Merchants Bancorp Reports First Quarter 2021 Results

CARMEL, Ind., April 28, 2021 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported first quarter 2021 net income of $62.0 million, or diluted earnings per common share of $2.02.  This compared to $24.6 million, or diluted earnings per common share of $0.73 in the first quarter of 2020, and compared to $59.8 million, or diluted earnings per common share of $1.95 in the fourth quarter of 2020.

The $37.4 million, or 152%, increase in net income for the first quarter 2021 compared to the first quarter of 2020 was driven by a $33.6 million, or 88%, increase in net interest income that reflected significant growth in multi-family and mortgage warehouse loans. The first quarter of 2021 also benefited from a $13.8 million increase in loan servicing fees compared to the first quarter of 2020, which was primarily associated with a positive fair market value adjustment to mortgage servicing rights.

The $2.2 million, or 4%, increase in net income for the first quarter 2021 compared to the fourth quarter of 2020 was primarily driven by a $4.9 million increase in loan servicing fees that was primarily associated with a positive fair market value adjustment to mortgage servicing rights.

"We are pleased to have started off 2021 with the highest quarterly earnings in Company history, at $2.02 per share, and to be named by S&P Global as the 3rd best performing bank in the nation with assets between $3 and $10 billion.  Our business model is designed to continue performing well in all interest rate environments, even as the refinancing boom starts to show signs of slowing down compared to its record pace in 2020. With a tangible book value of $22.09 per share, and industry-leading return on average assets of 2.49% and an efficiency ratio of 26.0% in the quarter, we remain proud of the results we are delivering," said Michael F. Petrie, Chairman and CEO of Merchants.

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "The additional capital raised during the first quarter further enhances our ability to generate profitable growth for the foreseeable future and we remain confident that our team will remain focused on maintaining our reputation for having exceptionally high credit quality standards."

Total AssetsTotal assets of $9.7 billion at March 31, 2021 increased $1.8 billion, or 23%, compared to March 31, 2020, and increased $59.9 million, or 1%, compared to December 31, 2020.

The 23% increase compared to March 31, 2020 was primarily due to growth in loans receivable, which increased by 63%, to $2.2 billion.  The increase primarily reflected higher loan volume generated in multi-family business. 

Return on average assets was 2.49% for the first quarter of 2021 compared to 1.49% for the first quarter of 2020 and 2.57% for the fourth quarter of 2020. 

Asset QualityThe allowance for loan losses of $29.1 million at March 31, 2021 increased $10.2 million compared to March 31, 2020 and increased $1.6 million compared to December 31, 2020.  The increases were primarily based on growth in the loan portfolio, but also reflected uncertainties surrounding the COVID-19 pandemic.  Approximately 91% of the $10.2 million increase compared to March 31, 2020, was related primarily to loan growth and portfolio mix, while an additional provision associated with the COVID-19 pandemic represented approximately $0.6 million, or 6%, of the increase.   Because it is still too early to know the full extent of potential future losses associated with the impact of COVID-19, the Company continues to monitor the situation and may need to adjust future expectations as developments occur.

Merchants believes it has minimal direct exposure to consumer, commercial and other small businesses that may be negatively impacted by COVID-19 but continues to assist customers facing financial setbacks.  As of March 31, 2021, the Company had only 9 loans remaining in payment deferral arrangements, with unpaid balances of $37.2 million. The increase compared to $0.9 million at December 31, 2020 reflected one multi-family loan for which full repayment is expected and is fully collateralized.

Non-performing loans were $4.7 million, or 0.08%, of loans receivable at March 31, 2021, compared to $6.6 million, or 0.19% of loans receivable at March 31, 2020, and compared to $6.3 million, or 0.11% of loans receivable at December 31, 2020. 

Total DepositsTotal deposits of $8.1 billion at March 31, 2021 increased $1.3 billion, or 20%, compared to March 31, 2020, and increased $655.1 million, or 9%, compared to December 31, 2020. The increase compared to March 31, 2020 was primarily due to growth in traditional demand accounts, as the Company significantly reduced its balances of brokered certificates of deposits.

Total brokered deposits of $858.2 million at March 31, 2021 decreased $2.0 billion, or 70%, from March 31, 2020 and decreased $315.6 million, or 27%, from December 31, 2020.  Brokered deposits represented 11% of total deposits at March 31, 2021 compared to 42% of total deposits at March 31, 2020 and 16% of total deposits at December 31, 2020.

