Annual Statements Open main menu

Merchants Bancorp - Quarter Report: 2019 March (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

March 31, 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)

 

 

 

11555 North Meridian Street, Suite 400 Carmel, Indiana

 

46032

(Address of principal

 

(Zip Code)

executive office)

 

 

 

(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

MBIN

MBINP

NASDAQ

NASDAQ

 

As of May 6,  2019, the latest practicable date,  28,704,163 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 March 31,  2019 and December 31, 2018 

3

 

 

Condensed Consolidated Statements of Income for the Three Months Ended March 31,  2019 and 2018 

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31,  2019 and 2018 

5

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31,  2019 and 2018 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,  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 

38

 

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk 

47

 

 

Item 4 Controls and Procedures 

47

 

 

PART II – OTHER INFORMATION 

48

 

 

Item 1 Legal Proceedings 

48

 

 

Item 1A Risk Factors 

48

 

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 

48

 

 

Item 3 Defaults Upon Senior Securities 

48

 

 

Item 4 Mine Safety Disclosures 

48

 

 

Item 5 Other Information 

48

 

 

Item 6 Exhibits 

49

 

 

SIGNATURES 

50

 

 

2


 

Table of Contents

Part I – Financial Information

Item 1. Financial Statements

Merchants Bancorp

Condensed Consolidated Balance Sheets

March 31, 2019 (Unaudited) and December 31, 2018

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

  

 

 

  

Cash and due from banks

 

$

19,554

 

$

25,855

Interest-earning demand accounts

 

 

293,897

 

 

310,669

Cash and cash equivalents

 

 

313,451

 

 

336,524

Securities purchased under agreements to resell

 

 

6,838

 

 

6,875

Trading securities

 

 

129,914

 

 

163,419

Available for sale securities

 

 

296,669

 

 

331,071

Federal Home Loan Bank (FHLB) stock

 

 

18,880

 

 

7,974

Loans held for sale (includes $6,307 and $11,886, respectively at fair value)

 

 

882,071

 

 

832,455

Loans receivable, net of allowance for loan losses of $13,356 and $12,704, respectively

 

 

2,168,256

 

 

2,045,423

Premises and equipment, net

 

 

21,078

 

 

15,136

Mortgage servicing rights

 

 

76,249

 

 

77,844

Interest receivable

 

 

14,365

 

 

13,827

Goodwill

 

 

17,144

 

 

17,477

Intangible assets, net

 

 

3,381

 

 

3,542

Other assets and receivables

 

 

28,429

 

 

32,596

Total assets

 

$

3,976,725

 

$

3,884,163

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Liabilities

 

 

  

 

 

  

Deposits

 

 

  

 

 

  

Noninterest-bearing

 

$

128,029

 

$

182,879

Interest-bearing

 

 

2,992,998

 

 

3,048,207

Total deposits

 

 

3,121,027

 

 

3,231,086

Borrowings

 

 

338,031

 

 

195,453

Deferred and current tax liabilities, net

 

 

18,274

 

 

15,444

Other liabilities

 

 

21,562

 

 

20,943

Total liabilities

 

 

3,498,894

 

 

3,462,926

Commitments and Contingencies

 

 

  

 

 

  

Shareholders' Equity

 

 

  

 

 

  

Common stock, without par value

 

 

  

 

 

  

Authorized - 50,000,000 shares

 

 

 

 

 

  

Issued and outstanding - 28,704,163 shares at March 31, 2019 and 28,694,036 shares at December 31, 2018

 

 

135,190

 

 

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 - 2,000,000 shares

 

 

48,269

 

 

 —

Retained earnings

 

 

252,637

 

 

244,909

Accumulated other comprehensive income (loss)

 

 

154

 

 

(310)

Total shareholders' equity

 

 

477,831

 

 

421,237

Total liabilities and shareholders' equity

 

$

3,976,725

 

$

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 Months Ended March 31, 2019 and 2018

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Interest Income

 

 

  

 

 

 

Loans

 

$

34,455

 

$

24,612

Investment securities:

 

 

  

 

 

  

Trading

 

 

1,045

 

 

989

Available for sale - taxable

 

 

1,551

 

 

1,542

Available for sale - tax exempt

 

 

96

 

 

 —

Federal Home Loan Bank stock

 

 

223

 

 

129

Other

 

 

2,304

 

 

1,766

Total interest income

 

 

39,674

 

 

29,038

Interest Expense

 

 

  

 

 

  

Deposits

 

 

14,227

 

 

7,016

Borrowed funds

 

 

1,316

 

 

1,914

Total interest expense

 

 

15,543

 

 

8,930

Net Interest Income

 

 

24,131

 

 

20,108

Provision for loan losses

 

 

649

 

 

1,406

Net Interest Income After Provision for Loan Losses

 

 

23,482

 

 

18,702

Noninterest Income

 

 

  

 

 

  

Gain on sale of loans

 

 

2,643

 

 

10,892

Loan servicing fees, net

 

 

(347)

 

 

(322)

Mortgage warehouse fees

 

 

753

 

 

486

Gains on sale of investments available for sale (includes $127 and $0, respectively, related to accumulated other comprehensive earnings reclassifications)

 

 

127

 

 

 —

Other income

 

 

488

 

 

257

Total noninterest income

 

 

3,664

 

 

11,313

Noninterest Expense

 

 

  

 

 

  

Salaries and employee benefits

 

 

8,567

 

 

6,487

Loan expenses

 

 

934

 

 

956

Occupancy and equipment

 

 

876

 

 

565

Professional fees

 

 

539

 

 

488

Deposit insurance expense

 

 

277

 

 

246

Technology expense

 

 

472

 

 

291

Other expense

 

 

1,370

 

 

1,237

Total noninterest expense

 

 

13,035

 

 

10,270

Income Before Income Taxes

 

 

14,111

 

 

19,745

Provision for income taxes (includes $32 and $0, respectively, related to income tax expense for reclassification items)

 

 

3,541

 

 

4,684

Net Income

 

$

10,570

 

$

15,061

  Dividends on preferred stock

 

 

(833)

 

 

(833)

Net Income Allocated to Common Shareholders

 

 

9,737

 

 

14,228

Basic Earnings Per Share

 

$

0.34

 

$

0.50

Diluted Earnings Per Share

 

$

0.34

 

$

0.50

Weighted-Average Shares Outstanding

 

 

  

 

 

  

Basic

 

 

28,702,250

 

 

28,690,876

Diluted

 

 

28,737,439

 

 

28,710,480

 

See notes to condensed consolidated financial statements.

 

 

 

4


 

Table of Contents

Merchants Bancorp

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended March 31, 2019 and 2018

(In thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Net Income

 

$

10,570

 

$

15,061

Other Comprehensive Income (Loss):

 

 

  

 

 

 

Net change in unrealized losses on investment securities available for sale, net of (taxes) benefits of $(192) and $97, respectively

 

 

559

 

 

(318)

Less: Reclassification adjustment for gains included in net income, net of $32 tax expense in 2019

 

 

95

 

 

 —

Other comprehensive income (loss) for the period

 

 

464

 

 

(318)

Comprehensive Income

 

$

11,034

 

$

14,743

 

See notes to condensed consolidated financial statements.

 

 

5


 

Table of Contents

Merchants Bancorp

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2019

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

8% Preferred Stock

 

7% Preferred Stock

 

Retained

 

Comprehensive

 

 

 

 

    

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, $5.00 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

 

 

For the Three Months Ended March 31, 2018

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

8% Preferred Stock

 

7% Preferred Stock

 

Retained

 

Comprehensive

 

 

 

 

    

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, $5.00 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

 

See notes to condensed consolidated financial statements.

