Merchants Bancorp Reports First Quarter 2023 Results

• First quarter 2023 net income of $55.0 million increased 10% compared to first quarter of 2022 and decreased 4% compared to the fourth quarter 2022.
• First quarter 2023 diluted earnings per common share of $1.07 increased 5% compared to the first quarter of 2022 and decreased 4% compared to the fourth quarter of 2022.
• Total assets of $14.2 billion increased 48% compared to March 31, 2022, and increased 13% compared to December 31, 2022.
• Loans receivable of $8.6 billion, net of allowance for credit losses on loans, increased $2.6 billion, or 43%, compared to March 31, 2022, and increased $1.1 billion, or 15% compared to December 31, 2022.
• Net interest margin was 3.27% in the first quarter of 2023 compared to 2.62% in the first quarter of 2022 and 3.13% in the fourth quarter of 2022.
• Efficiency ratio was 30.3% in the first quarter of 2023 compared to 30.9% in the first quarter of 2022 and 31.3% in the fourth quarter of 2022.
• As of March 31, 2023, the Company had $4.0 billion 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 $7.8 billion, or 55%, of the $14.2 billion in total assets as of March 31, 2023.
• Uninsured deposits totaled approximately $2 billion as of March 31, 2023, representing less than 25% of total deposits.
• Tangible book value per common share of $22.88 increased 22% compared to $18.70 in the first quarter of 2022 and increased 5% compared to $21.88 in the fourth quarter of 2022.
• Quarterly dividends were increased by 14%, to $.08 per common share.
• On March 30, 2023, the Company issued and sold $158.1 million senior credit linked notes, due May 26, 2028. The net proceeds of the offering were approximately $153.5 million and resulted in a reduction of risk-weighted assets, which will benefit regulatory capital ratios as the loan pipeline continues to expand.

CARMEL, Ind., April 27, 2023 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported first quarter 2023 net income of $55.0 million, or diluted earnings per common share of $1.07.  This compared to $50.1 million, or diluted earnings per common share of $1.02 in the first quarter of 2022, and compared to $57.2 million, or diluted earnings per common share of $1.12 in the fourth quarter of 2022.

"We continued to deliver superior results in the first quarter by consistently minimizing interest rate and credit risk in a way that has differentiated Merchants though many economic cycles.  Our strategy continues to focus on originating and selling adjustable-rate loans that typically reprice within 30 days.  We have stayed short to the yield curve to conservatively match the duration of our assets and liabilities.  We have also created a natural hedge between our lines of business to ensure we do well in rising or falling rate environments," said Michael F. Petrie, Chairman and CEO of Merchants. 

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "Recent bank failures have had minimal impact to our deposit base or operations.  Our liquidity continued to expand organically during the quarter, without the need to utilize the Fed's Bank Term Funding Program.  Our unused borrowing capacity increased to $4.0 billion.  Although more than 75% of our deposit balances were already insured through the FDIC as of March 31, 2023, we have also seen an elevated interest in our Insured Cash Sweep, or ICS, program that extends FDIC protection up to $100 million."  

Net income of $55.0 million for the first quarter 2023 increased by $4.8 million, or 10% compared to the first quarter of 2022, primarily driven by a $35.0 million, or 53% increase in net interest income that was partially offset by a $11.2 million, or 63%, decrease in gain on sale of loans, a $7.4 million, or 76%, decrease in loan servicing fees, and a $4.4 million, or 180%, increase in provision for credit losses.  Results for the first quarter 2023 included a $2.9 million negative fair market value adjustment to servicing rights compared to a $7.6 million positive adjustment in the first quarter of 2022.

Net income of $55.0 million for the first quarter 2023 decreased by $2.2 million, or 4%, compared to the fourth quarter of 2022, primarily driven by a $4.5 million, or 40%, decrease in gain on sale of loans and a $3.0 million decrease in syndication and asset management fees that were partially offset by a $5.3 million, or 6% increase in net interest income. Results for the first quarter of 2023 included a $2.9 million negative fair market value adjustment to servicing rights compared to a $0.2 million negative adjustment in the fourth quarter of 2022.

Total Assets

Total assets of $14.2 billion at March 31, 2023 increased $4.6 billion, or 48%, compared to March 31, 2022, and increased $1.6 billion, or 13%, compared to December 31, 2022.  Increases compared to both periods were primarily due to significant growth in the multi-family and healthcare loan portfolios.  Additionally, the increase compared to March 31, 2022 reflected new balances in securities held to maturity.

Return on average assets was 1.71% for the first quarter of 2023 compared to 1.92% for the first quarter of 2022 and 1.84% for the fourth quarter of 2022.

Asset Quality

The allowance for credit losses on loans of $51.8 million as of March 31, 2023 increased $19.7 million, or 61%, compared to March 31, 2022 and increased $7.8 million, or 18%, compared to December 31, 2022.  The increases were primarily due to growth in the multi-family, commercial and commercial real estate, and healthcare loan portfolios. 

Non-performing loans were $65.3 million, or 0.76%, of loans receivable at March 31, 2023, compared to 0.08% at March 31, 2022 and 0.36% at December 31, 2022.  The increase compared to March 31, 2022 was due to the delinquency of one multi-family customer and one healthcare customer.

Securities Available for Sale

Total securities available for sale of $679.5 million as of March 31, 2023 increased $365.3 million, or 116%, compared to March 31, 2022, and increased $356.2 million, or 110%, compared to December 31, 2022.

