Merchants Bancorp Reports First Quarter 2020 Results

CARMEL, Ind., April 23, 2020 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported first quarter 2020 net income of $24.6 million, or $0.73 per common share.  This compared to $10.6 million, or $0.34 per common share in the first quarter of 2019, and $30.1 million, or $0.92 per common share, in the fourth quarter of 2019.

The $14.0 million, or 133%, increase in net income for the first quarter 2020 compared to the first quarter of 2019 was primarily driven by a 701% increase in gain on sale of loans from significantly higher growth in multi-family loans, and a 59% increase in net interest income that reflected significant growth in mortgage warehouse loans.  These increases more than offset a $6.5 million negative valuation adjustment for mortgage servicing rights in the first quarter 2020 that compared to a $1.5 negative adjustment in the first quarter of 2019.

The $5.5 million, or 18%, decrease in net income for the first quarter 2020 compared to the fourth quarter of 2019 was primarily driven by a $6.5 million negative valuation adjustment for mortgage servicing rights in the first quarter 2020 that compared to a $1.1 positive adjustment in the fourth quarter of 2019.   The negative valuation adjustment was partially offset by a 38% increase in gain on sale of loans and a 2% increase in net interest income, reflecting a 9 basis point increase in net interest margin, to 2.40% compared to the fourth quarter of 2019.

"Merchants continued to produce solid results in the first quarter, and the benefits of our business model have never been clearer as we navigate these times of global economic uncertainty and lower interest rates.  We have continued to focus on short-duration loans in low-risk assets that are underwritten to, and backed by, federal agencies.  Our short-duration funding strategy has allowed us to maintain a net interest margin that benefits from our loan growth.  Additionally, our investments in technology have allowed us to reduce our cost structure and migrate our employees to a work-from-home status that is executing for the needs of our customers," said Michael F. Petrie, Chairman and CEO of Merchants.

"The strategic decision to expand our Small Business Administration ("SBA") team at the end of 2019 has positioned us well to support small businesses in our communities who could benefit from the Coronavirus Aid, Relief and Economic Security ("CARES") Act, particularly in the SBA's Paycheck Protection Program ("PPP").  We stand ready to assist our customers in their time of need," said Michael J. Dunlap, President and Chief Operating Officer of Merchants.

Total Assets
Total assets of $7.9 billion at March 31, 2020 increased $3.9 billion, or 99%, compared to $4.0 billion at March 31, 2019 and increased $1.5 billion, or 24%, compared to December 31, 2019.

The increase compared to December 31, 2019 was primarily due to growth in loans held for sale and net loans receivable, which increased a combined total of $1.2 billion.  The increase reflected the significant loan growth generated from mortgage warehouse business, primarily resulting from lower interest rates that increased the origination volume and refinancing in the single-family mortgage market, as well as higher loan volume generated in multi-family business. 

Return on average assets was 1.49% for the first quarter of 2020 compared to 1.14% for the first quarter of 2019 and 1.81% for the fourth quarter of 2019. 

Asset Quality
The allowance for loan losses of $18.9 million at March 31, 2020 increased $5.5 million compared to March 31, 2019 and increased $3.0 million compared to December 31, 2019, primarily reflecting increases associated with loan growth and uncertainties surrounding COVID-19.  While it is too early to know the full extent of potential future losses associated with the impact of COVID-19, the Company continues to monitor the situation and may need to adjust future expectations as developments occur throughout the remainder of 2020.

The Company has minimal exposure to consumer, commercial and other small businesses that may be negatively impacted by COVID-19 but continues to assist customers facing financial setbacks.  As of March 31, 2020, Merchants granted customer requests to defer payments on 24 loans with unpaid balances of $23.6 million.

Non-performing loans were $6.6 million, or 0.19% of total loans at March 31, 2020, compared to $2.6 million, or 0.12% of total loans at March 31, 2019 and compared to $4.7 million, or 0.15% of total loans at December 31, 2019.  The increase in non-performing loans compared to December 31, 2019 was primarily related to one collateralized agricultural loan that is delinquent greater than 90 days late, with repayment still anticipated.

Total Deposits
Total deposits of $6.7 billion at March 31, 2020 increased $3.6 billion, or 115%, compared to March 31, 2019 and increased $1.2 billion, or 23%, compared to December 31, 2019.

The increase in deposits compared to both March 31, 2019 and December 31,2019 was primarily due to higher brokered certificates of deposits to support the significant growth in loans and to match their expected duration.   Total brokered deposits of $2.8 billion at March 31, 2020 increased $2.1 billion from March 31, 2019 and increased $671.2 million from December 31, 2019.   Brokered deposits represented 42% of total deposits at March 31, 2020 compared to 24% of total deposits at March 31, 2019 and 39% of total deposits at December 31, 2019.