 

 

 

6


 

Table of Contents

Merchants Bancorp

Condensed Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31, 2019 and 2018

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

    

Operating activities:

 

 

  

 

 

  

 

Net income

 

$

10,570

 

$

15,061

 

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

 

 

 

 

 

  

 

Depreciation

 

 

137

 

 

103

 

Provision for loan losses

 

 

649

 

 

1,406

 

Gain on sale of securities

 

 

(127)

 

 

 —

 

Gain on sale of loans

 

 

(2,643)

 

 

(10,892)

 

Proceeds from sales of loans

 

 

3,729,430

 

 

4,020,784

 

Loans and participations originated and purchased for sale

 

 

(3,776,827)

 

 

(4,098,115)

 

Change in mortgage servicing rights for paydowns and fair value adjustments

 

 

2,615

 

 

2,263

 

Net change in:

 

 

 

 

 

  

 

Trading securities

 

 

33,505

 

 

(59,193)

 

Other assets and receivables

 

 

2,699

 

 

(3,407)

 

Other liabilities

 

 

1,933

 

 

7,918

 

Other

 

 

798

 

 

309

 

Net cash provided by (used in) operating activities

 

 

2,739

 

 

(123,763)

 

Investing activities:

 

 

 

 

 

  

 

Net change in securities purchased under agreements to resell

 

 

37

 

 

41

 

Purchases of available-for-sale securities

 

 

(45,000)

 

 

(28,224)

 

Proceeds from the sale of available-for-sale securities

 

 

31,086

 

 

 —

 

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

 

 

49,055

 

 

25,360

 

Purchases of loans

 

 

(14,233)

 

 

(34,273)

 

Net change in loans receivable

 

 

(109,620)

 

 

(137,092)

 

Purchase of Federal Home Loan Bank stock

 

 

(11,860)

 

 

(118)

 

Proceeds from sale of Federal Home Loan Bank stock

 

 

1,190

 

 

 —

 

Purchases of premises and equipment

 

 

(4,206)

 

 

(1,055)

 

Purchases of mortgage servicing rights

 

 

 —

 

 

(327)

 

Purchase of limited partnership interests

 

 

 —

 

 

(13)

 

Cash (paid) received in acquisition of subsidiary

 

 

 —

 

 

6,505

 

Net cash used in investing activities

 

 

(103,551)

 

 

(169,196)

 

Financing activities:

 

 

  

 

 

 

 

Net change in deposits

 

 

(110,031)

 

 

82,106

 

Proceeds from Federal Home Loan Bank borrowings

 

 

2,348,720

 

 

284,189

 

Repayment of Federal Home Loan Bank borrowings

 

 

(2,209,281)

 

 

(142,568)

 

Proceeds from issuance of preferred stock

 

 

48,269

 

 

 —

 

Proceeds from notes payable

 

 

4,404

 

 

 —

 

Payments on notes payable

 

 

(1,500)

 

 

 —

 

Dividends

 

 

(2,842)

 

 

(2,554)

 

Net cash provided by financing activities

 

 

77,739

 

 

221,173

 

Net Change in Cash and Cash Equivalents

 

 

(23,073)

 

 

(71,786)

 

Cash and Cash Equivalents, Beginning of Period

 

 

336,524

 

 

359,519

 

Cash and Cash Equivalents, End of Period

 

$

313,451

 

$

287,733

 

Additional Cash Flows Information:

 

 

 

 

 

  

 

Interest paid

 

$

14,745

 

$

7,751

 

Income taxes paid

 

 

64

 

 

 —

 

The Company purchased all of the capital stock of FMBI on January 2, 2018.  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 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 March 31, 2019 and for the three months ended March 31, 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 March 31, 2019 and the results of operations for the three months ended March 31, 2019 and 2018, and cash flows for the three months ended March 31, 2019 and 2018. All interim amounts have not been audited and the results of operations for the three months ended March 31, 2019, herein are not necessarily indicative of the results of operations to be expected for the entire year.

Principles of Consolidation

The consolidated financial statements as of and for the period ended March 31, 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 consolidated financial statements as of and for the period ended March 31, 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 Offering 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”), 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. 

Recent Acquisitions

 

On May 8, 2017, the Company entered into a Stock Purchase Agreement to acquire FMBI (formerly 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.

 

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 Farmers-Merchants National Bank of Paxton 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.   As of March 31, 2019, 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 includes 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.

 

9


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 totaling $5.0 million was recorded by the Company.  Certain fair value measurements, intangibles, and the purchase price allocation are still being evaluated by management and are subject to change during the measurement period.  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 months ended March 31, 2019.  These reclassifications had no effect 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 $545,000 and $1.5 million at March 31, 2019 and 2018, respectively.

Securities Available-For-Sale

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

Gross

 

Gross

 

Approximate

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

10,740

 

$

 8

 

$

 5

 

$

10,743

Federal agencies

 

 

235,621

 

 

 2

 

 

423

 

 

235,200

Municipals

 

 

12,050

 

 

430

 

 

 —

 

 

12,480

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

 

 

38,092

 

 

155

 

 

 1

 

 

38,246

Total available-for-sale securities

 

$

296,503

 

$

595

 

$

429

 

$

296,669

 

10


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

Gross

 

Gross

 

Approximate

 

 

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 March 31, 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.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

    

Cost

    

Value

    

Cost

    

Value

Contractual Maturity

 

(In thousands)

Within one year

 

$

149,649

 

$

149,318

 

$

179,323

 

$

178,581

After one through five years

 

 

98,685

 

 

98,643

 

 

72,470

 

 

72,282

After five through ten years

 

 

2,120

 

 

2,210

 

 

7,087

 

 

7,203

After ten years

 

 

7,957

 

 

8,252

 

 

11,956

 

 

12,137

 

 

 

258,411

 

 

258,423

 

 

270,836

 

 

270,203

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

 

 

38,092

 

 

38,246

 

 

60,693

 

 

60,868

 

 

$

296,503

 

$

296,669

 

$

331,529

 

$

331,071

 

During the three months ended March 31,  2019, $31.1 million of securities available-for-sale were sold, and a net gain of $127,000 was recognized, consisting of $361,000 in gains and $234,000 of losses.  During the three months ended March 31, 2018, no securities available-for-sale were sold.

 

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 March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

 —

 

$

 —

 

$

2,243

 

$

 5

 

$

2,243

 

$

 5

Federal agencies

 

 

 —

 

 

 —

 

 

180,198

 

 

423

 

 

180,198

 

 

423

Municipals

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

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

 

 

914

 

 

 1

 

 

 —

 

 

 —

 

 

914

 

 

 1

 

 

$

914

 

$

 1

 

$

182,441

 

$

428

 

$

183,355

 

$

429

 

11


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 bonds 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 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. 

12


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Interest earned from the time of funding to the time of sale is recognized as interest income as accrued. Fees earned agreements are recognized when collected as noninterest income.

Loans receivable at March 31, 2019 and December 31, 2018 include:

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

 

 

(In thousands)

 

 

 

 

 

 

 

Mortgage warehouse lines of credit

 

$

412,171

 

$

337,332

Residential real estate

 

 

409,172

 

 

410,871

Multi-family and healthcare financing

 

 

965,363

 

 

914,393

Commercial and commercial real estate

 

 

296,483

 

 

299,194

Agricultural production and real estate

 

 

81,063

 

 

79,255

Consumer and margin loans

 

 

17,360

 

 

17,082

 

 

 

2,181,612

 

 

2,058,127

Less

 

 

  

 

 

  

Allowance for loan losses

 

 

13,356

 

 

12,704

 

 

 

 

 

 

 

Loans Receivable

 

$

2,168,256

 

$

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.

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.

