Merchants & Marine Bancorp, Inc. (OTCQX: MNMB), the parent company of Merchants & Marine Bank, reported net income for the third quarter of 2022 of $1.406 million, or $1.06 per share, compared with earnings of $643 thousand, or 48 cents per share, for the same period last year. Earnings per share for the period showed improvement over the linked quarter, increasing by 88 cents from 18 cents per share. Third quarter gross income decreased 2.84% to $8.237 million from $8.478 million for the same period in 2021. However, gross income increased 4.66% from $7.87 million in the second quarter of 2022. Total deposits decreased by 5.26% from the same period in the prior year to $572 million at the end of the third quarter 2022. When adjusting for planned runoff in high-cost public funds that exited the bank during the second and third quarters of 2022, total deposits actually grew by 1.69% or $10.20 million from the previous year. Total interest expense for the quarter decreased by 57.34% to just $224 thousand, compared to $524 thousand during the same period in 2021.

Selected financial highlights:

• Gross revenues increased by 4.66% from the previous quarter, to $8.24 million. Improved interest income on loans and securities was the primary driver, along with increased service charge revenues. Year to date gross revenues declined by $241 thousand, or 2.84%, from the same period last year. The reason for the year-over-year decrease was due to the implementation of FAS 91. When controlling for this factor, the company would have seen growth in the year-to-date gross revenue numbers as well.
• Net loans grew by $27.97 million, or 8.28%, from the end of the same period in 2021. These statistics contain no PPP loans, as all PPP loans were either forgiven or sold during the second quarter of 2021.
• Credit quality metrics remained strong during the third quarter of 2022. The ratio of loans past due 30-89 days increased very slightly to 1.08% of total loans at the end of the third quarter of 2022 from 0.84% at the end of the same period last year. The ratio of non-accrual loans decreased slightly to 1.43% of total loans at the end of the third quarter of 2022, from 1.49% at the end of the same period in 2021. However, both past due and nonaccrual loan levels remain well below historical levels. Management considers the slight uptick in the past due loan ratio to be both temporary and limited in nature, rather than being indicative of broader shifts in the loan portfolio.
• Interest expense declined precipitously year over year. Interest expense totaled $224 thousand during the third quarter of 2022, a decline of 57.34% from $524 thousand in the same quarter last year. This was driven by the exit of high-cost public funds, a decrease in non-relationship CD balances, and adherence to the bank’s dynamic pricing strategy.
• Accumulated Other Comprehensive Income (AOCI) mark-to-market losses increased to an aggregate ($15.72 million) at the end the third quarter from an aggregate of ($11.24 million) at the end of the linked quarter. Of this total, ($12.99 million) is due to unrealized losses in the company’s available for sale security portfolio resulting from increases in market rates. Tangible equity at the bank, including AOCI unrealized losses, still stands at 12.31% of assets. The bank’s peer group average is significantly lower, with some peers approaching 0% tangible equity when accounting for AOCI losses.
• Total capital at the holding company as of September 30, 2022, inclusive of preferred stock issued through the US Treasury Department’s Community Development Financial Institution (CDFI) Emergency Capital Investment Program (ECIP), stands at $119.40 million, or 16.95% of total assets.
• The company closed on the issuance of $50.56 million in noncumulative perpetual preferred stock to the United States Treasury Department as a part of the CDFI ECIP during the second quarter of 2022. No dividend payments are due or payable on the preferred stock for 24 months following issuance, and thereafter the preferred stock will carry a lifetime maximum annual rate of just 2.00%. The capital will be used by the company to support both organic and strategic growth and increases in CDFI-qualified lending activities.

“As projected in our strategic financial plan approved in February 2021, the third quarter of 2022 represented the turning point in our investment cycle. Throughout 2020 and 2021, management pivoted as necessary to position the bank to maximize long-term value creation,” remarked Casey Hill, the company’s chief financial officer. “Over the last two years we held significant amounts of cash, maintained a positive interest rate gap, and made substantial investments into increasing operational capacity. In addition, we established new markets and business units that required significant capital. These decisions produced large gains in profitability in the third quarter, a trend we expect to continue. Management will continue to monitor economic developments and seek out opportunities to continue to position the bank for long-term success, while continuing to ignore the temptation to make knee-jerk decisions due to volatility in relevant markets.”

