Merchants Bancorp - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)


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


For the quarterly period ended	September 30, 2023


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

For the transition period from ____________ to _______________

Commission File No. 001-38258


	MERCHANTS BANCORP
	(Exact name of registrant as specified in its charter)


Indiana		20-5747400
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

410 Monon Blvd. Carmel, Indiana		46032
(Address of principal		(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	MBIN	NASDAQ
Series A Preferred Stock, without par value	MBINP	NASDAQ
Depositary Shares, each representing a 1/40^th interest in a share of Series B Preferred Stock, without par value	MBINO	NASDAQ
Depositary Shares, each representing a 1/40^th interest in a share of Series C Preferred Stock, without par value	MBINN	NASDAQ
Depositary Shares, each representing a 1/40^th interest in a share of Series D Preferred Stock, without par value	MBINM	NASDAQ

As of November 1, 2023, the latest practicable date, 43,240,212 shares of the registrant’s common stock, without par value, were issued and outstanding.

Table of Contents

Merchants Bancorp

Index to Quarterly Report on Form 10-Q

PART I – FINANCIAL INFORMATION

Item 1 Interim Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	3

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022	4

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022	5

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022	6

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	7

Notes to Condensed Consolidated Financial Statements	8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3 Quantitative and Qualitative Disclosures About Market Risk	68

Item 4 Controls and Procedures	69

PART II – OTHER INFORMATION	70

Item 1 Legal Proceedings	70

Item 1A Risk Factors	70

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3 Defaults Upon Senior Securities	70

Item 4 Mine Safety Disclosures	70

Item 5 Other Information	70

Item 6 Exhibits	71

SIGNATURES	72

Table of Contents

Part I – Financial Information

Item 1. Financial Statements

Merchants Bancorp

Condensed Consolidated Balance Sheets

September 30, 2023 (Unaudited) and December 31, 2022

(In thousands, except share data)


	September 30,		December 31,
	2023		2022
Assets
Cash and due from banks	$	10,633	$	22,170
Interest-earning demand accounts		396,605		203,994
Cash and cash equivalents		407,238		226,164
Securities purchased under agreements to resell		3,385		3,464
Mortgage loans in process of securitization		476,047		154,194
Securities available for sale		624,586		323,337
Securities held to maturity ($1,010,745 and $1,118,966 at fair value, respectively)		1,012,801		1,119,078
Federal Home Loan Bank (FHLB) stock		48,219		39,130
Loans held for sale (includes $90,875 and $82,192 at fair value, respectively)		3,477,036		2,910,576
Loans receivable, net of allowance for credit losses on loans of $66,864 and $44,014, respectively		9,910,681		7,426,858
Premises and equipment, net		36,730		35,438
Servicing rights		162,141		146,248
Interest receivable		78,401		56,262
Goodwill		15,845		15,845
Intangible assets, net		831		1,186
Other assets and receivables		241,295		157,447
Total assets	$	16,495,236	$	12,615,227
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing	$	287,846	$	326,875
Interest-bearing		12,719,492		9,744,470
Total deposits		13,007,338		10,071,345
Borrowings		1,654,075		930,392
Deferred and current tax liabilities, net		18,006		19,613
Other liabilities		183,102		134,138
Total liabilities		14,862,521		11,155,488
Commitments and Contingencies
Shareholders' Equity
Common stock, without par value
Authorized - 75,000,000 shares
Issued and outstanding - 43,240,212 shares at September 30, 2023 and 43,113,127 shares at December 31, 2022		139,609		137,781
Preferred stock, without par value - 5,000,000 total shares authorized
7% Series A Preferred stock - $25 per share liquidation preference
Authorized - 3,500,000 shares
Issued and outstanding - 2,081,800 shares		50,221		50,221
6% Series B Preferred stock - $1,000 per share liquidation preference
Authorized - 125,000 shares
Issued and outstanding - 125,000 shares (equivalent to 5,000,000 depositary shares)		120,844		120,844
6% Series C Preferred stock - $1,000 per share liquidation preference
Authorized - 200,000 shares
Issued and outstanding - 196,181 shares (equivalent to 7,847,233 depositary shares)		191,084		191,084
8.25% Series D Preferred stock - $1,000 per share liquidation preference
Authorized - 300,000 shares
Issued and outstanding - 142,500 shares (equivalent to 5,700,000 depositary shares)		137,459		137,459
Retained earnings		998,252		832,871
Accumulated other comprehensive loss		(4,754)		(10,521)
Total shareholders' equity		1,632,715		1,459,739
Total liabilities and shareholders' equity	$	16,495,236	$	12,615,227

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Condensed Consolidated Statements of Income (Unaudited)

For the Three and Nine Months Ended September 30, 2023 and 2022

(In thousands, except share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest Income
Loans	$	266,561	$	129,101	$	684,743	$	287,291
Mortgage loans in process of securitization		2,583		2,162		7,358		5,856
Investment securities:
Available for sale - taxable		6,182		485		14,012		2,103
Held to maturity		17,427		970		50,492		970
Federal Home Loan Bank stock		572		379		1,470		932
Other		3,351		1,015		7,964		2,242
Total interest income		296,676		134,112		766,039		299,394
Interest Expense
Deposits		162,906		45,002		405,149		68,583
Borrowed funds		16,334		3,725		37,144		7,670
Total interest expense		179,240		48,727		442,293		76,253
Net Interest Income		117,436		85,385		323,746		223,141
Provision for credit losses		4,014		2,225		33,484		10,888
Net Interest Income After Provision for Credit Losses		113,422		83,160		290,262		212,253
Noninterest Income
Gain on sale of loans		10,758		13,354		28,841		52,883
Loan servicing fees, net		17,384		8,169		28,360		27,507
Mortgage warehouse fees		1,858		1,105		5,751		4,313
Syndication and asset management fees		2,368		3,073		7,476		5,286
Other income		3,700		3,485		9,786		12,965
Total noninterest income		36,068		29,186		80,214		102,954
Noninterest Expense
Salaries and employee benefits		27,052		23,027		74,922		66,795
Loan expenses		1,038		1,226		2,749		3,621
Occupancy and equipment		2,196		1,967		6,884		5,792
Professional fees		2,555		2,429		8,547		5,326
Deposit insurance expense		3,568		755		9,552		2,184
Technology expense		1,609		1,325		4,757		3,865
Other expense		4,912		4,222		14,611		11,358
Total noninterest expense		42,930		34,951		122,022		98,941
Income Before Income Taxes		106,560		77,395		248,454		216,266
Provision for income taxes		25,056		18,907		46,693		53,701
Net Income	$	81,504	$	58,488	$	201,761	$	162,565
Dividends on preferred stock		(8,668)		(5,729)		(26,003)		(17,186)
Net Income Allocated to Common Shareholders		72,836		52,759		175,758		145,379
Basic Earnings Per Share	$	1.68	$	1.22	$	4.07	$	3.37
Diluted Earnings Per Share	$	1.68	$	1.22	$	4.06	$	3.36
Weighted-Average Shares Outstanding
Basic		43,238,724		43,107,975		43,218,125		43,182,380
Diluted		43,351,208		43,258,925		43,317,343		43,331,148

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three and Nine Months Ended September 30, 2023 and 2022

(In thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Net Income	$	81,504	$	58,488	$	201,761	$	162,565
Other Comprehensive Income (Loss):
Net change in unrealized gain/(losses) on investment securities available for sale, net of tax (expense)/benefits of $(714), $1,210, $(2,050) and $3,413, respectively		2,282		(3,616)		5,767		(10,232)
Other comprehensive income (loss) for the period		2,282		(3,616)		5,767		(10,232)
Comprehensive Income	$	83,786	$	54,872	$	207,528	$	152,333

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

For the Three and Nine Months Ended September 30, 2023 and 2022

(In thousands, except share data)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
	Shares		Amount	Shares		Amount	Shares		Amount	Shares		Amount
Common Stock
Balance beginning of period	43,237,300	$	138,853	43,106,505	$	136,671	43,113,127	$	137,781	43,180,079	$	137,565
Repurchase of common stock	-		-	-		-	-		-	(165,037)		(1,761)
Cash paid in lieu of fractional shares for stock split	-		-	-		-	-		-	(29)		(1)
Distribution to employee stock ownership plan	-		-	-		-	33,293		810	20,709		653
Shares issued for stock compensation plans, net of taxes withheld to satisfy tax obligations	2,912		756	3,073		555	93,792		1,018	73,856		770
Balance end of period	43,240,212		139,609	43,109,578		137,226	43,240,212		139,609	43,109,578		137,226

7% Series A Preferred Stock
Balance at beginning and end of period	2,081,800		50,221	2,081,800		50,221	2,081,800		50,221	2,081,800		50,221

6% Series B Preferred Stock
Balance at beginning and end of period	125,000		120,844	125,000		120,844	125,000		120,844	125,000		120,844

6% Series C Preferred Stock
Balance at beginning and end of period	196,181		191,084	196,181		191,084	196,181		191,084	196,181		191,084

8.25% Series D Preferred Stock
Balance beginning of period	142,500		137,459	-		-	142,500		137,459	-		-
Issuance of 8.25% Series D preferred stock, net of $5.1 million in offering expenses	-		-	142,500		137,371	-		-	142,500		137,371
Balance at beginning and end of period	142,500		137,459	142,500		137,371	142,500		137,459	142,500		137,371

Retained Earnings
Balance beginning of period			928,875			737,789			832,871			657,149
Net income			81,504			58,488			201,761			162,565
Impact from adoption of ASU 2016-13 (Credit Losses)			-			-			-			(3,648)
Impact from adoption of ASU 2016-02 (Leases)			-			-			-			(110)
Dividends on 7% Series A preferred stock, $1.75 per share, annually			(911)			(911)			(2,732)			(2,732)
Dividends on 6% Series B preferred stock, $60.00 per share, annually			(1,875)			(1,875)			(5,625)			(5,625)
Dividends on 6% Series C preferred stock, $60.00 per share, annually			(2,943)			(2,943)			(8,829)			(8,829)
Dividends on 8.25% Series D preferred stock, $82.50 per share, annually			(2,939)			-			(8,817)			-
Dividends on common stock, $0.32 per share, annually in 2023 and $0.28 per share, annually in 2022			(3,459)			(3,018)			(10,377)			(9,066)
Repurchase of common stock			-			-			-			(2,174)
Balance end of period			998,252			787,530			998,252			787,530

Accumulated Other Comprehensive Loss
Balance beginning of period			(7,036)			(8,070)			(10,521)			(1,454)
Other comprehensive income (loss)			2,282			(3,616)			5,767			(10,232)
Balance end of period			(4,754)			(11,686)			(4,754)			(11,686)

Total shareholders' equity		$	1,632,715		$	1,412,590		$	1,632,715		$	1,412,590

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2023 and 2022

(In thousands)


	Nine Months Ended
	September 30,
	2023		2022
Operating activities:
Net income	$	201,761	$	162,565
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,119		1,832
Provision for credit losses		33,484		10,888
Gain on sale of loans		(28,841)		(52,883)
Proceeds from sales of loans		15,552,382		21,488,416
Loans and participations originated and purchased for sale		(16,455,580)		(20,209,971)
Purchases of low-income housing tax credits for sale		(44,106)		(22,122)
Proceeds from sale of low-income housing tax credits		23,081		8,556
Change in servicing rights for paydowns and fair value adjustments		(6,729)		(11,974)
Net change in:
Mortgage loans in process of securitization		(321,853)		431,791
Other assets and receivables		(13,383)		(20,958)
Other liabilities		(9,986)		50,630
Other		(3,123)		(2,854)
Net cash (used in) provided by operating activities		(1,070,774)		1,833,916
Investing activities:
Net change in securities purchased under agreements to resell		79		2,391
Purchases of securities available for sale		(631,676)		(50,274)
Purchases of securities held to maturity		(9,786)		(1,005,487)
Proceeds from the sale of securities available for sale		1,516		11,379
Proceeds from calls, maturities and paydowns of securities available for sale		339,995		12,755
Proceeds from calls, maturities and paydowns of securities held to maturity		116,062		—
Purchases of loans		(329,014)		(289,030)
Net change in loans receivable		(1,829,247)		(1,675,505)
Purchase of FHLB stock		(9,089)		(10,326)
Proceeds from sale of FHLB stock		—		784
Purchases of premises and equipment		(3,459)		(6,178)
Purchase of servicing rights		—		(2,057)
Purchase of limited partnership interests		(71,001)		(42,710)
Proceeds from sale of limited partnership interests		52,984		—
Other investing activities		1,591		4,314
Net cash used in investing activities		(2,371,045)		(3,049,944)
Financing activities:
Net change in deposits		2,935,993		1,336,866
Proceeds from borrowings		69,132,347		44,950,000
Repayment of borrowings		(68,615,360)		(45,890,075)
Proceeds from notes payable		60,000		3,400
Proceeds from issuance of preferred stock		—		137,371
Proceeds from credit linked notes		153,546		—
Payment of credit linked notes		(7,253)		—
Repurchase of common stock		—		(3,935)
Dividends		(36,380)		(26,252)
Net cash provided by financing activities		3,622,893		507,375
Net Change in Cash and Cash Equivalents		181,074		(708,653)
Cash and Cash Equivalents, Beginning of Period		226,164		1,032,614
Cash and Cash Equivalents, End of Period	$	407,238	$	323,961
Supplemental Cash Flows Information:
Interest paid	$	415,920	$	63,917
Income taxes paid, net of refunds		50,076		47,174
Transfer of loans from loans held for sale to loans receivable		377,460		—
Transfer of loans from loans receivable to loans held for sale		21,960		788,849

See notes to condensed consolidated financial statements.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Merchants Bancorp, a registered bank holding company (the “Company”) and its wholly owned subsidiaries, Merchants Bank of Indiana (“Merchants Bank”), Farmers-Merchants Bank of Illinois (“FMBI”) and Merchants Asset Management, LLC (“MAM”). Merchants Bank’s primary operating subsidiaries include Merchants Capital Corp. (‘MCC”), Merchants Capital Servicing, LLC (“MCS”), and Merchants Capital Investments, LLC (“MCI”). All direct and indirectly owned subsidiaries owned by Merchants Bancorp are collectively referred to as the “Company”.

The accompanying unaudited condensed consolidated balance sheet of the Company as of December 31, 2022, which has been derived from audited financial statements, and unaudited condensed consolidated financial statements of the Company as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022, 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, 2022 in its Annual Report on Form 10-K. Reference is made to the accounting policies of the Company described in the Notes to the Financial Statements contained in the Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included to present fairly the financial position as of September 30, 2023 and the results of operations for the three and nine months ended September 30, 2023 and 2022, and cash flows for the nine months ended September 30, 2023 and 2022. All interim amounts have not been audited and the results of operations for the three and nine months ended September 30, 2023, herein are not necessarily indicative of the results of operations to be expected for the entire year.

Principles of Consolidation

The unaudited condensed consolidated financial statements as of and for the period ended September 30, 2023 and 2022 include results from the Company, and its wholly owned subsidiaries, Merchants Bank, FMBI and MAM. Also included are Merchants Bank’s primary operating subsidiaries, MCC, MCS and MCI, as well as all direct and indirectly owned subsidiaries owned by Merchants Bancorp.

In addition, when the Company makes an equity investment in or has a relationship with an entity for which it holds a variable interest, it is evaluated for consolidation requirements under Accounting Standards Update of Topic 810. Accordingly, the entity is assessed for potential consolidation under the variable interest entity (“VIE”) model and would only consolidate those entities for which it is a primary beneficiary. A primary beneficiary is defined as the party that has both the power to direct the activities that most significantly impact the entity, and an interest that could be significant to the entity. To determine if an interest could be significant to the entity, both qualitative and quantitative factors regarding the nature, size and form of the Company’s involvement with the entity are evaluated. Alternatively, under the voting interest model, it would only consolidate those entities for which it has a controlling interest.

In May 2023, the Company acquired a variable interest in an investment for which it is the primary beneficiary of, and its results have been consolidated since the date of acquisition. Additionally, the Company has certain variable interest investments that it was deemed not to be a primary beneficiary of as of September 30, 2023. These VIEs are not consolidated and the equity or proportional method of accounting has been applied. The Company will analyze whether the primary beneficiary designation has changed through triggering events on a prospective basis. Changes in facts and circumstances occurring since the previous primary beneficiary determination will be considered as part of this ongoing assessment. See Note 5: Variable Interest Entities (VIEs) for additional information about VIEs.

All significant intercompany accounts and transactions have been eliminated in consolidation.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Sale of Farmers-Merchants Bank of Illinois branches

On September 7, 2023, the Company entered into an agreement with Bank of Pontiac to sell its Farmers-Merchants Bank of Illinois branch locations in Paxton, Melvin, and Piper City, Illinois, and into an agreement with CBI Bank & Trust, to sell its Farmers-Merchants Bank of Illinois branch located in Joy, Illinois.

In addition to the branches, Bank of Pontiac will acquire approximately $157 million in deposits and $22 million in loans, and CBI Bank & Trust will acquire approximately $62 million in deposits and $27 million in loans.

This transaction enhances the Company’s ability to focus on its core business of single and multi-family mortgage lending and strategically aligns the branches with institutions that share a similar business model and allows them to provide additional products to their customers.

The acquisitions are subject to customary closing conditions, including regulatory approvals.

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 credit losses on loans and fair values of servicing rights and financial instruments.

