Merchants Bancorp Reports Third Quarter 2023 Results

• Third quarter 2023 net income of $81.5 million increased 39% compared to third quarter of 2022 and increased 25% compared to the second quarter 2023.
• Third quarter 2023 diluted earnings per common share of $1.68 increased 38% compared to the third quarter of 2022 and increased 28% compared to the second quarter of 2023.
• Total assets of $16.5 billion increased 4% compared to June 30, 2023, and increased 31% compared to December 31, 2022.
• As of September 30, 2023, the Company had $5.4 billion, or 32% of total assets, in unused borrowing capacity with the Federal Home Loan Bank and the Federal Reserve Discount window, based on available collateral.
• The Company's most liquid assets are in unrestricted cash, short-term investments, including interest-bearing demand deposits, mortgage loans in process of securitization, loans held for sale, and warehouse lines of credit included in loans receivable. Taken together, with unused borrowing capacity, these totaled $10.7 billion, or 65%, of the $16.5 billion in total assets as of September 30, 2023.
• Uninsured deposits totaled approximately $2 billion as of September 30, 2023, representing less than 20% of total deposits.
• Loans receivable of $9.9 billion, net of allowance for credit losses on loans, increased $56.7 million, or 1%, compared to June 30, 2023, and increased $2.5 billion, or 33%, compared to December 31, 2022.
• Efficiency ratio was 28.0% in the third quarter of 2023 compared to 30.5% in the third quarter of 2022 and 32.7% in the second quarter of 2023.
• Tangible book value per common share of $25.82 increased 24% compared to $20.78 in the third quarter of 2022 and increased 7% compared to $24.14 in the second quarter of 2023.
• On August 31, 2023, the Company completed a $303.6 million securitization of 11 multi-family mortgage loans through a Freddie Mac-sponsored Q-Series transaction.
• On September 7, 2023, the Company entered into an agreement with Bank of Pontiac to sell its Farmers-Merchants Bank of Illinois branch locations in Paxton, Melvin, and Piper City, Illinois, and into an agreement with CBI Bank & Trust, to sell its Farmers-Merchants Bank of Illinois branch located in Joy, Illinois.

CARMEL, Ind., Oct. 26, 2023 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported third quarter 2023 net income of $81.5 million, or diluted earnings per common share of $1.68. This compared to $58.5 million, or diluted earnings per common share of $1.22 in the third quarter of 2022, and compared to $65.3 million, or diluted earnings per common share of $1.31 in the second quarter of 2023.

"We could not be prouder to have achieved the highest earnings and asset levels in company history during the third quarter, along with tangible book value of $25.82 per share that grew 24% over the last year. Our focus on growing our sales teams in new markets, conservative underwriting, cost controls, and effectively matching our asset and liability duration have positioned us well for sustainable earnings growth for the remainder of 2023 and beyond," said Michael F. Petrie, Chairman and CEO of Merchants.

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "Our team has continued to maximize sources of liquidity and capital efficiencies to ensure that our strong pipeline of loan growth can be effectively executed in various interest rate environments so we can meet the needs of our customers and continue to generate ongoing profitability. We could not have achieved these record-setting milestones during the third quarter without the hard work and dedication of our entire team."

Net income of $81.5 million for the third quarter 2023 increased by $23.0 million, or 39%, compared to the third quarter of 2022, primarily driven by a $32.1 million, or 38%, increase in net interest income. Results for the third quarter 2023 included a $11.6 million positive fair market value adjustment to servicing rights compared to a $4.6 million positive adjustment in the third quarter of 2022.

Net income of $81.5 million for the third quarter 2023 increased by $16.2 million, or 25%, compared to the second quarter of 2023, primarily driven by an $11.8 million, or 11% increase, in net interest income, an $18.6 million decrease in provision for credit losses related to credit events in the second quarter 2023, and a $6.2 million, or 21% increase in noninterest income. These increases to net income were partially offset by a $21.8 million increase in the provision for income taxes following the $13.0 million tax benefit related to tax refunds and changes to state tax apportionment calculations that were recognized in the second quarter 2023. Results for the third quarter 2023 included a $11.6 million positive fair market value adjustment to servicing rights compared to a $3.4 million positive adjustment in the second quarter of 2023.

Total Assets
Total assets of $16.5 billion at September 30, 2023 increased $620.4 million, or 4%, compared to June 30, 2023, and increased $3.9 billion, or 31%, compared to December 31, 2022. The increase compared to December 31, 2022 was primarily due to significant growth in the healthcare, commercial lines of credit on collateralized mortgage servicing rights, multi-family, and warehouse loan portfolios.

