Merchants & Marine Bancorp Announces Earnings

Merchants & Marine Bancorp, Inc. (OTCQX: MNMB), the parent company of Merchants & Marine Bank, reports net income through the first nine months of 2021 of $2.08 million, or $1.56 per share, compared with net income of $3.81 million, or $2.86 per share during the same period in 2020. It should be noted that during the same period in 2020, the company monetized a $3.1 million gain (pretax) by liquidating a portion of its securities portfolio, which materially affected earnings during the prior period.

In the current year, the company has experienced material income from sources including the SBA's Paycheck Protection Program (PPP) and a grant from the U. S. Treasury's CDFI Rapid Response Program (RRP). Pretax income received from these programs in 2021 exceeded $4.51 million, with $1.83 million received from the CDFI's RRP and the remainder from the sale and forgiveness of PPP loans. "The company saw a large influx of one-time income during the first nine months of the year," stated Casey Hill, the company's Chief Financial Officer. "We believed that these funds should be used to position the bank to drive future increases in earnings and performance. To that end, the company has made substantial investments in several areas throughout 2021, including a holistic rebranding, the establishment of a new consumer mortgage division in Canvas Mortgage, a market expansion into Hattiesburg and the purchase of a key property in that city, and expanded facilities in Downtown Mobile, Alabama that will come online in the first part of 2022," continued Hill. "We're very proud of the positive movement these changes have produced. Canvas Mortgage is operating significantly ahead of budget, and on the cusp of profitability after less than a year in operation, our Hattiesburg team has originated more than $40 million in new loans this year. Our core earnings, removing one-time expenses and one-time income items, remain strong and are growing even stronger. This growth in core earnings validates not only our decisions this year, but also places us right on track for achieving our strategic plan through the end of next year and into future periods."

In addition to investments into new business lines and markets, the company also elected to utilize a portion of non-recurring income during the third quarter to purge its books of approximately $5 million of nonperforming loans. The loans were sold at a discount that, after recognizing non-accrual interest paid and specific reserves, represented a loss to the bank of just over $600 thousand. "We sold loans that, in management's estimation, carried the highest risk of loss on our books. Being able to de-risk our loan portfolio from both a credit risk and reputational risk view was the right thing to do for the health and ongoing profitability of the bank. We now move forward with much greater efficiency and without the burden of a large balance of legacy NPAs," stated Hill.

The company's assets grew $66.07 million, or 10.45 percent, over the prior 12 months due to the acquisition of a branch office in Mobile, Alabama during the fourth quarter of 2020 and organic deposit growth. Deposits increased during the same period by $66.48 million, or 12.38 percent. The sustained growth in deposits, and management's desire to avoid taking on significant interest rate risk in the form of investment securities, has contributed to the company's cash position increasing by over 50 percent over the last 12 months, to $207.15 million at the end of the third quarter of 2021.

"While the bank remains highly liquid relative to normal economic periods, we have reduced our cash position by more than $50 million since the end of the second quarter without adding material new interest rate risk," commented Hill. "Our bank has also been able to change its funding mix in an advantageous way through use of a proprietary deposit pricing model. This has allowed us to begin exiting high-cost public funds, which have decreased by 30 percent, or $26.02 million, since the end of the third quarter 2020, and to reduce non-retirement time deposits, which are down 13.43 percent, or $10.39 million, over the same period. "Along with the growth in deposits, our lending team also had a stellar quarter," continued Hill. Loans net of movement in the PPP portfolio grew 8 percent, or approximately $25 million, in the third quarter of 2021. "This sort of net loan growth in the face of an extremely challenging lending environment speaks to the talent and hard work of our lending teams, credit team and the operational colleagues that support them. This strong loan growth has continued after quarter end, and we expect net growth in the traditional loan portfolio to be considerable in Q4 as well."

Selected Financial Highlights, as of September 30, 2021:

• Demand Deposits and Savings increased by 16.93 percent, or $75.37 million over the past 12 months. Funding dependency on non-core funding now stands at negative (-) 35.79 percent. The bank has no current dependence on time deposits for funding of assets.
• Loans grew by 6 percent, or $19.28 million, from the second quarter of 2021. Excluding reductions in the loan portfolio related to PPP loan sales and forgiveness during the quarter, third quarter 2021 loan growth totaled $25 million, or 8 percent.
• Provisions for loan losses totaled $683 thousand during the third quarter of 2021, compared to $622 thousand through the first 6 months of 2021. The additional provision expense is a direct result of the significant organic loan growth experienced during the third quarter, and, to a lesser extent, the liquidation of a $5 million pool of nonperforming loans.
• Interest expense decreased during the first nine months of 2021 by 29.79 percent, or $750 thousand, compared to the same period last year. This is due, primarily, to the adoption and implementation of a dynamic pricing strategy on time deposits and a planned exit from public funds. High-cost public fund balances will continue to decrease in a substantial way through 2022.
• Operating expenses saw a significant increase over the same period last year, increasing to $17.35 million from $13.58 million, or 27.79 percent. The increase is primarily attributable to non-recurring expenses linked with previously discussed investments made to improve the bank's long term profitability. Examples of these expenses include, non-recurring expenses associated with a rebranding effort; startup costs associated with the establishment of the new Canvas Mortgage Division, including professional fees, software contract expenses, branding and staffing; and, new market expansions in Hattiesburg, Mississippi, and Mobile, Alabama.
• Asset quality indicators have improved substantially during the last 12 months. Past due loans have decreased from 1.56 percent a year ago, to 0.83 percent of loans on September 30, 2021. Nonaccrual loans have experienced a marked decrease as well, improving from 2.46 percent of loans to 1.37 percent of loans during the same period.

"The combination of sound long-term reinvestment into the bank and focused internal efforts by our team produced very strong results during the third quarter, including: strong organic loan growth with stable margins, greatly improved asset quality metrics, and significantly enhanced operational efficiencies," commented Clayton Legear, the Company's President & Chief Executive Officer. "We planned on 2021 being a year of heavy investments, resulting in greatly reduced bottom line income when compared with prior years. The investments made have been carefully selected to help improve our ability to grow earnings assets and core earnings, as well as to enhance operational strength and efficiency. The receipt of one-time revenues during 2021, through PPP loans and the CDFI RRP grant, allowed us to accelerate many of these investments into the first three quarters of the year. We expect operating expenses to begin normalizing during the fourth quarter of 2021 as investments are completed, and we look forward to stronger revenues from the organic loan growth that has been generated."

Merchants & Marine Bank is a wholly owned subsidiary of Merchants & Marine Bancorp, Inc. (OTCQX: MNMB), a Mississippi based bank holding company. 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 in assets to approximately $700 million and from 2 offices to 16 offices serving Coastal Mississippi, Coastal Alabama and the Mississippi Pine Belt Region. The bank offers mortgage financing across the region through its new division, Canvas Mortgage. For more information on Merchants & Marine Bank, visit www.mandmbank.com. For more information on Canvas Mortgage, visit www.canvasmortgage.com.