13


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

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 (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classified 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 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 either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.  For impaired loans where the Company utilizes discounted

14


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 non-performing 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 questionable 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 portfolio segment within troubled debt restructurings is the same as detailed previously above. 

The following tables present, by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2019 and 2018 and the recorded investment in loans and impairment method as of March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At or For the Three Months Ended March 31, 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 (credit) for loan losses

 

 

186

 

 

 4

 

 

347

 

 

71

 

 

34

 

 

 7

 

 

649

Loans charged to the allowance

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Recoveries of loans previously charged off

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 3

 

 

 —

 

 

 3

Balance, end of period

 

$

1,254

 

$

1,990

 

$

6,377

 

$

3,122

 

$

466

 

$

147

 

$

13,356

Ending balance: individually evaluated for impairment

 

$

225

 

$

 —

 

$

 —

 

$

500

 

$

20

 

$

 —

 

$

745

Ending balance: collectively evaluated for impairment

 

$

1,029

 

$

1,990

 

$

6,377

 

$

2,622

 

$

446

 

$

147

 

$

12,611

Loans

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Ending balance

 

$

412,171

 

$

409,172

 

$

965,363

 

$

296,483

 

$

81,063

 

$

17,360

 

$

2,181,612

Ending balance individually evaluated for impairment

 

$

572

 

$

4,255

 

$

 —

 

$

8,186

 

$

347

 

$

50

 

$

13,410

Ending balance collectively evaluated for impairment

 

$

411,599

 

$

404,917

 

$

965,363

 

$

288,297

 

$

80,716

 

$

17,310

 

$

2,168,202

 

 

15


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 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

 

 

223

 

 

76

 

 

748

 

 

323

 

 

13

 

 

23

 

 

1,406

Loans charged to the allowance

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17)

 

 

(17)

Recoveries of loans previously charged off

 

 

 —

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 4

 

 

 5

Balance, end of period

 

$

506

 

$

1,664

 

$

4,250

 

$

2,685

 

$

333

 

$

267

 

$

9,705

 

 

 

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.

16


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

MTG WHLOC

    

RES RE

    

MF RE

    

CML & CRE

    

AG & AGRE

    

CON & MAR

    

TOTAL

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention (Watch)

 

$

 —

 

$

590

 

$

56,962

 

$

12,451

 

$

2,791

 

$

381

 

$

73,175

Substandard

 

 

572

 

 

4,255

 

 

 —

 

 

8,186

 

 

347

 

 

50

 

 

13,410

Doubtful

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Acceptable and Above

 

 

411,599

 

 

404,327

 

 

908,401

 

 

275,846

 

 

77,925

 

 

16,929

 

 

2,095,027

Total

 

$

412,171

 

$

409,172

 

$

965,363

 

$

296,483

 

$

81,063

 

$

17,360

 

$

2,181,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

 —

 

$

 —

 

$

324

 

$

324

 

$

411,847

 

$

412,171

RES RE

 

 

3,431

 

 

237

 

 

998

 

 

4,666

 

 

404,506

 

 

409,172

MF RE

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

965,363

 

 

965,363

CML & CRE

 

 

191

 

 

306

 

 

175

 

 

672

 

 

295,811

 

 

296,483

AG & AGRE

 

 

53

 

 

 —

 

 

577

 

 

630

 

 

80,433

 

 

81,063

CON & MAR

 

 

13

 

 

 —

 

 

21

 

 

34

 

 

17,326

 

 

17,360

 

 

$

3,688

 

$

543

 

$

2,095

 

$

6,326

 

$

2,175,286

 

$

2,181,612

 

17


 

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 March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

MTG WHLOC

    

RES RE

    

MF RE

    

CML & CRE

    

AG & AGRE

    

CON & MAR

    

TOTAL

 

 

(In thousands)

Impaired loans without a specific allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Recorded investment

 

$

248

 

$

4,255

 

$

 —

 

$

5,907

 

$

88

 

$

50

 

$

10,548

Unpaid principal balance

 

 

248

 

 

4,255

 

 

 —

 

 

5,907

 

 

88

 

 

50

 

 

10,548

Impaired loans with a specific allowance:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Recorded investment

 

 

324

 

 

 —

 

 

 —

 

 

2,279

 

 

259

 

 

 —

 

 

2,862

Unpaid principal balance

 

 

324

 

 

 —

 

 

 —

 

 

2,279

 

 

259

 

 

 —

 

 

2,862

Specific allowance

 

 

225

 

 

 —

 

 

 —

 

 

500

 

 

20

 

 

 —

 

 

745

Total impaired loans:

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Recorded investment

 

 

572

 

 

4,255

 

 

 —

 

 

8,186

 

 

347

 

 

50

 

 

13,410

Unpaid principal balance

 

 

572

 

 

4,255

 

 

 —

 

 

8,186

 

 

347

 

 

50

 

 

13,410

Specific allowance

 

 

225

 

 

 —

 

 

 —

 

 

500

 

 

20

 

 

 —

 

 

745

 

18


 

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 months  ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

MTG WHLOC

    

RES RE

    

MF RE

    

CML & CRE

    

AG & AGRE

    

CON & MAR

    

TOTAL

 

 

(In thousands)

Three months ended March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment in impaired loans

 

$

574

 

$

2,806

 

$

 —

 

$

8,468

 

$

364

 

$

48

 

$

12,260

Interest income recognized

 

 

 —

  

 

15

  

 

 —

  

 

140

  

 

 —

  

 

 —

  

 

155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average recorded investment in impaired loans

 

$

1,352

 

$

729

 

$

117

 

$

6,587

 

$

635

 

$

146

 

$

9,566

Interest income recognized

 

 

19

 

 

 3

 

 

 3

 

 

46

 

 

 —

 

 

 —

 

 

71

 

 

 

 

19


 

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 March 31, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2019

 

2018

 

 

 

 

 

Total Loans >

 

 

 

 

Total Loans >

 

 

 

 

 

90 Days &

 

 

 

 

90 Days &

 

    

Nonaccrual

    

Accruing

    

Nonaccrual

    

Accruing

 

 

(In thousands)

MTG WHLOC

 

$

572

 

$

 —

 

$

575

 

$

 —

RES RE

 

 

702

 

 

454

 

 

893

 

 

74

MF RE

 

 

 —

 

 

 —

 

 

 —

 

 

 —

CML & CRE

 

 

228

 

 

 —

 

 

136

 

 

117

AG & AGRE

 

 

259

 

 

317

 

 

282

 

 

307

CON & MAR

 

 

13

 

 

 8

 

 

18

 

 

 9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,774

 

$

779

 

$

1,904

 

$

507

 

No troubled loans were restructured during the three months ended March 31, 2019 or 2018.  No restructured loans defaulted during the three months ended March 31,  2019 or 2018.  There were no residential loans in process of foreclosure at March 31, 2019 or 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 March 31, 2019 and December 31, 2018, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements to which they were subject.

As of March 31, 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.

20


 

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)

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Company

 

$

453,361

 

13.3

%  

$

272,136

 

8.0

%  

$

 —

 

N/A

 

Merchants Bank

 

 

478,574

 

14.6

%  

 

262,223

 

8.0

%  

 

327,778

 

10.0

%

FMBI

 

 

19,384

 

15.7

%  

 

9,876

 

8.0

%  

 

12,345

 

10.0

%

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

 

 

  

 

  

 

 

  

 

  

 

 

  

 

  

 

Company

 

 

440,007

 

12.9

%  

 

204,102

 

6.0

%  

 

 —

 

N/A

 

Merchants Bank

 

 

465,636

 

14.2

%  

 

196,667

 

6.0

%  

 

262,223

 

8.0

%

FMBI

 

 

18,966

 

15.4

%  

 

7,407

 

6.0

%  

 

9,876

 

8.0

%

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

350,157

 

10.3

%  

 

153,077

 

4.5

%  

 

 —

 

N/A

 

Merchants Bank

 

 

465,636

 

14.2

%  

 

147,500

 

4.5

%  

 

213,056

 

6.5

%

FMBI

 

 

18,966

 

15.4

%  

 

5,555

 

4.5

%  

 

8,025

 

6.5

%

Tier 1 capital(1) (to average assets)

 

 

 

 

  

 

 

  

 

 

 

 

  

 

  

 

Company

 

 

440,007

 

12.0

%  

 

146,417

 

4.0

%  

 

 —

 

N/A

 

Merchants Bank

 

 

465,636

 

13.3

%  

 

140,344

 

4.0

%  

 

175,430

 

5.0

%

FMBI

 

 

18,966

 

11.9

%  

 

6,384

 

4.0

%  

 

7,980

 

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.

