Merchants & Marine Bancorp, Inc. (OTCQX: MNMB), the parent company of Merchants & Marine Bank, reported net income for the second quarter of 2022 of $243 thousand, or 18 cents per share, compared with earnings of $872 thousand, or 66 cents per share, for the same period last year. Earnings per share for the period showed improvement over the linked quarter, increasing by 6 cents from 12 cents per share. Second quarter gross revenue grew by 1.62% to $7.87 million in 2022 from $7.75 million in 2021. Total deposits increased by 4.01% to $663.68 million at the end of the second quarter 2022, total interest expense decreased by 23.35% to just $523 thousand for the same period, compared to $683 thousand in the second quarter of 2021.

Selected financial highlights:

• Gross revenues increased by 1.62% from the same period in 2021, to $7.87 million, based primarily on increased interest income on loans and improving service charge revenue, along with some benefit from redeployment of cash into the bond markets.
• Net loans grew by $46.70 million, or 14.68%, from the end of the same period in 2021. This marks the fourth consecutive quarter of annualized loan growth of more than 10%. 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 second quarter of 2022. The ratio of loans past due 30-89 days increased very slightly to 0.63% of total loans at the end of the second quarter of 2022 from 0.55% at the end of the same period last year but remains well below historical levels. The ratio of non-accrual loans fell precipitously to 0.77% of total loans at the end of the second quarter of 2022, from 2.39% at the end of the same period in 2021.
• Total deposit balances increased by 4.01% year-over-year. However, the adoption of a dynamic proprietary deposit pricing model and the intentional rebalancing of the bank’s deposit portfolio resulted in a decline in interest expense of 23.25% from the same quarter in 2021.
• Accumulated Other Comprehensive Income (AOCI) mark-to-market losses increased to an aggregate ($11.24 million) during the second quarter from an aggregate of ($7.33 million) on March 31, 2022. Of this total, ($8.52 million) is due to unrealized losses in the company’s available for sale security portfolio resulting from increases in market rates. Unrealized losses in the investment portfolio represent an impairment of 10.54% to Tangible Common Equity (TCE), compared to a peer group average TCE impairment of more than 40%.
• Total capital increased 49.78%, or $40.84 million, from $82.03 million to $122.87 million since the same period in 2021. The bulk of the increase represents the net between the $50.56 million preferred stock purchase by the U.S. Treasury through the Community Development Financial Institution (CDFI) Emergency Capital Investment Program (ECIP) and the cumulative AOCI unrealized loss.
• 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. No dividend payments are due or payable on the preferred stock for the 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.

“We are starting to see acceleration in our core earnings, and we expect that acceleration to continue through the remainder of the year,” remarked Casey Hill, the company’s chief financial officer. He continued: “We continue to see a lot of noise in our financial results due to the large number of heavy investments and initiatives we’ve made in the last 18 months, and also due to the government’s response to COVID-19. It’s great to see our plans taking shape and beginning to yield the results that we thought they would. Obviously, when you make the types of investments in operations, technology, and human capital that we have, you see those expenses show up immediately, whereas the additional revenue they produce materializes gradually. The materialization of this additional revenue has commenced, and we expect it to accelerate significantly going forward.”

Within the revenue numbers are several early indicators of financial strengthening. Interest income on loans increased by 13.26%, or $502 thousand, to $4.29 million for the second quarter of 2022, from $3.79 million for the same period in 2021. In addition, interest income derived from the securities portfolio increased by 83.41%, to $909 thousand from $496 thousand during the same period last year. “We see several areas where income will only strengthen going forward,” said Hill. “After conserving cash for the last 18 months or so, we began selectively – and very carefully – deploying that cash into bond markets this quarter, with most of the push into bonds occurring in the middle of June. Thus, the rise in interest on securities has just begun to show in the quarter-end numbers. One should also keep in mind that we’re also still dealing with the effects of our adoption of FAS 91, which occurred in the second half of 2021. FAS 91 is an accounting standard that, in essence, dictates that fees on loans are recognized over the life of the loan. With an average maturity of 38 months in our portfolio, it will take us a while yet to get back to where we were on loan fee income each month. However, we see it as good news that we have multiple areas where we expect to see revenue acceleration even if we find ourselves in a stasis scenario regarding growth, which we do not expect.”

Growth in the company’s balance sheet remained strong, with total asset growth of $62.75 million, or 8.54% over the past twelve months. In the same period, the loan portfolio grew $46.70 million, or 14.68% on a net basis. Deposit growth slowed somewhat when compared with prior periods, totaling $25.60 million or 4.01%, from the same period last year. However, the deposit portfolio mix has shifted materially over the prior 12 months in a way that both reduces costs and improves stability:

• Demand deposits, exempting public funds, grew by $60.61 million, or 17.19%
• Savings account balances grew by $12.47 million, or 14.26%,
• Higher-cost public funds balances declined by $36.94 million, or 32.70%, and
• Certificates of Deposit balances declined by $10.54 million, or 12.39%.

AOCI mark-to-market adjustments in the securities portfolio reflects an unrealized loss position of ($8.52 million) as of the end of the second quarter of 2022. This represents a decline from an unrealized gain position of $1.68 million at the end of the second quarter of 2021, and from the ($4.61 million) unrealized loss at the end of the first quarter of 2022. The decline is due entirely to increases in market rates that have occurred over the prior year. “While we are never happy about any sort of loss on the balance sheet, we are pleased with the relatively low level of AOCI impairment we have when compared with the significant increases in market rates that have occurred. The unrealized loss in our securities portfolio represents a 10.54% impairment to our TCE, compared to a peer group average TCE impairment of more than 40%. We are seeing an increasing number of commercial banks with AOCI losses representing the majority of their TCE. We’re grateful for the conservative approach that we have been able to take with investments over the prior two years. While holding a very large amount of cash has resulted in reduced short-term earnings, we are now positioned to realize the benefits of much more advantageous market rates, with greatly reduced interest rate risk, and materially improve our profitability. Being able to execute on this strategy is a testament to our board and leadership team’s focus on the long-term health and profitability of the company,” stated Hill.

The company did see a bright spot in AOCI during the last twelve months, with the mark-to-market adjustment to the company’s now-frozen pension plan improving by $1.23 million from the same period last year to total ($2.72 million) as of June 30, 2022. “The company reallocated assets in our pension plan in 2021 to better match the market beta of plan assets to the liabilities of the plan, thereby decreasing interest rate volatility associated with the plan. This reallocation also greatly reduced the risk of future funding gaps in the plan that would have to be backstopped by corporate earnings. Going forward, our pension plan should be much less impactful to the overall P&L than it has been in the past,” stated Hill.

“We are more thankful than ever for the discipline maintained and hard work executed by our team over the prior 2 years,” remarked Clayton Legear, President & Chief Executive Officer. “While we could have easily invested our sizable cash position to drum up short-term earnings while rates were low, but those earnings would have come at the expense of our TCE and our longer-term profitability. Instead, we elected to focus our efforts on building our long-term profitability and resilience. Now, as we confront the current economic and market turmoil, we do so with a Battle-Ready Balance Sheet, more diversified revenue streams, and sustained organic loan and deposit growth momentum. We look forward to the continued acceleration in our income during the second half of 2022 as we reap the benefits of our carefully planned and unique position in the market.”

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. For more information on Merchants & Marine Bank, visit www.mandmbank.com. For more information on Canvas Mortgage, visit www.canvasmortgage.com.

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