LiquidityThe Company continues to have significant borrowing capacity, with unused lines of credit at $3.7 billion at March 31, 2021, up from $2.6 billion at December 31, 2020.  This liquidity enhances the ability to effectively manage interest expense and asset levels in the future.  The Company began utilizing the Federal Reserve's discount window and the Paycheck Protection Program Liquidity Facility ("PPPLF") during 2020, which have contributed to lower interest expenses and increased borrowing capacity. Participation in the American Financial Exchange began during the first quarter of 2021 and is also contributing to lower interest expense and increased borrowing capacity.

Net Interest IncomeNet interest income of $72.0 million in the first quarter of 2021 increased $33.6 million, or 88%, compared to the first quarter of 2020 and increased $2.7 million, or 4%, compared to the fourth quarter of 2020. 

The 88% increase in net interest income compared to the first quarter of 2020 reflected significantly higher loan growth and higher net interest margin.  The interest rate spread of 2.93% for the first quarter of 2021 increased 74 basis points compared to 2.19% in the first quarter of 2020. The net interest margin of 2.99% for the first quarter of 2021 increased 59 basis points compared to 2.40% for the first quarter of 2020. The increase in net interest margin compared to the first quarter of 2020 reflected higher loan volume and lower funding costs that outpaced the lower interest rates on loans.

The 4% increase in net interest income compared to the fourth quarter of 2020 reflected higher loan growth that offset slightly lower margins.  The interest rate spread of 2.93% for the first quarter of 2021 decreased 2 basis points compared to 2.95% in the fourth quarter of 2020.  The net interest margin of 2.99% for the first quarter of 2021 also decreased 2 basis points compared to 3.01% for the fourth quarter of 2020. 

Interest IncomeInterest income of $79.5 million in the first quarter of 2021 increased $19.1 million, or 32%, compared to the first quarter of 2020 and increased $1.6 million, or 2%, compared to the fourth quarter of 2020. 

The 32% increase in interest income compared to the first quarter of 2020 was primarily due to significant loan growth that was partially offset by lower rates.  The higher interest income reflected a $3.4 billion, or 67%, increase in the average balance of loans, including loans held for sale, which reached $8.4 billion for the first quarter of 2021. The average yield on loans and loans held for sale of 3.66% for the first quarter of 2021 decreased 64 basis points compared to 4.30% for the first quarter of 2020. The decline in average yields reflected higher loan volume and lower overall interest rates in the first quarter of 2021.

The 2% increase in interest income compared to the fourth quarter of 2020 reflected a $237.7 million, or 3%, increase in the average balance of loans, including loans held for sale, which reached $8.4 billion for the first quarter of 2021. The average yield on loans and loans held for sale of 3.66% for the first quarter of 2021 increased 2 basis points compared to 3.64% for the fourth quarter of 2020. 

Interest ExpenseTotal interest expense decreased $14.5 million, or 66%, to $7.6 million for the first quarter of 2021 compared to the first quarter of 2020 and decreased $1.1 million, or 13%, compared to the fourth quarter of 2020. Interest expense on deposits of $6.1 million for the first quarter of 2021 decreased $14.5 million, or 70%, compared to the first quarter of 2020 and decreased $1.0 million, or 14%, compared to the fourth quarter of 2020.

The 70% decrease in interest expense on deposits compared to the first quarter of 2020 was primarily due to significant decreases in balances and rates of brokered certificates of deposits, as well as higher balances of custodial interest-bearing checking accounts with warehouse customers that are tied to short-term LIBOR rates, which declined significantly. The average balance of interest-bearing deposits of $7.5 billion for the first quarter of 2021 increased $2.1 billion, or 40%, compared to the first quarter of 2020. The average yield of interest-bearing deposits was 0.33% for the first quarter of 2021, which was a 122 basis point decrease compared to 1.55% for the first quarter of 2020. 

The 14% decrease in interest expense on deposits compared to the fourth quarter of 2020 was primarily due to the higher volume and lower rates for money market accounts.  The average balance of interest-bearing deposits of $7.5 billion for the first quarter of 2021 increased $642.6 million, or 9%, compared to the fourth quarter of 2020. The average yield of interest-bearing deposits was 0.33% for the first quarter of 2021, which was an 8 basis point decrease compared to 0.41% in the fourth quarter of 2020. 

Noninterest Income Noninterest income of $43.9 million for the first quarter of 2021 increased $24.0 million, or 121%, compared to the first quarter of 2020 and increased $1.2 million, or 3%, compared to the fourth quarter of 2020.

The 121% increase in noninterest income compared to the first quarter of 2020 was primarily due to a $7.5 million, or 35%, increase in gain on sale of loans and a $13.8 million, or 237%, increase, in loan servicing fees.  Loan servicing fees for the first quarter of 2021 included a $6.9 million positive fair market value adjustment to mortgage servicing rights, which compared to a $6.5 million negative fair market value adjustment for the first quarter of 2020.