Significant Accounting Policies

The significant accounting policies followed by the Company for interim financial reporting are consistent with the accounting policies followed for annual financial reporting.

On January 1, 2022, the Company adopted FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"). The Company revised certain accounting policies and implemented certain accounting policy elections, related to the adoption of CECL, which are described below. All adjustments, which are of a normal recurring nature and are, in the opinion of management, necessary for a fair statement of the results for the periods reported, have been included in the accompanying Condensed Consolidated Financial Statements.

CECL replaces the previous "allowance for loan and lease losses" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the included assets. The new CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures (“OBCEs”) based on historical experiences, current conditions, and reasonable and supportable forecasts. CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio. In addition, CECL includes certain changes to the accounting for investment securities available for sale depending on whether management intends to sell the securities or believes that it is more likely than not they will be required to sell.

As of adoption date on January 1, 2022, the Company recorded a $3.6 million decrease, net of taxes, to retained earnings for the cumulative effect of adopting CECL. The transition adjustment included a $0.3 million increase to retained earnings related to allowance for credit losses on loans (“ACL-Loans”) and a $5.2 million decrease to retained earnings related to allowance for OBCEs (“ACL-OBCEs”).

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

ACL-Loans - the ACL-Loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans over the contractual term. Loans are charged-off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Adjustments to the ACL-Loans are reported in the income statement as a provision for credit loss. Further information regarding the policies and methodology used to estimate the ACL-Loans is detailed in Note 4: Loans and Allowance for credit losses on loans of these Notes to Consolidated Condensed Financial Statements.

ACL-OBCEs – the ACL–OBCEs is a liability account representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if the Company has the unconditional right to cancel the obligation. OBCEs primarily consist of amounts available under outstanding lines of credit. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management’s best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. The ACL–OBCEs is adjusted through the income statement as a component of provision for credit loss.

Restricted Cash

Included in cash equivalents is an account restricted as collateral for the potential risk of loss on senior credit linked notes issued by the Company in March 2023. As of September 30, 2023, there was $52.2 million in restricted cash. Also see Note 11: Borrowings.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 2: Investment Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities available for sale and held to maturity were as follows:


	September 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In thousands)
Securities available for sale:
Treasury notes	$	138,520	$	33	$	667	$	137,886
Federal agencies		229,997		—		5,599		224,398
Mortgage-backed - Government-sponsored entity (GSE)		262,302		6		6		262,302
Total securities available for sale	$	630,819	$	39	$	6,272	$	624,586
Securities held to maturity:
Mortgage-backed - Non-GSE multi-family	$	794,575	$	—	$	111	$	794,464
Mortgage-backed - Non-GSE residential		208,475		—		1,059		207,416
Mortgage-backed - Government - sponsored entity (GSE)		9,751		—		886		8,865
Total securities held to maturity	$	1,012,801	$	—	$	2,056	$	1,010,745


	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In thousands)
Securities available for sale:
Treasury notes	$	37,234	$	1	$	955	$	36,280
Federal agencies		284,986		—		13,096		271,890
Mortgage-backed - Government-sponsored entity (GSE)		15,167		7		7		15,167
Total securities available for sale	$	337,387	$	8	$	14,058	$	323,337
Securities held to maturity:
Mortgage-backed - Non-GSE multi-family	$	871,772	$	12	$	—	$	871,784
Mortgage-backed - Non-GSE residential		247,306		—		124		247,182
Total securities held to maturity	$	1,119,078	$	12	$	124	$	1,118,966

At September 30, 2023 and December 31, 2022, GSE mortgage-backed securities included in the tables above are primarily backed by multi-family and single-family loans.

Accrued interest on securities available for sale totaled $2.0 million at September 30, 2023 and $0.5 million at December 31, 2022, respectively, and is excluded from the estimate of credit losses.

Accrued interest on securities held to maturity totaled $4.4 million at September 30, 2023 and $4.3 million at December 31, 2022, respectively, and is excluded from the estimate of credit losses.

The amortized cost and fair value of available for sale securities at September 30, 2023 and December 31, 2022, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


	September 30, 2023				December 31, 2022
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Securities available for sale:	(In thousands)
Within one year	$	346,753	$	340,839	$	118,984	$	115,386
After one through five years		21,764		21,445		203,236		192,784
		368,517		362,284		322,220		308,170
Mortgage-backed - Government-sponsored entity (GSE)		262,302		262,302		15,167		15,167
	$	630,819	$	624,586	$	337,387	$	323,337
Securities held to maturity:
Mortgage-backed - Non-GSE multi-family	$	794,575	$	794,464	$	871,772	$	871,784
Mortgage-backed - Non-GSE residential		208,475		207,416		247,306		247,182
Mortgage-backed - Government - sponsored entity (GSE)		9,751		8,865		—		—
	$	1,012,801	$	1,010,745	$	1,119,078	$	1,118,966

During the three and nine months ended September 30, 2023, proceeds from sales of securities available for sale were $1.4 million and $1.5 million, respectively, and the net gain was inconsequential. During the three and nine months ended September 30, 2022 one of the mortgage-backed non-GSE multi-family securities available for sale was sold for $11.4 million, resulting in no gain or loss.

The following tables show the Company’s gross unrealized losses and fair value of the Company’s investment securities with unrealized losses for which an ACL has not been recorded, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022:


	September 30, 2023
					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)
Securities available for sale:
Treasury notes	$	5,312	$	52	$	32,773	$	615	$	38,085	$	667
Federal agencies		14,878		122		209,520		5,477		224,398		5,599
Mortgage-backed - Government-sponsored entity (GSE)		384		1		211		5		595		6
	$	20,574	$	175	$	242,504	$	6,097	$	263,078	$	6,272

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	December 31, 2022
					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)
Securities available for sale:
Treasury notes	$	29,560	$	762	$	5,798	$	193	$	35,358	$	955
Federal agencies		19,276		724		252,613		12,372		271,889		13,096
Mortgage-backed - Government-sponsored entity (GSE)		709		7		—		—		709		7
	$	49,545	$	1,493	$	258,411	$	12,565	$	307,956	$	14,058

Allowance for Credit Losses

For available for sale securities with an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in accumulated other comprehensive income (loss), net of tax. Credit-related impairment is recognized as an ACL for available for sale securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company expects, or is required, to sell an impaired available for sale security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

In evaluating available for sale securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized losses on the Company’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. There were no credit related factors underlying unrealized losses on available for sale debt securities at September 30, 2023 and December 31, 2022.

Securities held to maturity are comprised of non-GSE mortgage-backed securities secured by multi-family or single-family properties, and GSE mortgage-backed securities secured by multi-family properties. The GSE security is a Government National Mortgage Association (“Ginnie Mae”) mortgage-backed securities and backed by the full faith and credit of the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. The non-GSE securities were purchased under securitization arrangements where a credit loss component was purchased by third party investors. These securities were evaluated for credit losses over and above the credit loss percentage sold under the arrangements, and the Company does not anticipate any such losses. Additional qualitative factors are evaluated, including the timeliness of principal and interest payments under the contractual terms of the securities. Accordingly, no allowance for credit losses has been recorded for the non-GSE securities.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 3: Mortgage Loans in Process of Securitization

Mortgage loans in process of securitization are recorded at fair value with changes in fair value recorded in earnings. These include multi-family rental real estate loan originations to be sold as Ginnie Mae mortgage-backed securities and Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) participation certificates, all of which are pending settlement with firm investor commitments to purchase the securities, typically occurring within 30 days. A positive fair market value adjustment of $1.9 million and a negative fair market value adjustment of $3.7 million was recorded in earnings for the three months ended September 30, 2023 and 2022, respectively. A positive fair market value adjustment of $2.2 million and $1.1 million was recorded in earnings for the nine months ended September 30, 2023 and 2022, respectively.

Note 4: Loans and Allowance for Credit Losses on Loans

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 ACL-Loans, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

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

The Company has made a policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest separately from the related loan balance in the consolidated balance sheets. Accrued interest on loans totaled $53.8 million and $35.0 million at September 30, 2023 and December 31, 2022, respectively.

The Company also elected not to measure an allowance for credit losses for accrued interest receivables. 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 collected 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.

When cash payments for accrued interest are received on nonaccrual loans in each loan class, the Company records a reduction in principle on the balance of the loan. For loan modifications, interest income is recognized on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms.

The Company offers warehouse lines of credit to fund mortgage loans held for sale from closing until sale to an investor. Under a warehousing arrangement the Company funds a mortgage loan as secured financing. The warehousing arrangement is secured by the underlying mortgages and a combination of deposits, personal guarantees and advance rates. The Company typically holds the collateral until it is sent under a bailee arrangement instructing the investor to send proceeds to the Company. Typical investors are large financial institutions or government agencies. Interest earned from the time of funding to the time of sale is recognized as interest income as accrued. Warehouse fees are accrued as noninterest income.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Loan Portfolio Summary‌

Loans receivable at September 30, 2023 and December 31, 2022 include:


	September 30,		December 31,
	2023		2022

	(In thousands)

Mortgage warehouse lines of credit	$	1,022,692	$	464,785
Residential real estate(1)		1,358,908		1,178,401
Multi-family financing		3,709,320		3,135,535
Healthcare financing		2,218,559		1,604,341
Commercial and commercial real estate(2)(3)		1,560,031		978,661
Agricultural production and real estate		96,490		95,651
Consumer and margin loans		11,545		13,498
		9,977,545		7,470,872
Less:
ACL-Loans		66,864		44,014

Loans Receivable	$	9,910,681	$	7,426,858

(1)

Includes $1.2 billion and $1.1 billion of All-in-One^© first-lien home equity lines of credit at September 30, 2023 and December 31, 2022, respectively.

(2)

Includes $1.0 billion and $497.0 million of revolving lines of credit collateralized primarily by mortgage servicing rights as of September 30, 2023 and December 31, 2022, respectively.

(3)

Includes only $8.1 million and $12.8 million of non-owner occupied commercial real estate as of September 30, 2023 and December 31, 2022, respectively.

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 repurchase agreement, 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 the Federal Reserve’s Secured Overnight Financing Rate (“SOFR”), or mortgage note rate and 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. However, the warehouse customers are required to hedge the change in value of these loans to mitigate the risk, typically through forward sales contracts.

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. First-lien HELOC mortgages included in this segment typically carried a base rate of 30-day LIBOR, plus a

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

margin. With the sunset of LIBOR, loans have been transitioned to the One-Year Constant Maturity Treasury (“CMT”), plus a margin.

Multi-Family Financing (MF FIN): The Company engages in multi-family financing, including construction loans, specializing in originating and servicing loans for multi-family rental 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 are dependent on the cash flow of the property, and may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent agency-eligible financing is obtained. 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. Loans included in this segment typically carry a base rate of SOFR that adjusts on a monthly basis and a margin.

Healthcare Financing (HC FIN): The healthcare financing portfolio includes customized loan products for independent living, assisted living, memory care and skilled nursing projects. A variety of loan products are available to accommodate rehabilitation, acquisition, and refinancing of healthcare properties. Credit risk in these loans are primarily driven by local demographics and the expertise of the operators of the facilities. 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, as well as successful operation of a business or property and the borrower’s cash flows. Loans included in this segment typically carry a base rate of SOFR that adjusts on a monthly basis and a margin.

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 lines of credit collateralized by servicing rights. 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. Small Business Administration (“SBA”) loans are included in this category. Less than 1% of total commercial and commercial real estate loans are made up of non-owner occupied commercial real estate loans. The Company strategically focuses on loan classes that are government backed or can be sold in the secondary market.

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. Agricultural real estate loans included in this segment are typically structured with a one-year ARM, 3-year ARM or 5-year ARM CMT and a margin. Agriculture production, livestock, and equipment loans are structured with variable rates that are indexed to prime or fixed for terms not exceeding 5 years.

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.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

ACL-Loans

The Company adopted CECL on January 1, 2022. CECL replaces the previous “Allowance for Loan and Lease Losses” standard for measuring credit losses. Upon adoption of CECL, the difference in the two measurements was recorded in the ACL-Loans and retained earnings.

The ACL-Loans is the Company’s estimate of current expected credit losses. Loans receivable is presented net of the allowance to reflect the principal balance expected to be collected over the contractual term of the loans. This life of loan allowance is established through a provision for credit losses charged to net interest income as loans are recorded in the financial statements. The provision for a reporting period also reflects increases or decreases in the allowance related to changes in credit loss expectations. Actual credit losses are charged against the allowance when management believes the uncollectability of a loan balance, or a portion thereof, is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The ACL-Loans is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans considering relevant available information from internal and external sources, including 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. The allowance also incorporates reasonable and supportable forecasts. There have been no changes to the credit quality components used to assess risk during the nine months ended September 30, 2023. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The level of the ACL is believed to be adequate to absorb current expected future losses in the loan portfolio as of the measurement date.

The ACL-Loans consists of individually evaluated loans and pooled loan components. The Company’s primary portfolio segmentation is by segmenting loans with similar risk characteristics. Loans risk graded substandard and worse are individually evaluated for expected credit losses. For individually evaluated loans that are collateral dependent, the Company may use the fair value of the collateral, less estimated costs to sell, as a practical expedient as of the reporting date to determine the carrying amount of an asset and the allowance for credit losses, as applicable. A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or the sale of the collateral when the borrower is experiencing financial difficulty as of the reporting date.

To calculate the allowance for expected credit losses on loans risk graded pass through special mention, the portfolio is segmented by loans with similar risk characteristics.


Loan Portfolio Segment		ACL-Loans Methodology

Mortgage warehouse lines of credit		Remaining Life Method
Residential real estate loans		Discounted Cash Flow
Multi-family financing		Discounted Cash Flow
Healthcare financing		Discounted Cash Flow
Commercial and commercial real estate		Discounted Cash Flow
Agricultural production and real estate		Remaining Life Method
Consumer and margin loans		Remaining Life Method

Loan characteristics used in determining the segmentation included the underlying collateral, type or purpose of the loan, and expected credit loss patterns. The initial estimation of expected credit losses for each segment is based on historical credit loss experience and management’s judgement. Given the Company’s modest historical credit loss

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

experience, peer and industry data was incorporated into the measurement. Expected life of loan credit losses are quantified using discounted cash flows and remaining life methodologies.

Model results are supplemented by qualitative adjustments for risk factors relevant in assessing the expected credit losses within the portfolio segments. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. At September 30, 2023, the qualitative factors increased the estimate of expected losses.

The models utilized and the applicable qualitative adjustments require assumptions and management judgement that can be subjective in nature. The above measurement approach is also used to estimate the expected credit losses associated with unfunded loan commitments, which also incorporates expected utilization rates.

The following tables present, by loan portfolio segment, the activity in the ACL-Loans for the three and nine months ended September 30, 2023 and 2022:


	For the Three Months Ended September 30, 2023
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	3,361	$	7,413	$	24,701	$	16,123	$	10,695	$	556	$	137	$	62,986
Provision for credit losses		(495)		207		1,121		1,876		1,123		34		2		3,868
Loans charged to the allowance		—		(21)		—		—		—		—		—		(21)
Recoveries of loans previously charged-off		—		—		—		—		31		—		—		31
Balance, end of period	$	2,866	$	7,599	$	25,822	$	17,999	$	11,849	$	590	$	139	$	66,864


	For the Three Months Ended September 30, 2022
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	2,422	$	4,910	$	16,364	$	7,936	$	5,195	$	551	$	96	$	37,474
Provision for credit losses		(230)		1,370		(2,365)		1,061		1,821		1		51		1,709
Loans charged to the allowance		—		(4)		—		—		(275)		—		—		(279)
Recoveries of loans previously charged-off		—		—		—		—		92		—		—		92
Balance, end of period	$	2,192	$	6,276	$	13,999	$	8,997	$	6,833	$	552	$	147	$	38,996

The Company recorded a total provision for credit losses of $4.0 million for the three months ended September 30, 2023. The $4.0 million total provision for credit losses consisted of $3.9 million for the ACL-Loans as shown above and $0.1 million for the ACL-OBCE’s.

The Company recorded a total provision for credit losses of $2.2 million for the three months ended September 30, 2022. The $2.2 million total provision for credit losses consisted of $1.7 million for the ACL-Loans as shown above and $0.5 million for the ACL-OBCE’s.


	For the Nine Months Ended September 30, 2023
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	1,249	$	7,029	$	16,781	$	9,882	$	8,326	$	565	$	182	$	44,014
Provision for credit losses		1,617		604		17,441		8,117		4,601		25		(42)		32,363
Loans charged to the allowance		—		(34)		(8,400)		—		(1,118)		—		(1)		(9,553)
Recoveries of loans previously charged-off		—		—		—		—		40		—		—		40
Balance, end of period	$	2,866	$	7,599	$	25,822	$	17,999	$	11,849	$	590	$	139	$	66,864

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	For the Nine Months Ended September 30, 2022
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	1,955	$	4,170	$	14,084	$	4,461	$	5,879	$	657	$	138	$	31,344
Impact of adopting CECL		41		275		520		139		(1,277)		(18)		21		(299)
Provision for credit losses		196		1,835		(605)		4,397		2,726		(87)		(4)		8,458
Loans charged to the allowance		—		(4)		—		—		(1,238)		—		(15)		(1,257)
Recoveries of loans previously charged-off		—		—		—		—		743		—		7		750
Balance, end of period	$	2,192	$	6,276	$	13,999	$	8,997	$	6,833	$	552	$	147	$	38,996

The Company recorded a total provision for credit losses of $33.5 million for the nine months ended September 30, 2023. The $33.5 million total provision for credit losses consisted of $32.4 million for the ACL-Loans as shown above and $1.1 million for the ACL-OBCE’s.

