Merchants Bancorp Reports Second Quarter 2023 Results

• Second quarter 2023 net income of $65.3 million increased 21% compared to second quarter of 2022 and increased 19% compared to the first quarter 2023.
• Second quarter 2023 diluted earnings per common share of $1.31 increased 18% compared to the second quarter of 2022 and increased 22% compared to the first quarter of 2023.
• During the second quarter 2023, the Company recorded a $13.0 million tax benefit related to tax refunds and changes to its state tax apportionment calculations, which was offset by credit events that totaled approximately $14.8 million, primarily for the impact of a multi-family loan charge-off, an increase in specific reserves for a healthcare customer, and changes to qualitative factors and forecasted loss rates.
• Total assets of $15.9 billion increased 11% compared to March 31, 2023, and increased 26% compared to December 31, 2022.
• As of June 30, 2023, the Company had $5.3 billion, or 34% of total assets, in unused borrowing capacity with the Federal Home Loan Bank and the Federal Reserve Discount window, based on available collateral.
• The Company's most liquid assets are in unrestricted cash, short-term investments, including interest-bearing demand deposits, mortgage loans in process of securitization, loans held for sale, and warehouse lines of credit included in loans receivable.  Taken together, with unused borrowing capacity, these totaled $10.2 billion, or 64%, of the $15.9 billion in total assets as of June 30, 2023.
• Uninsured deposits totaled approximately $2 billion as of June 30, 2023, representing less than 20% of total deposits.
• Loans receivable of $9.9 billion, net of allowance for credit losses on loans, increased $1.3 billion, or 15%, compared to March 31, 2023, and increased $2.4 billion, or 33%, compared to December 31, 2022.
• Efficiency ratio was 32.7% in the second quarter of 2023 compared to 29.6% in the second quarter of 2022 and 30.3% in the first quarter of 2023.
• Tangible book value per common share of $24.14 increased 23% compared to $19.70 in the second quarter of 2022 and increased 6% compared to $22.88 in the first quarter of 2023.

CARMEL, Ind., July 27, 2023 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported second quarter 2023 net income of $65.3 million, or diluted earnings per common share of $1.31. This compared to $53.9 million, or diluted earnings per common share of $1.11 in the second quarter of 2022, and compared to $55.0 million, or diluted earnings per common share of $1.07 in the first quarter of 2023.

"We have continued to garner accolades for our performance and were honored to be named this month by American Banker Magazine as the #1 top-performing bank with assets between $10-50 billion.  Our results in the second quarter reflected that ongoing strength as we delivered profitable loan growth and our noninterest income gained momentum from diverse sources.  We have effectively managed our expenses and capital during this time of economic uncertainty, while maintaining an expense ratio of 32.7%, a return on average assets of 1.78%, and increasing tangible book value to $24.14 per share," said Michael F. Petrie, Chairman and CEO of Merchants. 

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "Our liquidity remains strong, with unused borrowing capacity that increased to $5.3 billion during the quarter, which positions us well to execute our plans for future growth.  Our relationship-focused teams are working hard every day to meet the needs of our loyal customers and improve communities across the country."  

Net income of $65.3 million for the second quarter 2023 increased by $11.4 million, or 21%, compared to the second quarter of 2022, driven by:

• a $33.6 million, or 47%, increase in net interest income,
• a $14.8 million, or 82%, decrease in the Provision for Income Tax, reflecting a $13.0 million tax benefit related to tax refunds and changes to its state tax apportionment calculations described in the Provision for Income Tax section,
• a $16.4 million, or 264%, increase in provision for credit losses, primarily due to credit events that totaled approximately $14.8 million for the impact of a multi-family loan charge-off, an increase in specific reserves for a healthcare customer, and changes to qualitative factors and forecasted loss rates, described in the Asset Quality section,
• an $11.4 million, 34%, increase in noninterest expense, and
• a $10.2 million, or 47%, decrease in gain on sale of loans.

