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7
Total assets and liabilities of approximately $ million and $ million, respectively, were sold. A net gain of $ was recognized from the transactions, which includes a $ million deposit premium and the extinguishment of $ million in goodwill and $ million in intangibles during the first quarter of 2024.
8
million. As of June 30, 2024, there was $ million in restricted cash held in a separate account included in the total of interest-earning demand accounts on the Balance Sheet. Also see Note 11: Borrowings.
9
$
$
—
$
Federal agencies
Mortgage-backed - Government Agency ("Agency") (2) - multi-family
—
—
Mortgage-backed - Non-Agency residential - fair value option (1)
—
—
Mortgage-backed - Agency - residential - fair value option (1)
—
—
Total securities available for sale
$
$
$
$
Securities held to maturity:
Mortgage-backed - Non-Agency - multi-family
$
$
—
$
$
Mortgage-backed - Non-Agency - residential
Mortgage-backed - Agency
—
Total securities held to maturity
$
$
$
$
(1) | Fair value option securities represent securities which the Company has elected to carry at fair value with changes in the fair value recognized in earnings as they occur. |
(2) | Agency includes government sponsored agencies, such as Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), and Government National Mortgage Association (“Ginnie Mae”). |
| | | | | | | | | | | | |
| | December 31, 2023 | ||||||||||
| | | | | Gross | | Gross | | | |||
| | Amortized | | Unrealized | | Unrealized | | Fair | ||||
|
| Cost |
| Gains |
| Losses |
| Value | ||||
| | (In thousands) | ||||||||||
Securities available for sale: |
| |
|
| |
|
| |
|
| |
|
Treasury notes | | $ |
| | $ |
| | $ |
| | $ |
|
Federal agencies | |
|
| |
| — | |
|
| |
|
|
Mortgage-backed - Government Agency ("Agency") (2) - multi-family | | |
| | |
| | |
| | |
|
Mortgage-backed - Non-Agency residential - fair value option (1) | | |
| | | — | | | — | | |
|
Mortgage-backed - Agency - residential - fair value option (1) | | |
| | | — | | | — | | |
|
Total securities available for sale | | $ |
| | $ |
| | $ |
| | $ |
|
Securities held to maturity: | | | | | | | | | | | | |
Mortgage-backed - Non-Agency - multi-family | | $ |
| | $ | — | | $ |
| | $ |
|
Mortgage-backed - Non-Agency - residential | | |
| | |
| | |
| | |
|
Mortgage-backed - Agency | | |
| | | — | | |
| | |
|
Total securities held to maturity | | $ |
| | $ |
| | $ |
| | $ |
|
(1) | Fair value option securities represent securities which the Company has elected to carry at fair value with changes in the fair value recognized in earnings as they occur. |
(2) | Agency includes government sponsored agencies, such as Fannie Mae, Freddie Mac, and Ginnie Mae. |
10
Accrued interest on securities available for sale totaled $ million at June 30, 2024 and $ million at December 31, 2023, respectively, and is excluded from the estimate of credit losses.
Accrued interest on securities held to maturity totaled $ million at June 30, 2024 and $ million at December 31, 2023, respectively, and is excluded from the estimate of credit losses.
The amortized cost and fair value of securities available for sale at June 30, 2024 and December 31, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
$
$
$
After one through five years
Mortgage-backed - Agency
Mortgage-backed - Non-Agency residential - fair value option
Mortgage-backed - Agency - residential - fair value option
$
$
$
$
Securities held to maturity:
Mortgage-backed - Non-Agency - multi-family
$
$
$
$
Mortgage-backed - Non-Agency - residential
Mortgage-backed - Agency
$
$
$
$
During the three months ended June 30, 2024, securities available for sale were sold. During the six months ended June 30, 2024, the Company received proceeds of $ million and recognized a net loss of $ from sales of securities available for sale. The $ net loss consisted of $ in gains and $ of losses. During the three and six months ended June 30, 2023, proceeds from sales of securities available for sale were $ and the net gain was inconsequential.
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 allowance for credit losses (“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 June 30, 2024 and December 31, 2023:
$
$
$
$
$
$
$
$
$
$
$
11
$
$
$
$
$
Federal agencies
Mortgage-backed - Agency
$
$
$
$
$
$
Allowance for Credit Losses
For securities available for sale 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 noncredit 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 securities available for sale 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 ACL in this situation.
In evaluating securities available for sale 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 credit related factors underlying unrealized losses on available for sale debt securities at June 30, 2024 and December 31, 2023.
Securities held to maturity are primarily comprised of non-agency mortgage-backed securities secured by multi-family or single-family properties, and agency mortgage-backed securities secured by multi-family properties. The agency securities held to maturity are Ginnie Mae mortgage-backed securities and backed by the full faith and credit of the U.S. government. Accordingly, allowance for credit losses has been recorded for these securities. The non-agency 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, allowance for credit losses has been recorded for the non-agency securities.
12
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. Loans may be 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 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 loan principal. 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 mortgage warehouse repurchase agreements to third parties 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.
13
$
Residential real estate(1)
Multi-family financing
Healthcare financing
Commercial and commercial real estate(2)(3)
Agricultural production and real estate
Consumer and margin loans
Less:
ACL-Loans
Loans Receivable
$
$
| (1) | Includes $ billion and $ billion of All-in-One© first-lien home equity lines of credit at June 30, 2024 and December 31, 2023, respectively. |
| (2) | Includes $ billion and $ billion of revolving lines of credit collateralized primarily by mortgage servicing rights as of June 30, 2024 and December 31, 2023, respectively. |
| (3) | Includes only $ million and $ million of non-owner occupied commercial real estate as of June 30, 2024 and December 31, 2023, respectively. |
Risk characteristics applicable to each segment of the loan portfolio are described as follows.
Mortgage Warehouse Repurchase Agreements (MTG WHRA): Under its warehouse program, the Company provides warehouse financing arrangements to approved mortgage companies for their origination and sale of residential mortgage and multi-family loans. Loans secured by mortgages placed on existing one-to-four family dwellings may be originated or purchased and placed through each mortgage warehouse facility.
As a secured repurchase agreement, collateral pledged to the Company secures each individual mortgage until the mortgage company sells the loan in the secondary market. A traditional secured warehouse facility 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 companies in warehouse, the sale of which is the expected source of repayment under a warehouse facility. 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 one-to-four 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 margin. With the sunset of LIBOR, loans have been transitioned to the One-Year Constant Maturity Treasury (“CMT”), plus a margin.
14
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 adjustable rate mortgage (“ARM”), three-year ARM or five-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 five 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.
15
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 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.
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.
16
$
$
$
$
$
$
$
Provision for credit losses
()
()
()
Loans charged to the allowance
—
—
()
—
()
—
—
()
Recoveries of loans previously charged-off
—
—
—
—
—
Balance, end of period
$
$
$
$
$
$
$
$
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, 2023 | ||||||||||||||||||||||
|
| MTG WHRA |
| RES RE |
| MF FIN |
| HC FIN | | CML & CRE |
| AG & AGRE |
| CON & MAR |
| TOTAL | ||||||||
| | (In thousands) | ||||||||||||||||||||||
ACL-Loans | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of period | | $ |
| | $ |
|
| $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
|
Provision for credit losses | |
|
| |
|
|
| |
| | |
| |
|
| |
|
| |
| () | |
|
|
Loans charged to the allowance | |
| — | |
| () |
| | () | | | — | |
| () | |
| — | |
| () | |
| () |
Recoveries of loans previously charged-off | |
| — | |
| — |
| | — | | | — | |
|
| |
| — | |
| — | |
|
|
Balance, end of period | | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
|
The Company recorded a total provision for credit losses of $ million for the three months ended June 30, 2024. The $ million total provision for credit losses consisted of $ million for the ACL-Loans as shown above and $ million for the ACL-OBCE’s.
The Company recorded a total provision for credit losses of $ million for the three months ended June 30, 2023. The $ million total provision for credit losses consisted of $ million for the ACL-Loans as shown above and $ million for the ACL-OBCE’s.
$
$
$
$
$
$
$
FMBI's ACL for loans sold
—
()
()
()
()
()
()
()
Provision for credit losses
()
()
Loans charged to the allowance
—
—
()
—
()
—
—
()
Recoveries of loans previously charged-off
—
—
—
—
—
Balance, end of period
$
$
$
$
$
$
$
$
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended June 30, 2023 | ||||||||||||||||||||||
|
| MTG WHRA |
| RES RE |
| MF FIN |
| HC FIN | | CML & CRE |
| AG & AGRE |
| CON & MAR |
| TOTAL | ||||||||
| | (In thousands) | ||||||||||||||||||||||
ACL-Loans | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of period | | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
|
Provision for credit losses | |
|
| | |
| | |
| | |
| | |
| | | () | | | () | |
|
|
Loans charged to the allowance | |
| — | | | () | | | () | | | — | | | () | | | — | | | () | |
| () |
Recoveries of loans previously charged-off | |
| — | | | — | | | — | | | — | | |
| | | — | | | — | |
|
|
Balance, end of period | | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
|
17
The Company recorded a total provision for credit losses of $ million for the six months ended June 30, 2023. The $ million total provision for credit losses consisted of $ million for the ACL-Loans as shown above and $ million for the ACL-OBCE’s.
The following table presents, by loan portfolio segment, the activity in the ACL-Loans, for the year-ended December 31, 2023:
$
$
$
$
$
$
$
Provision for credit losses
()
Loans charged to the allowance
—
()
()
—
()
—
()
()
Recoveries of loans previously charged-off
—
—
—
—
—
—
Balance, end of period
$
$
$
$
$
$
$
$
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 as of June 30, 2024 and December 31, 2023:
$
—
$
—
$
$
MF FIN
—
HC FIN
—
—
CML & CRE
AG & AGRE
—
—
Total collateral dependent loans
$
$
$
$
$
There have been no significant changes to the types of collateral securing the Company’s collateral dependent loans compared to December 31, 2023.
$
—
$
$
$
MF FIN
—
—
HC FIN
—
—
CML & CRE
AG & AGRE
—
—
CON & MAR
—
—
—
Total collateral dependent loans
$
$
$
$
$
18
19
$
Total
$
—
$
—
$
—
$
—
$
—
$
—
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
RES RE
Pass
$
$
$
$
$
$
$
$
Special Mention
—
—
—
—
—
—
Substandard
—
—
—
—
—
Total
$
$
$
$
$
$
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
MF FIN
Pass
$
$
$
$
$
$
$
$
Special Mention
—
—
Substandard
—
—
—
Total
$
$
$
$
$
$
$
$
Charge-offs
$
—
$
$
$
—
$
—
$
—
$
—
$
HC FIN
Pass
$
$
$
$
$
—
$
$
$
Special Mention
—
—
—
Substandard
—
—
—
—
Total
$
$
$
$
$
—
$
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
CML & CRE
Pass
$
$
$
$
$
$
$
$
Special Mention
—
—
—
Substandard
—
—
Total
$
$
$
$
$
$
$
$
Charge-offs
$
—
$
—
$
$
$
—
$
—
$
—
$
AG & AGRE
Pass
$
$
$
$
$
$
$
$
Substandard
—
—
—
—
—
—
Total
$
$
$
$
$
$
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
CON & MAR
Pass
$
$
$
$
$
—
$
$
$
Total
$
$
$
$
$
—
$
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Total Pass
$
$
$
$
$
$
$
$
Total Special Mention
$
$
$
$
$
—
$
$
$
Total Substandard
$
—
$
$
$
$
$
$
$
Total Doubtful
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Total Loans
$
$
$
$
$
$
$
$
Total Charge-offs
$
—
$
$
$
$
—
$
—
$
—
$
20
$
Total
$
—
$
—
$
—
$
—
$
—
$
—
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
RES RE
Pass
$
$
$
$
$
$
$
$
Special Mention
—
—
—
—
—
Substandard
—
—
—
—
—
Total
$
$
$
$
$
$
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
$
$
MF FIN
Pass
$
$
$
$
$
$
$
$
Special Mention
—
—
Substandard
—
—
—
—
Total
$
$
$
$
$
$
$
$
Charge-offs
$
—
$
$
—
$
—
$
—
$
—
$
—
$
HC FIN
Pass
$
$
$
$
—
$
$
—
$
$
Special Mention
—
—
—
—
Substandard
—
—
—
Total
$
$
$
$
—
$
$
—
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
CML & CRE
Pass
$
$
$
$
$
$
$
$
Special Mention
—
—
—
—
Substandard
—
—
Doubtful
—
—
—
—
—
—
Total
$
$
$
$
$
$
$
$
Charge-offs
$
—
$
$
$
$
—
$
—
$
—
$
AG & AGRE
Pass
$
$
$
$
$
$
$
$
Special Mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
Total
$
$
$
$
$
$
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
CON & MAR
Pass
$
$
$
$
$
$
$
$
Special Mention
—
—
—
—
—
Substandard
—
—
—
—
—
—
Total
$
$
$
$
$
$
$
$
Charge-offs
$
—
$
—
$
—
$
—
$
—
$
$
—
$
Total Pass
$
$
$
$
$
$
$
$
Total Special Mention
$
$
$
$
$
$
$
$
Total Substandard
$
$
$
$
$
$
$
$
Total Doubtful
$
—
$
—
$
—
$
—
$
—
$
$
—
$
Total Loans
$
$
$
$
$
$
$
$
Total Charge-offs
$
—
$
$
$
$
—
$
$
$
The Company did not have any material revolving loans converted to term loans at June 30, 2024 or December 31, 2023.
