Merchants Bancorp Reports Third Quarter 2020 Results

CARMEL, Ind., Oct. 28, 2020 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported third quarter 2020 net income of $55.0 million, or $1.79 per common share.  This compared to $20.3 million, or $0.60 per common share, in the third quarter of 2019, and $41.2 million, or $1.31 per common share, in the second quarter of 2020.

The $34.7 million, or 171%, increase in net income for the third quarter 2020, compared to the third quarter of 2019 was driven by a $32.7 million, or 100%, increase in net interest income that reflected significant growth in mortgage warehouse loans, and a 255% increase in gain on sale of loans, primarily from higher growth in both single-family and multi-family mortgages. 

The $13.8 million, or 34%, increase in net income for the third quarter 2020, compared to the second quarter of 2020 was primarily driven by a $14.1 million, or 27%, increase in net interest income that also reflected significant growth in mortgage warehouse loans and a 39 basis point increase in the net interest margin.

"Against a backdrop of economic uncertainty and lower interest rates, Merchants has delivered another record-setting level of net income during the third quarter.  Our commitment to conservative credit underwriting, effective cost management, and our entrepreneurial approach to serving customers has contributed to earnings per share growth of 198% and asset growth of 50% compared to the prior year's quarter.  By also managing our capital well, we delivered a return on average assets of 2.34%, a return on average tangible shareholders' equity of 41.0%, a tangible book value of $18.30 per share, and an efficiency ratio of 25.4%," said Michael F. Petrie, Chairman and CEO of Merchants.  

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "The safety of our employees and customers remains our first priority.  I am proud of our team and our ability to execute in a challenging environment."

Total Assets
Total assets of $9.5 billion at September 30, 2020 increased $3.2 billion, or 50%, compared to December 31, 2019, and increased $91.1 million, or 1%, compared to June 30, 2020.

The 50% increase compared to December 31, 2019 was primarily due to growth in loans held for sale and loans receivable, which increased a combined total of $3.1 billion, or 60%.  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 2.34% for the third quarter of 2020 compared to 1.35% for the third quarter of 2019 and 1.89% for the second quarter of 2020. 

Asset Quality
The allowance for loan losses of $23.4 million at September 30, 2020 increased $7.6 million compared to December 31, 2019 and increased $2.9 million compared to June 30, 2020.  The increases were primarily based on growth in the loan portfolio, but also reflected uncertainties surrounding the COVID-19 pandemic.  Approximately 85% of the $7.6 million increase compared to December 31, 2019, was related primarily to loan growth, while additional provision associated with the COVID-19 pandemic represented approximately $628,000, or 8%, of the increase.   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 throughout the remainder of 2020.

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 September 30, 2020, the Company had only 11 loans remaining in payment deferral arrangements, with unpaid balances of $1.6 million that represented less than 0.02% of total loans and loans held for sale. This compared favorably to the unpaid balances of $80.6 million at June 30, 2020.

Non-performing loans were $7.9 million, or 0.16% of loans receivable at September 30, 2020, compared to $4.7 million, or 0.15% of loans receivable at December 31, 2019, and compared to $6.7 million, or 0.16% of loans receivable at June, 2020.  The increase in non-performing loans compared to December 31, 2019 was primarily related to one collateralized agricultural loan that is delinquent greater than 90 days late, with repayment still anticipated.

Total Deposits
Total deposits of $7.1 billion at September 30, 2020 increased $1.6 billion, or 29%, compared to December 31, 2019, and increased $176.0 million, or 3%, compared to June 30, 2020. The increases compared to both periods were primarily due to growth in traditional and brokered demand accounts, while the Company significantly reduced its balances of brokered certificates of deposits.

Total brokered deposits of $1.7 billion at September 30, 2020 decreased $429.1 million from December 31, 2019 and decreased $627.0 million from June 30, 2020.   Brokered deposits represented 24% of total deposits at September 30, 2020 compared to 39% of total deposits at December 31, 2019 and 34% of total deposits at June 30, 2020.

Liquidity
The Company increased its available borrowing capacity, with unused lines of credit at $2.5 billion at September 30, 2020, compared to $1.9 billion at June 30, 2020.  This liquidity enhances the ability to effectively manage interest expense and assets levels in the future.  The Company also began utilizing the Federal Reserve's discount window during the second quarter of 2020 and the Paycheck Protection Program Liquidity Facility ("PPPLF") during the third quarter of 2020, which has contributed to lower interest expenses and increased borrowing capacity.

Net Interest Income
Net interest income of $65.3 million in the third quarter of 2020 increased $32.7 million, or 100%, compared to the third quarter of 2019 and increased $14.1 million, or 27%, compared to the second quarter of 2020. 

The 100% increase in net interest income compared to the third quarter of 2019 reflected significantly higher loan growth and a higher net interest margin.  The interest rate spread of 2.74% for the third quarter of 2020 increased 76 basis points compared to 1.98% in the third quarter of 2019. The net interest margin of 2.81% for the third quarter of 2020 increased 59 basis points compared to 2.22% for the third quarter of 2019. The increase in net interest margin compared to the third quarter of 2019 reflected lower funding costs that outpaced the lower interest rates on loans.

The 27% increase in net interest income compared to the second quarter of 2020 reflected an interest rate spread of 2.74% that increased 43 basis points compared to 2.31% in the second quarter of 2020.  The net interest margin of 2.81% for the third quarter of 2020 also increased 39 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 that outpaced the lower interest rates on loans.

Interest Income
Interest income of $76.3 million in the third quarter of 2020 increased $16.5 million, or 28%, compared to the third quarter of 2019 and increased $8.1 million, or 12%, compared to the second quarter of 2020. 