Liquidity
The Company maintained its available borrowing capacity, with unused lines of credit at $1.2 billion compared to $1.5 billion at December 31, 2019.  This liquidity enhances the ability to effectively manage interest expense and assets levels in the future.  The Company has also applied to utilize the Federal Reserve's discount window, should the need arise.

Net Interest Income
Net interest income of $38.4 million in the first quarter of 2020 increased $14.2 million, or 59%, compared to the first quarter of 2019 and increased $732,000, or 2%, compared to the fourth quarter of 2019. 

The 59% increase in net interest income compared to the first quarter of 2019 reflected significantly higher loan growth that offset lower margins.  The interest rate spread of 2.19% for the first quarter of 2020 decreased 31 basis points compared to 2.50% in the first quarter of 2019. The net interest margin of 2.40% for the first quarter of 2020 declined 37 basis points compared to 2.77% for the first quarter of 2019. The decline in net interest margin compared to the first quarter of 2019 reflected the flattening and inversion of the yield curve, and reflects the shift in business mix to a higher concentration of warehouse loans that typically are funded for a shorter duration and earn interest based on underlying mortgage rates or LIBOR.   Furthermore, interest rate floors are used in the Mortgage Warehousing segment to support net interest margin.   Profitability in this business, which also includes fees classified as noninterest income, made the most significant contribution to net income for the first quarter of 2020.

The 2% increase in net interest income compared to the fourth quarter of 2019 reflected an interest rate spread of 2.19% that increased 12 basis points compared to 2.07% in the fourth quarter of 2019. 

The net interest margin of 2.40% for the first quarter of 2020 also increased 9 basis points compared to 2.31% for the fourth quarter of 2019. 

Interest Income
Interest income of $60.4 million in the first quarter of 2020 increased $20.7 million, or 52%, compared to the first quarter of 2019 and decreased $3.4 million, or 5%, compared to the fourth quarter of 2019. 

The 52% increase in interest income compared to the first quarter of 2019 was primarily due to significant loan growth that was partially offset by lower rates.  The higher interest income reflected a $2.3 billion, or 82%, increase in the average balance of loans, including loans held for sale, which reached $5.0 billion for the first quarter of 2020. The average yield on loans and loans held for sale of 4.30% for the first quarter of 2020 decreased 79 basis points compared to 5.09% for the first quarter of 2019. The decline in average yields reflected a higher concentration of warehouse loans for the first quarter of 2020.

The 5% lower interest income compared to the fourth quarter of 2019 reflected a $170.2 million, or 3%, decrease in the average balance of loans, including loans held for sale, which was $5.0 billion for the first quarter of 2020. The average yield on loans and loans held for sale of 4.30% for the first quarter of 2020 also decreased 5 basis points compared to 4.35% for the fourth quarter of 2019. 

Interest Expense
Total interest expense of $22.1 million for the first quarter of 2020 increased $6.5 million, or 42%, compared to the first quarter of 2019 and decreased $4.1 million, or 16%, compared to the fourth quarter of 2019. Interest expense on deposits of $20.6 million for the first quarter of 2020 increased $6.4 million, or 45%, compared to the first quarter of 2019 and decreased $4.4 million, or 18%, compared to the fourth quarter of 2019.

The 45% increase in interest expense on deposits compared to the first quarter of 2019 was primarily due to the higher volume of brokered certificates of deposits and custodial interest-bearing checking. The average balance of interest-bearing deposits of $5.3 billion for the first quarter of 2020 increased $2.4 billion, or 79%, compared to the first quarter of 2019. The average cost of interest-bearing deposits was 1.55% for the first quarter of 2020, which was a 39 basis point decrease compared to 1.94% for the first quarter of 2019. 

The 18% decrease in interest expense on deposits compared to the fourth quarter of 2019 was due to both lower costs of deposits and lower average balances.  The average cost of interest-bearing deposits was 1.55% for the first quarter of 2020, which was a 23 basis point decrease compared to 1.78% in the fourth quarter of 2019.  The average balance of interest-bearing deposits of $5.3 billion for the first quarter of 2020 also decreased $244.9 million, or 4%, compared to the fourth quarter of 2019.

Noninterest Income
Noninterest income of $19.9 million for the first quarter of 2020 increased $16.2 million, or 443%, compared to the first quarter of 2019 and decreased $2.8 million, or 12%, compared to the fourth quarter of 2019.

