Merchants Bancorp Reports Record Full Year and Fourth Quarter 2019 Results

CARMEL, Ind., Jan. 30, 2020 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported fourth quarter 2019 net income of $30.1 million, or $0.92 per common share.  This compared to $15.4 million, or $0.51 per common share, in the fourth quarter of 2018 and $20.3 million, or $0.60 per common share, in the third quarter of 2019.

The 95% increase in net income for the fourth quarter 2019 compared to the fourth quarter of 2018 was primarily driven by a 56% increase in net interest income that reflected significant growth in mortgage warehouse loans, and a 31% increase in gain on sale of loans from significantly higher growth in multi-family loans.

The 48% increase in net income for the fourth quarter 2019 compared to the third quarter of 2019 was primarily driven by an 85% increase in gain on sale of loans from the multi-family business as well as a 15% increase in net interest income that benefited from 10% higher average loan balances and a 9 basis point increase in net interest margin.

"On many fronts, 2019 was an exceptional year at Merchants for record-setting results, as we grew total assets by 64%, raised over $171 million in net new capital, grew net income by 23%, and grew earnings per common share by 14%, compared to 2018.  The robust increases were fueled by significant growth in mortgage warehouse and multi-family loans, while we also maintained our reputation for high credit quality metrics and conservatively managed our expenses.  We continue to demonstrate that our business model, with its complementary portfolio of businesses, allows us to operate profitably across various interest rate environments and sets us apart from many of our peers," said Michael F. Petrie, Chairman and CEO of Merchants.   "As we move into 2020 with a top-notch team in place, I am optimistic that our model will continue to meet customer and community needs, which will lead us to achieve our growth and profit goals that will provide enhanced shareholder value," added Petrie.

Total Assets

Total assets of $6.4 billion at December 31, 2019 increased $2.5 billion, or 64%, compared to $3.9 billion at December 31, 2018 and increased $34.7 million, or 1%, compared to September 30, 2019.

The increase compared to December 31, 2018 was primarily due to growth in loans held for sale and net loans receivable, which increased a combined total of $2.2 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 1.81% for the fourth quarter of 2019 compared to 1.61% for the fourth quarter of 2018 and 1.35% for the third quarter of 2019. 

Asset Quality

The allowance for loan losses of $15.8 million at December 31, 2019 increased $3.1 million compared to December 31, 2018 and increased $2.1 million compared to September 30, 2019, primarily reflecting increases associated with loan growth.  Non-performing loans were $4.7 million, or 0.15% of total loans at December 31, 2019, compared to $2.4 million, or 0.12% of total loans at December 31, 2018 and compared to $6.1 million, or 0.22% of total loans at September 30, 2019.

Total Deposits

Total deposits of $5.5 billion at December 31, 2019 increased $2.2 billion, or 70%, compared to December 31, 2018 and decreased $21.6 million, compared to September 30, 2019.

The 70% increase in deposits compared to December 31, 2018 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 increased $1.2 billion, to $2.2 billion at December 31, 2019 from $988.2 million at December 31, 2018.   Brokered deposits represented 39% of total deposits at December 31, 2019 compared to 31% of total deposits at December 31, 2018.

The modest decrease in deposits compared to September 30, 2019 was primarily due to the reduced need for brokered certificates of deposits, matching the decrease in loans held for sale. Total brokered deposits of $2.2 billion at December 31, 2019 decreased $108.0 million from $2.3 billion at September 30, 2019.  Brokered deposits represented 39% of total deposits at December 31, 2019 compared to 41% of total deposits at September 30, 2019.

The Company increased its borrowing capacity, with unused lines of credit increasing from $634.6 million at September 30, 2019 to $1.5 billion at December 31, 2019.  This increase in liquidity further enhances the ability to effectively manage interest expense and assets levels in the future.

Net Interest Income

Net interest income of $37.6 million in the fourth quarter of 2019 increased $13.5 million, or 56%, compared to the fourth quarter of 2018 and increased $5.0 million, or 15%, compared to the third quarter of 2019. 

The 56% increase in net interest income compared to the fourth quarter of 2018 reflected significantly higher loan growth that offset lower margins.  The interest rate spread of 2.07% for the fourth quarter of 2019 decreased 21 basis points compared to 2.28% in the fourth quarter of 2018. The net interest margin of 2.31% for the fourth quarter of 2019 declined 29 basis points compared to 2.60% for the fourth quarter of 2018. The decline in net interest margin compared to the fourth quarter of 2018 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 longer term rates.    Profitability in this business, which also includes fees classified as noninterest income, made the most significant contribution to net income for the fourth quarter of 2019.

The 15% increase in net interest income compared to the third quarter of 2019 reflected an interest rate spread of 2.07% that increased 9 basis points compared to 1.98% in the third quarter of 2019. The net interest margin of 2.31% for the fourth quarter of 2019 also increased 9 basis points compared to 2.22% for the third quarter of 2019. 

Interest Income

Interest income of $63.8 million in the fourth quarter of 2019 increased $24.0 million, or 60%, compared to the fourth quarter of 2018 and increased $4.0 million, or 7%, compared to the third quarter of 2019. The increases for both periods were primarily due to loan growth. 

The 60% increase in interest income compared to the fourth quarter of 2018 reflected a $2.5 billion, or 89%, increase in the average balance of loans, including loans held for sale, which reached $5.2 billion for the fourth quarter of 2019. The average yield on loans and loans held for sale of 4.35% for the fourth quarter of 2019 decreased 58 basis points compared to 4.93% for the fourth quarter of 2018. The decline in average yields reflected the higher concentration of warehouse loans for the fourth quarter of 2019.

