Merchants Bancorp Reports Fourth Quarter 2023 Results

• Full year 2023 net income of $279.2 million set a new Company record, increasing 27% compared to 2022.
• Full year 2023 diluted earnings per common share of $5.64 reached the highest level in Company history and increased 26% compared to 2022.
• Fourth quarter 2023 net income of $77.5 million increased 36% compared to fourth quarter of 2022 and decreased 5% compared to the third quarter 2023.
• Fourth quarter 2023 diluted earnings per common share of $1.58 increased 41% compared to the fourth quarter of 2022 and decreased 6% compared to the third quarter of 2023.
• Total assets of $17.0 billion surpassed any level previously reported by the Company, increasing 34% compared to December 31, 2022 and increasing 3% compared to September 30, 2023.
• As of December 31, 2023, the Company had a record-level of $6.0 billion in unused borrowing capacity with the Federal Home Loan Bank and the Federal Reserve Discount window, representing 36% of total assets.
• 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 repurchase agreements included in loans receivable. Taken together, with unused borrowing capacity, these totaled $10.6 billion, or 62%, of the $17.0 billion in total assets as of December 31, 2023.
• Loans receivable of $10.1 billion, net of allowance for credit losses on loans, increased $217.1 million, or 2%, compared to September 30, 2023, and increased $2.7 billion, or 36%, compared to December 31, 2022.
• Efficiency ratio was 33.1% in the fourth quarter of 2023 compared to 31.3% in the fourth quarter of 2022 and 28.0% in the third quarter of 2023.
• Tangible book value per common share of $27.40 increased 25% compared to $21.88 in the fourth quarter of 2022 and increased 6% compared to $25.82 in the third quarter of 2023.
• The previously announced agreements to sell several Illinois bank branches were granted regulatory approval in January 2024 and the transactions were completed on January 26, 2024.

CARMEL, Ind., Jan. 29, 2024 /PRNewswire/ -- Merchants Bancorp (the "Company" or "Merchants") (Nasdaq: MBIN), parent company of Merchants Bank of Indiana, today reported fourth quarter 2023 net income of $77.5 million, or diluted earnings per common share of $1.58. This compared to $57.2 million, or diluted earnings per common share of $1.12 in the fourth quarter of 2022, and compared to $81.5 million, or diluted earnings per common share of $1.68 in the third quarter of 2023.

"While 2023 was a turbulent environment for the financial industry, we continued to deliver unmatched financial solutions that improve the quality of life in the communities we serve. Through the hard work of our entire Merchants team, we achieved significant success, with 34% growth in assets, 26% growth in earnings per share, and 25% growth in tangible book value that reached a record level of $27.40 per share, just to name a few. We strive to be at the forefront of industry trends and are poised to be strategically positioned for the future," said Michael F. Petrie, Chairman and CEO of Merchants.

Michael J. Dunlap, President and Chief Operating Officer of Merchants, added, "By continuously executing on our vision, mission and values throughout 2023, we achieved record results that surpassed our expectations. We are grateful to all our employees for fostering long-term relationships, providing innovative products, and delivering unparalleled service that adds value to our customers."

Net income of $77.5 million for the fourth quarter 2023 increased by $20.3 million, or 36%, compared to the fourth quarter of 2022, primarily driven by a $28.9 million, or 30%, increase in net interest income. Results for the fourth quarter 2023 included a $7.6 million negative fair market value adjustment to servicing rights compared to a $0.2 million negative adjustment in the fourth quarter of 2022.

Net income of $77.5 million for the fourth quarter 2023 decreased by $4.0 million, or 5%, compared to the third quarter of 2023, primarily driven by a $9.6 million, or 22%, increase in noninterest expense and a $1.6 million, or 4%, decrease in noninterest income that were partially offset by a $6.9 million, or 6%, increase in net interest income. Noninterest income for the fourth quarter 2023 included a $7.6 million negative fair market value adjustment to servicing rights compared to a $11.6 million positive fair market value adjustment to servicing rights in the third quarter 2023.

