Mountain Commerce Bancorp, Inc. Announces Third Quarter 2024 Results And Quarterly Cash Dividend

KNOXVILLE, Tenn., Oct. 21, 2024 /PRNewswire/ -- Mountain Commerce Bancorp, Inc. (the "Company") (OTCQX: MCBI), the holding company for century-old Mountain Commerce Bank (the "Bank"), today announced results and related data as of and for the three and nine months ended September 30, 2024.

The Company also announced today that its Board of Directors declared a quarterly cash dividend of $0.05 per common share, its sixteenth consecutive quarterly dividend.  The dividend is payable on December 2, 2024 to shareholders of record as of the close of business on November 4, 2024.

Management Commentary

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

"The third quarter of 2024 delivered further improvement in yields on interest-earning assets resulting in further increases in the Company's net interest margin, which improved from 2.00% in the second quarter of 2024 to 2.08% in the third quarter of 2024, and finished the quarter at 2.16% for the month of September 2024.  The Company anticipates continued improvement in its net interest margin for the remainder of 2024 and throughout 2025 as the result of improved loan yields and improved funding costs resulting from the repricing of certificates of deposit that have already repriced or will reprice during 2025.  We also believe we are well positioned for future changes in interest rates, whether these adjustments are up or down.  We are pleased that our average yield on taxable loans continues to increase, rising 12 bp to 5.89% in the third quarter of 2024 from 5.77% in the second quarter of 2024 and rising 45 bp from the same quarter a year ago.  Equally as important, our cost of funds remained steady at 3.70% in the second and third quarter of 2024 and declined 22bp from 3.92% in the first quarter of 2024.  We continue to experience excellent asset quality with non-performing assets to total assets of 0.08%, no properties in real estate owned, and an allowance to non-performing loans coverage ratio of over 8x.  Liquidity remained strong as of September 30, 2024 with available funding sources more than $100 million in excess of our level of uninsured and uncollateralized deposits. We remain very focused on controlling noninterest expenses which totaled 1.45% of average assets on an adjusted basis during the third quarter of 2024, which we believe is among the best in our peer group.  Careful management of our dividend and asset growth has allowed our tangible common equity to tangible assets ratio to rise to 7.50% from 7.06% at June 30, 2024, with the Bank's leverage ratio remaining steady at 9.29% at September 30, 2024 compared to 9.31% at June 30, 2024.  We continue to see excellent growth from our newest branches in Brentwood, West Knoxville and Johnson City and believe that these markets will continue to drive profitable growth for the Company.

While some of our markets were devastated by the recent storm and floods, we are thankful that our branches and employees sustained minimal damage.  Additionally, we have an immaterial amount of loans in Unicoi County where most of the storm damage occurred and do not expect significant loan losses."

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 nine months ended September 30, 2024.  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, gains and losses from the sale of fixed assets, the provision for or recovery of credit losses, the impact of material one-time fraud losses or recoveries, and software conversion expenses.  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.

Net Interest Income

Net interest income increased $0.3 million, or 3.1%, from $8.0 million for the three months ended September 30, 2023 to $8.3 million for the same period in 2024.  The change between the periods was primarily the net result of the following factors:

• Average interest-earning assets grew $50.9 million, or 3.1%, from $1.622 billion to $1.673 billion, driven primarily by increases in loans.
• Average net interest-earning assets declined $25.4 million, or 7.8%, from $324.3 million to $298.9 million, due primarily to a $16.6 million decrease in noninterest bearing deposits and a $19.4 million increase in noninterest earning assets – primarily resulting from higher levels of fixed assets which are discussed below.
• The average rate paid on interest-bearing liabilities increased 32 bp from 4.09% to 4.41%, while the average rate earned on interest-earning assets increased 35 bp from 5.35% to 5.70%, resulting in tax-equivalent net interest rate spread expanding by 3 bp to 1.29% from 1.26% and a consistent level of net interest margin of 2.08% in both periods.

Net interest income decreased $2.8 million, or 11.0%, from $25.3 million for the nine months ended September 30, 2023 to $22.5 million for the same period in 2024.  The change between the periods was primarily the net result of the following factors:

• Average interest-earning assets grew $78.2 million, or 4.9%, from $1.594 billion to $1.672 billion, driven primarily by increases in loans.
• Average net interest-earning assets declined $47.7 million, or 14.4%, from $330.5 million to $282.8 million, due primarily to a $31.0 million decrease in noninterest bearing deposits and a $23.1 million increase in noninterest earning assets – primarily resulting from higher levels of fixed assets which are discussed below.
• The average rate paid on interest-bearing liabilities increased 75 bp from 3.71% to 4.46%, while the average rate earned on interest-earning assets increased 40 bp from 5.18% to 5.58%, resulting in a decrease in tax-equivalent net interest rate spread from 1.47% to 1.13% and a decrease in tax-equivalent net interest margin from 2.24% to 1.88%.