The 7% increase in interest income compared to the third quarter of 2019 reflected a $463.8 million, or 10%, increase in the average balance of loans, including loans held for sale, which reached $5.2 billion for the fourth quarter of 2019. The average yield on loans and loans held for sale of 4.35% for the fourth quarter of 2019 decreased 9 basis points compared to 4.44% for the third quarter of 2019. 

Interest Expense

Total interest expense of $26.2 million for the fourth quarter of 2019 increased $10.5 million, or 67%, compared to the fourth quarter of 2018 and decreased $1.0 million, or 4%, compared to the third quarter of 2019. Interest expense on deposits of $25.1 million for the fourth quarter of 2019 increased $11.3 million, or 82%, compared to the fourth quarter of 2018 and decreased $1.0 million, or 4%, compared to the third quarter of 2019.

The 82% increase in interest expense on deposits compared to the fourth quarter of 2018 was primarily due to the higher volume of custodial interest-bearing checking and brokered certificates of deposits. The average balance of interest-bearing deposits of $5.6 billion for the fourth quarter of 2019 increased $2.6 billion, or 85%, compared to the fourth quarter of 2018. The average cost of interest-bearing deposits was 1.78% for the fourth quarter of 2019, which was a 3 basis point decrease compared to 1.81% for the fourth quarter of 2018. 

The 4% decrease in interest expense on deposits compared to the third quarter of 2019 was primarily due to lower costs of deposits.  The average cost of interest-bearing deposits was 1.78% for the fourth quarter of 2019, which was a 24 basis point decrease compared to 2.02% in the third quarter of 2019.  The average balance of interest-bearing deposits of $5.6 billion for the fourth quarter of 2019 increased $466.9 million, or 9%, compared to the third quarter of 2019.

Noninterest Income

Noninterest income of $22.7 million for the fourth quarter of 2019 increased $8.0 million, or 54%, compared to the fourth quarter of 2018 and increased $11.9 million, or 109%, compared to the third quarter of 2019.

The 54% increase in noninterest income compared to the fourth quarter of 2018 was primarily due to a $3.6 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.  Included in noninterest income for the fourth quarter of 2019 was a $1.1 million positive fair market value adjustment in mortgage servicing rights, which compared to a $436,000 positive fair market value adjustment for the fourth quarter of 2018.

The 109% increase in noninterest income compared to the third quarter of 2019 was primarily due to a $7.0 million, or 85%, increase in gain on sale of loans, and a $3.6 million increase in loan servicing fees.   Included in loan servicing fees for the fourth quarter of 2019 was a $1.1 million positive fair market value adjustment in mortgage servicing rights, which compared to a $1.5 million negative fair market value adjustment for the fourth quarter of 2018.

At December 31, 2019, the mortgage servicing rights asset was valued at $74.4 million, a decrease of 4% compared to December 31, 2018 and an increase of 3% compared to September 30, 2019.  The value of mortgage servicing rights generally declines in falling interest rate environments and increases in rising interest rate environments.

Noninterest Expense

Noninterest expense of $18.8 million for the fourth quarter of 2019 increased $2.7 million, or 16%, compared to the fourth quarter of 2018 and increased $3.3 million, or 21%, compared to the third quarter of 2019. 

The 16% increase in noninterest expense compared to the fourth quarter of 2018 was due primarily to a $1.1 million, or 410%, increase in deposit insurance related to the growth in deposits and assets and a $1.1 million increase in occupancy and equipment costs associated with the Company's move to its new corporate headquarters.    The efficiency ratio of 31.2% for the fourth quarter of 2019 compared to 41.6% for the fourth quarter of 2018.

The 21% increase in noninterest expense compared to the third quarter of 2019 was primarily due to a $1.3 million, or 14%, increase in salaries and employee benefits and a $799,000, or 80%, increase in occupancy and equipment costs associated with the company's move to its new corporate headquarters.  The increase in salaries and employee benefits was primarily due to the addition of new employees to support business growth, along with higher commission expense associated with higher loan growth during the fourth quarter of 2019.  The efficiency ratio of 31.2% for the fourth quarter of 2019 compared to 35.7% for the third quarter of 2019.

Segments

For the fourth quarter of 2019, net income for Mortgage Warehousing increased 177% compared to the fourth quarter of 2018 and increased 25% compared to the third quarter of 2019, primarily reflecting significant growth in net interest income during both periods. 

For the fourth quarter of 2019, net income for Multi-family Mortgage Banking increased 117% compared with the fourth quarter of 2018 and increased 273% compared to the third quarter of 2019.   The increases reflected higher gains on sale of loans for both periods.  The comparative performance was impacted by fair market value adjustments to mortgage servicing rights. The fourth quarter of 2019 included a positive fair market value adjustment of $1.1 million, which compared to a positive fair value adjustment of $436,000 for the fourth quarter of 2018 and a negative fair market value adjustment of $1.5 million for the third quarter of 2019.

For the fourth quarter of 2019, net income for Banking increased 5% compared to the fourth quarter of 2018 and decreased 8% compared to the third quarter of 2019, reflecting higher deposit insurance expense.

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 $6.4 billion in assets and $5.5 billion in deposits as of December 31, 2019, conducts its business 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 our current views with respect to, among other things, future events and our 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 our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution 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 we believe 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 our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in "Risk Factors" or "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 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