Merchants Bancorp Reports Full Year and Fourth Quarter 2021 Results

CARMEL, Ind., Jan. 31, 2022 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported fourth quarter 2021 net income of $55.2 million, or diluted earnings per common share of $1.71 (or $1.14 after adjusting for its 3:2 stock split in January 2022).  This compared to $59.8 million, or diluted earnings per common share of $1.95 ($1.30 split adjusted) in the fourth quarter of 2020, and compared to $58.5 million, or diluted earnings per common share of $1.83 ($1.22 split adjusted) in the third quarter of 2021.

"Execution and growth were the hallmarks of our performance during 2021.  With record earnings and asset levels in a low interest rate environment, we have continued to demonstrate the strength of our business model that has focused on conservative underwriting, cost efficiency, and holding short-duration assets by originating loans to be sold in the secondary market," said Michael F. Petrie, Chairman and CEO of Merchants.  

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "The entrepreneurial evolution of our businesses over the last year has resulted in Merchants becoming known as a one-stop-shop for borrowers with a broad array of product offerings that includes everything from multi-family, bridge, residential, SBA, agriculture, and mortgage warehouse financing, to traditional community banking and syndicated low-income housing tax credit and debt funds.  We have expanded our platform of offerings across all our businesses and see many opportunities for future growth."

Net income for the fourth quarter 2021 decreased by $4.6 million, or 8%, compared to the fourth quarter of 2020, primarily driven by a $10.2 million, or 37%, increase in noninterest expense that reflected a 53% increase in salaries and employee benefits, including commissions.  Also contributing to the lower net income was a $2.5 million, or 6%, decrease in noninterest income that reflected lower mortgage warehouse fees due to lower single family loan volume.  Partially offsetting these items was a $5.0 million, or 8%, increase in net interest income after provision for loan losses, and a $3.0 million lower tax provision.

Net income for the fourth quarter 2021 decreased by $3.3 million, or 6%, compared to the third quarter of 2021, primarily driven by an $8.2 million, or 28%, increase in noninterest expense that reflected a 26% increase in salaries and employee benefits, including commissions.  Also contributing to the lower net income was a $3.9 million, or 74%, decrease in loan servicing fees.  Partially offsetting these items was a $4.6 million, or 143%, increase in other income from low-income housing tax syndication fees, a $2.4 million increase in net interest income after provision for loan losses, and a $2.5 million lower tax provision.

Total Assets
Total assets of $11.3 billion at December 31, 2021 increased $326.6 million, or 3%, compared to September 30, 2021, and increased $1.6 billion, or 17%, compared to December 31, 2020.

Return on average assets was 2.02% for the fourth quarter of 2021 compared to 2.57% for the fourth quarter of 2020 and 2.29% for the third quarter of 2021. 

Asset Quality
The allowance for loan losses of $31.3 million at December 31, 2021 increased $2.2 million compared to September 30, 2021 and increased $3.8 million compared to December 31, 2020.  The increases compared to December 31, 2020 were primarily based on growth in the multi-family loan portfolio.  The portion of the allowance associated with the COVID-19 pandemic has remained relatively steady since September 30, 2020, at approximately $0.8 million.   As of December 31, 2021, the Company had only one loan remaining in a payment deferral arrangement, with an unpaid balance of $36.8 million.

Non-performing loans were $0.8 million, or 0.01%, of loans receivable at December 31, 2021, compared to $2.9 million, or 0.05% of loans receivable at September 30, 2021, and compared to $6.3 million, or 0.11% of loans receivable at December 31, 2020. 

Total Deposits
Total deposits of $9.0 billion at December 31, 2021 increased $35.3 million compared to September 30, 2021, and increased $1.6 billion, or 21%, compared to December 31, 2020. The increase compared to December 31, 2020 was primarily due to growth in savings accounts and brokered certificates of deposits.

Total brokered deposits of $2.2 billion at December 31, 2021 increased $493.3 million, or 30%, from September 30, 2021 and increased $986.1 million, or 84%, from December 31, 2020.   Brokered deposits represented 24% of total deposits at December 31, 2021 compared to 19% of total deposits at September 30, 2021 and 16% of total deposits at December 31, 2020.  The increases reflected a continuation of the Company's shift from borrowing at the Federal Home Loan Bank of Indianapolis after a change in their collateral policy to eliminate certain agency eligible mortgage loan participations during the third quarter of 2021.