The Company recorded a total provision for credit losses of $10.9 million for the nine months ended September 30, 2022. The $10.9 million total provision for credit losses consisted of $8.5 million for the ACL-Loans as shown above, $1.2 million for the ACL-OBCE’s and $1.2 million for ACL-Guarantees.

The following table presents the allowance for loan losses and the recorded investment in loans and impairment method as of December 31, 2022:


	December 31, 2022
	MTG WHLOC		RES RE		MF FIN		HC FIN		CML & CRE		AG & AGRE		CON & MAR		TOTAL

	(In thousands)
ACL-Loans
Balance, beginning of period	$	1,955	$	4,170	$	14,084	$	4,461	$	5,879	$	657	$	138	$	31,344
Impact of adopting CECL		41		275		520		139		(1,277)		(18)		21		(299)
Provision for credit losses		(747)		2,588		2,177		5,282		4,216		(74)		31		13,473
Loans charged to the allowance		—		(4)		—		—		(1,238)		—		(15)		(1,257)
Recoveries of loans previously charged-off		—		—		—		—		746		—		7		753
Balance, end of period	$	1,249	$	7,029	$	16,781	$	9,882	$	8,326	$	565	$	182	$	44,014

The below table presents the amortized cost basis and ACL-Loans allocated for collateral dependent loans, which are individually evaluated to determine expected credit losses:


	September 30, 2023
	Real Estate		Accounts Receivable / Equipment		Other		Total		ACL-Loans Allocation

	(In thousands)
RES RE	$	801	$	—	$	3	$	804	$	19
MF FIN		32,334		—		—		32,334		188
HC FIN		30,683		—		—		30,683		2,358
CML & CRE		—		3,829		3,333		7,162		1,124
AG & AGRE		147		—		—		147		1
CON & MAR		—		—		3		3		—
Total collateral dependent loans	$	63,965	$	3,829	$	3,339	$	71,133	$	3,690

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

There have been no significant changes to the types of collateral securing the Company’s collateral dependent loans compared to September 30, 2022.

Internal Risk Categories

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

Pass – Loans that are considered to be of acceptable credit quality, and not classified as Special Mention, Substandard or Doubtful.

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

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

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

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following tables present the credit risk profile of the Company’s loan portfolio based on internal risk rating category as of September 30, 2023 and December 31, 2022:


	As of September 30, 2023
	2023		2022		2021		2020		2019		Prior		Revolving Loans		TOTAL

	(In thousands)
MTG WHLOC
Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	1,022,692	$	1,022,692
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	1,022,692	$	1,022,692
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
RES RE
Pass		26,185		9,563		7,014		23,009		3,325		9,621		1,278,828		1,357,545
Special Mention (Watch)		—		—		—		—		60		499		—		559
Substandard		—		—		—		—		—		292		512		804
Total	$	26,185	$	9,563	$	7,014	$	23,009	$	3,385	$	10,412	$	1,279,340	$	1,358,908
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	21	$	13	$	34
MF FIN
Pass		840,146		827,151		307,639		87,313		29,926		8,866		1,448,317		3,549,358
Special Mention (Watch)		70,681		3,189		3,404		9,926		—		1,484		38,944		127,628
Substandard		—		28,360		3,974		—		—		—		—		32,334
Total	$	910,827	$	858,700	$	315,017	$	97,239	$	29,926	$	10,350	$	1,487,261	$	3,709,320
Charge-offs	$	—	$	8,400	$	—	$	—	$	—	$	—	$	—	$	8,400
HC FIN
Pass		364,365		1,068,033		214,938		67,266		14,668		—		274,666		2,003,936
Special Mention (Watch)		93,291		46,464		31,527		—		—		—		12,658		183,940
Substandard		—		—		21,783		—		—		—		8,900		30,683
Total	$	457,656	$	1,114,497	$	268,248	$	67,266	$	14,668	$	—	$	296,224	$	2,218,559
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CML & CRE
Pass		44,605		119,145		70,194		21,533		21,188		18,714		1,247,686		1,543,065
Special Mention (Watch)		112		36		8,671		173		145		233		434		9,804
Substandard		—		80		2,017		904		65		51		4,045		7,162
Total	$	44,717	$	119,261	$	80,882	$	22,610	$	21,398	$	18,998	$	1,252,165	$	1,560,031
Charge-offs	$	—	$	496	$	36	$	586	$	—	$	—	$	—	$	1,118
AG & AGRE
Pass		11,805		10,023		6,660		14,537		5,077		18,745		29,496		96,343
Special Mention (Watch)		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		147		—		147
Total	$	11,805	$	10,023	$	6,660	$	14,537	$	5,077	$	18,892	$	29,496	$	96,490
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
CON & MAR
Pass		515		4,432		293		137		31		4,387		1,715		11,510
Special Mention (Watch)		—		—		—		16		15		1		—		32
Substandard		—		—		—		—		—		3		—		3
Total	$	515	$	4,432	$	293	$	153	$	46	$	4,391	$	1,715	$	11,545
Charge-offs	$	—	$	—	$	—	$	—	$	—	$	1	$	—	$	1

Total Pass	$	1,287,621	$	2,038,347	$	606,738	$	213,795	$	74,215	$	60,333	$	5,303,400	$	9,584,449
Total Special Mention (Watch)	$	164,084	$	49,689	$	43,602	$	10,115	$	220	$	2,217	$	52,036	$	321,963
Total Substandard	$	—	$	28,440	$	27,774	$	904	$	65	$	493	$	13,457	$	71,133
Total Loans	$	1,451,705	$	2,116,476	$	678,114	$	224,814	$	74,500	$	63,043	$	5,368,893	$	9,977,545
Total Charge-offs	$	—	$	8,896	$	36	$	586	$	—	$	22	$	13	$	9,553

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	December 31, 2022
	2022		2021		2020		2019		2018		Prior		Revolving Loans		TOTAL

	(In thousands)
MTG WHLOC
Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	464,785	$	464,785
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	464,785	$	464,785
RES RE
Pass		13,344		8,192		24,708		3,498		1,722		11,166		1,114,705		1,177,335
Special Mention (Watch)		—		—		—		61		—		668		91		820
Substandard		—		—		—		—		74		172		—		246
Total	$	13,344	$	8,192	$	24,708	$	3,559	$	1,796	$	12,006	$	1,114,796	$	1,178,401
MF FIN
Pass		1,212,008		544,823		200,829		32,349		4,416		7,229		1,042,024		3,043,678
Special Mention (Watch)		32,919		—		8,000		—		—		—		14,178		55,097
Substandard		36,760		—		—		—		—		—		—		36,760
Total	$	1,281,687	$	544,823	$	208,829	$	32,349	$	4,416	$	7,229	$	1,056,202	$	3,135,535
HC FIN
Pass		987,676		301,103		78,792		13,770		—		—		123,888		1,505,229
Special Mention (Watch)		52,022		25,307		—		—		—		—		—		77,329
Substandard		—		21,783		—		—		—		—		—		21,783
Total	$	1,039,698	$	348,193	$	78,792	$	13,770	$	—	$	—	$	123,888	$	1,604,341
CML & CRE
Pass		123,757		86,282		23,803		24,730		12,335		8,765		690,114		969,786
Special Mention (Watch)		43		164		963		119		99		228		1,376		2,992
Substandard		—		2,017		591		72		—		666		2,537		5,883
Total	$	123,800	$	88,463	$	25,357	$	24,921	$	12,434	$	9,659	$	694,027	$	978,661
AG & AGRE
Pass		12,112		7,485		15,660		5,808		3,137		20,176		29,566		93,944
Special Mention (Watch)		14		55		462		421		163		389		56		1,560
Substandard		—		—		—		—		—		147		—		147
Total	$	12,126	$	7,540	$	16,122	$	6,229	$	3,300	$	20,712	$	29,622	$	95,651
CON & MAR
Pass		4,673		463		307		101		4,589		9		3,328		13,470
Special Mention (Watch)		—		—		20		—		—		2		—		22
Substandard		—		—		—		—		—		6		—		6
Total	$	4,673	$	463	$	327	$	101	$	4,589	$	17	$	3,328	$	13,498

Total Pass	$	2,353,570	$	948,348	$	344,099	$	80,256	$	26,199	$	47,345	$	3,468,410	$	7,268,227
Total Special Mention (Watch)	$	84,998	$	25,526	$	9,445	$	601	$	262	$	1,287	$	15,701	$	137,820
Total Substandard	$	36,760	$	23,800	$	591	$	72	$	74	$	991	$	2,537	$	64,825
Total Loans	$	2,475,328	$	997,674	$	354,135	$	80,929	$	26,535	$	49,623	$	3,486,648	$	7,470,872

The Company did not have any material revolving loans converted to term loans at September 30, 2023 or December 31, 2022.

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

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Delinquent Loans

The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2023 and December 31, 2022.


	September 30, 2023
	30-59 Days		60-89 Days		Greater Than		Total				Total
	Past Due		Past Due		90 Days		Past Due		Current		Loans

	(In thousands)
MTG WHLOC	$	—	$	—	$	—	$	—	$	1,022,692	$	1,022,692
RES RE		749		137		1,787		2,673		1,356,235		1,358,908
MF FIN		6,600		—		32,334		38,934		3,670,386		3,709,320
HC FIN		32,000		25,600		21,783		79,383		2,139,176		2,218,559
CML & CRE		—		44		4,095		4,139		1,555,892		1,560,031
AG & AGRE		—		58		147		205		96,285		96,490
CON & MAR		19		—		19		38		11,507		11,545
	$	39,368	$	25,839	$	60,165	$	125,372	$	9,852,173	$	9,977,545


	December 31, 2022
	30-59 Days		60-89 Days		Greater Than		Total				Total
	Past Due		Past Due		90 Days		Past Due		Current		Loans

	(In thousands)
MTG WHLOC	$	—	$	—	$	—	$	—	$	464,785	$	464,785
RES RE		4,053		152		272		4,477		1,173,924		1,178,401
MF FIN		—		—		—		—		3,135,535		3,135,535
HC FIN		—		—		21,783		21,783		1,582,558		1,604,341
CML & CRE		4,759		—		3,778		8,537		970,124		978,661
AG & AGRE		4,903		—		—		4,903		90,748		95,651
CON & MAR		6		24		22		52		13,446		13,498
	$	13,721	$	176	$	25,855	$	39,752	$	7,431,120	$	7,470,872

Nonperforming Loans

Nonaccrual loans, including modified loans that have not met the six-month minimum performance criterion, are reported as nonperforming loans. For all loan classes, it is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is doubtful under the terms of the loan agreement. Most generally, this is at 90 or more days past due. The amount of interest income recognized on nonaccrual financial assets during the nine months ended September 30, 2023 was inconsequential.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table presents the Company’s nonaccrual loans and loans past due 90 days or more and still accruing at September 30, 2023 and December 31, 2022.


	September 30,				December 31,
	2023				2022
			Total Loans >				Total Loans >
			90 Days &				90 Days &
	Nonaccrual		Accruing		Nonaccrual		Accruing

	(In thousands)
RES RE	$	729	$	1,058	$	245	$	96
MF FIN		32,334		—		—		—
HC FIN		21,783		—		21,783		—
CML & CRE		4,095		—		4,390		—
AG & AGRE		147		—		147		—
CON & MAR		3		16		6		16
	$	59,091	$	1,074	$	26,571	$	112

The Company did not have any nonperforming loans without an estimated ACL at September 30, 2023.

Modifications to Borrowers Experiencing Financial Difficulty

On January 1, 2023, the Company adopted FASB Accounting Standards Update (“ASU”) No. 2022-02, Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, which eliminates the recognition and measurement of a troubled debt restructuring (“TDR”). The Company adopted the prospective approach for this new guidance.

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, an other-than-insignificant payment delay or interest rate reduction. In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period.

The following table presents the amortized cost basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the nine months ended September 30, 2023, by class and by type of modification. There were no new loans modified for borrowers experiencing financial difficulty during the three months ended September 30, 2023. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below:


	For the Nine Months Ended September 30, 2023
	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Principal Forgiveness		Combination Term Extension Interest Rate Reduction		Total Class of Financing Receivable

	(In thousands)
Commercial and commercial real estate	$	—	$	3,778	$	—	$	—	$	—	$	—		N/M	%
Total	$	—	$	3,778	$	—	$	—	$	—	$	—		N/M	%

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The financial effects of the modifications in the table above include an increase in the weighted average term for commercial and commercial real estate loans of twelve months. As part of our ACL analysis, these loans were individually evaluated for impairment and no specific reserve was recorded. The Company has committed to lend no additional amounts to the borrowers included in the table above.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of such loans that have been modified in the last twelve months:


	30 ‑ 59 Days		60 ‑ 89 Days		Greater Than		Total
	Past Due		Past Due		90 Days		Past Due

	(In thousands)
Commercial and commercial real estate	$	—	$	—	$	3,778	$	3,778
Total	$	—	$	—	$	3,778	$	3,778

No modified loans defaulted during the three and nine months ended September 30, 2023.

Foreclosures

There were no residential loans in process of foreclosure as of September 30, 2023 and December 31, 2022.

Significant Loan Sales

Freddie Mac Q Series Securitization – 2023 Activity

On August 31, 2023, the Company completed a $303.6 million securitization of 11 multi-family mortgage loans through a Freddie Mac-sponsored Q-Series transaction. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance with ASC 860, and a $60,000 loss on sale was recognized. The Company was retained as the mortgage sub-servicer for Freddie Mac on the entire $303.6 million pool of loans. Beyond sub-servicing the loans, the Company’s ongoing involvement in this transaction is limited to customary obligations of loan sales, including any material breach in representation. In connection with this transaction, a mortgage servicing right of $1.5 million was established.

Loans Purchased

The Company purchased $329.0 million and $289.0 million of loans during the nine months ended September 30, 2023 and 2022, respectively.

Note 5: Variable Interest Entities (VIEs)

A VIE is a corporation, partnership, limited liability company, or any other legal structure used to conduct activities or hold assets generally that either:

●

Does not have equity investors with voting rights that can directly or indirectly make decisions about the entity’s activities through those voting rights or similar rights; or

●

Has equity investors that do not provide sufficient equity for the entity to finance its activities without additional subordinated financial support.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company has invested in single-family, multi-family, and healthcare debt financing entities, as well as low-income housing syndicated funds that are deemed to be VIEs. The Company also has deemed as a VIE, a real estate mortgage investment conduit (“REMIC”) trust that was established in conjunction with the September 2022 multi-family loan sale and securitization transaction. Accordingly, the entities were assessed for potential consolidation under the VIE model that requires primary beneficiaries to consolidate the entity’s results. A primary beneficiary is defined as the party that has both the power to direct the activities that most significantly impact the entity, and an interest that could be significant to the entity. To determine if an interest could be significant to the entity, both qualitative and quantitative factors regarding the nature, size and form of involvement with the entity are evaluated.

At September 30, 2023 the Company determined it was not the primary beneficiary for most of its VIEs, primarily because the Company did not have the obligation to absorb losses or the rights to receive benefits from the VIE that could potentially be significant to the VIE. Evaluation and assessment of VIEs for consolidation is performed on an ongoing basis by management. Any changes in facts and circumstances occurring since the previous primary beneficiary determination will be considered as part of this ongoing assessment.

The Company’s maximum exposure to loss associated with its unconsolidated VIEs consists of the capital invested plus any unfunded equity commitments. These investments are recorded in other assets and other liabilities on our consolidated balance sheet. The table below reflects the size of the VIEs as well as our maximum exposure to loss in connection with VIEs at September 30, 2023 and December 31, 2022.


	Total		Total		Maximum
Assets ($ in thousands)	Assets		Liabilities		Exposure to Loss

	(In thousands)
September 30, 2023
Unconsolidated VIEs	$	82,346	$	37,964	$	82,346
December 31, 2022
Unconsolidated VIEs	$	52,125	$	25,564	$	52,125

In addition to the table above, the Company also has a VIE in a REMIC trust that was established in September 2022 in conjunction with a loan sale and securitization. Although the trust is not recognized on the balance sheet, the maximum exposure to loss is the carrying value of the security acquired as part of the securitization transaction, which was $794.6 million and $871.8 million at September 30, 2023 and December 31, 2022, respectively.

Note 6: 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’s, 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, and other factors. Furthermore, the Company’s, Merchants Bank’s, and FMBI’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company, Merchants Bank, and FMBI to maintain minimum amounts and ratios (set forth in the table below). Management believes, as of September 30, 2023 and December 31, 2022, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of September 30, 2023 and December 31, 2022, 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. There are no conditions or events since that notification that management believes have changed the Company’s, Merchants Bank’s, or FMBI’s category.