21
$
RES RE
—
MF FIN
HC FIN
—
CML & CRE
—
AG & AGRE
—
—
CON & MAR
—
—
—
—
$
$
$
$
$
$
| | | | | | | | | | | | | | | | | | |
| | December 31, 2023 | ||||||||||||||||
|
| 30-59 Days |
| 60-89 Days |
| 90+ Days |
| Total |
| | |
| Total | |||||
| | Past Due | | Past Due | | Past Due | | Past Due | | Current | | Loans | ||||||
| | (In thousands) | ||||||||||||||||
MTG WHRA | | $ | — |
| $ | — | | $ | — | | $ | — | | $ |
| | $ |
|
RES RE | |
|
|
| | — | |
|
| |
|
| |
|
| |
|
|
MF FIN | |
|
|
| |
| |
|
| |
|
| |
|
| |
|
|
HC FIN | | | — | | |
| | |
| | |
| | |
| | |
|
CML & CRE | |
|
|
| |
| |
|
| |
|
| |
|
| |
|
|
AG & AGRE | |
|
|
| |
| |
|
| |
|
| |
|
| |
|
|
CON & MAR | |
|
|
| |
| |
|
| |
|
| |
|
| |
|
|
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
| | $ |
|
There were delinquent loans classified as held for sale at June 30, 2024. The above table does not include multi-family loan, 30-59 days past due, classified as held for sale at December 31, 2023, totaling $ million.
Nonperforming Loans
Nonaccrual loans, including modified loans to borrowers experiencing financial difficulty 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 modified loans which are on nonaccrual status prior to being modified, 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. Generally, this is at 90 days or more past due. The amount of interest income recognized on nonaccrual financial assets during the three and six months ended June 30, 2024 was $ million, which was collected when a loan was paid off, and was immaterial for the three and six months ended June 30, 2023.
22
$
—
$
$
MF FIN
—
—
HC FIN
—
CML & CRE
AG & AGRE
—
CON & MAR
—
—
$
$
$
$
The Company did not have any nonaccrual loans without an estimated ACL at June 30, 2024 or December 31, 2023. There were $ million in specific reserves associated with nonaccrual loans totaling $ million at June 30, 2024 and there were $ million in specific reserves associated with nonaccrual loans totaling $ million at December 31, 2023, excluding the reserves associated with FMBI, whose branches were sold in January 2024.
Modifications to Borrowers Experiencing Financial Difficulty
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 modifications on one loan. Typically, one type of modification, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another modification, such as principal forgiveness, may be granted, but is rare.
The following table presents the amortized cost basis of loans at June 30, 2024 that were both experiencing financial difficulty and modified during the three and six months ended June 30, 2024, by class and by type of modification. 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:
$
$
N/M
%
$
$
$
N/M
%
HC FIN
—
N/M
—
N/M
Total
$
$
$
N/M
%
$
$
$
N/M
%
23
HC FIN
Added a weighted average to the life of loans.
For the Three Months Ended June 30, 2024 - Payment Delay
Loan Type
Financial Effect
MF FIN
Forbearance average of .
For the Six Months Ended June 30, 2024 - Term Extension
Loan Type
Financial Effect
MF FIN
Added a weighted average to the life of loans.
HC FIN
Added a weighted average to the life of loans.
For the Six Months Ended June 30, 2024 - Payment Delay
Loan Type
Financial Effect
MF FIN
Forbearance average of .
$
—
$
HC FIN
—
—
Total
$
$
—
$
modified loans defaulted during the three and six months ended June 30, 2024.
Foreclosures
There were residential loans in process of foreclosure as of June 30, 2024 and December 31, 2023.
Significant Loan Sales
Freddie Mac Q Series Securitization – 2024 Activity
On April 30, 2024, the Company completed a $ million securitization of 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 $ million gain on sale was recognized. The Company was retained as the mortgage sub-servicer for Freddie Mac on the entire $ 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 $ million was established.
24
$
$
—
$
$
Debt funds
—
Off-balance-sheet REMIC trusts
—
—
Total Unconsolidated VIEs
$
$
$
$
$
December 31, 2023
Low-income housing tax credit investments
$
$
$
—
$
$
Debt funds
—
Off-balance-sheet REMIC trusts
—
—
—
Total Unconsolidated VIEs
$
$
$
$
$
25
%
$
%
$
—
N/A
%
Merchants Bank
%
%
Tier I capital(1) (to risk-weighted assets)
Company
%
%
—
N/A
%
Merchants Bank
%
%
Common Equity Tier I capital(1) (to risk-weighted assets)
Company
%
%
—
N/A
%
Merchants Bank
%
%
Tier I capital(1) (to average assets)
Company
%
%
—
N/A
%
Merchants Bank
%
%
| (1) | As defined by regulatory agencies. |
26
%
$
%
$
—
N/A
%
Merchants Bank
%
%
%
FMBI
%
%
%
Tier I capital(1) (to risk-weighted assets)
Company
%
%
—
N/A
%
Merchants Bank
%
%
%
FMBI
%
%
%
Common Equity Tier I capital(1) (to risk-weighted assets)
Company
%
%
—
N/A
%
Merchants Bank
%
%
%
FMBI
%
%
%
Tier I capital(1) (to average assets)
Company
%
%
—
N/A
%
Merchants Bank
%
%
%
FMBI
%
%
%
| (1) | As defined by regulatory agencies. |
27
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 unaudited condensed consolidated statements of income. The fair value of derivative instruments with a positive fair value are reported in other assets in the unaudited condensed consolidated balance sheets while derivative instruments with a negative fair value are reported in other liabilities in the unaudited condensed consolidated balance sheets.
The following table presents the notional amount and fair value of interest rate locks, forward contracts, interest rate swaps, put options and interest rate floors utilized by the Company at June 30, 2024 and December 31, 2023. This table excludes the fair market value adjustment on loans associated with these derivatives.
Other assets/liabilities
$
$
Forward contracts
Other assets/liabilities
Interest rate swaps
Other assets/liabilities
—
Put options
Other assets
—
Interest rate floors
Other assets
—
Credit derivatives
Other liabilities
—
—
$
$
| | | | | | | | | | | |
| | Notional | | | | | | Fair Value | |||
| | Amount |
| | Balance Sheet Location |
| | Asset |
| | Liability |
December 31, 2023 | | (In thousands) | | | | | | (In thousands) | |||
Interest rate lock commitments | $ |
| | | Other assets/liabilities | | $ |
| | $ |
|
Forward contracts | |
| | | Other assets/liabilities | | |
| | |
|
Interest rate swaps | |
| | | Other assets/liabilities | | |
| | | — |
Put options | |
| | | Other assets | | |
| | | — |
Interest rate floors | |
| | | Other assets | | |
| | | — |
| | | | | | | $ |
| | $ |
|
28
$
()
$
()
$
Forward contracts (includes pair-off settlements)
Interest rates swaps
Net gain
$
$
$
$
Derivative gain included in other income:
Put options
$
$
—
$
$
—
Interest rate floors
—
—
Net gain
$
$
—
$
$
—
Derivatives on Behalf of Customers
The Company offers derivative contracts to some customers in connection with their risk management needs. These derivatives include interest rate swap, cap, and floor arrangements. The Company manages the risk associated with these contracts by entering into an equal and offsetting back-to-back derivative with a third-party dealer. These derivatives generally work together as an offsetting 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 material net earnings impact.
The fair values of derivative assets and liabilities related to back-to-back derivatives on behalf of customers were recorded in the unaudited condensed consolidated balance sheets as follows:
Other assets/liabilities
$
$
December 31, 2023
$
Other assets/liabilities
$
$
The gross gains and losses on these derivative assets and liabilities were recorded in other noninterest income and other noninterest expense in the unaudited condensed consolidated statements of income as follows:
$
$
$
Gross swap losses
Net swap gains (losses)
$
—
$
—
$
—
$
—
The Company pledged $ in collateral to secure its obligations under swap contracts at both June 30, 2024 and December 31, 2023.
29
30
$
—
$
$
—
Securities available for sale:
Treasury notes
—
—
Federal agencies
—
—
Mortgage-backed - Agency
—
—
Mortgage-backed - Non-agency residential - fair value option
—
—
Mortgage-backed - Agency - fair value option
—
—
Loans held for sale
—
—
Servicing rights
—
—
Derivative assets:
Interest rate lock commitments
—
—
Forward contracts
—
—
Interest rate swaps
—
—
Interest rate swaps, caps and floors (back-to-back)
—
—
Put options
—
Interest rate floors
—
—
Derivative liabilities:
Interest rate lock commitments
—
—
Forward contracts
—
—
Interest rate swaps, caps and floors (back-to-back)
—
—
December 31, 2023
Mortgage loans in process of securitization
$
$
—
$
$
—
Securities available for sale:
Treasury notes
—
—
Federal agencies
—
—
Mortgage-backed - Agency
—
—
Mortgage-backed - Non-agency residential - fair value option
—
—
Mortgage-backed - Agency - fair value option
—
—
Loans held for sale
—
—
Servicing rights
—
—
Derivative assets:
Interest rate lock commitments
—
—
Forward contracts
—
—
Interest rate swaps
—
—
Interest rate swaps, caps and floors (back-to-back)
—
—
Put options
—
Interest rate floors
—
—
Derivative liabilities:
Interest rate lock commitments
—
—
Forward contracts
—
—
Interest rate swaps, caps and floors (back-to-back)
—
—
31
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 unaudited condensed consolidated 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 six months ended June 30, 2024 and the year ended December 31, 2023. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Mortgage Loans in Process of Securitization, Securities Available for Sale, and Securities with a Fair Value Option Election
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
Interest rate lock commitments - 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.
Forward sales 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.
32
33
$
$
$
Additions
Originated servicing
Subtractions
Paydowns
()
()
()
()
Changes in fair value
Balance, end of period
$
$
$
$
Securities available for sale - Mortgage-backed - Non-Agency residential - fair value option
Balance, beginning of period
$
$
—
$
$
—
Paydowns
()
—
()
—
Changes in fair value
()
—
()
—
Balance, end of period
$
$
—
$
$
—
Derivative assets - put options
Balance, beginning of period
$
$
—
$
$
—
Changes in fair value
—
—
Balance, end of period
$
$
—
$
$
—
Derivative assets - interest rate floors
Balance, beginning of period
$
$
—
$
$
—
Changes in fair value
—
—
Balance, end of period
$
$
—
$
$
—
Derivative assets - interest rate lock commitments
Balance, beginning of period
$
$
$
$
Changes in fair value
()
()
Balance, end of period
$
$
$
$
Derivative liabilities - interest rate lock commitments
Balance, beginning of period
$
$
$
$
Changes in fair value
Balance, end of period
$
$
$
$
34
$
—
$
—
$
December 31, 2023
Collateral dependent loans
$
$
—
$
—
$
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 unaudited condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Collateral Dependent 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 classified as substandard, 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.
35
Discounted cash flow
Market credit spread
%
%
Collateral dependent loans
$
Market comparable properties
Marketability discount
% - %
%
Servicing rights - Multi-family
$
Discounted cash flow
Discount rate
% - %
%
Constant prepayment rate
% - %
%
Servicing rights - Single-family
$
Discounted cash flow
Discount rate
% - %
%
Constant prepayment rate
% - %
%
Servicing rights - SBA
$
Discounted cash flow
Discount rate
%
%
Constant prepayment rate
% - %
%
Derivative assets:
Interest rate lock commitments
$
Discounted cash flow
Loan closing rates
% - %
%
Put options
$
Intrinsic option value
Market credit spread
%
%
Interest rate floors
$
Discounted cash flow
Discount rate
%-%
%
Derivative liabilities - interest rate lock commitments
$
Discounted cash flow
Loan closing rates
% - %
%
At December 31, 2023:
Securities available for sale - Mortgage-backed - Non-Agency residential - fair value option
$
Discounted cash flow
Market credit spread
%
%
Collateral dependent loans
$
Market comparable properties
Marketability discount
% - %
%
Servicing rights - Multi-family
$
Discounted cash flow
Discount rate
% - %
%
Constant prepayment rate
% - %
%
Servicing rights - Single-family
$
Discounted cash flow
Discount rate
% - %
%
Constant prepayment rate
% - %
%
Servicing rights - SBA
$
Discounted cash flow
Discount rate
%
%
Constant prepayment rate
% - %
%
Derivative assets:
Interest rate lock commitments
$
Discounted cash flow
Loan closing rates
% - %
%
Put options
$
Intrinsic option value
Market credit spread
%
%
Interest rate floors
$
Discounted cash flow
Discount rate
%-%
%
Derivative liabilities - interest rate lock commitments
$
Discounted cash flow
Loan closing rates
% - %
%
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.
