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

Management Commentary

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

"While the first quarter of 2024 was a challenging quarter, we continue to focus on repositioning our balance sheet through targeted loan growth funded with higher levels of core (non-wholesale) deposits. Consistent with those priorities, wholesale time deposits and FHLB advances declined $92.9M during the first quarter of 2024, while core deposits grew $159.5 million during the same period. We are pleased that our average yield on taxable loans continues to increase, rising 55 bp to 5.66% in the first quarter of 2024 from 5.11% in the same quarter a year ago and 5.59% in the fourth quarter of 2023. Our recent monthly results are suggesting that cost of deposits may have reached its peak during the first quarter of 2024, and we are anticipating improvement in our net interest margin in the coming quarters. We continue to experience very low levels of loan charge-offs and non-performing assets, and our allowance coverage of nonperforming loans was greater than 15 to 1 at March 31, 2024 with no properties in real estate owned. Liquidity remained strong as of March 31, 2024 with available funding sources in excess of our level of uninsured and uncollateralized deposits. During this time of lower net interest income, we remain very focused on controlling noninterest expenses which declined to 1.30% of average assets during the first quarter of 2024 from 1.47% in the same quarter of 2023, which we believe is among the lowest in our per group. With respect to our dividend, we remain committed to managing our tangible book value and ensuring that we have adequate capital for future growth.

Construction of our Johnson City financial center continues with an expected opening date of July 1, 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 deposit market share. We expect to consolidate approximately 8,300 sf of space we currently lease with an annual cost of $170 thousand into this building."

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 months ended March 31, 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, and the impact of material one-time fraud losses or recoveries. 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.

Five Quarter Trends

Net Interest Income

Net interest income decreased $3.0 million, or 31.6%, from $9.4 million for the three months ended March 31, 2023 to $6.4 million for the same period in 2024. The decrease between the periods was primarily the net result of the following factors:

• Average interest-earning assets grew $111.5 million, or 7.1%, from $1.568 billion to $1.680 billion, driven primarily by increases in loans.
• Average net interest-earning assets declined $68.2 million, or 20.3%, from $336.8 million to $268.6 million, due primarily to a $56.3 million decrease in noninterest bearing deposits and a $26.9 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 150 bp from 3.08% to 4.58%, while the average rate earned on interest-earning assets increased 55 bp from 4.96% to 5.51%, resulting in a decrease in tax-equivalent net interest margin from 2.55% to 1.66%. The increase in the average rate paid on interest-bearing liabilities was due to the heightened rate environment and competitive funding pressures in our markets throughout much of 2023, which resulted in customers seeking higher rates on certificates of deposit and other interest-bearing accounts and the Company's cost of wholesale funding rising significantly.

Rate Sensitivity

The Company has the following loans subject to repricing of interest rates as of March 31, 2024:

The Federal Reserve has increased the Federal Funds interest rate by 525 bp since December 31, 2021. Since that time, the Company has experienced the following cumulative impacts on its loan yields and deposit costs:

Effective October 1, 2023, the Company entered into a $150 million notional amount pay-fixed swap with a term of 3 years whereby the Company pays a fixed rate of 4.69% and receives the SOFR Compound rate. This swap has been accounted for as a fair value hedge of fixed-rate loans and should improve the Company's exposure to interest rates in a rising rate environment.

Provision For Credit Losses

A provision for (recovery of) credit losses of ($0.5) million and $0.6 million was recognized for the three months ended March 31, 2024 and 2023, respectively. The recovery of credit losses recognized in the first quarter of 2024 was driven by the payoff of a $0.7 million loan with a full reserve established in the fourth quarter of 2023 as well limited loan growth.

The Company continues to experience near historically low levels of problem assets and charge-offs.

