Merchants & Marine Bancorp, Inc. (OTCQX: MNMB), the parent company of Merchants & Marine Bank, reported net income for the first quarter of 2022 of $153 thousand, or 12 cents per share, compared with earnings of $572 thousand, or 43 cents per share, for the same period last year. First quarter gross revenue grew by 3.21% to $6.98 million in 2022 from $6.76 million in 2021. While total deposits remained relatively flat at $649.72 million at the end of the first quarter 2022, total interest expense decreased by 32.73% to just $368 thousand for the same period, compared to $547 thousand in the first quarter of 2021.

Selected financial highlights:

• Gross revenues increased by 3.21% from the same period in 2021, to $6.98 million, based primarily on increased interest income on loans and improving service charge revenue.
• The loan portfolio grew by $12.82 million, or 3.65%, from year end 2021. Furthermore, loans grew by $40.76 million, or 11.58%, since the first quarter of 2021 when removing PPP Loans from 2021 totals. This marks the third consecutive quarter of annualized compound annual loan growth of more than 10%, with an average annualized compound annual growth rate of more than 16% across the prior three quarters. The company presently has no PPP Loans on its books, as all such loans were either forgiven or sold during the second quarter of 2021.
• Credit quality metrics continued to steadily improve during the first quarter of 2022. The ratio of loans past due 30-89 days fell to just 0.31% of totals loans from 0.50% at year-end 2021, and from 0.99% during the first quarter of 2021. The ratio of non-accrual loans fell to 1.25% of total loans during the first quarter of 2022, from 1.46% at year-end 2021 and 2.64% during the first quarter of 2021.
• While total deposit balances remained flat year over year, 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 32.73% from the same quarter in 2021.
• Increases in overhead expenses compared with the prior year were heavily centered in additional salary expense associated with expansionary efforts, as well as the payout of the company’s new lender incentive program for 2021 calendar year production.
• AOCI mark-to-market adjustments decreased from an aggregate of ($3.08 million) in unrealized loss to ($7.33 million) in unrealized loss in the 12 months ended March 31, 2022.

“We are very, very encouraged by the trends that we’re seeing in our financial structure and scorekeeping,” remarked Casey Hill, the company’s Chief Financial Officer. “On its face, it may appear that we gave up ground in 2022. However, when considering the improvement in our balance sheet and the investments made into the company, we see this as the launching point of the results derived from the strategy we implemented nearly two years ago. We’ve cleaned our loan portfolio and invested in technology, infrastructure, operations, people and new business units. The company has undertaken a half-dozen very heavy lifts in the past 12 months or so, each of which on its own would be a significant project and investment in a typical year,” continued Hill.

A bright spot during the quarter, organic loan growth continued to be robust. The loan portfolio grew by $12.82 million, or 3.65%, from year end 2021. When evaluated against the same period in 2021 adjusted to remove Paycheck Protection Program Loans (PPP Loans), loans grew by $40.76 million, or 11.58%. This marks the third consecutive quarter of annualized loan growth of more than 10%, with an average annualized growth rate of more than 16% across the prior three quarters. Credit quality metrics further improved during the second quarter of 2022. Loans past due 30-89 days and non-accrual loans totaled 0.31% and 1.25% of total loans as of March 31, 2022, respectively, compared with 0.99% and 2.64% during the same period in 2021.

Overhead expense increased by 16.24% compared to the same period in 2021. The increase is due primarily to increased salary expense associated new staff members, including the continued ramp up of the bank’s Canvas Mortgage division, and the payout of new lender incentives for 2021 calendar year production. “While our investments into human capital were sizeable, particularly in the back office as we prepare to embark upon our strategic growth plans, the bulk of the increased salary expense during the quarter is actually representative of our new, and somewhat novel, approach to incentivizing our business development functions,” said Hill. The company adopted a new lender incentive program last year, the first annual payout of which occurred in the first quarter of 2022. “The incentive amounts could be seen as relatively large when considering our historical lender compensation structure, but when looking at net loan growth over the last 12 months of $41 million, or more than 11%, we’re very happy to make that payout to the folks that earned it, especially when considering the continued improvement in credit quality and stability in loan yields.”