Securities Available for Sale with a Fair Value Option Election, Loans, and Related Derivative Financial Instruments
The significant unobservable input used in the fair value measurement of certain securities available for sale and their related put options include market credit spreads that can be impacted by market conditions and drive a significant amount of a market participant’s valuation of the security and its related put option. The impact of changes to the unobservable inputs for the securities is mitigated by changes to the unobservable inputs for the put options, which are valued in opposite directions, so as to minimize the financial impact to the Company.
36
37
$
$
$
—
$
—
Securities purchased under agreements to resell
—
—
Securities held to maturity
—
FHLB stock
—
—
Loans held for sale
—
—
Loans receivable, net
—
—
Interest receivable
—
—
Financial liabilities:
Deposits
—
Short-term subordinated debt
—
—
FHLB advances
—
—
Other borrowing
—
—
Credit linked notes
—
—
Interest payable
—
—
December 31, 2023
Financial assets:
Cash and cash equivalents
$
$
$
$
—
$
—
Securities purchased under agreements to resell
—
—
Securities held to maturity
—
FHLB stock
—
—
Loans held for sale
—
—
Loans receivable, net
—
—
Interest receivable
—
—
Financial liabilities:
Deposits
—
Short-term subordinated debt
—
—
FHLB advances
—
—
Other borrowing
—
—
Credit linked notes
—
—
Interest payable
—
—
38
The Company has operating lease right-of-use assets of $ million and $ million as of June 30, 2024 and December 31, 2023, respectively, and operating lease right-of-use liabilities of $ million and $ million as of June 30, 2024 and December 31, 2023, respectively.
Unaudited condensed consolidated balance sheet, income statement and cash flow detail regarding operating leases follows:
$
Operating lease liability (in other liabilities)
Weighted average remaining lease term (years)
Weighted average discount rate
%
%
Maturities of lease liabilities:
One year or less
$
$
Year two
Year three
Year four
Year five
Thereafter
Total future minimum lease payments
Less: imputed interest
Total
$
$
Three Months Ended
Three Months Ended
June 30, 2024
June 30, 2023
Income Statement
(In thousands)
(In thousands)
Components of lease expense:
Operating lease cost (in occupancy and equipment expense)
$
$
Six Months Ended
Six Months Ended
June 30, 2024
June 30, 2023
Income Statement
(In thousands)
(In thousands)
Components of lease expense:
Operating lease cost (in occupancy and equipment expense)
$
$
Six Months Ended
Six Months Ended
June 30, 2024
June 30, 2023
Cash Flow Statement
(In thousands)
(In thousands)
Supplemental cash flow information:
Operating cash flows from operating leases
$
$
39
$
Total noninterest-bearing deposits
Interest-bearing deposits
Demand deposits
$
$
Savings deposits
Certificates of deposit
Total interest-bearing deposits
Total deposits
$
$
Maturities for certificates of deposit are as follows:
Due in one year to two years
Due in two years to three years
Due in three years to four years
—
Due in four years to five years
—
Due in five years to six years
—
$
Brokered deposit amounts at June 30, 2024 and December 31, 2023, were as follows:
$
Brokered savings deposits
Brokered deposit on demand accounts
—
$
$
$
FHLB advances
Credit linked notes, net of debt discount
Other borrowings
Total borrowings
$
$
40
$
Dividends on preferred stock
()
()
Preferred stock redemption
()
—
Net income available to common shareholders
$
$
Basic earnings per share
$
$
Effect of dilutive securities-restricted stock awards
Diluted earnings per share
$
$
| | | | | | | | | | | | | | | | |
| | Six Month Periods Ended June 30, | ||||||||||||||
| | 2024 | | 2023 | ||||||||||||
| | | | | Weighted- | | Per | | | | | Weighted- | | Per | ||
| | Net | | Average | | Share | | Net | | Average | | Share | ||||
|
| Income |
| Shares |
| Amount |
| Income |
| Shares |
| Amount | ||||
| | (In thousands, except share data) | ||||||||||||||
Net income | | $ |
|
|
|
| |
| | $ |
|
|
|
| |
|
Dividends on preferred stock | |
| () |
|
|
| |
| |
| () |
|
|
| |
|
Preferred stock redemption | | | () | | | | | | | | — | | | | | |
Net income available to common shareholders | | $ |
|
|
|
| |
| | $ |
|
|
|
| |
|
Basic earnings per share | |
|
|
|
| | $ |
| |
|
|
|
| | $ |
|
Effect of dilutive securities-restricted stock awards | |
|
|
|
| |
|
| |
|
|
|
| |
|
|
Diluted earnings per share | |
|
|
|
| | $ |
| |
|
|
|
| | $ |
|
shares of the Company’s common stock, without par value, at a public offering price of $ per share in an underwritten public offering. The aggregate gross offering proceeds for the shares issued by the Company was $ million, and after deducting underwriting discounts, commissions, and offering expenses of $ million paid to third parties, the Company received total net proceeds of $ million.
shares of % Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $ per share (the41
The Company redeemed all outstanding shares of the Series A Preferred Stock on April 1, 2024 at a price equal to the liquidation preference of $ per share, or $ million, using cash on hand.
Series B – On August 19, 2019, the Company issued depositary shares, each representing a 1/40th interest in a share of its % Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, without par value (the “Series B Preferred Stock”), and with a liquidation preference of $ per share (equivalent to $ per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $ million, and after deducting underwriting discounts and commissions and offering expenses of approximately $ million paid to third parties, the Company received total net proceeds of $ million.
The Series B Preferred Stock have no voting rights with respect to matters that generally require the approval of common shareholders. Dividends on the Series B Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series B Preferred Stock, in whole or in part, at its option, on any dividend payment date on or after October 1, 2024, 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.
Series C – On March 23, 2021, the Company issued depositary shares, each representing a 1/40th interest in a share of its % Fixed-to-Floating Rate Series C Non-Cumulative Perpetual Preferred Stock, without par value (the “Series C Preferred Stock”), and with a liquidation preference of $ per share (equivalent to $ per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $ million, and after deducting underwriting discounts and commissions and offering expenses of approximately $ million paid to third parties, the Company received total net proceeds of $ million.
The Series C Preferred Stock have no voting rights with respect to matters that generally require the approval of common shareholders. 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 its 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.
Series D – On September 27, 2022, the Company issued depositary shares, each representing a 1/40th interest in a share of its % Fixed Rate Reset Series D Non-Cumulative Perpetual Preferred Stock, without par value (the “Series D Preferred Stock”), and with a liquidation preference of $ per share (equivalent to $ per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $ million, and after deducting underwriting discounts and commissions and offering expenses of approximately $ million paid to third parties, the Company received total net proceeds of $ million. On September 30, 2022, the Company issued an additional depositary 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 $ million in net proceeds, after deducting $ million in underwriting discounts.
The Series D Preferred Stock have no voting rights with respect to matters that generally require the approval of common shareholders. 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 its option, on any dividend payment date on or after October 1, 2027, subject to the approval of the appropriate federal banking agency, at
42
t issue any shares. During the six months ended June 30, 2024 and 2023, the Company issued and 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. In November 2023, 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 $ per member, rounded up to the nearest whole share, to be effective as of January 1, 2024. Accordingly, there were and shares, issued to non-executive directors during the three months ended June 30, 2024 and 2023, respectively and there were and shares, issued to non-executive directors during the six months ended June 30, 2024 and 2023, respectively.
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 contribution to the ESOP during the three months ended June 30, 2024 and 2023. Expenses recognized for the contribution to the ESOP totaled $ and $ for the six months ended June 30, 2024 and 2023, respectively. The Company contributed shares and shares to the ESOP for the six months ended June 30, 2024 and 2023, respectively.
43
$
$
$
$
Interest expense
()
Net interest income
Provision for credit losses
—
—
Net interest income after provision for credit losses
Noninterest income
()
Noninterest expense
Income (loss) before income taxes
()
Income taxes
()
Net income (loss)
$
$
$
$
()
$
Total assets
$
$
$
$
$
| | | | | | | | | | | | | | | |
| | Multi-family | | | | | | | | | | | |
| |
| | Mortgage | | Mortgage | | | | | | | | |
| ||
|
| Banking |
| Warehousing |
| Banking |
| Other |
| Total | |||||
Three Months Ended June 30, 2023 | | (In thousands) | |||||||||||||
Interest income | | $ |
| | $ |
| | $ |
| | $ |
|
| $ |
|
Interest expense | |
|
| |
|
| |
|
| |
| () |
|
|
|
Net interest income | |
|
| |
|
| |
|
| |
|
|
|
|
|
Provision for credit losses | |
| — | |
|
| |
|
| |
| — |
|
|
|
Net interest income after provision for credit losses | |
|
| |
|
| |
|
| |
|
|
|
|
|
Noninterest income | |
|
| |
|
| |
| () | |
| () |
|
|
|
Noninterest expense | |
|
| |
|
| |
|
| |
|
|
|
|
|
Income (loss) before income taxes | |
|
| |
|
| |
|
| |
| () |
|
|
|
Income taxes | |
|
| |
| () | |
|
| |
| () |
|
|
|
Net income (loss) | | $ |
| | $ |
| | $ |
| | $ | () |
| $ |
|
Total assets | | $ |
| | $ |
| | $ |
| | $ |
|
| $ |
|
44
$
$
$
Interest expense
()
Net interest income
Provision for credit losses
—
—
Net interest income after provision for credit losses
Noninterest income
()
Noninterest expense
Income (loss) before income taxes
()
Income taxes
()
Net income (loss)
$
$
$
$
()
$
Total assets
$
$
$
$
$
| | | | | | | | | | | | | | | |
| | Multi-family | | | | | | | | | | | |
| |
| | Mortgage | | Mortgage | | | | | | | | |
| ||
|
| Banking |
| Warehousing |
| Banking |
| Other |
| | Total | ||||
| | (In thousands) | |||||||||||||
Six Months Ended June 30, 2023 | | | | | | | | | | | | | | | |
Interest income | | $ |
| | $ |
| | $ |
| | $ |
|
| $ |
|
Interest expense | |
|
| |
|
| |
|
| |
| () |
|
|
|
Net interest income | |
|
| |
|
| |
|
| |
|
|
|
|
|
Provision for credit losses | |
| — | |
|
| |
|
| |
| — |
|
|
|
Net interest income after provision for credit losses | |
|
| |
|
| |
|
| |
|
|
|
|
|
Noninterest income | |
|
| |
|
| |
| () | |
| () |
|
|
|
Noninterest expense | |
|
| |
|
| |
|
| |
|
|
|
|
|
Income (loss) before income taxes | |
|
| |
|
| |
|
| |
| () |
|
|
|
Income taxes | |
|
| |
|
| |
|
| |
| () |
|
|
|
Net income (loss) | | $ |
| | $ |
| | $ |
| | $ | () |
| $ |
|
Total assets | | $ |
| | $ |
| | $ |
| | $ |
|
| $ |
|
45
46
Merchants Bancorp
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, 2023 or “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q or the following:
| ● | business and economic conditions, particularly those affecting the financial services industry and our primary market areas; |
| ● | our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss; |
| ● | factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions; |
| ● | 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; |
| ● | 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; |
| ● | 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 |
47
Merchants Bancorp
| ● | 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.
