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Merchants Bancorp - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended

September 30, 2019

 

 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to _______________

 

 

 

 

Commission File No. 001-38258

 

MERCHANTS BANCORP

 

 

(Exact name of registrant as specified in its charter)

 

 

Indiana

    

20‑5747400

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

410 Monon Blvd. Carmel, Indiana

 

46032

(Address of principal executive office)

 

(Zip Code)

 

 

 

(317) 569‑7420

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☐

 

 

 

Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act.).
Yes ☐    No ☒

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, without par value

Series A Preferred Stock, without par value

Depositary Shares, each representing a 1/40th interest in a share of Series B Preferred Stock, without par value

MBIN

MBINP

 

MBINO

NASDAQ

NASDAQ

 

NASDAQ

 

 

As of November 5, 2019, the latest practicable date, 28,706,438 shares of the registrant’s common stock, without par value, were issued and outstanding.

 

 

 

Table of Contents

Merchants Bancorp

Index to Quarterly Report on Form 10‑Q

PART I – FINANCIAL INFORMATION 

 

 

 

    Item 1 Interim Financial Statements (Unaudited)

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 

3

 

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 

5

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2019 and 2018 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 

7

 

 

Notes to Condensed Consolidated Financial Statements 

8

 

 

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 

40

 

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk 

58

 

 

Item 4 Controls and Procedures 

58

 

 

PART II – OTHER INFORMATION 

59

 

 

Item 1  Legal Proceedings 

59

 

 

Item 1A  Risk Factors 

59

 

 

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds 

59

 

 

Item 3  Defaults Upon Senior Securities 

59

 

 

Item 4  Mine Safety Disclosures 

59

 

 

Item 5  Other Information 

59

 

 

Item 6  Exhibits 

60

 

 

SIGNATURES 

61

 

2

Table of Contents

Part I – Financial Information

Item 1. Financial Statements

Merchants Bancorp

Condensed Consolidated Balance Sheets

September 30, 2019 (Unaudited) and December 31, 2018

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

  

 

 

  

Cash and due from banks

 

$

15,614

 

$

25,855

Interest-earning demand accounts

 

 

349,362

 

 

310,669

Cash and cash equivalents

 

 

364,976

 

 

336,524

Securities purchased under agreements to resell

 

 

6,760

 

 

6,875

Trading securities

 

 

227,914

 

 

163,419

Available for sale securities

 

 

308,673

 

 

331,071

Federal Home Loan Bank (FHLB) stock

 

 

18,808

 

 

7,974

Loans held for sale (includes $23,357 and $11,886, respectively at fair value)

 

 

2,498,538

 

 

832,455

Loans receivable, net of allowance for loan losses of $13,705 and $12,704, respectively

 

 

2,742,088

 

 

2,045,423

Premises and equipment, net

 

 

29,211

 

 

15,136

Mortgage servicing rights

 

 

71,989

 

 

77,844

Interest receivable

 

 

18,780

 

 

13,827

Goodwill

 

 

15,574

 

 

17,477

Intangible assets, net

 

 

4,182

 

 

3,542

Other assets and receivables

 

 

29,693

 

 

32,596

Total assets

 

$

6,337,186

 

$

3,884,163

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

Deposits

 

 

  

 

 

  

Noninterest-bearing

 

$

198,843

 

$

182,879

Interest-bearing

 

 

5,300,806

 

 

3,048,207

Total deposits

 

 

5,499,649

 

 

3,231,086

Borrowings

 

 

159,673

 

 

195,453

Other liabilities

 

 

48,425

 

 

36,387

Total liabilities

 

 

5,707,747

 

 

3,462,926

Commitments and Contingencies

 

 

  

 

 

  

Shareholders' Equity

 

 

  

 

 

  

Common stock, without par value

 

 

  

 

 

  

Authorized - 50,000,000 shares

 

 

 

 

 

  

Issued and outstanding - 28,706,438 shares at September 30, 2019 and 28,694,036 shares at December 31, 2018

 

 

135,507

 

 

135,057

Preferred stock, without par value - 5,000,000 total shares authorized

 

 

 

 

 

 

8% Preferred stock - $1,000 per share liquidation preference

 

 

 

 

 

 

Authorized - 50,000 shares

 

 

 

 

 

 

Issued and outstanding - 41,625 shares

 

 

41,581

 

 

41,581

7% Series A Preferred stock - $25 per share liquidation preference

 

 

 

 

 

 

Authorized - 3,500,000 shares

 

 

 

 

 

 

Issued and outstanding - 2,081,800 shares

 

 

50,245

 

 

 —

6% Series B Preferred stock - $1,000 per share liquidation preference

 

 

 

 

 

 

Authorized - 125,000 shares

 

 

 

 

 

 

Issued and outstanding - 125,000 shares (equivalent to 5,000,000 depositary shares)

 

 

120,863

 

 

 —

Retained earnings

 

 

280,551

 

 

244,909

Accumulated other comprehensive income (loss)

 

 

692

 

 

(310)

Total shareholders' equity

 

 

629,439

 

 

421,237

Total liabilities and shareholders' equity

 

$

6,337,186

 

$

3,884,163

 

See notes to condensed consolidated financial statements.

3

Table of Contents

Merchants Bancorp

Condensed Consolidated Statements of Income (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

    

Interest Income

 

 

  

 

 

  

 

 

  

 

 

 

 

Loans

 

$

52,779

 

$

32,056

 

$

129,599

 

$

85,458

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

  

 

Trading

 

 

1,422

 

 

1,299

 

 

4,434

 

 

3,777

 

Available for sale - taxable

 

 

1,604

 

 

1,541

 

 

4,632

 

 

4,708

 

Available for sale - tax exempt

 

 

68

 

 

 —

 

 

217

 

 

 —

 

Federal Home Loan Bank stock

 

 

262

 

 

87

 

 

742

 

 

297

 

Other

 

 

3,626

 

 

2,594

 

 

8,572

 

 

6,498

 

Total interest income

 

 

59,761

 

 

37,577

 

 

148,196

 

 

100,738

 

Interest Expense

 

 

  

 

 

  

 

 

  

 

 

  

 

Deposits

 

 

26,039

 

 

11,670

 

 

59,610

 

 

28,427

 

Borrowed funds

 

 

1,098

 

 

2,425

 

 

3,909

 

 

6,515

 

Total interest expense

 

 

27,137

 

 

14,095

 

 

63,519

 

 

34,942

 

Net Interest Income

 

 

32,624

 

 

23,482

 

 

84,677

 

 

65,796

 

Provision for loan losses

 

 

1,193

 

 

617

 

 

1,947

 

 

3,021

 

Net Interest Income After Provision for Loan Losses

 

 

31,431

 

 

22,865

 

 

82,730

 

 

62,775

 

Noninterest Income

 

 

  

 

 

  

 

 

  

 

 

  

 

Gain on sale of loans

 

 

8,312

 

 

8,825

 

 

20,059

 

 

27,548

 

Loan servicing fees, net

 

 

(1,410)

 

 

1,851

 

 

(3,318)

 

 

4,084

 

Mortgage warehouse fees

 

 

2,699

 

 

778

 

 

4,590

 

 

1,948

 

Gains/(losses) on sale of investments available for sale (includes $0, $0, $124, and $0, respectively, related to accumulated other comprehensive earnings reclassifications)

 

 

 —

 

 

 —

 

 

124

 

 

 —

 

Other income

 

 

1,251

 

 

453

 

 

2,931

 

 

1,270

 

Total noninterest income

 

 

10,852

 

 

11,907

 

 

24,386

 

 

34,850

 

Noninterest Expense

 

 

  

 

 

  

 

 

  

 

 

  

 

Salaries and employee benefits

 

 

9,139

 

 

7,842

 

 

27,671

 

 

21,597

 

Loan expenses

 

 

1,248

 

 

1,254

 

 

3,527

 

 

3,512

 

Occupancy and equipment

 

 

994

 

 

736

 

 

2,816

 

 

2,062

 

Professional fees

 

 

508

 

 

590

 

 

1,500

 

 

1,755

 

Deposit insurance expense

 

 

859

 

 

269

 

 

1,354

 

 

751

 

Technology expense

 

 

674

 

 

412

 

 

1,775

 

 

996

 

Other expense

 

 

2,100

 

 

1,346

 

 

5,834

 

 

4,046

 

Total noninterest expense

 

 

15,522

 

 

12,449

 

 

44,477

 

 

34,719

 

Income Before Income Taxes

 

 

26,761

 

 

22,323

 

 

62,639

 

 

62,906

 

Provision for income taxes (includes $0,  $0,  $(31) and $0, respectively, related to income tax (expense)/benefit for reclassification items)

 

 

6,502

 

 

5,584

 

 

15,371

 

 

15,454

 

Net Income

 

$

20,259

 

$

16,739

 

$

47,268

 

$

47,452

 

  Dividends on preferred stock

 

 

(3,022)

 

 

(833)

 

 

(5,598)

 

 

(2,498)

 

Net Income Allocated to Common Shareholders

 

 

17,237

 

 

15,906

 

 

41,670

 

 

44,954

 

Basic Earnings Per Share

 

$

0.60

 

$

0.55

 

$

1.45

 

$

1.57

 

Diluted Earnings Per Share

 

$

0.60

 

$

0.55

 

$

1.45

 

$

1.57

 

Weighted-Average Shares Outstanding

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic

 

 

28,706,438

 

 

28,694,036

 

 

28,704,682

 

 

28,692,591

 

Diluted

 

 

28,744,953

 

 

28,727,822

 

 

28,742,911

 

 

28,719,740

 

 

See notes to condensed consolidated financial statements.  

 

4

Table of Contents

Merchants Bancorp

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three and Nine Months Ended September 30, 2019 and 2018

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

    

Net Income

 

$

20,259

 

$

16,739

 

$

47,268

 

$

47,452

 

Other Comprehensive Income (Loss):

 

 

  

 

 

 

 

 

  

 

 

  

 

Net change in unrealized gains/(losses) on investment securities available for sale, net of tax (expense)/benefits of $(7),  $(58),  $(352), and $(15), respectively

 

 

52

 

 

173

 

 

1,095

 

 

(48)

 

Less: Reclassification adjustment for gains/(losses) included in net income, net of tax (expense)/benefits of $0,  $0,  $(31), and $0, respectively

 

 

 —

 

 

 —

 

 

93

 

 

 —

 

Other comprehensive income (loss) for the period

 

 

52

 

 

173

 

 

1,002

 

 

(48)

 

Comprehensive Income

 

$

20,311

 

$

16,912

 

$

48,270

 

$

47,404

 

 

See notes to condensed consolidated financial statements.

 

 

5

Table of Contents

Merchants Bancorp

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2019 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

8% Preferred Stock

 

7% Preferred Stock

 

6% Preferred Stock

 

Retained

 

Comprehensive

 

 

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Earnings

    

Income (Loss)

    

Total

Balance, January 1, 2019

 

28,694,036

 

$

135,057

 

41,625

 

$

41,581

 

 —

 

$

 —

 

 —

 

$

 —

 

$

244,909

 

$

(310)

 

$

421,237

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

10,570

 

 

 —

 

 

10,570

Shares issued for stock compensation plans

 

10,127

 

 

133

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

133

Issuance of 7% preferred stock, net of offering expenses of $1,731

 

 —

 

 

 —

 

 —

 

 

 —

 

2,000,000

 

 

48,269

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

48,269

Dividends on 8% preferred stock, $20.00 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(833)

 

 

 —

 

 

(833)

Dividends on common stock, $0.07 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,009)

 

 

 —

 

 

(2,009)

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

464

 

 

464

Balance, March 31, 2019

 

28,704,163

 

$

135,190

 

41,625

 

$

41,581

 

2,000,000

 

$

48,269

 

 —

 

$

 —

 

$

252,637

 

$

154

 

$

477,831

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

16,439

 

 

 —

 

 

16,439

Shares issued for stock compensation plans

 

2,275

 

 

184

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

184

Issuance of 7% preferred stock, net of offering expenses of $69

 

 —

 

 

 —

 

 —

 

 

 —

 

955,800

 

 

23,826

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

23,826

Dividends on 7% preferred stock, $0.4375 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(911)

 

 

 —

 

 

(911)

Dividends on 8% preferred stock, $20.00 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(832)

 

 

 —

 

 

(832)

Dividends on common stock, $0.07 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,010)

 

 

 —

 

 

(2,010)

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

486

 

 

486

Balance, June 30, 2019

 

28,706,438

 

$

135,374

 

41,625

 

$

41,581

 

2,955,800

 

$

72,095

 

 —

 

$

 —

 

$

265,323

 

$

640

 

$

515,013

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

20,259

 

 

 —

 

 

20,259

Shares issued for stock compensation plans

 

 —

 

 

133

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

133

Issuance of 6% preferred stock, net of offering expenses of $4.138

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

125,000

 

 

120,863

 

 

 —

 

 

 —

 

 

120,863

Repurchase of 7% preferred stock

 

 —

 

 

 —

 

 —

 

 

 —

 

(874,000)

 

 

(21,850)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(21,850)

Dividends on 6% preferred stock, $7.166667 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(896)

 

 

 —

 

 

(896)

Dividends on 7% preferred stock, $0.4375 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,293)

 

 

 —

 

 

(1,293)

Dividends on 8% preferred stock, $20.00 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(833)

 

 

 —

 

 

(833)

Dividends on common stock, $0.07 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,009)

 

 

 —

 

 

(2,009)

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

52

 

 

52

Balance, September 30, 2019

 

28,706,438

 

$

135,507

 

41,625

 

$

41,581

 

2,081,800

 

$

50,245

 

125,000

 

$

120,863

 

$

280,551

 

$

692

 

$

629,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merchants Bancorp

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2018

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

8% Preferred Stock

 

7% Preferred Stock

 

6% Preferred Stock

 

Retained

 

Comprehensive

 

 

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Earnings

    

Income (Loss)

    

Total

Balance, January 1, 2018

 

28,685,167

 

$

134,891

 

41,625

 

$

41,581

 

 —

 

$

 —

 

 —

 

$

 —

 

$

192,008

 

$

(1,006)

 

$

367,474

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

15,061

 

 

 —

 

 

15,061

Shares issued for stock compensation plans

 

7,039

 

 

50

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

50

Dividends on 8% preferred stock, $20.00 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(833)

 

 

 —

 

 

(833)

Dividends on common stock, $0.06 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,721)

 

 

 —

 

 

(1,721)

Reclassification of deferred tax asset due to tax reform

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

243

 

 

(243)

 

 

 —

Other comprehensive loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(318)

 

 

(318)

Balance, March 31, 2018

 

28,692,206

 

$

134,941

 

41,625

 

$

41,581

 

 —

 

$

 —

 

 —

 

$

 —

 

$

204,758

 

$

(1,567)

 

$

379,713

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

15,652

 

 

 —

 

 

15,652

Shares issued for stock compensation plans

 

1,830

 

 

11

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

11

Dividends on 8% preferred stock, $20.00 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(832)

 

 

 —

 

 

(832)

Dividends on common stock, $0.06 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,722)

 

 

 —

 

 

(1,722)

Other comprehensive loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

97

 

 

97

Balance, June 30, 2018

 

28,694,036

 

 

134,952

 

41,625

 

 

41,581

 

 —

 

 

 —

 

 —

 

 

 —

 

 

217,856

 

 

(1,470)

 

$

392,919

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

16,739

 

 

 —

 

 

16,739

Shares issued for stock compensation plans

 

 —

 

 

69

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

69

Dividends on 8% preferred stock, $20.00 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(833)

 

 

 —

 

 

(833)

Dividends on common stock, $0.06 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,721)

 

 

 —

 

 

(1,721)

Other comprehensive loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

173

 

 

173

Balance, September 30, 2018

 

28,694,036

 

$

135,021

 

41,625

 

$

41,581

 

 —

 

$

 —

 

 —

 

$

 —

 

$

232,041

 

$

(1,297)

 

$

407,346

 

See notes to condensed consolidated financial statements.

 

 

 

6

Table of Contents

Merchants Bancorp

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2019 and 2018

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2019

    

2018

    

Operating activities:

 

 

  

 

 

  

 

Net income

 

$

47,268

 

$

47,452

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

  

 

Depreciation

 

 

436

 

 

336

 

Provision for loan losses

 

 

1,947

 

 

3,021

 

Gain on sale of securities

 

 

(124)

 

 

 —

 

Gain on sale of loans

 

 

(20,059)

 

 

(27,548)

 

Proceeds from sales of loans

 

 

20,483,906

 

 

13,387,330

 

Loans and participations originated and purchased for sale

 

 

(22,133,767)

 

 

(13,374,161)

 

Change in mortgage servicing rights for paydowns and fair value adjustments

 

 

10,492

 

 

1,854

 

Net change in:

 

 

 

 

 

  

 

Trading securities

 

 

(64,495)

 

 

66,721

 

Other assets and receivables

 

 

(4,839)

 

 

(4,718)

 

Other liabilities

 

 

9,979

 

 

3,441

 

Other

 

 

4,249

 

 

1,050

 

Net cash provided by (used in) operating activities

 

 

(1,665,007)

 

 

104,778

 

Investing activities:

 

 

 

 

 

  

 

Net change in securities purchased under agreements to resell

 

 

115

 

 

130

 

Purchases of available-for-sale securities

 

 

(382,385)

 

 

(36,284)

 

Proceeds from the sale of available-for-sale securities

 

 

31,083

 

 

6,431

 

Proceeds from calls, maturities and paydowns of available-for-sale securities

 

 

375,095

 

 

171,319

 

Purchases of loans

 

 

(61,848)

 

 

(112,219)

 

Net change in loans receivable

 

 

(637,957)

 

 

(403,900)

 

Purchase of Federal Home Loan Bank stock

 

 

(14,085)

 

 

(233)

 

Proceeds from sale of Federal Home Loan Bank stock

 

 

3,251

 

 

218

 

Proceeds from sale of assets

 

 

 —

 

 

10

 

Purchases of premises and equipment

 

 

(12,273)

 

 

(5,440)

 

Purchases of mortgage servicing rights

 

 

 —

 

 

(790)

 

Purchase of limited partnership interests

 

 

 —

 

 

(3,005)

 

Cash received in acquisition of subsidiary

 

 

 —

 

 

6,505

 

Other investing activities

 

 

124

 

 

(74)

 

Net cash used in investing activities

 

 

(698,880)

 

 

(377,332)

 

Financing activities:

 

 

  

 

 

 

 

Net change in deposits

 

 

2,268,637

 

 

321,931

 

Proceeds from Federal Home Loan Bank borrowings

 

 

6,887,077

 

 

536,367

 

Repayment of Federal Home Loan Bank borrowings

 

 

(6,899,275)

 

 

(536,379)

 

Proceeds from notes payable

 

 

6,118

 

 

9,534

 

Payments on notes payable

 

 

(29,700)

 

 

 —

 

Proceeds from issuance of preferred stock

 

 

192,958

 

 

 —

 

Redemption of preferred stock

 

 

(21,850)

 

 

 —

 

Dividends

 

 

(11,626)

 

 

(7,662)

 

Net cash provided by financing activities

 

 

2,392,339

 

 

323,791

 

Net Change in Cash and Cash Equivalents

 

 

28,452

 

 

51,237

 

Cash and Cash Equivalents, Beginning of Period

 

 

336,524

 

 

359,519

 

Cash and Cash Equivalents, End of Period

 

$

364,976

 

$

410,756

 

Additional Cash Flows Information:

 

 

 

 

 

  

 

Interest paid

 

$

54,522

 

$

31,694

 

Income taxes paid

 

 

13,871

 

 

13,023

 

The Company purchased all of the capital stock of FMBI on January 2, 2018 for $5,472.  In conjunction with the acquisitions, liabilities were assumed as follows:

 

 

 

 

 

 

 

Fair value of assets acquired

 

$

 —

 

$

44,217

 

Cash paid for the capital stock/fair value common stock issued

 

 

 —

 

 

5,472

 

  Fair value of liabilities assumed

 

 

 —

 

 

38,745

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

7

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1:   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Merchants Bancorp, a registered bank holding company (the “Company”) and its wholly owned subsidiaries, Merchants Bank of Indiana (“Merchants Bank”) and Farmers-Merchants Bank of Illinois (“FMBI”).  Merchants Bank’s direct and indirect subsidiaries include Merchants Capital Corp. (“MCC”), Merchants Capital Servicing, LLC (“MCS”), Ash Realty Holdings, LLC (“Ash Realty”), MBI Midtown West, LLC (“MMW”), Natty Mac Funding, Inc. (“NMF”), and OneTrust Funding, Inc. The Company also acquired Farmers-Merchants National Bank of Paxton (‘FMNBP”) on October 1, 2018 through a merger with FMBI, with FMBI as the surviving entity.  All these entities are collectively referred to as the “Company”.

