Merchants Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. The company is a diversified bank holding company with multi-family mortgage banking, mortgage warehousing, and banking businesses. Financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income | $50.1 million | $62.0 million in Q1 2021; down 19% |
| Diluted EPS | $1.02 | $1.35 in Q1 2021; down 24% |
| Net interest income | $65.7 million | $72.0 million in Q1 2021; down 9% |
| Net interest margin / spread | 2.62% / 2.55% | 2.99% / 2.93% in Q1 2021 |
| Noninterest income | $34.6 million | $43.9 million in Q1 2021; down 21% |
| Noninterest expense | $31.0 million | $30.1 million in Q1 2021; up 3% |
| Efficiency ratio / return on average assets | 30.9% / 1.92% | 26.0% / 2.49% in Q1 2021 |
| Total assets | $9.65 billion | $11.28 billion at December 31, 2021; down 14% |
| Loans held for sale / loans receivable, net | $2.29 billion / $5.98 billion | $3.30 billion / $5.75 billion at year-end |
| Deposits / borrowings | $7.48 billion / $879.9 million | $8.98 billion / $1.03 billion at year-end |
| Cash and cash equivalents | $411.5 million | $1.03 billion at year-end |
| Shareholders’ equity | $1.19 billion | $1.16 billion at year-end |
| Operating / investing / financing cash flow | $1.30 billion / $(247.1) million / $(1.67) billion | $295.8 million / $(194.7) million / $(11.4) million in Q1 2021 |
Results and material changes
- Lower loan-sale gains were the main earnings headwind: gain on sale fell 37% to $18.0 million. Warehouse loan funding volume declined 56% to $9.3 billion, exceeding the cited 37% industry decline. Multi-family originations for sale fell 25% to $541.6 million.
- Net interest income declined as average loan balances and yields were lower, while deposit costs rose. Deposit interest expense increased 44% to $8.8 million; total interest expense rose 36% to $10.3 million.
- Servicing fees increased 22%; results included a $7.6 million positive fair-value adjustment to servicing rights, versus $6.9 million in Q1 2021. Servicing rights rose to $121.0 million.
- Segment net income: Banking $28.8 million, up 25%; Mortgage Warehousing $13.2 million, down 55%; Multi-family Mortgage Banking $11.5 million, down 4%.
- Assets declined largely due to lower loans held for sale and cash. Deposits fell $1.51 billion, including a substantial reduction in brokered funding; brokered deposits were reported at 5% of deposits, versus 24% at year-end.
- Loans receivable grew 4% to $6.0 billion, led by multi-family financing. The allowance for credit losses was $32.1 million, or 0.53% of loans; Q1 provision was $2.5 million.
- Available-for-sale securities had $8.5 million of gross unrealized losses at quarter-end, attributed by management to interest-rate changes rather than credit factors. Other comprehensive loss was $4.9 million.
Liquidity, capital, outlook and risks
- Management reported $2.2 billion of unused FHLB and Federal Reserve borrowing capacity, plus $350 million through AFX. Liquid assets identified by the company represented 39% of total assets.
- At March 31, the company reported $2.6 billion of commitments to extend credit and $4.1 billion of other commitments subject to performance criteria and cancellation. Certificates of deposit maturing within one year totaled $476.4 million; management expected a substantial portion to renew.
- Company, Merchants Bank, and FMBI were reported well-capitalized under the community bank leverage ratio framework, with ratios of 11.3%, 11.2%, and 10.1%, respectively. However, company off-balance-sheet exposures exceeded the 25% eligibility limit. If they remained above that level, the company could lose CBLR eligibility after September 30, 2022; management did not expect a significant financial impact from meeting additional requirements.
- Interest-rate sensitivity showed modeled net interest income increases of 11.2% and 26.2% under +100 and +200 basis-point scenarios, and decreases of 7.6% and 8.4% under -100 and -200 basis-point scenarios. Management said the scenarios remained within policy limits.
- The board was expected to declare a quarterly common dividend of $0.07 per share in each quarter of 2022. The filing provides no specific earnings or revenue guidance.
- Key risks include changing rates and deposit competition, brokered-deposit retention and replacement costs, loan and collateral performance, economic conditions, liquidity, regulatory capital eligibility, cyber and operational risks, and the company’s ability to manage growth. Management reported one remaining COVID-related modified loan of $36.8 million. Nonperforming loans were $4.7 million, or 0.08% of loans, versus 0.01% at year-end.
- The company adopted CECL on January 1, 2022, recording a $3.6 million after-tax reduction to retained earnings, primarily related to unfunded commitments. It also adopted lease accounting, with a $110,000 retained-earnings adjustment. No material subsequent events or legal proceedings were reported; management said there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the decline in mortgage warehouse activity and loan-sale gains persists, and how it affects earnings and fee income.
- Whether deposit outflows stabilize, the reported brokered-deposit level is maintained, and funding costs rise as rates change.
- Credit quality trends, including the $36.8 million modified loan, higher watch-list balances, and adequacy of the CECL allowance.
- Whether off-balance-sheet exposures fall enough to preserve CBLR eligibility or what additional regulatory capital reporting would require after the grace period.
- Key assumptions behind servicing-right valuations and the substantial unrealized losses in the securities portfolio.