48
Merchants Bancorp
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the financial condition at June 30, 2024 and results of operations for the three and six months ended June 30, 2024 and 2023, 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 June 30, 2024
| ● | Net income of $76.4 million increased $11.1 million, or 17%, compared to the three months ended June 30, 2023. The increase was primarily driven by a $22.5 million, or 21%, increase in net interest income and a $12.6 million, or 56%, decrease in provision for credit losses, partially offset by a $19.5 million, or 594%, increase in provision for income tax. |
| ● | Diluted earnings per share of $1.49 increased 14% compared to the three months ended June 30, 2023. |
| ● | Tangible book value per common share of $31.27 increased 30% compared to $24.14 for the three months ended June 30, 2023. |
| ● | Total assets of $18.2 billion increased 2% compared to March 31, 2024, and increased 7% compared to December 31, 2023. |
| ● | Loans receivable, net of allowance for credit losses on loans, of $10.9 billion, increased $242.7 million, or 2%, compared to March 31, 2024, and increased $805.4 million, or 8%, compared to December 31, 2023. |
| ● | As of June 30, 2024, approximately 94% of the total net loans reprice within three months, which reduces the risk of market rate increases. |
| ● | Net interest margin was 2.99% compared to 2.97% for the three months ended June 30, 2023. |
| ● | Efficiency ratio was 31.59% compared to 32.71% for the three months ended June 30, 2023. |
| ● | As of June 30, 2024, the Company had $7.0 billion in unused borrowing capacity with the Federal Home Loan Bank and the Federal Reserve Discount window, based on available collateral. Our line of credit with the Federal Reserve Board, alone, could fund 118% of uninsured deposits. |
| ● | The Company’s most liquid assets are in unrestricted cash, short-term investments, including interest-earning demand deposits, mortgage loans in process of securitization, loans held for sale, and warehouse repurchase agreements included in loans receivable. Taken together, with unused borrowing capacity, these totaled $12.6 billion, or 69%, of the $18.2 billion in total assets as of June 30, 2024. |
| ● | The volume of warehouse loans funded during the three months ended June 30, 2024 amounted to $10.9 billion, an increase of $2.5 billion, or 30%, compared to the three months ended June 30, 2023. This compared to the 7% industry decrease in single-family residential loan volumes for the three months ended June 30, 2024 to the same period in 2023, according to an estimate of industry volume by the Mortgage Bankers Association. |
49
Merchants Bancorp
| ● | On May 13, 2024, the Company completed a common stock offering of 2.4 million shares, resulting in net proceeds of $97.7 million, which contributed to the estimated 70 basis point increase in the common equity tier I capital ratio that reached 8.7% as of June 30, 2024. |
| ● | On April 30, 2024, the Company completed a $324.6 million securitization of 13 multi-family mortgage loans through a Freddie Mac-sponsored Q-Series transaction. |
| ● | The Company redeemed all outstanding shares of the Series A Preferred Stock on April 1, 2024 for $52 million at the liquidation preference of $25.00 per share. |
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, 2023. 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, 2023.
Financial Condition
As of June 30, 2024, we had approximately $18.2 billion in total assets, $14.9 billion in deposits and $1.9 billion in total shareholders’ equity. Total assets as of June 30, 2024 included approximately $540.9 million of cash and cash equivalents, $3.5 billion of loans held for sale, and $10.9 billion of loans receivable, net of Allowance for credit losses on loans (“ACL-loans”). Assets also included $209.2 million of mortgage loans in process of securitization that represent pre-sold multi-family rental real estate loan originations in primarily Government National Mortgage Association (“Ginnie Mae”), Federal National Mortgage Association (“Fannie Mae”), and Federal Home Loan Mortgage Corporation (“Freddie Mac”) mortgage-backed securities pending settlements that typically occur within 30 days. There
50
Merchants Bancorp
were also $1.3 billion in securities classified as held to maturity, most of which were acquired through loan securitizations. Additionally, we had $1.0 billion in securities available for sale, the majority of which were acquired from a warehouse customer through loan securitizations, and others are match funded or required to collateralize our credit-linked notes. Other assets at June 30, 2024 totaled $343.1 million, which primarily represents low-income housing tax credits. Servicing rights at June 30, 2024 totaled $178.8 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 June 30, 2024 and December 31, 2023
Total Assets. Total assets of $18.2 billion at June 30, 2024 increased 7% compared to $17.0 billion at December 31, 2023. The increase was due primarily to growth in the warehouse, multi-family, and healthcare loan portfolios, as well as loans held for sale.
Cash and Cash Equivalents. Cash and cash equivalents of $540.9 million at June 30, 2024 decreased $43.5 million, or 7%, compared to $584.4 million at December 31, 2023. Included in cash equivalents was $37.0 million in restricted cash associated with the March 2023 issuance of senior credit linked notes described in Note 1: Basis of Presentation and the Company’s 2023 Annual Report on Form 10–K.
Mortgage Loans in Process of Securitization. Mortgage loans in process of securitization of $209.2 million at June 30, 2024 increased $98.6 million, or 89%, compared to $110.6 million at December 31, 2023. These represent loans that our banking subsidiary, Merchants Bank, has funded and are held pending settlement, primarily as Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities with a firm investor commitment to purchase the securities. The 89% increase was primarily due to a higher origination volume of loans pending settlement date.
Securities Available for Sale. Securities available for sale of $1.0 billion at June 30, 2024 decreased $96.7 million, or 9%, compared to December 31, 2023. The decrease in securities available for sale was primarily due to $399.5 in calls, maturities, repayments, sales and other adjustments, partially offset by purchases of $302.8 million during the period.
Included in securities available for sale were $682.8 million of investments for which a fair value option was elected. Fair value option securities represent securities which the Company has elected to carry at fair value and are separately identified on the unaudited condensed consolidated balance sheets with changes in the fair value recognized in earnings as they occur.
As of June 30, 2024, Accumulated Other Comprehensive Losses (“AOCL”) of $0.5 million losses, related to securities available for sale, decreased $2.0 million, or 80%, compared to losses of $2.5 million at December 31, 2023. The $0.5 million of AOCL as of June 30, 2024 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 $1.3 billion at June 30, 2024 increased $86.9 million, or 7%, compared to $1.2 billion at December 31, 2023. The increase was due to purchases of $155.3 million partially offset by remittances of loan payments underlying the securities during the period.
Loans Held for Sale. Loans held for sale of $3.5 billion at June 30, 2024 increased $338.3 million, or 11%, compared to $3.1 billion at December 31, 2023. The increase in loans held for sale was due primarily to an increase in warehouse participations, as we experienced higher volume. Loans held for sale are comprised primarily of single-family residential real estate loan participations that meet Fannie Mae, Freddie Mac, or Ginnie Mae eligibility.
Loans Receivable, Net. Loans receivable, net, of $10.9 billion at June 30, 2024, which are comprised of loans held for investment, increased $805.4 million, or 8%, compared to $10.1 billion at December 31, 2023. The increase in net loans was comprised primarily of:
51
Merchants Bancorp
| ● | an increase of $617.5 million, or 82%, in mortgage warehouse repurchase agreements, to $1.4 billion at June 30, 2024 reflecting higher loan volume from increased sales efforts and market exits or reductions of competitors. |
| ● | an increase of $154.3 million, or 4%, in multi-family financing loans, to $4.2 billion at June 30, 2024 reflecting higher origination volume for construction, bridge and other loans generated through 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. |
| ● | an increase of $139.2 million, or 6%, in healthcare financing loans, to $2.5 billion at June 30, 2024 reflecting higher loan originations. |
As of June 30, 2024, approximately 94% of the total net loans reprice within three months, which reduces the risk of market rate increases.
Allowance for Credit Losses on Loans (“ACL-Loans”). The ACL-Loans of $81.0 million at June 30, 2024 increased $9.3 million, or 13%, compared to December 31, 2023, primarily reflecting increases associated with loan charge-offs, increases in specific reserves, loan growth in the multi-family and healthcare portfolios, and changes to qualitative loss factors to reflect changes in industry and market conditions. Additional details provided in the ACL-Loans portion of the Comparison of Financial Condition at June 30, 2024 and December 31, 2023 and in Note 4: Loans and Allowance for Credit Losses on Loans.
Also influencing the overall level of the ACL-Loans is our differentiated strategy to typically hold loans with shorter durations and to maintain agency underwriting standards that enable us to sell or refinance the majority of our loans under government programs.
Goodwill. Goodwill of $8.0 million at June 30, 2024 decreased $7.8 million, or 49%, compared to $15.8 million at December 31, 2023. The goodwill associated with FMBI was eliminated upon the sale of their branches to unaffiliated third parties on January 26, 2024.
Servicing Rights. Servicing rights of $178.8 million at June 30, 2024 increased $20.3 million, or 13%, compared to $158.5 million at December 31, 2023. During the six months ended June 30, 2024, originated servicing of $5.9 million and a positive fair market value adjustment of $19.0 million were partially offset by paydowns of $4.6 million. The $19.0 million positive fair market value adjustment reflected $17.7 million for multi-family mortgages and $1.3 million for single-family mortgages and SBA loans during the six months ended June 30, 2024.
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 six months ended June 30, 2024 was driven by higher interest rates that impacted fair market value adjustments. The value of servicing rights generally increases in rising interest rate environments and declines in falling interest rate environments due to expected prepayments and earnings rates on escrow deposits.
Other Assets and Receivables. Other assets and receivables of $343.1 million at June 30, 2024 increased $36.0 million, or 12%, compared to December 31, 2023. The increase in other assets and receivables was primarily due to the acquisition of low-income housing tax credit investments.
Deposits. Deposits of $14.9 billion at June 30, 2024 increased $855.6 million, or 6%, compared to $14.1 billion at December 31, 2023. The increase was primarily due to a $1.7 billion increase in certificates of deposit that was partially offset by a $738.3 million decrease in demand deposits and a decrease of $104.2 million in savings deposits. As of June 30, 2024, approximately 79% of the total deposits reprice within three months.
52
Merchants Bancorp
Core deposits increased by $705.9 million, or 9%, to $8.8 billion at June 30, 2024 compared to December 31, 2023. Core deposits represented 59% of total deposits at June 30, 2024 compared to 58% of total deposits at December 31, 2023.
We have increased our use of brokered deposits by $149.7 million, or 3%, to $6.1 billion at June 30, 2024 compared to December 31, 2023. Brokered deposits represented 41% of total deposits at June 30, 2024 compared to 42% of total deposits at December 31, 2023. As of June 30, 2024, brokered certificates of deposit had a weighted average remaining duration of 70 days.
| ● | Brokered certificates of deposit accounts of $6.1 billion at June 30, 2024 increased by $1.7 billion, or 37%, compared to December 31, 2023. |
| ● | Brokered demand deposit accounts decreased by $1.5 million, or 100%, compared to December 31, 2023. |
Compared to December 31, 2023, interest-bearing deposits increased $992.4 million, or 7%, to $14.5 billion at June 30, 2024, and noninterest-bearing deposits decreased $136.8 million, or 26%, to $383.3 million at June 30, 2024.
Uninsured deposits represented approximately 15% 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 $1.5 billion as of June 30, 2024 compared to $1.6 billion as of December 30, 2023 and $1.7 billion as of June 30, 2023. Our line of credit with the Federal Reserve Board could fund 118% of our uninsured deposits.
Borrowings. Borrowings increased $195.1 million, or 20%, to $1.2 billion at June 30, 2024, compared to $964.1 million at December 31, 2023. The increase was primarily due to $202.6 million in additional FHLB advances. 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 AFX. See Note 11: Borrowings for further information.
The Company continues to have significant borrowing capacity based on available collateral. As of June 30, 2024, unused lines of credit totaled $7.0 billion, compared to $6.0 billion at December 31, 2023.
Total Shareholders’ Equity. Total shareholders’ equity of $1.9 billion at June 30, 2024, increased $187.1 million, or 11%, compared to $1.7 billion as of December 31, 2023. The $187.1 million increase resulted primarily from net income of $163.4 million and net proceeds of $97.7 million from a common stock offering, which was partially offset by redemption of 7% Series A Preferred Stock for $52.0 million and dividends paid on common and preferred shares of $24.4 million during the period.
Asset Quality
Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $143.5 million, or 1.30%, of total loans at June 30, 2024, compared to $82.0 million, or 0.80%, of total loans at December 31, 2023 and $68.4 million, or 0.69%, at June 30, 2023. The increase in non-performing loans compared to both periods was driven by multi-family and healthcare customers with delinquent payments on variable rate loans that have required higher payments due to interest rates remaining at elevated levels.
As a percentage of nonperforming loans, the ACL-Loans was 56% at June 30, 2024 compared to 87% at December 31, 2023 and 92% at June 30, 2023. The decrease in percentage compared to both periods was due to an increase in nonperforming loans, all of which have been individually evaluated for impairment.
53
Merchants Bancorp
Total loans greater than 30 days past due were $234.8 million at June 30, 2024, $183.5 million at December 31, 2023, and $92.9 million at June 30, 2023. The increase in non-performing loans compared to both periods was driven by multi-family and healthcare customers with delinquent payments on variable rate loans that have required higher payments due to interest rates remaining at elevated levels.
Loans classified as Special Mention totaled $244.0 million at June 30, 2024, compared to $191.3 million at December 31, 2023. The increase was primarily due to the increase in interest rates for our borrowers and the related levels of net operating income on certain properties in the healthcare financing loan portfolio.