The accompanying unaudited condensed consolidated balance sheet of the Company as of December 31, 2018, which has been derived from audited financial statements, and unaudited condensed consolidated financial statements of the Company as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018, were prepared in accordance with the instructions for Form 10‑Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed financial statements should be read in conjunction with the audited financial statements and notes thereto of the Company as of and for the year ended December 31, 2018 in its Annual Report on Form 10-K. Reference is made to the accounting policies of the Company described in the Notes to the Financial Statements contained in the Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included to present fairly the financial position as of September 30, 2019 and the results of operations for the three and nine months ended September 30, 2019 and 2018, and cash flows for the nine months ended September 30, 2019 and 2018. All interim amounts have not been audited and the results of operations for the three and nine months ended September 30, 2019, herein are not necessarily indicative of the results of operations to be expected for the entire year.

Principles of Consolidation

The unaudited condensed consolidated financial statements as of and for the period ended September 30, 2019 include the Company, and its wholly owned subsidiaries, Merchants Bank, and FMBI.   Also included are Merchants Bank’s wholly owned subsidiaries, MCC, MCC’s wholly owned subsidiary, MCS, Ash Realty, NMF, MMW, and OneTrust Funding, Inc.  The unaudited condensed consolidated financial statements as of and for the period ended September 30, 2018, include the Company and its wholly owned subsidiary, Merchants Bank, and Merchants Bank’s wholly owned subsidiaries, FMBI (after being acquired on January 2, 2018 and excluding results from FMNBP, which was acquired on October 1, 2018), MCC, MCC’s wholly owned subsidiary, MCS, Ash Realty, NMF, and MMW.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, loan servicing rights and fair values of financial instruments.

8

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Public Offerings of Preferred Stock

On March 28, 2019 the Company issued 2,000,000 shares of 7.00% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, without par value (the “Series A Preferred Stock”), and with a liquidation preference of $25.00 per share.  The aggregate gross offering proceeds for the shares issued by the Company was $50.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $1.7 million paid to third parties, the Company received total net proceeds of $48.3 million.  On April 12, 2019, the Company issued an additional 81,800 shares of Series A Preferred Stock to the underwriters related to their exercise of an option to purchase additional shares under the associated underwriting agreement, resulting in an addition $2.0 million in net proceeds, after deducting $41,000 underwriting discounts.  The Series A Preferred Stock have no voting rights with respect to matters that generally require the approval of our common shareholders. Dividends on the Series A Preferred Stock, to the extent declared by the Company’s board, are payable quarterly.    

On August 19, 2019 the Company issued 5,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, without par value (the “Series B Preferred Stock”), and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share).  The aggregate gross offering proceeds for the shares issued by the Company was $125.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $4.1 million paid to third parties, the Company received total net proceeds of $120.9 million. The Series B Preferred Stock have no voting rights with respect to matters that generally require the approval of our common shareholders. Dividends on the Series B Preferred Stock, to the extent declared by the Company’s board, are payable quarterly.

Private Placement Offering of Preferred Stock

On June 27, 2019 the Company issued an additional 874,000 shares of its 7.00% Series A Preferred Stock,  without par value and with a liquidation preference of $25.00 per share, for aggregate proceeds of $21.85 million.  No underwriter or placement agent was involved in this private placement and the Company did not pay any brokerage or underwriting fees or discounts in connection with the issuance of such shares.  The shares were purchased primarily by related parties, including Michael Petrie, Chairman and Chief Executive Officer; Randall Rogers, Vice Chairman and a director and members of his family; Michael Dury, President of Merchants Capital; and other accredited investors.

Repurchase of Preferred Stock

On September 23, 2019 the Company repurchased and subsequently retired 874,000 shares of its 7.00% Series A Preferred Stock, for its liquidation preference of $25 per share, at an aggregate cost of $21.85 million.  There were no brokerage fees in connection with the transaction.

Acquisitions

On May 8, 2017, the Company entered into a Stock Purchase Agreement to acquire FMBI (formerly known as Joy State Bank).  The acquisition closed on January 2, 2018 at a total cost of approximately $5.5 million.  At December 31, 2017 Joy State Bank had $43 million in assets.  The Company recorded goodwill and intangible assets totaling $988,000 and $478,000, respectively, in connection with the acquisition.  The intangible assets consisted of core deposit intangibles that are being amortized over 10 years on an accelerated basis. The acquired time deposits of $16.7 million were recorded at a fair value of $16.9 million.  The fair value premium of $185,000 is being accreted against interest expense over 20 months. The acquired loan portfolio of $27.9 million was recorded at a fair value of $27.5 million.  The fair value discount of $458,000 is being accreted to interest income on a straight-line basis over an average of 39 months in accordance with ASC 310-20.  While there were some loans identified for potential classification under ASC 310-30, they were not material to the transaction.  On October 22, 2018, the Company changed the name of Joy State Bank to Farmers-Merchants Bank of Illinois (“FMBI”).  As a result of the acquisition, the Company increased its deposit base and benefited from economies of scale.  The acquisition did not materially impact the Company’s financial position, results of operations or cash flows.

9

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

On October 1, 2018, the Company acquired FM Bancorp, Inc., a bank holding company, and its wholly owned subsidiary, Farmers-Merchants National Bank of Paxton (“FMNBP”).  On that date, FM Bancorp, Inc. ultimately merged with and into the Company, with the Company as the surviving entity, and FMNBP merged with and into Joy State Bank, with Joy State Bank as the surviving bank.  Effective October 22, 2018, Joy State Bank’s name changed to Farmers-Merchants Bank of Illinois (“FMBI”).  Under the terms of the merger agreement, shareholders of the 27,537 outstanding shares of FM Bancorp, Inc. were compensated $795.29 per share, for a total purchase price of $21.9 million.  As of September 30, 2018, FM Bancorp, Inc. and FMNBP had total assets of approximately $110.0 million, available for sale securities of $66.3 million, deposits of approximately $95.7 million, and net loan receivables of approximately $35.0 million. The Company recorded goodwill and intangible assets totaling $6.9 million and $1.9 million.  The intangible assets consisted of core deposit intangibles that are being amortized over 10 years on an accelerated basis.  The acquired available for sale securities of $66.3 million were recorded at fair value. A fair value discount associated with securities of $1.0 million is being accreted into interest income, in accordance with ASC 310-20.  While there were some loans identified for potential classification under ASC 310-30, they were not material to the transaction.  The acquired gross loan portfolio of $35.4 million was recorded at a fair value of $34.8 million.  The fair value discount of $625,000 included a discount related to interest assumptions for $279,000 and to credit assumptions for $346,000. The portion related to interest assumptions is being accreted into interest income on a straight-line basis over an average of 72 months in accordance with ASC 310-20.  The discount portion related to credit assumptions is being accreted into interest income over the life of the loan.  The acquired deposits of $95.7 million were recorded at a fair value of $95.7 million.  As a result of the acquisition, the Company increased its deposit base and benefited from economies of scale.  The acquisition did not materially impact the Company’s financial position, results of operations or cash flows.

On December 31, 2018, the Company acquired the assets of NattyMac, LLC, a warehouse lender operating out of Clearwater, Florida, from Home Point Financial Corporation (“Home Point”).  The Company also fully repaid Home Point the balance of, and all interest owed on, the $30 million subordinated debt it had previously invested in the Company.  Goodwill and intangible assets of $3.4 million and $1.6 million, respectively, were recorded by the Company.  The intangible assets consisted of customer lists that are being amortized over 21 months on a straight-line basis.   As a result of the acquisition, the Company expects to increase its geographic footprint in the warehouse business, reduce its costs of borrowing, increase the earnings generated from its warehouse business, and benefit from its experienced talent pool. The acquisition did not materially impact the Company’s financial position, results of operations or cash flows.

 

Given the impact of the acquisitions was immaterial to the Company and its results of operations, pro forma information has not been included. 

 

Reclassifications

 

Certain reclassifications have been made to the 2018 financial statements to conform to the financial statement presentation as of and for the three and nine months ended September 30, 2019.  These reclassifications had no effect on net income.

Note 2:   Securities

Trading Securities

 

Securities that are held principally for resale in the near term are recorded as trading securities at fair value with changes in fair value recorded in earnings.  Trading securities include FHA and conventional Fannie Mae and Freddie Mac participation certificates.  The unrealized gains included in trading securities totaled $1.7 million and $661,000 at September 30, 2019 and 2018, respectively.

 

 

 

10

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Securities Available-For-Sale

 

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

2,743

 

$

22

 

$

 —

 

$

2,765

Federal agencies

 

 

257,572

 

 

 9

 

 

193

 

 

257,388

Municipals

 

 

11,976

 

 

784

 

 

 —

 

 

12,760

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

35,517

 

 

246

 

 

 3

 

 

35,760

Total available-for-sale securities

 

$

307,808

 

$

1,061

 

$

196

 

$

308,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

11,928

 

$

26

 

$

13

 

$

11,941

Federal agencies

 

 

237,894

 

 

 8

 

 

972

 

 

236,930

Municipals

 

 

21,014

 

 

336

 

 

18

 

 

21,332

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

60,693

 

 

254

 

 

79

 

 

60,868

Total available-for-sale securities

 

$

331,529

 

$

624

 

$

1,082

 

$

331,071

 

The amortized cost and fair value of available-for-sale securities at September 30, 2019 and December 31, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

    

Cost

    

Value

    

Cost

    

Value

Contractual Maturity

 

(In thousands)

Within one year

 

$

16,248

 

$

16,247

 

$

179,323

 

$

178,581

After one through five years

 

 

246,533

 

 

246,480

 

 

72,470

 

 

72,282

After five through ten years

 

 

1,587

 

 

1,686

 

 

7,087

 

 

7,203

After ten years

 

 

7,923

 

 

8,500

 

 

11,956

 

 

12,137

 

 

 

272,291

 

 

272,913

 

 

270,836

 

 

270,203

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

35,517

 

 

35,760

 

 

60,693

 

 

60,868

 

 

$

307,808

 

$

308,673

 

$

331,529

 

$

331,071

 

During the three months ended September 30, 2019, there were no sales of securities available for sale.  During the nine months ended September 30, 2019, proceeds from sales of securities available for sale were $31.1 million, and a net gain of $124,000 was recognized, consisting of $361,000 in gains and $237,000 of losses. During the three and nine months ended September 30, 2018, $6.4 million securities available-for-sale were sold and no gain or loss was recognized.

 

11

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following tables show the Company’s investments’ gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

 

 

 

 

12 Months or

 

 

 

 

 

 

 

 

Less than 12 Months

 

 Longer

 

Total

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Federal agencies

 

 

121,552

 

 

190

 

 

14,996

 

 

 3

 

 

136,548

 

 

193

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

1,114

 

 

 3

 

 

 —

 

 

 —

 

 

1,114

 

 

 3

 

 

$

122,666

 

$

193

 

$

14,996

 

$

 3

 

$

137,662

 

$

196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

12 Months or

 

 

 

 

 

 

 

 

Less than 12 Months

 

Longer

 

Total

 

    

 

 

    

Gross

    

 

 

    

Gross

    

 

 

    

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

1,990

 

$

 8

 

$

995

 

$

 5

 

$

2,985

 

$

13

Federal agencies

 

 

28,296

 

 

97

 

 

191,280

 

 

875

 

 

219,576

 

$

972

Municipals

 

 

2,051

 

 

18

 

 

 —

 

 

 —

 

 

2,051

 

$

18

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

15,543

 

 

79

 

 

 —

 

 

 —

 

 

15,543

 

 

79

 

 

$

47,880

 

$

202

 

$

192,275

 

$

880

 

$

240,155

 

$

1,082

 

Other-than-temporary Impairment

Unrealized losses on securities have not been recognized to income because the Company has the intent and ability to hold the securities for the foreseeable future, and the decline in fair value is primarily due to increased market interest rates. The fair value is expected to recover as the securities approach the maturity date.

Note 3:   Loans and Allowance for Loan Losses

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. 

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past-due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income.  The interest on these loans is applied to the principal balance until the loan can be returned to an

12

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

accrual status.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

For all loan portfolio segments, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectable based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations.  For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan.  Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms. 

Loans receivable at September 30, 2019 and December 31, 2018 include:

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

 

 

(In thousands)

 

 

 

 

 

 

 

Mortgage warehouse lines of credit

 

$

796,344

 

$

337,332

Residential real estate

 

 

410,550

 

 

410,871

Multi-family and healthcare financing

 

 

1,145,646

 

 

914,393

Commercial and commercial real estate

 

 

297,788

 

 

299,194

Agricultural production and real estate

 

 

85,737

 

 

79,255

Consumer and margin loans

 

 

19,728

 

 

17,082

 

 

 

2,755,793

 

 

2,058,127

Less

 

 

  

 

 

  

Allowance for loan losses

 

 

13,705

 

 

12,704

 

 

 

 

 

 

 

Loans Receivable

 

$

2,742,088

 

$

2,045,423

 

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Mortgage Warehouse Lines of Credit (MTG WHLOC):  Under its warehouse program, the Company provides warehouse financing arrangements to approved mortgage companies for the origination and sale of residential mortgage loans and to a lesser extent multi-family loans. Agency eligible, governmental and jumbo residential mortgage loans that are secured by mortgages placed on existing one-to-four family dwellings may be originated or purchased and placed on each mortgage warehouse line.

As a secured line of credit, collateral pledged to the Company secures each individual mortgage until the lender sells the loan in the secondary market. A traditional secured warehouse line of credit typically carries a base interest rate of 30 day LIBOR, plus a margin, or mortgage note rate, less a margin. 

Risk is evident if there is a change in the fair value of mortgage loans originated by mortgage bankers in warehouse, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit.

Residential Real Estate Loans (RES RE):  Real estate loans are secured by owner-occupied 1‑4 family residences. Repayment of residential real estate loans is primarily dependent on the personal income and credit rating of the borrowers.  All-in-One mortgages included in this segment typically carry a base rate of 30-day LIBOR, plus a margin.

13

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Multi-Family and Healthcare Financing (MF RE):  The Company engages in multi-family and healthcare financing, including construction loans, specializing in originating and servicing loans for multi-family rental and senior living properties. In addition, the Company originates loans secured by an assignment of federal income tax credits by partnerships invested in multi-family real estate projects. Construction and land loans are generally based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent agency-eligible financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economy in the Company’s market area. Repayment of these loans depends on the successful operation of a business or property and the borrower’s cash flows.

Commercial Lending and Commercial Real Estate Loans (CML & CRE):  The commercial lending and commercial real estate portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions, as well as loans to commercial customers to finance land and improvements. It also includes loans collateralized by mortgage servicing rights of mortgage warehouse customers.  The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Agricultural Production and Real Estate Loans (AG & AGRE):  Agricultural production loans are generally comprised of seasonal operating lines of credit to grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. The Company also offers long term financing to purchase agricultural real estate. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry-developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. The Company is approved to sell agricultural loans in the secondary market through the Federal Agricultural Mortgage Corporation and uses this relationship to manage interest rate risk within the portfolio.

Consumer and Margin Loans (CON & MAR):  Consumer loans are those loans secured by household assets. Margin loans are those loans secured by marketable securities. The term and maximum amount for these loans are determined by considering the purpose of the loan, the margin (advance percentage against value) in all collateral, the primary source of repayment, and the borrower’s other related cash flow.

Allowance for Loan Losses:  The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to net interest income.  Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance. 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 

The allowance consists of allocated and general components.  The allocated component relates to loans that are classified as impaired.  For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan.  The general component covers non-impaired loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process.  Other adjustments may be made to the allowance

14

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by the fair value of the collateral if the loan is collateral dependent, the loan’s obtainable market price, or present value of expected future cash flows discounted at the loan’s effective interest rate.  For impaired loans where the Company utilizes discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense. 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. 

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In restructuring the loan, the Company attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan.  A troubled debt restructuring (TDR) occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

Nonaccrual loans, including TDRs that have not met the six month minimum performance criterion, are reported as nonperforming loans. For all loan classes, it is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until three months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is doubtful under the terms of the loan agreement. Most generally, this is at 90 or more days past due. 

With regard to determination of the amount of the allowance for credit losses, restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each loan portfolio segment within troubled debt restructurings is the same as detailed previously above. 

