Merchants Bancorp — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Merchants Bancorp is a bank holding company focused on multifamily mortgage banking, mortgage warehousing and banking. Financial statements are unaudited.
Financial performance and position
- Profit: Net income was $87.1 million, up 58% from $55.0 million in Q1 2023. Diluted EPS was $1.80, compared with $1.07. Net income allocated to common shareholders was $78.4 million after $8.7 million of preferred dividends.
- Income and margins: Interest income rose 49% to $314.2 million; interest expense increased 69% to $187.1 million. Net interest income increased 26% to $127.1 million. Net interest margin declined to 3.14% from 3.27%, and the interest rate spread narrowed to 2.58% from 2.76%. Noninterest income rose 187% to $40.9 million; noninterest expense increased 41% to $48.9 million. The efficiency ratio improved to 29.1% from 30.3%.
- Credit costs: Provision for credit losses was $4.7 million, down from $6.9 million. The $75.7 million loan allowance equaled 0.70% of loans. Management cited portfolio growth and changes in specific reserves and loss factors.
- Assets and lending: Total assets were $17.8 billion, up 5% from year-end. Net loans receivable were $10.7 billion, up 6%; loans held for sale were $3.5 billion, up 11%. Growth included warehouse, healthcare and multifamily lending. About 94% of Merchants Bank’s net loans reprice within three months, according to management.
- Asset quality: Nonperforming loans were $131.8 million, or 1.22% of loans, versus $82.0 million, or 0.80%, at year-end. Management attributed the increase principally to three customers delinquent at least 90 days. Special Mention loans increased to $232.1 million from $191.3 million. Q1 included one $925,000 commercial loan charge-off.
- Funding and liquidity: Deposits were $14.0 billion, down 1% from year-end; borrowings rose 90% to $1.8 billion. Borrowings included $1.43 billion of FHLB advances, $50 million from the Federal Reserve discount window and $175 million from AFX. Unused FHLB and Federal Reserve borrowing capacity was $5.6 billion. The company reported $10.9 billion of liquid assets plus unused borrowing capacity, or 61% of total assets. Uninsured deposits were about $2.1 billion, under 15% of deposits.
- Deposit mix: Brokered deposits were $5.8 billion, or 41% of deposits. Certificates of deposit totaled $6.0 billion, with $5.9 billion due within one year; brokered CDs had a 57-day weighted-average remaining duration. Management noted that brokered funding can be rate-sensitive and may be difficult or more costly to replace.
- Capital and cash flow: Shareholders’ equity was $1.8 billion. Company regulatory capital ratios included 11.7% total capital, 11.2% Tier 1 and 8.0% common equity Tier 1; management said the company and bank met applicable requirements and were well capitalized. Operating cash flow was negative $383.8 million and investing cash flow negative $695.0 million; financing provided $1.0 billion. Cash and cash equivalents ended at $508.8 million.
Changes, management commentary and notable items
- Compared with Q1 2023, higher loan and securities balances and yields lifted net interest income, while higher deposit and borrowing costs partly offset the benefit. Deposit expense increased $66.6 million; borrowing expense rose $9.9 million.
- Loan servicing fees rose to $19.4 million from $2.4 million. Results included a $14.0 million positive fair-value adjustment to servicing rights, versus a $2.9 million negative adjustment in Q1 2023. Servicing rights were $172.2 million at quarter-end; their valuation is sensitive to interest rates and prepayment assumptions.
- Multifamily loan originations and acquisitions for sale increased 122% to $252.7 million. Mortgage warehouse funding volume increased 46% to $7.9 billion, compared with an estimated 13% industry increase cited by the company.
- The sale of Illinois bank branches closed January 26, 2024. It included approximately $230 million of deposits and $48 million of loans and produced a reported net gain of $715,000. The remaining FMBI charter merged into Merchants Bank.
- On March 27, the company entered into a credit default swap covering a $543.5 million pool of multifamily loans. Management said it provides credit protection and reduces risk-based capital requirements; the protection seller posted $76.1 million of collateral.
- All Series A Preferred Stock was redeemed April 1, 2024 for approximately $52 million using cash on hand; the cash had been prepaid to the transfer agent by March 31. The company declared a Q1 common dividend of $0.09 per share.
- No formal earnings or operating guidance is provided in the supplied filing text. Management expects a substantial portion of CDs maturing within one year to renew, but noted alternative funding or higher deposit rates may be needed if retention is lower.
- Interest-rate sensitivity modeling showed projected one-year net interest income changes of negative 7.2% for a 100-basis-point decline and positive 5.6% for a 100-basis-point increase. The filing identifies credit, liquidity, interest-rate, economic, regulatory, cybersecurity and execution risks. Management reported no material changes to previously disclosed risk factors and no material legal proceedings.
Important facts for investors to verify
- Whether the increase in nonperforming loans and Special Mention loans stabilizes, particularly in multifamily and healthcare portfolios, and how allowance coverage develops.
- Deposit renewal and pricing trends, especially for the $5.9 billion of CDs due within one year, brokered funding and uninsured deposits.
- Whether loan and warehouse growth sustains earnings without further compressing net interest margin or increasing credit and funding costs.
- The durability of servicing-fee income: Q1 earnings included a $14.0 million favorable servicing-rights valuation adjustment sensitive to interest rates and prepayments.
- Liquidity and capital effects of the Series A redemption, short-term borrowings and the new credit default swap, including its collateral and realized protection.
- Credit performance and funding needs associated with $3.8 billion of outstanding commitments to extend credit and $4.1 billion of other commitments subject to stated performance criteria or cancellation.