The company experienced slight balance sheet growth of $6.05 million, or 0.87% over the past twelve months. The composition of the balance sheet, however, was changed significantly in that time through active management. The loan portfolio grew $27.96 million, or 8.28% on a net basis. Deposits decreased somewhat when compared with the prior year, decreasing 5.26%, or $31.76 million from the same period last year. However, the deposit portfolio mix when compared with the prior year is much more advantageous:

• Demand deposits, exempting public funds, grew by $20.31 million, or 5.49%
• Savings account balances grew by $9.83 million, or 10.92%,
• Higher-cost public funds balances declined by $41.96 million, or 69.12%, and
• Certificates of Deposit balances declined by $19.94 million, or 24.05%.

The company continues to maintain a significant liquidity position compared to peer banks. In addition to cash on the balance sheet, the company has more than $70 million in securities that will mature by the end of the first quarter of 2023. “We stood outside the bond market for quite some time in regard to new investments, holding over $200 million in cash at points in the last year,” continued Hill. “We began to carefully reinvest those funds this year as the yield curve began to normalize relative to the huge increase in money supply over the past two years. Even then, we have laddered investments to roll back into cash in relatively short order. We do not believe that it will be prudent to reinvest the entirety of this cash due to liquidity declines in the industry and across the economy. However, we should nevertheless see significant lift in yield on the instruments into which we elect to redeploy our cash.”

Another facet of performance that should see continued improvement is the recognition of deferred loan fees. As previously reported, the company instituted FAS 91 during the second half of 2021 due to the materiality of loan fee income from the Paycheck Protection Program. While fees continue to be collected on loans at the same rate they were prior to this accounting change, these fees are now deferred and recognized as income over the weighted average life of a loan rather than at origination. While temporary, the reduction in loan fee income following the implementation of this accounting standard has been significant. Recognition of deferred loan fees continues to accelerate monthly, with current monthly loan fee income totaling approximately 35% of pre-FAS 91 levels from less than 10% when the accounting change was initially made. Deferred loan fee income will continue to accelerate in coming months, as it normalizes to pre-FAS 91 levels.

“The acceleration in loan fee income has been roughly linear in nature, and we see continued progress each month as we move forward.” stated Hill. He continued “In this and in so many other areas we see material opportunity for continued improvement in our financial performance. We are very grateful to be positioned in the way we are, especially given the materialization of our projections and plans.”

“Our team’s ability to not only navigate the rapidly changing post-COVID economic environment, but to simultaneously execute an aggressive reengineering of our organization and deliver the strong results posted in the third quarter of 2022 speaks to the caliber of our bankers.” remarked Clayton Legear, the company’s chief executive officer. “Make no mistake, executing on our long term financial and strategic plans in the face of significant market turmoil and pressure over the last 2 years has not been easy. However, our team stayed the course, and their efforts have been rewarded in the form of solid third quarter results that affirm our strategy and execution. We look forward to continuing to leverage our unique market position to drive continued progress in our company’s service, operational resilience, and financial performance.”

Merchants & Marine Bancorp, Inc. (OTCQX: MNMB) is the parent company of Merchants & Marine Bank, a Mississippi chartered community bank serving the Gulf South region. Originally founded in 1899, Merchants & Marine Bank was reborn in 1932 during the middle of the worst economic disaster in the history of the United States: The Great Depression. More than eight decades later, Merchants & Marine Bank has grown from $25,000 to over $700 million in assets, and from 2 offices to 16 offices serving the Mississippi & Alabama Gulf Coast region, as well as the Mississippi Pine Belt. The bank offers mortgage financing through its Canvas Mortgage division, and medical cannabis banking through its CannaFirst Financial division. For more information on Merchants & Marine Bank, visit https://mandmbank.com/investor-relations

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