Merchants Bancorp, a diversified bank holding company, has established itself as a formidable player in the financial services industry, weathering market challenges with its strategic approach and innovative product offerings. With a rich history spanning over four decades, this Indiana-based institution has consistently demonstrated its ability to adapt to the ever-changing financial landscape, delivering sustainable growth and exceptional value to its stakeholders.

Company History and Evolution

Founded in 1994 and headquartered in Carmel, Indiana, Merchants Bancorp operates as a registered bank holding company through its wholly-owned subsidiary Merchants Bank of Indiana. The company's roots can be traced back to 1910 when Merchants Bank was originally established as a community bank serving Indiana. In the early 2000s, Merchants Bancorp began expanding its business model beyond traditional community banking, launching its multi-family mortgage banking division, Merchants Capital, in 2002. This division specializes in originating and servicing government-sponsored multi-family and healthcare facility loans and has grown to become one of the top affordable housing lenders in the country.

In 2007, the company entered the mortgage warehouse lending business, providing short-term financing for non-depository mortgage companies. This Mortgage Warehousing segment has become a significant contributor to Merchants Bancorp's revenue and earnings, with the company steadily growing its mortgage warehouse lending portfolio to over $30 billion in annual loan volume.

Merchants Bancorp faced a challenge in 2019 when it had to redeem its 7.0% Series A Preferred Stock for $52 million. However, the company successfully navigated this situation and went on to raise additional capital through the issuance of its Series B, C, and D preferred stock offerings in subsequent years. These capital raises have provided Merchants Bancorp with the resources to continue expanding its multi-family lending, mortgage warehousing, and traditional community banking operations.

Today, Merchants Bancorp operates in three main business segments - Multi-family Mortgage Banking, Mortgage Warehousing, and Community Banking. The company has grown to over $18 billion in total assets and maintains a strong capital position to support its continued growth initiatives. Merchants Bancorp's diversified business model and disciplined risk management have allowed it to navigate various market conditions and challenges over its nearly 30-year history.

Financials

Merchants Bancorp's financial strength is evident in its robust balance sheet and impressive financial metrics. As of September 30, 2024, the company reported total assets of $18.65 billion, a 10% increase compared to the previous year's $16.95 billion. This growth can be attributed to the company's strategic expansion into new business segments and its ability to capitalize on market opportunities.

One of the key drivers of Merchants Bancorp's success has been its diversified revenue streams. The company's multi-family Mortgage Banking segment, which specializes in originating and servicing government-sponsored mortgages for multi-family and healthcare facilities, has consistently contributed to the company's top and bottom lines. Additionally, the Mortgage Warehousing segment, which provides financing solutions for non-depository financial institutions, has played a vital role in diversifying the company's revenue sources.

The Banking segment, which encompasses the company's retail banking, commercial lending, agricultural lending, and SBA lending operations, has also been a significant contributor to Merchants Bancorp's overall performance. This well-rounded business model has allowed the company to navigate various economic cycles and market conditions with agility and resilience.

Merchants Bancorp's commitment to asset quality is another defining characteristic of the company. As of September 30, 2024, the company's nonperforming loans stood at $210.90 million, or 2.04% of total loans, compared to $82.00 million, or 0.80%, at the end of the previous year. Despite the increase in nonperforming loans, the company's allowance for credit losses on loans (ACL-Loans) was $84.50 million, or 0.82% of total loans, as of September 30, 2024, reflecting the company's proactive approach to risk management.

For the most recent quarter (Q3 2024), Merchants Bancorp reported revenue of $148,449,000 and net income of $61,273,000. The company's operating cash flow (OCF) for the quarter was negative $492,648,000, while free cash flow (FCF) was negative $497,174,000. These figures demonstrate the company's ability to generate substantial revenue and profits, although the negative cash flows suggest potential investment in growth initiatives or other capital-intensive activities.

The company's financial ratios further underscore its strong financial position. As of the latest reporting period, Merchants Bancorp had a current ratio and quick ratio of 34.19, indicating a robust ability to meet short-term obligations. These high ratios suggest that the company maintains a significant amount of liquid assets relative to its current liabilities.

Liquidity

The company's liquidity position remains strong, with $601.90 million in cash and cash equivalents and $3.28 million in securities purchased under agreements to resell as of September 30, 2024. Additionally, the company had $5.10 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window, providing ample flexibility to manage its funding needs.

Merchants Bancorp's commitment to shareholder value is evident in its dividend history. The company has consistently paid quarterly dividends to its common shareholders, with the latest dividend of $0.09 per share declared on November 20, 2024, payable on January 2, 2025. The company's dividend payout ratio stood at 16.03% as of September 30, 2024, demonstrating its ability to balance growth initiatives and shareholder returns.