21


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Beginning January 1, 2015, a new 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 are being phased in over a four-year period (beginning on January 1, 2015, and an additional 20% per year thereafter.) Under the new 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.  The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and was phased in over a four‑year period (increasing by that amount on each subsequent January 1 until it reached 2.5% on January 1, 2019).

 

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.  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. 

22


 

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 March 31, 2019 and December 31, 2018. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

Fair Value

 

 

Amount

 

 

Balance Sheet Location

 

 

Asset

 

 

(Liability)

March 31, 2019

 

(In thousands)

 

 

 

 

 

(In thousands)

Interest rate lock commitments

$

9,706

 

 

Derivative assets/liabilities

 

$

71

 

$

 1

Forward contracts

 

15,260

 

 

Derivative assets/liabilities

 

 

 —

 

 

18

 

 

 

 

 

 

 

$

71

 

$

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

 

 

Fair Value

 

 

Amount

 

 

Balance Sheet Location

 

 

Asset

 

 

(Liability)

December 31, 2018

 

(In thousands)

 

 

 

 

 

(In thousands)

Interest rate lock commitments

$

8,812

 

 

Derivative assets/liabilities

 

$

70

 

$

 —

Forward contracts

 

19,640

 

 

Derivative assets/liabilities

 

 

 —

 

 

 9

 

 

 

 

 

 

 

$

70

 

$

 9

Fair values of 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 months ended March 31, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

 

 

(In thousands)

 

Interest rate lock commitments

 

$

 —

 

$

114

 

Forward contracts (1)

 

 

(5)

 

 

105

 

    Net derivative gains (losses)

 

$

(5)

 

$

219

 

_____________________________________

(1)

Amount includes pair-off settlements.

 

 

 

 

 

 

 

 

 

 

 

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

23


 

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 March 31, 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)

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

$

129,914

 

$

 —

 

$

129,914

 

$

 —

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

 

10,743

 

 

10,743

 

 

 —

 

 

 —

Federal agencies

 

 

235,200

 

 

 —

 

 

235,200

 

 

 —

Municipals

 

 

12,480

 

 

 —

 

 

12,480

 

 

 —

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

 

 

38,246

 

 

 —

 

 

38,246

 

 

 —

Loans held for sale

 

 

6,307

 

 

 —

 

 

6,307

 

 

 —

Mortgage servicing rights

 

 

76,249

 

 

 —

 

 

 —

 

 

76,249

Derivative assets - interest rate lock commitments

 

 

71

 

 

 —

 

 

 —

 

 

71

Derivative liabilities - interest rate lock commitments

 

 

 1

 

 

 —

 

 

 —

 

 

 1

Derivative liabilities - forward contracts

 

 

18

 

 

 —

 

 

18

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 three months ended March 31, 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.

Trading and Available-for-Sale Securities

Where quoted market prices are available in an active market, securities 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

24


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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, U.S. Treasuries, 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.  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.  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.  Changes in fair value of the Company’s derivative financial instruments are recognized through noninterest income on its condensed consolidated statement of income.

25


 

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 March 31, 

 

    

2019

    

2018

 

 

(In thousands)

Mortgage servicing rights

 

 

 

 

 

 

Balance, beginning of period

 

$

77,844

 

$

66,079

Additions

 

 

  

 

 

  

Originated and purchased servicing

 

 

1,020

 

 

3,452

Subtractions

 

 

  

 

 

  

Paydowns

 

 

(1,110)

 

 

(1,370)

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

 

 

(1,505)

 

 

(893)

Balance, end of period

 

$

76,249

 

$

67,268

 

 

 

 

 

 

 

Available-for-sale securities - Municipals

 

 

 

 

 

 

Balance, beginning of period

 

$

 —

 

$

6,688

Additions

 

 

  

 

 

  

Purchased securities

 

 

 —

 

 

 —

Subtractions

 

 

 

 

 

 

Paydowns

 

 

 —

 

 

(258)

Sales

 

 

 —

 

 

 —

Unrealized gains (losses) included in other comprehensive income

 

 

 —

 

 

 —

Balance, end of period

 

$

 —

 

$

6,430

 

 

 

 

 

 

 

Derivative Assets - interest rate lock commitments

 

 

 

 

 

 

Balance, beginning of period

 

$

70

 

$

 —

Purchases

 

 

 —

 

 

 —

Changes in fair value

 

 

 1

 

 

116

Balance, end of period

 

$

71

 

$

116

 

 

 

 

 

 

 

Derivative Liabilities - interest rate lock commitments

 

 

 

 

 

 

Balance, beginning of period

 

$

 —

 

$

 —

Purchases

 

 

 —

 

 

 —

Changes in fair value

 

 

 1

 

 

 2

Balance, end of period

 

$

 1

 

$

 2

 

 

 

 

 

 

 

 

 

 

 

 

 

26


 

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 March 31, 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)

March 31, 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.

27


 

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 March 31, 2019:

 

 

  

 

  

 

 

 

 

Collateral-dependent impaired loans

 

$

1,600

 

Market comparable properties

 

Marketability discount

 

32%

Mortgage servicing rights

 

$

76,249

 

Discounted cash flow

 

Discount rate

 

8% - 13%

 

 

 

  

 

  

 

Constant prepayment rate

 

1% - 30%

Derivative assets - interest rate lock commitments

 

$

71

 

Discounted cash flow

 

loan closing rates

 

63-99%

Derivative liabilities - interest rate lock commitments

 

$

 1

 

Discounted cash flow

 

loan closing rates

 

63-99%

 

 

 

 

 

 

 

 

 

 

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.

28


 

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 March 31, 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)

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Cash and cash equivalents

 

$

313,451

 

$

313,451

 

$

313,451

 

$

 —

 

$

 —

Securities purchased under agreements to resell

 

 

6,838

 

 

6,838

 

 

 —

 

 

6,838

 

 

 —

FHLB stock

 

 

18,880

 

 

18,880

 

 

 —

 

 

18,880

 

 

 —

Loans held for sale

 

 

875,764

 

 

875,764

 

 

 —

 

 

875,764

 

 

 —

Loans, net

 

 

2,168,256

 

 

2,170,521

 

 

 —

 

 

 —

 

 

2,170,521

Interest receivable

 

 

14,365

 

 

14,365

 

 

 —

 

 

14,365

 

 

 —

Financial liabilities:

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

Deposits

 

 

3,121,027

 

 

3,120,546

 

 

2,438,323

 

 

682,223

 

 

 —

Lines of credit

 

 

31,605

 

 

31,605

 

 

 —

 

 

31,605

 

 

 —

Short-term subordinated debt

 

 

13,486

 

 

13,486

 

 

 —

 

 

13,486

 

 

 —

FHLB advances

 

 

292,940

 

 

292,823

 

 

 —

 

 

292,823

 

 

 —

Interest payable

 

 

4,930

 

 

4,930

 

 

 —

 

 

4,930

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

29


 

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.