As of March 31, 2023, Accumulated Other Comprehensive Losses ("AOCI") of $7.7 million, related to securities available for sale, increased $1.4 million compared to March 31, 2022, and decreased $2.8 million, or 28%, compared to December 31, 2022.  The $7.7 million of AOCI as of March 31, 2023 represented less than 1% of total equity and less than 1% of total investment securities.

Total Deposits

Total deposits of $11.3 billion at March 31, 2023 increased $3.9 billion, or 52%, compared to March 31, 2022, and increased $1.3 billion, or 13%, 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 $3.7 billion at March 31, 2023 increased $3.4 billion, or 882%, from March 31, 2022 and increased $967.4 million, or 35%, from December 31, 2022.   Brokered deposits represented 33% of total deposits at March 31, 2023 compared to 5% of total deposits at March 31, 2022 and 27% of total deposits at December 31, 2022.  As of March 31, 2023, brokered certificates of deposit had a weighted average remaining duration of 70 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 ICS program since 2018, which extends FDIC protection up to $100 million.  This program has contributed to its low level of uninsured deposits, which were below 25% of total deposits as of March 31, 2023.

Liquidity

Cash balances of $369.6 million as of March 31, 2023 decreased by $41.9 million compared to March 31, 2022 and increased by $143.4 million compared to December 31, 2022.  The Company continues to have significant borrowing capacity, with unused lines of credit totaling $4.0 billion as of March 31, 2023 compared to $2.2 billion at March 31, 2022 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

March 31, 2023 and 2022

Net Interest Income of $100.7 million increased $35.0 million, or 53% compared to $65.7 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 borrowings. 

• Interest rate spread of 2.76% increased 21 basis points compared to 2.55%.
• Net interest margin of 3.27% increased 65 basis points compared to 2.62%.

Interest Income of $211.3 million increased 178% compared to $76.0 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 $10.6 billion for loans and loans held for sale increased 32% compared to $8.0 billion.
• Average yield on loans and loans held for sale of 7.25% increased 361 basis points compared to 3.64%.

Interest Expense of $110.6 million increased $100.3 million, or 975%, compared to $10.3 million.  Interest expense on deposits of $104.4 million increased $95.6 million, or 1,085%, compared $8.8 million, primarily reflecting higher rates on interest bearing checking, money market, and certificates of deposit accounts.

• Average balances of $10.5 billion for interest-bearing deposits increased 30% compared to $8.0 billion.
• Average interest rates of 4.05% for interest-bearing deposits increased 361 basis points compared to 0.44%.

Noninterest Income of $14.3 million decreased $20.3 million, or 59%, compared to $34.6 million, primarily due to a $11.2 million, or 63%, decrease in gain on sale of loans, and a $7.4 million, or 76% decrease in loan servicing fees that included a $10.5 million lower fair market value adjustments to mortgage servicing rights.  

• 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 $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. This compared to a $7.6 million positive fair market value adjustment to mortgage servicing rights, of which $4.3 million was in the Banking segment and $3.3 million was in the Multi-family Mortgage Banking segment.

Noninterest Expense of $34.8 million increased $3.7 million, or 12%, compared to $31.0 million, primarily due to increases in deposit insurance expense and professional fees.

The efficiency ratio of 30.25% decreased 68 basis points compared to 30.93%.

Comparison of Operating Results for the Three Months Ended

March 31, 2023 and December 31, 2022

Net Interest Income of $100.7 million increased $5.3 million, or 6% compared to $95.4 million, reflecting higher yields and average balances on loans and loans held for sale that were partially offset by higher interest rates and average balances on deposits and borrowings.

• Interest rate spread of 2.76% increased 7 basis points compared to 2.69%.
• Net interest margin of 3.27% increased 14 basis points compared to 3.13%.

Interest Income of $211.3 million increased $29.9 million, or 16%, compared to $181.4 million, reflecting an increase in yields and average balances of loans and loans held for sale, as well securities held to maturity.

• Average balances of $10.6 billion for loans and loans held for sale increased $295.9 million, or 3%, compared to $10.3 billion.
• Average yield on loans and loans held for sale of 7.25% increased 91 basis points compared to 6.34%.

Interest Expense of $110.6 million increased $24.6 million, or 29%, compared to $86.0 million.  Interest expense on deposits of $104.4 million increased $23.4 million, or 29%, compared to $81.1 million, primarily due to higher interest rates on certificates of deposit, interest bearing checking, and money market accounts.

• Average balances of $10.5 billion for interest-bearing deposits increased $467.0 million, or 5%, compared to $10.0 billion.
• Average interest rates of 4.05% for interest-bearing deposits increased 83 basis points compared to 3.22%.

Noninterest Income of $14.3 million decreased $8.7 million, or 38%, compared $23.0 million, primarily due to a $4.5 million, or 40%, decrease in gain on sale of loans and a $3.0 million, or 71% decrease in syndication and asset management fees.

• The decrease in gain on sale of loans was associated with lower volume in the secondary market for multi-family loans resulting from higher interest rates across the industry.
• Loan servicing fees included 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. This compared to a $0.2 million negative fair market value adjustment to servicing rights, with a $0.6 million negative adjustment in the Banking segment and a $0.4 million positive adjustment in the Multi-family Mortgage Banking segment.

Noninterest Expense of $34.8 million decreased $2.3 million, or 6%, compared to $37.1 million, primarily due to decreases in professional fees and lower commission expenses.

• The efficiency ratio of 30.3% decreased 109 basis points compared to 31.3%.

About Merchants BancorpRanked 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 $14.2 billion in assets and $11.3 billion in deposits as of March 31, 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. 

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SOURCE Merchants Bancorp