Merchants Bancorp quarterly report, Q2 FY2022

Vollständiges Dokument

Merchants Bancorp — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.

Business context

Merchants Bancorp is an Indiana bank holding company with multi-family mortgage banking, mortgage warehousing, and banking businesses. Its activities include multi-family and healthcare lending, mortgage warehouse financing, community banking, and loan servicing. Results are exposed to interest rates, loan and mortgage origination volumes, deposit funding costs, and real estate and borrower credit conditions.

Financial performance and position

  • Q2 earnings: Net income was $53.9 million, up 5% year over year; net income allocated to common shareholders was $48.2 million. Diluted EPS was $1.11 versus $1.06 (per-share amounts reflect the 2022 3-for-2 stock split).
  • First-half earnings: Net income was $104.1 million, down 8% year over year; diluted EPS was $2.14 versus $2.40.
  • Income and margins: Q2 interest income was $89.3 million and noninterest income was $39.2 million. Net interest income rose 12% to $72.0 million; net interest margin increased to 3.03% from 2.75%, and the interest-rate spread rose to 2.90% from 2.68%. For the first half, net interest income edged up 1% to $137.8 million, while net interest margin declined to 2.82% from 2.87%.
  • Other Q2 results: Provision for credit losses was $6.2 million, compared with a $0.3 million credit in Q2 2021. Noninterest expense rose 17% to $33.0 million; the efficiency ratio was 29.6% versus 29.0%. The effective tax rate was 25.1%.
  • Assets and lending: Total assets were $11.1 billion, down 2% from year-end 2021. Net loans receivable grew 22% to $7.0 billion, including growth in multi-family, healthcare, commercial real estate, and warehouse lending. Loans held for sale fell 16% to $2.8 billion, and mortgage loans pending securitization declined to $323.0 million.
  • Funding and liquidity: Deposits declined 8% to $8.3 billion; borrowings increased 39% to $1.4 billion. Cash and cash equivalents fell to $258.1 million from $1.03 billion at year-end. The company reported $1.7 billion of unused FHLB and Federal Reserve borrowing capacity, plus $475 million of AFX capacity. Operating cash flow was $874.8 million for the first half; investing activities used $1.35 billion and financing activities used $297.4 million.
  • Capital and credit: Shareholders’ equity was $1.23 billion. The reported community bank leverage ratio was 12.4% for the company, 12.3% for Merchants Bank, and 10.3% for FMBI. Nonperforming loans were $4.8 million, or 0.07% of loans; the allowance for credit losses on loans was $37.5 million, or 0.53% of loans.

Material changes versus comparable periods

  • Q2 net income increased despite a $9.2 million rise in interest expense, a $6.5 million increase in credit-loss provision, and lower gains on loan sales. Higher loan interest income and a $7.7 million positive servicing-rights fair-value adjustment were important offsets.
  • For the first half, net income fell 8%. Lower gains on loan sales, higher funding costs, higher credit-loss provision, and increased operating expense outweighed higher interest income and servicing income.
  • Mortgage warehousing net income fell 45% in Q2 and 51% for the first half, amid lower industry volumes and rising market rates. Warehouse funding volume declined 49% in Q2 and 53% in the first half year over year. Banking and multi-family mortgage banking earnings increased for both periods.
  • Deposits shifted away from brokered funding: brokered deposits declined $935 million to $1.2 billion, or 15% of deposits, from 24% at year-end. Total borrowings rose as cash and loans held for sale declined.
  • The company adopted CECL on January 1, 2022, recording a $3.6 million after-tax reduction to retained earnings, largely related to unfunded commitments. Prior-year credit-loss figures use the earlier incurred-loss accounting model.

Outlook, commentary, risks, and unusual items

  • Outlook: The filing provides no specific earnings or revenue guidance. Management said it expects sufficient funds to meet current loan-origination commitments and expects a substantial portion of certificates of deposit maturing within one year to renew. The board expected to declare a quarterly common dividend of $0.07 per share during 2022.
  • Funding and regulatory risk: Brokered deposits may be more rate-sensitive and costly to renew or replace. $1.4 billion of certificates of deposit were scheduled to mature within one year. Company assets exceeded the $10 billion CBLR eligibility threshold and off-balance-sheet exposures exceeded 25% of assets; management expected the company may need to move to risk-based capital rules after the grace period ending September 30, 2022, and did not expect significant financial implications.
  • Interest-rate sensitivity: The company estimated that a gradual 100-basis-point rate increase would raise 12-month net interest income by 10.4%; a 200-basis-point increase would raise it by 20.9%. These are model estimates, not guidance. The filing also notes that rising rates can increase deposit costs and reduce the value of fixed-rate assets.
  • Credit and concentration: Lending growth was concentrated in multi-family and healthcare portfolios. Special-mention loans were $131.2 million; substandard loans were $42.6 million, including a $36.8 million multi-family loan. One $36.8 million loan remained on COVID-related modified terms and was not classified as delinquent.
  • Securitization exposure: A May 2022 Freddie Mac-sponsored transaction sold and securitized $214 million of multi-family loans. The company retained a first-loss reimbursement obligation capped at approximately $25.7 million, recorded a $1.2 million contingent reserve and a $2.5 million noncontingent reserve, and acquired $27 million of U.S. Treasury collateral.
  • Valuation and market risk: Available-for-sale securities had $10.8 million of gross unrealized losses at quarter-end, attributed by management to interest rates rather than credit factors. Servicing rights rose to $130.7 million, including a $15.4 million first-half fair-value increase; their valuation depends on assumptions including discount rates and prepayments.
  • Capital returns and other items: The company repurchased 165,037 shares for $3.9 million in Q2 under a program authorized up to $75 million through December 31, 2023. No legal proceedings or material subsequent events were reported; management reported no material change to previously disclosed risk factors.

Important facts for investors to verify

  1. Whether deposit pricing, brokered-deposit maturities, and borrowing needs affect funding costs and liquidity after quarter-end.
  2. Whether the company transitioned from CBLR to risk-based capital reporting after the September 2022 grace period, and the resulting capital ratios and requirements.
  3. Whether credit quality and the allowance keep pace with rapid multi-family, healthcare, and commercial loan growth, particularly the $36.8 million modified/substandard loan.
  4. How the Freddie Mac securitization first-loss obligation performs, and whether reserves or collateral requirements change.
  5. Whether servicing-rights fair values, loan-sale gains, and mortgage warehouse volumes remain sensitive to interest rates and market activity.