Merchants Bancorp Reports Record Second Quarter 2020 Results

CARMEL, Ind., July 28, 2020 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") MBIN, parent company of Merchants Bank of Indiana, today reported second quarter 2020 net income of $41.2 million, or $1.31 per common share.  This compared to $16.4 million, or $0.51 per common share in the second quarter of 2019, and $24.6 million, or $0.73 per common share, in the first quarter of 2020.

The $24.7 million, or 150%, increase in net income for the second quarter 2020 compared to the second quarter of 2019 was driven by an 83% increase in net interest income that reflected significant growth in mortgage warehouse loans, and an 88% increase in gain on sale of loans, primarily from higher growth in single-family mortgages. 

The $16.6 million, or 67%, increase in net income for the second quarter 2020 compared to the first quarter of 2020 was primarily driven by a $12.9 million, or 34%, increase in net interest income that also reflected significant growth in mortgage warehouse loans and a 2 basis point increase in the net interest margin.

"During the second quarter, the unique, low-risk nature of our business model was a catalyst to delivering the highest asset levels and quarterly net income ever reported in the history of our company, despite being in the middle of an unprecedented  global pandemic and an environment of historically low interest rates," said Michael F. Petrie, Chairman and CEO of Merchants.  

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "Our team has worked tirelessly to support our customers with their financing needs during the quarter, resulting in a 57% increase in total loans and loans held for sale since the end of December 2019 and a return on average assets of 1.89%.  All our businesses delivered growth in loan volume that contributed significantly to our bottom line. Our Small Business Administration team also financed $88 million in loans during the second quarter through the Paycheck Protection Program ("PPP")."

Total Assets
Total assets of $9.4 billion at June 30, 2020 increased $3.1 billion, or 48%, compared to December 31, 2019, and increased $1.5 billion, or 19%, compared to $7.9 billion at March 31, 2020.

The increase compared to December 31, 2019 was primarily due to growth in loans held for sale and net loans receivable, which increased a combined total of $2.9 billion.  The increase reflected the significant loan growth generated from mortgage warehouse business, primarily resulting from lower interest rates that increased the origination volume and refinancing in the single-family mortgage market, as well as higher loan volume generated in multi-family business. 

Return on average assets was 1.89% for the second quarter of 2020 compared to 1.41% for the second quarter of 2019 and 1.49% for the first quarter of 2020. 

Asset Quality
The allowance for loan losses of $20.5 million at June 30, 2020 increased $4.7 million compared to December 31, 2019 and increased $1.6 million compared to March 31, 2020.  The increases were primarily based on growth in the loan portfolio, but also reflected uncertainties surrounding the COVID-19 pandemic.  Approximately 79% of the $4.7 million increase compared to December 31, 2019, was related primarily to loan growth, while additional provision associated with the COVID-19 pandemic represented approximately $595,000, or 13%, of the increase.   An additional $48,000 of COVID-19 related provision was added during the second quarter of 2020. 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 throughout the remainder of 2020.

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 June 30, 2020, the Company granted customer requests to defer payments on 52 loans with unpaid balances of $80.6 million, representing only 1.0% of total loans and loans held for sale.

Non-performing loans were $6.7 million, or 0.16% of total loans at June 30, 2020, compared to $4.7 million, or 0.15% of total loans at December 31, 2019, and compared to $6.6 million, or 0.19% of total loans at March 31, 2020.  The increase in non-performing loans compared to December 31, 2019 was primarily related to one collateralized agricultural loan that is delinquent greater than 90 days late, with repayment still anticipated.

Total Deposits
Total deposits of $6.9 billion at June 30, 2020 increased $1.4 billion, or 26%, compared to December 31, 2019, and increased $185.9 million, or 3%, compared to March 31, 2020. The increases compared to both periods were primarily due to growth in traditional and brokered demand accounts, while the Company significantly reduced its balances of brokered certificates of deposits.

Total brokered deposits of $2.4 billion at June 30, 2020 increased $197.9 million from December 31, 2019 and decreased $473.3 million from March 31, 2020.   Brokered deposits represented 34% of total deposits at June 30, 2020 compared to 39% of total deposits at December 31, 2019 and 42% of total deposits at March 31, 2020.

Liquidity
The Company increased its available borrowing capacity, with unused lines of credit at $1.9 billion, compared to $1.2 billion at March 31, 2020.  This liquidity enhances the ability to effectively manage interest expense and assets levels in the future.  The Company also began utilizing the Federal Reserve's discount window during the second quarter of 2020, which has contributed to lower interest expenses and increased borrowing capacity.

Net Interest Income
Net interest income of $51.2 million in the second quarter of 2020 increased $23.3 million, or 83%, compared to the second quarter of 2019 and increased $12.9 million, or 34%, compared to the first quarter of 2020. 

The 83% increase in net interest income compared to the second quarter of 2019 reflected significantly higher loan growth and a slightly lower net interest margin.  The interest rate spread of 2.31% for the second quarter of 2020 increased 9 basis points compared to 2.22% in the second quarter of 2019. The net interest margin of 2.42% for the second quarter of 2020 decreased 7 basis points compared to 2.49% for the second quarter of 2019. The decline in net interest margin compared to the second quarter of 2019 reflected lower overall market interest rates.

The 34% increase in net interest income compared to the first quarter of 2020 reflected an interest rate spread of 2.31% that increased 12 basis points compared to 2.19% in the first quarter of 2020.  The net interest margin of 2.42% for the second quarter of 2020 also increased 2 basis points compared to 2.40% for the first quarter of 2020. 

Interest Income
Interest income of $68.2 million in the second quarter of 2020 increased $19.4 million, or 40%, compared to the second quarter of 2019 and increased $7.8 million, or 13%, compared to the first quarter of 2020. 