30


 

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 March 31, 

 

 

2019

 

2018

 

 

 

 

 

Weighted-

 

Per 

 

 

 

 

Weighted-

 

Per 

 

 

Net

 

Average

 

Share

 

Net

 

Average

 

Share

 

    

Income

    

Shares

    

Amount

    

Income

    

Shares

    

Amount

 

 

(In thousands)

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Net income

 

$

10,570

 

  

 

 

  

 

$

15,061

 

  

 

 

  

Dividends on preferred stock

 

 

(833)

 

  

 

 

  

 

 

(833)

 

  

 

 

  

Net income allocated to common shareholders

 

$

9,737

 

  

 

 

  

 

$

14,228

 

  

 

 

  

Basic earnings per share

 

 

  

 

28,702,250

 

$

0.34

 

 

  

 

28,690,876

 

$

0.50

Effect of dilutive securities-restricted stock awards

 

 

  

 

35,189

 

 

  

 

 

  

 

19,604

 

 

  

Diluted earnings per share

 

 

  

 

28,737,439

 

$

0.34

 

 

  

 

28,710,480

 

$

0.50

 

 

 

 

 

Note 8:   Share-Based Payment Plans

Equity-based incentive awards are currently made though our 2017 Equity Incentive Plan (the “2017 Incentive Plan”). Prior to the adoption of the 2017 Incentive Plan, the equity awards we issued historically consisted of restricted stock awards issued pursuant to the Incentive Plan for Merchants Bank of Indiana 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 March 31, 2019 and March 31, 2018, the Company issued 10,127 and 7,039 shares, respectively, pursuant to the Prior Incentive Plan. As of March 31, 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 common stock equal to $10,000, rounded up to the nearest whole share.  No shares were issued to directors during the three months ended March 31, 2019 or March 31, 2018.

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 origination or purchase to sale in the secondary market, as well as commercial loans to 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.

 

 

31


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The tables below present selected business segment financial information for the three months ended March 31, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

    

 

 

 

Mortgage 

 

Mortgage

 

 

 

 

 

 

 

 

 

 

    

Banking

    

Warehousing

    

Banking

    

Other

    

Total

 

 

(In thousands)

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

331

 

$

14,380

 

$

24,492

 

$

471

 

$

39,674

Total interest expense

 

 

 —

 

 

7,529

 

 

8,982

 

 

(968)

 

 

15,543

Net interest income

 

 

331

 

 

6,851

 

 

15,510

 

 

1,439

 

 

24,131

Provision for loan losses

 

 

 —

 

 

133

 

 

516

 

 

 —

 

 

649

Net interest income after provision for loan losses

 

 

331

 

 

6,718

 

 

14,994

 

 

1,439

 

 

23,482

Total noninterest income

 

 

2,691

 

 

753

 

 

883

 

 

(663)

 

 

3,664

Total noninterest expense

 

 

3,977

 

 

2,336

 

 

4,120

 

 

2,602

 

 

13,035

Income before income taxes

 

 

(955)

 

 

5,135

 

 

11,757

 

 

(1,826)

 

 

14,111

Income taxes

 

 

(243)

 

 

1,303

 

 

2,988

 

 

(507)

 

 

3,541

Net income (loss)

 

$

(712)

 

$

3,832

 

$

8,769

 

$

(1,319)

 

$

10,570

Total assets

 

$

160,609

 

$

1,554,233

 

$

2,223,890

 

$

37,993

 

$

3,976,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage 

 

Mortgage

 

 

 

 

 

 

 

 

 

 

    

Banking

    

Warehousing

    

Banking

    

Other

    

Total

 

 

(In thousands)

Three Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

163

 

$

11,857

 

$

16,753

 

$

265

 

$

29,038

Total interest expense

 

 

 —

 

 

3,797

 

 

5,593

 

 

(460)

 

 

8,930

Net interest income

 

 

163

 

 

8,060

 

 

11,160

 

 

725

 

 

20,108

Provision for loan losses

 

 

 —

 

 

674

 

 

732

 

 

 —

 

 

1,406

Net interest income after provision for loan losses

 

 

163

 

 

7,386

 

 

10,428

 

 

725

 

 

18,702

Total noninterest income

 

 

10,511

 

 

486

 

 

652

 

 

(336)

 

 

11,313

Noninterest expense

 

 

3,382

 

 

1,736

 

 

3,169

 

 

1,983

 

 

10,270

Income before income taxes

 

 

7,292

 

 

6,136

 

 

7,911

 

 

(1,594)

 

 

19,745

Income taxes

 

 

1,808

 

 

1,506

 

 

1,931

 

 

(561)

 

 

4,684

Net income (loss)

 

$

5,484

 

$

4,630

 

$

5,980

 

$

(1,033)

 

$

15,061

Total assets

 

$

141,703

 

$

1,603,584

 

$

1,908,823

 

 

21,739

 

$

3,675,849

 

 

 

 

 

 

 

 

 

 

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

32


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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, 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, but does not expect the impact 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 on its consolidated financial statements, but the adoption of ASU 2016-01 is not expected 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.

33


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 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, 2019, and for interim periods for years beginning after January 1, 2020.  Management is in the process of gathering documentation on current lease agreements to assess the impact of adopting this guidance on the Company’s financial statements, but its impact is not expected to be material.

FASB ASU 2016‑13, Financial Instruments—Credit Losses

In June 2016, the FASB issued ASU 2016‑13, “Financial Instruments—Credit Losses”. The amendments in this ASU replace the incurred loss model with a methodology that reflects 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, 2021,  including interim periods within those fiscal years.   The Company has established a cross-functional committee that is developing a project plan to review modeling data currently available and technology needed to ensure compliance of this standard.  The committee has also met with multiple vendors to potentially 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 expect 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.

34


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

FASB ASU 2017‑08, Premium Amortization of Purchased Callable Debt

In March 2017, the FASB issued ASU 2017‑08, “Premium Amortization of Purchased Callable Debt.” This ASU applies to all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). The ASU requires the premium to be amortized to the earliest call date, not the maturity date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

As an emerging growth company, ASU 2017‑08 is effective as to the Company for years beginning after December 15, 2019 and interim periods within years beginning after December 15, 2020.  Early adoption is permitted. Management is still in the process of evaluating the impact of adopting this guidance, but does not expect the ASU to have a material effect on the Company’s financial position or results of operations.

 

35


 

Table of Contents

Merchants Bancorp

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;

36


 

Table of Contents

Merchants Bancorp

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.

 

 

 

37


 

Table of Contents

Merchants Bancorp

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

Management’s discussion and analysis of the financial condition at March 31, 2019 and results of operations for the three months ended March 31, 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.

 

Introduction

 

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 multiple lines of business, including multi-family housing and servicing, 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 from the multi-family rental real estate loans servicing portfolio contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, and retail and commercial deposits. We believe that the combination of net interest income and noninterest income from the sale of low risk profile assets results in lower than industry charge offs and a lower expense base serving to maximize net income and shareholder return.

 

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.

Financial Condition

As of March 31, 2019, we had approximately $4.0 billion in total assets, $3.1 billion in deposits, and $477.8 million in total shareholders’ equity. Total assets as of March 31, 2019 included approximately $313.5 million of cash and cash equivalents, $882.1 million of loans held for sale and $2.2 billion of loans held for investment. It also includes $129.9 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

38


 

Table of Contents

Merchants Bancorp

occur within 30 days. There are $296.7 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 $76.2 million at March 31, 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 March 31, 2019 and December 31, 2018

Total Assets.    Total assets increased $92.6 million, or 2%, to $4.0 billion at March 31, 2019 from $3.9 billion at December 31, 2018. The increase was due primarily to increases in net loans receivable of $122.8 million, which were partially offset by decreases in available for sale securities of $34.4 million and trading securities of $33.5 million.