Net income of $65.3 million for the second quarter 2023 increased by $10.3 million, or 19%, compared to the first quarter of 2023, primarily driven by:

• a $15.6 million, or 109%, increase in noninterest income reflecting higher gain on sale of loans, loan servicing fees and syndication and asset management fees,
• a $15.1 million, or 82%, decrease in the Provision for Income Tax, reflecting a $13.0 million tax benefit related to tax refunds and changes to its state tax apportionment calculations described in the Provision for Income Tax section,
• a $4.9 million, or 5%, increase in net interest income,
• a $15.7 million, or 229%, increase in provision for credit losses, primarily due to credit events that totaled approximately $14.8 million for the impact of a multi-family loan charge-off, an increase in specific reserves for a healthcare customer, and changes to qualitative factors and forecasted loss rates, described in the Asset Quality section, and
• a $9.5 million, 27%, increase in noninterest expense.

Total Assets
Total assets of $15.9 billion at June 30, 2023 increased $1.6 billion, or 11%, compared to March 31, 2023, and increased $3.3 billion, or 26%, compared to December 31, 2022.  Increases compared to both periods were primarily due to significant growth in the mortgage warehouse, multi-family and healthcare loan portfolios. 

Return on average assets was 1.78% for the second quarter of 2023 compared to 2.20% for the second quarter of 2022 and 1.71% for the first quarter of 2023.

Asset Quality
The allowance for credit losses on loans of $63.0 million as of June 30, 2023 increased $11.1 million, or 22%, compared to March 31, 2023 and increased $19.0 million, or 43%, compared to December 31, 2022.  The increases were primarily due to the following:

• replenishment of $8.2 million related to the charge-off of a loan in the multi-family portfolio,
• a $2.0 million increase in net specific reserves, primarily related to a loan in the healthcare portfolio,  
• a $4.6 million increase related to changes in qualitative factors and forecasted loss rates to reflect changes in industry conditions, such as the impact of higher interest rates, and
• loan growth in the period.  

The increases to the allowance for credit losses were partially offset by charge-offs of $9.5 million during the second quarter of 2023, which compared to no charge-offs in the first quarter of 2023 and $47 thousand of charge-offs in the second quarter of 2022.

Non-performing loans were $68.4 million, or 0.69%, of loans receivable as of June 30, 2023, compared to 0.76% at March 31, 2023, and 0.36% at December 31, 2022.  The increase in non-performing loans compared to both periods was primarily due to 3 customers.

Securities Available for Sale 
Total securities available for sale of $648.0 million as of June 30, 2023 decreased $31.5 million, or 5%, compared to March 31, 2023, and increased $324.7 million, or 100%, compared to December 31, 2022.

As of June 30, 2023, Accumulated Other Comprehensive Losses ("AOCL") of $7.0 million, related to securities available for sale, decreased $0.7 million, or 9%, compared to March 31, 2023, and decreased $3.5 million, or 33%, compared to December 31, 2022.  The $7.0 million of AOCL as of June 30, 2023 represented less than 1% of total equity and less than 1% of total investment securities.

Total Deposits
Total deposits of $13.1 billion at June 30, 2023 increased $1.7 billion, or 15%, compared to March 31, 2023, and increased $3.0 billion, or 30%, compared to December 31, 2022. The increase for both periods was primarily due to an increase in brokered certificates of deposit.

Total brokered deposits of $4.8 billion at June 30, 2023 increased $1.0 billion, or 27%, from March 31, 2023 and increased $2.0 billion, or 72%, from December 31, 2022.   Brokered deposits represented 36% of total deposits at June 30, 2023 compared to 33% of total deposits at March 31, 2023 and 27% of total deposits at December 31, 2022.  As of June 30, 2023, brokered certificates of deposit had a weighted average remaining duration of 51 days.

The Company continues to offer new products, such as adjustable-rate certificates of deposits, to minimize interest rate risks by aligning the rate and short duration characteristics of its deposit and loan portfolios.  Additionally, the Company has offered its insured cash sweep program since 2018, which extends FDIC protection up to $100 million.  This program has contributed to the Company's low level of uninsured deposits, which were below 20% of total deposits as of June 30, 2023.