Liquidity
Cash balances of $1.0 billion at December 31, 2021 increased by $230.0 million compared to September 30, 2021 and increased by $852.9 million compared to December 31, 2020.  The Company also continues to have significant borrowing capacity, with unused lines of credit at $2.4 billion at December 31, 2021 compared to $2.1 billion at September 30, 2021 and $2.6 billion at December 31, 2020.  This liquidity enhances the ability to effectively manage interest expense and asset levels in the future.

Net Interest Income
Net interest income of $72.7 million in the fourth quarter of 2021 increased $3.5 million, or 5%, compared to the fourth quarter of 2020 and increased $3.9 million, or 6%, compared to the third quarter of 2021. 

The 5% increase in net interest income compared to the fourth quarter of 2020 reflected a 6% increase in interest income from higher loan balances that was partially offset by a 20% increase in the cost of deposits. The interest rate spread of 2.62% for the fourth quarter of 2021 decreased 33 basis points compared to 2.95% in the fourth quarter of 2020. The net interest margin of 2.70% for the fourth quarter of 2021 decreased 31 basis points compared to 3.01% for the fourth quarter of 2020. The decrease in net interest margin compared to the fourth quarter of 2020 reflected higher loan balances that were outpaced by lower interest rates on loans.

The 6% increase in net interest income compared to the third quarter of 2021 reflected higher loan balances and a modest increase in average loan yields.  The interest rate spread of 2.62% for the fourth quarter of 2021 decreased 5 basis points compared to 2.67% in the third quarter of 2021.  The net interest margin of 2.70% for the fourth quarter of 2021 also decreased 3 basis points compared to 2.73% for the third quarter of 2021. 

Interest Income
Interest income of $82.6 million in the fourth quarter of 2021 increased $4.7 million, or 6%, compared to the fourth quarter of 2020 and increased $5.3 million, or 7%, compared to the third quarter of 2021. 

The 6% increase in interest income compared to the fourth quarter of 2020 was primarily due to significant loan growth that was partially offset by lower rates.  The higher interest income reflected a $923.3 million, or 11%, increase in the average balance of loans, including loans held for sale, which reached $9.1 billion for the fourth quarter of 2021. The average yield on loans and loans held for sale of 3.37% for the fourth quarter of 2021 decreased 27 basis points compared to 3.64% for the fourth quarter of 2020.

The 7% increase in interest income compared to the third quarter of 2021 reflected a $375.7 million, or 4%, increase in the average balance of loans, including loans held for sale, which reached $9.1 billion for the fourth quarter of 2021. The average yield on loans and loans held for sale of 3.37% for the fourth quarter of 2021 increased 4 basis points compared to 3.33% for the third quarter of 2021. 

Interest Expense
Total interest expense increased $1.2 million, or 13%, to $9.8 million for the fourth quarter of 2021 compared to the fourth quarter of 2020 and increased $1.4 million, or 17%, compared to the third quarter of 2021. Interest expense on deposits of $8.5 million for the fourth quarter of 2021 increased $1.4 million, or 20%, compared to the fourth quarter of 2020 and increased $1.5 million, or 22%, compared to the third quarter of 2021.

The 20% increase in interest expense on deposits compared to the fourth quarter of 2020 was primarily due to increases in average balances of money market accounts and certificates of deposits, which was partially offset by lower rates.  The average balance of interest-bearing deposits of $8.3 billion for the fourth quarter of 2021 increased $1.5 billion, or 21%, compared to the fourth quarter of 2020. The average yield of interest-bearing deposits was 0.41% for the fourth quarter of 2021, which was the same as the fourth quarter of 2020. 

The 22% increase in interest expense on deposits compared to the third quarter of 2021 was primarily due to higher balances of certificates of deposit and money market accounts, that were partially offset by lower rates on certificates of deposit.  The average balance of interest-bearing deposits of $8.3 billion for the fourth quarter of 2021 increased $481.7 million, or 6%, compared to the third quarter of 2021. The average yield of interest-bearing deposits was 0.41% for the fourth quarter of 2021, which was a 6 basis point increase compared to 0.35% in the third quarter of 2021. 

Noninterest Income
Noninterest income of $40.3 million for the fourth quarter of 2021 decreased $2.5 million, or 6%, compared to the fourth quarter of 2020 and was consistent with the third quarter of 2021.