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


					Minimum				Minimum
					Amount to be Well				Amount To Be
					Capitalized with				Well
	Actual				Basel III Buffer⁽¹⁾				Capitalized⁽¹⁾
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
September 30, 2023
Total capital⁽¹⁾ (to risk-weighted assets)
Company	$	1,699,507	11.5	%	$	1,556,494	10.5	%	$	—	N/A	%
Merchants Bank		1,669,849	11.5	%		1,526,849	10.5	%		1,454,142	10.0
FMBI		38,995	11.2	%		36,546	10.5	%		34,806	10.0	%
Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,620,024	10.9	%		1,260,019	8.5	%		—	N/A	%
Merchants Bank		1,591,057	10.9	%		1,236,021	8.5	%		1,163,314	8.0
FMBI		38,303	11.0	%		29,585	8.5	%		27,845	8.0	%
Common Equity Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,120,416	7.6	%		1,037,663	7.0	%		—	N/A	%
Merchants Bank		1,591,057	10.9	%		1,017,899	7.0	%		945,192	6.5
FMBI		38,303	11.0	%		24,364	7.0	%		22,624	6.5	%
Tier I capital⁽¹⁾ (to average assets)
Company		1,620,024	10.1	%		640,543	4.0	%		—	N/A	%
Merchants Bank		1,591,057	10.1	%		628,478	4.0	%		785,597	5.0
FMBI		38,303	10.6	%		14,440	4.0	%		18,050	5.0	%

(1)

As defined by regulatory agencies.

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)


					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, 2022
Total capital⁽¹⁾ (to risk-weighted assets)
Company	$	1,507,968	12.2	%	$	992,883	8.0	%	$	—	N/A	%
Merchants Bank		1,427,738	11.7	%		975,853	8.0	%		1,219,817	10.0	%
FMBI		34,769	11.3	%		24,703	8.0	%		30,878	10.0	%
Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,452,456	11.7	%		744,662	6.0	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		731,890	6.0	%		975,853	8.0	%
FMBI		34,054	11.0	%		18,527	6.0	%		24,703	8.0	%
Common Equity Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		952,848	7.7	%		558,497	4.5	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		548,917	4.5	%		792,881	6.5	%
FMBI		34,054	11.0	%		13,895	4.5	%		20,071	6.5	%
Tier I capital⁽¹⁾ (to average assets)
Company		1,452,456	11.7	%		497,604	4.0	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		487,511	4.0	%		609,389	5.0	%
FMBI		34,054	10.7	%		12,702	4.0	%		15,878	5.0	%

(1)

As defined by regulatory agencies.

Note 7: Derivative Financial Instruments

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

Forward Sales Commitments, Interest Rate Lock Commitments, and Interest Rate Swaps

The Company enters into forward contracts for the future delivery of mortgage loans to third party investors and enters into interest rate lock commitments 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.

Interest rate swaps are also used by the Company to reduce the risk that significant increases in interest rates may have on the value of certain fixed rate loans held for sale and the respective loan payments received from borrowers. All changes in the fair market value of these interest rate swaps and associated loans held for sale have been included in gain on sale of loans. Any difference between the fixed and floating interest rate components of these transactions have been included in interest income.

All 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.

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, forward contracts, and interest rate swaps utilized by the Company at September 30, 2023 and December 31, 2022. This table excludes the fair market value adjustment on loans associated with these derivatives.


		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability

September 30, 2023		(In thousands)			(In thousands)
Interest rate lock commitments	$	24,495	Other assets/liabilities	$	44	$	141
Forward contracts	$	34,376	Other assets/liabilities		236		1
Interest rate swaps	$	57,548	Other assets/liabilities		5,792		—
				$	6,072	$	142


		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability

December 31, 2022		(In thousands)			(In thousands)
Interest rate lock commitments	$	8,759	Other assets/liabilities	$	28	$	23
Forward contracts	$	13,096	Other assets/liabilities		46		52
Interest rate swaps	$	57,574	Other assets/liabilities		3,030		—
				$	3,104	$	75

Fair values of these derivative financial instruments were estimated using changes in mortgage interest rates from the date the Company entered into the interest rate lock commitment and the balance sheet date. The following table summarizes the periodic changes in the fair value of the derivative financial instruments on the condensed consolidated statements of income for the three and nine months ended September 30, 2023 and 2022.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022

	(In thousands)					(In thousands)
Derivative gain (loss) included in gain on sale of loans:
Interest rate lock commitments	$	(123)	$	(592)	$	(102)	$	(637)
Forward contracts (includes pair-off settlements)		595		1,091		875		5,550
Interest rates swaps		2,501		3,245		2,762		3,405
Net derivative gains	$	2,973	$	3,744	$	3,535	$	8,318

Derivatives on Behalf of Customers

The Company offers derivative contracts to some customers in connection with their risk management needs. These derivatives include back-to-back interest rate swaps. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer. These derivatives generally work together as an economic interest rate hedge, but the Company does not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred, typically resulting in no net earnings impact.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The fair values of derivative assets and liabilities related to derivatives for customers with back-to-back interest rate swaps were recorded in the condensed consolidated balance sheets as follows:


		Notional			Fair Value
		Amount	Balance Sheet Location		Asset		Liability

		(In thousands)			(In thousands)
September 30, 2023	$	270,427	Other assets/liabilities	$	11,588	$	11,588
December 31, 2022	$	77,495	Other assets/liabilities	$	3,041	$	3,041

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022

	(In thousands)					(In thousands)
Gross swap gains	$	2,111	$	249	$	8,547	$	2,282
Gross swap losses		2,111		249		8,547		2,282
Net swap gains (losses)	$	—	$	—	$	—	$	—

The Company pledged $0 in collateral to secure its obligations under swap contracts at both September 30, 2023 and December 31, 2022.

Note 8: 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

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Recurring Measurements

The following tables present the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2023 and December 31, 2022:


	Fair Value Measurements Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)

	(In thousands)
September 30, 2023
Mortgage loans in process of securitization	$	476,047	$	—	$	476,047	$	—
Securities available for sale:
Treasury notes		137,886		137,886		—		—
Federal agencies		224,398		—		224,398		—
Mortgage-backed - Government-sponsored entity (GSE)		262,302		—		262,302		—
Loans held for sale		90,875		—		90,875		—
Servicing rights		162,141		—		—		162,141
Derivative assets - interest rate lock commitments		44		—		—		44
Derivative assets - forward contracts		236		—		236		—
Derivative assets - interest rate swaps		5,792		—		5,792		—
Derivative assets - interest rate swaps (back-to-back)		11,588		—		11,588		—
Derivative liabilities - interest rate lock commitments		141		—		—		141
Derivative liabilities - forward contracts		1		—		1		—
Derivative liabilities - interest rate swaps (back-to-back)		11,588		—		11,588		—


December 31, 2022
Mortgage loans in process of securitization	$	154,194	$	—	$	154,194	$	—
Securities available for sale:
Treasury notes		36,280		36,280		—		—
Federal agencies		271,890		—		271,890		—
Mortgage-backed - Government-sponsored entity (GSE)		15,167		—		15,167		—
Loans held for sale		82,192		—		82,192		—
Servicing rights		146,248		—		—		146,248
Derivative assets - interest rate lock commitments		28		—		—		28
Derivative assets - forward contracts		46		—		46		—
Derivative assets - interest rate swaps		3,030		—		3,030		—
Derivative assets - interest rate swaps (back-to-back)		3,041		—		3,041		—
Derivative liabilities - interest rate lock commitments		23		—		—		23
Derivative liabilities - forward contracts		52		—		52		—
Derivative liabilities - interest rate swaps (back-to-back)		3,041		—		3,041		—

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the nine months ended September 30, 2023 and the year ended December 31, 2022. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Mortgage Loans in Process of Securitization and Securities Available for Sale

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

Servicing Rights

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, cost of servicing, interest rates, and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy.

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

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 3 Reconciliation

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

	(In thousands)				(In thousands)
Servicing rights
Balance, beginning of period	$	147,288	$	130,710	$	146,248	$	110,348
Additions
Originated servicing		4,867		11,667		9,164		22,662
Subtractions
Paydowns		(1,660)		(1,946)		(5,431)		(7,963)
Sales of servicing		—		—		—		—
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model		11,646		4,553		12,160		19,937
Balance, end of period	$	162,141	$	144,984	$	162,141	$	144,984

Derivative Assets - interest rate lock commitments
Balance, beginning of period	$	94	$	299	$	28	$	264
Changes in fair value		(50)		(275)		16		(240)
Balance, end of period	$	44	$	24	$	44	$	24

Derivative Liabilities - interest rate lock commitments
Balance, beginning of period	$	68	$	121	$	23	$	41
Changes in fair value		73		317		118		397
Balance, end of period	$	141	$	438	$	141	$	438

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2023 and December 31, 2022.


	Fair Value Measurements Using
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Fair		Identical Assets		Inputs		Inputs
Assets	Value		(Level 1)		(Level 2)		(Level 3)

	(In thousands)
September 30, 2023
Impaired loans (collateral-dependent)	$	40,809	$	—	$	—	$	40,809
December 31, 2022
Impaired loans (collateral-dependent)	$	4,465	$	—	$	—	$	4,465

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.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Collateral Dependent Loans, Net of ACL-Loans

The estimated fair value of collateral dependent loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral dependent 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 Chief Credit Officer’s (“CCO)” office. Appraisals and evaluations 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.

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			Weighted
	Fair Value		Technique	Unobservable Inputs	Range	Average
	(In thousands)
At September 30, 2023:
Collateral dependent loans	$	40,809	Market comparable properties	Marketability discount	0% - 54%	2%
Servicing rights - Multi-family	$	125,111	Discounted cash flow	Discount rate	8% - 13%	9%
				Constant prepayment rate	1% - 25%	7%
Servicing rights - Single-family	$	31,898	Discounted cash flow	Discount rate	9% - 10%	9%
				Constant prepayment rate	7% - 12%	7%
Servicing rights - SBA	$	5,132	Discounted cash flow	Discount rate	16%	16%
				Constant prepayment rate	3% - 14%	8%
Derivative assets - interest rate lock commitments	$	44	Discounted cash flow	Loan closing rates	62% - 99%	80%
Derivative liabilities - interest rate lock commitments	$	141	Discounted cash flow	Loan closing rates	62% - 99%	80%

At December 31, 2022:
Collateral dependent loans	$	4,465	Market comparable properties	Marketability discount	4% - 54%	5%
Servicing rights - Multi-family	$	111,690	Discounted cash flow	Discount rate	8% - 13%	9%
				Constant prepayment rate	0 - 39%	8%
Servicing rights - Single-family	$	29,926	Discounted cash flow	Discount rate	9% - 10%	9%
				Constant prepayment rate	7% - 10%	7%
Servicing rights - SBA	$	4,632	Discounted cash flow	Discount rate	16%	16%
				Constant prepayment rate	3% - 12%	8%
Derivative assets - interest rate lock commitments	$	28	Discounted cash flow	Loan closing rates	60% - 87%	77%
Derivative liabilities - interest rate lock commitments	$	23	Discounted cash flow	Loan closing rates	60% - 87%	77%

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.

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Servicing Rights

The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights are discount rates and constant prepayment rates. These two inputs can drive a significant amount of a market participant’s valuation of servicing rights. Significant increases (decreases) in the discount rate or assumed constant prepayment rates used to value servicing rights would decrease (increase) the value derived.

Fair Value of Financial Instruments

The following table presents the carrying amount and estimated fair values of the Company’s financial instruments not carried at fair value and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2023 and December 31, 2022.


			Fair Value Measurements Using
					Quoted Prices in		Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
Assets	Value		Value		(Level 1)		(Level 2)		(Level 3)

	(In thousands)
September 30, 2023
Financial assets:
Cash and cash equivalents	$	407,238	$	407,238	$	407,238	$	—	$	—
Securities purchased under agreements to resell		3,385		3,385		—		3,385		—
Securities held to maturity		1,012,801		1,010,745		—		216,281		794,464
FHLB stock		48,219		48,219		—		48,219		—
Loans held for sale		3,386,161		3,386,161		—		3,386,161		—
Loans receivable, net		9,910,681		9,871,660		—		—		9,871,660
Interest receivable		78,401		78,401		—		78,401		—
Financial liabilities:
Deposits		13,007,338		13,005,483		7,961,135		5,044,348		—
Short-term subordinated debt		81,000		81,000		—		81,000		—
FHLB advances		1,063,445		1,063,139		—		1,063,139		—
Other borrowing		362,934		362,934		—		362,934		—
Credit linked notes		146,696		146,694		—		146,694		—
Interest payable		49,757		49,757		—		49,757		—

December 31, 2022
Financial assets:
Cash and cash equivalents	$	226,164	$	226,164	$	226,164	$	—	$	—
Securities purchased under agreements to resell		3,464		3,464		—		3,464		—
Securities held to maturity		1,119,078		1,118,966		—		247,182		871,784
FHLB stock		39,130		39,130		—		39,130		—
Loans held for sale		2,828,384		2,828,384		—		2,828,384		—
Loans receivable, net		7,426,858		7,431,731		—		—		7,431,731
Interest receivable		56,262		56,262		—		56,262		—
Financial liabilities:
Deposits		10,071,345		10,064,941		7,082,056		2,982,885		—
Short-term subordinated debt		21,000		21,000		—		21,000		—
FHLB advances		859,392		858,984		—		858,984		—
Other borrowing		50,000		50,000		—		50,000		—
Interest payable		23,384		23,384		—		23,384		—

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 9: Leases

The Company has operating leases for various locations with terms ranging from two to eleven years. Some operating leases include options to extend. The extensions were included in the right-of-use asset if the likelihood of extension was fairly certain. The Company elected not to separate non-lease components from lease components for its operating leases.

The Company has operating lease right-of-use assets of $10.6 million and operating lease right-of-use liabilities of $11.8 million as of September 30, 2023.

Balance sheet, income statement and cash flow detail regarding operating leases follows:


		September 30, 2023		December 31, 2022
Balance Sheet		(In thousands)		(In thousands)
Operating lease right-of-of use asset (in other assets)	$	10,556	$	10,969
Operating lease liability (in other liabilities)		11,790		11,992

Weighted average remaining lease term (years)		6.1		6.5
Weighted average discount rate		2.88%		2.65%

Maturities of lease liabilities:
One year or less	$	622	$	2,181
Year two		2,441		2,321
Year three		2,064		1,881
Year four		2,100		1,911
Year five		2,046		1,853
Thereafter		3,566		2,902
Total future minimum lease payments		12,839		13,049
Less: imputed interest		1,049		1,057
Total	$	11,790	$	11,992

		Three Months Ended		Three Months Ended
		September 30, 2023		September 30, 2022
Income Statement		(In thousands)		(In thousands)
Components of lease expense:
Operating lease cost (in occupancy and equipment expense)	$	591	$	482

		Nine Months Ended		Nine Months Ended
		September 30, 2023		September 30, 2022
Income Statement		(In thousands)		(In thousands)
Components of lease expense:
Operating lease cost (in occupancy and equipment expense)	$	1,840	$	1,274

		Nine Months Ended		Nine Months Ended
		September 30, 2023		September 30, 2022
Cash Flow Statement		(In thousands)		(In thousands)
Supplemental cash flow information:
Operating cash flows from operating leases	$	1,506	$	1,061

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 10: Deposits

Deposits were comprised of the following at September 30, 2023 and December 31, 2022:


	September 30,		December 31,
	2023		2022

	(In thousands)
Noninterest-bearing deposits
Demand deposits	$	287,846	$	326,875
Total noninterest-bearing deposits		287,846		326,875
Interest-bearing deposits
Demand deposits	$	4,616,742	$	3,720,363
Savings deposits		3,056,547		3,034,818
Certificates of deposit		5,046,203		2,989,289
Total interest-bearing deposits		12,719,492		9,744,470
Total deposits	$	13,007,338	$	10,071,345

Maturities for certificates of deposit are as follows:


	September 30, 2023
	(In thousands)
Due within one year	$	4,903,831
Due in one year to two years		92,483
Due in two years to three years		48,520
Due in three years to four years		961
Due in four years to five years		408
Due in five years to six years		—
	$	5,046,203

Brokered deposit amounts at September 30, 2023 and December 31, 2022, were as follows:


	September 30,		December 31,
	2023		2022

	(In thousands)
Brokered certificates of deposit	$	4,393,282	$	2,681,198
Brokered savings deposits		6,715		81,532
Brokered deposit on demand accounts		306		13
	$	4,400,303	$	2,762,743

Note 11: Borrowings

Borrowings were comprised of the following at September 30, 2023 and December 31, 2022:


	September 30,		December 31,
	2023		2022

	(In thousands)
Federal Reserve discount window borrowings	$	210,000	$	20,000
Short-term subordinated debt		81,000		21,000
FHLB advances		1,063,445		859,392
American Financial Exchange borrowing		145,000		30,000
Credit linked notes		146,696		—
Other borrowings		7,934		—
Total borrowings	$	1,654,075	$	930,392

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

On March 30, 2023, Merchants Bank of Indiana issued and sold credit linked notes, due May 26, 2028. The notes are secured by a restricted collateral account which the Company is required to maintain with a third-party financial institution. The collateral account maintains an amount equal to at least the initial aggregate unpaid principal of the notes. As of September 30, 2023, the account included $52.2 million of restricted cash and the acquisition of $98.8 million in short-term Treasury securities. These are reported as cash equivalents and securities available for sale in the consolidated balance sheets.

