Merchants Bancorp Reports Third Quarter 2019 Results

CARMEL, Ind., Oct. 30, 2019 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported third quarter 2019 net income of $20.3 million, or $0.60 per common share.  This compared to $16.7 million, or $0.55 per common share, in the third quarter of 2018 and $16.4 million, or $0.51 per common share, in the second quarter of 2019.

"Our proactive approach to capital and asset management has generated superior results during the third quarter, including 63% growth in total assets since December 2018 and 21% growth in net income compared to the third quarter of 2018.  Our results reflected not only a 37% increase in net interest income compared to the same quarter last year, but also reinforced our expense control, as our efficiency ratio hit 35.7% despite the growth of our businesses during the year," said Michael Petrie, Chairman and CEO of Merchants.  "We are planning for continued momentum going forward and the success of our preferred stock offerings have positioned us well to capitalize on the strength of the growing loan pipelines in all of our businesses," added Petrie.

Total Assets

Total assets of $6.3 billion at September 30, 2019 increased $2.5 billion, or 63%, compared to $3.9 billion at December 31, 2018 and increased $1.0 billion, or 20%, compared to June 30, 2019. The increases compared to both periods were primarily due to growth in net loans receivable and loans held for sale, which increased $2.4 billion compared to December 30, 2018 and increased $1.0 billion compared to June 30, 2019.  Return on average assets was 1.35% for the third quarter of 2019 compared to 1.75% for the third quarter of 2018 and 1.41% for the second quarter of 2019.

Loans held for sale of $2.5 billion at September 30, 2019 increased $1.7 billion, or 200%, compared to December 31, 2018 and increased $580.4 million, or 30% compared to June 30, 2019.  For both periods, the increases were due to the significant loan growth generated from the mortgage warehouse business, primarily resulting from lower interest rates that increased the origination volume and refinancing in the single-family mortgage market. 

Net loans receivable of $2.7 billion at September 30, 2019 increased $696.7 million, or 34%, compared to December 31, 2018 and increased $394.2 million, or 17%, compared to June 30, 2019. These increases were primarily a result of growth in mortgage warehouse lines of credit, as well as multi-family and healthcare financing during both periods.

Asset Quality

The allowance for loan losses of $13.7 million at September 30, 2019 increased $1.0 million compared to December 31, 2018 and increased $1.1 million compared to June 30, 2019, primarily reflecting increases associated with loan growth.  Non-performing loans were $6.1 million, or 0.22% of total loans at September 30, 2019, compared to $2.4 million, or 0.12% of total loans at December 31, 2018 and compared to $3.8 million, or 0.16% of total loans at June 30, 2019.

Total Deposits

Total deposits of $5.5 billion at September 30, 2019 increased $2.3 billion, or 70%, compared to $3.2 billion at December 31, 2018 and increased $843.7 million, or 18%, compared to June 30, 2019. The increases were 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 $1.3 billion, to $2.3 billion at September 30, 2019 from $988.2 million at December 31, 2018 and increased $266.5 million from $2.0 billion at June 30, 2019.  The higher levels of brokered deposits were primarily to support the significant growth in warehouse loans and to appropriately match the expected duration.   Brokered deposits represented 41% of total deposits at September 30, 2019, 31% of total deposits at December 31, 2018, and 43% of total deposits at June 30, 2019. 

Net Interest Income

Net interest income of $32.6 million in the third quarter of 2019 increased $9.1 million, or 39%, compared to the third quarter of 2018 and increased $4.7 million, or 17%, compared to the second quarter of 2019.  The increases for both periods were primarily due to the growth in loans and loans held for sale that offset declining interest rate margins.   The interest rate spread of 1.98% for the third quarter of 2019 increased 4 basis points compared to 1.94% in the third quarter of 2018 and decreased 24 basis points compared to 2.22% in the second quarter of 2019. 

The net interest margin of 2.22% for the third quarter of 2019 declined 31 basis points compared to 2.53% for the third quarter of 2018 and declined 27 basis points compared to 2.49% for the second quarter of 2019.  The declines in net interest margin reflected the flattening and inversion of the yield curve compared to prior periods, 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 growth during the third quarter of 2019 compared to both the third quarter of 2018 and the second quarter of 2019.

Interest Income

Interest income of $59.8 million in the third quarter of 2019 increased $22.2 million, or 59%, compared to the third quarter of 2018 and increased $11.0 million, or 23%, compared to the second quarter of 2019. The increases for both periods were primarily due to loan growth.  The average balance of loans, including loans held for sale, was $4.7 billion for the third quarter of 2019.  This represented an increase of $2.0 billion, or 76%, compared to $2.7 billion for the third quarter of 2018 and an increase of $1.1 billion, or 32% compared to the second quarter of 2019.  The average yield on loans and loans held for sale of 4.44% for the third quarter of 2019 decreased 31 basis points compared to 4.75% for both the third quarter 2018 and the second quarter of 2019.  The decline in average yields reflected the higher concentration of warehouse loans for the third quarter of 2019.