Total Assets
Total assets of $17.0 billion at December 31, 2023 increased $457.3 million, or 3%, compared to September 30, 2023, and increased $4.3 billion, or 34%, compared to December 31, 2022. The increase compared to December 31, 2022 was primarily due to significant growth in the multi-family, healthcare, commercial lines of credit on collateralized mortgage servicing rights, and warehouse repurchase agreement portfolios.

Return on average assets was 1.86% for the fourth quarter of 2023 compared to 1.84% for the fourth quarter of 2022 and 2.03% for the third quarter of 2023.

Asset Quality
The allowance for credit losses on loans of $71.8 million, as of December 31, 2023, increased $4.9 million, or 7%, compared to September 30, 2023 and increased $27.7 million, or 63%, compared to December 31, 2022. The increase compared to September 30, 2023 was primarily in the healthcare financing portfolio, due to a combination of specific reserves, loan growth, and changes in qualitative loss factors. The increase compared to December 31, 2022 was primarily due to loan growth in the period, as well as increases in qualitative factors to reflect changes in industry conditions, in addition to credit events that were recorded during the second quarter 2023. The Company experienced charge offs of $238,000 and recoveries of $1,000 during the fourth quarter 2023.

Non-performing loans were $82.0 million, or 0.80% of loans receivable before the allowance for credit losses on loans, as of December 31, 2023 compared to $60.2 million, or 0.60%, as of September 30, 2023, and $26.7 million, or 0.36%, as of December 31, 2022. The increase in non-performing loans compared to September 30, 2023 was primarily due to three customers.

Securities Available for Sale
Total securities available for sale of $1.1 billion as of December 31, 2023 increased $489.1 million, or 78%, compared to September 30, 2023, and increased $790.4 million, or 244%, compared to December 31, 2022.

The increases in securities available for sale compared to both periods were primarily associated with the acquisition of certain securities from a warehouse customer that provide protective put options and interest rate floor derivatives to prevent losses in value.

As of December 31, 2023, Accumulated Other Comprehensive Losses ("AOCL") of $2.5 million, related to securities available for sale, decreased $2.3 million, or 48%, compared to September 30, 2023, and decreased $8.0 million, or 76%, compared to December 31, 2022. The $2.5 million of AOCL as of December 31, 2023 represented less than 1% of total equity and less than 1% of total investment securities.

Total Deposits
Total deposits of $14.1 billion at December 31, 2023 increased $1.1 billion compared to September 30, 2023, and increased $4.0 billion, or 40%, compared to December 31, 2022. The change compared to September 30, 2023 was primarily due to increases in brokered demand deposit accounts. The change compared to December 31, 2022 was primarily due to increases in brokered certificates of deposit accounts.

Total brokered deposits of $6.0 billion at December 31, 2023 increased $1.6 billion, or 36%, from September 30, 2023 and increased $3.2 billion, or 116%, from December 31, 2022. Brokered deposits represented 42% of total deposits at December 31, 2023 compared to 34% of total deposits at September 30, 2023 and 27% of total deposits at December 31, 2022. As of December 31, 2023, brokered certificates of deposit had a weighted average remaining duration of 55 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 December 31, 2023, deposit balances in Flex CD products increased by $324.8 million, or 222%, 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 $1.6 billion as of December 31, 2023 compared to $1.8 billion at September 30, 2023 and $1.5 billion at December 31, 2022, and has contributed to the Company's low level of uninsured deposits, which were below 20% of total deposits.

Liquidity
Cash balances of $584.4 million as of December 31, 2023 increased by $177.2 million compared to September 30, 2023 and increased by $358.3 million compared to December 31, 2022. The Company continues to have significant borrowing capacity, with unused lines of credit totaling $6.0 billion as of December 31, 2023 compared to $5.4 billion at September 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
December 31, 2023 and 2022

Net Interest Income of $124.3 million increased $28.9 million, or 30%, compared to $95.4 million, reflecting higher yields and average balances on loans and loans held for sale, and higher average 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 2.48% decreased 21 basis points compared to 2.69%.
• Net interest margin of 3.05% decreased 8 basis points compared to 3.13%.

Interest Income of $311.8 million increased 72% compared to $181.4 million, reflecting an increase in both yields and average balances of loans and loans held for sale, as well as higher yields in securities held to maturity and securities available for sale.