Loans classified as Substandard totaled $246.8 million at June 30, 2024, compared to $128.6 million at December 31, 2023. The increase was primarily due to the increase in interest rates for our borrowers and the related levels of net operating income on certain properties in the multi-family financing loan portfolio.
During the three months ended June 30, 2024 there were $3.5 million of charge-offs and $15,000 of recoveries, compared to $9.5 million of charge-offs and $2,000 recoveries for the three months ended June 30, 2023.
For the six months ended June 30, 2024, there were $4.4 million of charge-offs and $16,000 of recoveries, compared to $9.5 million of charge-offs and $9,000 of recoveries for the six months ended June 30, 2023.
Comparison of Operating Results for the Three Months Ended June 30, 2024 and 2023
General. Net income of $76.4 million for the three months ended June 30, 2024 increased by $11.1 million, or 17%, compared with $65.3 million for the three months ended June 30, 2023. The increase was primarily driven by a $22.5 million, or 21%, increase in net interest income and a $12.6 million, or 56%, decrease in provision for credit losses, partially offset by a $19.5 million, or 594%, increase in provision for income tax.
Net Interest Income. Net interest income of $128.1 million for the three months ended June 30, 2024 increased $22.5 million, or 21%, compared with $105.6 million for the three months ended June 30, 2023. The 21% increase reflected higher average balances and yields on loans and loans held for sale, as well as higher average yields and balances of securities available for sale, which were partially offset by higher average balances and interest rates on deposits, as well as higher average balances on borrowings. The interest rate spread of 2.45% for the three months ended June 30, 2024 increased 4 basis points compared to 2.41% for the three months ended June 30, 2023.
Our net interest margin increased 2 basis points, to 2.99%, for the three months ended June 30, 2024 compared to 2.97% for the three months ended June 30, 2023. The margin was negatively impacted by approximately 6 basis points in the second quarter of 2024 from the net reversal of $2.5 million in accrued interest income associated with the movement of loans into nonaccrual status.
Interest Income. Interest income of $328.3 million for the three months ended June 30, 2024 increased $70.2 million, or 27%, compared with $258.1 million for the three months ended June 30, 2023. This increase reflected an increase in both average balances and yields of loans and loans held for sale, as well as securities available for sale. The higher yields were in response to higher interest rates set by the Federal Reserve.
Interest income of $284.4 million for the three months ended June 30, 2024 for loans and loans held for sale increased $55.7 million, or 24%, compared to $228.7 million for the three months ended June 30, 2023. The average balance of loans, including loans held for sale, during the three months ended June 30, 2024 increased $2.4 billion, or 20%, to $14.3 billion compared to the three months ended June 30, 2023. The average yield on loans increased 30 basis points, to 7.97% for the three months ended June 30, 2024, compared to 7.67% for the three months ended June 30, 2023. The increase in average balances of loans and loans held for sale was primarily due to increases in the multi-family, healthcare, and loans held for sale.
54
Merchants Bancorp
Interest income of $14.8 million for the three months ended June 30, 2024 on securities available for sale increased $9.2 million, or 166%, compared to $5.6 million for the three months ended June 30, 2023. The average balance of securities available for sale of $1.0 billion increased $366.5 million, or 54%, compared to $672.9 million for the three months ended June 30, 2023. The average yield increased 240 basis points, to 5.72% for the three months ended June 30, 2024, compared to 3.32% for the three months ended June 30, 2023. The increase in average balances of securities available for sale was primarily associated with the acquisition of certain securities from a warehouse customer in December 2023 that provide protective put options and interest rate floor derivatives to prevent losses in value.
Interest income of $19.8 million for the three months ended June 30, 2024 for securities held to maturity increased $2.5 million, or 14%, compared to $17.3 million for the three months ended June 30, 2023. The average balance of securities held to maturity, during the three months ended June 30, 2024 increased $67.2 million, or 6%, to $1.2 billion compared to the three months ended June 30, 2023. The average yield on securities held to maturity increased 51 basis points, to 6.86% for the three months ended June 30, 2024, compared to 6.35% for the three months ended June 30, 2023. The increase in average balance of securities held to maturity was primarily related to held maturity securities acquired as part of loan securitizations.
Interest income of $6.2 million for the three months ended June 30, 2024 on interest-earning deposits and other increased $2.9 million, or 87%, compared to $3.3 million for the three months ended June 30, 2023. The average balance of interest-earning deposits and other of $438.4 million increased $188.7 million, or 76%, compared to $249.7 million for the three months ended June 30, 2023. The average yield increased 35 basis points, to 5.71% for the three months ended June 30, 2024, compared to 5.36% for the three months ended June 30, 2023.
Interest Expense. Total interest expense of $200.2 million for the three months ended June 30, 2024 increased $47.7 million, or 31%, compared to $152.5 million for the three months ended June 30, 2023.
Interest expense on deposits increased $41.9 million, or 30%, to $180.0 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase was primarily due to higher average balances and rates on certificates of deposit and interest-bearing checking accounts. The higher rates on our deposits were in response to higher interest rates set by the Federal Reserve.
Interest expense of $88.3 million for the three months ended June 30, 2024 on certificates of deposit increased $29.6 million, or 50%, compared to $58.7 million for the three months ended June 30, 2023. The average balance of certificates of deposit of $6.5 billion for the three months ended June 30, 2024 increased $1.8 billion, or 38%, compared to the three months ended June 30, 2023. The average rate on certificates of deposit was 5.43% for the three months ended June 30, 2024, which was a 45 basis point increase compared to 4.98% for three months ended June 30, 2023.
Interest expense of $58.1 million for the three months ended June 30, 2024 on interest-bearing checking accounts increased $9.8 million, or 20%, compared to $48.3 million for the three months ended June 30, 2023. The average balance of interest-bearing checking accounts of $4.9 billion for the three months ended June 30, 2024 increased $627.4 million, or 15%, compared to $4.3 billion for the three months ended June 30, 2023. The average yield of interest-bearing checking accounts was 4.74% for the three months ended June 30, 2024, which was a 24 basis point increase compared to 4.50% for three months ended June 30, 2023.
Interest expense of $20.5 million for the three months ended June 30, 2024 on borrowings increased $5.9 million, or 40%, compared to $14.7 million for the three months ended June 30, 2023. The increase reflected an increase of $439.8 million, or 74%, in the average balance of borrowings, to $1.0 billion compared to the three months ended June 30, 2023. Also included in borrowings, our warehouse structured financing agreements provide for additional interest payments for a portion of the earnings generated. As a result, the cost of borrowings increased from a base rate of 7.53% and 9.53%, to an effective rate of 8.00% and 9.94% for the three months ended June 30, 2024 and 2023, respectively.
55
Merchants Bancorp
The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. Nonaccrual loans are included in loans and loans held for sale.
| | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| ||||||||||||||
| | 2024 | | 2023 |
| ||||||||||||
| |
| | | Interest | |
| |
| | | Interest | | |
| ||
| | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ |
| ||||
|
| Balance |
| Expense |
| Rate |
| Balance |
| Expense |
| Rate |
| ||||
| | (Dollars in thousands) | | ||||||||||||||
Assets: | | | | | | | | | | | | | | | | | |
Interest-earning deposits, and other | | $ | 438,445 | | $ | 6,225 |
| 5.71 | % | $ | 249,722 | | $ | 3,335 |
| 5.36 | % |
Securities available for sale | |
| 1,039,388 | |
| 14,784 |
| 5.72 | % |
| 672,887 | |
| 5,564 |
| 3.32 | % |
Securities held to maturity | | | 1,160,170 | | | 19,799 | | 6.86 | % | | 1,093,018 | |
| 17,311 |
| 6.35 | % |
Mortgage loans in process of securitization | |
| 234,706 | |
| 3,044 |
| 5.22 | % |
| 280,092 | |
| 3,127 |
| 4.48 | % |
Loans and loans held for sale | |
| 14,347,165 | |
| 284,421 |
| 7.97 | % |
| 11,968,565 | |
| 228,732 |
| 7.67 | % |
Total interest-earning assets | |
| 17,219,874 | |
| 328,273 |
| 7.67 | % |
| 14,264,284 | |
| 258,069 |
| 7.26 | % |
Allowance for credit losses on loans | |
| (76,456) | |
|
|
|
| |
| (54,411) | |
|
|
|
| |
Noninterest-earning assets | |
| 670,773 | |
|
|
|
| |
| 463,384 | |
|
|
|
| |
Total assets | | $ | 17,814,191 | |
|
|
|
| | $ | 14,673,257 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | |
Liabilities/Equity: | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Interest-bearing checking | | $ | 4,935,123 | | $ | 58,128 |
| 4.74 | % | $ | 4,307,736 | | $ | 48,296 |
| 4.50 | % |
Savings deposits | |
| 145,262 | |
| 19 |
| 0.05 | % |
| 236,012 | |
| 299 |
| 0.51 | % |
Money market | |
| 2,788,335 | |
| 33,207 |
| 4.79 | % |
| 2,749,594 | |
| 30,521 |
| 4.45 | % |
Certificates of deposit | |
| 6,535,651 | |
| 88,297 |
| 5.43 | % |
| 4,729,242 | |
| 58,685 |
| 4.98 | % |
Total interest-bearing deposits | |
| 14,404,371 | |
| 179,651 |
| 5.02 | % |
| 12,022,584 | |
| 137,801 |
| 4.60 | % |
Borrowings | |
| 1,031,180 | |
| 20,503 |
| 8.00 | % |
| 591,333 | |
| 14,651 |
| 9.94 | % |
Total interest-bearing liabilities | |
| 15,435,551 | |
| 200,154 |
| 5.22 | % |
| 12,613,917 | |
| 152,452 |
| 4.85 | % |
Noninterest-bearing deposits | |
| 331,246 | |
|
|
|
| |
| 346,837 | |
|
|
|
| |
Noninterest-bearing liabilities | |
| 222,664 | |
|
|
|
| |
| 167,527 | |
|
|
|
| |
Total liabilities | |
| 15,989,461 | |
|
|
|
| |
| 13,128,281 | |
|
|
|
| |
Equity | |
| 1,824,730 | |
|
|
|
| |
| 1,544,976 | |
|
|
|
| |
Total liabilities and equity | | $ | 17,814,191 | |
|
|
|
| | $ | 14,673,257 | |
|
|
|
| |
Net interest income | |
|
| | $ | 128,119 |
|
| |
|
| | $ | 105,617 |
|
| |
Interest rate spread | |
|
| |
|
|
| 2.45 | % |
|
| |
|
|
| 2.41 | % |
Net interest-earning assets | | $ | 1,784,323 | |
|
|
|
| | $ | 1,650,367 | |
|
|
| | |
Net interest margin | |
|
| |
|
|
| 2.99 | % |
|
| |
|
|
| 2.97 | % |
Average interest-earning assets to average interest-bearing liabilities | |
|
| |
|
|
| 111.56 | % |
|
| |
|
|
| 113.08 | % |
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). Yields have been calculated on a pre-tax basis.
56
Merchants Bancorp
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 June 30, 2024 | |||||||
| | compared to June 30, 2023 | |||||||
| | Increase (Decrease) | | | |||||
| | Due to | | | |||||
(Dollars in thousands) |
| Volume |
| Rate |
| Total | |||
Interest income |
| |
|
| |
|
| |
|
Interest-earning deposits, and other | | $ | 2,520 | | $ | 370 | | $ | 2,890 |
Securities available for sale | |
| 3,031 | |
| 6,189 | |
| 9,220 |
Securities held to maturity | | | 1,064 | | | 1,424 | | | 2,488 |
Mortgage loans in process of securitization | |
| (507) | |
| 424 | |
| (83) |
Loans and loans held for sale | |
| 45,458 | |
| 10,231 | |
| 55,689 |
Total interest income | |
| 51,566 | |
| 18,638 | |
| 70,204 |
Interest expense | |
|
| |
|
| |
|
|
Deposits | |
|
| |
|
| |
|
|
Interest-bearing checking | |
| 7,034 | |
| 2,798 | |
| 9,832 |
Savings deposits | |
| (115) | |
| (165) | |
| (280) |
Money market deposits | |
| 430 | |
| 2,256 | |
| 2,686 |
Certificates of deposit | |
| 22,416 | |
| 7,196 | |
| 29,612 |
Total Deposits | |
| 29,765 | |
| 12,085 | |
| 41,850 |
Borrowings | |
| 10,898 | |
| (5,046) | |
| 5,852 |
Total interest expense | |
| 40,663 | |
| 7,039 | |
| 47,702 |
Net interest income | | $ | 10,903 | | $ | 11,599 | | $ | 22,502 |
Provision for Credit Losses. We recorded a total provision for credit losses of $10.0 million for the three months ended June 30, 2024, a decrease of $12.6 million, or 56%, compared to the three months ended June 30, 2023. The 56% decrease was primarily due to lower loan charge-offs and relative changes to qualitative factors.