15

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following tables present, by loan portfolio segment, the activity in the allowance for loan losses for the three and nine months ended September 30, 2019 and 2018 and the recorded investment in loans and impairment method as of September 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At or For the Three Months Ended September 30, 2019

 

 

MTG WHLOC

 

RES RE

 

MF RE

 

CML & CRE

 

AG & AGRE

 

CON & MAR

 

TOTAL

 

 

(In thousands)

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,565

 

$

1,929

 

$

5,144

 

$

3,271

 

$

515

 

$

180

 

$

12,604

Provision (credit) for loan losses

 

 

533

 

 

63

 

 

753

 

 

(174)

 

 

14

 

 

 4

 

 

1,193

Loans charged to the allowance

 

 

(107)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(107)

Recoveries of loans previously charged off

 

 

 —

 

 

 —

 

 

 —

 

 

15

 

 

 —

 

 

 —

 

 

15

Balance, end of period

 

$

1,991

 

$

1,992

 

$

5,897

 

$

3,112

 

$

529

 

$

184

 

$

13,705

Ending balance: individually evaluated for impairment

 

$

 —

 

 

14

 

 

 —

 

 

544

 

 

27

 

 

 8

 

$

593

Ending balance: collectively evaluated for impairment

 

$

1,991

 

$

1,978

 

$

5,897

 

$

2,568

 

$

502

 

$

176

 

$

13,112

Loans

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Ending balance

 

$

796,344

 

$

410,550

 

$

1,145,646

 

$

297,788

 

$

85,737

 

$

19,728

 

$

2,755,793

Ending balance individually evaluated for impairment

 

$

237

 

$

5,161

 

$

 —

 

$

8,437

 

$

214

 

$

25

 

$

14,074

Ending balance collectively evaluated for impairment

 

$

796,107

 

$

405,389

 

$

1,145,646

 

$

289,351

 

$

85,523

 

$

19,703

 

$

2,741,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2018

 

 

MTG WHLOC

 

RES RE

 

MF RE

 

CML & CRE

 

AG & AGRE

 

CON & MAR

 

TOTAL

 

 

(In thousands)

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

646

 

$

1,812

 

$

4,662

 

$

2,803

 

$

392

 

$

273

 

$

10,588

Provision (credit) for loan losses

 

 

73

 

 

96

 

 

240

 

 

184

 

 

35

 

 

(11)

 

 

617

Loans charged to the allowance

 

 

 —

 

 

 —

 

 

 —

 

 

46

 

 

 —

 

 

28

 

 

74

Recoveries of loans previously charged off

 

 

 —

 

 

(16)

 

 

 —

 

 

(1)

 

 

 —

 

 

(19)

 

 

(36)

Balance, end of period

 

$

719

 

$

1,892

 

$

4,902

 

$

3,032

 

$

427

 

$

271

 

$

11,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2019

 

  

MTG WHLOC

  

RES RE

  

MF RE

  

CML & CRE

  

AG & AGRE

  

CON & MAR

  

TOTAL

 

 

(In thousands)

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

1,068

 

$

1,986

 

$

6,030

 

$

3,051

 

$

429

 

$

140

 

$

12,704

Provision for loan losses

 

 

1,030

 

 

 6

 

 

(133)

 

 

900

 

 

100

 

 

44

 

 

1,947

Loans charged to the allowance

 

 

(107)

 

 

 —

 

 

 —

 

 

(854)

 

 

(3)

 

 

 —

 

 

(964)

Recoveries of loans previously charged off

 

 

 —

 

 

 —

 

 

 —

 

 

15

 

 

 3

 

 

 —

 

 

18

Balance, end of period

 

$

1,991

 

$

1,992

 

$

5,897

 

$

3,112

 

$

529

 

$

184

 

$

13,705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2018

 

  

MTG WHLOC

  

RES RE

  

MF RE

  

CML & CRE

  

AG & AGRE

  

CON & MAR

  

TOTAL

 

 

(In thousands)

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

283

 

$

1,587

 

$

3,502

 

$

2,362

 

$

320

 

$

257

 

$

8,311

Provision (credit) for loan losses

 

 

436

 

 

305

 

 

1,400

 

 

759

 

 

107

 

 

14

 

 

3,021

Loans charged to the allowance

 

 

 —

 

 

 —

 

 

 —

 

 

(89)

 

 

 —

 

 

 —

 

 

(89)

Recoveries of loans previously charged off

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Balance, end of period

 

$

719

 

$

1,892

 

$

4,902

 

$

3,032

 

$

427

 

$

271

 

$

11,243

 

16

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table presents the allowance for loan losses and the recorded investment in loans and impairment method as of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

MTG WHLOC

 

RES RE

 

MF RE

 

CML & CRE

 

AG & AGRE

 

CON & MAR

 

TOTAL

 

 

(In thousands)

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

$

1,068

 

$

1,986

 

$

6,030

 

$

3,051

 

$

429

 

$

140

 

$

12,704

Ending balance: individually evaluated for impairment

 

$

225

 

$

 —

 

$

 —

 

$

400

 

$

20

 

$

 —

 

$

645

Ending balance: collectively evaluated for impairment

 

$

843

 

$

1,986

 

$

6,030

 

$

2,651

 

$

409

 

$

140

 

$

12,059

Loans

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Balance, December 31, 2018

 

$

337,332

 

$

410,871

 

$

914,393

 

$

299,194

 

$

79,255

 

$

17,082

 

$

2,058,127

Ending balance individually evaluated for impairment

 

$

575

 

$

1,606

 

$

 —

 

$

8,576

 

$

370

 

$

58

 

$

11,185

Ending balance collectively evaluated for impairment

 

$

336,757

 

$

409,265

 

$

914,393

 

$

290,618

 

$

78,885

 

$

17,024

 

$

2,046,942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internal Risk Categories

In adherence with policy, the Company uses the following internal risk grading categories and definitions for loans:

Average or above – Loans to borrowers of satisfactory financial strength or better. Earnings performance is consistent with primary and secondary sources of repayment that are well defined and adequate to retire the debt in a timely and orderly fashion. These businesses would generally exhibit satisfactory asset quality and liquidity with moderate leverage, average performance to their peer group and experienced management in key positions. These loans are disclosed as “Acceptable and Above” in the following table.

Acceptable – Loans to borrowers involving more than average risk and which contain certain characteristics that require some supervision and attention by the lender. Asset quality is acceptable, but debt capacity is modest and little excess liquidity is available. The borrower may be fully leveraged and unable to sustain major setbacks. Covenants are structured to ensure adequate protection. Borrower’s management may have limited experience and depth. This category includes loans which are highly leveraged due to regulatory constraints, as well as loans involving reasonable exceptions to policy. These loans are disclosed as “Acceptable and Above” in the following table.

Special Mention (Watch) – This is a loan that is sound and collectable but contains considerable risk. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

17

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating category and payment activity as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

MTG WHLOC

    

RES RE

    

MF RE

    

CML & CRE

    

AG & AGRE

    

CON & MAR

    

TOTAL

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention (Watch)

 

$

 —

 

$

674

 

$

38,999

 

$

11,259

 

$

5,116

 

$

38

 

$

56,086

Substandard

 

 

237

 

 

5,161

 

 

 —

 

 

8,437

 

 

214

 

 

25

 

 

14,074

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Acceptable and Above

 

 

796,107

 

 

404,715

 

 

1,106,647

 

 

278,092

 

 

80,407

 

 

19,665

 

 

2,685,633

Total

 

$

796,344

 

$

410,550

 

$

1,145,646

 

$

297,788

 

$

85,737

 

$

19,728

 

$

2,755,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

MTG WHLOC

    

RES RE

    

MF RE

    

CML & CRE

    

AG & AGRE

    

CON & MAR

    

TOTAL

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention (Watch)

 

$

 —

 

$

443

 

$

71,734

 

$

14,650

 

$

3,096

 

$

681

 

$

90,604

Substandard

 

 

575

 

 

1,606

 

 

 —

 

 

8,576

 

 

370

 

 

58

 

 

11,185

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Acceptable and Above

 

 

336,757

 

 

408,822

 

 

842,659

 

 

275,968

 

 

75,789

 

 

16,343

 

 

1,956,338

Total

 

$

337,332

 

$

410,871

 

$

914,393

 

$

299,194

 

$

79,255

 

$

17,082

 

$

2,058,127

 

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the past year.

The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

30-59 Days

    

60-89 Days

    

Greater Than

    

Total

    

 

 

    

Total

 

 

Past Due

 

Past Due

 

90 Days

 

Past Due

 

Current

 

Loans

 

 

(In thousands)

MTG WHLOC

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

796,344

 

$

796,344

RES RE

 

 

438

 

 

548

 

 

3,206

 

 

4,192

 

 

406,358

 

 

410,550

MF RE

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,145,646

 

 

1,145,646

CML & CRE

 

 

2,443

 

 

111

 

 

1,664

 

 

4,218

 

 

293,570

 

 

297,788

AG & AGRE

 

 

159

 

 

 —

 

 

601

 

 

760

 

 

84,977

 

 

85,737

CON & MAR

 

 

25

 

 

22

 

 

27

 

 

74

 

 

19,654

 

 

19,728

 

 

$

3,065

 

$

681

 

$

5,498

 

$

9,244

 

$

2,746,549

 

$

2,755,793

 

18

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

30-59 Days

    

60-89 Days

    

Greater Than

    

Total

    

 

 

    

Total

 

 

Past Due

 

Past Due

 

90 Days

 

Past Due

 

Current

 

Loans

 

 

(In thousands)

MTG WHLOC

 

$

 —

 

$

 —

 

$

324

 

$

324

 

$

337,008

 

$

337,332

RES RE

 

 

579

 

 

178

 

 

825

 

 

1,582

 

 

409,289

 

 

410,871

MF RE

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

914,393

 

 

914,393

CML & CRE

 

 

245

 

 

52

 

 

253

 

 

550

 

 

298,644

 

 

299,194

AG & AGRE

 

 

91

 

 

 —

 

 

588

 

 

679

 

 

78,576

 

 

79,255

CON & MAR

 

 

 2

 

 

52

 

 

28

 

 

82

 

 

17,000

 

 

17,082

 

 

$

917

 

$

282

 

$

2,018

 

$

3,217

 

$

2,054,910

 

$

2,058,127

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings.

The following tables present impaired loans and specific valuation allowance information based on class level as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

MTG WHLOC

    

RES RE

    

MF RE

    

CML & CRE

    

AG & AGRE

    

CON & MAR

    

TOTAL

 

 

(In thousands)

Impaired loans without a specific allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Recorded investment

 

$

237

 

$

5,016

 

$

 —

 

$

6,019

 

$

 —

 

$

14

 

$

11,286

Unpaid principal balance

 

 

237

 

 

5,016

 

 

 —

 

 

6,019

 

 

 —

 

 

14

 

 

11,286

Impaired loans with a specific allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Recorded investment

 

 

 —

 

 

145

 

 

 —

 

 

2,418

 

 

214

 

 

11

 

 

2,788

Unpaid principal balance

 

 

 —

 

 

145

 

 

 —

 

 

2,418

 

 

214

 

 

11

 

 

2,788

Specific allowance

 

 

 —

 

 

14

 

 

 —

 

 

544

 

 

27

 

 

 8

 

 

593

Total impaired loans:

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Recorded investment

 

 

237

 

 

5,161

 

 

 —

 

 

8,437

 

 

214

 

 

25

 

 

14,074

Unpaid principal balance

 

 

237

 

 

5,161

 

 

 —

 

 

8,437

 

 

214

 

 

25

 

 

14,074

Specific allowance

 

 

 —

 

 

14

 

 

 —

 

 

544

 

 

27

 

 

 8

 

 

593

 

19

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

MTG WHLOC

    

RES RE

    

MF RE

    

CML & CRE

    

AG & AGRE

    

CON & MAR

    

TOTAL

 

 

(In thousands)

Impaired loans without a specific allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Recorded investment

 

$

251

 

$

1,606

 

$

 —

 

$

5,636

 

$

88

 

$

58

 

$

7,639

Unpaid principal balance

 

 

251

 

 

1,606

 

 

 —

 

 

5,636

 

 

88

 

 

58

 

 

7,639

Impaired loans with a specific allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Recorded investment

 

 

324

 

 

 —

 

 

 —

 

 

2,940

 

 

282

 

 

 —

 

 

3,546

Unpaid principal balance

 

 

324

 

 

 —

 

 

 —

 

 

2,940

 

 

282

 

 

 —

 

 

3,546

Specific allowance

 

 

225

 

 

 —

 

 

 —

 

 

400

 

 

20

 

 

 —

 

 

645

Total impaired loans:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Recorded investment

 

 

575

 

 

1,606

 

 

 —

 

 

8,576

 

 

370

 

 

58

 

 

11,185

Unpaid principal balance

 

 

575

 

 

1,606

 

 

 —

 

 

8,576

 

 

370

 

 

58

 

 

11,185

Specific allowance

 

 

225

 

 

 —

 

 

 —

 

 

400

 

 

20

 

 

 —

 

 

645

 

The following tables present by portfolio class, information related to the average recorded investment and interest income recognized on impaired loans for the three and nine month periods ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

MTG WHLOC

    

RES RE

    

MF RE

    

CML & CRE

    

AG & AGRE

    

CON & MAR

    

TOTAL

 

 

(In thousands)

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment in impaired loans

 

$

239

 

$

5,172

 

$

 —

 

$

8,264

 

$

214

 

$

26

 

$

13,915

Interest income recognized

 

 

 —

 

 

 9

 

 

 —

 

 

127

 

 

 —

 

 

 —

  

 

136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment in impaired loans

 

$

691

 

$

1,042

 

$

109

 

$

7,254

 

$

425

 

$

187

 

$

9,708

Interest income recognized

 

 

26

 

 

21

 

 

 6

 

 

98

 

 

 4

 

 

 —

 

 

155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

MTG WHLOC

    

RES RE

    

MF RE

    

CML & CRE

    

AG & AGRE

    

CON & MAR

    

TOTAL

 

 

(In thousands)

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment in impaired loans

 

$

244

 

$

5,206

 

$

 —

 

$

8,351

 

$

239

 

$

28

 

$

14,068

Interest income recognized

 

 

 —

 

 

62

 

 

 —

 

 

375

 

 

 —

 

 

 1

 

 

438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment in impaired loans

 

$

1,030

 

$

1,097

 

$

113

 

$

7,556

 

$

525

 

$

184

 

$

10,505

Interest income recognized

 

 

66

 

 

51

 

 

 8

 

 

177

 

 

43

 

 

 1

 

 

346

 

 

20

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table presents the Company’s nonaccrual loans and loans past due 90 days or more and still accruing at September 30, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2019

 

2018

 

 

 

 

 

Total Loans >

 

 

 

 

Total Loans >

 

 

 

 

 

90 Days &

 

 

 

 

90 Days &

 

    

Nonaccrual

    

Accruing

    

Nonaccrual

    

Accruing

 

 

(In thousands)

MTG WHLOC

 

$

237

 

$

 —

 

$

575

 

$

 —

RES RE

 

 

833

 

 

2,772

 

 

893

 

 

74

MF RE

 

 

 —

 

 

 —

 

 

 —

 

 

 —

CML & CRE

 

 

858

 

 

805

 

 

136

 

 

117

AG & AGRE

 

 

214

 

 

386

 

 

282

 

 

307

CON & MAR

 

 

18

 

 

10

 

 

18

 

 

 9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,160

 

$

3,973

 

$

1,904

 

$

507

 

No troubled loans were restructured during the three or nine months ended September 30, 2019 or 2018.  No restructured loans defaulted during the three or nine months ended September 30, 2019 or 2018.  There was one customer with a residential loan balance of $725,000 in the process of foreclosure at September 30, 2019 and there were no residential loans in the process of foreclosure at December 31, 2018.

 

Note 4:   Regulatory Matters

The Company, Merchants Bank, and FMBI are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by federal and state banking regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company, Merchants Bank, and FMBI must meet specific capital guidelines that involve quantitative measures of the Company’s, Merchants Bank, and FMBI’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s, Merchants Bank’s, and FMBI’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s, Merchants Bank’s, and FMBI’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company, Merchants Bank, and FMBI to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of September 30, 2019 and December 31, 2018, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements to which they were subject.

As of September 30, 2019 and December 31, 2018, the most recent notifications from the Board of Governors of the Federal Reserve System (“Federal Reserve”) categorized the Company as well capitalized and most recent notifications from the Federal Deposit Insurance Corporation (“FDIC”) categorized Merchants Bank and FMBI as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, a company must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company, Merchants Bank,  or FMBI’s category.