Note 12: Earnings Per Share

Earnings per share were computed as follows:


	Three Month Periods Ended September 30,
	2023					2022
			Weighted-	Per				Weighted-	Per
	Net		Average	Share		Net		Average	Share
	Income		Shares	Amount		Income		Shares	Amount
	(In thousands)					(In thousands)
Net income	$	81,504				$	58,488
Dividends on preferred stock		(8,668)					(5,729)
Net income allocated to common shareholders	$	72,836				$	52,759
Basic earnings per share			43,238,724	$	1.68			43,107,975	$	1.22
Effect of dilutive securities-restricted stock awards			112,484					150,950
Diluted earnings per share			43,351,208	$	1.68			43,258,925	$	1.22


	Nine Month Periods Ended September 30,
	2023					2022
			Weighted-	Per				Weighted-	Per
	Net		Average	Share		Net		Average	Share
	Income		Shares	Amount		Income		Shares	Amount
	(In thousands)					(In thousands)
Net income	$	201,761				$	162,565
Dividends on preferred stock		(26,003)					(17,186)
Net income allocated to common shareholders	$	175,758				$	145,379
Basic earnings per share			43,218,125	$	4.07			43,182,380	$	3.37
Effect of dilutive securities-restricted stock awards			99,218					148,768
Diluted earnings per share			43,317,343	$	4.06			43,331,148	$	3.36

Note 13: Share-Based Payment Plans

Equity-based incentive awards for Company officers are currently issued pursuant to the 2017 Equity Incentive Plan (the “2017 Incentive Plan”). During the three months ended September 30, 2023 and 2022, the Company did not issue any shares. During the nine months ended September 30, 2023 and 2022, the Company issued 84,335 and 64,962 shares, respectively.

During 2018, the Compensation Committee of the Board of Directors approved a plan for non-executive directors to receive a portion of their annual retainer fees in the form of shares of common stock equal to $10,000, rounded up to the nearest whole share. In January 2021, the Board of Directors amended the plan for nonexecutive directors to receive a portion of their annual fees, issued quarterly, in the form of restricted common stock equal to $50,000 per member, rounded up to the nearest whole share, to be effective after the Company’s annual meeting of shareholders held in May 2021. Accordingly, there were 2,912 and 3,073 shares, issued to non-executive directors during the three months ended September 30, 2023 and 2022, respectively and there were 9,457 and 8,894 shares, issued to non-executive directors during the nine months ended September 30, 2023 and 2022, respectively.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company established an employee stock ownership plan (“ESOP”) effective as of January 1, 2020 to provide certain benefits for all employees who meet certain requirements. There was no contribution to the ESOP during the three months ended September 30, 2023 and 2022. Expenses associated with the contribution to the ESOP totaled $810,000 and $653,000 for the nine months ended September 30, 2023 and 2022, respectively. The Company contributed 33,293 shares and 20,709 shares to the ESOP for the nine months ended September 30, 2023 and 2022, respectively.

Note 14: Segment Information

Our Company’s 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. It is also a fully integrated syndicator of low-income housing tax credit and debt funds. The Mortgage Warehousing segment funds agency eligible residential loans from the date of origination or purchase, until the date of sale in the secondary market, as well as commercial loans to 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. The Other segment includes general and administrative expenses that provide services to all segments; internal funds transfer pricing offsets resulting from allocations to/from the other segments, certain elimination entries and investments in qualified affordable housing limited partnerships. All operations are domestic.

The tables below present selected business segment financial information for the three and nine months ended September 30, 2023 and 2022.


	Multi-family
	Mortgage		Mortgage
	Banking		Warehousing		Banking		Other		Total

Three Months Ended September 30, 2023	(In thousands)
Interest income	$	1,580	$	85,280	$	208,307	$	1,509	$	296,676
Interest expense		19		57,633		123,594		(2,006)		179,240
Net interest income		1,561		27,647		84,713		3,515		117,436
Provision for credit losses		—		(495)		4,509		—		4,014
Net interest income after provision for credit losses		1,561		28,142		80,204		3,515		113,422
Noninterest income		37,266		1,884		(536)		(2,546)		36,068
Noninterest expense		19,169		4,014		10,945		8,802		42,930
Income (loss) before income taxes		19,658		26,012		68,723		(7,833)		106,560
Income taxes		4,973		6,086		16,278		(2,281)		25,056
Net income (loss)	$	14,685	$	19,926	$	52,445	$	(5,552)	$	81,504
Total assets	$	392,754	$	4,757,817	$	11,135,651	$	209,014	$	16,495,236

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Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Multi-family
	Mortgage		Mortgage
	Banking		Warehousing		Banking		Other		Total

Three Months Ended September 30, 2022	(In thousands)
Interest income	$	589	$	31,240	$	99,982	$	2,301	$	134,112
Interest expense		—		15,089		34,513		(875)		48,727
Net interest income		589		16,151		65,469		3,176		85,385
Provision for credit losses		—		222		2,003		—		2,225
Net interest income after provision for credit losses		589		15,929		63,466		3,176		83,160
Noninterest income		39,421		1,106		(8,317)		(3,024)		29,186
Noninterest expense		21,741		2,332		3,752		7,126		34,951
Income (loss) before income taxes		18,269		14,703		51,397		(6,974)		77,395
Income taxes		4,903		2,902		12,053		(951)		18,907
Net income (loss)	$	13,366	$	11,801	$	39,344	$	(6,023)	$	58,488
Total assets	$	343,443	$	2,735,278	$	8,760,416	$	139,585	$	11,978,722


	Multi-family
	Mortgage		Mortgage
	Banking		Warehousing		Banking		Other		Total

	(In thousands)
Nine Months Ended September 30, 2023
Interest income	$	3,934	$	191,865		566,439	$	3,801	$	766,039
Interest expense		32		128,411		319,431		(5,581)		442,293
Net interest income		3,902		63,454		247,008		9,382		323,746
Provision for credit losses		—		3,189		30,295		—		33,484
Net interest income after provision for credit losses		3,902		60,265		216,713		9,382		290,262
Noninterest income		84,188		5,789		(2,485)		(7,278)		80,214
Noninterest expense		53,762		10,386		33,233		24,641		122,022
Income (loss) before income taxes		34,328		55,668		180,995		(22,537)		248,454
Income taxes		6,435		8,505		36,593		(4,840)		46,693
Net income (loss)	$	27,893	$	47,163	$	144,402	$	(17,697)	$	201,761
Total assets	$	392,754	$	4,757,817	$	11,135,651	$	209,014	$	16,495,236


	Multi-family
	Mortgage		Mortgage
	Banking		Warehousing		Banking		Other			Total

	(In thousands)
Nine Months Ended September 30, 2022
Interest income	$	1,229	$	74,816	$	217,285	$	6,064	$	299,394
Interest expense		—		22,686		55,066		(1,499)		76,253
Net interest income		1,229		52,130		162,219		7,563		223,141
Provision for credit losses		1,153		849		8,886		—		10,888
Net interest income after provision for credit losses		76		51,281		153,333		7,563		212,253
Noninterest income		121,037		4,316		(16,380)		(6,019)		102,954
Noninterest expense		60,231		7,699		12,960		18,051		98,941
Income (loss) before income taxes		60,882		47,898		123,993		(16,507)		216,266
Income taxes		16,468		11,070		29,953		(3,790)		53,701
Net income (loss)	$	44,414	$	36,828	$	94,040	$	(12,717)	$	162,565
Total assets	$	343,443	$	2,735,278	$	8,760,416	$	139,585	$	11,978,722

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 15: Recent Accounting Pronouncements

The Company continually monitors potential accounting pronouncement and SEC release changes. No new pronouncements or releases are expected to be applicable to the Company.

Note 16: Subsequent Events

No material events were noted.

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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, 2022 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 credit losses on loans;

●

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 relating to banking, consumer protection, securities, and tax matters;

●

our ability to maintain licenses required in connection with residential and 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;

●

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

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●

changes in federal tax law or policy.

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

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

Management’s discussion and analysis of the financial condition at September 30, 2023 and results of operations for the three and nine months ended September 30, 2023 and 2022, is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this Form 10-Q.

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

Financial Highlights for the Three Months Ended September 30, 2023

●

Net income of $81.5 million increased 39% compared to September 30, 2022 and diluted earnings per share of $1.68 increased 38% compared to September 30, 2022.

●

The 39% increase in net income was primarily driven by a $32.1 million, or 38%, increase in net interest income.

●

Total assets of $16.5 billion increased 4% compared to June 30, 2023, and increased 31% compared to December 31, 2022.

●

As of September 30, 2023, the Company had $5.4 billion, or 32%, of total assets, in unused borrowing capacity with the Federal Home Loan Bank and the Federal Reserve Discount window, based on available collateral.

●

The Company’s most liquid assets are in unrestricted cash, short-term investments, including interest-bearing demand deposits, mortgage loans in process of securitization, loans held for sale, and warehouse lines of credit included in loans receivable. Taken together, with unused borrowing capacity, these totaled $10.7 billion, or 65%, of the $16.5 billion in total assets as of September 30, 2023.

●

Uninsured deposits totaled approximately $2 billion as of September 30, 2023, representing less than 20% of total deposits.

●

Loans receivable of $9.9 billion, net of allowance for credit losses on loans increased $2.5 billion, or 33%, compared to December 31, 2022.

●

Efficiency ratio was 28.0% compared to 30.5% for the three months ended September 30, 2022.

●

As of September 30, 2023, approximately 94% of the total net loans at Merchants Bank reprice within three months, which reduces the risk of market rate increases.

●

Tangible book value per common share of $25.82 increased 24% compared to $20.78 for the three months ended September 30, 2022.

●

On August 31, 2023, the Company completed a $303.6 million securitization of 11 multi-family mortgage loans through a Freddie Mac-sponsored Q-Series transaction.

●

On September 7, 2023, the Company entered into an agreement with Bank of Pontiac to sell its Farmers-Merchants Bank of Illinois branch locations in Paxton, Melvin and Piper City, Illinois and an agreement with CBI Bank & Trust, to sell its Farmers-Merchants Bank of Illinois branch located in Joy, Illinois.

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●

The volume of warehouse loans funded during the three months ended September 30, 2023 amounted to $10.8 billion, an increase of $2.0 billion, or 23%, compared to the three months ended September 30, 2022. This compared to the 10% industry decrease in single-family residential loan volumes for the three months ended September 30, 2023 according to an estimate of industry volume by the Mortgage Bankers Association.

●

The total volume of loans originated and acquired through our multi-family business was $1.4 billion, a decrease of $869.4 million, or 39%, compared to $2.2 billion for the three months ended September 30, 2022. Many of these loans are bridge loans housed in our banking segment while borrowers await conversion to permanent financing. The volume of bridge loans was $785.8 million, a decrease of $705.7 million, or 47%, compared to $1.5 billion for the three months ended September 30, 2022. The volume of loans originated and acquired for sale in the secondary market increased by $55.1 million, or 15%, to $422.1 million, compared to $367.0 million for the three months ended September 30, 2022.

Business Overview

We are a diversified bank holding company headquartered in Carmel, Indiana and registered under the Bank Holding Company Act of 1956, as amended. We currently operate in multiple business segments, including Multi-family Mortgage Banking that offers multi-family housing and healthcare facility financing and servicing, as well as syndicated low-income housing tax credit and debt funds; Mortgage Warehousing that offers mortgage warehouse financing, commercial loans, and deposit services; and Banking that offers portfolio lending for multi-family and healthcare facility loans, retail and correspondent residential mortgage banking, agricultural lending, Small Business Administration (“SBA”) lending, and traditional community banking.

Our business consists primarily of funding fixed rate, low risk, multi-family, residential and SBA loans meeting underwriting standards of government programs under an originate to sell model, and retaining adjustable rate loans as held for investment to reduce interest rate risk. The gain on sale of these loans and servicing fees contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, retail, commercial, and brokered deposits, and short-term borrowing. 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 which serves to maximize net income and higher than industry 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 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, 2022. 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, 2022.

Financial Condition

As of September 30, 2023, we had approximately $16.5 billion in total assets, $13.0 billion in deposits and $1.6 billion in total shareholders’ equity. Total assets as of September 30, 2023 included approximately $407.2 million of cash and cash equivalents, $3.5 billion of loans held for sale and $9.9 billion of loans receivable, net of ACL-loans.

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Assets also included $476.0 million of mortgage loans in process of securitization that represent pre-sold multi-family rental real estate loan originations in primarily Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), or Government National Mortgage Association (“GNMA”) mortgage backed securities pending settlements that typically occur within 30 days. There was also $1.0 billion in securities held to maturity that were primarily acquired in conjunction with the securitization of loans that the Company originated. Additionally, we had $624.6 million in securities available for sale that are typically match funded with related custodial deposits or required to collateralize our credit-linked notes. There are some restrictions on the types of securities we hold, particularly for those that are funded by certain custodial deposits where we set the cost of deposits based on the yield of the related securities. Servicing rights at September 30, 2023 were $162.1 million based on the fair value of the loan servicing, which are primarily GNMA multi-family servicing rights with 10-year call protection.

Comparison of Financial Condition at September 30, 2023 and December 31, 2022

Total Assets. Total assets of $16.5 billion at September 30, 2023 increased $3.9 billion, or 31%, compared to $12.6 billion at December 31, 2022. The increase was due primarily to significant growth in the healthcare, commercial lines of credit collateralized by mortgage servicing rights, multi-family, and mortgage warehouse loan portfolios.

Cash and Cash Equivalents. Cash and cash equivalents of $407.2 million at September 30, 2023 increased $181.1 million, or 80%, compared to December 31, 2022. The 80% increase reflected higher liquidity to fund anticipated loan growth. Included in cash equivalents was $52.2 million in restricted cash associated with the March 2023 issuance of senior credit linked notes described in Note 11: Borrowings.

Mortgage Loans in Process of Securitization. Mortgage loans in process of securitization of $476.0 million at September 30, 2023 increased $321.9 million, or 209%, compared to December 31, 2022. These represent loans that our banking subsidiary, Merchants Bank, has funded and are held pending settlement, primarily as GNMA or other agency mortgage-backed securities with a firm investor commitment to purchase the securities. The 209% increase was primarily due to an increase in the volume of loans that had not yet settled with government agencies.

Securities Available for Sale. Securities available for sale of $624.6 million at September 30, 2023 increased $301.2 million, or 93%, compared to December 31, 2022. The increase in available for sale securities was primarily due to purchases of $631.7 million, partially offset by calls, maturities, repayments, sales and other adjustments of $330.5 million during the period. The purchases were primarily related to securities with protections against any loss in fair value.

As of September 30, 2023, Accumulated Other Comprehensive Losses (“AOCL”) of $4.8 million losses, related to securities available for sale, decreased $5.7 million, or 55%, compared to losses of $10.5 million at December 31, 2022. The $4.8 million of AOCL losses as of September 30, 2023 represented less than 1% of total equity and less than 1% of total securities available for sale.

Securities Held to Maturity. Securities held to maturity of $1.0 billion at September 30, 2023 decreased $106.3 million, or 9%, compared to $1.1 billion at December 31, 2022. The decrease was primarily due to purchases of $9.8 million offset by calls, maturities and repayments of securities totaling $116.1 million during the period.

Loans Held for Sale. Loans held for sale, comprised primarily of single-family residential real estate loan participations that meet Fannie Mae, Freddie Mac, or GNMA eligibility, of $3.5 billion at September 30, 2023 increased $566.5 million, or 19%, compared to $2.9 billion at December 31, 2022. The increase in loans held for sale was due primarily to an increase in warehouse participations, partially offset by loans associated with credit linked notes that were transferred to loans receivable during the first quarter of 2023.

Loans Receivable. Loans receivable, which are comprised of loans held for investment, of $9.9 billion at September 30, 2023 increased $2.5 billion, or 33%, compared to $7.4 billion at December 31, 2022. The increase was comprised primarily of:

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●

an increase of $614.2 million, or 38%, in healthcare financing loans, to $2.2 billion at September 30, 2023,

●

an increase of $581.4 million, or 59%, in commercial and commercial real estate loans, to $1.6 billion at September 30, 2023,

●

an increase of $573.8 million, or 18%, in multi-family financing loans, to $3.7 billion at September 30, 2023,

●

an increase of $557.9 million, or 120%, in mortgage warehouse lines of credit, to $1.0 billion at September 30, 2023, and

●

an increase of $180.5 million, or 15%, in residential real estate loans, to $1.4 billion at September 30, 2023.

The $614.2 million increase in healthcare financing was due to increased volume associated with the credit link notes transaction where loans were transferred from loans held for sale during the first quarter of 2023.

The $581.4 million increase in commercial and commercial real estate was primarily due to higher revolving lines of credit on collateralized mortgage servicing rights during the period.

The $573.8 million increase in multi-family financing was due to higher origination volume for construction, bridge and other loans generated through our multi-family segment that will remain on our balance sheet until they convert to permanent financing or are otherwise paid off over an average of one to three years.

The $557.9 million increase in mortgage warehouse lines of credit was due to higher loan volume from increased sales efforts and market exits of several competitors.

The $180.5 million increase in residential real estate loans was primarily due an increase in All-in-One® first-lien home equity line of credit.

As of September 30, 2023, approximately 94% of the total net loans at Merchants Bank reprice within three months, which reduces the risk of market rate increases.

Allowance for Credit Losses on Loans (“ACL-Loans”). The ACL-Loans of $66.9 million at September 30, 2023 increased $22.9 million compared to $44.0 million at December 31, 2022. The increase was primarily due to loan growth in the period, as well as credit events and increases in qualitative factors and forecasted loss rates to reflect changes in industry conditions that were reported during the three months ended September 30, 2023.