Cash and Cash Equivalents.   Cash and cash equivalents decreased $23.1 million, or 7%, to $313.5 million at March 31, 2019 from $336.5 million at December 31, 2018.

Trading Securities.    Trading securities decreased $33.5 million, or 21%, to $129.9 million at March 31, 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 $34.4 million, or 10%, to $296.7 million at March 31, 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 $80.1 million during the period, partially offset by purchases of $45.0 million.    We invest in available for sale securities primarily using funds from escrow deposits held at Merchants Bank, received in connection with our multi-family mortgage servicing activities.

The available for sale securities are funded by, and paired with as to interest rates, escrow custodial deposits held at the Company on loans serviced by us. This portfolio of securities is structured to achieve a favorable interest rate spread.

Federal Home Loan Bank (“FHLB”) stock.    FHLB stock increased $10.9 million, or 137%, to $18.9 million at March 31, 2019 from $8.0 million at December 31, 2018. The increase in FHLB stock was due primarily to our strategic shift to reduce our reliance on brokered deposits, in favor of additional borrowing that allows us to manage our liquidity 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, increased $49.6 million, or 6%, to $882.1 million at March 31, 2019 from $832.5 million at December 31, 2018. The increase in loans held for sale was due primarily to higher volumes at the end of the quarter ended March 31, 2019.

Loans Receivable, Net.    Loans receivable, net, which are comprised of loans held for investment, increased  $122.8 million, or 6%, to $2.2 billion at March 31, 2019 compared to December 31, 2018. The increase in net loans was comprised primarily of:   

·

an increase of $74.8 million, or 22%, in mortgage warehouse lines of credit, to $412.2 million at March 31, 2019,  and

·

an increase of $51.0 million, or 6%, in multi-family and healthcare financing loans, to $965.4 million at March 31, 2019.

The increase in multi-family and healthcare financing was due to origination volume in excess of paydowns during the three months ended March 31, 2019. The increase in mortgage warehouse lines of credit was despite an industry

39


 

Table of Contents

Merchants Bancorp

decline in volume. There was a 5.0% industry decline in single-family residential loan volumes from the three months ended March 31, 2018 to the three months ended March 31, 2019, according to the Mortgage Bankers Association. This compares to the 6.0% increase in mortgage warehouse volumes we reported during the same period.    

Mortgage Servicing Rights.    Mortgage servicing rights decreased $1.6 million, or 2%, to $76.3 million at March 31, 2019 compared to December 31, 2018. During the three months ended March 31, 2019, originated and purchased servicing of  $1.0 million was offset by paydowns of $1.1 million and a fair value decrease of $1.5 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.

Deposits.    Deposits decreased $110.1 million, or 3%, to $3.1 billion at March 31, 2019 from $3.2 billion at December 31, 2018.  The decrease was due to a reduction in demand accounts that reduced our reliance on brokered deposits, in favor of additional borrowing for more effective liquidity management.

 

Demand deposits decreased $156.0 million, or 10%, to $1.4 billion at March 31, 2019, savings deposits increased $43.7 million, or 4%, to $1.0 billion at March 31, 2019, while certificates of deposit accounts increased $2.2 million, to $682.7 million at March 31, 2019. The decrease in demand accounts was driven by the lower level of brokered deposits outstanding period to period. Brokered demand accounts decreased by $250.1 million, or 83%, to $50.1 million at March 31, 2019.  Brokered certificates of deposit accounts decreased $1.6 million, to $576.9 million at March 31, 2019 from $578.5 million at December 31, 2018. Brokered savings deposits increased $20.5 million, or 19%, to $130.1 million at March 31, 2019 from $109.6 million at December 31, 2018. In total, brokered deposits decreased $231.1 million, or 23%, to $757.1 million at March 31, 2019 from $988.2 million at December 31, 2018.  Brokered deposits represented 24% of total deposits at March 31, 2019, compared with 31% at December 31, 2018.

 

Interest-bearing deposits decreased $55.2 million, or 2%, to $3.0 billion at March 31, 2019, and noninterest-bearing deposits decreased $54.9 million, or 30%, to $128.0 million at March 31, 2019.

 

Borrowings.    Borrowings totaled $338.0 million at March 31, 2019, an increase of $142.6 million, or 73%, from December 31, 2018, in order to maintain an appropriate level of cash to fund our businesses.  Depending on rates and timing, borrowing can be a more effective liquidity management alternative than utilizing brokered deposits.

Total Shareholders’ Equity.    Total shareholders’ equity increased $56.6 million, or 13%, to $477.8 million at March 31, 2019 from $421.2 million at December 31, 2018. The increase resulted primarily from the $48.3 million increase in preferred stock associated with the issuance of 2 million shares and an increase in net income of $10.6 million. These increases were partially offset by dividends paid on common and preferred shares of $2.0 million and $833,000, respectively, during the period.

Comparison of Operating Results for the Three Months Ended March 31,  2019 and 2018

General.    Net income for the three months ended March 31,  2019 was $10.6 million, a decrease of $4.5 million, or 30%, from net income of $15.1 million for the three months ended March 31,  2018. The decrease was due to a $8.2 million decrease in gain on sale of loans and a  $2.8 million increase in noninterest expenses, which were partially offset by a $4.0 million increase in net interest income and a $1.1 million decrease in the provision for income taxes 

Interest Income.    Interest income increased $10.6 million, or 37%, to $39.7 million for the three months ended March 31,  2019, compared with the three months ended March 31,  2018. This increase was primarily attributable to a $9.8 million increase in interest on loans and loans held for sale and a $538,000 increase in interest on other interest-earning deposits.  

The average balance of loans, including loans held for sale, during the three months ended March 31,  2019 increased $498.7 million, or 22%, to $2.7 billion from $2.2 billion for the three months ended March 31,  2018, while the

40


 

Table of Contents

Merchants Bancorp

average yield on loans increased 65 basis points, to 5.09%, for the three months ended March 31,  2019, compared to 4.44% for the three months ended March 31,  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 interest-earning assets and other decreased $87.5 million, or 19%, to $369.7 million for the three months ended March 31,  2019 from $457.2 million for the three months ended March 31,  2018, while the average yield increased 109 basis points to 2.77% for the three months ended March 31,  2019. 

The average balance of trading securities decreased $11.6 million, or 10%, to $109.4 million for the three months ended March 31,  2019, compared to $121.0 million for the three months ended March 31,  2018, while the average yield increased 56 basis points to 3.87% for the three months ended March 31,  2019. 

The average balance of taxable available-for-sale securities decreased $123.8 million, or 30%, to $292.5 million for the three months ended March 31,  2019, compared with $416.3 million for the three months ended March 31,  2018, and the average yield increased 65 basis points to 2.15% for the three months ended March 31,  2019.  

Interest Expense.    Total interest expense increased $6.6 million, or 74%, to $15.5 million for the three months ended March 31,  2019, compared with the three months ended March 31,  2018.  

Interest expense on deposits increased $7.2 million, or 103%, to $14.2 million for the three months ended March 31,  2019 from the three months ended March 31,  2018. The increase was attributable to a 67 basis point increase in the average cost of interest-bearing deposits, to 1.94% for the three months ended March 31,  2019 from 1.27% for the same period in 2018, and an increase in the average balance of interest-bearing deposits of $730.9 million, or 33%, to $3.0 billion for the three months ended March 31,  2019. The increase in the cost of deposits was primarily due to the overall increase in interest rates in the economy period to period and the increase in the average balance of interest-bearing deposits was primarily due to growth in interest-bearing checking accounts.