The 28% increase in interest income compared to the third quarter of 2019 was primarily due to significant loan growth that was partially offset by lower rates.  The higher interest income reflected a $3.2 billion, or 68%, increase in the average balance of loans, including loans held for sale, which reached $7.9 billion for the third quarter of 2020. The average yield on loans and loans held for sale of 3.61% for the third quarter of 2020 decreased 83 basis points compared to 4.44% for the third quarter of 2019. The decline in average yields reflected higher loan volume and lower overall interest rates in the third quarter of 2020.

The 12% increase in interest income compared to the second quarter of 2020 reflected a $987.4 million, or 14%, increase in the average balance of loans, including loans held for sale, which reached $7.9 billion for the third quarter of 2020. The average yield on loans and loans held for sale of 3.61% for the third quarter of 2020 also decreased 10 basis points compared to 3.71% for the second quarter of 2020. 

Interest Expense
Total interest expense of $10.9 million for the third quarter of 2020 decreased $16.2 million, or 60%, compared to the third quarter of 2019 and decreased $6.0 million, or 36%, compared to the second quarter of 2020. Interest expense on deposits of $9.1 million for the third quarter of 2020 decreased $16.9 million, or 65%, compared to the third quarter of 2019 and decreased $6.3 million, or 41%, compared to the second quarter of 2020.

The 65% decrease in interest expense on deposits compared to the third quarter of 2019 was primarily due to custodial interest-bearing checking accounts that are tied to short-term LIBOR rates, which declined significantly. Also contributing significantly to the decline were lower rates on brokered certificates of deposits.  The average balance of interest-bearing deposits of $7.2 billion for the third quarter of 2020 increased $2.1 billion, or 42%, compared to the third quarter of 2019. The average cost of interest-bearing deposits was 0.50% for the third quarter of 2020, which was a 152 basis point decrease compared to 2.02% for the third quarter of 2019. 

The 41% decrease in interest expense on deposits compared to the second quarter of 2020 was also primarily due to custodial interest-bearing checking accounts that are tied to short-term LIBOR rates, which declined significantly.  The average cost of interest-bearing deposits was 0.50% for the third quarter of 2020, which was a 38 basis point decrease compared to 0.88% in the second quarter of 2020.  The average balance of interest-bearing deposits of $7.2 billion for the third quarter of 2020 also increased $241.5 million, or 3%, compared to the second quarter of 2020.

Noninterest Income
Noninterest income of $38.7 million for the third quarter of 2020 increased $27.8 million, or 256%, compared to the third quarter of 2019 and increased $12.5 million, or 48%, compared to the second quarter of 2020.

The 256% increase in noninterest income compared to the third quarter of 2019 was primarily due to a $21.2 million, or 255%, increase in gain on sale of loans and a $4.1 million increase in mortgage warehouse fees. Noninterest income for the second quarter of 2020 included a $971,000 negative fair market value adjustment to mortgage servicing rights, which compared to a $1.5 million negative fair market value adjustment for the third quarter of 2019.

The 48% increase in noninterest income compared to the second quarter of 2020 was primarily due to a $12.4 million, or 73%, increase in gain on sale of loans, that were partially offset by a $2.2 million decrease in loan servicing fees.   Included in loan servicing fees for the second quarter of 2020 was a $971,000 negative fair market value adjustment to mortgage servicing rights, which compared to a $500,000 negative fair market value adjustment for the second quarter of 2020.

At September 30, 2020, the mortgage servicing rights asset was valued at $75.8 million, an increase of 2% compared to December 31, 2019 and an increase of 5% compared to September 30, 2019.  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 $26.4 million for the third quarter of 2020 increased $10.9 million, or 70%, compared to the third quarter of 2019 and increased $6.1 million, or 30%, compared to the second quarter of 2020. 

The 70% increase in noninterest expense compared to the third quarter of 2019 was due primarily to a $7.4 million, or 81%, increase in salaries and employee benefits to support business growth and a $1.7 million, or 136%, increase in loan expenses.    The efficiency ratio of 25.4% for the third quarter of 2020 compared to 35.7% for the third quarter of 2019.

The 30% increase in noninterest expense compared to the second quarter of 2020 was primarily due to a $4.7 million, or 40%, increase in salaries and employee benefits to support business growth and a $905,000, or 44%, increase in loan expenses.  The efficiency ratio of 25.4% for the third quarter of 2020 compared to 26.2% for the second quarter of 2020.

Segments
For the third quarter of 2020, net income for Mortgage Warehousing increased 209% compared to the third quarter of 2019, and increased 22% compared to the second quarter of 2020, reflecting significant growth in net interest income from higher loan volume. 

For the third quarter of 2020, net income for Multi-family Mortgage Banking increased 115% compared with the third quarter of 2019, and increased 61% compared to the second quarter of 2020, primarily due to higher gain on sale of loans for both periods that was partially offset by higher salaries and benefit expenses to support growth.

For the third quarter of 2020, net income for Banking increased 129% compared to the third quarter of 2019, and increased 48% compared to the second quarter of 2020, reflecting higher net interest income and gain on sale of loans in the single-family mortgage business for both periods.

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 $9.5 billion in assets and $7.1 billion in deposits as of September 30, 2020, 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.

Certain non-GAAP financial measures provide useful information to management and investors that is supplementary to the company's financial condition, results of operations and cash flows computed in accordance with GAAP; however, they do have a number of limitations.  As such, the reader should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable  to non-GAAP financial measures that other companies use.  A reconciliation of GAAP to non-GAAP financial measures is below.  Net Income Available to Common Shareholders excludes preferred stock.  Tangible common equity is calculated by excluding the balance of goodwill and other intangible assets and preferred stock from the calculation of total assets.  Tangible Assets is calculated by excluding the balance of goodwill and intangible assets.  Tangible book value per share is calculated by dividing tangible common equity by the number of shares outstanding.