Rate Sensitivity

The Company has the following assets subject to contractual repricing of interest rates as of September 30, 2024:

Interest Rate Swaps

The Company has the following interest rate swaps hedging loans receivable as of September 30, 2024:

Recovery Of Credit Losses

The Company continues to experience near historically low levels of problem assets and charge-offs which, when combined with favorable economic factors, has resulted in minimal provisions for credit losses or reductions to our allowance for credit losses in recent periods.  Additionally, the Company began recognizing industry benchmarks for expected recoveries during the third quarter of 2024 which had the effect of reducing the allowance for credit losses.

Noninterest Income

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

Noninterest income increased to $0.7 million in the third quarter of 2024 from $0.4 million in the same quarter of 2023.  The following factors had an impact on noninterest income during these periods:

• Realized and unrealized losses on equity securities improved by $0.1 million from the third quarter of 2023 as a result of the sale of the majority of the Company's equity securities during the fourth quarter of 2023 which were causing the realized and unrealized losses.
• The Company incurred a $0.3 million loss on the sale of fixed assets from the sale of its former headquarters building during the third quarter of 2023.
• The Company recognized a $0.1 million decrease in swap fees from the third quarter of 2023 due to a decline in the Company's lending volume. The Bank receives a fee for delivering the swap to a third party with our borrower as counterparty to the swap, but does not maintain a contractual obligation for the swap other than in the event of a default.

Noninterest income increased to $2.2 million for the nine months ended September 30, 2024 from $1.2 million in the same period of 2023.  The following factors had an impact on noninterest income during these periods:

• Realized and unrealized losses on equity securities improved by $0.8 million from the nine months ended September 30, 2023 as a result of the sale of the majority of the Company's equity securities during the fourth quarter of 2023 which were causing the realized and unrealized losses.
• The Company incurred a $0.3 million loss on the sale of fixed assets from the sale of its former headquarters building during the third quarter of 2023.
• Wealth management fees improved by $0.1 million from the 2023 to the 2024 period as a result of an improvement in equity market conditions.
• The Company recognized a $0.3 million decrease in swap fees from the nine months ended June 30, 2023 due to a decline in the Company's lending volume. 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 Expense

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

Noninterest expense increased $0.8 million, or 13.7%, from $5.7 million in the third quarter of 2023 to $6.5 million in the same period of 2024. The following factors had an impact on changes in noninterest expense during these periods:

• Compensation and employee benefits expense decreased $0.2 million, or 7.8%, due primarily to a decrease in incentive accruals and bonuses tied to 2024 performance and a decline in FTE employees from 115 to 108, offset, in part, by merit increases.
• Occupancy and furniture and equipment expenses increased by a combined $0.4 million, or 49.9%, due to the opening of the Johnson City financial center on July 1, 2024, offset by the absence of expenses previously recorded for formerly leased facilities.
• Data processing increased $0.4 million, or 78.1%, due primarily to a $0.3 million one-time payment to a vendor in connection with the termination of a software relationship.

Noninterest expense increased $0.4 million, or 2.4%, from $17.9 million in the first nine months of 2023 to $18.3 million in the same period of 2024. The following factors had an impact on changes in noninterest expense during these periods:

• Compensation and employee benefits decreased $0.9 million, or 9.2%, due primarily to a decrease in incentive accruals and bonuses tied to 2024 performance and a decline in FTE employees from 117 to 108, offset, in part, by merit increases.
• Occupancy and furniture and equipment expenses increased by a combined $0.6 million, or 24.6%, due to the opening of the West Knoxville financial center on October 1, 2023 and Johnson City financial center on July 1, 2024, offset by the absence of expenses previously recorded for formerly leased facilities.
• Data processing increased $0.4 million, or 25.8%, due primarily to a $0.3 million one-time payment to a vendor in connection with the termination of a software relationship.
• FDIC insurance increased $0.2 million, or 28.0%, due primarily to an increase in average assets and the quarterly multiplier used to determine assessments.
• Professional fees increased $0.3 million, or 20.0%, due to a change in the timing of recognizing certain auditing, regulatory and legal costs.