Interest expense on borrowings decreased $598,000, or 31%, to $1.3 million for the three months ended March 31,  2019 from $1.9 million for the three months ended March 31,  2018. The decrease was due primarily to a 579 basis point decrease in the average cost of borrowings of 6.04%, compared to 11.83%, partially offset by a $22.7 million, or 35%, increase in the average balance of borrowings outstanding for the three months ended March 31,  2018.  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 includes 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, the cost of borrowings increased from a base rate of 3.68% and 4.22%, to an effective rate of 6.04% and 11.83% for the three months ended March 31, 2019 and 2018, respectively. 

Net Interest Income.     Net interest income increased $4.0 million, or 20%, to $24.1 million for the three months ended March 31,  2019, compared with the three months ended March 31,  2018. The increase was due to a 44 basis point increase in our interest rate spread, to 2.50%, for the three months ended March 31,  2019, from 2.06% for the three months ended March 31,  2018.  Also contributing to the increase was the overall growth in our interest-earning assets period to period. Our net interest margin increased 25 basis points, to 2.77%, for the three months ended March 31,  2019 from 2.52% for the three months ended March 31,  2018.

41


 

Table of Contents

Merchants Bancorp

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 March 31, 

 

 

 

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

 

$

369,736

 

$

2,527

 

2.77

%  

$

457,235

 

$

1,895

 

1.68

%

Securities available for sale - taxable

 

 

292,500

 

 

1,551

 

2.15

%  

 

416,266

 

 

1,542

 

1.50

%

Securities available for sale - tax exempt

 

 

12,460

 

 

96

 

3.12

%  

 

 —

 

 

 —

 

 —

%

Trading securities

 

 

109,423

 

 

1,045

 

3.87

%  

 

121,029

 

 

989

 

3.31

%

Loans and loans held for sale

 

 

2,746,562

 

 

34,455

 

5.09

%  

 

2,247,890

 

 

24,612

 

4.44

%

Total interest-earning assets

 

 

3,530,681

 

 

39,674

 

4.56

%  

 

3,242,420

 

 

29,038

 

3.63

%

Allowance for loan losses

 

 

(12,704)

 

 

  

 

  

 

 

(9,071)

 

 

  

 

  

 

Noninterest-earning assets

 

 

179,968

 

 

  

 

  

 

 

130,816

 

 

  

 

  

 

Total assets

 

$

3,697,945

 

 

  

 

  

 

$

3,364,165

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities/Equity:

 

 

  

 

 

  

 

  

 

 

  

 

 

  

 

  

 

Interest-bearing checking

 

$

1,314,733

 

 

6,434

 

1.98

%  

$

645,339

 

 

2,425

 

1.52

%

Savings deposits

 

 

147,534

 

 

80

 

0.22

%  

 

381,749

 

 

215

 

0.23

%

Money market

 

 

892,806

 

 

4,208

 

1.91

%  

 

816,707

 

 

2,887

 

1.43

%

Certificates of deposit

 

 

618,646

 

 

3,505

 

2.30

%  

 

398,992

 

 

1,489

 

1.51

%

Total deposits

 

 

2,973,719

 

 

14,227

 

1.94

%  

 

2,242,787

 

 

7,016

 

1.27

%

Borrowings

 

 

88,353

 

 

1,316

 

6.04

%  

 

65,635

 

 

1,914

 

11.83

%

Total interest-bearing liabilities

 

 

3,062,072

 

 

15,543

 

2.06

%  

 

2,308,422

 

 

8,930

 

1.57

%

Noninterest-bearing deposits

 

 

155,218

 

 

  

 

  

 

 

656,284

 

 

  

 

  

 

Noninterest-bearing liabilities

 

 

51,425

 

 

  

 

  

 

 

23,772

 

 

  

 

  

 

Total liabilities

 

 

3,268,715

 

 

  

 

  

 

 

2,988,478

 

 

  

 

  

 

Equity

 

 

429,230

 

 

  

 

  

 

 

375,687

 

 

  

 

  

 

Total liabilities and equity

 

$

3,697,945

 

 

  

 

  

 

$

3,364,165

 

 

  

 

  

 

Net interest income

 

 

  

 

$

24,131

 

  

 

 

  

 

$

20,108

 

  

 

Interest rate spread

 

 

  

 

 

  

 

2.50

%  

 

  

 

 

  

 

2.06

%

Net interest-earning assets

 

$

468,609

 

 

  

 

  

 

$

933,998

 

 

  

 

  

 

Net interest margin

 

 

  

 

 

  

 

2.77

%  

 

  

 

 

  

 

2.52

%

Average interest-earning assets to average interest-bearing liabilities

 

 

  

 

 

  

 

115.30

%  

 

 

 

 

  

 

140.46

%

 

Provision for Loan Losses.    We recorded a provision for loan losses of $649,000 for the three months ended March 31,  2019, a decrease of $757,000, over the three months ended March 31,  2018.  The allowance for loan losses was $13.4 million, or 0.61% of total loans, at March 31,  2019, compared to $12.7 million, or 0.62% of total loans, at December 31, 2018, and $9.7 million, or 0.62%, at March 31,  2018.  Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $2.6 million at March 31,  2019, compared to $2.4 million at December 31, 2018 and $4.9 million at March 31,  2018. Special Mention (Watch) loans were $73.2 million at March 31,  2019, compared to $90.6 million at December 31, 2018 and $33.6 million at March 31,  2018.      The increase compared to March 31, 2018 primarily reflected the active monitoring of certain construction projects with cost over-runs that were funded by the borrowers.  The loan payments on these projects have remained current.    Classified (substandard,

42


 

Table of Contents

Merchants Bancorp

doubtful and loss) loans were $13.4 million at March 31,  2019, $11.2 million at December 31, 2018 and $8.6 million at March 31,  2018.  Total loans greater than 30 days past due were $6.3 million at March 31,  2019, $3.2 million at December 31, 2018 and $5.9 million at March 31,  2018. We had no charge-offs and $3,000 in recoveries during the three months ended March 31,  2019.  For the three months ended March 31,  2018, there were $17,000 in charge-offs and $5,000 in recoveries. As a percentage of nonperforming loans, the allowance for loan losses was 523.1% at March 31,  2019 compared to 526.9% at December 31, 2018 and 198.1% at March 31,  2018.  The increase compared to March 31, 2018 was primarily due to the decrease in nonperforming loans.

Noninterest Income.    Noninterest income decreased $7.6 million, or 68%, to $3.7 million for the three months ended March 31,  2019 compared to the three months ended March 31,  2018. The decrease was due to a decrease of $8.2 million in gain on sale of loans.  The gain on sale of loans amounted to $2.6 million during the three months ended March 31,  2019, compared to $10.9 million in the year earlier period, a decrease of 76%, due primarily to a decrease in the volume of multi-family rental real estate loan sales.  The lower gain on sale of loans reflects the volatility we have reported from quarter to quarter in this business based on loan volumes, which were also negatively impacted by loan processing delays caused by the federal government shutdown in January 2019.  Furthermore, loan servicing fees included a  $1.5 million decrease in the fair value of mortgage servicing rights for the three months ended March 31,  2019, compared with a decrease of $893,000 for the three months ended March 31,  2018.    

Noninterest Expense.    Noninterest expense increased $2.8 million, or 27%, to $13.0 million for the three months ended March 31,  2019 compared to the three months ended March 31,  2018. The increase was due primarily to a $2.1 million, or 32% 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. The efficiency ratio was at 46.9% in the three months ended March 31, 2019, compared with 32.7% the first quarter of 2018.

Income Taxes.    Income tax expense decreased $1.1 million, or 24%, to $3.5 million for the three months ended March 31,  2019 from the three months ended March 31,  2018. The decrease was due primarily to a 29%  decrease in pretax income period to period. The effective tax rate was 25.1% for the three months ended March 31,  2019 and 23.7% for the three months ended March 31,  2018. 