21

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Company, Merchants Bank, and FMBI’s actual capital amounts and ratios are also presented in the following tables.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Required for

 

Minimum Amount

 

 

 

 

 

 

 

 

Adequately

 

To Be Well

 

 

 

Actual

 

Capitalized(1)

 

Capitalized(1)

 

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

 

 

(Dollars in thousands)

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital(1) (to risk-weighted assets)

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Company

 

$

609,995

 

10.8

%  

$

450,589

 

8.0

%  

$

 —

 

N/A

 

Merchants Bank

 

 

613,387

 

11.2

%  

 

439,405

 

8.0

%  

 

549,257

 

10.0

%

FMBI

 

 

20,154

 

14.2

%  

 

11,315

 

8.0

%  

 

14,144

 

10.0

%

Tier 1 capital(1) (to risk-weighted assets)

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Company

 

 

596,290

 

10.6

%  

 

337,942

 

6.0

%  

 

 —

 

N/A

 

Merchants Bank

 

 

600,164

 

10.9

%  

 

329,554

 

6.0

%  

 

439,405

 

8.0

%

FMBI

 

 

19,672

 

13.9

%  

 

8,486

 

6.0

%  

 

11,315

 

8.0

%

Common Equity Tier 1 capital(1) (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

383,602

 

6.8

%  

 

253,457

 

4.5

%  

 

 —

 

N/A

 

Merchants Bank

 

 

600,164

 

10.9

%  

 

247,166

 

4.5

%  

 

357,017

 

6.5

%

FMBI

 

 

19,672

 

13.9

%  

 

6,365

 

4.5

%  

 

9,194

 

6.5

%

Tier 1 capital(1) (to average assets)

 

 

 

 

  

 

 

  

 

 

 

 

  

 

  

 

Company

 

 

596,290

 

10.0

%  

 

239,096

 

4.0

%  

 

 —

 

N/A

 

Merchants Bank

 

 

600,164

 

10.3

%  

 

232,749

 

4.0

%  

 

290,937

 

5.0

%

FMBI

 

 

19,672

 

11.5

%  

 

6,845

 

4.0

%  

 

8,556

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

Minimum

 

 

 

 

 

 

 

 

Amount Required

 

Amount To Be

 

 

 

 

 

 

 

 

for Adequately

 

Well

 

 

 

Actual

 

Capitalized(1)

 

Capitalized(1)

 

 

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Amount

    

Ratio

 

 

 

(Dollars in thousands)

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital(1) (to risk-weighted assets)

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Company

 

$

393,654

 

12.3

%  

$

255,884

 

8.0

%  

$

 —

 

N/A

 

Merchants Bank

 

 

412,386

 

13.3

%  

 

248,290

 

8.0

%  

 

310,363

 

10.0

%

FMBI

 

 

17,537

 

18.6

%  

 

7,559

 

8.0

%  

 

9,448

 

10.0

%

Tier 1 capital(1) (to risk-weighted assets)

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Company

 

 

380,950

 

11.9

%  

 

191,913

 

6.0

%  

 

 —

 

N/A

 

Merchants Bank

 

 

399,815

 

12.9

%  

 

186,218

 

6.0

%  

 

248,290

 

8.0

%

FMBI

 

 

17,404

 

18.4

%  

 

5,669

 

6.0

%  

 

7,559

 

8.0

%

Common Equity Tier 1 capital(1) (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

339,369

 

10.6

%  

 

143,935

 

4.5

%  

 

 —

 

N/A

 

Merchants Bank

 

 

399,815

 

12.9

%  

 

139,663

 

4.5

%  

 

201,736

 

6.5

%

FMBI

 

 

17,404

 

18.4

%  

 

4,252

 

4.5

%  

 

6,141

 

6.5

%

Tier 1 capital(1) (to average assets)

 

 

 

 

  

 

 

  

 

 

 

 

  

 

  

 

Company

 

 

380,950

 

10.0

%  

 

152,081

 

4.0

%  

 

 —

 

N/A

 

Merchants Bank

 

 

399,815

 

11.0

%  

 

145,723

 

4.0

%  

 

182,154

 

5.0

%

FMBI

 

 

17,404

 

10.8

%  

 

6,453

 

4.0

%  

 

8,066

 

5.0

%


1

As defined by regulatory agencies.

22

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Beginning January 1, 2015, the Basel III Capital Rule applied to Merchants Bank. The following table lists the capital categories and ratios determined by the Board of Governors of the Federal Reserve System and the FDIC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity

 

 

 

 

 

Total Risk-based

 

Tier 1 Risk-based

 

Tier 1 Risk-based

 

Tier 1

 

Capital Category

    

Capital ratio

    

Capital ratio

    

Capital ratio

    

Leverage ratio

 

Well capitalized

 

10

%  

 8

%  

6.5

%  

 5

%

Adequately capitalized

 

 8

 

 6

 

4.5

 

 4

 

Undercapitalized

 

<8

 

<6

 

<4.5

 

<4

 

Significantly undercapitalized

 

<6

 

<4

 

<3

 

<3

 

Critically undercapitalized

 

Tangible Equity/Total Assets </= 2%

 

 

The Basel III Capital Rules, among other things, (i) introduced a new capital measure called “Common Equity Tier 1” (CET1), (ii) specified that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments as compared to existing regulations.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015, and were phased in over a four-year period, becoming fully phased in on January 1, 2019.  Additionally, under the Basel III Capital Rules, in order to avoid limitations on capital distributions of dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of capital above its minimum risk-based capital requirements. On January 1, 2019 the capital conservation buffer became fully phased in at 2.5%.

 

Note 5: Derivative Financial Instruments

 

The Company uses derivative financial instruments to help manage exposure to interest rate risk and the effects that changes in interest rates may have on net income and the fair value of assets and liabilities. 

Forward Sales Commitments and Interest Rate Lock Commitments

The Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into interest rate locks with potential borrowers to fund specific mortgage loans that will be sold into the secondary market.  The forward contracts are entered into in order to economically hedge the effect of changes in interest rates resulting from the Company’s commitment to fund the loans.

Each of these items are considered derivatives, but are not designated as accounting hedges, and are recorded at fair value with changes in fair value reflected in noninterest income on the condensed consolidated statements of income.  The fair value of derivative instruments with a positive fair value are reported in other assets in the condensed consolidated balance sheets while derivative instruments with a negative fair value are reported in other liabilities in the condensed consolidated balance sheets. 

23

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table presents the notional amount and fair value of interest rate locks and forward contracts utilized by the Company at September 30, 2019 and December 31, 2018. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

Fair Value

 

 

Amount

 

 

Balance Sheet Location

 

 

Asset

 

 

Liability

September 30, 2019

 

(In thousands)

 

 

 

 

 

(In thousands)

Interest rate lock commitments

$

46,846

 

 

Other assets/liabilities

 

$

296

 

$

 8

Forward contracts

 

67,698

 

 

Other assets/liabilities

 

 

14

 

 

16

 

 

 

 

 

 

 

$

310

 

$

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

Fair Value

 

 

Amount

 

 

Balance Sheet Location

 

 

Asset

 

 

Liability

December 31, 2018

 

(In thousands)

 

 

 

 

 

(In thousands)

Interest rate lock commitments

$

8,812

 

 

Other assets/liabilities

 

$

70

 

$

 —

Forward contracts

 

19,640

 

 

Other assets/liabilities

 

 

 —

 

 

 9

 

 

 

 

 

 

 

$

70

 

$

 9

Fair values of these derivative financial instruments were estimated using changes in mortgage interest rates from the date the Company entered into the interest rate lock commitment and the balance sheet date.  The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the condensed consolidated statements of income for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(In thousands)

 

 

(In thousands)

Interest rate lock commitments

 

$

144

 

$

(95)

 

$

218

 

$

68

Forward contracts (includes pair-off settlements)

 

 

(25)

 

 

16

 

 

(80)

 

 

(76)

    Net derivative gains (losses)

 

$

119

 

$

(79)

 

 

138

 

$

(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives on Behalf of Customers

The Company began offering derivative contracts to some customers in connection with their risk management needs during the three months ended September 30, 2019.  These derivatives include interest rate swaps.  The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer.  These derivatives generally work together as an economic interest rate hedge, but the Company does not designate them for hedge accounting treatment.  Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred, typically resulting in no net earnings impact.  The fair values of derivative assets and liabilities related to derivatives for customers with interest rate swaps were recorded in the condensed consolidated balance sheets as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

Fair Value

 

 

Amount

 

 

Balance Sheet Location

 

 

Asset

 

 

Liability

 

 

(In thousands)

 

 

 

 

 

(In thousands)

September 30, 2019

$

4,400

 

 

Other assets/liabilities

 

$

48

 

$

48

December 31, 2018

 

 —

 

 

Other assets/liabilities

 

$

 —

 

$

 —

 

24

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The gross gains and losses on these derivative assets and liabilities recorded in Other Noninterest income and Other Noninterest expense in the condensed consolidated statements of income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(In thousands)

 

 

(In thousands)

Gross swap gains

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Gross swap losses

 

 

 —

 

 

 —

 

 

 —

 

 

 —

    Net swap gains (losses)

 

$

 —

 

$

 —

 

 

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company pledged no collateral to secure its obligations under these contracts at September 30, 2019 and September 30, 2018, respectively.

 

Note 6:   Disclosures about Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1    Quoted prices in active markets for identical assets or liabilities

Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3    Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities

25

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Recurring Measurements

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

Active Markets 

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

Assets

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

(In thousands)

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

$

227,914

 

$

 —

 

$

227,914

 

$

 —

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

 

2,765

 

 

2,765

 

 

 —

 

 

 —

Federal agencies

 

 

257,388

 

 

 —

 

 

257,388

 

 

 —

Municipals

 

 

12,760

 

 

 —

 

 

12,760

 

 

 —

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

35,760

 

 

 —

 

 

35,760

 

 

 —

Loans held for sale

 

 

23,357

 

 

 —

 

 

23,357

 

 

 —

Mortgage servicing rights

 

 

71,989

 

 

 —

 

 

 —

 

 

71,989

Derivative assets - interest rate lock commitments

 

 

296

 

 

 —

 

 

 —

 

 

296

Derivative assets - forward contracts

 

 

14

 

 

 —

 

 

14

 

 

 —

Derivative assets - interest rate swaps

 

 

48

 

 

 —

 

 

48

 

 

 —

Derivative liabilities - interest rate lock commitments

 

 

 8

 

 

 —

 

 

 —

 

 

 8

Derivative liabilities - forward contracts

 

 

16

 

 

 —

 

 

16

 

 

 —

Derivative liabilities - interest rate swaps

 

 

48

 

 

 —

 

 

48

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

  

 

 

 

 

 

 

 

 

 

Trading securities

 

$

163,419

 

$

 —

 

$

163,419

 

$

 —

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

 

11,941

 

 

11,941

 

 

 —

 

 

 —

Federal agencies

 

 

236,930

 

 

 —

 

 

236,930

 

 

 —

Municipals

 

 

21,332

 

 

 —

 

 

21,332

 

 

 —

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

60,868

 

 

 —

 

 

60,868

 

 

 —

Loans held for sale

 

 

11,886

 

 

 —

 

 

11,886

 

 

 —

Mortgage servicing rights

 

 

77,844

 

 

 —

 

 

 —

 

 

77,844

Derivative assets - interest rate lock commitments

 

 

70

 

 

 —

 

 

 —

 

 

70

Derivative liabilities - forward contracts

 

 

 9

 

 

 —

 

 

 9

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the nine months ended September 30, 2019 and the year ended December 31, 2018. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

26

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Trading and Available-for-Sale Securities

Where quoted market prices are available in an active market, securities such as U.S. Treasuries are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy including federal agencies, mortgage-backed securities, equities, and Federal Housing Administration participation certificates. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Loans Held for Sale

Certain loans held for sale at fair value are saleable into the secondary mortgage markets and their fair values are estimated using observable quoted market or contracted prices, or market price equivalents, which would be used by other market participants. These saleable loans are considered Level 2.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

The Chief Financial Officer’s (CFO) office contracts with a pricing specialist to generate fair value estimates on a quarterly basis. The CFO’s office challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States.

Derivative Financial Instruments

The Company estimates the fair value of interest rate lock commitments based on the value of the underlying mortgage loan, quoted mortgage backed security prices, estimates of the fair value of the mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the interest rate lock commitment, net of expenses.  With respect to its interest rate lock commitments, management determined that a Level 3 classification was most appropriate based on the various significant unobservable inputs utilized in estimating the fair value of its interest rate lock commitments.  The Company estimates the fair value of forward sales commitments based on market quotes of mortgage backed security prices for securities similar to the ones used, which are considered Level 2.  The fair value of interest rate swaps is based on prices that are obtained from a third-party that uses observable market inputs, thereby supporting a Level 2 classification. Changes in fair value of the Company’s derivative financial instruments are recognized through noninterest income and/or noninterest expense on its condensed consolidated statement of income.

27

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

    

 

 

(In thousands)

 

(In thousands)

Mortgage servicing rights

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

74,550

 

$

70,085

 

$

77,844

 

$

66,079

 

Additions

 

 

  

 

 

  

 

 

  

 

 

  

 

Originated and purchased servicing

 

 

1,356

 

 

1,563

 

 

4,637

 

 

7,265

 

Subtractions

 

 

  

 

 

  

 

 

  

 

 

  

 

Paydowns

 

 

(2,438)

 

 

(658)

 

 

(4,627)

 

 

(3,267)

 

Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model

 

 

(1,479)

 

 

500

 

 

(5,865)

 

 

1,413

 

Balance, end of period

 

$

71,989

 

$

71,490

 

$

71,989

 

$

71,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities - Municipals

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

 —

 

$

6,431

 

$

 —

 

$

6,688

 

Additions

 

 

  

 

 

  

 

 

  

 

 

  

 

Purchased securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Subtractions

 

 

 

 

 

 

 

 

 

 

 

 

 

Paydowns

 

 

 —

 

 

 —

 

 

 —

 

 

(257)

 

Sales

 

 

 —

 

 

(6,431)

 

 

 —

 

 

(6,431)

 

Unrealized gains (losses) included in other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Balance, end of period

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets - interest rate lock commitments

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

147

 

$

170

 

$

70

 

$

 —

 

Changes in fair value

 

 

149

 

 

(102)

 

 

226

 

 

68

 

Balance, end of period

 

$

296

 

$

68

 

$

296

 

$

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities - interest rate lock commitments

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

 3

 

$

 7

 

$

 —

 

$

 —

 

Changes in fair value

 

 

 5

 

 

(7)

 

 

 8

 

 

 —

 

Balance, end of period

 

$

 8

 

$

 —

 

$

 8

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

Active Markets 

 

Other

 

Significant

 

 

 

 

 

for Identical

 

Observable

 

Unobservable 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

Assets

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

(In thousands)

September 30, 2019

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans (collateral-dependent)

 

$

1,600

 

$

 —

 

$

 —

 

$

1,600

December 31, 2018

 

 

  

 

 

  

 

 

  

 

 

  

Impaired loans (collateral-dependent)

 

$

2,639

 

$

 —

 

$

 —

 

$

2,639

 

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheet, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral-Dependent Impaired Loans, Net of Allowance for Loan Losses

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value.  Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Company’s Chief Credit Officer’s (CCO) office.  Appraisals are reviewed for accuracy and consistency by the CCO’s office.  Appraisers are selected from the list of approved appraisers maintained by management.  The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.  These discounts and estimates are developed by the CCO’s office by comparison to historical results.

29

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Unobservable (Level 3) Inputs:

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements other than goodwill. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation

 

 

 

 

 

    

Fair Value

    

Technique

    

Unobservable Inputs

    

Range

 

 

(In thousands)

 

 

 

 

 

 

At September 30, 2019:

 

 

  

 

  

 

 

 

 

Collateral-dependent impaired loans

 

$

1,600

 

Market comparable properties

 

Marketability discount

 

37%

Mortgage servicing rights

 

$

71,989

 

Discounted cash flow

 

Discount rate

 

8% - 13%

 

 

 

  

 

  

 

Constant prepayment rate

 

1% - 39%

Derivative assets - interest rate lock commitments

 

$

296

 

Discounted cash flow

 

loan closing rates

 

73-99%

Derivative liabilities - interest rate lock commitments

 

$

 8

 

Discounted cash flow

 

loan closing rates

 

73-99%

 

 

 

 

 

 

 

 

 

 

At December 31, 2018:

 

 

  

 

  

 

 

 

 

Collateral-dependent impaired loans

 

$

2,639

 

Market comparable properties

 

Marketability discount

 

17%-59%

Mortgage servicing rights

 

$

77,844

 

Discounted cash flow

 

Discount rate

 

8% - 13%

 

 

 

  

 

  

 

Constant prepayment rate

 

1% - 30%

Derivative assets - interest rate lock commitments

 

$

70

 

Discounted cash flow

 

loan closing rates

 

95-100%

 

Sensitivity of Significant Unobservable Inputs

The following is a discussion of the sensitivity of significant unobservable inputs, the interrelationships between those inputs and other unobservable inputs used in recurring fair value measurement and of how those inputs might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement.

Mortgage Servicing Rights

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are discount rates and constant prepayment rates. Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement.

30

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Fair Value of Financial Instruments 

The following table presents the carrying amount and estimated fair values of the Company’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2019 and December 31, 2018. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Active Markets 

 

Other

 

Significant

 

 

 

 

 

 

 

 

for Identical

 

Observable

 

Unobservable 

 

 

Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

Assets

    

Value

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

 

(In thousands)

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Cash and cash equivalents

 

$

364,976

 

$

364,976

 

$

364,976

 

$

 —

 

$

 —

Securities purchased under agreements to resell

 

 

6,760

 

 

6,760

 

 

 —

 

 

6,760

 

 

 —

FHLB stock

 

 

18,808

 

 

18,808

 

 

 —

 

 

18,808

 

 

 —

Loans held for sale

 

 

2,475,181

 

 

2,475,181

 

 

 —

 

 

2,475,181

 

 

 —

Loans, net

 

 

2,742,088

 

 

2,728,683

 

 

 —

 

 

 —

 

 

2,728,683

Interest receivable

 

 

18,780

 

 

18,780

 

 

 —

 

 

18,780

 

 

 —

Financial liabilities:

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

Deposits

 

 

5,499,649

 

 

5,500,297

 

 

3,248,689

 

 

2,251,608

 

 

 —

Lines of credit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Short-term subordinated debt

 

 

12,000

 

 

12,000

 

 

 —

 

 

12,000

 

 

 —

FHLB advances

 

 

147,673

 

 

147,772

 

 

 —

 

 

147,772

 

 

 —

Interest payable

 

 

13,130

 

 

13,130

 

 

 —

 

 

13,130

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Financial assets:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Cash and cash equivalents

 

$

336,524

 

$

336,524

 

$

336,524

 

$

 —

 

$

 —

Securities purchased under agreements to resell

 

 

6,875

 

 

6,875

 

 

 —

 

 

6,875

 

 

 —

FHLB stock

 

 

7,974

 

 

7,974

 

 

 —

 

 

7,974

 

 

 —

Loans held for sale

 

 

820,569

 

 

820,569

 

 

 —

 

 

820,569

 

 

 —

Loans, net

 

 

2,045,423

 

 

2,041,772

 

 

 —

 

 

 —

 

 

2,041,772

Interest receivable

 

 

13,827

 

 

13,827

 

 

 —

 

 

13,827

 

 

 —

Financial liabilities:

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

Deposits

 

 

3,231,086

 

 

3,230,397

 

 

2,550,632

 

 

679,765

 

 

 —

Lines of credit

 

 

33,150

 

 

33,150

 

 

 —

 

 

33,150

 

 

 —

Short-term subordinated debt

 

 

10,582

 

 

10,582

 

 

 —

 

 

10,582

 

 

 —

FHLB advances

 

 

151,721

 

 

151,723

 

 

 —

 

 

151,723

 

 

 —

Interest payable

 

 

4,132

 

 

4,132

 

 

 —

 

 

4,132

 

 

 —

 

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.

Cash and Cash Equivalents and Securities Purchased Under Agreement to Resell

The carrying amount approximates fair value.

31

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Federal Home Loan Bank Stock

The fair value of Federal Home Loan Bank of Indianapolis and Federal Home Loan Bank of Chicago (“FHLB”) stock is based on the price at which it may be sold to the FHLB.

Loans Held For Sale

The carrying amount approximates fair value due to the insignificant time between origination and date of sale.