Interest Expense

Total interest expense of $27.1 million for the third quarter of 2019 increased $13.0 million, or 93%, compared to the third quarter of 2018 and increased $6.3 million, or 30%, compared to the second quarter of 2019. Interest expense on deposits of $26.0 million for the third quarter of 2019 increased $14.4 million, or 123%, compared to the third quarter of 2018 and increased $6.7 million, or 35%, compared to the second quarter of 2019. The increase in the cost of deposits for both periods was primarily due to the higher volume of interest-bearing checking and certificates of deposits. The average balance of interest-bearing deposits of $5.1 billion for the third quarter of 2019 increased $2.5 billion, or 99%, compared to the third quarter of 2018 and increased $1.3 million, or 34%, compared to the second quarter of 2019. The average cost of interest-bearing deposits was 2.02% for the third quarter of 2019, which was a 22 basis point increase compared to 1.80% for the third quarter of 2018, and a 2 basis point decrease compared to 2.04% in the second quarter of 2019. 

Noninterest Income

Noninterest income of $10.9 million for the third quarter of 2019 decreased $1.1 million, or 9%, compared to the third quarter of 2018 and increased $982,000, or 10%, compared to the second quarter of 2019. The 9% decrease compared to the third quarter of 2018 was primarily due to a $3.3 million decrease in loan servicing fees, which reflected a $1.5 million negative fair market value adjustment in mortgage servicing rights during the third quarter of 2019 compared to a $500,000 positive fair market adjustment in mortgage servicing rights for the third quarter of 2018.  Partially offsetting the lower loan servicing fees from a negative fair market value adjustment in the third quarter of 2019 was a $1.9 million, or 247%, increase in mortgage warehouse fees, reflecting the significant loan growth for this line of business.

The 10% increase in noninterest income for the third quarter of 2019 compared to the second quarter of 2019 was primarily due to a $1.6 million, or 137%, increase in mortgage warehouse fees, which was partially offset by a $792,000 decrease in gain on sale of loans.  

At September 30, 2019, the mortgage servicing rights asset was valued at $72.0 million, a decrease of 8% compared to December 31, 2018 and a decrease of 3% compared to June 30, 2019.  The value of mortgage servicing rights generally declines in falling interest rate environments and increase in rising interest rate environments.

Noninterest Expense

Noninterest expense of $15.5 million for the third quarter of 2019 increased $3.1 million, or 25%, compared to the third quarter of 2018 and decreased $398,000, or 3%, compared to the second quarter of 2019.  The 25% increase compared to the third quarter of 2018 was due primarily to a $1.3 million, or 17%, increase in salaries and employee benefits and a $590,000, or 219%, increase in deposit insurance related to the growth in deposits and assets.  The increase in salaries and employee benefits was due primarily to an increase in the number of employees resulting from business growth and acquisitions that occurred during the fourth quarter of 2018. 

The 3% decrease in noninterest expense for the third quarter of 2019 compared to the second quarter of 2019 was primarily due to a $826,000, or 8%, decrease in salaries and employee benefits that was partially offset by a $641,000, or 294% increase in deposit insurance expense related to the growth in deposits and assets.  The decrease in salaries and employee benefits was primarily due to lower commission expense for the third quarter of 2019.

The efficiency ratio of 35.7% for the third quarter of 2019 compared to 35.2% for the third quarter of 2018 and 42.1% for the second quarter of 2019.

Segments

For the third quarter of 2019, net income for Mortgage Warehousing increased 93% compared to the third quarter of 2018 and increased 73% compared to the second quarter of 2019, reflecting significant growth in loans and loans held for sale during both periods. 

For the third quarter of 2019, net income for Banking increased 8% compared to the third quarter of 2018 and decreased 9% compared to the second quarter of 2019, reflecting higher deposit insurance expense compared to both periods.

For the third quarter of 2019, net income for Multi-family Mortgage Banking decreased 44% compared with the third quarter of 2018 and increased 9% compared to the second quarter of 2019. The comparative performance was impacted by fair market value adjustments. The third quarter of 2019 included a negative fair market value adjustment of $1.5 million, which compared to a positive fair value adjustment of $500,000 for the third quarter of 2018 and a negative fair market value adjustment of $2.9 million for the second 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 $6.3 billion in assets and $5.5 billion in deposits as of September 30, 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