Knoxville, Tennessee, October 26, 2020 – 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, 2020.
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, 2020.  As further detailed in Appendix A to this press release, (i) adjusted results (which are non-GAAP financial measures) reflect adjustments for investment gains and losses, the impact of PPP fee amortization, net of the amortization of PPP deferred loan costs and one-time PPP bonuses, and gains and losses from the sale of REO and (ii) adjusted results excluding provision (which are also non-GAAP financial measures) further reflect adjustments for the provisions for credit losses, including the provision for loan losses and the provision for unfunded loan commitments.  See Appendix B to this press release for more information on our tax equivalent net interest margin.
 


Management Commentary

William E. “Bill” Edwards, III, President and Chief Executive Officer of the Company, commented, “We are once again pleased with our strong quarterly results which saw adjusted net income excluding the provisions for credit losses (non-GAAP) increase 28% from $3.2 million in the third quarter of 2019 to $4.1 million in the same quarter of 2020, while adjusted earnings per diluted share excluding the provisions for credit losses (non-GAAP) increased 27% from $0.51 to $0.65 over the same periods. As a result of the continuing economic recession, we adjusted several components of our allowance for loan losses model, which contributed to an additional $2.5 million of allowance for loan losses in the third quarter of 2020, bringing our allowance to non-PPP loans (non-GAAP) to 1.58%. We continue to remain highly focused on delivering a strong return to our shareholders, which is reflected in our adjusted return on average equity excluding the provisions for credit losses (non-GAAP) increasing from 14.9% in the third quarter of 2019 to 16.7% in the same period of 2020. Finally, we were very pleased to see loan balances with COVID-related modifications drop from $191.5 million at June 30, 2020 to $40.1 million, or less than 5% of non-PPP loans, at September 30, 2020. We expect further reductions in these balances during the fourth quarter of 2020.”

Net Interest Income

Net interest income increased $1.9 million, or 26.5%, from $7.3 million for the three months ended September 30, 2019 to $9.2 million for the same period in 2020. The increase between the periods was primarily the result of the following factors:

  • Average interest-earning assets grew $271.3 million, or 32.1%, from $845.4 million to $1.117 billion, due in part to PPP loans.
  • Average net interest-earning assets grew $89.0 million, or 47.1%, from $188.9 million to $277.9 million, funded by increases in noninterest bearing deposits and an increase in shareholders’ equity.
  • The rate paid on interest-bearing liabilities dropped 50.1% from 1.90% to 0.94%.

These increases were partially offset by a decrease in net interest margin from 3.43% for the three months ended September 30, 2019 to 3.30% for the same period of 2020 as a result of increased liquidity and a decrease in the yield on interest-earning assets from 4.90% during the three months ended September 30, 2019 to 4.00% during the same period in 2020 due, in part, to lower yields on PPP loans.
Net interest income increased approximately $4.4 million, or 21.0%, from $21.0 million for the nine months ended September 30, 2019 to $25.4 million for the same period in 2020. The increase between the periods was primarily the result of the following factors:

  • Average interest-earning assets grew $214.7 million, or 26.0%, from $826.0 million to $1.041 billion, due in part to PPP loans.
  • Average net interest-earning assets grew $81.8 million, or 50.0%, from $165.0 million to $246.8 million, funded by increases in noninterest bearing deposits and an increase in shareholders’ equity.
  • The rate paid on interest-bearing liabilities dropped 37.1% from 1.91% to 1.20%.

These increases were partially offset by a decrease in net interest margin from 3.40% for the nine months ended September 30, 2019 to 3.27% during the same period of 2020 as a result of increased liquidity and a decrease in the yield on interest-earning assets from 4.92% during the nine months ended September 30, 2019 to 4.18% during the same period in 2020 due, in part, to lower yields on PPP loans.
The Company recognized approximately $0.4 million and $0.8 million of PPP loan origination fees, net of the amortization of deferred PPP loan costs, through net interest income during the three and nine months ended September 30, 2020, respectively.

Provision For Loan Losses

A provision for loan losses of $2.5 million and $7.5 million was recorded for the three and nine months ended September 30, 2020, respectively, as a result of the Company increasing the qualitative factors in its allowance for loan loss model and increasing reserve factors on certain loans to borrowers more likely to be impacted by the economic recession. A recovery of loan losses of $0 and $0.8 million was recorded in the three and nine months ended September 30, 2019, respectively.

Noninterest Income

Noninterest income decreased $0.5 million, or 46.1%, from $1.1 million in the third quarter of 2019 to $0.6 million in the same quarter of 2020, due primarily to a $0.3 million decline in swap brokerage fees.
Noninterest income decreased $0.1 million, or 7.2%, from $1.9 million during the nine months ended September 30, 2019 to $1.8 million during the same period of 2020. The decrease was primarily due to the $0.3 million decline in swap brokerage fees discussed above, partially offset by an increase in the gain on the sale of investments and an increase in the gain on sale of loans

Noninterest Expense

Noninterest expense increased $1.0 million, or 24.9%, from $4.1 million in the third quarter of 2019 to $5.1 million in the same period of 2020. The increase was primarily the result of a $0.5 million increase in compensation and benefits expense due primarily to one-time, PPP-related bonuses paid to certain employees. Other noninterest expense increased $0.3 million due to an increase in the reserve for unfunded loan commitments.
Noninterest expense increased $0.8 million, or 6.8%, from $11.6 million for the nine months ended September 30, 2019 to $12.3 million for the same period of 2020. This increase was primarily the result of the $0.5 million PPP-related bonuses and $0.3 million increase in the reserve for unfunded loan commitments discussed above.

