Merchants Bancorp — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; interim financial statements are unaudited. Unless stated otherwise, amounts below are in millions of dollars. Merchants Bancorp is a diversified bank holding company focused on multifamily mortgage banking and servicing, mortgage warehousing, and community banking.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $24.1 | $20.1 in Q1 2018 |
| Net interest margin | 2.77% | 2.52% in Q1 2018 |
| Net income | $10.6; $0.34 diluted EPS | $15.1; $0.50 diluted EPS in Q1 2018 |
| Net income allocated to common shareholders | $9.7 | $14.2 in Q1 2018 |
| Net cash from operating activities | $2.7 | $(123.8) in Q1 2018 |
| Total assets | $3,976.7 | $3,884.2 at December 31, 2018 |
| Loans receivable, net | $2,168.3 | $2,045.4 at December 31, 2018 |
| Deposits | $3,121.0 | $3,231.1 at December 31, 2018 |
| Borrowings | $338.0 | $195.5 at December 31, 2018 |
| Shareholders’ equity | $477.8 | $421.2 at December 31, 2018 |
- Interest income increased 37% to $39.7, while interest expense rose 74% to $15.5. Net interest income grew 20%, and the interest-rate spread increased to 2.50% from 2.06% in Q1 2018.
- Net income declined 30% year over year. Noninterest income fell 68% to $3.7, principally because gain on sale of loans dropped to $2.6 from $10.9. Noninterest expense rose 27% to $13.0, including higher salary and benefit costs. The efficiency ratio increased to 46.9% from 32.7%.
- Cash and cash equivalents were $313.5, down from $336.5 at year-end. Investing activities used $103.6; financing activities provided $77.7. Available-for-sale securities were $296.7 and loans held for sale were $882.1.
- Management shifted funding away from brokered deposits toward borrowings. Brokered deposits fell to $757.1 (24% of deposits) from $988.2 (31%); borrowings increased to support liquidity and lending. The company reported access to up to $559.1 of additional FHLB advances, subject to available collateral and FHLB stock.
- The allowance for loan losses was $13.4, or 0.61% of loans. Nonperforming loans totaled $2.6; classified loans were $13.4, up from $11.2 at year-end. Watch-list loans declined to $73.2 from $90.6. No loan charge-offs were recorded in Q1.
- All reported banking entities were categorized as well capitalized. Company total risk-based capital was 13.3%, and common equity Tier 1 was 10.3% at March 31, 2019.
Material changes and segment results
- Loan growth was led by mortgage warehouse lines, up $74.8 (22%) from year-end, and multifamily and healthcare loans, up $51.0 (6%). Total assets increased 2% from year-end.
- Multifamily Mortgage Banking reported a $0.7 net loss versus $5.5 net income in Q1 2018. Loan originations and acquisitions for sale fell 90% to $24.4; management cited lower loan-sale volume and processing delays associated with the January federal government shutdown. Mortgage servicing rights also recorded a $1.5 fair-value decrease.
- Mortgage Warehousing earned $3.8, down 17% year over year, despite funding $5.4 billion of loans, up 6%. Banking earned $8.8, up 47%, primarily on higher net interest income.
- The company issued 2.0 million 7% Series A preferred shares on March 28, receiving $48.3 net proceeds. An additional 81,800 shares were issued to underwriters on April 12, after quarter-end, for $2.0 million net proceeds.
Outlook, risks and other notable items
- The filing provides no specific earnings or revenue guidance. Management expected sufficient funds to meet current loan-origination commitments and anticipated that a substantial portion of certificates of deposit maturing within one year ($635.6) would renew; failure to retain deposits could lead to increased FHLB borrowing or higher deposit rates and expense.
- Interest-rate sensitivity analysis indicated an asset-sensitive position for net interest income. A modeled 100-basis-point rate decrease reduced projected 12-month net interest income by 13.6%; a 100-basis-point increase raised it by 12.1%. Management stated the scenarios were within board policy limits. The economic value of equity model projected declines when rates rise.
- Key stated risks include credit quality and allowance adequacy; real estate values and construction-project performance; interest-rate and liquidity changes; deposit retention; regulatory compliance; cybersecurity, fraud and systems risks; competition; and execution of growth plans. Management said there were no material changes to previously disclosed risk factors.
- Management expects the future adoption of the expected-credit-loss standard (CECL) may increase the allowance; the effect could not yet be quantified. Management did not expect material effects from several other accounting standards discussed in the filing.
- Management identified construction projects with cost overruns under active monitoring; borrower payments remained current. Available-for-sale securities had unrealized losses attributed primarily to higher market rates; management stated it intended and was able to hold them for the foreseeable future.
- No legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification points
- Track whether multifamily loan-sale volumes recover after the quarter’s shutdown-related processing delays, and how that affects gains, servicing income and segment profitability.
- Assess the persistence of higher deposit costs, the continued decline in brokered deposits, and the increased reliance on FHLB advances and other borrowings.
- Monitor classified, past-due and watch-list loans, especially construction and commercial exposures, alongside allowance coverage and subsequent charge-offs.
- Review the preferred-stock terms, distributions and post-quarter additional issuance when evaluating common-shareholder earnings and capital.
- Confirm liquidity and capital remain adequate as $635.6 of certificates mature within one year and as loan commitments are funded.