Loans

Fair value is estimated by discounting the future cash flows using the market rates at which similar notes would be made to borrowers with similar credit ratings and for the same remaining maturities. The market rates used are based on current rates the Company would impose for similar loans and reflect a market participant assumption about risks associated with nonperformance, illiquidity, and the structure and term of the loans along with local economic and market conditions.

Interest Receivable and Payable

The carrying amount approximates fair value. The carrying amount is determined using the interest rate, balance and last payment date.

Deposits

The fair values of noninterest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. Fair values for fixed-rate certificates and time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of expected monthly maturities on such time deposits.

Line of Credit and Short-term Subordinated Debt

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

Fair value is estimated by discounting the future cash flows using rates of similar advances with similar maturities. These rates were obtained from current rates offered by the FHLB.

Off-Balance Sheet Commitments

Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans and standby letters of credit and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments to extend credit and letters of credit is not presented in the previous table since the fair value is considered to be insignificant.

32

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 7:   Earnings Per Share

Earnings per share were computed as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Month Periods Ended September 30, 

 

 

2019

 

2018

 

 

 

 

 

Weighted-

 

Per 

 

 

 

 

Weighted-

 

Per 

 

 

Net

 

Average

 

Share

 

Net

 

Average

 

Share

 

    

Income

    

Shares

    

Amount

    

Income

    

Shares

    

Amount

 

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Net income

 

$

20,259

 

  

 

 

  

 

$

16,739

 

  

 

 

  

Dividends on preferred stock

 

 

(3,022)

 

  

 

 

  

 

 

(833)

 

  

 

 

  

Net income allocated to common shareholders

 

$

17,237

 

  

 

 

  

 

$

15,906

 

  

 

 

  

Basic earnings per share

 

 

  

 

28,706,438

 

$

0.60

 

 

  

 

28,694,036

 

$

0.55

Effect of dilutive securities-restricted stock awards

 

 

  

 

38,515

 

 

  

 

 

  

 

33,786

 

 

  

Diluted earnings per share

 

 

  

 

28,744,953

 

$

0.60

 

 

  

 

28,727,822

 

$

0.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Month Periods Ended September 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Weighted-

 

Per 

 

 

 

 

Weighted-

 

Per 

 

 

Net

 

Average

 

Share

 

Net

 

Average

 

Share

 

    

Income

    

Shares

    

Amount

    

Income

    

Shares

    

Amount

 

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Net income

 

$

47,268

 

  

 

 

  

 

$

47,452

 

  

 

 

  

Dividends on preferred stock

 

 

(5,598)

 

  

 

 

  

 

 

(2,498)

 

  

 

 

  

Net income allocated to common shareholders

 

$

41,670

 

  

 

 

  

 

$

44,954

 

  

 

 

  

Basic earnings per share

 

 

  

 

28,704,682

 

$

1.45

 

 

  

 

28,692,591

 

$

1.57

Effect of dilutive securities-restricted stock awards

 

 

  

 

38,229

 

 

  

 

 

  

 

27,149

 

 

  

Diluted earnings per share

 

 

  

 

28,742,911

 

$

1.45

 

 

  

 

28,719,740

 

$

1.57

 

 

 

Note 8:   Share-Based Payment Plans

Equity-based incentive awards are currently issued pursuant to the 2017 Equity Incentive Plan (the “2017 Incentive Plan”). Prior to the adoption of the 2017 Incentive Plan, the equity awards issued historically consisted of restricted stock awards issued pursuant to the Incentive Plan for Merchants Bank Executive Officers (the “Prior Incentive Plan”). As of the effective date of the 2017 Equity Incentive Plan, no further awards will be granted under the Prior Incentive Plan. However, any previously outstanding incentive award granted under the Prior Incentive Plan remains subject to the terms of such plans until the time it is no longer outstanding. During the three months ended September 30, 2019 and 2018, the Company did not issue any shares pursuant to awards issued under these plans.  During the nine months ended September 30, 2019 and 2018, the Company issued 10,127 and 7,039 shares, respectively, pursuant to the Prior Incentive Plan. As of September 30, 2019, the Company has not issued any shares pursuant to the 2017 Equity Incentive Plan.

During 2018, the Compensation Committee of the Board of Directors approved a plan for non-executive directors to receive a portion of their annual retainer fees in the form of shares of common stock equal to $10,000, rounded up to the nearest whole share.  There were no shares issued to non-executive directors during the three months ended September 30, 2019 or 2018, respectively.  There were 2,275 and 1,830 shares issued to non-executive directors during the nine months ended September 30, 2019 and 2018, respectively.

Note 9:   Segment Information

Our business segments are defined as Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. The reportable business segments are consistent with the internal reporting and evaluation of the principal lines of business of the Company. The Multi-family Mortgage Banking segment originates and services government sponsored mortgages for multi-family and healthcare facilities. The Mortgage Warehousing segment funds agency eligible residential loans from the date of origination or purchase, until the date of sale in the secondary market, as well as commercial loans to

33

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

non-depository financial institutions. The Banking segment provides a wide range of financial products and services to consumers and businesses, including retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and Small Business Administration (“SBA”) lending. Other includes general and administrative expenses that provide services to all segments; internal funds transfer pricing offsets resulting from allocations to/from the other segments; certain elimination entries and investments in qualified affordable housing limited partnerships. All operations are domestic.

 

The tables below present selected business segment financial information for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Mortgage 

 

Mortgage

 

 

 

 

 

 

 

 

 

 

    

Banking

    

Warehousing

    

Banking

    

Other

    

Total

 

 

(In thousands)

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

335

 

$

30,946

 

$

27,963

 

$

517

 

$

59,761

Total interest expense

 

 

 —

 

 

16,157

 

 

12,738

 

 

(1,758)

 

 

27,137

Net interest income

 

 

335

 

 

14,789

 

 

15,225

 

 

2,275

 

 

32,624

Provision for loan losses

 

 

 —

 

 

415

 

 

778

 

 

 —

 

 

1,193

Net interest income after provision for loan losses

 

 

335

 

 

14,374

 

 

14,447

 

 

2,275

 

 

31,431

Total noninterest income

 

 

9,759

 

 

2,699

 

 

(867)

 

 

(739)

 

 

10,852

Total noninterest expense

 

 

6,088

 

 

2,829

 

 

3,708

 

 

2,897

 

 

15,522

Income before income taxes

 

 

4,006

 

 

14,244

 

 

9,872

 

 

(1,361)

 

 

26,761

Income taxes

 

 

1,265

 

 

3,320

 

 

2,223

 

 

(306)

 

 

6,502

Net income (loss)

 

$

2,741

 

$

10,924

 

$

7,649

 

$

(1,055)

 

$

20,259

Total assets

 

$

169,283

 

$

3,529,267

 

$

2,596,313

 

$

42,323

 

$

6,337,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage 

 

Mortgage

 

 

 

 

 

 

 

 

 

 

    

Banking

    

Warehousing

    

Banking

    

Other

    

Total

 

 

(In thousands)

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

201

 

$

16,335

 

$

20,341

 

$

700

 

$

37,577

Total interest expense

 

 

 —

 

 

7,289

 

 

7,835

 

 

(1,029)

 

 

14,095

Net interest income

 

 

201

 

 

9,046

 

 

12,506

 

 

1,729

 

 

23,482

Provision for loan losses

 

 

 —

 

 

227

 

 

390

 

 

 —

 

 

617

Net interest income after provision for loan losses

 

 

201

 

 

8,819

 

 

12,116

 

 

1,729

 

 

22,865

Total noninterest income

 

 

10,874

 

 

779

 

 

818

 

 

(564)

 

 

11,907

Noninterest expense

 

 

4,346

 

 

1,998

 

 

3,740

 

 

2,365

 

 

12,449

Income before income taxes

 

 

6,729

 

 

7,600

 

 

9,194

 

 

(1,200)

 

 

22,323

Income taxes

 

 

1,866

 

 

1,946

 

 

2,093

 

 

(321)

 

 

5,584

Net income (loss)

 

$

4,863

 

$

5,654

 

$

7,101

 

$

(879)

 

$

16,739

Total assets

 

$

152,035

 

$

1,624,375

 

$

2,010,485

 

 

20,054

 

$

3,806,949

 

 

 

 

 

 

 

 

 

 

34

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Mortgage 

 

Mortgage

 

 

 

 

 

 

 

 

 

 

    

Banking

    

Warehousing

    

Banking

    

Other

    

Total

 

 

(In thousands)

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

1,000

 

$

67,276

 

$

78,439

 

$

1,481

 

$

148,196

Total interest expense

 

 

 —

 

 

35,281

 

 

32,929

 

 

(4,691)

 

 

63,519

Net interest income

 

 

1,000

 

 

31,995

 

 

45,510

 

 

6,172

 

 

84,677

Provision for loan losses

 

 

 —

 

 

875

 

 

1,072

 

 

 —

 

 

1,947

Net interest income after provision for loan losses

 

 

1,000

 

 

31,120

 

 

44,438

 

 

6,172

 

 

82,730

Total noninterest income

 

 

20,868

 

 

4,593

 

 

1,015

 

 

(2,090)

 

 

24,386

Total noninterest expense

 

 

15,392

 

 

7,955

 

 

12,690

 

 

8,440

 

 

44,477

Income before income taxes

 

 

6,476

 

 

27,758

 

 

32,763

 

 

(4,358)

 

 

62,639

Income taxes

 

 

1,930

 

 

6,682

 

 

7,937

 

 

(1,178)

 

 

15,371

Net income

 

$

4,546

 

$

21,076

 

$

24,826

 

$

(3,180)

 

$

47,268

Total assets

 

$

169,283

 

$

3,529,267

 

$

2,596,313

 

$

42,323

 

$

6,337,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage 

 

Mortgage

 

 

 

 

 

 

 

 

 

 

    

Banking

    

Warehousing

    

Banking

    

Other

    

 

Total

 

 

(In thousands)

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

472

 

$

42,850

 

$

56,122

 

$

1,294

 

$

100,738

Total interest expense

 

 

 —

 

 

16,499

 

 

20,748

 

 

(2,305)

 

 

34,942

Net interest income

 

 

472

 

 

26,351

 

 

35,374

 

 

3,599

 

 

65,796

Provision for loan losses

 

 

 —

 

 

1,185

 

 

1,836

 

 

 —

 

 

3,021

Net interest income after provision for loan losses

 

 

472

 

 

25,166

 

 

33,538

 

 

3,599

 

 

62,775

Total noninterest income

 

 

32,000

 

 

1,949

 

 

2,333

 

 

(1,432)

 

 

34,850

Noninterest expense

 

 

11,946

 

 

5,919

 

 

10,373

 

 

6,481

 

 

34,719

Income before income taxes

 

 

20,526

 

 

21,196

 

 

25,498

 

 

(4,314)

 

 

62,906

Income taxes

 

 

5,414

 

 

5,138

 

 

5,932

 

 

(1,030)

 

 

15,454

Net income

 

$

15,112

 

$

16,058

 

$

19,566

 

$

(3,284)

 

$

47,452

Total assets

 

$

152,035

 

$

1,624,375

 

$

2,010,485

 

$

20,054

 

$

3,806,949

 

 

 

 

Note 10:   Recent Accounting Pronouncements

The Company is an emerging growth company and as such will be subject to the effective dates noted for the private companies if they differ from the effective dates noted for public companies.

FASB ASU 2014‑09, Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014‑09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016 the FASB issued ASU 2016‑08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in determining revenue recognition as principal versus agent. In April 2016, the FASB issued ASU 2016‑10, “Identifying Performance Obligations and Licensing,” which provides guidance in accounting for immaterial performance obligations and shipping and handling. In May 2016, the FASB issued ASU 2016‑12, “Narrow‑Scope Improvements and Practical Expedients,” which provides clarification on assessing the collectability criterion,

35

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. This ASU also provides a practical expedient for contract modifications.

As an emerging growth company, these amendments are effective for annual reporting periods beginning after December 15, 2018, and for interim periods within annual periods beginning after December 15, 2019. The Company’s revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09.    The Company has evaluated the impact of adopting ASU 2014-09 and does not expect it to have a material impact on the Company’s financial position or results of operations.

FASB ASU 2016‑01, Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU 2016‑01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” For public business entities, the amendments in this update include the elimination of the requirement to disclose the method(s) and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, the requirement to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, the requirement to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument‑specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, the requirement for separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or accompanying notes to the financial statements, and the amendments clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available‑for‑sale securities in combination with the entity’s other deferred tax assets.  An entity should apply the amendments to this update by means of a cumulative‑effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.

As an emerging growth company, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within years beginning after December 15, 2019.  Early adoption of the amendments in the update is not permitted, except that early application by public business entities to financial statements of fiscal years or interim periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance, are permitted as of the beginning of the fiscal year of adoption for the following amendment: An entity should present separately in other comprehensive income the portion of the total change in the fair value of a liability at fair value in accordance with the fair value option for financial instruments.  An entity should apply the amendments to this update by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.  The Company is continuing to evaluate the impact of adopting this new guidance, but does not expect the adoption of ASU 2016-01 to have a material impact on the Company’s financial position or results of operation.

 

FASB ASU 2016‑02, Leases

In February 2016, the FASB issued ASU 2016‑02, “Leases.” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short‑term leases) at the commencement date:

·

A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and

·

A right‑of‑use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers.”  The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

off‑balance sheet financing.  Lessees (for capital and operating leases) and lessors (for sales‑type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.

As an emerging growth company, the amendments in ASU 2016‑02 are effective, as an emerging growth company, beginning after December 15, 2020, and for interim periods for years beginning after January 1, 2021.  The Company is continuing to evaluate the impact of adopting this new guidance, but it does not expect the adoption to have a material impact on the Company’s financial position or results of operations.

FASB ASU 2016‑13, Financial Instruments—Credit Losses

In June 2016, the FASB issued ASU 2016‑13, “Financial Instruments—Credit Losses”, commonly referred to as “CECL”. The amendments in this ASU replace the incurred loss model with a methodology that reflects the “current expected credit losses” over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. ASU 2016‑13 replaces the incurred loss impairment methodology with a new methodology that reflects expected credit losses over the lives of the loans and requires consideration of a broader range of information to form credit loss estimates. The ASU requires an organization to estimate all expected credit losses for financial assets measured at amortized cost, including loans and held‑to‑maturity debt securities, based on historical experience, current conditions, and reasonable and supportable forecasts. Additional disclosures are required.

As an emerging growth company, the amendments in ASU 2016‑13 are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years beginning after December 15, 2022.    Because the Company’s status as an emerging growth company is expected to expire on December 31, 2022, this standard will likely be implemented by December 31, 2022. The Company has established a cross-functional committee that has developed a project plan to review modeling data currently available and technology needed to ensure compliance of this standard.  The committee has contracted with a vendor to assist in generating specific loan level details within our core systems, as well as compiling peer and industry data that would be useful in our modeling forecasts. While the Company generally expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, the Company cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial statements.  Management continues to recognize that the implementation of this ASU may increase the balance of the allowance for loan losses and is continuing to evaluate the potential impact on the Company’s financial position and results of operations.

FASB ASU No. 2017‑04, Intangibles—Goodwill and Other (Topic 350)

In January 2017, the FASB issued ASU 2017‑04, “Intangibles—Goodwill and Other (Topic 350).” This ASU simplifies the test for goodwill impairment. Specifically, these amendments eliminate Step 2 from the goodwill impairment test, and also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.

As an emerging growth company, the amendments in this ASU are effective for annual goodwill impairment tests in fiscal years beginning after December 15, 2021. Management continues to believe that the changes will not have a material effect on the Company’s financial position and results of operations.

 

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Forward-Looking Statements

Certain statements in this Form 10-Q, including, but not limited to, statements within Management’s Discussion and Analysis of Financial Condition and Results of Operations, are “forward-looking statements” within the meaning of the rules and regulations of the Securities and Exchange Commission (“SEC”).  These forward-looking statements reflect our current views with respect to, among other things, future events and our 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 our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution 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 we believe 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 our actual results to differ materially from those indicated in these forward‑looking statements, including those factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018 or “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q or the following:

·

business and economic conditions, particularly those affecting the financial services industry and our primary market areas;

·

our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;

·

factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions;

·

compliance with governmental and regulatory requirements, including the Dodd‑Frank Act and others relating to banking, consumer protection, securities and tax matters;

·

our ability to maintain licenses required in connection with multi‑family mortgage origination, sale and servicing operations;

·

our ability to identify and address cyber‑security risks, fraud and systems errors;

·

our ability to effectively execute our strategic plan and manage our growth;

·

changes in our senior management team and our ability to attract, motivate and retain qualified personnel;

·

governmental monetary and fiscal policies, and changes in market interest rates;

·

liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;

·

incremental costs and obligations associated with operating as a public company;

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

·

effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

·

the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; and

·

changes in federal tax law or policy.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-Q. Any forward‑looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward‑looking statement, whether as a result of new information, future developments or otherwise.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of the financial condition at September 30, 2019 and results of operations for the three and nine months ended September 30, 2019 and 2018, is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this Form 10-Q.

The words “the Company,” “we,” “our” and “us” refer to Merchants Bancorp and its consolidated subsidiaries, unless we indicate otherwise.

 

Financial Highlights for the Three Months Ended September 30, 2019

 

·

Assets of $6.3 billion increased 63% compared to December 2018, reflecting a 200% increase in loans held for sale and 34% increase in loans receivable.

·

Net income increased $3.5 million, or 21%, compared to the three months ended September 30, 2018, driven primarily by a $9.1 million, or 39%, increase in net interest income from significant growth in loans held for sale and loans receivable in our Warehouse segment.  The 132% increase in warehouse loan volume during this period was well ahead of industry volume increases of 32%, according to the Mortgage Bankers Association.  We have benefited from the increased loan origination and refinancing activity due to lower market interest rates. The additional $171.1 million of net capital provided by our successful preferred stock offerings during 2019 has also allowed us to increase our capacity to offer additional funding opportunities to our customers while remaining  a well-capitalized institution.     

·

We experienced a 31 basis point decrease in our net interest margin of 2.22% compared to the three months ended September 30, 2018.  The declines in net interest margin reflected the flattening and inversion of the yield curve compared to prior periods, and reflects the shift in business mix to a higher concentration of warehouse loans that typically are funded for a shorter duration and earn interest based on longer term rates.  Profitability in this business, which also includes fees classified as noninterest income, made the most significant contribution to net income growth during the period.  Our diverse business model is designed to maximize overall profitability in both rising and falling interest rate environments, and unlike many other banks, our future profitability relies less upon changes in net interest margin.