Income Taxes

The effective tax rate of the Company was 16.6% and 26.1% for the three months ended September 30, 2020 and 2019, respectively. The effective tax rate of the Company was 23.0% and 25.5% for the nine months ended September 30, 2020 and 2019, respectively. The Company’s marginal tax rate of 26.14% is favorably impacted by certain sources of non-taxable income including BOLI, tax-free loans and investments in municipal securities. The Company’s effective tax rate declined during the three and nine months ended September 30, 2020 due primarily to an investment of approximately $11.2 million made during the third quarter of 2020 in certain loans eligible for a 5% state tax credit.

Balance Sheet

Total assets increased $220.3 million, or 24.3%, from $906.7 million at December 31, 2019 to $1.127 billion at September 30, 2020. The increase was primarily driven by the following factors:

  • Loans receivable increased $140.7 million, or 17.4%, from $807.4 million at December 31, 2019 to $948.1 million at September 30, 2020. $107.7 million of this increase resulted from PPP loans.
  • Interest-earning deposits in other banks increased $50.1 million from $7.5 million at December 31, 2019 to $57.5 million at September 30, 2020. The Company believes it is prudent to maintain higher levels of liquidity during the economic recession.
  • Investments available for sale increased $36.4 million from $46.9 million to $83.3 million as proceeds from higher deposit and borrowing levels were invested partially in investment securities.

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

Total deposits increased $141.4 million, or 18.7%, from $757.9 million at December 31, 2019 to $899.4 million at September 30, 2020.  The increase in noninterest-bearing deposit balances of $82.5 million during that period was largely unrelated to PPP loan balances, which should improve the Company’s ability to retain such balances in the immediate future.
The following summarizes changes in deposit balances over the last three quarters:

 
FHLB / FRB borrowings increased $61.9 million, or 76.9%, from $35.0 million at December 31, 2019 to $96.9 million at September 30, 2020.  $46.9 million of this increase related to borrowings from the FRB to fund PPP loans, which we expect to pay back as the related loans are forgiven or repaid.
On July 15, 2020, the Company issued $10.0 million aggregate principal amount of 6.00% Fixed-to-Floating Rate Subordinated Notes due 2030 in a private offering to institutional accredited investors. The notes will initially bear interest at a fixed rate of 6.00% per annum, payable semi-annually in arrears. From and including July 15, 2025 to, but excluding, the maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal to the then current three-month term SOFR (provided, however, that in the event three-month term SOFR is less than zero, three-month term SOFR shall be deemed to be zero), plus 593 basis points, with interest during this period payable quarterly in arrears. The notes are redeemable by the Company, in whole or in part, on or after July 15, 2025, and at any time, in whole but not in part, upon the occurrence of certain events.
Total equity increased $7.9 million, or 8.7%, from $91.0 million at December 31, 2019 to $98.9 million at September 30, 2020.  This increase was primarily comprised of net income of $5.7 million.  Tangible book value per share improved from $14.57 at December 31, 2019 to $15.74 at September 30, 2020.  Equity to assets declined from 10.04% at December 31, 2019 to 8.78% at September 30, 2020 because of the meaningful increase in total assets, including the PPP loans.

Asset Quality

Non-performing loans to total loans increased slightly from 0.21% at December 31, 2019 to 0.23% at September 30, 2020.  Non-performing assets to total assets decreased from 0.73% at December 31, 2019 to 0.22% at September 30, 2020, primarily as a result of the sale of several real estate owned properties which declined $4.6 million over the same period.  Net charge-offs of $23 thousand were recognized during the first nine months of 2020.  The allowance for loan losses to total loans increased from 0.72% at December 31, 2019 to 1.40% at September 30, 2020 (1.58% excluding PPP loans) and coverage of non-performing loans remained strong at 623.71% at September 30, 2020.  Pursuant to interagency guidance, the Company has elected to not consider loans modified under the CARES Act as troubled debt restructurings or non-performing loans.
During the first six months of 2020, the Company granted principal and/or interest deferrals on loans in response to the COVID-19 pandemic.  As noted below, the balance of loans with COVID-related modifications decreased from $191.5 million at June 30, 2020 to $40.1 million at September 30, 2020.  The Company has not granted any additional deferrals past the six-month maximum deferral period it initially offered borrowers.  The following summarizes the outstanding loans with COVID-related modifications as of September 30, 2020 and June 30, 2020 by customer industry:

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, 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, both including and excluding the provisions for (recovery of) credit losses, which are all non-GAAP financial measures. We also present in this press release and the accompanying tables pre-tax, pre-provision earnings and the allowance for loan losses to loans excluding PPP loans 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) further deterioration in the financial condition of our borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) the further effects of the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on general economic and financial market conditions and on our and our customers’ business, results of operations, asset quality and financial condition; (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 further deterioration of the economy in our market areas, (vi) 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, (vii) the ability to grow and retain low-cost core deposits, (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 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 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 additional increases to compliance costs as a result of increased regulatory oversight, (xx) loss of key personnel, and (xxi) 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 East Tennessee through 5 branches located in Erwin, Johnson City, Knoxville and Unicoi.  The Bank focuses on relationship banking of small and medium-sized businesses and high net worth individuals who value the personal service and attention that only a community bank can offer.  For further information, please visit us at www.mcb.com