The Company also announced today that its Board of Directors declared a quarterly cash dividend of $0.14 per common share, representing a 4% increase from the $0.135 cash dividend declared in the prior quarter and our third consecutive quarterly dividend increase. The dividend is payable on December 1, 2021 to shareholders of record as of the close of business on November 8, 2021.
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, 2021. As further detailed in Appendix A and C to this press release, adjusted results (which are non-GAAP financial measures), reflect adjustments for realized and unrealized investment gains and losses, the impact of 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, and the provision for (recovery of) unfunded loan commitments. 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
Net Interest Income
Net interest income increased $2.2 million, or 23.4%, from $9.2 million for the three months ended September 30, 2020 to $11.4 million for the same period in 2021. The increase between the periods was primarily the result of the following factors:
- Average interest-earning assets grew $94.0 or 8.4%, from $1.117 billion to $1.211 billion, driven by increases in loans, interest-earning deposits and investment securities.
- Average net interest-earning assets grew $95.9 million, or 34.5%, from $277.9 million to $373.8 million, funded by increases in noninterest bearing deposits and an increase in shareholders’ equity.
- The average rate paid on interest-bearing liabilities dropped 55.3% from 0.94% to 0.42%, while the average rate earned on interest-earning assets increased 3.25% from 4.00% to 4.13%, driving an increase in tax-equivalent net interest margin from 3.30% to 3.84%.
The Company recognized approximately $1.0 million and $0.4 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, 2021 and 2020, respectively.
Net interest income increased $6.5 million, or 25.5%, from $25.4 million for the nine months ended September 30, 2020 to $31.9 million for the same period in 2021. The increase between the periods was primarily the result of the following factors:
- Average interest-earning assets grew $101.7 million, or 9.8%, from $1.041 billion to $1.142 billion, driven by increases in loans and investment securities.
- Average net interest-earning assets grew $89.2 million, or 36.1%, from $246.8 million to $336.1 million, funded by increases in noninterest bearing deposits and an increase in shareholders’ equity.
- The average rate paid on interest-bearing liabilities dropped 56.7% from 1.20% to 0.52%, while the average rate earned on interest-earning assets decreased slightly from 4.18% to 4.14%, driving an increase in tax-equivalent net interest margin from 3.27% to 3.78%.
The Company recognized approximately $2.6 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 nine months ended September 30, 2021 and 2020, respectively.
Provision For Loan Losses
A provision for loan losses of $0.2 million was recorded for the three months ended September 30, 2021, primarily as a result of continued loan growth. A recovery of loan losses of $3.3 million was recorded during the nine months ended September 30, 2021 as the Company decreased the qualitative factors in its allowance for loan loss model in response to a declining and de minimis levels of COVID-related loan modifications, continued strong asset quality, and continued strengthening of the economy in our primary markets. The Company recorded a provision for loan losses of $2.5 million and $7.5 million 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 we viewed then as more likely to be negatively impacted by the COVID-19 pandemic.
Noninterest income increased $0.1 million, or 13.7%, from $0.6 million in the third quarter of 2020 to $0.7 million in the same quarter of 2021. This increase was due primarily to increases in service charges and fee income as a result of increases in transaction deposit balances, gains on the sale of loans as a result of continued low interest rates, and wealth management fees as a result of increases in equity market values, offset by a $0.1 million decline in unrealized gains on equity securities.
Noninterest income increased $0.2 million, or 10.9%, from $1.8 million for the nine months ended September 30, 2020 to $2.0 million in the same period of 2021. This increase was due primarily to increases in service charges and fee income as a result of increases in transaction deposit balances, gains on the sale of loans as a result of continued low interest rates, and wealth management fees as a result of increases in equity market values, offset by a decline in swap fees as the Company has focused on longer duration loans.
Noninterest expense decreased $0.4 million, or 8.5%, from $5.1 million in the third quarter of 2020 to $4.6 million in the same period of 2021. The decrease was primarily the result of the following:
- $0.2 million decrease in compensation and employee benefits, due to $0.4 million of PPP bonuses that were paid during the third quarter of 2020;
- $0.2 million decrease in real estate owned expense as a result of lower revels of real estate owned; and
- $0.3 million decrease in other noninterest expense as a result of a $0.3 million increase in the reserve for unfunded commitments in the third quarter of 2020 as compared to a nominal amount in the same period of 2021.
Noninterest expense increased $0.5 million, or 4.4%, from $12.3 million for the first nine months of 2020 to $12.9 million in the same period of 2021. The increase was primarily the result of the following:
- a $0.5 million, or 6.8%, increase in compensation and employee benefits, due in part to $0.3 million of deferred PPP compensation costs during the first nine months of 2020 compared to $0.1 million during the same period in 2021, as well as normal increases in compensation and benefit costs, offset by $0.4 million of PPP bonuses that were paid during the third quarter of 2020;
- $0.2 million increase in data processing expense due to continued growth in the number of loan and deposit accounts.
Offsetting these increases was a $0.4 million decrease in other noninterest expense due to a decrease in the reserve for unfunded loan commitments during the nine months ended September 30, 2021.
The effective tax rate of the Company was 21.9% and 16.6% for the three months ended September 30, 2021 and 2020, respectively. The effective tax rate of the Company was 23.7% and 22.9% for the nine months ended September 30, 2021 and 2020, respectively. 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. The Company’s effective tax rate increased during the 2021 periods compared to the same periods in 2020 due primarily to the timing and amount of certain investments in loans eligible for a 5% state tax credit.