·

Partially offsetting the increase in net interest income compared to the three months ended September 30, 2018 was a $3.1 million, or 25%, increase in noninterest expenses, primarily due to an increase in salaries and employee benefits.  The efficiency ratio was 35.7% compared to  35.2%  for the three months ended September 30, 2018.

·

Our asset quality remained strong, with nonperforming loans representing only 0.22% of total loans.

Business Overview

 

We are a diversified bank holding company headquartered in Carmel, Indiana and registered under the Bank Holding Company Act of 1956, as amended. We currently operate in and service multiple lines of business, including multi-family housing, mortgage warehouse financing, retail and correspondent residential mortgage banking, agricultural lending and traditional community banking.

 

Our business consists primarily of funding low risk loans that sell within 90 days of origination. The sale of loans and servicing fees generated primarily from the multi-family rental real estate loans servicing portfolio contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, retail, commercial, and brokered deposits. We believe that the combination of net interest income and noninterest income from the sale of low

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risk profile assets results in lower than industry charge offs and a lower expense base serve to maximize net income and shareholder return.

 

Financial Condition

As of September 30, 2019, we had approximately $6.3 billion in total assets, $5.5 billion in deposits, and $629.4 million in total shareholders’ equity. Total assets as of September 30, 2019, included approximately $365.0 million of cash and cash equivalents, $2.5 billion of loans held for sale and $2.8 billion of loans held for investment. It also included  $227.9 million of trading securities that represent pre-sold multi-family rental real estate loan originations in primarily Government National Mortgage Association (“GNMA”) mortgage backed securities pending settlements that typically occur within 30 days. There were  $308.7 million of available for sale securities that are match funded with related custodial deposits. There are restrictions on the types of securities, as these are funded by certain custodial deposits where we set the cost of deposits based on the yield of the related securities. Mortgage servicing rights were $72.0 million at September 30, 2019 based on the fair value of the multi-family rental real estate loan servicing, which are primarily GNMA servicing rights with 10-year call protection.

Comparison of Financial Condition at September 30, 2019 and December 31, 2018

Total Assets.    Total assets of $6.3 billion at September 30, 2019 increased $2.5 billion, or 63%, compared to December 31, 2018. The increase was due primarily to increases in loans held for sale of $1.7 billion, net loans receivable of $696.7 million, and trading securities of $64.5 million.

Cash and Cash Equivalents.   Cash and cash equivalents increased $28.5 million, or 8%, to $365.0 million at September 30, 2019 from $336.5 million at December 31, 2018.  The increase reflected cash levels consistent with balance sheet growth.

Trading Securities.    Trading securities increased $64.5 million, or 39%, to $227.9 million at September 30, 2019, from $163.4 million at December 31, 2018. The trading securities represent loans that our banking subsidiary, Merchants Bank, has funded and are held pending settlement, primarily as GNMA mortgage-backed securities with a firm investor commitment to purchase the securities.

Securities Available-for-Sale.    Investment securities available-for-sale decreased $22.4 million, or 7%, to $308.7 million at September 30, 2019 from $331.1 million at December 31, 2018. The decrease in securities available-for-sale was primarily due to calls, maturities, sales, and repayments of securities totaling $406.2 million during the period, that were partially offset by purchases of $382.4 million.  Our available for sale portfolio is funded with escrow deposits related to our multifamily mortgage GNMA servicing portfolio.  These deposits must be either FDIC insured or invested in federal agency securities.  The decline in available for sale securities compared with December 31, 2018 reflects a continuation of our strategy to increase the use of FDIC insurance for the deposits, as opposed to securities, which can be a more efficient approach to deploying deposits for the Company.

Federal Home Loan Bank (“FHLB”) stock.    FHLB stock increased $10.8 million, or 136%, to $18.8 million at September 30, 2019 from $8.0 million at December 31, 2018. The increase in FHLB stock was due primarily to the additional borrowing that allows us to manage our liquidity and funding costs more effectively.  Additional stock purchases are required by the FHLB in order to facilitate increased borrowing capacity.

Loans Held for Sale.    Loans held for sale, comprised primarily of single-family residential real estate loan participations in our mortgage warehouse segment, increased $1.7 billion, or 200%, to $2.5 billion at September 30, 2019 from $832.5 million at December 31, 2018. The increase in loans held for sale was primarily due to significant growth in our mortgage warehouse business, resulting from lower mortgage interest rates that increased our origination volume in the single-family mortgage market.

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Loans Receivable, Net.    Loans receivable, net, which are comprised of loans held for investment, increased  $696.7 million, or 34%, to $2.7 billion at September 30, 2019 compared to December 31, 2018. The increase in net loans was comprised primarily of:   

·

an increase of $459.0 million, or 136%, in mortgage warehouse lines of credit, to $796.3 million at September 30, 2019,  

·

an increase of $231.3 million, or 25%, in multi-family and healthcare financing loans, to $1.1 billion at September 30, 2019,

·

an increase of $6.4 million, or 8%, in agricultural production and real estate loans, to $85.7 million at September 30, 2019.  

The growth in mortgage warehouse lines of credit was substantially higher than the industry reported. There was a 14% industry increase in single-family residential loan volumes from the nine months ended September 30, 2018 to the nine months ended September 30, 2019, according to the Mortgage Bankers Association. This compares to the 72% increase in mortgage warehouse volumes we reported during the same period.  The increase in multi-family and agricultural loans was also due to higher origination volume during the nine months ended September 30, 2019.

As of September 30, 2019, approximately 93% of the total net loans at Merchants Bank reprice within 3 months.

Premises and Equipment, Net.    Premises and equipment, net, increased $14.1 million, or 93%, to $29.2 million at September 30, 2019 compared to December 31, 2018.  The increase was primarily due to the construction and furnishing of the Company’s new headquarters building in Carmel, Indiana.

Mortgage Servicing Rights.    Mortgage servicing rights decreased $5.9 million, or 8%, to $72.0 million at September 30, 2019 compared to December 31, 2018. During the nine months ended September 30, 2019, additions included originated and purchased servicing of $4.6 million.  These increases were offset by a reduction for paydowns of $4.6 million and a fair value decrease of $5.9 million.  Mortgage servicing rights are recognized in connection with sales of multi-family loans when we retain servicing of the sold loans, as well as upon purchases of loan servicing portfolios. The mortgage servicing rights are recorded and carried at fair value.  The fair value decrease recorded during the nine months ended September 30, 2019 was driven primarily by the decline in multi-family mortgage rates that increased borrower prepayment assumptions.  Further decreases in interest rates could result in additional reductions to fair market values.  The opposite could occur if interest rates increase.

Deposits.    Deposits increased $2.3  billion, or 70%, to $5.5 billion at September 30, 2019 compared with December 31, 2018.  The increase was primarily due to our higher use of brokered certificates of deposits to support the significant growth in warehouse loans and to match the expected duration.  

 

Certificates of deposit accounts increased $1.6 billion, or 231%, to $2.3 billion at September 30, 2019, while demand deposits increased $579.4 million, or 37%, to $2.1 billion at September 30, 2019, and savings deposits increased $118.7 million, or 12%, to $1.1 billion at September 30, 2019.  

 

Brokered certificates of deposit accounts increased $1.5 billion, to $2.1  billion at September 30, 2019 from $578.5 million at December 31, 2018. Brokered savings deposits increased $80.3 million, or 73%, to $190.0 million at September 30, 2019 from $109.6 million at December 31, 2018.    Brokered demand accounts decreased by $300.1 million, or 100%, to $26,000 at September 30, 2019 compared to December 31, 2018.  In total, brokered deposits increased $1.3  billion, or 129%, to $2.3  billion at September 30, 2019, from $988.2 million at December 31, 2018.  Brokered deposits represented 41% of total deposits at September 30, 2019, compared with 31% at December 31, 2018.

 

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Interest-bearing deposits increased $2.3  billion, or 74%, to $5.3 billion at September 30, 2019, and noninterest-bearing deposits of $198.8 million at September 30, 2019 increased $16.0 million, or 9%, compared to $182.9 million at December 31, 2018.  

 

Borrowings.    Borrowings totaled $159.7 million at September 30, 2019, a decrease of $35.8 million, or 18%, from December 31, 2018.  The decrease reflected a shift towards utilizing more brokered deposits to appropriately match the duration of the new loans established during the period.

Total Shareholders’ Equity.    Total shareholders’ equity increased $208.2 million, or 49%, to $629.4 million at September 30, 2019 from $421.2 million at December 31, 2018. The increase resulted primarily from the issuance of $171.1 million in preferred stock, net of expenses and repurchases, and net income of $47.3 million, which was partially offset by dividends paid on common and preferred shares of $6.0 million and $5.6 million, respectively, during the period.

Comparison of Operating Results for the Three Months Ended September 30, 2019 and 2018

General.    Net income for the three months ended September 30, 2019 was $20.3 million, an increase of $3.5 million, or 21%, compared to the three months ended September 30, 2018. The increase was primarily due to a $8.6 million increase in net interest income after the provision for loan losses, which was partially offset by a $3.1 million increase in noninterest expense and a $1.1 million decrease in noninterest income.

Net Interest Income.     Net interest income increased $9.1 million, or 39%, to $32.6 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The increase was due to the overall growth in our interest-earning assets period to period and a 4 basis point increase in our interest rate spread, to 1.98%, for the three months ended September 30, 2019 from 1.94% for the three months ended September 30, 2018.  

Our net interest margin decreased 31 basis points, to 2.22% for the three months ended September 30, 2019 from 2.53% for the three months ended September 30, 2018. The declines in net interest margin reflected the flattening and inversion of the yield curve compared to prior periods, and reflects the shift in business mix to a higher concentration of warehouse loans that typically are funded for a shorter duration and earn interest based on longer term rates.  Profitability in this business, which also includes fees classified as noninterest income, made the most significant contribution to net income growth during the three months ended September 30, 2019 compared to the three months ended September 30, 2018.

Interest Income.    Interest income increased $22.2 million, or 59%, to $59.8 million for the three months ended September 30, 2019, compared with the three months ended September 30, 2018. This increase was primarily attributable to a $20.7 million increase in interest on loans and loans held for sale, and a $1.0 million increase in interest on other interest-earning deposits. 

The average balance of loans, including loans held for sale, during the three months ended September 30, 2019 increased $2.0 billion, or 76%, to $4.7 billion from $2.7 billion for the three months ended September 30, 2018, while the average yield on loans decreased 31 basis points, to 4.44%, for the three months ended September 30, 2019, compared to 4.75% for the three months ended September 30, 2018.  The increase was primarily driven by higher loan volume in our mortgage warehouse segment as a result of lower mortgage rates.

The average balance of other interest-earning assets increased $160.3 million, or 31%, to $670.4 million for the three months ended September 30, 2019 from $510.1 million for the three months ended September 30, 2018, while the average yield increased 21 basis points to 2.30% for the three months ended September 30, 2019. 

The average balance of trading securities increased $25.6 million, or 19%, to $162.9 million for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, while the average yield decreased 29 basis points to 3.46% for the three months ended September 30, 2019. 

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The average balance of taxable securities available-for-sale decreased $77.3 million, or 22%, to $278.3 million for the three months ended September 30, 2019, compared with $355.6 million for the three months ended September 30, 2018, and the average yield increased 57 basis points to 2.29% for the three months ended September 30, 2019.  

Interest Expense.    Total interest expense increased $13.0 million, or 93%, to $27.1 million for the three months ended September 30, 2019, compared with the three months ended September 30, 2018.  

Interest expense on deposits increased $14.4 million, or 123%, to $26.0 million for the three months ended September 30, 2019 from the three months ended September 30, 2018. The increase was primarily attributable to a $2.5 billion, or 99%, increase in the average balance of interest-bearing deposits for the three months ended September 30, 2019, and a  22 basis point increase in the average cost of interest-bearing deposits, to 2.02% for the three months ended September 30, 2019 from 1.80% for the same period in 2018. The increase in the cost of deposits was primarily due to growth in the volume of brokered certificates of deposits and interest-bearing checking accounts, as well as the overall increase in interest rates for certificates of deposits from period to period. 

Interest expense on borrowings decreased $1.3 million, or 55%, to $1.1 million for the three months ended September 30, 2019 from $2.4 million for the three months ended September 30, 2018. The decrease was primarily due to a 565 basis point decrease in the 7.31%  average cost of borrowings for the three months ended September 30, 2019 compared to 12.96% for the three months ended September 30, 2018,  as well as a $14.6 million, or 20%, decrease in the average balance of borrowings outstanding. 

The 565 basis point decrease in the cost of borrowings compared to the three months ended September 20, 2018 was primarily due to the repayment of $30 million in subordinated debt associated with the acquisition of NattyMac assets on December 31, 2018.  Our short-term subordinate debt instruments have carried a higher cost than our other categories of borrowing, as they include a variable interest rate equal to the one-month LIBOR rate plus an applicable margin. Additionally, our warehouse structured financing agreements provide for an additional interest payment for a portion of the earnings generated.   As a result of these payments, cost of borrowings increased from a base rate of 3.29% and 4.71%, to an effective rate of 7.31% and 12.96% for the three months ended September 30, 2019 and 2018, respectively.    

The $14.6 million decrease in the average balance of borrowings outstanding compared to the three months ended September 30, 2018 was primarily due to the repayment of $30 million in subordinated debt associated with the acquisition of NattyMac assets and the repayment of $25 million for a line of credit that expired, which was partially offset by an increase in borrowings with the FHLB.

 

 

 

 

 

 

 

 

 

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The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. Nonaccrual loans are included in loans and loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

 

2019

 

2018

 

 

 

    

 

 

Interest

 

    

 

    

 

 

Interest

 

 

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

    

Balance

    

Expense

    

Rate 

    

Balance

    

Expense

    

Rate 

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits, and other

 

$

670,399

 

$

3,888

 

2.30

%  

$

510,115

 

$

2,681

 

2.09

%

Securities available for sale - taxable

 

 

278,314

 

 

1,604

 

2.29

%  

 

355,564

 

 

1,541

 

1.72

%

Securities available for sale - tax exempt

 

 

9,032

 

 

68

 

2.99

%  

 

 —

 

 

 —

 

 —

%

Trading securities

 

 

162,915

 

 

1,422

 

3.46

%  

 

137,351

 

 

1,299

 

3.75

%

Loans and loans held for sale

 

 

4,718,771

 

 

52,779

 

4.44

%  

 

2,677,449

 

 

32,056

 

4.75

%

Total interest-earning assets

 

 

5,839,431

 

 

59,761

 

4.06

%  

 

3,680,479

 

 

37,577

 

4.05

%

Allowance for loan losses

 

 

(12,990)

 

 

  

 

  

 

 

(10,695)

 

 

  

 

  

 

Noninterest-earning assets

 

 

183,399

 

 

  

 

  

 

 

159,388

 

 

  

 

  

 

Total assets

 

$

6,009,840

 

 

  

 

  

 

$

3,829,172

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities/Equity:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest-bearing checking

 

$

1,951,613

 

 

9,253

 

1.88

%  

$

853,066

 

 

4,471

 

2.08

%

Savings deposits

 

 

152,509

 

 

85

 

0.22

%  

 

148,348

 

 

109

 

0.29

%

Money market

 

 

977,228

 

 

4,698

 

1.91

%  

 

997,046

 

 

4,294

 

1.71

%

Certificates of deposit

 

 

2,032,619

 

 

12,003

 

2.34

%  

 

577,233

 

 

2,796

 

1.92

%

Total deposits

 

 

5,113,969

 

 

26,039

 

2.02

%  

 

2,575,693

 

 

11,670

 

1.80

%

Borrowings

 

 

59,585

 

 

1,098

 

7.31

%  

 

74,227

 

 

2,425

 

12.96

%

Total interest-bearing liabilities

 

 

5,173,554

 

 

27,137

 

2.08

%  

 

2,649,920

 

 

14,095

 

2.11

%

Noninterest-bearing deposits

 

 

198,832

 

 

  

 

  

 

 

748,312

 

 

  

 

  

 

Noninterest-bearing liabilities

 

 

69,722

 

 

  

 

  

 

 

27,183

 

 

  

 

  

 

Total liabilities

 

 

5,442,108

 

 

  

 

  

 

 

3,425,415

 

 

  

 

  

 

Equity

 

 

567,732

 

 

  

 

  

 

 

403,757

 

 

  

 

  

 

Total liabilities and equity

 

$

6,009,840

 

 

  

 

  

 

$

3,829,172

 

 

  

 

  

 

Net interest income

 

 

  

 

$

32,624

 

  

 

 

  

 

$

23,482

 

  

 

Interest rate spread

 

 

  

 

 

  

 

1.98

%  

 

  

 

 

  

 

1.94

%

Net interest-earning assets

 

$

665,877

 

 

  

 

  

 

$

1,030,559

 

 

  

 

  

 

Net interest margin

 

 

  

 

 

  

 

2.22

%  

 

  

 

 

  

 

2.53

%

Average interest-earning assets to average interest-bearing liabilities

 

 

  

 

 

  

 

112.87

%  

 

 

 

 

  

 

138.89

%

 

Provision for Loan Losses.    We recorded a provision for loan losses of $1.2 million for the three months ended September 30, 2019, an increase of $576,000 over the three months ended September 30, 2018.  The increase was primarily due to loan growth.  The allowance for loan losses was $13.7 million, or 0.50% of total loans, at September 30, 2019, compared to $12.7 million, or 0.62% of total loans, at December 31, 2018 and $11.2 million, or 0.59%, at September 30, 2018.  

Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $6.1 million at September 30, 2019, compared to $2.4 million at December 31, 2018 and $1.9 million at September 30, 2018. The increase compared to December 31, 2018 reflected higher delinquencies in residential real estate and commercial loans. 

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Included in the increases were several large loans that moved into the 90 days late category but were subsequently paid off in October 2019.  The increases were also impacted by the probate of the estate of a deceased borrower, from which we anticipate full repayment. 

Special Mention (Watch) loans were $56.1 million at September 30, 2019, compared to $90.6 million at December 31, 2018 and $66.4 million at September 30, 2018.   The decrease compared to December 31, 2018 primarily reflected the completion of certain construction projects with cost over-runs that were funded by the borrowers.  Classified (substandard, doubtful and loss) loans were $14.1 million at September 30, 2019, $11.2 million at December 31, 2018 and $9.3 million at September 30, 2018.  Total loans greater than 30 days past due were $9.2 million at September 30, 2019, $3.2 million at December 31, 2018 and $3.0 million at September 30, 2018.  The increase compared to December 31, 2018 included several large loans that moved into the 90 days late category but were subsequently paid off in October 2019.  The increases were also impacted by the probate of the estate of a deceased borrower, from which we anticipate full repayment.