Liquidity
Cash balances of $377.3 million as of June 30, 2023 increased by $7.7 million compared to March 31, 2023 and increased by $151.1 million compared to December 31, 2022.  The Company continues to have significant borrowing capacity, with unused lines of credit totaling $5.3 billion as of June 30, 2023 compared to $4.0 billion at March 31, 2023 and $3.1 billion at December 31, 2022. 

This liquidity enhances the ability to effectively manage interest expense and asset levels in the future. Additionally, the Company's business model is designed to continuously sell a significant portion of its loans, which provides flexibility in managing its liquidity.

Comparison of Operating Results for the Three Months Ended

June 30, 2023 and 2022

Net Interest Income of $105.6 million increased $33.6 million, or 47%, compared to $72.0 million, reflecting higher yields and average balances on loans and loans held for sale, and new balances of securities held to maturity, which were partially offset by higher interest rates on deposits and higher average rates on borrowings, primarily related to the credit linked notes issued by the Company during the first quarter of 2023.

• Interest rate spread of 2.41% decreased 49 basis points compared to 2.90%.
• Net interest margin of 2.97% decreased 6 basis points compared to 3.03%.

Interest Income of $258.1 million increased $168.8 million, or 189%, compared to $89.3 million, reflecting an increase in both yields and average balances of loans and loans held for sale, as well as new balances in securities held to maturity. 

• Average balances of $12.0 billion for loans and loans held for sale increased 38% compared to $8.6 billion.
• Average yield on loans and loans held for sale of 7.67% increased 368 basis points compared to 3.99%.

Interest Expense of $152.5 million increased 784% compared to $17.2 million.  Interest expense on deposits of $137.8 million increased $123.0 million, or 833%, compared $14.8 million, primarily reflecting higher rates on certificates of deposit, interest-bearing checking, and money market accounts, as well as higher average rates on borrowings, primarily related to the credit linked notes issued by the Company during the first quarter of 2023.

• Average balances of $12.0 billion for interest-bearing deposits increased 63% compared to $7.4 billion.
• Average interest rates of 4.60% for interest-bearing deposits increased 379 basis points compared to 0.81%.

Provision for Credit Losses of $22.6 million increased $16.4 million compared to $6.2 million, primarily reflecting the impact of charge-offs, an increase in specific reserves, changes to qualitative and loss factors, as well as loan growth described in the Asset Quality section above.

Noninterest Income of $29.9 million decreased $9.3 million, or 24%, compared to $39.2 million, primarily due to a $10.2 million, or 47%, decrease in gain on sale of loans.  

• The decrease in gain on sale of loans was associated with a business mix shift in multi-family lending, from volumes sold in the secondary market towards those maintained on the balance sheet.
• Loan servicing fees included a $3.4 million positive fair market value adjustment to servicing rights, with a $1.3 million positive adjustment in the Banking segment and a $2.1 million positive adjustment in the Multi-family Mortgage Banking segment.  This compared to a $7.7 million positive fair market value adjustment to mortgage servicing rights, of which $1.1 million was in the Banking segment and $6.6 million was in the Multi-family Mortgage Banking segment.

Noninterest Expense of $44.3 million increased $11.4 million, or 34%, compared to $33.0 million, primarily due to increases in salaries and employee benefits, deposit insurance expense, and professional fees.

• The efficiency ratio of 32.7% increased 307 basis points compared to 29.6%.

Provision for Income Taxes of $3.3 million decreased $14.8 million compared to $18.1 million, reflecting a $13.0 million tax benefit related to tax refunds and changes to state tax apportionment calculations.  

During the second quarter of 2023, the Company received an advisory letter it requested from the State of Indiana related to certain state tax apportionment provisions in the Indiana Financial Institution Tax Code and Regulations. The advisory letter provided guidance related to the methodology used to determine and source the receipts in the state of Indiana for the Company's mortgage origination and warehousing service lines. In effect, the guidance provided the Company the ability to revise its state income tax apportionment calculation to reduce its Indiana tax and related deferred tax liabilities. As such, the Company will amend several of its state returns and request the respective refunds.  Additionally, the change in methodology is expected to result in a 1.0% to 1.5% reduction in the Company's overall effective tax rate in the future.

