Thesis: Merchants Bancorp (“MBIN” or the “Company”) is a truly unique regional bank that went public in October 2017 and has remained under the radar, given its small capitalization ($800mm), industry niche, and lack of sell-side coverage. Its niche focus on the multi-family mortgage market has allowed it to grow rapidly and continue to generate industry-leading ROEs. Furthermore, the growth of its Warehousing and traditional Banking segments has diversified its exposure and provides a natural hedge against changes in interest rate environments. MBIN’s ROE’s have been 20%+ in each of the past six years, and it has compounded book/share at ~24% since 2012. While there is no good comp for MBIN in the universe of thrifts/regional banks, peer multiples (relative to their ROE’s) suggest MBIN should trade near 3x P/Book (versus current 2.1x). Over 70% of MBIN is owned by insiders, and none have sold stock since its IPO. Based on $14.50/sh of book value and a 3.0x book multiple, MBIN has >50% upside over 12 months.
Business Overview: MBIN was founded as PR Mortgage by its current CEO/Chairman, Mike Petrie, and BOD member, Randall Rogers. Its traditional Banking segment started in 2002, and the Warehousing segment began operations in 2009. Over the past three years, the Mortgage, Warehousing, and Banking segments have contributed 34%/39%/27% of revenues and 38%/41%/21% of net income, respectively. The Mortgage segment is an FHA lender to developers of multi-family residential and healthcare properties. Unlike the residential mortgage market, the multi-family is niche, relationship-driven, and NOT commoditized (i.e., far less price competitive than resi). The Warehousing segment is a warehouse lender to independent mortgage banks, and the Banking segment operates as a traditional community bank. The Warehousing and Banking segments provide a natural rate hedge for the Mortgage segment, as rate headwinds to multifamily mortgage origination are offset by rising interest income from the Warehousing/Banking segments. There is also synergy created between segments, as Mortgage can refer multi-family construction and bridge loans to Banking.
Financials: MBIN’s financial performance demonstrates its strong credit culture and growth.
Valuation: Street has MBIN’s ROEs slowing from >20% to the high-teen% in 2018/19 and ~$14.50 of book/share by the middle of 2019. Based on a comp set of community banks/thrifts, MBIN should trade at 2.5x-3.0x book, depending on whether its ROEs slow to Street’s high-teens or remain above 20%. This implies 25-50% upside for MBIN over the next 12 months.
Risks: MBIN’s niche focus means it’s a difficult business to track (demand drivers, etc). Mortgage segment earnings are lumpy quarter-to-quarter given the timing of originations. Multifamily has been in a strong growth cycle since the 2008/09, and is slowing. However, MBIN is run by an excellent and proven management team, annual growth has been consistently strong, and the Company has ample green space for expansion into new geographies, businesses, etc.
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I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.