Merchants and Marine

Merchants & Marine Bancorp, Inc. (OTCQX: MNMB), the parent company of Merchants & Marine Bank, reports net income for the third quarter of $274 thousand, yielding earnings per share of twenty-one cents. Comparable earnings for the third quarter of 2019 were $1.17 million or eighty-eight cents per share, representing a decrease in earnings per share of just under 77 percent. Interest and fee income on loans held steady year-over-year at just over $4.2 million, however interest on securities decreased by 45 percent from $940 thousand to $513 thousand. This is due to both the marked decrease in yield in investment grade securities and to the liquidation of a portion of the securities portfolio in the second quarter of 2020. Service charges and fee income in the third quarter fell $741 thousand, or 42 percent, when compared the same period in 2019, largely due to COVID-19-induced changes in customer spending patterns. Interest on excess funds decreased from $158 thousand to $27 thousand due to the Fed Funds rate hovering at near zero for the entirety of the quarter.

While interest income on loans held steady, bank management was able to affect a 10 percent decrease in interest expense even as total deposits grew by 11 percent over the same time last year, demonstrating a shift in deposit mix toward non-interest-bearing accounts.

“We find ourselves operating in a very unique economic situation, largely created by the government’s response to COVID-19, but one that management plans to use to the bank’s advantage,” commented Casey Hill, the company’s chief financial officer. “While the 42 percent decrease in service charges and fees is largely beyond management’s control, the decrease in interest income from securities was the direct and predicted result of the decision to monetize a portion of the unrealized gain in the securities portfolio in the second quarter. The gains realized from the liquidated securities during the second quarter constituted approximately 30 months of income from those assets. The bank is operating under a strategic plan to employ the liquidity created by that action in a way that will be economically advantageous over the long term,” said Hill. “The bank has reinvested a significant portion of these gains into initiatives designed to drive stronger future performance, including expansions into new markets, ongoing upgrades to our digital presence and new marketing and advertising initiatives.”

The bank also continued to add to its already healthy reserve for loan losses at a higher rate than in periods leading up to the pandemic. As of the end of September, the allowance for loan and lease losses (ALLL) stood at 1.13 percent of gross loans. Net of PPP loans, that ratio increases to 1.26 percent, a significant increase from 1.05 percent at the end of September 2019. “While we continue to aggressively reserve for the probable economic effects of the pandemic and resulting economic strain, we also see the need to look to the future when we emerge from this temporary stressor,” said Hill. “While it does not excuse us from managing and mitigating current economic risks, the bank has managed its capital in a way that allows us to also look to a future past the current economic headwinds.”

The bank’s balance sheet shrank by 1.59 percent in the three months ended September 30th, driven almost exclusively by deposit balances decreasing by $8.6 million or 1.57 percent. Net decreases in interest-bearing balances accounted for the bulk of the decrease in deposits, with time deposits decreasing by $17.4 million. Decreases in repo agreements of $876 thousand accounted for the remainder of the variance. Cash decreased by 3.69 percent but remained high at $136 million. Regarding the balance sheet, Hill stated “The monetary impacts of federal stimulus and its utilization has placed a great deal of cash on balance sheets across the banking system. Unfortunately, the attempt to employ the excess cash by investors across the market has also pushed bond yields historically low. While it is tempting to redeploy cash back into earning assets immediately, the present low yields on those securities demands that management take a more disciplined approach. Our strategic investments into new markets and talent acquisition will allow us to utilize that cash in funding new loan opportunities in those communities without pressuring funding sources in the near term.”

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