Merchants Bancorp — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Merchants Bancorp is a diversified bank holding company focused on multifamily mortgage banking, mortgage warehouse financing, and community banking.
Financial results and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets at year-end | $9.65 billion | $6.37 billion |
| Loans held for investment | $5.54 billion | $3.03 billion |
| Loans held for sale | $3.07 billion | $2.09 billion |
| Deposits | $7.41 billion | $5.48 billion |
| Borrowings | $1.35 billion | $181.4 million |
| Shareholders’ equity | $810.6 million | $653.7 million |
| Net interest income | $224.1 million | $122.3 million |
| Noninterest income | $127.5 million | $47.1 million |
| Net income | $180.5 million | $77.3 million |
| Diluted EPS | $5.77 | $2.37 |
| Net interest margin | 2.69% | 2.40% |
| Efficiency ratio (non-GAAP) | 27.42% | 37.38% |
Net income increased 133%. Higher net interest income and loan-sale gains drove growth; gain on sale of loans rose 173% to $96.6 million, while noninterest expense increased 52% to $96.4 million, primarily reflecting compensation, commissions, and higher business volumes. Return on average assets was 2.12%, up from 1.47%.
Fourth-quarter 2020 net income was $59.8 million and diluted EPS was $1.95. Net interest income was $69.2 million; provision for loan losses was $4.1 million; noninterest income was $42.7 million; and noninterest expense was $27.5 million.
Operating cash flow was negative $874.9 million and investing cash flow negative $2.53 billion, largely reflecting loan origination, sales, and portfolio growth. Financing cash flow was positive $3.08 billion, primarily from deposit growth and borrowings. Cash and cash equivalents ended the year at $179.7 million, down from $506.7 million. Management reported $2.6 billion of available borrowing capacity.
Material changes and business drivers
- Assets grew 51%; loans held for investment grew 83%, led by multifamily and healthcare financing (+104%) and mortgage warehouse lines (+110%). Mortgage warehouse funding volume reached $110.6 billion, up 139%.
- Deposits increased 35%. Brokered deposits fell to $1.17 billion, or 16% of deposits, from $2.16 billion, or 39%. Borrowings rose as the company used FHLB, Federal Reserve discount-window, and PPP Liquidity Facility funding.
- The mortgage warehouse segment earned $106.3 million, versus $34.8 million in 2019; Banking earned $53.6 million, versus $31.9 million; and Multifamily Mortgage Banking earned $29.2 million, versus $14.8 million.
- The allowance for loan losses increased to $27.5 million from $15.8 million. The provision was $11.8 million, with management attributing most of the reserve increase to loan growth and approximately $590,000 to COVID-19 uncertainty.
Outlook, risks, and unusual items
- No formal company earnings or growth guidance is provided. Management said it did not expect 2020’s asset growth rate necessarily to continue and noted that loan-loss provisions could moderate if portfolio growth does, subject to credit conditions and loan mix.
- The filing cites Mortgage Bankers Association forecasts for lower single-family mortgage volume in 2021 and 2022 than in 2020. The company cautioned that refinancing activity and loan-sale profitability depend on interest rates, secondary-market conditions, and agency eligibility.
- COVID-19 payment deferrals had fallen to 11 loans totaling $937,000 at year-end, representing 0.01% of loans and loans held for sale. Management said the pandemic’s eventual credit and operating effects remained uncertain.
- Credit indicators included $6.3 million of nonperforming loans (0.11% of loans), $47.8 million past due more than 30 days, and $152.9 million of traditional Special Mention loans, up from $60.3 million a year earlier. Watch-list growth included multifamily projects with cost overruns and weaker-than-projected rent collections or occupancy.
- At $9.65 billion of assets, the company was close to the $10 billion threshold that could bring added regulatory scrutiny and affect eligibility to use the Community Bank Leverage Ratio framework. Year-end leverage ratios were 8.6% for the company and 8.7% for Merchants Bank, above the temporary 8% threshold then in effect.
- Other material exposures include interest-rate and mortgage-servicing-rights valuation risk, concentration in mortgage-related deposits and warehouse funding, LIBOR transition, regulatory and cybersecurity risks, and potential mortgage repurchase or servicing obligations. The filing identifies a $400 million FHLB advance subject to a put option, exercisable quarterly, with the next opportunity in May 2021.
- The company reported no material pending legal proceedings and no material subsequent events. Its auditor gave an unqualified opinion on the financial statements; the auditor did not express an opinion on internal control over financial reporting. Management assessed disclosure controls and internal control over financial reporting as effective.
Most important facts for investors to verify
- Whether exceptionally strong mortgage warehouse and loan-sale volumes persist, and how results respond to lower refinancing activity or rising rates.
- Credit quality behind the increase in watch-list and delinquent loans, particularly multifamily projects and the loan under forbearance; also monitor COVID-related losses and reserve adequacy.
- Funding resilience: the composition and stability of deposits, the cost and maturity of borrowings, and continued access to the reported $2.6 billion of borrowing capacity.
- Capital headroom and regulatory implications if assets exceed $10 billion, including the effect of the CBLR threshold returning to 9% in 2022.
- Changes in mortgage servicing rights fair value, LIBOR-linked contracts and preferred-stock provisions, and any resulting effects on earnings, liquidity, or capital.