Merchants Bancorp — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Merchants Bancorp is a diversified bank holding company focused on multifamily mortgage banking, mortgage warehousing and banking, alongside residential mortgage, agricultural, SBA and community banking businesses.
Financial performance and condition
| Metric | FY2021 / Dec. 31, 2021 | Comparable period |
|---|---|---|
| Total assets | $11.28 billion | $9.65 billion at Dec. 31, 2020; up 17% |
| Deposits | $8.98 billion | $7.41 billion; up 21% |
| Total shareholders’ equity | $1.16 billion | $810.6 million; up 43% |
| Net interest income | $278.0 million | $224.1 million; up 24% |
| Net interest margin | 2.79% | 2.69% |
| Noninterest income / expense | $157.3 million / $125.4 million | $127.5 million / $96.4 million |
| Net income | $227.1 million | $180.5 million; up 26% |
| Diluted EPS | $4.76 | $3.85; up 24% |
| Return on average assets / equity | 2.23% / 22.07% | 2.12% / 25.09% |
| Efficiency ratio | 28.80% | 27.42% |
Profit drivers and costs: Net interest income rose primarily on growth in average earning assets and lower deposit costs. Interest expense fell 42% to $33.9 million. Noninterest income increased 23%, including higher multifamily loan-sale gains and a $12.4 million positive fair-value adjustment to servicing rights; FY2020 had a $5.8 million negative adjustment. Noninterest expense rose 30%, mainly from salaries, benefits and commissions supporting business growth. Provision for loan losses was $5.0 million, down from $11.8 million.
Fourth quarter: Net income was $55.2 million and diluted EPS was $1.14, compared with $59.8 million and $1.30 in Q4 2020. Q4 2021 net interest income was $72.7 million; provision for loan losses was $2.6 million.
Cash flow and liquidity: Cash and cash equivalents ended the year at $1.03 billion, up $852.9 million. Net cash used in operating activities was $49.2 million, net cash used in investing activities was $474.3 million, and financing activities provided $1.38 billion. These cash flows reflect the company’s high-volume loan origination, sale and funding activities. Available unused borrowing capacity was approximately $2.4 billion, with an additional $350 million available through AFX, subject to daily availability. Total borrowings were $1.03 billion, down from $1.35 billion.
Credit and capital: Loans held for investment were $5.78 billion, including $3.53 billion in multifamily and healthcare financing (60% of the portfolio). Nonperforming loans were $761,000, or 0.01% of loans, versus $6.3 million, or 0.11%, a year earlier. Allowance for loan losses was $31.3 million, or 0.54% of loans. The company reported a 10.4% community bank leverage ratio and stated that the company and its bank subsidiaries were well capitalized. Tangible common equity to tangible assets was 6.9%.
Material changes versus FY2020
- Assets grew 17%; loans held for investment grew 4%, with multifamily and healthcare loans increasing 28%. Mortgage warehouse lines held for investment fell 51% to $781 million.
- Multifamily loan originations and acquisitions for secondary-market sale rose 49% to $2.9 billion. Warehouse lending volume fell 29% to $78.3 billion, while management cited an estimated 3% industry volume decline.
- Segment net income increased 76% in multifamily mortgage banking and 69% in Banking, but declined 11% in Mortgage Warehousing.
- Brokered deposits rose to $2.16 billion, or 24% of deposits, from $1.17 billion, or 16%. Cash increased substantially, while borrowings declined.
- Common dividends declared increased to $0.24 per share from $0.21. A 3-for-2 common-stock split was approved in November 2021 and distributed in January 2022; share and per-share data in the filing reflect the split.
Outlook, risks and unusual items
- Management did not provide formal earnings guidance. It said 2020’s exceptional mortgage-volume growth was not necessarily expected to continue. The filing cites the Mortgage Bankers Association forecast of a 35% decline in single-family mortgage volume in 2022.
- Management expected continued spending on infrastructure, technology, marketing and personnel. It said loan-portfolio moderation could reduce the provision for loan losses, subject to portfolio mix, problem loans, COVID-19 developments and CECL adoption.
- Assets exceeded $10 billion at year-end. Management expected the additional regulatory requirements to have no significant financial impact, but described a potential return to risk-based capital reporting and increased regulatory scrutiny after applicable transition periods.
- Key risks include interest-rate and yield-curve changes, mortgage origination and secondary-market volumes, multifamily real-estate and construction credit, servicing-right valuations, and reliance on custodial, brokered and large mortgage-related deposits. Brokered deposits were 24% of total deposits.
- COVID-19: one loan with a $36.8 million balance remained under payment deferral at year-end; management expected full repayment and said it was fully collateralized. Outcomes remain uncertain.
- LIBOR transition could affect loans, contracts and preferred stock. The company said it was preparing for replacement reference rates.
- CECL adoption on January 1, 2022 was expected to result in a one-time $4–$6 million cumulative increase to the allowance for credit losses, much of it related to unfunded commitments. Lease accounting adoption was expected to add about $7.2 million of assets and liabilities, without a material income-statement effect.
- In a multifamily securitization, $262 million of loans were sold; the company retained securities and a first-loss position capped at approximately $26.2 million, with a $1.4 million reserve recorded. A debt-fund restructuring led to deconsolidation, with no material gain or loss. No material subsequent events or material pending litigation were reported.
Important facts for investors to verify
- Whether the rise in multifamily loan balances, fee income and servicing-right values is sustainable, and how sensitive servicing values are to rates and prepayments.
- Deposit concentration, brokered-deposit renewal and pricing, custodial-deposit stability, and the effect of the increase in brokered funding on liquidity costs.
- Credit quality behind the $36.8 million deferred loan and the increase in classified loans to $43.4 million, as well as the adequacy of reserves after CECL adoption.
- How the company’s move beyond $10 billion in assets affects capital reporting, regulatory oversight and compliance costs.
- Fourth-quarter earnings drivers and the year-over-year decline in quarterly net income and EPS; distinguish recurring operations from fair-value movements and loan-sale activity.
- Preferred-stock dividend obligations, borrowing maturities and put options, and the company’s capacity to maintain common dividends and meet commitments.