Noninterest Income

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

Noninterest income increased to $0.8 million in the first quarter of 2024 from $0.2 million in the same quarter of 2023. The following factors had an impact on noninterest income during these periods:

• An increase of $0.1 million in realized gains on the sale of investment securities available for sale compared to the first quarter of 2023. During the first quarter of 2024, the Company sold approximately $8.0 million of securities at a gain of $77 thousand and utilized the proceeds to pay down wholesale borrowings.
• Realized and unrealized losses on equity securities improved by $0.5 million from the first quarter of 2023 as a result of the sale of preferred stock in which the Company had invested during the fourth quarter of 2023.
• The Company recognized a $0.1 million increase in swap fees from the first quarter of 2023 due to increased demand by customers for fixed rate loans. 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 declined $0.2 million, or 3.9%, from $6.0 million in the first quarter of 2023 to $5.8 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 $0.3 million, or 8.3%, due primarily to a decrease in incentive accruals and a decline in FTE employees from 116 to 110, offset, in part, by merit increases and an increase in benefit costs.
• FDIC insurance increased $0.2 million due to a growth in deposits and other Company specific risk factors.

Income Taxes

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

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 $65.3 million, or 8.6%, from $1.738 billion at December 31, 2023 to $1.803 billion at March 31, 2024. The change was primarily driven by the following factors:

• Cash and cash equivalents increased $71.3 million, or 103.4%, due to a decrease in lending volume and an increased focus on core deposit growth.
• Available for sale investment security balances decreased $9.9 million, or 7.6%, primarily due to the sale of approximately $8.0 million of securities during the first quarter of 2024.

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

Non-agency MBS/CMO have an average credit-enhancement of approximately 33% as of March 31, 2024. Municipal securities are generally rated AA or higher.

• The Company did not have any securities classified as held-to-maturity as of March 31, 2024 and December 31, 2023.
• Loans receivable increased $2.5 million, or 0.2%, from $1.453 billion at December 31, 2023 to $1.455 billion at March 31, 2024. 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 March 31, 2024:

• Premises and equipment increased $3.8 million, or 7.2%, during the quarter ended March 31, 2024 primarily due to costs incurred for the construction of the new 23,000 sf Johnson City combined financial/corporate center. The following summarizes costs incurred and remaining to be incurred with respect to this project as of March 31, 2024:

• Total deposits increased $116.6 million, or 7.9%, from $1.472 billion at December 31, 2023 to $1.589 billion at March 31, 2024. An increase in NOW and money market and savings accounts of $167.5 million during the first quarter of 2024 from December 31, 2023 was used to reduce wholesale time deposit balances 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 March 31, 2024:

• FHLB borrowings decreased $50.0 million from December 31, 2023 and consisted of the following at March 31, 2024:

• Total equity increased $1.3 million, or 1.1%, from $122.8 million at December 31, 2023 to $124.1 million at March 31, 2024. The following summarizes the components of the change in total shareholders' equity and tangible book value per share for the quarter ended March 31, 2024:

The Company's tangible equity to tangible assets ratio declined to 6.88% at March 31, 2024 from 7.07% at December 31, 2023, primarily as the result of a decline in net income combined with continued asset growth and dividends. 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 March 31, 2024, with the Bank maintaining a regulatory leverage ratio of 9.15% at March 31, 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 during the quarter ended March 31, 2024.

Asset Quality

Non-performing loans to total loans decreased to 0.06% at March 31, 2024 from 0.11% at December 31, 2023. Non-performing assets to total assets decreased to 0.04% at March 31, 2024 from 0.09% at December 31, 2023. Other real estate owned balances remained at $0 at both March 31, 2024 and December 31, 2023. Net recoveries of $0.2 million were recognized during the quarter ended March 31, 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 0.86% at March 31, 2024 from 0.90% at December 31, 2023 due primarily to the payoff in full of a fully-reserved $0.7 million loan as of December 31, 2023. Coverage of non-performing loans by the allowance for credit losses was greater than 15 to 1 at March 31, 2024 compared to 8 to 1 at 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 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) the ability to grow and retain lower-cost core deposits, including during times when uncertainty exists in the financial services sector; (viii) 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 further decline; (ix) significant downturns in the business of one or more large customers; (x) effectiveness of our asset management activities in improving, resolving or liquidating lower quality assets; (xi) our inability to maintain the historical, long-term growth rate of our loan portfolio; (xii) risks of expansion into new geographic or product markets; (xiii) the possibility of increased compliance and operational costs as a result of increased regulatory oversight; (xiv) our inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (xv) the ineffectiveness of our hedging strategies, or the unexpected counterparty failure or failure of the underlying hedges; (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 credit 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) 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, 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.