The 3% increase in noninterest income compared to the fourth quarter of 2020 was primarily due to a $4.9 million increase in loan servicing fees.  Included in loan servicing fees for the first quarter of 2021 was a $6.9 million positive fair market value adjustment to mortgage servicing rights, which compared to a $2.1 million positive fair market value adjustment for the fourth quarter of 2020.

At March 31, 2021, the mortgage servicing rights asset was valued at $96.2 million, an increase of 37% compared to March 31, 2020 and an increase of 16% compared to December 31, 2020.  These increases were driven by higher loan balances of mortgages serviced and higher interest rates that impacted fair market value adjustments in the first quarter of 2021.  The value of mortgage servicing rights generally increases in rising interest rate environments and declines in falling interest rate environments.

Noninterest ExpenseNoninterest expense of $30.1 million for the first quarter of 2021 increased $7.8 million, or 35%, compared to the first quarter of 2020 and increased $2.6 million, or 10%, compared to the fourth quarter of 2020. 

The 35% increase in noninterest expense compared to the first quarter of 2020 was due primarily to a $7.0 million, or 49%, increase in salaries and employee benefits to support higher loan production volumes and a $1.4 million, or 117%, increase in loan expenses. The efficiency ratio of 26.0% for the first quarter of 2021 compared to 38.3% for the first quarter of 2020.

The 10% increase in noninterest expense compared to the fourth quarter of 2020 was primarily due to a $4.7 million, or 28%, increase in salaries and employee benefits to support higher loan production volumes.  The efficiency ratio of 26.0% for the first quarter of 2021 compared to 24.5% for the fourth quarter of 2020.

Segments For the first quarter of 2021, net income for Banking increased 190% from to the first quarter of 2020, reflecting higher net interest income and loan servicing fees that reflected a positive fair market value adjustment of $4.7 million on single-family mortgage servicing rights during the first quarter of 2021, compared to no adjustments in the first quarter of 2020.  Net income for this segment increased 40% from the fourth quarter of 2020, reflecting higher net interest income and a positive fair market value adjustment of $4.7 million on mortgage servicing rights during the first quarter of 2021 compared to a negative adjustment of $0.5 million during the fourth quarter of 2020.

For the first quarter of 2021, net income for Mortgage Warehousing increased 135% compared to the first quarter of 2020, reflecting significant growth in net interest income from higher loan volume. Compared to the fourth quarter of 2020, net income for this segment decreased 10%, as warehouse lines of credit and loans held for sale declined, consistent with industry volumes.

For the first quarter of 2021, net income for Multi-family Mortgage Banking increased 122% compared with the first quarter of 2020, primarily due to higher noninterest income from gain on sale of loans and loan servicing fees that reflected a positive fair market value adjustment of $2.1 million on mortgage servicing rights in the first quarter of 2021 compared to a negative fair market value adjustment of $6.5 million in the first quarter of 2020.  Compared to the fourth quarter of 2020, net income for this segment decreased 16%, reflecting higher salaries and employee benefits to support higher loan production volume, an increase in gain on sale, and a positive fair market value adjustment of $2.1 million on mortgage servicing rights in the first quarter of 2021 compared to a positive fair market value adjustment of $2.7 million in the first quarter of 2020.

About Merchants BancorpMerchants Bancorp is a diversified bank holding company headquartered in Carmel, Indiana operating multiple lines of business, including Federal Housing Administration ("FHA") multi-family housing and healthcare facility financing and servicing; mortgage warehouse financing; retail and correspondent residential mortgage banking; agricultural lending; and traditional community banking.  Merchants Bancorp, with $9.7 billion in assets and $8.1 billion in deposits as of March 31, 2021, conducts its business primarily through its direct and indirect subsidiaries, Merchants Bank of Indiana, Merchants Capital Corp., Farmers-Merchants Bank of Illinois, Merchants Capital Servicing, LLC, and Merchants Mortgage, a division of Merchants Bank of Indiana. For more information and financial data, please visit Merchants' Investor Relations page at investors.merchantsbancorp.com.

Forward-Looking Statements  This press release contains forward-looking statements which reflect management's current views with respect to, among other things, future events and financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "goal," "target," "outlook," "aim," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, such as the potential impacts of the COVID-19 pandemic. Accordingly, management cautions that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.  A number of important factors could cause actual results to differ materially from those indicated in these forward-looking statements, including the impacts of the COVID-19 pandemic, such as the severity, magnitude, duration and businesses' and governments' responses thereto, on the Company's operations and personnel, and on activity and demand across its businesses, and other factors identified in "Risk Factors" or "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K and other periodic filings with the Securities and Exchange Commission.  Any forward-looking statements presented herein are made only as of the date of this press release, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

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SOURCE Merchants Bancorp