 20.68% for the quarter ended September 30, 2022, compared to 17.17% for the same period in the prior year. Our annualized adjusted return on average assets (non-GAAP) remained strong at 1.58% in the third quarter of 2022, down slightly from 1.60% in the third quarter of 2021.  We continue to experience very low levels of loan charge-offs and our allowance coverage of nonperforming loans exceeds 9 to 1 for the second consecutive quarter.  From an asset quality perspective, our non-performing assets to total assets remained at historical lows at 0.08%, with no properties in real estate owned.  During the third quarter of 2022, we received an insurance recovery of $250,000 related to the fraudulent wire loss incurred during the prior quarter, and we continue to pursue other options for further recovery.  As a result of our continued strong performance, we are pleased to announce that we have increased our quarterly dividend by 3.2% to $0.16 per quarter, our seventh consecutive quarterly increase. 

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

• The construction of a new 25,000 sf operations center to replace our existing 10,000 sf leased space in Johnson City, TN. Construction on this facility continues and the facility is expected to be operational by the first quarter of 2023.
• The construction of a new 23,000 sf Johnson City combined financial/corporate center with significant I-26 visibility. This building will be a major upgrade from our existing 3,000 sq. ft. branch, and we believe will allow us to substantially grow our Johnson City and TriCities market share. We expect construction on this building to start in the fourth quarter of 2022 and estimate the project will cost approximately $19.5 million.
• We are pleased to announce that we completed the purchase of a 37,500 sf former bank building at 9950 Kingston Pike in Knoxville, TN during the third quarter of 2022. In addition to providing a much needed additional financial center, we also expect to consolidate approximately 9,000 sf of space that is currently leased into this building. As a result of purchasing this building, the Company no longer intends to build a financial center in Knoxville, resulting in a considerable savings of time and money. This building is expected to be operational during the second quarter of 2023.
• We were happy to conduct the grand opening of our first Nashville area office in Brentwood on September 19, 2022. This event was well attended by the community and provided a great opportunity to showcase our brand.

Finally, we are proud to once again have been named a Top 200 Publicly Traded Community Bank (#26) by American Banker Magazine and a Top 100 Bank Under $3 Billion in Assets (#51) by S&P Global for 2022."

Net interest income increased $1.5 million, or 13.6%, from $11.4 million for the three months ended September 30, 2021 to $12.9 million for the same period in 2022.  The increase between the periods was primarily the result of the following factors:

• Average interest-earning assets grew $240.9 million, or 19.9%, from $1.211 billion to $1.452 billion, driven by increases in loans and investment securities.
• Average net interest-earning assets grew $38.6 million, or 10.3%, from $373.8 million to $412.4 million, funded by increases in noninterest bearing deposits and shareholders' equity.
• The average rate paid on interest-bearing liabilities increased from 0.42% to 1.01%, while the average rate earned on interest-earning assets increased from 4.13% to 4.38%, resulting in a decrease in tax-equivalent net interest margin from 3.84% to 3.66%.

The Company recognized approximately $39 thousand and $1.0 million of PPP loan origination fees, net of the amortization of deferred PPP loan costs, through net interest income during the three months ended September 30, 2022 and 2021, respectively.  Less than $0.1 million in net PPP loan origination fees remains to be recognized as of September 30, 2022.

Net interest income increased $5.1 million, or 15.9%, from $31.9 million for the nine months ended September 30, 2021 to $36.9 million for the same period in 2022.  The increase between the periods was primarily the result of the following factors:

• Average interest-earning assets grew $233.1 million, or 20.4%, from $1.142 billion to $1.375 billion, driven by increases in loans and investment securities.
• Average net interest-earning assets grew $66.3 million, or 19.7%, from $336.1 million to $402.4 million, funded by increases in noninterest bearing deposits and shareholders' equity.
• The average rate paid on interest-bearing liabilities increased from 0.52% to 0.63%, while the average rate earned on interest-earning assets increased from 4.14% to 4.16%, resulting in a decrease in tax-equivalent net interest margin from 3.78% to 3.72%.

The Company recognized approximately $0.3 million and $2.7 million of PPP loan origination fees, net of the amortization of deferred PPP loan costs, through net interest income during the nine months ended September 30, 2022 and 2021, respectively.

The Company has approximately $241.2 million of adjustable rate loans, substantially all of which have adjusted in connection with the recent rise in short-term interest rates and could adjust further with an additional increase in short term interest rates.  Additionally, the Company has approximately $33.5 million and $48.7 million of fixed rate loans which are subject to repricing during 2023 and 2024, respectively.

The Federal Reserve has increased the Federal Funds interest rate by 300 bp since December 31, 2021.  Since that time, the Company has experienced the following impacts on its loan yields and deposit costs:

A provision for loan losses of $0.9 million and $2.0 million was recorded for the three and nine months ended September 30, 2022, respectively, primarily as a result of continued loan growth.  A provision (recovery) of loan losses of $0.2 million and ($3.3 million) was recognized during the three and nine months ended September 30, 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 engaged a vendor to assist with implementation and is on track with its milestones for implementation.