Accumulated other comprehensive income (AOCI) mark-to-market adjustments on the securities portfolio reflects an unrealized loss position of ($4.61 million) as of the end of the first quarter of 2022. This represents a decline from an unrealized gain position of $875.53 thousand at the end of the first quarter of 2021, and is due entirely to increases in market rates that have occurred over the prior year. “Throughout the last two years we have exercised great caution in deploying our cash into investment securities and resisted the temptation to bolster short term earnings by chasing yields with longer term investments.” said Hill. “In the end, management judged the risk of reinvestment as too great given the propensity for the increase in money supply to cause some inflationary woes and decided to bide our time with regards to reinvestment. We intentionally gave up some income throughout 2020 and 2021 due to this approach, but are very happy we did, as the mark to market adjustment could be several multiples of what it is today should we have invested that cash. Furthermore, we are now very well-positioned to begin judiciously deploying our excess cash into relatively high yielding investments with short durations as opportunities emerge, and in so doing, significantly bolster our income.”

The company did see a bright spot in AOCI, with the mark-to-market adjustment to the company’s now-frozen pension plan improving by $1.23 million over the same period last year to total ($2.72 million) as of March 31, 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 reduces the propensity for future funding gaps in the plan that would have to be backstopped by corporate earnings. Going forward, our now frozen pension plan should be much less impactful to the overall P&L than it has been in the past,” stated Hill.

Another material factor of note is the marked reduction in loan fee income, which fell $715 thousand, or 78.99%, in the first quarter of 2022 compared to the same period during the prior year. When asked about the decline, Hill said “During the process of recognizing fee income derived from the Paycheck Protection Program in 2021, we saw the need to revise our methodology for adhering to FAS 91. FAS 91 has its roots in the basic matching concept of accounting and dictates that origination fees on loans must be amortized based on the repayment schedule of the loan. Historically, banks have recognized fee income as soon as a loan was booked. PPP loan fee income was so large in relation to past fee income that it required the revision of our longstanding FAS 91 methodology.” Fee income on loans totaled $190 thousand in the three months ended March 31, 2022, a decrease of $715 thousand from the same period in the prior year – a direct result of the implementation of FAS 91. “When you look at our bottom-line net income figure and recognize that top line revenue was impaired by over $700 thousand dollars due to nothing more than a change in accounting treatment, you can see why we’re proud of the results that we are publishing today. This revenue line item will normalize and grow to a level beyond what we’ve seen in the past due to continued growth in our loan portfolio. This normalization will occur in close concert with the dollar-weighted average maturity of our loan portfolio, which is relatively short at 4.27 years. The speed at which fees accrue will continue to accelerate each month.”

While total deposits were flat at March 31, 2022, when compared with twelve months prior, it should be noted that the mix of those deposits changed substantially:

• Demand deposits, exempting public funds, grew by $43.28 million, or 12.45%
• Savings account balances grew by $11.73 million, or 13.88%,
• Higher-cost public funds balances declined by $44.38 million, or 34.13% and
• Certificates of Deposit balances declined by $13.04 million, or 17.96%.

“Market interest rates on deposits have not fallen in the past 12 months,” stated Hill. He continued: “The marked fall in interest expense at our company is due to management seizing on the opportunity presented by lingering balance sheet bloat caused by federal stimulus and the commendable deposit-gathering efforts of our retail staff. These have enabled us to reconstitute the liability side of our balance sheet with a focus on stability and profitability. You will see continued movement throughout the rest of the year as we continue to exit higher-cost public funds, and as we stay committed to pricing CDs according to our liquidity needs and that of the market in general. Even as low as interest expense is at the current time, we still see significant opportunity to decrease it further.”

“The continued improvements in our core profitability, as well as our team’s progress in building a battle-ready balance sheet, are most encouraging,” remarked Clayton Legear, the company’s President & Chief Executive Officer. “We set out two years ago to build a solid foundation from which our company could continue to grow profitability, resilience, service and scale while holding onto our proud legacy. Not only has our team succeeded in laying a strong foundation, they have also made tremendous progress in moving our company forward financially. Whether it’s our ability to produce sustained strong organic loan growth, our greatly improved credit metrics, our increasingly stable and low-cost deposit base, or our more diversified income streams: or the results of our investments are increasingly prominent. We are thankful to be moving forward from a position of strength as we prepare to confront economic headwinds that appear to be building.”

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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