• Average balances of $13.7 billion for loans and loans held for sale increased 33% compared to $10.3 billion.
• Average yield on loans and loans held for sale of 7.98% increased 164 basis points compared to 6.34%.

Interest Expense of $187.4 million increased $101.4 million, or 118%, compared to $86.0 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 interest-bearing checking accounts.

• Average balances of $13.7 billion for interest-bearing deposits increased 37% compared to $10.0 billion.
• Average interest rates of 4.98% for interest-bearing deposits increased 176 basis points compared to 3.22%.

Noninterest Income of $34.5 million increased $11.5 million, or 50%, compared to $23.0 million, primarily due to an $8.1 million, or 72%, increase in gain on sale of loans and a $6.7 million, or 180%, increase in other income. These increases were partially offset by a $4.9 million, or 180%, decrease in loan servicing fees.

• The increase in gain on sale of loans was associated with significant growth in production volume of multi-family loans that were sold in the secondary market.
• The increase in other income reflected a $6.6 million benefit to record the value of a protective interest rate floor derivative that was provided with the acquisition of certain securities available for sale.
• Loan servicing fees included a $7.6 million negative fair market value adjustment to servicing rights, with a $1.1 million negative adjustment in the Banking segment and a $6.5 million negative adjustment in the Multi-family Mortgage Banking segment. This compared to a $0.2 million negative fair market value adjustment to mortgage servicing rights in the prior period, of which $0.6 million negative adjustment in the Banking segment and $0.4 million positive adjustment in the Multi-family Mortgage Banking segment.

Noninterest Expense of $52.6 million increased $15.5 million, or 42%, compared to $37.1 million primarily due to increases in salaries and employee benefits associated with higher commissions on higher production volume, as well as increases in deposit insurance expense.

• The efficiency ratio of 33.1% increased 177 basis points compared to 31.3%.

Comparison of Operating Results for the Three Months Ended
December 31, 2023 and September 30, 2023

Net Interest Income of $124.3 million increased $6.9 million, or 6%, compared to $117.4 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.

• Interest rate spread of 2.48% increased 4 basis points compared to 2.44%.
• Net interest margin of 3.05% increased 6 basis points compared to 2.99%.

Interest Income of $311.8 million increased $15.1 million, or 5%, compared to $296.7 million, reflecting an increase in average balances and yields on loans and loans held for sale.

• Average balances of $13.7 billion for loans and loans held for sale increased 2% compared to $13.4 billion.
• Average yield on loans and loans held for sale of 7.98% increased 9 basis points compared to 7.89%.

Interest Expense of $187.4 million increased $8.2 million, or 5%, compared to $179.2 million. The increase was primarily due to higher average balances and rates on interest-bearing checking accounts, as well as higher rates on certificates of deposit. The increases were partially offset by lower average balances of certificates of deposits and lower rates on borrowings.

• Average balances of $13.7 billion for interest-bearing deposits increased 4% compared to $13.2 billion.
• Average interest rates of 4.98% for interest-bearing deposits increased 8 basis points compared to 4.90%.

Noninterest Income of $34.5 million decreased $1.6 million, or 4%, compared $36.1 million, primarily due to a $19.6 million, or 112%, decrease in loan servicing fees, partially offset by an increase of $8.6 million, or 80%, in gain on sale and a $6.7 million, or 182%, increase in other income.

• Loan servicing fees included a $7.6 million negative fair market value adjustment to servicing rights, with a $1.1 million negative adjustment in the Banking segment and a $6.5 million negative adjustment in the Multi-family Mortgage Banking segment. This compared to a $11.6 million positive fair market value adjustment to servicing rights in the prior period, 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.
• The increase in gain on sale of loans was associated with significant growth in production volume of multi-family loans that were sold in the secondary market.
• The increase in other income reflected a $6.6 million benefit to record the value of a protective interest rate floor derivative that was provided with the acquisition of certain securities available for sale.

Noninterest Expense of $52.6 million increased $9.6 million, or 22%, primarily due to increases in salaries and employee benefits associated with higher commissions on higher production volume, as well as increases in professional fees.

• The efficiency ratio of 33.1% increased 514 basis points compared to 28.0%.

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 $17.0 billion in assets and $14.1 billion in deposits as of December 31, 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, 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.