Merchants Bancorp — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 16, 2023. This is an annual report, not a standalone fourth-quarter filing. Merchants Bancorp is a diversified bank holding company with multi-family mortgage banking, mortgage warehousing, and banking businesses.
Financial results and condition
| Metric | FY 2022 / year-end | Comparison |
|---|---|---|
| Total assets | $12.6 billion | Up 12% year over year |
| Deposits | $10.1 billion | Up 12% |
| Loans held for investment, net | $7.43 billion | Up 29% |
| Net interest income | $318.6 million | Up 15% |
| Noninterest income | $125.9 million | Down 20% |
| Net income | $219.7 million | Down 3% |
| Net income available to common shareholders | $193.7 million | Down from $206.2 million |
| Diluted EPS | $4.47 | Down 6% from $4.76 |
| Net interest margin | 2.97% | Up 18 basis points |
| Efficiency ratio | 30.61% | Up 181 basis points |
Fourth-quarter 2022 net income was $57.2 million and diluted EPS was $1.12, versus $55.2 million and $1.14 in Q4 2021. Quarterly interest expense rose sharply during 2022, reaching $86.0 million in Q4, while quarterly net interest income increased to $95.4 million.
Cash flow: Operating activities provided $975.8 million, investing activities used $2.86 billion, and financing activities provided $1.08 billion. Cash and cash equivalents ended the year at $226.2 million, down $806.5 million. Management attributed the cash reduction to deliberate liquidity management.
Funding and capital: Borrowings were $930.4 million, down 10%; available unused FHLB and Federal Reserve borrowing capacity was $3.1 billion, plus $500 million of AFX capacity. Brokered deposits were $2.76 billion, or 27% of deposits, versus 24% a year earlier. Tangible common equity to tangible assets was 7.5%; the Company reported a 12.2% total risk-based capital ratio and said the Company and both bank subsidiaries remained well capitalized. These capital ratios reflect the transition from the community bank leverage ratio to Basel III reporting after assets exceeded $10 billion.
Changes versus 2021
- Higher asset yields and average loan balances lifted interest income by $168.9 million, but interest expense increased $128.4 million as deposit and borrowing costs rose. The average cost of interest-bearing deposits increased to 1.74% from 0.36%.
- Noninterest income fell $31.4 million, principally because gain on sale of loans declined $47.0 million amid lower secondary-market volumes and a shift toward lower-priced multi-family programs. Servicing fees increased $13.8 million, including positive servicing-rights fair-value adjustments.
- Provision for credit losses increased to $17.3 million from $5.0 million. The year-end allowance for credit losses on loans rose to $44.0 million, or 0.59% of loans, from $31.3 million, or 0.54%.
- Noninterest expense increased 9% to $136.1 million, reflecting higher compensation and professional fees. The efficiency ratio worsened despite higher net interest income.
- Warehouse lending volume fell 58% to $33.2 billion; multi-family loans originated or acquired for secondary-market sale declined 39% to $1.8 billion. Segment net income was $48.6 million for Mortgage Warehousing, down 49%; $54.6 million for Multi-family Mortgage Banking, up 6%; and $134.2 million for Banking, up 48%.
- Nonperforming loans increased to $26.7 million, or 0.36% of loans, from $0.8 million. Management attributed most of the increase to one healthcare borrower; it stated the loan was fully collateralized and full repayment was expected.
Outlook, risks and unusual items
- Management described a challenging rate and mortgage-volume environment: the federal funds target range reached 4.5%–4.75% by February 2023, and 30-year mortgage rates exceeded 7% during 2022. The filing cites an MBA forecast for a 17% decline in single-family mortgage volume in 2023, followed by an increase in 2024; management said warehouse-market growth may not resume until 2024. These are industry forecasts, not company earnings guidance.
- Management expects loan growth to continue in 2023 and said credit-loss provisions could rise with portfolio growth, portfolio mix, or changes in problem loans. It also expects continued general and administrative spending for infrastructure, personnel, and strategic initiatives. No specific company revenue or earnings guidance is provided.
- In September, the Company sold $1.2 billion of multi-family bridge loans through a private securitization and retained a $1.0 billion senior security classified as held to maturity. An outside investor held the subordinate interests and first-loss position for 13.4% of portfolio losses. The Company reported $871.8 million as its maximum exposure to loss for the retained security at year-end.
- Freddie Mac-sponsored securitizations included a $214.0 million May transaction with a first-loss reimbursement obligation capped at approximately $25.7 million, and a $284.2 million November transaction. The Company recorded related reserves and servicing rights.
- The Company adopted CECL on January 1, 2022, recording a $3.6 million after-tax reduction to retained earnings. The auditor identified the allowance for credit losses as a critical audit matter, citing model complexity and judgment in qualitative adjustments. The financial-statement and internal-control audit opinions were unqualified; the auditor also reported effective internal control over financial reporting.
- Key risks include deposit concentration and rate sensitivity, continued increases in funding costs, mortgage-volume and gain-on-sale declines, real-estate and healthcare borrower credit risks, construction-loan performance, interest-rate and securities valuation changes, liquidity, cybersecurity, and regulatory costs associated with exceeding $10 billion in assets. Management notes that $3.0 billion of certificates of deposit mature within one year and expects a substantial portion to renew.
- The filing reports no material pending legal proceedings and no material subsequent events. It identifies no unresolved SEC staff comments.
Important facts for investors to verify
- Review the healthcare loan delinquency, collateral valuation, repayment status, and the increase in loans past due over 30 days ($39.8 million versus $2.6 million).
- Assess the retained $1.0 billion securitization security, its credit performance and valuation, and the Company’s stated $871.8 million maximum exposure to loss.
- Track brokered-deposit levels, deposit renewal rates, funding costs, and liquidity capacity as certificates mature and market rates change.
- Reconcile continued growth in loans and commitments with capital ratios, CECL reserves, and off-balance-sheet exposure; verify the effect of the Basel III reporting transition.
- Monitor mortgage and warehouse volumes, servicing-rights valuations, and the sustainability of 2022 earnings amid lower industry mortgage forecasts.