Also influencing the overall level of the ACL-Loans is our differentiated strategy to typically hold loans with shorter durations and to maintain strict underwriting standards that enable us to sell the majority of our loans to government agencies.

Goodwill. Goodwill of $15.8 million at September 30, 2023 remained unchanged compared to December 31, 2022. At this time, we do not believe there exists any impairment to goodwill or intangible assets.

Servicing Rights. Servicing rights of $162.1 million at September 30, 2023 increased $15.9 million, or 11%, compared to $146.2 million at December 31, 2022. During the nine months ended September 30, 2023, originated servicing of $9.2 million and a positive fair market value adjustment of $12.2 million were partially offset by paydowns of $5.4 million. Servicing rights are recognized in connection with sales of loans when we retain servicing of the sold loans. The servicing rights are recorded and carried at fair value. The fair value increase recorded during the nine months ended September 30, 2023 was driven by higher loan balances of mortgages serviced and higher interest rates that impacted fair market value adjustments. The value of servicing rights generally increases in rising interest rate

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environments which impact the value of escrow deposits, and declines in falling interest rate environments due to expected prepayments.

Other Assets and Receivables. Other assets and receivables of $241.3 million at September 30, 2023 increased $83.8 million, or 53%, compared to December 31, 2022. The 53% increase in other assets and receivables was primarily due to the acquisition of low-income housing tax credit investments.

Deposits. Deposits of $13.0 billion at September 30, 2023 increased $2.9 billion, or 29%, compared to $10.1 billion at December 31, 2022. The 29% increase in total deposits was primarily due to a $2.1 billion increase in certificates of deposit, a $857.4 million increase in demand deposits and an increase of $21.7 million in savings deposits. As of September 30, 2023, approximately 88% of the total deposits at Merchants Bank reprice within three months.

Uninsured deposits totaled approximately $2 billion as of September 30, 2023, representing less than 20% of total deposits. Since 2018, the Company has offered its customers an opportunity to insure balances in excess of $250,000 through our insured cash sweep program that extends FDIC protection up to $100 million. The balance of deposits in this program was $1.8 billion as of September 30, 2023.

Core deposits increased by $1.3 billion, or 18%, to $8.6 billion at September 30, 2023 compared to December 31, 2022. Core deposits represented 66% of total deposits at September 30, 2023 compared to 73% of total deposits at December 31, 2022.

We increased our use of brokered deposits by $1.6 billion, or 59%, to $4.4 billion at September 30, 2023 compared to December 31, 2022. Brokered deposits represented 34% of total deposits at September 30, 2023 compared to 27% of total deposits at December 31, 2022.

●

Brokered certificates of deposit accounts of $4.4 billion at September 30, 2023 increased by $1.7 billion, or 64%, compared to December 31, 2022.

●

Brokered demand deposit accounts of $0.3 million at September 30, 2023 increased by $0.3 million, compared to December 31, 2022.

●

Brokered savings deposits accounts of $6.7 million at September 30, 2023 decreased $74.8 million, compared to December 31, 2022.

As of September 30, 2023, brokered certificates of deposit had a weighted average remaining duration of 49 days. Although our brokered deposits are short-term in nature, they may be more rate sensitive compared to other sources of funding. In the future, those depositors may not replace their brokered deposits with us as they mature, or we may have to pay a higher rate of interest to keep those deposits or to replace them with other deposits or other sources of funds. Not being able to maintain or replace those deposits as they mature would adversely affect our liquidity. Additionally, if Merchants Bank does not maintain its well-capitalized position, it may not accept or renew any brokered deposits without a waiver granted by the Federal Deposit Insurance Corporation (“FDIC”).

Compared to December 31, 2022, interest-bearing deposits increased $3.0 billion, or 31%, to $12.7 billion at September 30, 2023, and noninterest-bearing deposits decreased $39.0 million, or 12%, to $287.8 million at September 30, 2023.

Borrowings. Borrowings of $1.7 billion at September 30, 2023, an increase of $723.7 million, or 78%, compared to December 31, 2022. The increase was primarily due to additional borrowings from the FHLB and Federal Reserve, along with the issuance of senior credit linked notes described in Note 11: Borrowings. Depending on rates and timing, borrowing can be a more effective liquidity management alternative than utilizing brokered certificates of deposits. The Company primarily utilizes borrowing facilities from the FHLB, the Federal Reserve’s discount window, and the American Financial Exchange (“AFX”).

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The Company continues to have significant borrowing capacity based on available collateral. As of September 30, 2023, unused lines of credit totaled $5.4 billion, compared to $3.1 billion at December 31, 2022.

Other Liabilities. Other liabilities of $183.1 million at September 30, 2023 increased $49.0 million, or 37%, compared to $134.1 million at December 31, 2022. The 37% increase in other liabilities was primarily due to interest payable and unfunded commitments for low-income housing tax credit investments.

Total Shareholders’ Equity. Total shareholders’ equity of $1.6 billion at September 30, 2023, increased $173.0 million, or 12%, compared to $1.5 billion as of December 31, 2022. The $173.0 million increase resulted primarily from net income of $201.8 million, which was partially offset by dividends paid on common and preferred shares of $36.4 million during the period.

Asset Quality

Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $60.2 million, or 0.60%, of total loans at September 30, 2023, compared to $26.7 million, or 0.36%, of total loans at December 31, 2022 and $26.6 million, or 0.38%, at September 30, 2022. The increase in nonperforming loans compared to both periods was primarily due to 3 customers, while the remainder of our loan portfolio continued to generally perform as expected.

As a percentage of nonperforming loans, the ACL-Loans was 111% at September 30, 2023 compared to 165% at December 31, 2022 and 147% at September 30, 2022. The decrease in percentage was due to an increase in nonperforming loans. While this percentage decreased compared to both periods, the increase in nonperforming loans was primarily related to increases in the nonaccrual classification and have all been individually evaluated for impairment.

Total loans greater than 30 days past due were $125.4 million at September 30, 2023, $39.8 million at December 31, 2022, and $26.6 million at September 30, 2022. Since the majority of loans to customers have variable rates, the rapid increase in interest rates over the last several quarters has negatively impacted borrowers by increasing their required payment amounts.

Special Mention (including Watch) loans were $322.0 million at September 30, 2023, compared to $137.8 million at December 31, 2022 and $142.8 million at September 30, 2022. The increase to both periods was primarily due to the increase in interest rates for our borrowers.

During the three months ended September 30, 2023 there were $21,000 of charge-offs and $31,000 of recoveries, compared to $279,000 of charge-offs and $92,000 recoveries for the three months ended September 30, 2022.

For the nine months ended September 30, 2023, there were $9.6 million of charge-offs, primarily related to one customer, and $40,000 of recoveries, compared to $1.3 million of charge-offs and $750,000 of recoveries for the nine months ended September 30, 2022.

Comparison of Operating Results for the Three Months Ended September 30, 2023 and 2022

General. Net income of $81.5 million for the three months ended September 30, 2023 increased by $23.0 million, or 39%, compared to the three months ended September 30, 2022. The increase was primarily driven by a $32.1 million, or 38%, increase in net interest income and a $6.9 million, or 24%, increase in noninterest income. The increases were partially offset by an $8.0 million, or 23%, increase in noninterest expense and a $6.2 million, or 33%, increase in provision for income tax.

Net Interest Income. Net interest income of $117.4 million for the three months ended September 30, 2023 increased $32.1 million, or 38%, compared to the three months ended September 30, 2022. The 38% increase reflected a $162.6 million, or 121%, increase in interest income from higher yields and average loan balances as well as higher

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average balances of securities held to maturity. The increases were partially offset by a $130.5 million, or 268%, increase in interest expense from higher rates and average balances on deposits, as well as higher rates on borrowings that were primarily related to the credit linked notes issued by the Company in March 2023. The interest rate spread of 2.44% for the three months ended September 30, 2023 decreased 33 basis points compared to 2.77% in the three months ended September 30, 2022.

Our net interest margin decreased 6 basis points, to 2.99%, for the three months ended September 30, 2023 from 3.05% for the three months ended September 30, 2022.

Interest Income. Interest income of $296.7 million for the three months ended September 30, 2023 increased $162.6 million, or 121%, compared to $134.1 million for the three months ended September 30, 2022. This increase was primarily attributable to an increase in both higher average yields and average balances of loans and loans held for sale, as well as higher average balances in securities held to maturity. The higher yields were in response to higher interest rates set by the Federal Reserve.

The average balance of loans, including loans held for sale, during the three months ended September 30, 2023 increased $3.2 billion, or 31%, to $13.4 billion compared to the three months ended September 30, 2022. The average yield on loans increased 289 basis points, to 7.89% for the three months ended September 30, 2023, compared to 5.00% for the three months ended September 30, 2022. The increase in average balances of loans and loans held for sale was primarily due to increases in the healthcare, commercial lines of credit collateralize by mortgage servicing rights real estate and multi-family portfolios, but all loan portfolios contributed to the growth during the period.

The average balance of securities held to maturity, during the three months ended September 30, 2023 increased $941.7 million, to $1.1 billion compared to the three months ended September 30, 2022. The average yield on securities held to maturity increased 274 basis points, to 6.65% for the three months ended September 30, 2023, compared to 3.91% for the three months ended September 30, 2022. The increase in average balance of securities held to maturity was primarily related to held maturity securities acquired as part of loan securitizations that the Company originated.

The average balance of securities available for sale increased $324.8 million, or 98%, to $656.6 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The average yield increased 316 basis points, to 3.74% for the three months ended September 30, 2023, compared to 0.58% for the three months ended September 30, 2022.

The average balance of interest-earning deposits and other increased $48.0 million, or 23%, to $259.6 million for the three months ended September 30, 2023 from the three months ended September 30, 2022, while the average yield increased 338 basis points, to 5.99% for the three months ended September 30, 2023, compared to 2.61% for the three months ended September 30, 2022.

The average balance of mortgage loans in process of securitization decreased $26.5 million, or 11%, to $208.8 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, while the average yield increased 126 basis points, to 4.91% for the three months ended September 30, 2023, compared to 3.65% for the three months ended September 30, 2022.

Interest Expense. Total interest expense of $179.2 million for the three months ended September 30, 2023 increased $130.5 million, or 268%, compared to $48.7 million for the three months ended September 30, 2022.

Interest expense on deposits increased $117.9 million, or 262%, to $162.9 million for the three months ended September 30, 2023 from $45.0 million for the three months ended September 30, 2022. The increase was primarily due to higher rates on certificates of deposit, interest-bearing checking, and money market accounts. The higher rates on our deposits were in response to higher interest rates set by the Federal Reserve.

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The average balance of certificates of deposit of $5.3 billion for the three months ended September 30, 2023 increased $3.2 billion, or 159%, compared to the three months ended September 30, 2022. The average rate on certificates of deposit was 5.34% for the three months ended September 30, 2023, which was a 343 basis point increase compared to 1.91% for three months ended September 30, 2022.

The average balance of interest-bearing checking accounts of $4.9 billion for the three months ended September 30, 2023 increased $675.5 million, or 16%, compared to $4.2 billion for the three months ended September 30, 2022. The average yield of interest-bearing checking accounts was 4.76% for the three months ended September 30, 2023, which was a 269 basis point increase compared to 2.07% for three months ended September 30, 2022.

The average balance of money market accounts of $2.8 billion for the three months ended September 30, 2023 increased $275.0, or 11%, compared to $2.5 billion for the three months ended September 30, 2022. The average yield of money market accounts was 4.71% for the three months ended September 30, 2023, which was a 265 basis point increase compared to 2.06% for three months ended September 30, 2022.

Interest expense on borrowings increased $12.6 million, or 338%, to $16.3 million for the three months ended September 30, 2023 from $3.7 million for the three months ended September 30, 2022. The increase reflected a 659 basis points increase in the average cost of borrowings, to 9.10% compared to 2.51% for the three months ended September 30, 2022. The increase was primarily related to the credit linked notes issued by the Company in 2023. Also contributing to the increase in borrowings was an increase of $123.4 million, or 21%, in the average balance of borrowings $711.9 million compared to the three months ended September 30, 2022. Also included in borrowings, our warehouse structured financing agreements provide for additional interest payments for a portion of the earnings generated.

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


	Three Months Ended September 30,
	2023						2022
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate

	(Dollars in thousands)
Assets:
Interest-bearing deposits, and other	$	259,630	$	3,923	5.99	%	$	211,653	$	1,394	2.61	%
Securities available for sale - taxable		656,561		6,182	3.74	%		331,796		485	0.58	%
Securities held to maturity		1,040,070		17,427	6.65	%		98,363		970	3.91	%
Mortgage loans in process of securitization		208,767		2,583	4.91	%		235,230		2,162	3.65	%
Loans and loans held for sale		13,399,854		266,561	7.89	%		10,245,294		129,101	5.00	%
Total interest-earning assets		15,564,882		296,676	7.56	%		11,122,336		134,112	4.78	%
Allowance for credit losses on loans		(63,449)						(39,325)
Noninterest-earning assets		529,582						354,794
Total assets	$	16,031,015					$	11,437,805

Liabilities/Equity:
Interest-bearing checking	$	4,882,727	$	58,642	4.76	%	$	4,207,217	$	21,980	2.07	%
Savings deposits		241,861		340	0.56	%		239,262		162	0.27	%
Money market		2,798,325		33,235	4.71	%		2,523,315		13,094	2.06	%
Certificates of deposit		5,255,573		70,689	5.34	%		2,030,152		9,766	1.91	%
Total interest-bearing deposits		13,178,486		162,906	4.90	%		8,999,946		45,002	1.98	%
Borrowings		711,948		16,334	9.10	%		588,582		3,725	2.51	%
Total interest-bearing liabilities		13,890,434		179,240	5.12	%		9,588,528		48,727	2.02	%
Noninterest-bearing deposits		333,155						474,925
Noninterest-bearing liabilities		199,647						107,192
Total liabilities		14,423,236						10,170,645
Equity		1,607,779						1,267,160
Total liabilities and equity	$	16,031,015					$	11,437,805
Net interest income			$	117,436					$	85,385
Interest rate spread					2.44	%					2.77	%
Net interest-earning assets	$	1,674,448					$	1,533,808
Net interest margin					2.99	%					3.05	%
Average interest-earning assets to average interest-bearing liabilities					112.05	%					116.00	%

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in weighted average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis.

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The following table summarizes the increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates:


	Three Months Ended September 30, 2023
	compared to September 30, 2022
	Increase (Decrease)
	Due to
(Dollars in thousands)	Volume		Rate		Total
Interest income
Interest-bearing deposits, and other	$	316	$	2,213	$	2,529
Securities available for sale - taxable		475		5,222		5,697
Securities held to maturity		9,287		7,170		16,457
Mortgage loans in process of securitization		(243)		664		421
Loans and loans held for sale		39,751		97,709		137,460
Total interest income		49,586		112,978		162,564
Interest expense
Deposits
Interest-bearing checking		3,529		33,133		36,662
Savings deposits		2		176		178
Money market deposits		1,427		18,714		20,141
Certificates of deposit		15,516		45,407		60,923
Total Deposits		20,474		97,430		117,904
Borrowings		781		11,828		12,609
Total interest expense		21,255		109,258		130,513
Net interest income	$	28,331	$	3,720	$	32,051

Provision for Credit Losses. We recorded a total provision for credit losses of $4.0 million for the three months ended September 30, 2023, an increase of $1.8 million, compared to the three months ended September 30, 2022. The increase was primarily due to loan growth in the period and increases in qualitative factors and forecasted loss rates to reflect changes in industry conditions.

The $4.0 million total provision for credit losses consisted of $3.9 million for the ACL-Loans and $0.1 million for the ACL-OBCE’s. The ACL-Loans was $66.9 million, or 0.67%, of total loans, at September 30, 2023, compared to $44.0 million, or 0.59%, of total loans, at December 31, 2022, and $39.0 million, or 0.56%, at September 30, 2022.

Noninterest Income. Noninterest income of $36.1 million for the three months ended September 30, 2023 increased $6.9 million, or 24%, compared to $29.2 million for the three months ended September 30, 2022. The increase was primarily due to a $9.2 million, or 113%, increase in loan servicing fees that were partially offset by a $2.6 million, or 19%, decrease in gain on sale of loans associated with a business mix shift in multi-family lending, from volumes sold in the secondary market towards those maintained on the balance sheet.

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A summary of the gain on sale of loans for the three months ended September 30, 2023 and 2022 is below:


		Gain on Sale of Loans
		Three Months Ended
		September 30,		September 30,
		2023		2022

		(in thousands)
Loan Type
Multi-family	$	8,616	$	12,002
Single-family		951		138
Small Business Association (SBA)		1,191		1,214
Total	$	10,758	$	13,354

Loan servicing fees included a $11.6 million positive fair market value adjustment to servicing rights for the three months ended September 30, 2023, compared to a $4.6 million positive adjustment to fair value of servicing rights for the three months ended September 30, 2022.

Noninterest Expense. Noninterest expense of $42.9 million for the three months ended September 30, 2023 increased $8.0 million, or 23%, compared to $35.0 million for the three months ended September 30, 2022. The increase was due primarily to a $4.0 million, or 17%, increase in salaries and employee benefits to support loan growth, as well as a $2.8 million, or 373%, increase in FDIC deposit insurance expenses. The efficiency ratio was at 28.0% for the three months ended September 30, 2023, compared with 30.5% for the three months ended September 30, 2022.

