Merchants Bancorp Reports Second Quarter 2021 Results

CARMEL, Ind., July 28, 2021 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported second quarter 2021 net income of $51.4 million, or diluted earnings per common share of $1.58.  This compared to $41.2 million, or diluted earnings per common share of $1.31 in the second quarter of 2020, and compared to $62.0 million, or diluted earnings per common share of $2.02 in the first quarter of 2021.

The $10.3 million, or 25%, increase in net income for the second quarter 2021 compared to the second quarter of 2020 was driven by a $13.2 million, or 26%, increase in net interest income that reflected a 57% decrease in the cost of deposits and a 7% increase in interest income from higher loan balances.

The $10.6 million, or 17%, decrease in net income for the second quarter 2021 compared to the first quarter of 2021 was primarily driven by a $7.6 million, or 10%, decrease in net interest income that reflected a 10% decrease in interest income on loans.  The decrease in net income also reflected a $6.2 million decrease in loan servicing fees, which included a $6.2 million lower fair market value adjustment to mortgage servicing rights.  The second quarter of 2021 benefited from a $0.7 million positive fair market value adjustment compared to $6.9 positive fair market value adjustment in the first quarter of 2021.

"Following the record-setting income reported in the first quarter, we continued to effectively manage our capital and resources to reach the highest asset levels achieved in Company history, with $9.9 billion in total assets at June 30, 2021.  During the second quarter we also maintained one of the lowest efficiency ratios in the industry at 29.0%, had nonperforming loans at only .05% of loans receivable, and achieved tangible book value of $23.59 per share, which demonstrates our ongoing commitment to conservative underwriting, capital management and profitable growth," said Michael F. Petrie, Chairman and CEO of Merchants.  

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "The entrepreneurial culture at Merchants has provided our team with the product diversity that is enabling our businesses to evolve and expand, regardless of the changing market dynamics."

Total Assets

Total assets of $9.9 billion at June 30, 2021 increased $176.3 million, or 2%, compared to March 31, 2021, and increased $236.2 million, or 2%, compared to December 31, 2020.

The asset levels increased compared to both periods despite a $262.1 million multi-family loan sale to Freddie Mac in May of 2021, which was subsequently securitized. The Company also acquired $28.7 million of those securities.

Return on average assets was 2.14% for the second quarter of 2021 compared to 1.89% for the second quarter of 2020 and 2.49% for the first quarter of 2021. 

Asset Quality

The allowance for loan losses of $28.7 million at June 30, 2021 decreased $0.4 million compared to March 31, 2021 and increased $1.2 million compared to December 31, 2020.  The increase compared to December 31, 2020 was 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 $0.6 million.   Because it is still 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.

Merchants believes it has minimal direct 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 June 30, 2021, the Company had only 4 loans remaining in payment deferral arrangements, with unpaid balances of $37.0 million.

Non-performing loans were $3.0 million, or 0.05%, of loans receivable at June 30, 2021, compared to $4.7 million, or 0.08% of loans receivable at March 31, 2021, and compared to $6.3 million, or 0.11% of loans receivable at December 31, 2020. 

Total Deposits

Total deposits of $8.0 billion at June 30, 2021 decreased $23.6 million compared to March 31, 2021, and increased $631.5 million, or 9%, compared to December 31, 2020. The increase compared to December 31, 2020 was primarily due to growth in savings accounts.

Total brokered deposits of $853.1 million at June 30, 2021 decreased $5.0 million, or 1%, from March 31, 2021 and decreased $320.6 million, or 27%, from December 31, 2020.   Brokered deposits represented 11% of total deposits at June 30, 2021 compared to 11% of total deposits at March 31, 2021 and 16% of total deposits at December 31, 2020.

Liquidity

The Company continues to have significant borrowing capacity, with unused lines of credit at $3.3 billion at June 30, 2021 compared to $3.7 billion at March 31, 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.  The Company began utilizing the Federal Reserve's discount window and the Paycheck Protection Program Liquidity Facility ("PPPLF") during 2020, which have contributed to lower interest expenses and increased borrowing capacity. Participation in the American Financial Exchange began during the first quarter of 2021 and is also contributing to lower interest expense and increased borrowing capacity.

Net Interest Income

Net interest income of $64.4 million in the second quarter of 2021 increased $13.2 million, or 26%, compared to the second quarter of 2020 and decreased $7.6 million, or 10%, compared to the first quarter of 2021. 

The 26% increase in net interest income compared to the second quarter of 2020 reflected a 57% decrease in the cost of deposits and a 7% increase in interest income from higher loan balances. The interest rate spread of 2.68% for the second quarter of 2021 increased 37 basis points compared to 2.31% in the second quarter of 2020. The net interest margin of 2.75% for the second quarter of 2021 increased 33 basis points compared to 2.42% for the second quarter of 2020. The increase in net interest margin compared to the second quarter of 2020 reflected lower funding costs and higher loan balances that outpaced lower interest rates on loans.

The 10% decrease in net interest income compared to the first quarter of 2021 reflected lower balances and lower rates on loans.  The interest rate spread of 2.68% for the second quarter of 2021 decreased 25 basis points compared to 2.93% in the first quarter of 2021.  The net interest margin of 2.75% for the second quarter of 2021 also decreased 24 basis points compared to 2.99% for the first quarter of 2021. 

Interest Income

Interest income of $72.4 million in the second quarter of 2021 increased $4.2 million, or 6%, compared to the second quarter of 2020 and decreased $7.1 million, or 9%, compared to the first quarter of 2021. 

