Merchants Bancorp — Q3 2023 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited. Merchants Bancorp is a bank holding company focused on multifamily mortgage banking and servicing, mortgage warehousing, and banking.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $117.4 million | $85.4 million | $323.7 million | $223.1 million |
| Provision for credit losses | $4.0 million | $2.2 million | $33.5 million | $10.9 million |
| Noninterest income | $36.1 million | $29.2 million | $80.2 million | $103.0 million |
| Noninterest expense | $42.9 million | $35.0 million | $122.0 million | $98.9 million |
| Net income | $81.5 million | $58.5 million | $201.8 million | $162.6 million |
| Diluted EPS | $1.68 | $1.22 | $4.06 | $3.36 |
- Q3 net interest margin was 2.99%, down from 3.05% a year earlier; nine-month margin was 3.07%, up from 2.90%. The Q3 interest-rate spread narrowed to 2.44% from 2.77%.
- Q3 efficiency ratio improved to 28.0% from 30.5%; the nine-month ratio was 30.2% versus 30.3%.
- Q3 earnings growth reflected higher loan yields and balances and higher servicing income. Deposit and borrowing costs rose substantially. For nine months, lower loan-sale gains more than offset growth in servicing and other fee income.
Financial position, liquidity, and capital
- At September 30, 2023, total assets were $16.5 billion, up 31% from year-end 2022. Net loans receivable were $9.91 billion, up 33%; loans held for sale were $3.48 billion.
- Deposits were $13.01 billion, up 29%, while borrowings were $1.65 billion, up 78%. Shareholders’ equity was $1.63 billion, up 12%.
- Cash and cash equivalents were $407 million, including $52.2 million of restricted cash. Management reported $5.4 billion of unused FHLB and Federal Reserve borrowing capacity; liquid assets plus this capacity totaled $10.7 billion, or 65% of assets.
- Uninsured deposits were approximately $2 billion, less than 20% of deposits. Brokered deposits were $4.4 billion, or 34% of deposits, compared with 27% at year-end 2022; brokered CDs had a weighted-average remaining duration of 49 days. About $4.9 billion of CDs mature within one year.
- The company and its banking subsidiaries were reported as meeting capital adequacy requirements and categorized as well capitalized. Company common equity Tier 1 capital was 7.6% of risk-weighted assets.
- Nine-month cash flows were negative $1.07 billion from operations, negative $2.37 billion from investing, and positive $3.62 billion from financing; cash ended the period at $407 million. The filing attributes liquidity management to deposits, borrowings, loan sales, and loan repayments.
Changes, risks, and notable items
- Funding costs rose sharply: Q3 interest expense increased 268% year over year, including deposit expense up 262%. Nine-month interest expense increased 480%. Higher rates and greater use of certificates of deposit and brokered funding contributed.
- Credit indicators weakened. Nonperforming loans rose to $60.2 million, or 0.60% of loans, from $26.7 million, or 0.36%, at year-end 2022. Loans more than 30 days past due increased to $125.4 million from $39.8 million; special-mention loans rose to $322.0 million from $137.8 million. Management attributed much of the NPL increase to three customers and said rate increases affected borrowers.
- Nine-month charge-offs were $9.6 million, primarily related to one customer. The allowance for credit losses was $66.9 million, or 0.67% of loans, versus $44.0 million, or 0.59%, at year-end. Management cited loan growth, credit events, and higher qualitative factors and forecast loss rates.
- Multifamily loan originations and acquisitions fell 39% in Q3 and 46% for nine months year over year. Conversely, Q3 warehouse lending volume rose 23% to $10.8 billion, while nine-month volume declined 9% to $24.6 billion.
- On August 31, the company completed a $303.6 million Freddie Mac multifamily securitization, recognizing a $60,000 loss and retaining subservicing. In September, it agreed to sell four Farmers-Merchants Bank of Illinois branches and related deposits and loans, subject to customary conditions and regulatory approvals.
- The company reported no formal earnings guidance. Management expected a substantial portion of CDs maturing within one year to renew and anticipated declaring a quarterly common dividend of $0.08 per share in each 2023 quarter. It anticipated replacing LIBOR with three-month SOFR for Series A and B preferred dividends, with an adjusted spread.
- Key stated risks include deposit retention and funding costs, credit quality and collateral values, interest-rate and liquidity changes, real estate and borrower conditions, regulatory requirements, cyber and fraud risks, and execution of growth plans. Management reported no material change to previously disclosed risk factors and no material subsequent events.
Important facts for investors to verify
- Whether deposit pricing, brokered-deposit dependence, and CD renewals preserve funding stability and net interest margin.
- Whether past-due, special-mention, and nonperforming loan trends—and the allowance for credit losses—remain adequate as rates and borrower payments stay elevated.
- How the multifamily origination slowdown and lower loan-sale gains affect future fee income, servicing values, and segment earnings.
- Completion and financial impact of the announced branch sales, and the ongoing obligations associated with securitizations and credit-linked notes.
- Current regulatory capital, liquidity capacity, and interest-rate sensitivity; the filing’s modeled one-year NII sensitivity was positive 5.5% under a +100-basis-point scenario and negative 8.3% under a -100-basis-point scenario.