Income Taxes. Provision for income tax of $25.1 million for the three months ended September 30, 2023 increased $6.1 million, or 33%, compared to the three months ended September 30, 2022. The increase primarily reflected a 38% increase in net income for the three months ended September 30, 2023.

The effective tax rate was 23.5% for the three months ended September 30, 2023 and 24.4% for the three months ended September 30, 2022.

Comparison of Operating Results for the Nine Months Ended September 30, 2023 and 2022

General. Net income of $201.8 million for the nine months ended September 30, 2023 increased $39.2 million, or 24%, from net income of $162.6 million for the nine months ended September 30, 2022. The increase was primarily due to a $100.6 million increase in net interest income and a $7.0 million decrease in provision for income taxes that was partially offset by a $23.1 million increase in noninterest expense, a $22.7 million decrease in noninterest income and a $22.6 million increase in provision for credit losses.

Net Interest Income. Net interest income of $323.7 million for the nine months ended September 30, 2023 increased $100.6 million, or 45%, compared to $223.1 million for the nine months ended September 30, 2022. The 45% increase reflected a $466.6 million, or 156%, increase in interest income from higher yields and average loan balances, partially offset by a $366.0 million, or 480%, increase in interest expense from higher rates and average balances of deposits. The interest rate spread of 2.52% for the nine months ended September 30, 2023 decreased 21 basis points compared to 2.73% for the nine months ended September 30, 2022.

Our net interest margin increased 17 basis points, to 3.07%, for the nine months ended September 30, 2023 from 2.90% for the nine months ended September 30, 2022.

Interest Income. Interest income of $766.0 million for the nine months ended September 30, 2023 increased $466.6 million, or 156%, compared with $299.4 million for the nine months ended September 30, 2022. This increase

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was primarily attributable to an increase in higher average yields and average loan balances, as well as higher average balances of held to maturity securities that were acquired after September 30, 2022.

The average balance of loans, including loans held for sale, during the nine months ended September 30, 2023 increased $3.0 billion, or 33%, to $12.0 billion compared to $9.0 billion for the nine months ended September 30, 2022, and the average yield on loans increased 336 basis points, to 7.63% for the nine months ended September 30, 2023, compared to 4.27% for the nine months ended September 30, 2022.

The average balance of securities held to maturity, during the nine months ended September 30, 2023 increased $1.0 billion to $1.1 billion compared to the nine months ended September 30, 2022. The average yield on securities held to maturity increased 233 basis points, to 6.24% for the nine months ended September 30, 2023 ended, compared to 3.91% for the nine months ended September 30, 2022.

The average balance of securities available for sale increased $269.6 million, or 84%, to $592.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, and the average yield increased 229 basis points, to 3.16% for the nine months ended September 30, 2023, compared to 0.87% for the nine months ended September 30, 2022.

The average balance of interest-earning deposits and other decreased $443.8 million, or 66%, to $231.5 million for the nine months ended September 30, 2023, from $675.3 million for the nine months ended September 30, 2022, and the average yield increased 482 basis points, to 5.45% for the nine months ended September 30, 2023, compared to 0.63% for the nine months ended September 30, 2022.

Interest Expense. Total interest expense of $442.3 million for the nine months ended September 30, 2023 increased $366.0 million, or 480%, compared to $76.3 million for the nine months ended September 30, 2022.

Interest expense on deposits increased $336.6 million, or 491%, to $405.1 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increase was primarily due to increases in rates on certificates of deposit, interest-bearing checking and money market accounts.

The average balance of certificates of deposit accounts was $4.4 billion for the nine months ended September 30, 2023, an increase of $3.2 billion, or 254%, compared to the nine months ended September 30, 2022. The average rate on certificates of deposit accounts was 4.94% for the nine months ended September 30, 2023, which was a 363 basis point increase compared to 1.31% for the nine months ended September 30, 2022.

The average balance of interest-bearing checking accounts of $4.4 billion for the nine months ended September 30, 2023 increased $392.3 million, or 10%, compared to $4.0 billion for the nine months ended September 30, 2022. The average rate on interest-bearing checking accounts was 4.47% for the nine months ended September 30, 2023, which was a 344 basis point increase compared to 1.03% for the nine months ended September 30, 2022.

The average balance of money market accounts of $2.8 billion for the nine months ended September 30, 2023 increased $179.0 million, or 7%, compared to $2.6 million for the nine months ended September 30, 2022. The average rate on money market accounts was 4.41% for the nine months ended September 30, 2023, which was a 314 basis point increase compared to 1.27% for the nine months ended September 30, 2022.

Interest expense on borrowings increased $29.5 million, or 384%, to $37.1 million for the nine months ended September 30, 2023 from the nine months ended September 30, 2022. The increase was due primarily to a 673 basis points increase in the average rate of borrowings to 8.33% compared to 1.60% for the nine months ended September 30, 2022. The increase was primarily related to the credit linked notes issued by the Company in 2023. The higher average rates were partially offset by a $46.4 million decrease in average balances compared to the nine months ended September 30, 2022. Additionally, borrowings include our warehouse structured financing agreements that provide for

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additional interest payments for a portion of the earnings generated. As a result, the cost of borrowings increased from a base rate of 8.12% and 1.03%, to an effective rate of 8.33% and 1.60% for the nine months ended September 30, 2023 and 2022, respectively.


	Nine Months Ended September 30,
	2023						2022
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate

	(Dollars in thousands)
Assets:
Interest-bearing deposits, and other	$	231,549	$	9,434	5.45	%	$	675,318	$	3,174	0.63	%
Securities available for sale - taxable		592,460		14,012	3.16	%		322,814		2,103	0.87	%
Held to maturity securities		1,082,502		50,492	6.24	%		33,148		970	3.91	%
Mortgage loans in process of securitization		216,245		7,358	4.55	%		260,452		5,856	3.01	%
Loans and loans held for sale		11,998,301		684,743	7.63	%		8,987,526		287,291	4.27	%
Total interest-earning assets		14,121,057		766,039	7.25	%		10,279,258		299,394	3.89	%
Allowance for credit losses on loans		(54,417)						(34,614)
Noninterest-earning assets		474,883						324,068
Total assets	$	14,541,523					$	10,568,712

Liabilities/Equity:

Interest-bearing checking	$	4,417,224	$	147,585	4.47	%	$	4,024,969	$	31,128	1.03	%
Savings deposits		238,404		905	0.51	%		236,334		257	0.15	%
Money market		2,798,622		92,364	4.41	%		2,619,729		24,914	1.27	%
Certificates of deposit		4,443,014		164,295	4.94	%		1,253,527		12,284	1.31	%
Total interest-bearing deposits		11,897,264		405,149	4.55	%		8,134,559		68,583	1.13	%
Borrowings		596,174		37,144	8.33	%		642,599		7,670	1.60	%
Total interest-bearing liabilities		12,493,438		442,293	4.73	%		8,777,158		76,253	1.16	%
Noninterest-bearing deposits		328,143						464,973
Noninterest-bearing liabilities		169,746						107,276
Total liabilities		12,991,327						9,349,407
Equity		1,550,196						1,219,305
Total liabilities and equity	$	14,541,523					$	10,568,712
Net interest income			$	323,746					$	223,141
Interest rate spread					2.52	%					2.73	%
Net interest-earning assets	$	1,627,619					$	1,052,100
Net interest margin					3.07	%					2.90	%
Average interest-earning assets to average interest-bearing liabilities					113.03	%					117.11	%

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following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis.

The following table summarizes the increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates:


	Nine Months Ended September 30, 2023
	compared to September 30, 2022
	Increase (Decrease)
	Due to
(Dollars in thousands)	Volume		Rate		Total
Interest income
Interest-bearing deposits, and other	$	(2,086)	$	8,346	$	6,260
Securities available for sale - taxable		1,757		10,152		11,909
Securities held to maturity		30,707		18,815		49,522
Mortgage loans in process of securitization		(994)		2,496		1,502
Loans and loans held for sale		96,241		301,211		397,452
Total interest income		125,625		341,020		466,645
Interest expense
Deposits
Interest-bearing checking		3,034		113,423		116,457
Savings deposits		2		646		648
Money market deposits		1,701		65,749		67,450
Certificates of deposit		31,256		120,755		152,011
Total Deposits		35,993		300,573		336,566
Borrowings		(554)		30,028		29,474
Total interest expense		35,439		330,601		366,040
Net interest income	$	90,186	$	10,419	$	100,605

Provision for Credit Losses. We recorded a provision for credit losses of $33.5 million for the nine months ended September 30, 2023, an increase of $22.6 million, or 208%, compared to $10.9 million for the nine months ended September 30, 2022. The increase was primarily due to loan growth in the period, as well as credit events and increases in qualitative factors and forecasted loss rates to reflect changes in industry conditions that were reported during the three months ended June 30, 2023, including:

●

replenishment of $8.2 million related to the charge-off of a loan in the multi-family portfolio,

●

a $4.6 million increase related to changes in qualitative factors and forecasted loss rates to reflect changes in industry conditions, such as the impact of higher rates, and

●

a $2.0 million increase in net specific reserves, primarily related to a loan in the healthcare portfolio.

The $33.5 million total provision for credit losses consisted of $32.4 million for the ACL-Loans and $1.1 million for the ACL-OBCE’s. The ACL-Loans was $66.9 million, or 0.67%, of total loans, at September 30, 2023, compared to $44.0 million, or 0.59%, of total loans, at December 31, 2022, and $39.0 million, or 0.56%, at September 30, 2022.

Noninterest Income. Noninterest income of $80.2 million for the nine months ended September 30, 2023 decreased $22.7 million, or 22%, compared to $103.0 million for the nine months ended September 30, 2022. The decrease was primarily due to a $24.0 million, or 45%, decrease in gain on sale of loans associated with a shift in

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business mix to programs with lower average trade pricing in the multi-family loan portfolio, as well as lower single-family and multi-family secondary market volumes.

A summary of the gain on sale of loans for the nine months ended September 30, 2023 and 2022 is below:


		Gain on Sale of Loans
		Nine Months Ended
		September 30,		September 30,
		2023		2022

		(in thousands)
Loan Type
Multi-family	$	23,897	$	46,578
Single-family		1,430		1,001
Small Business Association (SBA)		3,514		5,304
Total	$	28,841	$	52,883

Partially offsetting the decreases in noninterest income was a $2.2 million increase in syndication and asset management fees compared to the nine months ended September 30, 2022. This line of business is becoming a more meaningful source of noninterest income.

Also offsetting the decreases in noninterest income was a $0.9 million increase in loan servicing fees compared to the nine months ended September 30, 2022. The decrease reflected lower positive adjustments to fair value of servicing rights partially offset by higher servicing fees. Included in loan servicing fees was a $12.2 million positive adjustment to the fair value of servicing rights for the nine months ended September 30, 2023, compared to a positive adjustment of $19.9 million for the nine months ended September 30, 2022.

Noninterest Expense. Noninterest expense of $122.0 million for the nine months ended September 30, 2023 increased $23.1 million, compared to $98.9 million for the nine months ended September 30, 2022. The increase was primarily due to a $8.1 million, or 12%, increase in salaries and employee benefits as well as a $7.4 million, or 337%, increase in deposit insurance expense, reflecting asset growth. The efficiency ratio was at 30.2% for the nine months ended September 30, 2023, compared with 30.3% in the nine months ended September 30, 2022.

Income Taxes. Provision for income taxes of $46.7 million for the nine months ended September 30, 2023 decreased $7.0 million, or 13%, compared to $53.7 million for the nine months ended September 30, 2022. The decrease reflected a $13.0 million tax benefit related to tax refunds receivable and changes to state tax apportionment calculations that were partially offset by taxes on higher pre-tax income.

The effective tax rate was 18.8% for the nine months ended September 30, 2023 and 24.8% for the nine months ended September 30, 2022.

Our Segments

We operate in three primary segments: Multi-Family Mortgage Banking, Mortgage Warehousing, and Banking. The reportable 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. It is also a fully integrated syndicator of low-income housing tax credit and debt funds. As one of the top ranked agency lenders in the nation, our licenses with Fannie Mae, Freddie Mac, and FHA, coupled with our bank financing products, provide sponsors custom beginning-to-end financing solutions that adapt to an ever-changing market. We are also one of the largest GNMA servicers in the country based on aggregate loan principal value. As of September 30, 2023 the Company’s total servicing portfolio had an unpaid principal balance of $24.5 billion, primarily managed in the Multi-Family Mortgage Banking segment. Included in this amount was an

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unpaid principal balance of loans serviced for others of $14.5 billion, an unpaid principal balance of loans sub-serviced for others of $2.1 billion, and other servicing balances of $0.7 billion at September 30, 2023. These loans are not included in the accompanying balance sheets. The Company also manages $7.2 billion of loans for customers that have loans on the balance sheet at September 30, 2023. The servicing portfolio is primarily GNMA, Fannie Mae, and Freddie Mac loans and is a significant source of our noninterest income and deposits.

Our Mortgage Warehousing segment funds agency eligible loans for non-depository financial institutions from the date of origination or purchase until the date of sale to an investor, which typically takes less than 30 days and is a significant source of our net interest income, loans, and deposits. Mortgage Warehousing has grown to fund over $78.3 billion in 2021, $33.2 billion in 2022, and $24.6 billion for the nine months ended September 30, 2023. Mortgage Warehousing also provides commercial loans secured by GNMA, Fannie Mae, and Freddie Mac servicing rights and collects deposits related to the mortgage escrow accounts of its customers. Merchants was recently ranked as the third largest warehouse lender ranked by total commitments by Inside Mortgage Finance.

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

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

For the three months ended September 30, 2023 and 2022, we had total net income of $81.5 million and $58.5 million, respectively. For the nine months ended September 30, 2023 and 2022, we had total net income of $201.8 million and $162.6 million, respectively. Net income for our segments for the respective periods was as follows:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022

	(In thousands)
Multi-family Mortgage Banking	$	14,685	$	13,366	$	27,893	$	44,414
Mortgage Warehousing		19,926		11,801		47,163		36,828
Banking		52,445		39,344		144,402		94,040
Other		(5,552)		(6,023)		(17,697)		(12,717)

Total	$	81,504	$	58,488	$	201,761	$	162,565

Multi-family Mortgage Banking.

Comparison of results for the three months ended September 30, 2023 and 2022:

The Multi-family Mortgage Banking segment reported net income of $14.7 million for the three months ended September 30, 2023, an increase of $1.3 million, or 10%, compared to the three months ended September 30, 2022. The

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increase was primarily due to a $1.0 million increase in net interest income and a $2.6 million decrease in noninterest expenses, that was partially offset by a $2.2 million decrease in noninterest income.

Noninterest income included a $9.3 million increase in loan servicing fees that was offset by a $10.7 million decrease on gain on sale of loans for the three months ended September 30, 2023. Loan servicing fees included a positive fair market value adjustment of $10.4 million on servicing rights, compared to a positive fair market value adjustment of $3.7 million for the three months ended September 30, 2022.

The total volume of loans originated and acquired through our multi-family business was $1.4 billion for the three months ended September 30, 2023, a decrease of $869.4 million, or 39%, compared to $2.2 billion for the three months ended September 30, 2022. Many of these loans are bridge loans housed in our banking segment while borrowers await conversion to permanent financing. The volume of bridge loans was $785.8 million for the three months ended September 30, 2023, a decrease of $705.7 million, or 47%, compared to $1.5 billion for the three months ended September 30, 2022. The volume of loans originated and acquired for sale in the secondary market increased by $55.1 million, or 15%, to $422.1 million, compared to $367.0 million for the three months ended September 30, 2022.

Comparison of results for the nine months ended September 30, 2023 and 2022:

The Multi-family Mortgage Banking segment reported net income of $27.9 million for the nine months ended September 30, 2023, a decrease of $16.5 million, or 37%, from the $44.4 million of net income reported for the nine months ended September 30, 2022. The decrease was primarily due to a $36.8 million decrease in noninterest income, including a $42.9 million decrease in gain on sale of loans that was partially offset by a $8.1 million increase in loan servicing fees.

Loan servicing fees for the nine months ended September 30, 2023 included a positive fair market value adjustment of $10.4 million on servicing rights, compared to a positive fair market value adjustment of $13.6 million for the nine months ended September 30, 2022.

The lower noninterest income was partially offset by a $10.0 million decrease in the provision for income tax that was associated with a tax benefit for tax refunds receivable and changes to state tax apportionment calculations, as well as a $6.5 million decrease in noninterest expense that was associated with lower commission expenses on lower gain on sale for the nine months ended September 30, 2023.

The total volume of loans originated and acquired through our multi-family business was $3.7 billion for the nine months ended September 30, 2023, a decrease of $3.1 billion, or 46%, compared to $6.8 billion for the nine months ended September 30, 2022. Many of these loans are bridge loans housed in our banking segment while borrowers await conversion to permanent financing. The volume of bridge loans was $1.8 billion for the nine months ended September 30, 2023, a decrease of $3.0 billion, or 62%, compared to $4.8 billion for the nine months ended September 30, 2022. The volume of loans originated and acquired for sale in the secondary market decreased by $110.6 million, or 8%, to $1.2 billion, compared to $1.3 billion for the nine months ended September 30, 2022.

Mortgage Warehousing.