Income Taxes

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

The Company's tax rates for the three and nine months ended September 30, 2024 and 2023 reflect the impact of tax credits on certain loans which reduce the effective state tax rate to a nominal amount.  The Company's marginal tax rate of 26.14% is also favorably impacted by certain sources of non-taxable income including bank-owned life insurance (BOLI) and investments in tax-free municipal securities. 

Balance Sheet

Total assets increased 33.3 million, or 1.9%, from $1.738 billion at December 31, 2023 to $1.771 billion at September 30, 2024.  The change was primarily driven by the following factors:

• Cash and cash equivalents increased $17.0 million, or 24.7%, due to a decrease in new loan volumes and an increased focus on core deposit growth.
• Available for sale investment security balances decreased $12.4 million, or 9.5%, primarily due to the sale of approximately $8.0 million of securities during the first quarter of 2024 and principal paydowns.

The following summarizes the composition of the Company's available for sale investment securities portfolio (at fair value) as of September 30, 2024 and December 31, 2023:

Non-agency MBS/CMO have an average credit-enhancement of approximately 32% as of September 30, 2024.  Municipal securities are generally rated AA or higher. 

• The Company did not have any securities classified as held-to-maturity as of September 30, 2024 and December 31, 2023.
• Loans receivable increased $19.6 million, or 1.4%, from $1.453 billion at December 31, 2023 to $1.472 billion at September 30, 2024. The Company is actively managing its exposure to commercial real estate and has a regulatory commercial real estate concentration of 312% of total risk-based capital as of September 30, 2024, down from 322% as of June 30, 2024 and 318% at December 31, 2023. 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 September 30, 2024.  Office loans are primarily comprised of low-rise office space.

• Premises and equipment increased $9.3 million, or 17.8%, from December 31, 2023 to September 30 30, 2024 primarily due to costs incurred for the construction of the 23,000 sf Johnson City combined financial/corporate center which opened for business on July 1, 2024.
• Total deposits increased $79.7 million, or 5.4%, from $1.472 billion at December 31, 2023 to $1.552 billion at September 30, 2024. An increase in non-interest bearing transaction and NOW and money market accounts during the first nine months of 2024 offset a decline in savings accounts and retail time deposits and was further used to reduce wholesale time deposits and increase liquidity.

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

The following summarizes the composition of wholesale time deposits as of September 30, 2024:

• FHLB borrowings decreased $55.5 million from December 31, 2023 to September 30, 2024, and consisted of the following at September 30, 2024:

• Total equity increased $10.0 million, or 8.1%, from $122.8 million at December 31, 2023 to $132.7 million at September 30, 2024. 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, 2024:

The Company's tangible equity to tangible assets ratio increased to 7.50% at September 30, 2024 from 7.07% at December 31, 2023, as the Company continues to manage its growth and dividend levels in light of current income levels.  The Company and Bank both remain well capitalized at September 30, 2024, with the Bank maintaining a regulatory leverage ratio of 9.29% at September 30, 2024.

Share Repurchases

The Company has an active authorization to repurchase up to $5 million of shares through March 31, 2025.  No shares were repurchased pursuant to such plan during the nine months ended September 30, 2024.

Asset Quality

Non-performing loans to total loans decreased to 0.09% at September 30, 2024 from 0.11% at December 31, 2023.  Non-performing assets to total assets decreased to 0.08% at September 30, 2024 from 0.09% at December 31, 2023.  Other real estate owned balances remained at $0 at both September 30, 2024 and December 31, 2023.  Net recoveries of $0.3 million were recognized during the nine months ended September 30, 2024, compared to net charge-offs of $0.5 million during the year ended December 31, 2023.  The allowance for credit losses to total loans declined to 0.76% at September 30, 2024 from 0.90% at December 31, 2023 due, in part, to the payoff in full of a $0.7 million loan which was fully-reserved as of December 31, 2023, an improvement in modeled economic projections, and inclusion of expected recoveries beginning in the third quarter of 2024.  Coverage of non-performing loans by the allowance for credit losses was more than 8 to 1 at September 30, 2024 and 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, 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 continued elevated interest rates, 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) our ability to grow and retain low cost core deposits and retain large, uninsured deposits including during times when we are seeking to limit the rates we pay on deposits or uncertainty exists in the financial services sector; v) 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; (vi) 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; (vii) our ability to meet our liquidity needs without having to liquidate investment securities that we own while those securities are in an unrealized loss position as a result of the elevated rate environment, or increase the rates we pay on deposits or increase our levels of non-core deposits to levels that cause our net interest margin to 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 or do business with, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xx) loss of key personnel; and (xxi) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future 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 7 branches located in Brentwood, Erwin, Johnson City (2), 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.