Segment Performance

Multi-family Mortgage Banking Segment

Merchants Bancorp's Multi-family Mortgage Banking segment has shown impressive growth and performance. As of September 30, 2024, this segment maintains a servicing portfolio of $28.2 billion, cementing its position as a top-ranked agency affordable lender and one of the largest Ginnie Mae servicers in the country. For the nine months ended September 30, 2024, the segment generated net income of $33.71 million, marking a substantial 21% increase compared to the prior year period.

This growth was primarily driven by a $13.3 million increase in gain on sale of loans from higher production volume, a $6.0 million increase in loan servicing fees, and a $2.8 million increase in syndication and asset management fees. The latter reflects the company's continued growth in its Low-Income Housing Tax Credit (LIHTC) syndication business. These positive factors were partially offset by a $12.2 million increase in noninterest expenses, primarily due to higher salaries and employee benefits related to the increased production volume.

Mortgage Warehousing Segment

The Mortgage Warehousing segment, which provides mortgage warehouse financing, commercial loans, and deposit services, experienced strong growth in the same period. Net income for this segment reached $58.40 million for the nine months ended September 30, 2024, representing a 24% increase compared to the prior year period. This growth was primarily driven by higher net interest income resulting from increased loan volumes, which grew by an impressive 30% to $32.0 billion for the nine months ended September 30, 2024, compared to $24.6 billion in the prior year period.

Notably, this growth outpaced the industry average, which saw a 17% increase in volume according to the Mortgage Bankers Association. This outperformance reflects Merchants Bancorp's increased sales efforts and market share gains from competitors who have either exited or reduced their presence in the market.

Banking Segment

Merchants Bancorp's Banking segment offers a comprehensive range of financial products and services, including retail banking, commercial lending, agricultural lending, residential mortgage banking, and SBA lending. For the nine months ended September 30, 2024, the Banking segment reported net income of $153.79 million, representing a 6% increase compared to the prior year period. This growth was primarily attributed to higher net interest income and lower provision for loan losses, partially offset by higher noninterest expense and a higher provision for income taxes.

Key Financial Metrics

As of September 30, 2024, Merchants Bancorp's total assets stood at $18.65 billion, marking a 10% increase compared to December 31, 2023. Loans receivable, net of allowance for credit losses, were $10.26 billion, up 1% from the end of 2023. The company's total deposits were $12.89 billion, down 8% from the prior year-end, as the company strategically shifted away from more expensive brokered deposits in favor of more cost-effective funding options.

The allowance for credit losses on loans (ACL-Loans) was $84.55 million, or 0.82% of total loans, at September 30, 2024, compared to $71.75 million, or 0.70%, at December 31, 2023. The increase in the ACL-Loans was primarily due to $8.0 million in specific reserves related to a small number of borrowers, as well as loan growth in the warehouse and multi-family loan portfolios.

Merchants Bancorp's capital ratios remained strong, with a total capital ratio of 12.20% and a Tier 1 capital ratio of 11.60% as of September 30, 2024, well above the regulatory minimums to be considered "well capitalized." These robust capital ratios provide the company with a solid foundation for future growth and the ability to weather potential economic uncertainties.

Conclusion

Despite the challenges posed by the evolving financial landscape, Merchants Bancorp has demonstrated its resilience and adaptability. The company's diversified business model, focus on asset quality, and prudent risk management have contributed to its consistent performance and positioned it for continued growth.

As Merchants Bancorp navigates the future, investors can take comfort in the company's strong financial foundations, experienced management team, and unwavering commitment to providing exceptional financial services to its clients. With its proven track record and strategic vision, Merchants Bancorp remains poised to capitalize on emerging opportunities and deliver long-term value to its shareholders.

The company's performance across its three main business segments - Multi-family Mortgage Banking, Mortgage Warehousing, and Banking - showcases its ability to generate consistent growth and adapt to changing market conditions. The strong growth in the Mortgage Warehousing segment, outpacing industry averages, particularly highlights Merchants Bancorp's competitive advantage and market positioning.

While the company faces challenges such as increased nonperforming loans and negative cash flows in the most recent quarter, its robust liquidity position and strong capital ratios provide a buffer against potential headwinds. The company's strategic shift away from expensive brokered deposits demonstrates its proactive approach to managing funding costs and optimizing its balance sheet.

As Merchants Bancorp continues to expand its operations and capitalize on market opportunities, it remains well-positioned to navigate the complexities of the financial services industry and deliver value to its stakeholders. The company's focus on niche markets such as affordable housing and mortgage warehousing, combined with its traditional banking services, provides a diversified revenue stream that should help insulate it from sector-specific downturns.

Investors and stakeholders should continue to monitor Merchants Bancorp's performance, particularly its ability to manage credit quality and maintain its strong capital position as it pursues growth opportunities. The company's track record of adapting to market changes and its strategic focus on key growth areas suggest a promising outlook for the future, despite the challenges inherent in the current economic environment.