Comparison of results for the three months ended September 30, 2023 and 2022:

The Mortgage Warehousing segment reported net income of $19.9 million for the three months ended September 30, 2023, an increase of $8.1 million, or 69%, compared to the three months ended September 30, 2022. The higher net income reflected a $11.5 million increase in net interest income primarily from higher yields and volumes on loans held for sale and revolving lines of credit that are collateralized by mortgage servicing rights.

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There was a 23% increase in warehouse loan volume of $10.8 billion compared to $8.8 billion for the three months ended September 30, 2022, which compared to an industry volume decrease of 10%, according to the Mortgage Bankers Association.

Comparison of results for the nine months ended September 30, 2023 and 2022:

The Mortgage Warehousing segment reported net income for the nine months ended September 30, 2023 of $47.2 million, an increase of $10.3 million, or 28%, over the nine months ended September 30, 2022. The higher net income was primarily due to a $11.3 million increase in net interest income associated with higher interest income due to higher yields and volume on loans held for sale and revolving lines of credit that are collateralized by mortgage servicing rights.

There was a 9% decrease in warehouse loan volume of $24.6 billion compared to $26.9 billion for the nine months ended September 30, 2022, which compared to an industry volume decrease of 35% according to the Mortgage Bankers Association.

Banking.

Comparison of results for the three months ended September 30, 2023 and 2022:

The Banking segment reported net income of $52.4 million for the three months ended September 30, 2023, an increase of $13.1 million, or 33%, compared to the three months ended September 30, 2022. The increase was primarily due to a $19.2 million increase in net interest income and a $7.8 million increase in noninterest income, which were partially offset by a $7.2 million increase in noninterest expense and a $4.2 million increase in the provision for income taxes.

Noninterest income for the three months ended September 30, 2023 included a positive fair market value adjustment of $1.2 million on single-family servicing rights, compared to a positive fair market value adjustment of $0.9 million for the three months ended September 30, 2022.

Comparison of results for the nine months ended September 30, 2023 and 2022:

The Banking segment reported net income of $144.4 million for the nine months ended September 30, 2023, an increase of $50.4 million, or 54%, compared to $94.0 million for the nine months ended September 30, 2022. The increase was primarily due to a $84.8 million increase in net interest income and a $13.9 million increase in noninterest income, partially offset by a $21.4 million increase in the provision for credit losses, and a $20.3 million increase in noninterest expense.

Noninterest income for the nine months ended September 30, 2023 included a positive fair market value adjustment of $1.8 million on single-family servicing rights, compared to a positive fair market value adjustment of $6.3 million for the nine months ended September 30, 2022.

Liquidity and Capital Resources

Liquidity.

Our primary sources of funds are business and consumer deposits, escrow and custodial deposits, brokered deposits, borrowings, 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.

At September 30, 2023, based on available collateral, we had $5.4 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window. While the amounts available fluctuate daily, we also had

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available capacity in credit lines through our membership in the AFX. This liquidity enhances the ability to effectively manage interest expense and asset levels in the future.

The Company’s most liquid assets are in cash, short-term investments, including interest-bearing demand deposits, mortgage loans in process of securitization, loans held for sale, and warehouse lines of credit included in loans receivable. Taken together with its unused borrowing capacity of $5.4 billion described below, these totaled $10.7 billion, or 65%, of its $16.5 billion total assets at September 30, 2023. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our liquid assets and borrowing capacity significantly exceed our uninsured deposits. Uninsured deposits totaled approximately $2 billion as of September 30, 2023, representing less than 20% of total deposits. Since 2018, the Company has offered its customers an opportunity to insure balances in excess of $250,000 through our insured cash sweep program that extends FDIC protection up to $100 million. The balance of deposits in this program was $1.8 billion as of September 30, 2023.

The Company’s investment portfolio has minimal levels of unrealized losses and management does not anticipate a need to sell securities for liquidity purposes at a loss. We are able to maintain minimal levels of investment securities because of our originate to sell model, which provides ongoing liquidity. As of September 30, 2023, Accumulated Other Comprehensive Losses (“AOCL”) of $4.8 million losses, related to securities available for sale, decreased $5.8 million, or 55%, compared to losses of $10.5 million as of December 31, 2022. The $4.8 million loss in AOCL as of September 30, 2023 represented less than 1% of total equity and 1% of total securities available for sale.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash (used in) provided by operating activities was $(1.1) billion and $1.8 billion for the nine months ended September 30, 2023 and 2022, respectively. Net cash (used in) investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities and loans, was $(2.4) billion and $(3.0) billion for the nine months ended September 30, 2023 and 2022, respectively. Net cash provided by financing activities, which is comprised primarily of net change in borrowings and deposits was $3.6 billion and $507.4 million for the nine months ended September 30, 2023 and 2022, respectively.

At September 30, 2023 we had $3.4 billion in outstanding commitments to extend credit that are subject to credit risk and $5.7 billion outstanding commitments subject to certain performance criteria and cancellation by the Company, including loans pending closing, unfunded construction draws, and unfunded lines of warehouse credit. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Additionally, our business model is designed to sell a significant portion of our loans, which provides flexibility in managing liquidity.

Certificates of deposit that are scheduled to mature in less than one year from September 30, 2023 totaled $4.9 billion, or 97%, of total certificates of deposit. 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, the Federal Reserve discount window, brokered deposits, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and standby letters of credit.

Capital Resources.

The access to and cost of funding for new business initiatives, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs and the level and nature of regulatory oversight depend, in part, on our capital position. The Company filed a shelf registration statement on Form S-3 with the SEC on August 8,

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2022, which was declared effective on August 17, 2022, under which we can issue up to $500 million aggregate offering amount of registered securities to finance our growth objectives. As previously demonstrated, the Company also has the ability to utilize securitization transactions to free up capital as needed.

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

Shareholders’ Equity. Shareholders’ equity was $1.6 billion as of September 30, 2023, compared to $1.5 billion as of December 31, 2022. The $173.0 million increase resulted primarily from net income of $201.8 million, which was partially offset by dividends paid on common and preferred shares of $36.4 million during the period.

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

In June 2019 the Company issued an additional 874,000 shares of Series A Preferred Stock for net proceeds of $21.85 million.

In September 2019 the Company repurchased and subsequently retired 874,000 shares of Series A Preferred Stock at an aggregate cost of $21.85 million. There were no brokerage fees in connection with the transaction.

Dividends on the Series A Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $1.75 per share through March 31, 2024. After such date, quarterly dividends were to accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 460.5 basis points per year. However, the terms of the Series A Preferred Stock permit us to replace three-month LIBOR if we determine that LIBOR has been discontinued or is no longer viewed as an acceptable benchmark for similar securities. With the cessation of published three-month LIBOR rates as of June 30, 2023, the Company has determined that three-month LIBOR has been discontinued and is no longer an acceptable benchmark. The Company anticipates replacing three-month LIBOR with Federal Reserve’s three month Secured Overnight Financing Rate (“SOFR”). The Company believes that three-month SOFR represents the most comparable replacement benchmark, is an industry-accepted substitute, and is consistent with expectations of investors in securities similar to the Series A Preferred Stock. In addition to replacing three-month LIBOR with three-month SOFR, the terms of the Series A Preferred Stock permit us to adjust the spread to ensure that the payable floating rate remains comparable. Therefore, the Company anticipates increasing the spread by 26.2 basis points, which is consistent with industry practice and the recommendation of the Federal Reserve’s Alternative Reference Rates Committee, resulting in the Company paying a floating rate of three-month SOFR plus a spread of 486.7 basis points during the floating rate period. The Company may also redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2024.

6% Series B Preferred Stock. In August 2019 the Company issued 5,000,000 depositary shares, each representing a 1/40^th interest in a share of its 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share)(“Series B Preferred Stock”). After deducting underwriting discounts, commissions, and direct offering expenses, the Company received total net proceeds of $120.8 million.

Dividends on the Series B Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $60.00 per share (equivalent to $1.50 per depositary share) through September 30, 2024. After such date, quarterly dividends were to accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of

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456.9 basis points per year. However, the terms of the Series B Preferred Stock permit us to replace three-month LIBOR if we determine that LIBOR has been discontinued or is no longer viewed as an acceptable benchmark for similar securities. With the cessation of published three-month LIBOR rates as of June 30, 2023, the Company has determined that three-month LIBOR has been discontinued and is no longer an acceptable benchmark. The Company anticipates replacing three-month LIBOR with Federal Reserve’s three month Secured Overnight Financing Rate (“SOFR”). The Company believes that three-month SOFR represents the most comparable replacement benchmark, is an industry-accepted substitute, and is consistent with expectations of investors in securities similar to the Series B Preferred Stock. In addition to replacing three-month LIBOR with three-month SOFR, the terms of the Series B Preferred Stock permit us to adjust the spread to ensure that the payable floating rate remains comparable. Therefore, the Company anticipates increasing the spread by 26.2 basis points, which is consistent with industry practice and the recommendation of the Federal Reserve’s Alternative Reference Rates Committee, resulting in the Company paying a floating rate of three-month SOFR plus a spread of 483.1 basis points during the floating rate period. The Company may also redeem the Series B Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2024.

6% Series C Preferred Stock. On March 23, 2021, the Company issued 6,000,000 depositary shares, each representing a 1/40^th interest in a share of its 6.00% Fixed Rate Series C Non-Cumulative Perpetual Preferred Stock, without par value (the “Series C Preferred Stock”), and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $150.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $5.1 million paid to third parties, the Company received total net proceeds of $144.9 million.

On May 6, 2021, our previously issued, 8% preferred shareholders participated in a private offering to replace their redeemed 8% preferred shares with the Company’s 6% Series C preferred stock. Accordingly, 46,181 shares (1,847,233 depositary shares) of the Company’s 6% Series C preferred stock were issued at a price of $25 per depositary share. The total capital raised from the private offering was $46.2 million, net of $23,000 in expenses.

Dividends on the Series C Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series C Preferred Stock, in whole or in part, at our option, on any dividend payment date on or after April 1, 2026, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.

8.25% Series D Preferred Stock. On September 27, 2022, the Company issued 5,200,000 depositary shares, each representing a 1/40^th interest in a share of its 8.25% Fixed Rate Series D Non-Cumulative Perpetual Preferred Stock, without par value (the “Series D Preferred Stock”), and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $130.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $4.6 million paid to third parties, the Company received total net proceeds of $125.4 million. On September 30, 2022, the Company issued an additional 500,000 shares of Series D Preferred Stock to the underwriters related to their exercise of an option to purchase additional shares under the associated underwriting agreement, resulting in an additional $12.1 million in net proceeds, after deducting $0.4 million in underwriting discounts.

Dividends on the Series D Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series D Preferred Stock, in whole or in part, at our option, on any dividend payment date on or after October 1, 2027, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.

Common Shares/Dividends. As of September 30, 2023, the Company had 43,240,212 common shares issued and outstanding. The Board expects to declare a quarterly dividend of $0.08 per share in each quarter of 2023.

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Capital Adequacy.

The following tables present the Company’s capital ratios at September 30, 2023 and December 31, 2022:


					Minimum				Minimum
					Amount to be Well				Amount To Be
					Capitalized with				Well
	Actual				Basel III Buffer⁽¹⁾				Capitalized⁽¹⁾
	Amount		Ratio		Amount		Ratio		Amount		Ratio

	(Dollars in thousands)
September 30, 2023
Total capital⁽¹⁾ (to risk-weighted assets)
Company	$	1,699,507	11.5	%	$	1,556,494	10.5	%	$	—	N/A	%
Merchants Bank		1,669,849	11.5	%		1,526,849	10.5	%		1,454,142	10.0
FMBI		38,995	11.2	%		36,546	10.5	%		34,806	10.0	%
Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,620,024	10.9	%		1,260,019	8.5	%		—	N/A	%
Merchants Bank		1,591,057	10.9	%		1,236,021	8.5	%		1,163,314	8.0
FMBI		38,303	11.0	%		29,585	8.5	%		27,845	8.0	%
Common Equity Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,120,416	7.6	%		1,037,663	7.0	%		—	N/A	%
Merchants Bank		1,591,057	10.9	%		1,017,899	7.0	%		945,192	6.5
FMBI		38,303	11.0	%		24,364	7.0	%		22,624	6.5	%
Tier I capital⁽¹⁾ (to average assets)
Company		1,620,024	10.1	%		640,543	4.0	%		—	N/A	%
Merchants Bank		1,591,057	10.1	%		628,478	4.0	%		785,597	5.0
FMBI		38,303	10.6	%		14,440	4.0	%		18,050	5.0	%

(1)

As defined by regulatory agencies.

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					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, 2022
Total capital⁽¹⁾ (to risk-weighted assets)
Company	$	1,507,968	12.2	%	$	992,883	8.0	%	$	—	N/A	%
Merchants Bank		1,427,738	11.7	%		975,853	8.0	%		1,219,817	10.0	%
FMBI		34,769	11.3	%		24,703	8.0	%		30,878	10.0	%
Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		1,452,456	11.7	%		744,662	6.0	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		731,890	6.0	%		975,853	8.0	%
FMBI		34,054	11.0	%		18,527	6.0	%		24,703	8.0	%
Common Equity Tier I capital⁽¹⁾ (to risk-weighted assets)
Company		952,848	7.7	%		558,497	4.5	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		548,917	4.5	%		792,881	6.5	%
FMBI		34,054	11.0	%		13,895	4.5	%		20,071	6.5	%
Tier I capital⁽¹⁾ (to average assets)
Company		1,452,456	11.7	%		497,604	4.0	%		—	N/A	%
Merchants Bank		1,372,941	11.3	%		487,511	4.0	%		609,389	5.0	%
FMBI		34,054	10.7	%		12,702	4.0	%		15,878	5.0	%

(1)

As defined by regulatory agencies.

Quantitative measures established by regulation to ensure capital adequacy require the Company, Merchants Bank, and FMBI to maintain minimum amounts and ratios. Management believes, as of September 30, 2023 and December 31, 2022, that the Company, Merchants Bank, and FMBI met all capital adequacy requirements to which they were subject.

As of September 30, 2023 and December 31, 2022, the most recent notifications from the Federal Reserve categorized the Company as well capitalized and most recent notifications from the FDIC categorized Merchants Bank and FMBI as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Company’s, Merchants Bank’s, or FMBI’s category.

Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

Overview. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in

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a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries or SOFR.

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.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

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 and excludes non-interest income. 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

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and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one-year period.

The following table presents NII at Risk for Merchants Bank as of September 30, 2023 and December 31, 2022.


	Net Interest Income Sensitivity
	Twelve Months Forward
	- 200			- 100			+ 100			+ 200

	(Dollars in thousands)
September 30, 2023:
Dollar change	$	(82,126)		$	(40,859)		$	26,931		$	51,728
Percent change		(16.7)	%		(8.3)	%		5.5	%		10.5	%

December 31, 2022:
Dollar change	$	(96,861)		$	(48,581)		$	37,232		$	74,094
Percent change		(23.8)	%		(11.9)	%		9.2	%		18.2	%

Our interest rate risk management policy limits the change in our net interest income to 20% for a +/- 100 basis point move in interest rates, and 30% for a +/- 200 basis point move in rates. At September 30, 2023 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 EVE results for Merchants Bank included in the following table reflect the analysis used quarterly by management. It models immediate -200, -100, +100 and +200 basis point parallel shifts in market interest rates.


	Economic Value of Equity
	Sensitivity (Shock)
	Immediate Change in Rates
	- 200			- 100			+ 100			+ 200

	(Dollars in thousands)
September 30, 2023:
Dollar change	$	34,279		$	19,426		$	(25,408)		$	(65,764)
Percent change		2.2	%		1.2	%		(1.6)	%		(4.2)	%

December 31, 2022:
Dollar change	$	22,855		$	11,640		$	(10,925)		$	(26,385)
Percent change		1.6	%		0.8	%		(0.8)	%		(1.9)	%

Our interest rate risk management policy limits the change in our EVE to 15% for a +/- 100 basis point move in interest rates, and 20% for a +/- 200 basis point move in rates. We are within policy limits set by our board of directors for the -200, -100, +100 and +200 basis point scenarios. The EVE reported at September 30, 2023 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.”

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ITEM 4 Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, the Company’s disclosure controls and procedures were effective.

(b) Changes in internal control.

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

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Part II

Other Information

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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.

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ITEM 6. Exhibits


Exhibit
Number		Description

3.1		Second Amended and Restated Articles of Incorporation of Merchants Bancorp. (incorporated by reference to Exhibit 3.1 of Form 8-K, filed on May 24, 2022).

3.2		Articles of Amendment to the Second Amended and Restated Articles of Incorporation dated September 27, 2022 designating the 8.25% Fixed Rate Reset Series D Non-Cumulative Perpetual Preferred Stock (incorporated by reference to Exhibit 3.2 of Form 8-A filed on September 27, 2022).

3.3		Second Amended and Restated By-Laws of Merchants Bancorp (incorporated by reference to Exhibit 3.1 of Form 8-K, filed on November 20, 2017).
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 – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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

104		Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

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SIGNATURES

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


			Merchants Bancorp

Date:	November 9, 2023	By:	/s/ Michael F. Petrie
			Michael F. Petrie
			Chairman & Chief Executive Officer



Date:	November 9, 2023	By:	/s/ John F. Macke
			John F. Macke Chief Financial Officer
			(Principal Financial & Accounting Officer)