The 6% decrease in noninterest income compared to the fourth quarter of 2020 was primarily due to a $3.5 million decrease in mortgage warehouse fees. Included in loan servicing fees for the fourth quarter of 2021 was a $1.9 million positive fair market value adjustment to servicing rights, which compared to a $2.1 million positive fair market value adjustment for the fourth quarter of 2020.

Noninterest income was consistent with the third quarter of 2021 but included a $4.6 million increase in other income from low-income housing tax credit syndication fees that was mostly offset by a $3.9 million decrease in loan servicing fees.  Included in loan servicing fees for the fourth quarter of 2021 was a $1.9 million positive fair market value adjustment to servicing rights, which compared to a $3.0 million positive fair market value adjustment for the third quarter of 2021.

At December 31, 2021, servicing rights were valued at $110.3 million, an increase of 34% compared to December 31, 2020 and an increase of 5% compared to September 30, 2021.  These increases were driven by higher loan balances of serviced assets and higher interest rates that impacted fair market value adjustments in the fourth quarter of 2021.  The value of servicing rights generally increases in rising interest rate environments and declines in falling interest rate environments.

Noninterest Expense
Noninterest expense of $37.6 million for the fourth quarter of 2021 increased $10.2 million, or 37%, compared to the fourth quarter of 2020 and increased $8.2 million, or 28%, compared to the third quarter of 2021. 

The 37% increase in noninterest expense compared to the fourth quarter of 2020 was due primarily to a $8.8 million, or 53%, increase in salaries and employee benefits, including commissions, to support higher loan production volumes.    The efficiency ratio of 33.3% for the fourth quarter of 2021 compared to 24.5% for the fourth quarter of 2020.

The 28% increase in noninterest expense compared to the third quarter of 2021 was primarily due to a $5.2 million, or 26%, increase in salaries and employee benefits that reflected higher commissions from higher loan volumes.  The efficiency ratio of 33.3% for the fourth quarter of 2021 compared to 27.0% for the third quarter of 2021.

Segments

Multi-family Mortgage Banking 
For the fourth quarter of 2021, net income of $14.1 million for Multi-family Mortgage Banking decreased 1% compared with the fourth quarter of 2020, primarily due to higher noninterest income from gain on sale of loans that was offset by higher noninterest expense from salaries and employee benefits, including commissions. Noninterest income reflected a positive fair market value adjustment of $1.0 million on servicing rights in the fourth quarter of 2021 compared to a positive fair market value adjustment of $2.7 million in the fourth quarter of 2020. 

Compared to the third quarter of 2021, net income for this segment decreased 2%, reflecting higher gain on sale of loans and other income from low-income housing tax credit syndication fees that were offset by higher noninterest expense from salaries and employee benefits, including commissions.  Included in loan servicing fees was a positive fair market value adjustment of $1.0 million on servicing rights in the fourth quarter of 2021 compared to a positive fair market value adjustment of $0.7 million in the third quarter of 2021.

Banking 
For the fourth quarter of 2021, net income of $22.6 million for Banking increased 38% from the fourth quarter of 2020, reflecting higher net interest income and lower salaries and employee benefits that were partially offset by lower noninterest income from gains on sale of loans. Included in noninterest income for the fourth quarter of 2021 was a $0.9 million positive fair market value adjustment to servicing rights, which compared to a $0.5 million negative fair market value adjustment for the fourth quarter of 2020. 

Net income for this segment decreased 4% from the third quarter of 2021 primarily due to lower noninterest income from gain on sale of loans that offset higher net interest income and lower salaries and employee benefits.  Included in loan servicing fees for the fourth quarter of 2021 was a $0.9 million positive fair market value adjustment to servicing rights, which compared to a $2.3 million positive fair market value adjustment for the third quarter of 2021.

Mortgage Warehousing 
For the fourth quarter of 2021, net income of $21.3 million for Mortgage Warehousing decreased 34% compared to the fourth quarter of 2020 and decreased 8% compared to the third quarter of 2021.  The decreases compared to the prior periods reflected lower net interest income and mortgage warehouse fees as industry volumes declined. 

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 $11.3 billion in assets and $9.0 billion in deposits as of December 31, 2021, 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.merchantsbancorp.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.