Return on average assets was 2.03% for the third quarter of 2023 compared to 2.05% for the third quarter of 2022 and 1.78% for the second quarter of 2023.

Asset Quality
The allowance for credit losses on loans of $66.9 million, as of September 30, 2023, increased $3.9 million, or 6%, compared to June 30, 2023 and increased $22.9 million, or 52%, compared to December 31, 2022. The increase compared to June 30, 2023 was primarily in the multi-family, healthcare, and commercial portfolios due to a combination of changes in qualitative loss factors and loan growth. The increase compared to December 31, 2022 was primarily due to loan growth in the period, as well as credit events and increases in qualitative factors and forecasted loss rates to reflect changes in industry conditions that were recorded during the second quarter 2023. The Company experienced net recoveries of $10,000 during the third quarter 2023.

Non-performing loans were $60.2 million, or 0.60%, of loans receivable as of September 30, 2023, compared to 0.69% at June 30, 2023, and 0.36% at December 31, 2022. The increase in non-performing loans compared to December 31, 2022 was primarily due to 3 customers.

Securities Available for Sale
Total securities available for sale of $624.6 million as of September 30, 2023 decreased $23.4 million, or 4%, compared to June 30, 2023, and increased $301.2 million, or 93%, compared to December 31, 2022.

As of September 30, 2023, Accumulated Other Comprehensive Losses ("AOCL") of $4.8 million, related to securities available for sale, decreased $2.3 million, or 32%, compared to June 30, 2023, and decreased $5.8 million, or 55%, compared to December 31, 2022. The $4.8 million of AOCL as of September 30, 2023 represented less than 1% of total equity and less than 1% of total investment securities.

Total Deposits
Total deposits of $13.0 billion at September 30, 2023 decreased $52.5 million compared to June 30, 2023, and increased $2.9 billion, or 29%, compared to December 31, 2022. The changes for both periods were primarily due to changes in brokered certificates of deposit.

Total brokered deposits of $4.4 billion at September 30, 2023 decreased $350.8 million, or 7%, from June 30, 2023 and increased $1.6 billion, or 59%, from December 31, 2022. Brokered deposits represented 34% of total deposits at September 30, 2023 compared to 36% of total deposits at June 30, 2023 and 27% of total deposits at December 31, 2022. As of September 30, 2023, brokered certificates of deposit had a weighted average remaining duration of 49 days.

The Company continues to offer new products, such as adjustable-rate certificates of deposits, to minimize interest rate risks by aligning the rate and short duration characteristics of its deposit and loan portfolios. As of September 30, 2023, deposit balances in Flex CD products increased by $294.3 million, or 201%, compared to December 31, 2022. Additionally, the Company has offered an insured cash sweep program since 2018, which extends FDIC protection up to $100 million per depositor. The balance of deposits in this program was $1.8 billion as of September 30, 2023 and has contributed to the Company's low level of uninsured deposits, which were below 20% of total deposits.

Liquidity
Cash balances of $407.2 million as of September 30, 2023 increased by $29.9 million compared to June 30, 2023 and increased by $181.1 million compared to December 31, 2022. The Company continues to have significant borrowing capacity, with unused lines of credit totaling $5.4 billion as of September 30, 2023 compared to $5.3 billion at June 30, 2023 and $3.1 billion at December 31, 2022.

This liquidity enhances the ability to effectively manage interest expense and asset levels in the future. Additionally, the Company's business model is designed to continuously sell or securitize a significant portion of its loans, which provides flexibility in managing its liquidity.

Comparison of Operating Results for the Three Months Ended
September 30, 2023 and 2022

Net Interest Income of $117.4 million increased $32.1 million, or 38%, reflecting higher yields and average balances on loans and loans held for sale, and higher balances of securities held to maturity, which were partially offset by higher rates and average balances on deposits, as well as higher rates on borrowings that were primarily related to the credit linked notes issued by the Company during the first quarter of 2023.

• Interest rate spread of 2.44% decreased 33 basis points compared to 2.77%.
• Net interest margin of 2.99% decreased 6 basis points compared to 3.05%.

Interest Income of $296.7 million increased $162.6 million, or 121%, compared to $134.1 million, reflecting an increase in both yields and average balances of loans and loans held for sale, as well as higher balances in securities held to maturity.

• Average balances of $13.4 billion for loans and loans held for sale increased 31% compared to $10.2 billion.
• Average yield on loans and loans held for sale of 7.89% increased 289 basis points compared to 5.00%.