Comparison of Operating Results for the Three Months Ended

June 30, 2023 and March 31, 2023

Net Interest Income of $105.6 million increased $4.9 million, or 5%, compared to $100.7 million, reflecting higher average balances and yields on loans and loans held for sale, which were partially offset by higher interest rates and average balances on deposits and borrowings.

• Interest rate spread of 2.41% decreased 35 basis points compared to 2.76%.
• Net interest margin of 2.97% decreased 30 basis points compared to 3.27%.

Interest Income of $258.1 million increased $46.8 million, or 22%, compared to $211.3 million, reflecting an increase in average balances and yields on loans and loans held for sale.

• Average balances of $12.0 billion for loans and loans held for sale increased 13%, compared to $10.6 billion.
• Average yield on loans and loans held for sale of 7.67% increased 42 basis points compared to 7.25%.

Interest Expense of $152.5 million increased $41.9 million, or 38%, compared to $110.6 million.  Interest expense on deposits of $137.8 million increased $33.4 million, or 32%, compared to $104.4 million, primarily due to higher average balances and interest rates on certificates of deposit and interest-bearing checking, accounts, as well as higher average rates on borrowings, primarily related to the credit linked notes issued by the Company during the first quarter of 2023.  

• Average balances of $12.0 billion for interest-bearing deposits increased 15% compared to $10.5 billion.
• Average interest rates of 4.60% for interest-bearing deposits increased 55 basis points compared to 4.05%.

Provision for Credit Losses of $22.6 million increased $15.7 million compared to $6.9 million, primarily reflecting the impact of charge-offs, an increase in specific reserves, changes to qualitative and loss factors, as well as loan growth described in the Asset Quality section above.

Noninterest Income of $29.9 million increased $15.6 million, or 109%, compared $14.3 million, primarily due to a $6.3 million, or 265%, increase in loan servicing fees, a $4.6 million, or 69%, increase in gain on sale of loans, and a $2.7 million, or 221% increase in syndication and asset management fees.

• Loan servicing fees included a $3.4 million positive fair market value adjustment to servicing rights, with a $1.3 million positive adjustment in the Banking segment and a $2.1 million positive adjustment in the Multi-family Mortgage Banking segment.  This compared to a $2.9 million negative fair market value adjustment to servicing rights, with a $0.7 million negative adjustment in the Banking segment and a $2.2 million negative adjustment in the Multi-family Mortgage Banking segment.

Noninterest Expense of $44.3 million increased $9.5 million, or 27%, compared to $34.8 million, primarily due to increases in salaries and employee benefits, deposit insurance expense and professional fees.

• The efficiency ratio of 32.7% increased 246 basis points compared to 30.3%.

Provision for Income Taxes of $3.3 million decreased $15.1 million compared to $18.4 million, reflecting the $13.0 million tax benefit related to the tax refunds and changes to state tax apportionment calculations described in the Comparison of Operating Results for the Three Months Ended June 30, 2023 and March 31, 2023 section above.

About Merchants Bancorp
Ranked as a top performing U.S. public bank by S&P Global Market Intelligence, Merchants Bancorp is a diversified bank holding company headquartered in Carmel, Indiana operating multiple segments, including Multi-family Mortgage Banking that primarily offers multi-family housing and healthcare facility financing and servicing. Through this segment it also serves as a syndicator of low-income housing tax credit and debt funds; Mortgage Warehousing that offers mortgage warehouse financing, commercial loans, and deposit services; and Banking that offers retail and correspondent residential mortgage banking, agricultural lending, and traditional community banking.  Merchants Bancorp, with $15.9 billion in assets and $13.1 billion in deposits as of June 30, 2023, conducts its business primarily through its direct and indirect subsidiaries, Merchants Bank of Indiana, Merchants Capital Corp., Merchants Capital Investments, LLC, Merchants Capital Servicing, LLC, Merchants Asset Management, LLC, Farmers-Merchants Bank of Illinois, 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. 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 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 the Company does not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.