Merchants Bancorp — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed March 12, 2024. The filing also reports fourth-quarter results. Merchants Bancorp is a diversified bank holding company focused on multifamily and healthcare mortgage banking, mortgage warehouse lending, and community and commercial banking.
Financial results and condition
| Metric | FY2023 / year-end | Comparison |
|---|---|---|
| Total assets | $16.95 billion | Up 34% from $12.62 billion |
| Deposits | $14.06 billion | Up 40% from $10.07 billion |
| Total shareholders’ equity | $1.70 billion | Up 17% from $1.46 billion |
| Net interest income | $448.1 million | Up 41% from $318.6 million |
| Net income | $279.2 million | Up 27% from $219.7 million |
| Net income available to common shareholders | $244.6 million | Up from $193.7 million |
| Diluted earnings per share | $5.64 | Up 26% from $4.47 |
| Net interest margin | 3.06% | Up 9 basis points from 2.97% |
| Noninterest income / expense | $114.7 million / $174.6 million | Income down 9%; expense up 28% |
| Provision for credit losses | $40.2 million | Up from $17.3 million |
| Loans held for investment, net | $10.13 billion | Up 36% from $7.43 billion |
Profit growth was principally driven by higher loan yields and average loan balances. Interest expense rose sharply as deposit costs increased: total interest expense grew 288% to $629.7 million, and the average cost of interest-bearing deposits rose to 4.67% from 1.74%. The efficiency ratio was 31.03%, compared with 30.61%. Return on average assets was 1.85%, down from 1.99%; return on average equity was 17.63%, up from 17.21%.
Fourth quarter: Net income was $77.5 million and diluted EPS was $1.58, versus $57.2 million and $1.12 in Q4 2022. Q4 net interest income was $124.3 million; provision for credit losses was $6.7 million.
Cash flow and liquidity: Operating activities used $356.4 million, versus providing $975.8 million in 2022; investing activities used $3.26 billion, while financing activities provided $3.97 billion, primarily reflecting deposit growth. Year-end cash and cash equivalents were $584.4 million. Management reported $6.0 billion of unused FHLB and Federal Reserve borrowing capacity; liquid assets plus that capacity totaled $10.6 billion, or 62% of assets.
Funding and capital: Borrowings were $964.1 million, versus $930.4 million a year earlier. Brokered deposits were $6.0 billion, or 42% of deposits, compared with 27% in 2022. Uninsured deposits were approximately $2.7 billion, below 20% of deposits. The company reported a 7.8% common equity Tier 1 ratio and an 11.6% total capital ratio; Merchants Bank’s corresponding ratios were 10.9% and 11.5%. Management said the company and bank were well capitalized.
Material changes and business developments
- Multifamily and healthcare lending drove loan growth, while higher rates delayed some borrowers’ conversions to permanent financing and slowed loan sales. Multifamily originations and acquisitions fell 30% to $6.2 billion; warehouse funding volume was approximately $33.0 billion, roughly flat year over year.
- Nonperforming loans rose to $82.0 million, or 0.80% of loans, from $26.7 million, or 0.36%. Past-due loans over 30 days increased to $183.5 million from $39.8 million. Management attributed the increase mainly to six multifamily and healthcare borrowers and higher borrower payments following rate increases. Charge-offs were $9.8 million, primarily related to one customer.
- The allowance for credit losses increased to $71.8 million, or 0.70% of loans, from $44.0 million, or 0.59%. Allowance coverage of nonperforming loans declined to 87% from 165%.
- Noninterest income decreased, mainly due to lower loan-sale gains and a smaller positive servicing-rights fair-value adjustment. Salary and benefits and FDIC deposit insurance costs contributed to higher expenses.
- In March 2023, the company issued $158.1 million of senior credit-linked notes, with net proceeds of approximately $153.5 million, tied to a healthcare loan reference pool. The notes had a 20.9% effective interest rate at year-end and supported lower risk-weighted assets; $36.4 million of cash and $89.0 million of Treasury securities were restricted as collateral.
- In August 2023, the company completed a $303.6 million Freddie Mac multifamily securitization. Its LIHTC syndication business raised $483.7 million of equity in 2023.
- After year-end, on January 26, 2024, the company sold all Farmers-Merchants Bank of Illinois branches and merged the remaining charter into Merchants Bank. A net gain of approximately $703,000 was expected in Q1 2024.
Outlook, risks and contingencies
Management cited forecasts for higher single-family mortgage industry volume in 2024–2026, but said elevated rates had slowed residential and multifamily activity and that mortgage production may not recover until rates stabilize or decline. It expects loan growth in 2024, with credit-loss provisions influenced by portfolio growth, problem loans, loan mix, rates and economic conditions. Management also expects continued investment in staffing, infrastructure, technology and regulatory compliance to increase expenses. No formal company earnings or margin guidance is provided in the supplied filing text.
Key exposures include credit deterioration in multifamily, healthcare, construction and commercial lending; interest-rate and deposit-pricing sensitivity; reliance on brokered and mortgage-custodial deposits; refinancing and secondary-market conditions; and regulatory, cybersecurity, third-party-service-provider and compliance risks. Approximately 93% of Merchants Bank’s net loans and 89% of its deposits reprice within three months. The filing reports $4.0 billion of commitments subject to credit risk and $3.7 billion of commitments subject to performance criteria or cancellation. The company disclosed no material pending litigation beyond ordinary routine matters. The auditor gave an unqualified opinion on the financial statements and internal controls; the allowance for credit losses was identified as a critical audit matter.
Subsequent capital actions include the announced redemption of all Series A preferred shares on April 1, 2024 using cash on hand. Series B preferred dividends were scheduled to reset in October 2024 if the shares remained outstanding; redemption is an option subject to regulatory approval. The common dividend was $0.08 per quarter in 2023; the company declared $0.09 for Q1 2024 and said it expected to raise the dividend in 2024.
Investor verification points
- Track delinquency, nonperforming-loan and criticized-loan trends, especially in multifamily and healthcare, and compare future credit-loss provisions and charge-offs with the year-end increase.
- Assess whether net interest margin can hold up as deposit costs, brokered funding and borrowing costs change, and as large volumes of certificates of deposit mature within one year.
- Review the credit-linked notes’ cost, collateral requirements, reference-pool performance and actual capital benefit.
- Verify execution and financial effects of the Illinois branch sale, including the expected gain and post-sale deposit and loan balances.
- Monitor preferred-stock redemptions or rate resets, common-dividend actions, regulatory capital headroom and liquidity available after restricted collateral and commitments.