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. As of March 31,  2019, MCC originated and acquired $262.4 million loans during the three months ended March 31, 2019 and services or subservices $10.3 billion. The servicing portfolio is primarily GNMA 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. These segments diversify the net income of Merchants Bank and provide synergies across the segments. The strategic opportunities include that MCC loans are funded by the Banking segment and the Banking segment provides GNMA custodial services to MCC. The securities available for sale funded by MCC 

43


 

Table of Contents

Merchants Bancorp

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 March 31,  2019 and 2018, we had total net income of $10.6 million and $15.1 million, respectively. Net income for our three segments for the respective periods was as follows: 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

 

 

(In thousands)

Multi-family Mortgage Banking

 

$

(712)

 

$

5,484

 

Mortgage Warehousing

 

 

3,832

 

 

4,630

 

Banking

 

 

8,769

 

 

5,980

 

Other

 

 

(1,319)

 

 

(1,033)

 

 

 

 

 

 

 

 

 

Total

 

$

10,570

 

$

15,061

 

 

Multi-family Mortgage Banking.    The Multi-family Mortgage Banking segment reported a  net loss for the three months ended March 31,  2019, of $712,000, a decrease of $6.2 million, or 113%, from the $5.5 million reported for the three months ended March 31,  2018. The decrease was due to a $7.8 million decrease in noninterest income, primarily associated with lower gain on sale of loans. The volume of loans originated and acquired for sale in the secondary market decreased by $217.9 million, or 90%, to $24.4 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.  The lower volume reflected the volatility we have reported from quarter to quarter in this business and was also negatively impacted by the federal government shutdown that resulted in loan processing delays.  During the three months ended March 31,  2019, noninterest income also included a $1.5 decrease in the fair value of the mortgage servicing rights asset, compared with a $900,000 decrease for the three months ended March 31,  2018.    

Mortgage Warehousing.    The Mortgage Warehousing segment reported net income for the three months ended March 31,  2019 of $3.8 million, a decrease of $798,000, or 17%, over the $4.6 million reported for the three months ended March 31,  2018.  The lower net income was primarily due to a $668,000, or 9%, decrease in net interest income after provision for loan loss, associated with higher costs of deposits and a $600,000, or 35%, increase in noninterest expense.  The increase in noninterest expense was associated with higher salaries and benefits, primarily due to additional employees associated with an acquisition that were not included in the three months ending March 31,2018, and to support planned business growth.  These higher costs were partially offset by a $267,000, or 55%, increase in noninterest income and $203,000 decrease in income taxes.   The volume of loans funded during the three months ended March 31, 2019 amounted to $5.4 billion, an increase of $311.8 million, or 6.0%, compared to the same period in 2018. This compared favorably to the 5.0% industry decline in single-family residential loan volumes from the three months ended March 31, 2018 to the three months ended March 31, 2019, according to the Mortgage Bankers Association.

Banking.    The Banking segment reported net income for the three months ended March 31,  2019, of $8.7 million, an increase of $2.8 million, or 47%, over the three months ended March 31,  2018. The increase was comprised primarily of a $4.6 million increase in net interest income after provision for loan losses, including an increase in both the average loan balance outstanding and the average yield on loans.  The growth in net interest income was partially offset by an increase of $951,000 of noninterest expenses associated with higher salaries and benefits, reflecting additional employees associated with an acquisition that were not included in the three months ending March 31,2018. The results of FMNBP in the Banking segment during the three months ended March 31,  2019 did not make a material contribution to the increase in net income compared to the three months ended March 31,  2018.

44


 

Table of Contents

Merchants Bancorp

Liquidity and Capital Resources 

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 $2.7 million and $(123.8) million for the three months ended March 31, 2019 and 2018, respectively. Net cash provided by (used in) investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $(103.6) million and $(169.2) million for the three months ended March 31, 2019 and 2018, respectively. Net cash provided by financing activities, which is comprised primarily of net change in deposits and borrowings, was $77.7 million and $221.2 million for the three months ended March 31, 2019 and 2018, respectively.    

At March 31, 2019, we had outstanding commitments to originate loans of $408.3 million, unused lines of credit of $150.8 million and outstanding letters of credit of $16.2 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 March 31, 2019 totaled $635.6 million. 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 March 31, 2019, based on available collateral and our ownership of FHLB stock we had access to additional FHLB advances of up to $559.1 million.    

At March 31, 2019, Merchants Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $465.6 million, or 13.3% of adjusted total assets, which is above the required level of $140.3 million, or 4.0%; total risk-based capital of $478.6 million, or 14.6% of risk-weighted assets, which is above the required level of $262.2 million, or 8.0%; and common equity Tier 1 capital of $465.6 million, or 14.2% of risk-weighted assets, which is above the required level of $147.5 million, or 4.5% of risk-weighted assets. Accordingly, Merchants Bank was categorized as well capitalized at March 31, 2019. Management is not aware of any conditions or events since the most recent notification that would change Merchants Bank’s category.

At March 31, 2019, FMBI exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $19.0 million, or 11.9% of adjusted total assets, which is above the required level of $6.4 million, or 4.0%; total risk-based capital of $19.4 million, or 15.7% of risk-weighted assets, which is above the required level of $9.9 million, or 8.0%; and common equity Tier 1 capital of $19.0 million, or 15.4% of risk-weighted assets, which is above the required level of $5.6 million, or 4.5% of risk-weighted assets. Accordingly, FMBI was categorized as well capitalized at March 31, 2019. Management is not aware of any conditions or events since the most recent notification that would change FMBI’s category. 

At March 31, 2019, the Company exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $440.0 million, or 12.0% of adjusted total assets, which is above the required level of $146.4 million, or 4.0%; total risk-based capital of $453.4 million, or 13.3% of risk-weighted assets, which is above the required level of $272.1 million, or 8.0%; and common equity Tier 1 capital of $350.2 million, or 10.3% of risk-weighted assets, which is above the required level of $153.1 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.

45


 

Table of Contents

Merchants Bancorp

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.

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 March 31, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income Sensitivity

 

 

Twelve Months Forward

 

 

- 200

    

- 100

    

+ 100

    

+ 200

 

 

(Dollars in thousands)

 

March 31, 2019:

 

  

 

 

  

 

 

  

 

 

  

 

Dollar change

$

(20,752)

 

$

(9,793)

 

$

8,738

 

$

17,330

 

Percent change

 

(28.7)

%  

 

(13.6)

%  

 

12.1

%  

 

24.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 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 March 31, 2019 show an asset sensitive position.

46


 

Table of Contents

Merchants Bancorp

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)

 

March 31, 2019:

 

  

 

 

  

 

 

  

 

 

  

 

Dollar change

$

1,254

 

$

1,151

 

$

(5,385)

 

$

(11,864)

 

Percent change

 

0.3

%  

 

0.2

%  

 

(1.1)

%  

 

(2.4)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 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 March 31,  2019, the Company’s disclosure controls and procedures were effective.

(b)        Changes in internal control.

There has been no change made 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.

 

47


 

Table of Contents

Merchants Bancorp

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

None.

ITEM 3.       Defaults Upon Senior Securities

None.

ITEM 4.       Mine Safety Disclosures

Not applicable.

ITEM 5.       Other Information

None.

48


 

Table of Contents

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

 

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

 

 

49


 

Table of Contents

Merchants Bancorp

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:

 May 10,  2019

 

By:

/s/ Michael F. Petrie

 

 

 

 

Michael F. Petrie

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

 May 10,  2019

 

By:

/s/ John F. Macke

 

 

 

 

John F. Macke

Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

50