The 443% increase in noninterest income compared to the first quarter of 2019 was primarily due to a $18.5 million increase in gain on sale of loans and a $2.0 million increase in mortgage warehouse fees, reflecting the significant loan growth for these lines of business. Also included in noninterest income for the first quarter of 2020 was a $6.5 million negative fair market value adjustment to mortgage servicing rights, which compared to a $1.5 million negative fair market value adjustment for the first quarter of 2019.

The 12% decrease in noninterest income compared to the fourth quarter of 2019 was primarily due to an $8.0 million decrease in loan servicing fees that was partially offset by a $5.8 million, or 38%, increase in gain on sale of loans.   Included in loan servicing fees for the first quarter of 2020 was a $6.5 million negative fair market value adjustment to mortgage servicing rights, which compared to a $1.1 million positive fair market value adjustment for the fourth quarter of 2019.

At March 31, 2020, the mortgage servicing rights asset was valued at $70.0 million, a decrease of 8% compared to March 31, 2019 and a decrease of 6% compared to December 31, 2019.  The value of mortgage servicing rights generally declines in falling interest rate environments and increases in rising interest rate environments.  Call protections on the Company's Ginnie Mae multi-family servicing rights help to minimize valuation declines as compared to the single-family market.

Noninterest Expense
Noninterest expense of $22.3 million for the first quarter of 2020 increased $9.3 million, or 71%, compared to the first quarter of 2019 and increased $3.5 million, or 18%, compared to the fourth quarter of 2019. 

The 71% increase in noninterest expense compared to the first quarter of 2019 was due primarily to a $5.7 million, or 66%, increase in salaries and employee benefits to support business growth and a $1.5 million, or 545%, increase in deposit insurance related to the growth in deposits and assets.    The efficiency ratio of 38.3% for the first quarter of 2020 compared to 46.9% for the first quarter of 2019.

The 18% increase in noninterest expense compared to the fourth quarter of 2019 was primarily due to a $3.8 million, or 37%, increase in salaries and employee benefits to support business growth.  The efficiency ratio of 38.3% for the first quarter of 2020 compared to 31.2% for the fourth quarter of 2019.

Segments
For the first quarter of 2020, net income for Mortgage Warehousing increased 225% compared to the first quarter of 2019, reflecting significant growth in net interest income from higher volume.  Net income decreased 9% compared to the fourth quarter of 2019, primarily reflecting lower interest income from moderating loan growth and rates. 

For the first quarter of 2020, net income for Multi-family Mortgage Banking increased 858% compared with the first quarter of 2019 and decreased 47% compared to the fourth quarter of 2019, reflecting higher gains on sale of loans compared to both periods. The results also included fair market value adjustments to mortgage servicing rights. The first quarter of 2020 included a negative fair market value adjustment of $6.5 million, which compared to a negative fair value adjustment of $1.5 million for the first quarter of 2019 and a positive fair market value adjustment of $1.1 million for the fourth quarter of 2019.  

For the first quarter of 2020, net income for Banking decreased 9% compared to the first quarter of 2019, reflecting higher deposit insurance expense, and increased 13% compared to the fourth quarter of 2019.

About Merchants Bancorp
Merchants Bancorp is a diversified bank holding company headquartered in Carmel, Indiana operating multiple lines of business, including Federal Housing Administration ("FHA") multi-family housing and healthcare facility financing and servicing; mortgage warehouse financing; retail and correspondent residential mortgage banking; agricultural lending; and traditional community banking.  Merchants Bancorp, with $7.9 billion in assets and $6.7 billion in deposits as of March 31, 2020, conducts its business primarily through its direct and indirect subsidiaries, Merchants Bank of Indiana, Merchants Capital Corp., Farmers-Merchants Bank of Illinois, Merchants Capital Servicing, LLC, and Merchants Mortgage, a division of Merchants Bank of Indiana. For more information and financial data, please visit Merchants' Investor Relations page at investors.merchantsbankofindiana.com.

Forward-Looking Statements 
This press release contains forward-looking statements which reflect management's current views with respect to, among other things, future events and financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "goal," "target," "outlook," "aim," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, such as the potential impacts of the COVID-19 pandemic. Accordingly, management cautions that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.  A number of important factors could cause actual results to differ materially from those indicated in these forward-looking statements, including the impacts of the COVID-19 pandemic, such as the severity, magnitude, duration and businesses' and governments' responses thereto, on the Company's operations and personnel, and on activity and demand across its businesses, and other factors identified in "Risk Factors" or "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K and other periodic filings with the Securities and Exchange Commission.  Any forward-looking statements presented herein are made only as of the date of this press release, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

SOURCE Merchants Bancorp