Interest Expense of $179.2 million increased $130.5 million, or 268%, compared to $48.7 million. The increase was primarily due to higher rates on certificates of deposit, interest-bearing checking, and money market accounts, as well higher average balances of certificates of deposit and higher rates on borrowings.

• Average balances of $13.2 billion for interest-bearing deposits increased 46% compared to $9.0 billion.
• Average interest rates of 4.90% for interest-bearing deposits increased 292 basis points compared to 1.98%.

Noninterest Income of $36.1 million increased $6.9 million, or 24%, compared to $29.2 million, primarily due to a $9.2 million, or 113%, increase in loan servicing fees that was offset by a $2.6 million, or 19%, decrease in gain on sale of loans.

• Loan servicing fees included a $11.6 million positive fair market value adjustment to servicing rights, with a $1.2 million positive adjustment in the Banking segment and a $10.4 million positive adjustment in the Multi-family Mortgage Banking segment. This compared to a $4.6 million positive fair market value adjustment to mortgage servicing rights in the prior period, of which $0.9 million was in the Banking segment and $3.7 million was in the Multi-family Mortgage Banking segment.
• The decrease in gain on sale of loans was associated with a business mix shift in multi-family lending, from volumes sold in the secondary market towards those maintained on the balance sheet.

Noninterest Expense of $42.9 million increased $8.0 million, or 23%, primarily due to increases in salaries and employee benefits and deposit insurance expense.

• The efficiency ratio of 28.0% decreased 253 basis points compared to 30.5%.

Comparison of Operating Results for the Three Months Ended
September 30, 2023 and June 30, 2023

Net Interest Income of $117.4 million increased $11.8 million, or 11%, compared to $105.6 million, reflecting higher average balances and yields on loans and loans held for sale, which were partially offset by higher average balances and rates and on deposits, as well as higher average balances on borrowings.

• Interest rate spread of 2.44% increased 3 basis points compared to 2.41%.
• Net interest margin of 2.99% increased 2 basis points compared to 2.97%.

Interest Income of $296.7 million increased $38.6 million, or 15%, compared to $258.1 million, reflecting an increase in average balances and yields on loans and loans held for sale.

• Average balances of $13.4 billion for loans and loans held for sale increased 12%, compared to $12.0 billion.
• Average yield on loans and loans held for sale of 7.89% increased 22 basis points compared to 7.67%.

Interest Expense of $179.2 million increased 18% compared to $152.5 million. The increase was primarily due to higher average balances and rates on certificates of deposit and interest-bearing checking accounts, as well as higher average balances on borrowings.

• Average balances of $13.2 billion for interest-bearing deposits increased 10% compared to $12.0 billion.
• Average interest rates of 4.90% for interest-bearing deposits increased 30 basis points compared to 4.60%.

Noninterest Income of $36.1 million increased $6.2 million, or 21%, compared $29.9 million, primarily due to a $8.8 million, or 102%, increase in loan servicing fees.

• Loan servicing fees included a $11.6 million positive fair market value adjustment to servicing rights, with a $1.2 million positive adjustment in the Banking segment and a $10.4 million positive adjustment in the Multi-family Mortgage Banking segment. This compared to a $3.4 million positive fair market value adjustment to servicing rights in the prior period, with a $1.3 million positive adjustment in the Banking segment and a $2.1 million positive adjustment in the Multi-family Mortgage Banking segment.

Noninterest Expense of $42.9 million decreased $1.4 million, or 3%, primarily due to a decrease in professional fees and other miscellaneous expenses that were partially offset by higher salaries and employee benefits.

• The efficiency ratio of 28.0% decreased 474 basis points compared to 32.7%.

About Merchants Bancorp
Ranked as a top performing U.S. public bank by S&P Global Market Intelligence, Merchants Bancorp is a diversified bank holding company headquartered in Carmel, Indiana operating multiple segments, including Multi-family Mortgage Banking that primarily offers multi-family housing and healthcare facility financing and servicing. Through this segment it also serves as a syndicator of low-income housing tax credit and debt funds; Mortgage Warehousing that offers mortgage warehouse financing, commercial loans, and deposit services; and Banking that offers retail and correspondent residential mortgage banking, agricultural lending, and traditional community banking. Merchants Bancorp, with $16.5 billion in assets and $13.0 billion in deposits as of September 30, 2023, conducts its business primarily through its direct and indirect subsidiaries, Merchants Bank of Indiana, Merchants Capital Corp., Merchants Capital Investments, LLC, Merchants Capital Servicing, LLC, Merchants Asset Management, LLC, Farmers-Merchants Bank of Illinois, 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. 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 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 the Company does not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.