Merchants & Marine Bancorp, Inc. (OTCQX: MNMB), the parent company of Merchants & Marine Bank, reported net income for the first quarter of 2023 of $1.161 million, or $0.87 per share, compared with earnings of $158 thousand, or $0.12 per share, for the same period in the prior year. First quarter gross income increased 27.29% to $8.883 million from $6.979 million for the same period in 2022. Total deposits decreased by 17.67% from the same period in the prior year, from $649 million to $534 million at the end of the first quarter 2023. However, when adjusting for planned runoff in high-cost public funds that exited the bank during the second and third quarters of 2022, total deposits declined by just 7.54% from the previous year. Total interest expense for the quarter decreased by 17.29% compared to the same period in 2022.

Selected financial highlights:

• Gross revenues increased by 2.85% from the previous quarter, to $8.88 million. Improved interest income on loans and fed funds was the primary driver, with these two categories increasing by 9.03% and 56.27%, respectively, over the prior quarter. First quarter gross revenues increased by $1.904 million, or 6.14%, from the same period last year.
• Net loans grew by $3.68 million from the prior quarter and by $43.36 million, or 12.07%, from the same period in 2022.
• Credit quality remained strong during the first quarter. The ratio of loans past due 30-89 days decreased to 1.04% of total loans at the end of the first quarter of 2023 from 1.49% at the end of the same period last year. The ratio of non-accrual loans remained relatively flat at 1.22% of total loans, compared to 1.20% at the end of the first quarter of 2022.
• The bank adopted the Financial Accounting Standard Board’s Current Expected Credit Losses (CECL) methodology effective January 2023. The adoption of this methodology led to the growth in the allowance for loan and lease losses (ALLL) to $8.505 million, or 2.07% of gross loans, at the end of the first quarter of 2023, from $4.476 million, or 1.23%, in the same period last year. Consistent with regulatory guidance, the initial addition to the ALLL that accompanied conversion to CECL was made as a direct adjustment to retained earnings, rather than through an expense to income.
• Interest expense declined precipitously year-over-year. Interest expense totaled $304 thousand during the first quarter of 2023, a decline of 17.29% from $412 thousand in the same quarter in 2022. This decline was driven by the planned repositioning of the bank’s deposit portfolio, including the exit of high-cost public funds and a decrease in non-relationship CD balances, as well as adherence to the bank’s dynamic deposit pricing strategy. The bank did, however, see an 11.68% lift in cost of funds over the linked quarter driven by careful pricing adjustments in response to heightened deposit competition.
• Accumulated Other Comprehensive Income (AOCI) mark-to-market losses in the securities portfolio eased to ($8.88 million) at the end the first quarter from ($10.09 million) at the end of the linked quarter. Tangible equity at the bank subsidiary stands at a robust 12.79% of total assets even when including AOCI unrealized losses.
• Liquidity levels remain robust. Cash and cash equivalents remain elevated at $47.814 million. In addition to these balances, the bank’s investment portfolio stands at $162 million, $19 million of which will mature during the second quarter of 2023. In addition to the sizeable on balance sheet liquidity position, the bank has more than $150 million in borrowing capacity available through lines with both the Federal Home Loan Bank and the Federal Reserve.
• Total capital at the holding company as of December 31, 2022, inclusive of preferred stock issued through the US Treasury Department’s Community Development Financial Institution (CDFI) Emergency Capital Investment Program (ECIP), stands at $118.1 million, or 17.74% of total assets.
• On April 10, 2023, the company was notified that its bank subsidiary had been awarded $3.718 million in response to its 2022 application for a CDFI Equitable Recovery Program grant. These grant funds will support the bank’s ongoing growth and support of low- and moderate-income communities and businesses who operate in them. Exact timing concerning the receipt of these funds is unknown, but it is anticipated that funds will be received by the end of third quarter 2023. As such, these dollars are not included in first quarter income.

“The first quarter of 2023 has confirmed the proper execution of our strategic plans,” said Casey Hill, the company’s Chief Financial Officer. “Over the past 18 months, we’ve experienced the full cycle of the investment curve. Our investments in Canvas Mortgage, CannaFirst Financial and Voyager Lending are proving fruitful. Even better, we still see a very significant runway for earnings lift in these entities prior to a reversion to industry mean growth rates, such that we see the ability to continue to ride the investment curve upward for quite some time,” continued Hill.

The company saw the realization of planned balance sheet contraction over the past twelve months to the tune of 9.55%, with total assets declining to $665.92 million at the end of the first quarter of 2023 from $736.24 million at the end of the same period last year. The composition of the balance sheet also saw a high degree of positive change. The loan portfolio grew $47.39 million, or 13.03% on a gross basis, during the prior 12 months. Deposits decreased 17.67% from the same period last year. However, when excluding the planned elimination of higher cost public funds, total deposits declined by just 7.54%. Furthermore, the current deposit portfolio mix is much more advantageous than at the same time last year, as evidenced in the bank’s continued low cost of funds. “While the effective Fed Funds rate has increased 2,225% - that’s not an error – from just 0.20% to over 4.45% over the past year, interest expense at our bank has actually decreased over the same time period,” explained Hill. “While we did see linked-quarter interest expense grow by just under 12%, it should be noted that the rate of increase is a significant slowdown from the previous quarterly change of more than 21%. While we know that our cost of funds will increase in this environment, we are utilizing our peer-leading cash position to carefully manage the duration and rate of funding that we’re allowing to board our balance sheet.”

The company continues to maintain a robust liquidity position compared to peer banks. In addition to cash on the balance sheet, the company has more than $19 million in securities that will mature during the second quarter of 2023. In addition, the bank has more than $150 million in supplementary borrowing capacity between the Federal Home Loan Bank and the Federal Reserve. “We feel very secure in the cash and liquidity that we have on the balance sheet today, especially considering peer numbers and what transpired in the first quarter within the banking sector. In addition, because we have very little AOCI mark-to-market losses in our securities book, and a tremendously strong tangible capital position, our ability to borrow, if needed, is assured. Our balance sheet, dollar-for-dollar, is as strong as you can expect to find today,” assured Hill.

“As the banking industry continues to face significant uncertainty, we are more thankful than ever to be operating with a ‘Battle-Ready Balance Sheet,’” commented Clayton Legear, the company’s Chief Executive Officer. “Our team has worked tirelessly over the prior three years to position our company to not only survive, but to thrive, in this type of environment. In addition to building our ‘Battle-Ready Balance Sheet’ to handle market volatility, our team has significantly strengthened and diversified our revenue streams to help buffer against a wide variety of economic scenarios while still supporting clients and communities who depend on us. We look forward to the continued steady improvement in core earnings as our family of brands continues growing and scaling organically throughout 2023. We also look forward to leveraging our position of strength to take advantage of opportunities that are likely to emerge as the economic uncertainty continues to drive even stronger returns for our shareholders and enhanced support for the clients and communities who depend on us.”

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 nearly $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, medical cannabis banking through its CannaFirst Financial division, and access to government-guaranteed credit through Voyager Lending. For more information on Merchants & Marine Bancorp, Inc., visit https://mandmbank.com/investor-relations.

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