We had $107,000 of charge-offs and $15,000 of recoveries during the three months ended September 30, 2019. For the three months ended September 30, 2018 we had a  $74,000 reversal of charge-offs and a  $36,000 reversal of recoveries.    

As a percentage of nonperforming loans, the allowance for loan losses was 223.5% at September 30, 2019 compared to 526.9% at December 31, 2018 and 590.2% at September 30, 2018.  The decrease compared to December 31, 2018 was primarily due to the increase in nonperforming loans.

Noninterest Income.    Noninterest income decreased $1.1 million, or 9%, to $10.9 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. The decrease was primarily due to a decrease of $3.3 million in net loan servicing fees, partially offset by an increase of $1.9 million in mortgage warehouse fees resulting from the growth in warehouse loans.  The decrease in loan servicing fees reflected a $1.5 million decrease in the fair value of mortgage servicing rights for the three months ended September 30, 2019, compared with an increase of $500,000 for the three months ended September 30, 2018The value of mortgage servicing rights generally declines in falling interest rate environments and increases in rising interest rate environments.

Noninterest Expense.    Noninterest expense increased $3.1 million, or 25%, to $15.5 million for the three months ended September 30, 2019 compared with $12.4 million for the three months ended September 30, 2018. The increase was due primarily to a $1.3 million, or 17% increase in salaries and employee benefits. The increase in salaries and employee benefits was due primarily to an increase in the number of employees resulting from business growth and acquisitions that closed during the fourth quarter of 2018. Also contributing to the increase was a $590,000 increase in deposit insurance expense related to the growth in deposits and assets. The efficiency ratio was 35.7% in the three months ended September 30, 2019, compared with 35.2%  for the three months ended September 30, 2018.

Income Taxes.    Income tax expense increased $918,000, or 16%, to $6.5 million for the three months ended September 30, 2019 from the three months ended September 30, 2018. The increase was due primarily to the 20%  increase in pretax income period to period. The effective tax rate was 24.3% for the three months ended September 30, 2019 and 25.0% for the three months ended September 30, 2018. 

Comparison of Operating Results for the Nine Months Ended September 30, 2019 and 2018

General.    Net income for the nine months ended September 30, 2019 was $47.3 million, a decrease of $184,000, from net income of $47.5 million for the nine months ended September 30, 2018. The decrease was due primarily to a $10.5 million decrease in noninterest income and a $9.8 million increase in noninterest expenses, partially offset by a $20.0 million increase in net interest income after provision for loan losses.

Net Interest Income.     Net interest income increased $18.9 million, or 29%, to $84.7 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase was due to the overall

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growth in our interest-earning assets period to period, coupled with a  19 basis point increase in our interest rate spread, to 2.20%, for the nine months ended September 30, 2019 from 2.01% for the nine months ended September 30, 2018.  

Our net interest margin decreased 7 basis points, to 2.45% for the nine months ended September 30, 2019 from 2.52% for the nine months ended September 30, 2018. The declines in net interest margin reflected the flattening and inversion of the yield curve compared to prior periods, and reflects the shift in business mix to a higher concentration of warehouse loans that typically are funded for a shorter duration and earn interest based on longer term rates.  Profitability in this business, which also includes fees classified as noninterest income, had the most significant growth in net income of all our businesses during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

Interest Income.    Interest income increased $47.5 million, or 47%, to $148.2 million for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018. This increase was primarily attributable to a $44.1 million increase in interest on loans and loans held for sale.

The average balance of loans, including loans held for sale, during the nine months ended September 30, 2019 increased $1.2 billion, or 50%, to $3.7 billion from $2.5 billion for the nine months ended September 30, 2018, while the average yield on loans increased 4 basis points to 4.70% for the nine months ended September 30, 2019 compared to 4.66% for the nine months ended September 30, 2018.  The increase in the average yield on loans was due to the overall increase in interest rates in the economy period to period.

The average balance of trading securities increased $11.0 million, or 8%, to $155.8 million for the nine months ended September 30, 2019 compared to $144.8 million for the nine months ended September 30, 2018, while the average yield increased 32 basis points to 3.81% for the nine months ended September 30, 2019. 

The average balance of other interest-earning assets decreased $570,000, to $494.6 million for the nine months ended September 30, 2019 from $495.2 million for the nine months ended September 30, 2018, while the average yield increased 69 basis points to 2.52% for the nine months ended September 30, 2019. 

The average balance of taxable securities available-for-sale decreased $113.8 million, or 29%, to $279.2 million for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, and the average yield increased 62 basis points to 2.22% for the nine months ended September 30, 2019.  

Interest Expense.    Total interest expense increased $28.6 million, or 82%, to $63.5 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.  

Interest expense on deposits increased $31.2 million, or 110%, to $59.6 million for the nine months ended September 30, 2019 from the nine months ended September 30, 2018. The increase was primarily due to an increase in the average balance of interest-bearing deposits of $1.5 billion, or 62%, to $4.0 billion for the nine months ended September 30, 2019, and a 45 basis point increase in the average cost of interest-bearing deposits, to 2.00% for the nine months ended September 30, 2019 from 1.55% for the same period in 2018. The increase in average balances was primarily due to the increase in brokered certificates of deposit and interest-bearing checking accounts. The increase in the cost of deposits was due to the overall increase in interest rates in the economy period to period.

Interest expense on borrowings decreased $2.6 million, or 40%, to $3.9 million for the nine months ended September 30, 2019 from $6.5 million for the nine months ended September 30, 2018. The decrease was due primarily to a 657 basis point decrease in the average cost of borrowings to 5.91% for the nine months ended September 30, 2019, compared to 12.48% for the nine months ended September 30, 2018.  Partially offsetting the decrease in the average cost of borrowing was a $18.6 million, or 27%, increase in the average balance outstanding period to period. The lower cost of borrowings was primarily due to the repayment of $30 million of subordinated debt associated with the acquisition of NattyMac assets on December 31, 2018.  Our short-term subordinated debt instruments have carried a higher cost than our other categories of borrowing, as they include a variable interest rate equal to the one-month LIBOR rate plus an

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applicable margin. Additionally, our warehouse structured financing agreements provide for an additional interest payment for a portion of the earnings generated.   As a result of these payments, the cost of borrowings increased from a base rate of 3.43% and 4.42%, to 5.91% and 12.48% for the nine months ended September 30, 2019 and 2018, respectively.    

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The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. Nonaccrual loans are included in loans and loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

 

2019

 

2018

 

 

 

 

 

 

Interest 

 

 

 

 

 

 

Interest 

 

 

 

 

 

Average

 

Income/

 

Yield/

 

Average

 

Income/

 

Yield/

 

 

    

Balance

    

Expense

    

Rate 

    

Balance

    

Expense

    

Rate 

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits, and other

 

$

494,647

 

$

9,314

 

2.52

%  

$

495,217

 

$

6,795

 

1.83

%

Securities available for sale - taxable

 

 

279,203

 

 

4,632

 

2.22

%  

 

393,029

 

 

4,708

 

1.60

%

Securities available for sale - tax exempt

 

 

10,169

 

 

217

 

2.85

%  

 

 —

 

 

 —

 

 —

 

Trading securities

 

 

155,779

 

 

4,434

 

3.81

%  

 

144,812

 

 

3,777

 

3.49

%  

Loans and loans held for sale

 

 

3,689,208

 

 

129,599

 

4.70

%  

 

2,453,830

 

 

85,458

 

4.66

%  

Total interest-earning assets

 

 

4,629,006

 

 

148,196

 

4.28

%  

 

3,486,888

 

 

100,738

 

3.86

%

Allowance for loan losses

 

 

(13,054)

 

 

  

 

  

 

 

(9,925)

 

 

  

 

  

 

Noninterest-earning assets

 

 

182,158

 

 

  

 

  

 

 

150,898

 

 

  

 

  

 

Total assets

 

$

4,798,110

 

 

  

 

  

 

$

3,627,861

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities/Equity:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking

 

$

1,617,221

 

 

23,255

 

1.92

%  

$

763,274

 

 

10,192

 

1.79

%  

Savings deposits

 

 

148,137

 

 

246

 

0.22

%  

 

264,391

 

 

513

 

0.26

%  

Money market

 

 

943,420

 

 

13,631

 

1.93

%  

 

877,682

 

 

10,446

 

1.59

%  

Certificates of deposit

 

 

1,280,303

 

 

22,478

 

2.35

%  

 

553,111

 

 

7,276

 

1.76

%  

Total deposits

 

 

3,989,081

 

 

59,610

 

2.00

%  

 

2,458,458

 

 

28,427

 

1.55

%  

Borrowings

 

 

88,423

 

 

3,909

 

5.91

%  

 

69,811

 

 

6,515

 

12.48

%  

Total interest-bearing liabilities

 

 

4,077,504

 

 

63,519

 

2.08

%  

 

2,528,269

 

 

34,942

 

1.85

%  

Noninterest-bearing deposits

 

 

166,238

 

 

  

 

  

 

 

682,998

 

 

  

 

  

 

Noninterest-bearing liabilities

 

 

56,277

 

 

  

 

  

 

 

26,834

 

 

  

 

  

 

Total liabilities

 

 

4,300,019

 

 

  

 

  

 

 

3,238,101

 

 

  

 

  

 

Equity

 

 

498,091

 

 

  

 

  

 

 

389,760

 

 

  

 

  

 

Total liabilities and equity

 

$

4,798,110

 

 

  

 

  

 

$

3,627,861

 

 

  

 

  

 

Net interest income

 

 

  

 

$

84,677

 

  

 

 

  

 

$

65,796

 

  

 

Interest rate spread

 

 

  

 

 

  

 

2.20

%

 

  

 

 

  

 

2.01

%

Net interest-earning assets

 

$

551,502

 

 

  

 

  

 

$

958,619

 

 

  

 

  

 

Net interest margin

 

 

  

 

 

  

 

2.45

%

 

  

 

 

  

 

2.52

%

Average interest-earning assets to average interest-bearing liabilities

 

 

  

 

 

  

 

113.53

%

 

  

 

 

  

 

137.92

%

 

Provision for Loan Losses.    We recorded a provision for loan losses of $1.9 million for the nine months ended September 30, 2019, a decrease of $1.1 million, over the nine months ended September 30, 2018.  The decrease reflected increases for loan growth that were offset by improvement in loss expectations for our multi-family loan portfolio based on historical loss experience.  The allowance for loan losses was $13.7 million, or 0.50% of total loans, at September 30, 2019, compared to $12.7 million, or 0.62% of total loans, at December 31, 2018 and $11.2 million, or 0.59%, at September 30, 2018.  

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Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $6.1 million at September 30, 2019, compared to $2.4 million at December 31, 2018 and $1.9 million at September 30, 2018. The increase compared to December 31, 2018 reflected higher delinquencies in residential real estate and commercial loans.  Included in the increases were several large loans that moved into the 90 days late category but were subsequently paid off in October 2019.  The increases were also impacted by the probate of the estate of a deceased borrower, from which we anticipate full repayment. 

Special Mention (Watch) loans were $56.1 million at September 30, 2019, compared to $90.6 million at December 31, 2018 and $66.4 million at September 30, 2018.   The decrease compared to December 31, 2018 primarily reflected the completion of certain construction projects with cost over-runs that were funded by the borrowers.  Classified (substandard, doubtful and loss) loans were $14.1 million at September 30, 2019, $11.2 million at December 31, 2018 and $9.3 million at September 30, 2018.  Total loans greater than 30 days past due were $9.2 million at September 30, 2019, $3.2 million at December 31, 2018 and $3.0 million at September 30, 2018.  The increase compared to December 31, 2018 included several large loans that moved into the 90 days late category but were subsequently paid off in October 2019.  The increases were also impacted by the probate of the estate of a deceased borrower, from which we anticipate full repayment.

For the nine months ended September 30, 2019, there were $964,000 charge-offs and $18,000 in recoveries.  For the nine months ended September 30, 2018 there were $89,000 in charge-offs and no recoveries.  The higher charge-offs in 2019 related primarily to two loans, reflecting a borrower losing its primary sources of revenue, as opposed to general weakening in credit quality. 

As a percentage of nonperforming loans, the allowance for loan losses was 223.5% at September 30, 2019 compared to 526.9% at December 31, 2018 and 590.2% at September 30, 2018.  The decrease compared to December 31, 2018 was primarily due to the increase in nonperforming loans.

Noninterest Income.    Noninterest income decreased $10.5 million, or 30%, to $24.4 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to a $7.5 million decrease in gain on sale of loans and a decrease of $7.4 million in loan servicing fees, partially offset by a $2.6 million increase in mortgage warehouse fees and a $1.7 million increase in other income.  The gain on sale of loans was  $20.1 million during the nine months ended September 30, 2019, compared to $27.5 million in same period of 2018, a decrease of 27%, due primarily to a decrease in the volume of multi-family rental real estate loan sales in the secondary market.  The lower gain on sale was also negatively impacted by loan processing delays caused by the federal government shutdown in January 2019.  The decrease in loan servicing fees for the nine months ended September 30, 2019 reflected a $5.9 million decrease in the fair value of mortgage servicing rights, compared to a $1.4 million increase for the nine months ended September 30, 2018.    The value of mortgage servicing rights generally declines in falling interest rate environments and increases in rising interest rate environments.

Noninterest Expense.    Noninterest expense increased $9.8 million, or 28%, to $44.5 million for the nine months ended September 30, 2019 compared to $34.7 million for the nine months ended September 30, 2018. The increase was due primarily to a $6.1 million, or 28% increase in salaries and employee benefits, reflecting an increase in the number of employees resulting from business growth and acquisitions that closed during the fourth quarter of 2018. The efficiency ratio was 40.8% for the nine months ended September 30, 2019, compared with 34.5% for the nine months ended September 30, 2018.

Income Taxes.    Income tax expense decreased $83,000, or 1%, to $15.4 million for the nine months ended September 30, 2019 from the nine months ended September 30, 2018. The effective tax rate was 24.5% for the nine months ended September 30, 2019 and 24.6% for the nine months ended September 30, 2018. 

 

 

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Our Segments

We operate in three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. We believe that Merchants Bank’s subsidiary, Merchants Capital Corp. (“MCC”), which operates in our Multi-Family Mortgage Banking segment, is one of the largest FHA lenders and GNMA servicers in the country based on aggregate loan principal value.    MCC originated and acquired $1.5 billion of loans during the nine months ended September 30, 2019.  As of September 30, 2019, MCC also had a $11.2 billion servicing portfolio for banks and investors, including $1.6 billion serviced for Merchants Bank. The servicing portfolio is primarily GNMA loans and is a significant source of our noninterest income and deposits.

Our Mortgage Warehousing segment funds agency eligible loans for non-depository financial institutions from the date of origination or purchase until the date of sale to an investor, which typically takes less than 30 days and is a significant source of our net interest income, loans, and deposits. Mortgage Warehousing has grown to fund over $20 billion of loan principal annually since 2015. Mortgage Warehousing also provides commercial loans and collects deposits related to the mortgage escrow accounts of its customers.

The Banking segment includes retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending. Banking operates primarily in Indiana and Illinois, except for correspondent mortgage banking which, like Multi-family Mortgage Banking and Mortgage Warehousing, is a national business. The Banking segment has a well-diversified customer and borrower base and has experienced significant growth over the past three years.

Our segments diversify the net income of Merchants Bank and provide synergies across the segments. The strategic opportunities include that MCC loans are funded by Merchants Banking segment and the Banking segment provides GNMA custodial services to MCC. The securities available for sale funded by MCC custodial deposits, as well as loans generated by Merchants Bank, are pledged to the FHLB to provide advance capacity during periods of high residential loan volume for Mortgage Warehousing. Mortgage Warehousing provides leads to correspondent residential lending in the banking segment. Retail and commercial customers provide cross selling opportunities within the banking segment. These and other synergies form a part of our strategic plan.

For the three months ended September 30, 2019 and 2018, we had total net income of $20.3  million and $16.7 million, respectively, and for the nine months ended September 30, 2019 and 2018, we had total net income of $47.3 million and $47.5 million, respectively. Net income for our three segments for the respective periods was as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(In thousands)

Multi-family Mortgage Banking

 

$

2,741

 

$

4,863

 

$

4,546

 

$

15,112

Mortgage Warehousing

 

 

10,924

 

 

5,654

 

 

21,076

 

 

16,058

Banking

 

 

7,649

 

 

7,101

 

 

24,826

 

 

19,566

Other

 

 

(1,055)

 

 

(879)

 

 

(3,180)

 

 

(3,284)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

20,259

 

$

16,739

 

$

47,268

 

$

47,452

 

Multi-family Mortgage Banking.    The Multi-family Mortgage Banking segment reported net income for the three months ended September 30, 2019, of $2.7 million, a decrease of $2.2 million, or 44%, from the $4.9 million reported for the three months ended September 30, 2018. The decrease in net income was primarily due to a $1.7 million increase in noninterest expense, primarily associated with higher salaries and benefits to support future loan growth, including the recent opening of a new origination office in Chicago.  Also contributing to the decrease in net income was a $1.1 million decrease in noninterest income, primarily associated with a decrease in loan servicing fees.   During the three months ended September 30, 2019, loan servicing fees included a $1.5 million negative fair value adjustment to our

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mortgage service rights asset, compared with a $500,000 positive adjustment for the three months ended September 30, 2018.  Partially offsetting the higher noninterest expenses and lower loan servicing fees was a $601,000 decrease in income taxes resulting from the 40% decrease in pre-tax net income. The volume of loans originated and acquired for sale in the secondary market increased by $39.8 million, or 19%, to $251.6 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. 

The Multi-family Mortgage Banking segment reported net income for the nine months ended September 30, 2019, of $4.5 million, a decrease of $10.6 million, or 70%, from the $15.1 million reported for the nine months ended September 30, 2018. The decrease was primarily due to a decrease of $11.1 million in noninterest income associated with lower gain on sale of loans and loan servicing fees.  The lower gain on sale portion of noninterest income was primarily due to lower loan volume during the nine months ended September 30, 2019 and was also negatively impacted by the federal government shutdown in January 2019 that resulted in loan processing delays. The lower loan servicing fees portion of noninterest income was due to a $5.9 million negative fair value adjustment to our mortgage servicing rights asset for the nine months ended September 30, 2019, compared with a $1.4 million positive fair value adjustment for the nine months ended September 30, 2018. Also contributing to the decrease in net income for the period was a $3.5 million increase in noninterest expenses primarily associated with higher salaries and benefits to support future loan growth, including the recent opening of a new origination office in Chicago. Partially offsetting the decreases in net income was a $3.5 million decrease in income taxes associated with the 68% decrease in pre-tax net income.  The volume of loans originated and acquired for sale in the secondary market decreased by $293.6 million, or 37%, to $502.4 million for the nine months ended September 30, 2019, compared with the nine months ended September 30, 2018.  