The 6% increase in interest income compared to the second quarter of 2020 was primarily due to significant loan growth that was partially offset by lower rates.  The higher interest income reflected a $969.4 million, or 14%, increase in the average balance of loans, including loans held for sale, which reached $7.9 billion for the second quarter of 2021. The average yield on loans and loans held for sale of 3.46% for the second quarter of 2021 decreased 25 basis points compared to 3.71% for the second quarter of 2020. The decline in average yields reflected higher loan volume and lower overall interest rates in the second quarter of 2021.

The 9% decrease in interest income compared to the first quarter of 2021 reflected a $473.5 million, or 6%, decrease in the average balance of loans, including loans held for sale, which reached $7.9 billion for the second quarter of 2021. The average yield on loans and loans held for sale of 3.46% for the second quarter of 2021 decreased 20 basis points compared to 3.66% for the first quarter of 2021. 

Interest Expense

Total interest expense decreased $8.9 million, or 53%, to $8.0 million for the second quarter of 2021 compared to the second quarter of 2020 and increased $0.4 million, or 6%, compared to the first quarter of 2021. Interest expense on deposits of $6.7 million for the second quarter of 2021 decreased $8.7 million, or 57%, compared to the second quarter of 2020 and increased $0.6 million, or 10%, compared to the first quarter of 2021.

The 57% decrease in interest expense on deposits compared to the second quarter of 2020 was primarily due to significant decreases in balances and rates of brokered certificates of deposits, as well as higher balances of custodial interest-bearing checking accounts with warehouse customers that are tied to short-term LIBOR rates, which declined significantly. The average balance of interest-bearing deposits of $7.4 billion for the second quarter of 2021 increased $390.1 million, or 6%, compared to the second quarter of 2020. The average yield of interest-bearing deposits was 0.36% for the second quarter of 2021, which was a 52 basis point decrease compared to 0.88% for the second quarter of 2020. 

The 10% increase in interest expense on deposits compared to the first quarter of 2021 was primarily due to the higher balances and rates for money market accounts.  The average balance of interest-bearing deposits of $7.4 billion for the second quarter of 2021 decreased $91.3 million, or 1%, compared to the first quarter of 2021. The average yield of interest-bearing deposits was 0.36% for the second quarter of 2021, which was a 3 basis point decrease compared to 0.33% in the first quarter of 2021. 

Noninterest Income

Noninterest income of $32.9 million for the second quarter of 2021 increased $6.7 million, or 25%, compared to the second quarter of 2020 and decreased $11.1 million, or 25%, compared to the first quarter of 2021.

The 25% increase in noninterest income compared to the second quarter of 2020 was primarily due to a $8.0 million, or 47%, increase in gain on sale of loans reflecting higher volume of multi-family loans. 

The 25% decrease in noninterest income compared to the first quarter of 2021 was primarily due to a $6.2 million decrease in loan servicing fees.   Included in loan servicing fees for the second quarter of 2021 was a $0.7 million positive fair market value adjustment to mortgage servicing rights, which compared to a $6.9 million positive fair market value adjustment for the first quarter of 2021.

At June 30, 2021, the mortgage servicing rights asset was valued at $98.3 million, an increase of 35% compared to June 30, 2020 and an increase of 2% compared to March 31, 2021.  These increases were driven by higher loan balances of mortgages serviced and higher interest rates that impacted fair market value adjustments in the second quarter of 2021.  The value of mortgage servicing rights generally increases in rising interest rate environments and declines in falling interest rate environments.

Noninterest Expense

Noninterest expense of $28.2 million for the second quarter of 2021 increased $7.9 million, or 39%, compared to the second quarter of 2020 and decreased $1.9 million, or 6%, compared to the first quarter of 2021. 

The 39% increase in noninterest expense compared to the second quarter of 2020 was due primarily to a $7.0 million, or 60%, increase in salaries and employee benefits, including commissions, to support higher loan production volumes.    The efficiency ratio of 29.0% for the second quarter of 2021 compared to 26.2% for the second quarter of 2020.

The 6% decrease in noninterest expense compared to the first quarter of 2021 was primarily due to a $2.4 million, or 11%, decrease in salaries and employee benefits that reflected lower commissions from lower loan volumes.  The efficiency ratio of 29.0% for the second quarter of 2021 compared to 26.0% for the first quarter of 2021.

Segments

For the second quarter of 2021, net income of $11.0 million for Multi-family Mortgage Banking increased 200% compared with the second quarter of 2020, primarily due to higher noninterest income from gain on sale of loans. Noninterest income reflected a positive fair market value adjustment of $0.1 million on mortgage servicing rights in the second quarter of 2021 compared to a negative fair market value adjustment of $0.8 million in the second quarter of 2020.  Compared to the first quarter of 2021, net income for this segment decreased 8%, reflecting lower gain on sale of loans and loan servicing fees.  Included in loan servicing fees was a positive fair market value adjustment of $0.1 million on mortgage servicing rights in the second quarter of 2021 compared to a positive fair market value adjustment of $2.1 million in the first quarter of 2021.

For the second quarter of 2021, net income of $21.7 million for Banking increased 84% from to the second quarter of 2020, reflecting higher net interest income.  Net income for this segment decreased 6% from the first quarter of 2021 primarily due to lower loan servicing fees.  Included in loan servicing fees for the second quarter of 2021 was a $0.6 million positive fair market value adjustment to mortgage servicing rights, which compared to a $4.7 million positive fair market value adjustment for the first quarter of 2021.

For the second quarter of 2021, net income of $21.4 million for Mortgage Warehousing decreased 23% compared to the second quarter of 2020 and decreased 27% compared to the first quarter of 2021.  The decreases reflected lower net interest income as warehouse lines of credit and loans held for sale 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 $9.9 billion in assets and $8.0 billion in deposits as of June 30, 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.