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

Noninterest income declined to $0.5 million in the third quarter of 2022 from $0.6 million in the same quarter of 2021.  This decrease was due primarily to approximately $0.2 million of unrealized losses on equity securities (primarily bank preferred stock).  These losses, which are not credit related, have not been realized and are subject to future increases or decreases in value.  Gain on sale of loans declined $0.1 million during the third quarter of 2022 compared to the same period in 2021 also due to an increase in interest rates which contributed to a decrease in residential mortgage loan volumes.  These declines were partially offset by an increase 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 income declined to $0.9 million during the nine months ended September 30, 2022 from $2.0 million during the same period of 2021.  This decrease was due primarily to approximately $1.2 million of unrealized losses on equity securities (primarily bank preferred stock) and $0.2 million of realized losses on sale of investment securities available for sale (primarily unscheduled paydowns and redemptions) during the 2022 period as a result of the rise in interest rates during the period and not due to credit concerns.  Gain on sale of loans declined $0.3 million during the nine months ended September 30, 2022 compared to the same period in 2021 also due to an increase in interest rates which contributed to a decrease in residential mortgage loan volumes.  These declines 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.

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

Noninterest expense increased $1.0 million, or 21.4%, from $4.6 million in the third quarter of 2021 to $5.6 million in the same period of 2022.  This increase was primarily due to a $0.7 million, or 27.0%, increase in compensation and benefits, as a result of an increase in employee headcount and incentive compensation expense.  Full time equivalent employees increased from 93 at September 30, 2021 to 113 at September 30, 2022, including an increase of 3 new Relationship Managers.  The Company has also recognized higher levels of incentive compensation expense with increased levels of growth and profitability.  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 advisory expenses in conjunction with its adoption of a required internal control audit and change in accounting for credit loss reserves.  Other noninterest expense decreased $0.2 million during the third quarter of 2022 compared to the same period in the prior year due to the Company's receipt of a $250,000 insurance recovery related to a fraudulent wire loss recognized in the second quarter of 2022.

Noninterest expense increased $4.1 million, or 31.4%, from $12.9 million during the first nine months of 2021 to $16.9 million in the same period of 2022.  Compensation and benefits increased $2.1 million, or 29.2%, as a result of an increase in employee headcount and incentive compensation expense.  Data processing expenses increased $0.2 million over the same periods as the Company has implemented several new lending and credit reserve related software solutions, and professional fees increased $0.3 million for the reasons noted above.  Other noninterest expense increased primarily due to a $0.8 million ($0.6 million net of insurance recovery) fraudulent wire loss incurred during the second quarter of 2022.

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

The Company's effective tax rate during the nine months ended September 30, 2022 decreased to 22.44% from 23.71% in the same period of the prior year due to an increase in the average balance of tax-exempt loans from $7.0 million to $24.4 million over the same periods.  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. 

Total assets increased $232.0 million, or 17.4%, from $1.335 billion at December 31, 2021 to $1.567 billion at September 30 2022.  The change was primarily driven by the following factors:

• Investments available for sale balances decreased $22.4 million, or 14.3%, 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 September 30, 2022 and December 31, 2021:

Non-agency MBS have an average credit-enhancement of approximately 33% as of September 30, 2022.  Municipal securities are generally rated AA or higher.

• Loans receivable increased $211.0 million, or 19.7%, from $1.071 billion at December 31, 2021 to $1.282 billion at September 30, 2022. Increases in construction, residential, multi-family, and owner-occupied and non-owner occupied commercial lending offset a $8.0 million reduction in PPP loans. On an annualized basis, the Company's loan portfolio grew 26.3% in the first nine months of 2022.

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

• Premises and equipment increased $12.3 million, or 71.5%, during the first nine months of 2022 primarily due to the following:
• Costs incurred for an operations center that the Company is currently constructing in Johnson City, TN. As of June 30, 2022, the Company has incurred approximately $7.8 million out of an estimated $11.0 million cost with respect to this facility. The operations center will replace certain leased space the Company currently occupies and is expected to be in use by the first quarter of 2023.
• 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 second quarter of 2023.
• Total deposits increased $179.6 million, or 16.2%, from $1.108 billion at December 31, 2021 to $1.288 billion at September 30, 2022. The primary drivers of this increase were a $56.1 million, or 18.2%, increase in noninterest-bearing deposit balances, a $78.2 million, or 33.4%, increase in NOW and money market balances, and a $36.6 million, or 10.5%, increase in savings accounts. Wholesale time deposits consist primarily of brokered certificates of deposit with a maximum maturity of one year or less.

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

• FHLB borrowings increased $40.0 million from December 31, 2021 and consist of the following at September 30, 2022:

• Total equity decreased $7.3 million, or 6.0%, from $121.1 million at December 31, 2021 to $113.8 million at September 30, 2022. The following summarizes the components of the change in total shareholders' equity and tangible book value per share for the nine months ended September 30, 2022:

The Company's tangible equity to tangible assets ratio declined to 7.26% at September 30, 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 a 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 September 30, 2022.

Non-performing loans to total loans decreased from 0.17% at December 31, 2021 to 0.10% at September 30, 2022.  Non-performing assets to total assets decreased from 0.14% at December 31, 2021 to 0.08% at September 30, 2022.  Foreclosed real estate owned balances remained at $0 at September 30, 2022.  Net charge-offs of $87 thousand were recognized during the nine months ended September 30, 2022 compared to $164 thousand during all of 2021.  The allowance for loan losses to total loans was 0.97% at September 30, 2022 and 0.98% at December 31, 2021.  Coverage of non-performing loans by the allowance for loan losses remained strong at more than 9 to 1 at September 30, 2022. 

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.

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) significant downturns in the business of one or more large customers; (viii) effectiveness of our asset management activities in improving, resolving or liquidating lower quality assets; (ix) our inability to maintain the historical, long-term growth rate of our loan portfolio; (x) vaccines' efficacy against the virus, including new variants; (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 loan 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.

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.