The provision for the three months ended June 30, 2024 reflected $3.5 million related to charge-offs, $3.8 million for specific reserves, and loan growth.
The provision for the three months ended June 30, 2023 included $8.2 million related to charge-offs, an increase of $4.6 million related to changes in qualitative factors and loss rates as well as $2.0 million for specific reserves.
The $10.0 million provision for credit losses consisted of $8.8 million for the ACL-Loans and $1.2 million for the ACL-OBCE’s. The ACL-Loans was $81.0 million, or 0.74%, of total loans, at June 30, 2024, compared to $71.8 million, or 0.70%, of total loans, at December 31, 2023, and $63.0 million, or 0.64%, at June 30, 2023.
Noninterest Income. Noninterest income of $31.4 million for the three months ended June 30, 2024 increased $1.5 million, or 5%, compared to $29.9 million for the three months ended June 30, 2023. The increase was primarily due to a $2.2 million, or 26%, increase in net loan servicing fees and a $1.4 million, or 46%, increase in other income, that was partially offset by a $1.3 million, or 47%, decrease in mortgage warehouse fees.
Loan servicing fees included a $5.1 million positive fair market value adjustment to servicing rights for the three months ended June 30, 2024, compared to a $3.4 million positive adjustment to fair value of servicing rights for the three months ended June 30, 2023.
57
Merchants Bancorp
A summary of the gain on sale of loans for the three months ended June 30, 2024 and 2023 is below:
| | | | | |
| | For the Three Months Ended June 30, | |||
| | 2024 | | | 2023 |
| | (in thousands) | |||
Loan Type | | | | | |
Multi-family | $ | 9,083 | | $ | 10,361 |
Single-family | | 524 | | | 202 |
Small Business Association (SBA) | | 1,561 | | | 787 |
Total | $ | 11,168 | | $ | 11,350 |
Noninterest Expense. Noninterest expense of $50.4 million for the three months ended June 30, 2024 increased $6.1 million, or 14%, compared to $44.3 million for the three months ended June 30, 2023. The increase was due primarily to a $2.6 million, or 10%, increase in salaries and employee benefits to support business growth, as well as a $1.8 million, or 47%, increase in FDIC deposit insurance expenses. The higher noninterest expense also reflected a $1.6 million, or 27%, increase in other expenses primarily associated with ongoing premium expense on the credit default swap that was executed in March 2024.
The efficiency ratio was at 31.59% for the three months ended June 30, 2024, compared with 32.71% for the three months ended June 30, 2023.
Income Taxes. Income tax expense of $22.7 million for the three months ended June 30, 2024 increased $19.5 million, or 594%, compared to the three months ended June 30, 2023. The increase was primarily due to a $13.0 million tax benefit recorded in the second quarter of 2023 that was related to tax refunds and changes to our state tax apportionment calculation. The effective tax rate was 22.9% for the three months ended June 30, 2024 and 4.8% for the three months ended June 30, 2023.
Comparison of Operating Results for the Six Months Ended June 30, 2024 and 2023
General. Net income of $163.4 million for the six months ended June 30, 2024 increased $43.2 million, or 36%, compared to the six months ended June 30, 2023. The increase was primarily due to a $48.9 million increase in net interest income, a $28.1 million increase in noninterest income, and a $14.8 million decrease in the provision for credit losses, partially offset by a $28.3 million increase in the provision for income taxes and a $20.2 million increase in noninterest expense.
Net Interest Income. Net interest income of $255.2 million for the six months ended June 30, 2024 increased $48.9 million, or 24%, compared to $206.3 million for the six months ended June 30, 2023. The increase reflected an increase in interest income primarily from both higher average balances and average yields on loans, securities available for sale, and securities held to maturity, partially offset by an increase in interest expense from both higher average balances and rates on certificates of deposit accounts, interest-bearing checking, and borrowings. The interest rate spread of 2.52% for the six months ended June 30, 2024 decreased 5 basis points compared to 2.57% for the six months ended June 30, 2023.
Our net interest margin decreased 4 basis points, to 3.07% for the six months ended June 30, 2024 from 3.11% for the six months ended June 30, 2023. The margin was negatively impacted by approximately 3 basis points from the net reversal of $2.8 million in accrued interest income associated with the movement of loans into nonaccrual status.
Interest Income. Interest income of $642.4 million for the six months ended June 30, 2024 increased $173.1 million, or 37%, compared to the six months ended June 30, 2023. This increase was primarily attributable to an increase in average balances and higher yields of loans and loans held for sale, securities available for sale, and securities held to maturity.
58
Merchants Bancorp
Interest income of $556.4 million for the six months ended June 30, 2024 on loans and loans held for sale increased $138.2 million, or 33%, compared to the six months ended June 30, 2023. The average balance of loans, including loans held for sale, during the six months ended June 30, 2024 increased $2.6 billion, or 23%, to $13.9 billion compared to $11.3 billion for the six months ended June 30, 2023, and the average yield on loans increased 57 basis points, to 8.04% for the six months ended June 30, 2024, compared to 7.47% for the six months ended June 30, 2023.
Interest income of $29.2 million for the six months ended June 30, 2024 on securities available for sale increased $21.3 million, or 273%, compared to the six months ended June 30, 2023. The average balance of securities available for sale increased $502.4 million, or 90%, to $1.1 billion for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, and the average yield increased 270 basis points, to 5.52% for the six months ended June 30, 2024, compared to 2.82% for the six months ended June 30, 2023.
Interest income of $40.3 million for the six months ended June 30, 2024 on securities held to maturity increased $7.3 million, or 22%, compared to the six months ended June 30, 2023. The average balance of securities held to maturity, during the six months ended June 30, 2024 increased $74.3 million, or 7%, to $1.2 billion compared to the six months ended June 30, 2023. The average yield on securities held to maturity increased 84 basis points, to 6.88% for the six months ended June 30, 2024 ended, compared to 6.04% for the six months ended June 30, 2023.
Interest income of $11.8 million for the six months ended June 30, 2024 on interest-earning deposits and other increased $6.3 million, or 114%, compared to $5.5 million for the six months ended June 30, 2023. The average balance of interest-earning deposits and other increased $175.0 million, or 81%, to $392.3 million for the six months ended June 30, 2024, from $217.3 million for the six months ended June 30, 2023, and the average yield increased 92 basis points, to 6.03% for the six months ended June 30, 2024, compared to 5.11% for the six months ended June 30, 2023.
Interest Expense. Total interest expense of $387.3 million for the six months ended June 30, 2024 increased $124.2 million, or 47%, compared to $263.1 million for the six months ended June 30, 2023.
Interest expense on deposits increased $108.4 million, or 45%, to $350.7 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The increase was primarily due to increases in both average balances and higher rates for certificate of deposit accounts and interest-bearing checking accounts, as well as higher rates on money market accounts.
Interest expense of $164.8 million for the six months ended June 30, 2024 for certificates of deposits increased $71.2 million, or 76%, compared to $93.6 million for the six months ended June 30, 2023. The average balance of certificates of deposit accounts was $6.1 billion for the six months ended June 30, 2024, an increase of $2.1 million, or 52%, compared to the six months ended June 30, 2023. The average rate on certificates of deposit accounts was 5.42% for the six months ended June 30, 2024, which was a 74 basis point increase compared to 4.68% for the six months ended June 30, 2023.
Interest expense of $118.8 million for the six months ended June 30, 2024 for interest-bearing checking accounts increased $29.9 million, or 34%, compared to $88.9 million for the six months ended June 30, 2023. The average balance of interest-bearing checking accounts of $5.0 billion for the six months ended June 30, 2024 increased $822.1 million, or 20%, compared to $4.2 billion for the six months ended June 30, 2023. The average rate on interest-bearing checking accounts was 4.78% for the six months ended June 30, 2024, which was a 49 basis point increase compared to 4.29% for the six months ended June 30, 2023.
Interest expense of $66.9 million for the six months ended June 30, 2024 for money market accounts increased $7.7 million, or 13%, compared to the six months ended June 30, 2023. The average balance of money market accounts of $2.8 billion for the six months ended June 30, 2024 increased $4.1 million compared to the six months ended June 30, 2023. The average rate on money market accounts was 4.80% for the six months ended June 30, 2024, which was a 54 basis point increase compared to 4.26% for the six months ended June 30, 2023.
59
Merchants Bancorp
Interest expense of $36.6 million for the six months ended June 30, 2024 for borrowings increased $15.8 million, or 76%, compared to $20.8 million for the six months ended June 30, 2023. The increase was primarily due to a $336.7 million, or 63%, increase in average balances to fund loan growth and an increase of 61 basis points in the average rate of borrowings, to 8.42% compared to 7.81% for the six months ended June 30, 2023. Also included in borrowings, is our warehouse structured financing agreements that provide for additional interest payments for a portion of the earnings generated. As a result, the cost of borrowings increased from a base rate of 7.93% and 7.43%, to an effective rate of 8.42% and 7.81% for the six months ended June 30, 2024 and 2023, respectively.
60
Merchants Bancorp
The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. Nonaccrual loans are included in loans and loans held for sale.
| | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| ||||||||||||||
| | 2024 | | 2023 |
| ||||||||||||
| | | | | Interest | | | | | | | Interest | | |
| ||
| | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ |
| ||||
|
| Balance |
| Expense |
| Rate |
| Balance |
| Expense |
| Rate |
| ||||
| | (Dollars in thousands) | | ||||||||||||||
Assets: | | | | | | | | | | | | | | | | | |
Interest-earning deposits, and other | | $ | 392,297 | | $ | 11,770 |
| 6.03 | % | $ | 217,276 | | $ | 5,511 |
| 5.11 | % |
Securities available for sale | |
| 1,062,251 | |
| 29,172 |
| 5.52 | % |
| 559,878 | |
| 7,830 |
| 2.82 | % |
Securities held to maturity | | | 1,178,401 | | | 40,321 | | 6.88 | % | | 1,104,069 | |
| 33,065 |
| 6.04 | % |
Mortgage loans in process of securitization | |
| 186,298 | |
| 4,764 |
| 5.14 | % |
| 220,046 | |
| 4,775 |
| 4.38 | % |
Loans and loans held for sale | |
| 13,921,063 | |
| 556,419 |
| 8.04 | % |
| 11,285,909 | |
| 418,182 |
| 7.47 | % |
Total interest-earning assets | |
| 16,740,310 | |
| 642,446 |
| 7.72 | % |
| 13,387,178 | |
| 469,363 |
| 7.07 | % |
Allowance for credit losses on loans | |
| (74,000) | |
|
|
|
| |
| (49,826) | |
|
|
|
| |
Noninterest-earning assets | |
| 637,322 | |
|
|
|
| |
| 447,082 | |
|
|
|
| |
Total assets | | $ | 17,303,632 | |
|
|
|
| | $ | 13,784,434 | |
|
|
|
| |
| | | | | | | | | | | | | | | | | |
Liabilities/Equity: | |
|
| |
|
|
|
| |
|
| |
|
|
|
| |
Interest-bearing checking | | $ | 5,002,758 | | $ | 118,816 |
| 4.78 | % | $ | 4,180,614 | | $ | 88,943 |
| 4.29 | % |
Savings deposits | |
| 173,561 | |
| 238 |
| 0.28 | % |
| 236,647 | |
| 565 |
| 0.48 | % |
Money market | |
| 2,802,859 | |
| 66,850 |
| 4.80 | % |
| 2,798,774 | |
| 59,129 |
| 4.26 | % |
Certificates of deposit | |
| 6,115,292 | |
| 164,769 |
| 5.42 | % |
| 4,030,001 | |
| 93,606 |
| 4.68 | % |
Total interest-bearing deposits | |
| 14,094,470 | |
| 350,673 |
| 5.00 | % |
| 11,246,036 | |
| 242,243 |
| 4.34 | % |
Borrowings | |
| 874,017 | |
| 36,598 |
| 8.42 | % |
| 537,328 | |
| 20,810 |
| 7.81 | % |
Total interest-bearing liabilities | |
| 14,968,487 | |
| 387,271 |
| 5.20 | % |
| 11,783,364 | |
| 263,053 |
| 4.50 | % |
Noninterest-bearing deposits | |
| 331,709 | |
|
|
|
| |
| 325,596 | |
|
|
|
| |
Noninterest-bearing liabilities | |
| 217,241 | |
|
|
|
| |
| 154,547 | |
|
|
|
| |
Total liabilities | |
| 15,517,437 | |
|
|
|
| |
| 12,263,507 | |
|
|
|
| |
Equity | |
| 1,786,195 | |
|
|
|
| |
| 1,520,927 | |
|
|
|
| |
Total liabilities and equity | | $ | 17,303,632 | |
|
|
|
| | $ | 13,784,434 | |
|
|
|
| |
Net interest income | |
|
| | $ | 255,175 |
|
| |
|
| | $ | 206,310 |
|
| |
Interest rate spread | |
|
| |
|
|
| 2.52 | % |
|
| |
|
|
| 2.57 | % |
Net interest-earning assets | | $ | 1,771,823 | |
|
|
|
| | $ | 1,603,814 | |
|
|
| | |
Net interest margin | |
|
| |
|
|
| 3.07 | % |
|
| |
|
|
| 3.11 | % |
Average interest-earning assets to average interest-bearing liabilities | |
|
| |
|
|
| 111.84 | % |
|
| |
|
|
| 113.61 | % |
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). Yields have been calculated on a pre-tax basis.