Total assets increased $184.0 million, or 16.6%, from $1.110 billion at December 31, 2020 to $1.294 billion at September 30, 2021. The increase was primarily driven by the following factors:
- Cash and cash equivalents increased $61.6 million, or 85.1%, from $72.4 million at December 31, 2020 to $134.0 million at September 30, 2021, as the Company continues to experience significant growth in deposits which has been only partially invested in investment securities and loans.
- Investments available for sale increased $34.8 million, or 45.0%, from $77.3 million at December 31, 2020 to $112.1 million at September 30, 2021, as the Company took advantage of a steepening yield curve to invest excess liquidity.
- Loans receivable increased $76.1 million, or 8.1%, from $935.5 million at December 31, 2020 to $1.012 billion at September 30, 2021. Increases in residential, owner-occupied and non-owner occupied commercial, and commercial and industrial lending offset a $63.3 million reduction in PPP loans.
- Premises and equipment increased $4.6 million due to the Company purchasing the land for an operations center it expects to construct in Johnson City, TN and a second stand-alone financial center it expects to construct in Knoxville, TN. The Company previously purchased the land for a financial center in Johnson City, TN that it now intends to use to consolidate certain existing locations. The operations center will replace certain leased space the Company currently occupies and is expected to be in use by the end of 2022. The Johnson City, TN and Knoxville, TN financial centers are expected to be completed during 2023 and 2024, respectively.
- Total deposits increased $123.1 million, or 13.4%, from $921.9 million at December 31, 2020 to $1.045 billion at September 30, 2021. The primary driver of this increase was a $106.2 million, or 51.0%, increase in noninterest-bearing deposit balances from $208.3 million to $314.4 million, as well as a $94.1 million, or 97.8%, increase in NOW and money market accounts. These increases were offset by a $75.8 million, or 43.7%, decrease in retail time deposits, as customers continue to prefer shorter maturities as a result of the historically low interest rates. Wholesale time deposits, which consist primarily of brokered certificates of deposit with a maximum maturity of one year, also declined between December 31, 2020 and September 30, 2021.
- FHLB borrowings of $100.0 million at September 30, 2021 consist of the following:
During the quarter ended September 30, 2021, the Bank terminated its interest rate swap on the 3 month FHLB advance noted above for a gain of approximately $0.2 million, which will be recognized as a reduction of interest expense through the original interest rate swap term of March, 2025.
- Total equity increased $13.6 million, or 13.1%, from $103.8 million at December 31, 2020 to $117.4 million at September 30, 2021. This increase was primarily comprised of net income of $18.5 million, offset by dividends paid of $2.5 million, share repurchases of $2.2 million and a net decline in the value of investments and derivatives of $0.6 million.During the three and nine months ended September 30, 2021, the Company repurchased the following shares of its common stock:
Tangible book value per share improved from $16.52 at December 31, 2020 to $18.69 at September 30, 2021, an annualized increase of greater than 17%. The Company’s equity to assets ratio was 9.07% at September 30, 2021, down from 9.36% at December 31, 2020. The Company continues to manage its equity levels through a combination of share repurchases and dividends. The Company and Bank both remain well capitalized at September 30, 2021.
Non-performing loans to total loans decreased from 0.19% at December 31, 2020 to 0.13% at September 30, 2021. Non-performing assets to total assets decreased from 0.16% at December 31, 2020 to 0.10% at September 30, 2021. During the quarter ended September 30, 2021, the Company successfully liquidated the agricultural property it foreclosed upon during the first quarter of 2021 at a nominal loss. Net charge- offs of $159 thousand were recognized during the first nine months of 2021 compared to $20 thousand during the full year ended December 31, 2020. The allowance for loan losses to total loans decreased from 1.42% (1.56% excluding PPP loans) at December 31, 2020 to 0.97% (1.01% excluding PPP loans) at September 30, 2021 due to a $3.3 million recovery for loan losses recognized during the first nine months of 2021. Coverage of non-performing loans by the allowance for loan losses remained strong at more than 7 to 1 at September 30, 2021.
There were no COVID-related modifications in place as of September 30, 2021. Pursuant to interagency guidance, the Company has elected to not consider qualifying loans modified under the CARES Act as troubled debt restructurings.
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, 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 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.
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 effects of new outbreaks of COVID-19, including actions taken by governmental officials to curb the spread of the virus, and the resulting impact on general economic and financial market conditions and on our customers’ business, results of operations, asset quality and financial condition; (iii) further public acceptance of the vaccines that were developed against the virus as well as the decisions of governmental agencies with respect to vaccines, including recommendations related to booster shots and requirements that seek to mandate that individuals receive or employers require that their employees receive the vaccine; (iv) those vaccines’ efficacy against the virus, including new variants; (v) deterioration in the real estate market conditions in our market areas, (vi) 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, (vii) the deterioration of the economy in our market areas, (viii) 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, (ix) the ability to grow and retain low-cost core deposits, (x) significant downturns in the business of one or more large customers, (xi) effectiveness of our asset management activities in improving, resolving or liquidating lower quality assets, (xii) our inability to maintain the historical, long-term growth rate of our loan portfolio, (xiii) risks of expansion into new geographic or product markets, (xiv) the possibility of increased compliance and operational costs as a result of increased regulatory oversight, (xv) our inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels, (xvi) 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, (xvii) changes in capital levels and loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments, (xviii) inadequate allowance for loan losses, (xix) results of regulatory examinations, (xx) 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, (xxi) 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, (xxii) approval of the declaration of any dividend by our Board of Directors, (xxiii) loss of key personnel, (xxiv) 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, and (xxv) the negative impact of possible future inflationary pressures. 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
Appendix A – Reconciliation of Non-GAAP Financial Measures