Mortgage Warehousing.    The Mortgage Warehousing segment reported net income for the three months ended September 30, 2019, of $10.9 million, an increase of $5.3 million, or 93%, compared to the three months ended September 30, 2018. The increase was primarily due to a $5.7 million, or 63%, increase in net interest income, primarily associated with the significant growth in loans receivable and loans held for sale.    The higher origination volume in the single-family mortgage market was primarily attributable to lower mortgage interest rates and the recently added capital has given the company more capacity to manage capital balances within the well-capitalized classification. The volume of loans funded during the three months ended September 30, 2019 amounted to $15.0 billion, an increase of $8.5 billion, or 132%, compared to the same period in 2018. This compared favorably to the 32% industry growth in single-family residential loan volumes from the three months ended September 30, 2018 to the three months ended September 30, 2019, according to the Mortgage Bankers Association. Further interest rate cuts could lead to additional growth in these markets as borrowers seek funding and refinancing opportunities.  Also contributing to the growth in net income was a $1.9 million increase in noninterest income related to higher warehouse fees that were partially offset by a $831,000 increase in noninterest expenses for salaries and benefits of additional employees associated with an acquisition that were not included in the three months ended September 30, 2018, and to support planned business growth. A $1.4 million increase in income taxes associated with an 87% increase in pe-tax net income also partially offset the increase in net income during the period.

    The Mortgage Warehousing segment reported net income for the nine months ended September 30, 2019, of $21.1 million, an increase of $5.0 million, or 31%, over the nine months ended September 30, 2018.  The increase was primarily due to a $5.6 million, or 21%, increase in net interest income associated with the significant growth in loans receivable and loans held for sale.    The higher origination volume in the single-family mortgage market was primarily attributable to lower mortgage interest rates and the recently added capital has given the company more capacity to manage capital balances within the well-capitalized classification.  These same drivers also contributed to a $2.6 million increase in noninterest income related to warehouse fees.  Partially offsetting the growth in net interest income and noninterest income was a $2.0 million increase in noninterest expenses for salaries and benefits of additional employees and a $1.5 million increase in income taxes from 31% higher pre-tax net income.  The higher salaries and benefits were associated with an acquisition that were not included in the nine months ended September 30, 2018, and to support planned business growth.  The volume of loans funded during the nine months ended September 30, 2019 amounted to $29.9 billion, an increase of $12.5 billion, or 72%, compared to the same period in 2018. This compared favorably to the 14% industry increase in single-family residential loan volumes from the nine months ended September 30, 2018 to the nine months ended September 30, 2019, according to the Mortgage Bankers Association. 

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Banking.    The Banking segment reported net income for the three months ended September 30, 2019 of $7.6 million, an increase of $548,000, or 8%, over the three months ended September 30, 2018. The increase was primarily due to a $2.7 million increase in net interest income, reflecting higher loan volume.  Partially offsetting the increase in net interest income was a $1.7 million decrease in noninterest income that reflected higher deferred fees from multi-family loans. The results of FMNBP in the Banking segment during the three months ended September 30, 2019 did not make a material contribution to the increase in net income compared to the three months ended September 30, 2018.

The Banking segment reported net income for the nine months ended September 30, 2019, of $24.8 million, an increase of 27%, over the $19.6 million reported for the nine months ended September 30, 2018. The increase was primarily due to a $10.1 million, or 29%, increase in net interest income, reflecting higher loan volume.    Partially offsetting the increase in net interest income was a $2.3 million increase in noninterest expense related to higher salaries and employee benefits that reflected additional employees associated with an acquisition that were not included in the prior period. Also partially offsetting the increase in net income was a $2.0 million increase in income taxes, reflecting a 28% increase in pre-tax net income. The results of FMNBP in the Banking segment during the nine months ended September 30, 2019 did not make a material contribution to the increase in net income compared to the three months ended September 30, 2018.

Liquidity and Capital Resources 

Liquidity.

Our primary sources of funds are business and consumer deposits, escrow and custodial deposits, principal and interest payments on loans, and proceeds from sale of loans. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash, short-term investments, including interest-bearing demand deposits, trading securities and loans held for sale. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $(1.7)  billion and $104.8 million for the nine months ended September 30, 2019 and 2018, respectively. Net cash used in investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $(698.9) million and $(377.3) million for the nine months ended September 30, 2019 and 2018, respectively. Net cash provided by financing activities, which is comprised primarily of net changes in deposits,  borrowings, and preferred stock issuances, was $2.4 billion and $323.8 million for the nine months ended September 30, 2019 and 2018, respectively.    

At September 30, 2019, we had outstanding commitments to originate loans of $686.6 million, unused lines of credit of $167.5 million and outstanding letters of credit of $16.7 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2019 totaled $2.2 billion. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may decide to utilize FHLB advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense. At September 30, 2019, based on available collateral and our ownership of FHLB stock we had access to additional FHLB advances of up to $634.6 million.

Capital Resources. 

The access to and cost of funding for new business initiatives, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs and the level and nature of regulatory oversight depend, in part, on our capital position. The Company filed a registration statement on Form S-3 with the SEC on December 7, 2018, which was declared effective on December 18, 2018, and which provides a means to allow us to issue registered securities to finance our growth objectives.

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The assessment of capital adequacy depends on a number of factors, including asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to our current operations and to promote public confidence in our Company.

Shareholders’ Equity. Shareholders’ equity was $629.4 million as of September 30, 2019, compared to $421.2 million as of December 31, 2018.  The $208.2 million increase resulted primarily from the issuance of $171.1 million in preferred stock, net of expenses and repurchases, as well as net income of $47.3 million, which was partially offset by dividends paid on common and preferred shares of $6.0 million and $5.6 million, respectively, during the period.

7% Preferred Shares. In March 2019 the Company issued 2,000,000 shares of 7.00% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $25.00 per share.  The Company received net proceeds of $48.3 million after underwriting discounts, commissions and direct offering expenses.  In April 2019, the Company issued an additional 81,800 shares of Series A Preferred Stock to the underwriters related to their exercise of an option to purchase additional shares under the associated underwriting agreement, resulting in an addition $2.0 million in net proceeds, after underwriting discounts. 

In June 2019 the Company issued an additional 874,000 shares of its 7.00% Series A Preferred Stock, without par value and with a liquidation preference of $25.00 per share, for net proceeds of $21.85 million.

In  September 2019 the Company repurchased and subsequently retired 874,000 shares of its 7.00% Series A Preferred Stock, for its liquidation preference of $25 per share, at an aggregate cost of $21.85 million.  There were no brokerage fees in connection with the transaction.

Dividends on the Series A Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $1.75 per share through March 31, 2024.  After such date, quarterly dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 460.5 basis points per year.  In the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero.    The Company may redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on March 22, 2019.    

6% Preferred Shares/Dividends.  In  August 2019 the Company issued 5,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, without par value (the Series B Preferred Stock), and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share).  After deducting underwriting discounts,  commissions, and direct offering expenses, the Company received total net proceeds of $120.9 million.  

Dividends on the Series B Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $60.00 per depositary share (equivalent to $1.50 per depositary share) through September 30, 2024. After such date, quarterly dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 456.9 basis points per year.  In the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero.  The Company may redeem the Series B Preferred Stock at its option, subject to regulatory approval, on or after October 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on August 13, 2019.        

8% Preferred Shares/Dividends. During 2015 and 2016 the Company issued a total of 41,625 shares of non-cumulative, perpetual Preferred Stock in private placement offerings, for $1,000.00 per share.

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Dividends on the 8% Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $80.00 per share. The Company may redeem the 8% Preferred Stock at its option, subject to regulatory approval, on or after the first dividend payment date falling on or after the fifth anniversary of the original issue date of the shares.

   

Common Shares/Dividends.  As of September 30, 2019, the Company had 28,706,438 common shares issued and outstanding.  Dividends, to the extent declared by the Company’s board, are currently payable quarterly at an annual rate of $0.28 per share.

Capital Adequacy.  At September 30, 2019, Merchants Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $600.2 million, or 10.3% of adjusted total assets, which is above the required level of $232.7 million, or 4.0%; total risk-based capital of $613.4 million, or 11.2% of risk-weighted assets, which is above the required level of $439.4 million, or 8.0%; and common equity Tier 1 capital of $600.2 million, or 10.9% of risk-weighted assets, which is above the required level of $247.2 million, or 4.5% of risk-weighted assets. Accordingly, Merchants Bank was categorized as well capitalized at September 30, 2019. Management is not aware of any conditions or events since the most recent notification that would change Merchants Bank’s category.

At September 30, 2019, FMBI exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $19.7 million, or 11.5% of adjusted total assets, which is above the required level of $6.8 million, or 4.0%; total risk-based capital of $20.2 million, or 14.2% of risk-weighted assets, which is above the required level of $11.3 million, or 8.0%; and common equity Tier 1 capital of $19.7 million, or 13.9% of risk-weighted assets, which is above the required level of $6.4 million, or 4.5% of risk-weighted assets. Accordingly, FMBI was categorized as well capitalized at September 30, 2019. Management is not aware of any conditions or events since the most recent notification that would change FMBI’s category. 

At September 30, 2019, the Company exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $596.3 million, or 10.0% of adjusted total assets, which is above the required level of $239.1 million, or 4.0%; total risk-based capital of $610.0 million, or 10.8% of risk-weighted assets, which is above the required level of $450.6 million, or 8.0%; and common equity Tier 1 capital of $383.6 million, or 6.8% of risk-weighted assets, which is above the required level of $253.5 million, or 4.5% of risk-weighted assets. Management is not aware of any conditions or events since the most recent notification that would change the Company’s category.

However, the Company’s common equity Tier 1 ratio of 6.8% at September 30, 2019, while enough for the Company to be well capitalized, did not satisfy the 2.5% capital conservation buffer under the Basel III Capital Rules. As a result, until the Company’s common equity Tier 1 ratio exceeds 7.0%, and thereby satisfies the capital conservation buffer, or the Company qualifies for and elects to use the community bank leverage ratio (as described further below), the Company’s distributions to shareholders in a quarter will be limited to 60% of its eligible retained income, which is generally defined as net income for the prior four quarters, less any distributions during such four-quarter period. This is not expected to have any material effect on the Company or its ability to pay dividends as the Company’s total distributions in a quarter have historically not approached such limit.      

On November 21, 2017, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (collectively, the “federal regulators”) finalized a joint proposal and adopted a final rule (the “Transitions Rule”) pursuant to which the current regulatory capital treatment for mortgage servicing rights (“MSRs”), certain temporary difference deferred tax assets, and significant investments in the capital of unconsolidated financial institutions were indefinitely extended in anticipation of a subsequent notice of proposed rulemaking by such regulators to simplify the regulatory capital treatment of such items (the “Simplification Rule”). The extension of the capital rules with respect to MSRs is the only portion of the Transitions Rule that is material to the Company.

If the Transitions Rule had not been enacted, beginning January 1, 2018, the Company would have been required to make certain additional deductions and increases to its risk-weighting for the purposes of the Company’s capital

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calculations, which would have resulted in the Company reporting a lower amount of capital. As a result of the Transitions Rule, there were no and will not be any such adjustments to our capital.

On July 9, 2019, the federal regulators finalized and adopted the final Simplification Rule. Under the existing rules, including the Transitions Rule, mortgage servicing rights, net of related deferred tax liabilities, that are in excess of 10% of common equity or when combined with certain other deduction items are in excess of 15% of common equity are deducted from Common Equity Tier 1 capital.  Under the Simplification Rule, this threshold will be raised to 25% of common equity, which we expect to benefit the Company because it will reduce the deductions to capital that have traditionally been required. However, the Company will be required to risk-weight the non-deducted portion of its MSRs at 250%. On September 17, 2019, the federal regulators announced that institutions may elect to implement the Simplification Rule beginning January 1, 2020 rather than the previously announced date of April 1, 2020.

Also on September 17, 2019, the Federal Deposit Insurance Corporation announced that the federal regulators have finalized a regulatory capital rule establishing a new community bank leverage ratio (“CBLR”). The intent of CBLR is to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions and depository institution holding companies, as directed under the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under CBLR, if a qualifying depository institution or depository institution holding company elects to use such measure, such institution or holding company will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds 9% and will not be required to calculate and report risk-based capital ratios. CBLR will become effective and the Company, Merchants Bank, and FMB may elect to use it, beginning the first quarter of 2020.          

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We are taking advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The estimates and judgments that management believes have the most effect on its reported financial position and results of operations are set forth within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since those reported for the year ended December 31, 2018.

Quantitative and Qualitative Disclosures About Market Risk

Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified two primary sources of market risk: interest rate risk and price risk related to market demand.

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Interest Rate Risk 

Our Asset-Liability Committee, or ALCO, is a management committee that manages our interest rate risk within broad policy limits established by our board of directors.  In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities.  Our ALCO meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.

Income Simulation and Economic Value Analysis. Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

We use two approaches to model interest rate risk: Net Interest Income at Risk (NII at Risk) and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results reflect the analysis used quarterly by management. It models gradual -200, -100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one-year period. The following table presents NII at Risk for Merchants Bank as of September 30, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income Sensitivity

 

 

Twelve Months Forward

 

 

- 200

    

- 100

    

+ 100

    

+ 200

 

 

(Dollars in thousands)

 

September 30, 2019:

 

  

 

 

  

 

 

  

 

 

  

 

Dollar change

$

(28,439)

 

$

(20,704)

 

$

18,598

 

$

37,007

 

Percent change

 

(18.6)

%  

 

(13.5)

%  

 

12.2

%  

 

24.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

  

 

 

  

 

 

  

 

 

  

 

Dollar change

$

(25,230)

 

$

(11,716)

 

$

11,225

 

$

22,407

 

Percent change

 

(24.1)

%  

 

(11.2)

%  

 

10.7

%  

 

21.4

%

 

Our interest rate risk management policy limits the change in our net interest income to 20% for a +/- 100 basis point move in interest rates, and 30% for a +/- 200 basis point move in rates. At September 30, 2019 we estimated that we are within policy limits set by our Board of Directors for the -200, -100, +100, and +200 basis point scenarios. The results reported as of September 30, 2019 show an asset sensitive position.

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The EVE results for Merchants Bank included in the table below reflect the analysis used quarterly by management. It models immediate -200, -100, +100 and +200 basis point parallel shifts in market interest rates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic Value of Equity

 

 

Sensitivity (Shock)

 

 

Immediate Change in Rates

 

 

- 200

    

- 100

    

+ 100

    

+ 200

 

 

(Dollars in thousands)

 

September 30, 2019:

 

  

 

 

  

 

 

  

 

 

  

 

Dollar change

$

2,267

 

$

(475)

 

$

(1,754)

 

$

(5,784)

 

Percent change

 

0.4

%  

 

(0.1)

%  

 

(0.3)

%  

 

(1.0)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018:

 

  

 

 

  

 

 

  

 

 

  

 

Dollar change

$

4,746

 

$

3,193

 

$

(4,622)

 

$

(9,757)

 

Percent change

 

1.1

%  

 

0.8

%  

 

(1.1)

%  

 

(2.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our interest rate risk management policy limits the change in our EVE to 15% for a +/- 100 basis point move in interest rates, and 20% for a +/- 200 basis point move in rates. We are within policy limits set by our board of directors for the -200, -100, +100 and +200 basis point scenarios. The EVE reported at September 30, 2019 projects that as interest rates increase (decrease) immediately, the economic value of equity position will be expected to decrease (increase). When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.

 

 

ITEM 3        Quantitative and Qualitative Disclosures About Market Risk

The information required under this item is included as part of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q under the headings “Liquidity and Capital Resources” and “Interest Rate Risk.”

ITEM 4        Controls and Procedures

(a)        Evaluation of disclosure controls and procedures.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2019, the Company’s disclosure controls and procedures were effective.

(b)        Changes in internal control.

There have been no changes in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II

Other Information

ITEM 1.       Legal Proceedings

None.

ITEM 1A.    Risk Factors

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

ITEM 2.       Unregistered Sales of Equity Securities and Use of Proceeds

Stock repurchases during the three months ended September 30, 2019 are as provided in the table below:

 

 

 

 

 

 

 

Period

 

Total Number of Shares Repurchased

 

Average Price

Paid Per Share

July 1, 2019 - July 31, 2019

 

 

 

 

August 1, 2019 - August 31, 2019

 

 

 

 

September 1, 2019 - September 30, 2019

 

874,000(1)

 

$25.00

 

 

 

 

 

(1)  None of the shares repurchased were pursuant to a publicly announced plan or program. All repurchases were through private negotiations with the holders of such shares. The shareholders were primarily related parties, including Michael Petrie, our Chairman and Chief Executive Officer; Randall Rogers, Vice Chairman and a director of the Company and members of his family; Michael Dury, President of MCC

 

 

ITEM 3.       Defaults Upon Senior Securities

None.

ITEM 4.       Mine Safety Disclosures

Not applicable.

ITEM 5.       Other Information

None.

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ITEM 6.       Exhibits

 

 

 

Exhibit

    

 

Number

 

Description

 

 

 

3.1

 

First Amended and Restated Articles of Incorporation of Merchants Bancorp. (incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (File No. 333- 220623) filed on September 25, 2018)

 

 

 

3.2

 

Articles of Amendment to the First Amended and Restated Articles of Incorporation dated March 27, 2019 designating the 7.00% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock. (incorporated by reference to Exhibit 3.2 of the registration statement on Form 8-A filed on March 28, 2019)

 

 

 

3.3

 

Articles of Amendment to the First Amended and Restated Articles of Incorporation dated August 19, 2019 designating the 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock. (incorporated by reference to Exhibit 3.3 of the registration statement on Form 8-A filed on August 19, 2019)

 

 

 

3.4

 

Second Amended and Restated By-Laws of Merchants Bancorp. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on November 20, 2018)

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32

 

Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

    

 

Merchants Bancorp

 

 

 

 

 

Date:

 November 8, 2019

 

By:

/s/ Michael F. Petrie

 

 

 

 

Michael F. Petrie

 

 

 

 

Chairman & Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

 November 8, 2019

 

By:

/s/ John F. Macke

 

 

 

 

John F. Macke

Chief Financial Officer

 

 

 

 

(Principal Financial & Accounting Officer)

 

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