61
Merchants Bancorp
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:
| | | | | | | | | |
| | Six Months Ended June 30, 2024 | |||||||
| | compared to June 30, 2023 | |||||||
| | Increase (Decrease) | | | |||||
| | Due to | | | |||||
(Dollars in thousands) |
| Volume |
| Rate |
| Total | |||
Interest income |
| |
|
| |
|
| |
|
Interest-earning deposits, and other | | $ | 4,439 | | $ | 1,820 | | $ | 6,259 |
Securities available for sale | |
| 7,026 | |
| 14,316 | |
| 21,342 |
Securities held to maturity | | | 2,226 | | | 5,030 | |
| 7,256 |
Mortgage loans in process of securitization | |
| (732) | |
| 721 | |
| (11) |
Loans and loans held for sale | |
| 97,642 | |
| 40,595 | |
| 138,237 |
Total interest income | |
| 110,601 | |
| 62,482 | |
| 173,083 |
Interest expense | |
|
| |
|
| |
|
|
Deposits | |
|
| |
|
| |
|
|
Interest-bearing checking | |
| 17,491 | |
| 12,382 | |
| 29,873 |
Savings deposits | |
| (151) | |
| (176) | |
| (327) |
Money market deposits | |
| 86 | |
| 7,635 | |
| 7,721 |
Certificates of deposit | |
| 48,436 | |
| 22,727 | |
| 71,163 |
Total Deposits | |
| 65,862 | |
| 42,568 | |
| 108,430 |
Borrowings | |
| 13,040 | |
| 2,748 | |
| 15,788 |
Total interest expense | |
| 78,902 | |
| 45,316 | |
| 124,218 |
Net interest income | | $ | 31,699 | | $ | 17,166 | | $ | 48,865 |
Provision for Credit Losses. We recorded a provision for credit losses of $14.7 million for the six months ended June 30, 2024, a decrease of $14.8 million, or 50%, compared to $29.5 million for the six months ended June 30, 2023. The decrease was primarily due to lower loan charge-offs and relative changes to qualitative factors.
Noninterest Income. Noninterest income of $72.2 million for the six months ended June 30, 2024 increased $28.1 million, or 64%, compared to $44.1 million for the six months ended June 30, 2023. The increase was primarily due to a $19.3 million, or 175%, increase in loan servicing fees, a $4.5 million, or 73%, increase in other income, a $3.4 million, or 67%, increase in syndication and asset management fees, and $2.4 million, or 13%, increase in gain on sale of loans compared to the six months ended June 30, 2023.
The increase in loan servicing fees reflected higher positive adjustments to fair value of servicing rights. Included in loan servicing fees was a $19.0 million positive adjustment to the fair value of servicing rights for the six months ended June 30, 2024, compared to a positive adjustment of $0.5 million for the six months ended June 30, 2023. The $4.5 million increase in other income is primarily due to $3.5 million in fee income related to derivatives. The $3.4 million increase in syndication and asset management fees increased as we continue to experience growth in this line of business.
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Merchants Bancorp
A summary of the gain on sale of loans for the six months ended June 30, 2024 and 2023 is below:
| | | | | |
| | For the Six Months Ended June 30, | |||
| | 2024 | | | 2023 |
| | (in thousands) | |||
Loan Type | | | | | |
Multi-family | $ | 17,506 | | $ | 15,281 |
Single-family | | 804 | | | 479 |
Small Business Association (SBA) | | 2,214 | | | 2,323 |
Total | $ | 20,524 | | $ | 18,083 |
Noninterest Expense. Noninterest expense of $99.3 million for the six months ended June 30, 2024 increased $20.2 million, or 26%, compared to $79.1 million for the six months ended June 30, 2023. The increase was primarily due to a $10.1 million, or 21%, increase in salaries and employee benefits primarily due to higher commissions associated with loan growth, as well as a $4.7 million, or 79%, increase in deposit insurance. Other expenses increased $3.1 million, or 32%, primarily due to ongoing premium expense on the credit default swap that was executed in March 2024.
The efficiency ratio was at 30.33% for the six months ended June 30, 2024, compared with 31.58% for the six months ended June 30, 2023.
Income Taxes. Provision for income taxes of $50.0 million for the six months ended June 30, 2024 increased $28.3 million, or 131%, compared to $21.6 million for the six months ended June 30, 2023. The increase reflected a $13.0 million tax benefit recorded in the second quarter of 2023 related to tax refunds and changes to state tax apportionment calculations, as well as taxes on higher pre-tax income during the six months ended June 30, 2024. The effective tax rate was 23.4% for the six months ended June 30, 2024 and 15.2% for the six months ended June 30, 2023.
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 through Merchants Capital. Merchants Capital is also a fully integrated syndicator of low-income housing tax credit and debt funds. As one of the top ranked agency affordable lenders in the nation, our licenses with Fannie Mae, Freddie Mac, and FHA, coupled with our bank financing products, provide sponsors with custom beginning-to-end financing solutions that adapt to an ever-changing market. We are also one of the largest Ginnie Mae servicers in the country based on aggregate loan principal value. As of June 30, 2024 the Company’s total servicing portfolio had an unpaid principal balance of $27.1 billion, primarily managed in the Multi-Family Mortgage Banking segment. Included in this amount was an unpaid principal balance of loans serviced for others of $15.9 billion, an unpaid principal balance of loans sub-serviced for others of $2.4 billion, and other servicing balances of $0.7 billion at June 30, 2024. These loans are not included in the accompanying balance sheets. The Company also manages $8.1 billion of loans for customers that have loans on the balance sheet at June 30, 2024. The servicing portfolio primarily consists of Ginnie Mae, 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 $33.2 billion in 2022, $33.0 billion in 2023, and $18.8 billion for the six months ended June 30, 2024. Mortgage Warehousing also provides commercial loans and collects deposits related to the mortgage escrow accounts of its customers.
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Merchants Bancorp
The Banking segment includes retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending. Banking operates primarily in Indiana, 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. Strategic opportunities come from MCC and MCS, where loans are funded by the Banking segment and the Banking segment provides Ginnie Mae custodial services to MCC and MCS. Low-income tax credit syndication and debt fund offerings complement the lending activities of new and existing multi-family mortgage customers. The securities available for sale and held to maturity funded by MCC custodial deposits or purchases of securitized loans originated by MCC are pledged to the FHLB to provide advance capacity during periods of high residential loan volume for Mortgage Warehousing. Mortgage Warehousing provides leads to Correspondent Residential Lending in the Banking segment. Retail and commercial customers provide cross selling opportunities within the banking segment. Merchants Mortgage is a risk mitigant to Mortgage Warehousing because it provides us with a ready platform to sell or refinance the underlying collateral to secure repayment. These and other synergies form a part of our strategic plan.
The Other segment presented below, in Note 16: Segment Information, and elsewhere in this report includes general and administrative expenses for provision of services to all segments, internal funds transfer pricing offsets resulting from allocations to or from the other segments, certain elimination entries, and investments in low-income housing tax credit limited partnerships or Limited Liability Companies (“LLC”).
For the three months ended June 30, 2024 and 2023, we had total net income of $76.4 million and $65.3 million, respectively. For the six months ended June 30, 2024 and 2023, we had total net income of $163.4 million and $120.3 million, respectively. Net income and assets for our segments for the respective periods was as follows:
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended | | | Assets at | ||||||||
| | June 30, | | June 30, | | | June 30, | ||||||||
|
| 2024 |
| 2023 |
| 2024 |
| 2023 | | | 2024 | ||||
| | (In thousands) | |||||||||||||
Multi-family Mortgage Banking | | $ | 9,037 | | $ | 11,242 | | $ | 25,646 | | $ | 13,208 | | $ | 428,299 |
Mortgage Warehousing | |
| 22,270 | |
| 18,596 | |
| 42,460 | |
| 27,237 | |
| 5,626,055 |
Banking | |
| 52,378 | |
| 42,650 | |
| 108,803 | |
| 91,957 | |
| 11,885,484 |
Other | |
| (7,292) | |
| (7,186) | |
| (13,462) | |
| (12,145) | |
| 272,584 |
Total | | $ | 76,393 | | $ | 65,302 | | $ | 163,447 | | $ | 120,257 | | $ | 18,212,422 |
Multi-family Mortgage Banking.
Comparison of results for the three months ended June 30, 2024 and 2023:
The Multi-family Mortgage Banking segment reported net income of $9.0 million for the three months ended June 30, 2024, a decrease of $2.2 million, or 20%, compared to $11.2 million for the three months ended June 30, 2023. The decrease in net income was primarily due to a tax benefit recorded in the second quarter of 2023 that was related to tax refunds and changes in state tax apportionment calculations.
Results included a $4.5 million positive fair market value adjustment to servicing rights for the three months ended June 30, 2024 compared to a $2.1 million positive fair market value adjustment for the three months ended June 30, 2023.
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Merchants Bancorp
The volume of loans originated and acquired for sale in the secondary market decreased by $329.5 million, or 49%, to $338.7 million, for the three months ended June 30, 2024, compared to $668.2 million for the three months ended June 30, 2023.
Comparison of results for the six months ended June 30, 2024 and 2023:
The Multi-family Mortgage Banking segment reported net income of $25.6 million for the six months ended June 30, 2024, an increase of $12.4 million, or 94%, from the $13.2 million of net income reported for the six months ended June 30, 2023. The increase in net income was primarily due to a $19.9 million increase in servicing fees, as well as a $3.3 million increase in syndication and asset management fees as we continue to see growth in this line of business, and a $1.4 million increase in gain on sale of loans. These increases to net income were partially offset by a $5.6 million increase in noninterest expense, primarily associated with an $8.0 million increase in income tax expense reflecting a tax benefit recorded in the second quarter of 2023 related to tax refunds and changes in state tax apportionment calculations, as well as higher salaries and benefits to support business growth.
Loan servicing fees for the six months ended June 30, 2024 included a positive fair market value adjustment of $17.7 million on servicing rights, compared to a negative fair market value adjustment of $0.1 million for the six months ended June 30, 2023.
The volume of loans originated and acquired for sale in the secondary market decreased by $190.9 million, or 24%, to $591.4 million, for the six months ended June 30, 2024, compared to $782.3 million for the six months ended June 30, 2023.
Mortgage Warehousing.
Comparison of results for the three months ended June 30, 2024 and 2023:
The Mortgage Warehousing segment reported net income of $22.3 million for the three months ended June 30, 2024, an increase of $3.7 million, or 20%, compared to $18.6 million for the three months ended June 30, 2023. The increase in net income reflected higher net interest income as volumes increased.
There was a 30% increase in warehouse loan volume of $10.9 billion compared to $8.4 billion for the three months ended June 30, 2023, which compared to an industry volume decrease of 7% according to the Mortgage Bankers Association.
Comparison of results for the six months ended June 30, 2024 and 2023:
The Mortgage Warehousing segment reported net income for the six months ended June 30, 2024 of $42.5 million, an increase of $15.2 million, or 56%, compared to the six months ended June 30, 2023. The increase in net income reflected higher net interest income as volumes increased.
There was a 36% increase in warehouse loan volume of $18.8 billion compared to $13.8 billion for the six months ended June 30, 2023, which compared to an industry volume increase of 1% according to the Mortgage Bankers Association.
Banking.
Comparison of results for the three months ended June 30, 2024 and 2023:
The Banking segment reported net income of $52.4 million for the three months ended June 30, 2024, an increase of $9.7 million, or 23%, compared to $42.7 million for the three months ended June 30, 2023. The increase in net income
65
Merchants Bancorp
was primarily due to higher net interest income from higher average balances and yields on loans and loans held for sale that were partially offset by higher average balances and rates on deposits.
Noninterest income for the three months ended June 30, 2024 included a positive fair market value adjustment of $0.6 million on single-family servicing rights, compared to a positive fair market value adjustment of $1.3 million for the three months ended June 30, 2023.