The 40% increase in interest income compared to the second quarter of 2019 was primarily due to significant loan growth that was partially offset by lower rates.  The higher interest income reflected a $3.4 billion, or 94%, increase in the average balance of loans, including loans held for sale, which reached $6.9 billion for the second quarter of 2020. The average yield on loans and loans held for sale of 3.71% for the second quarter of 2020 decreased 104 basis points compared to 4.75% for the second quarter of 2019. The decline in average yields reflected lower overall interest rates in the second quarter of 2020.

The 13% increase in interest income compared to the first quarter of 2020 reflected a $1.9 billion, or 38%, increase in the average balance of loans, including loans held for sale, which reached $6.9 billion for the second quarter of 2020. The average yield on loans and loans held for sale of 3.71% for the second quarter of 2020 also decreased 59 basis points compared to 4.30% for the first quarter of 2020. 

Interest Expense
Total interest expense of $17.0 million for the second quarter of 2020 decreased $3.9 million, or 19%, compared to the second quarter of 2019 and decreased $5.1 million, or 23%, compared to the first quarter of 2020. Interest expense on deposits of $15.4 million for the second quarter of 2020 decreased $3.9 million, or 20%, compared to the second quarter of 2019 and decreased $5.2 million, or 25%, compared to the first quarter of 2020.

The 20% decrease in interest expense on deposits compared to the second quarter of 2019 was primarily due to custodial interest-bearing checking accounts that are tied to short-term LIBOR rates, which declined significantly. Also contributing significantly to the decline were lower rates on brokered certificates of deposits.  The average balance of interest-bearing deposits of $7.0 billion for the second quarter of 2020 increased $3.2 billion, or 84%, compared to the second quarter of 2019. The average cost of interest-bearing deposits was 0.88% for the second quarter of 2020, which was a 116 basis point decrease compared to 2.04% for the second quarter of 2019. 

The 25% decrease in interest expense on deposits compared to the first quarter of 2020 was also primarily due to custodial interest-bearing checking accounts that are tied to short-term LIBOR rates, which declined significantly.  The average cost of interest-bearing deposits was 0.88% for the second quarter of 2020, which was a 67 basis point decrease compared to 1.55% in the first quarter of 2020.  The average balance of interest-bearing deposits of $7.0 billion for the second quarter of 2020 also increased $1.7 billion, or 31%, compared to the first quarter of 2020.

Noninterest Income
Noninterest income of $26.2 million for the second quarter of 2020 increased $16.3 million, or 165%, compared to the second quarter of 2019 and increased $6.3 million, or 32%, compared to the first quarter of 2020.

The 165% increase in noninterest income compared to the second quarter of 2019 was primarily due to an $8.0 million increase in gain on sale of loans and a $4.3 million increase in mortgage warehouse fees. Also included in noninterest income for the second quarter of 2020 was a $500,000 negative fair market value adjustment to mortgage servicing rights, which compared to a $2.9 million negative fair market value adjustment for the second quarter of 2019.

The 32% increase in noninterest income compared to the first quarter of 2020 was primarily due to a $7.4 million increase in loan servicing fees and $2.7 million increase in mortgage warehouse fees, that were partially offset by a $4.1 million decrease in gain on sale of loans.   Included in loan servicing fees for the second quarter of 2020 was a $500,000 negative 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.

At June 30, 2020, the mortgage servicing rights asset was valued at $72.9 million, a decrease of 2% compared to both June 30, 2019 and December 31, 2019.  The value of mortgage servicing rights generally declines in falling interest rate environments and increases in rising interest rate environments.

Noninterest Expense
Noninterest expense of $20.3 million for the second quarter of 2020 increased $4.4 million, or 27%, compared to the second quarter of 2019 and decreased $2.0 million, or 9%, compared to the first quarter of 2020. 

The 27% increase in noninterest expense compared to the second quarter of 2019 was due primarily to a $1.9 million, or 19%, increase in salaries and employee benefits to support business growth and a $1.6 million, or 749%, increase in deposit insurance related to the growth in deposits and assets.    The efficiency ratio of 26.2% for the second quarter of 2020 compared to 42.1% for the second quarter of 2019.

The 9% decrease in noninterest expense compared to the first quarter of 2020 was primarily due to a $2.4 million, or 17%, decrease in salaries and employee benefits that reflected lower commissions on lower gain on sale of loans.  The efficiency ratio of 26.2% for the second quarter of 2020 compared to 38.3% for the first quarter of 2020.

Segments
For the second quarter of 2020, net income for Mortgage Warehousing increased 338% compared to the second quarter of 2019, and increased 123% compared to the first quarter of 2020, reflecting significant growth in net interest income from higher loan volume. 

For the second quarter of 2020, net income for Multi-family Mortgage Banking increased 45% compared with the second quarter of 2019, primarily due to a lower negative fair market value adjustment to mortgage servicing rights.  Net income decreased 32% compared to the first quarter of 2020, primarily due to lower gains on sale of loans that were partially offset by a lower negative fair market adjustment to mortgage servicing rights. The second quarter of 2020 included a smaller negative fair market value adjustment than the negative fair value adjustment of $2.9 million for the second quarter of 2019 and the negative fair market value adjustment of $6.5 million for the first quarter of 2020.  

For the second quarter of 2020, net income for Banking increased 40% compared to the second quarter of 2019, and increased 49% compared to the first quarter of 2020, reflecting higher gain on sale of loans in the single-family mortgage business for both periods.

About Merchants Bancorp
Merchants 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 $9.4 billion in assets and $6.9 billion in deposits as of June 30, 2020, 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.merchantsbankofindiana.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.

SOURCE Merchants Bancorp