Comparison of results for the six months ended June 30, 2024 and 2023:
The Banking segment reported net income of $108.8 million for the six months ended June 30, 2024, an increase of $16.8 million, or 18%, compared to $92.0 million for the six months ended June 30, 2023. The increase in net income was primarily due to higher net interest income from higher average balances and yields on loans that were partially offset by increased interest expense primarily due to higher average balances and rates on deposits and borrowings.
Noninterest income for the six months ended June 30, 2024 included a positive fair market value adjustment of $1.3 million on single-family servicing rights, compared to a positive fair market value adjustment of $0.6 million for the six months ended June 30, 2023.
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, interest on investment securities, 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 June 30, 2024, based on collateral, we had $7.0 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window. This compared to $6.0 billion at December 31, 2023. While the amounts available fluctuate daily, we also had available capacity 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-earning 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 $7.0 billion described above, these totaled $12.6 billion, or 69%, of its $18.2 billion total assets at June 30, 2024. 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 represent approximately 15% of total deposits. Our line of credit with Federal Reserve Board, alone, could fund 118% of uninsured 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 $1.5 billion and $1.6 billion as of June 30, 2024 and December 31, 2023, respectively.
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. As of June 30, 2024, Accumulated Other Comprehensive Losses (“AOCL”) of $0.5 million losses, related to securities available for sale, decreased $2.0 million, or 80%, compared to losses of $2.5 million as of December 31, 2023. The $0.5 million of AOCL as of June 30, 2024 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 operating activities was ($332.7) million and $(543.0) million for the
66
Merchants Bancorp
six months ended June 30, 2024 and 2023, 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 $(1.0) billion and $(2.4) billion for the six months ended June 30, 2024 and 2023, respectively. Net cash provided by financing activities, which is comprised primarily of net change in borrowings and deposits was $1.3 billion and $3.1 billion for the six months ended June 30, 2024 and 2023, respectively.
Certificates of deposit that are scheduled to mature in less than one year from June 30, 2024 totaled $6.8 billion, or 98%, 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.
Off-Balance Sheet Arrangements.
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.
At June 30, 2024, we had $3.9 billion in outstanding commitments to extend credit that are subject to credit risk and $3.7 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, the Company’s business model is designed to continuously sell a significant portion of its loans, which provides flexibility in managing its liquidity.
Capital Resources.
The access to and cost of funding 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, 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 $1.9 billion as of June 30, 2024, compared to $1.7 billion as of December 31, 2023. The $187.1 million or 11%, increase resulted primarily from net income of $163.4 million and net proceeds of $97.7 million from a common stock offering, which was partially offset by redemption of 7% Series A Preferred Stock for $52.0 million and dividends paid on common and preferred shares of $24.4 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.
67
Merchants Bancorp
The Company redeemed all outstanding shares of the Series A Preferred Stock on April 1, 2024 for $52 million at a price equal to the liquidation preference of $25.00 per share, using cash on hand.
6% Series B Preferred Stock. In August 2019 the Company issued 5,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, without par value, 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 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 has replaced 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, if the Series B Preferred Stock remains outstanding on or after October 1, 2024, in addition to using three-month SOFR as the benchmark, the Company will increase 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 October 1, 2024.
6% Series C Preferred Stock. On March 23, 2021, the Company issued 6,000,000 depositary shares, each representing a 1/40th 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 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 1/40th interest in a share of its 8.25% Fixed Rate Reset 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
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Merchants Bancorp
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. If the Series D Preferred Stock remains outstanding on October 1, 2027, its dividend rate would reset to the 5-year Treasury rate, plus 4.34% and would remain at that level for an additional 5 years.
Common Shares/Dividends. As of June 30, 2024, the Company had 45,757,567 common shares issued and outstanding. The Board expects to declare a quarterly dividend of $0.09 per share in each quarter of 2024.
On May 13, 2024, the Company issued 2.4 million shares of the Company’s common stock, without par value, at a public offering price of $43.00 per share in an underwritten public offering. The aggregate gross offering proceeds for the shares issued by the Company was $103.2 million, and after deducting underwriting discounts, commissions, and offering expenses of $5.5 million paid to third parties, the Company received total net proceeds of $97.7 million.
Capital Adequacy.
The following tables present the Company’s capital ratios at June 30, 2024 and December 31, 2023:
| | | | | | | | | | | | | | | | |
| | | | | | | Minimum | | | | ||||||
| | | | | | | Amount to be Well | | Minimum Amount | | ||||||
| | | | | | | Capitalized with | | To Be Well | | ||||||
| | Actual | | Basel III Buffer(1) | | Capitalized(1) | | |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio | | Amount |
| Ratio |
| |||
| | (Dollars in thousands) | | |||||||||||||
June 30, 2024 | | | | | | | | | | | | | | | | |
Total capital(1) (to risk-weighted assets) |
| |
|
|
|
| | | | | | |
|
|
|
|
Company | | $ | 1,977,729 |
| 12.0 | % | $ | 1,726,065 |
| 10.5 | % | $ | — |
| N/A | % |
Merchants Bank | | | 1,971,631 |
| 12.0 | % |
| 1,725,481 |
| 10.5 | % |
| 1,643,316 |
| 10.0 | |
Tier I capital(1) (to risk-weighted assets) | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
Company | |
| 1,879,605 |
| 11.4 | % |
| 1,397,291 |
| 8.5 | % |
| — |
| N/A | % |
Merchants Bank | | | 1,873,508 |
| 11.4 | % |
| 1,396,818 |
| 8.5 | % |
| 1,314,653 |
| 8.0 | |
Common Equity Tier I capital(1) (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Company | |
| 1,430,219 |
| 8.7 | % |
| 1,150,710 |
| 7.0 | % |
| — |
| N/A | % |
Merchants Bank | | | 1,873,508 |
| 11.4 | % |
| 1,150,321 |
| 7.0 | % |
| 1,068,155 |
| 6.5 | |
Tier I capital(1) (to average assets) | |
| |
|
| |
|
|
| | |
|
|
|
| |
Company | |
| 1,879,605 |
| 10.6 | % |
| 890,257 |
| 5.0 | % |
| — |
| N/A | % |
Merchants Bank | | | 1,873,508 |
| 10.5 | % |
| 887,924 |
| 5.0 | % |
| 887,924 |
| 5.0 | |
| (1) | As defined by regulatory agencies. |
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Merchants Bancorp
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | Minimum | | | | ||||||
| | | | | | | Amount to be Well | | Minimum Amount | | ||||||
| | | | | | | Capitalized with | | To Be Well | | ||||||
| | | | | | | Basel III Buffer(1) | | Capitalized(1) | | ||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio | | Amount | | Ratio | | |||
| | (Dollars in thousands) | | | | | | |||||||||
December 31, 2023 | | | | | | | | | | | | | | | | |
Total capital(1) (to risk-weighted assets) |
| |
|
|
|
| | | | | | |
|
|
|
|
Company | | $ | 1,772,195 |
| 11.6 | % | $ | 1,598,260 |
| 10.5 | % | $ | — |
| N/A | % |
Merchants Bank | | | 1,724,505 |
| 11.5 | % |
| 1,577,434 |
| 10.5 | % |
| 1,502,318 |
| 10.0 | % |
FMBI | |
| 40,613 |
| 21.1 | % |
| 20,209 |
| 10.5 | % |
| 19,247 |
| 10.0 | % |
Tier I capital(1) (to risk-weighted assets) | |
|
|
|
| |
|
|
|
| |
|
|
|
| |
Company | |
| 1,686,202 |
| 11.1 | % |
| 1,293,830 |
| 8.5 | % |
| — |
| N/A | % |
Merchants Bank | | | 1,639,171 |
| 10.9 | % |
| 1,276,970 |
| 8.5 | % |
| 1,201,854 |
| 8.0 | % |
FMBI | |
| 39,953 |
| 20.8 | % |
| 16,360 |
| 8.5 | % |
| 15,398 |
| 8.0 | % |
Common Equity Tier I capital(1) (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Company | |
| 1,186,594 |
| 7.8 | % |
| 1,065,507 |
| 7.0 | % |
| — |
| N/A | % |
Merchants Bank | | | 1,639,171 |
| 10.9 | % |
| 1,051,623 |
| 7.0 | % |
| 976,507 |
| 6.5 | % |
FMBI | |
| 39,953 |
| 20.8 | % |
| 13,473 |
| 7.0 | % |
| 12,511 |
| 6.5 | % |
Tier I capital(1) (to average assets) | |
| |
|
| |
|
|
| | |
|
|
|
| |
Company | |
| 1,686,202 |
| 10.1 | % |
| 832,706 |
| 5.0 | % |
| — |
| N/A | % |
Merchants Bank | | | 1,639,171 |
| 10.1 | % |
| 815,191 |
| 5.0 | % |
| 815,191 |
| 5.0 | % |
FMBI | |
| 39,953 |
| 11.5 | % |
| 17,391 |
| 5.0 | % |
| 17,391 |
| 5.0 | % |
| | | | | | | | | | | | | | | | |
| (1) | As defined by regulatory agencies. |
Quantitative measures established by regulation to ensure capital adequacy require the Company and Merchants Bank to maintain minimum amounts and ratios (set forth in the table above). Management believes, as of June 30, 2024 and December 31, 2023, that the Company and Merchants Bank met all capital adequacy requirements to which they were subject. For additional information regarding dividend restrictions, see the Company’s 2023 Annual Report on Form 10–K.
As of June 30, 2024 and December 31, 2023, the most recent notifications from the Federal Reserve categorized the Company as well capitalized and most recent notifications from the FDIC categorized Merchants Bank 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 or Merchants Bank’s category.
FMBI was subject to these measures prior to the sale of its branches and the merger of its remaining charter into Merchants Bank in January 2024. As of December 31, 2023, FMBI met all capital adequacy requirements (as set forth in the table above). The FDIC categorized FMBI as well capitalized at that time and there are no conditions or events since that notification that management believes would have changed that 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.
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Merchants Bancorp
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 a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries or SOFR.
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.
Our Asset-Liability Committee, or ALCO, is a management committee that manages our interest rate risk within 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, at a minimum, to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits. Additionally, the Risk Committee meets quarterly, in conjunction with Board meetings, to assess risks associated with interest rate sensitivity.
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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Merchants Bancorp
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 June 30, 2024 and December 31, 2023.
| | | | | | | | | | | | |
| Net Interest Income Sensitivity |
| ||||||||||
| Twelve Months Forward |
| ||||||||||
| - 200 |
| - 100 |
| + 100 |
| + 200 |
| ||||
| (Dollars in thousands) |
| ||||||||||
June 30, 2024: | |
|
| |
|
| |
|
| |
| |
Dollar change | $ | (89,293) | | $ | (44,404) | | $ | 36,099 | | $ | 70,343 | |
Percent change |
| (16.8) | % |
| (8.4) | % |
| 6.8 | % |
| 13.3 | % |
| | | | | | | | | | | | |
December 31, 2023: |
|
| |
|
| |
|
| |
|
| |
Dollar change | $ | (73,311) | | $ | (36,576) | | $ | 29,601 | | $ | 57,294 | |
Percent change |
| (15.0) | % |
| (7.5) | % |
| 6.0 | % |
| 11.7 | % |
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 June 30, 2024 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) |
| ||||||||||
June 30, 2024: | |
|
| |
|
| |
|
| |
| |
Dollar change | $ | 148,524 | | $ | 77,540 | | $ | (25,446) | | $ | (65,403) | |
Percent change |
| 8.1 | % |
| 4.2 | % |
| (1.4) | % |
| (3.6) | % |
| | | | | | | | | | | | |
December 31, 2023: |
|
| |
|
| |
|
| |
|
| |
Dollar change | $ | 180,864 | | $ | 92,793 | | $ | (34,800) | | $ | (79,455) | |
Percent change |
| 10.8 | % |
| 5.5 | % |
| (2.1) | % |
| (4.7) | % |
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 June 30, 2024 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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Merchants Bancorp
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 June 30, 2024, 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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Merchants Bancorp
Part II
Other Information
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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
.
74
ITEM 6. Exhibits
Exhibit |
| |
Number | Description | |
| ||
3.1 | | |
| | |
3.2 | | |
| | |
3.3 | | |
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 | | |
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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Merchants Bancorp
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | ||
| |
| | Merchants Bancorp |
| | | | |
Date: | August 9, 2024 | | By: | /s/ Michael F. Petrie |
Michael F. Petrie | ||||
Chairman & Chief Executive Officer | ||||
Date: | August 9, 2024 | By: | /s/ John F. Macke | |
John F. Macke Chief Financial Officer | ||||
(Principal Financial & Accounting Officer) |
76