Merchants Bancorp (MBIN) came out with quarterly earnings of $1.80 per share, beating the Zacks Consensus Estimate of $1.38 per share. This compares to earnings of $1.07 per share a year ago. These figures are adjusted for non-recurring items.This quarterly report represents an earnings surprise of 30.43%. A quarter ago, it was expected that this bank holding company would post earnings of $1.44 per share when it actually produced earnings of $1.58, delivering a surprise of 9.72%.Over the last four quarters ...

Financial Performance - First quarter 2024 net income reached $87.1 million, a 58% increase compared to $55.0 million in the first quarter of 2023[2] - Diluted earnings per common share for the first quarter 2024 were $1.80, up 68% from $1.07 in the first quarter of 2023[2] - Net income for Q1 2024 reached $87,054,000, representing a 12% increase from Q4 2023 and a 58% increase from Q1 2023[40] - The company reported a net income allocated to common shareholders of $78,387,000, a 14% increase from Q4 2023 and a 69% increase from Q1 2023[40] - Net income for the three months ended March 31, 2024, was $87,054 million, a 12.4% increase from $77,473 million in the previous quarter and a 58.5% increase from $54,955 million in the same quarter last year[49] Asset and Loan Growth - Total assets increased to $17.8 billion, a 25% rise compared to $14.2 billion as of March 31, 2023[7] - Loans receivable amounted to $10.7 billion, reflecting a $2.1 billion increase, or 25%, compared to March 31, 2023[7] - Total assets as of March 31, 2024, reached $17,822,576 million, up from $16,952,516 million at the end of the previous quarter and $14,240,966 million a year ago, reflecting a year-over-year growth of 25.5%[49] - Loans receivable as of March 31, 2024, totaled $10,690,513 million, an increase of 5.5% from $10,127,801 million in the previous quarter and a 24.7% increase from $8,575,210 million a year ago[49] - Total loans, net of allowance for credit losses, reached $14,193,644 million as of March 31, 2024, compared to $13,272,557 million in the previous quarter and $11,430,460 million a year ago, reflecting a year-over-year growth of 23.5%[49] Income and Expense Analysis - Noninterest income surged to $40.9 million, a 187% increase compared to $14.3 million in the prior year[23] - Noninterest Income increased by $6.4 million, or 19%, to $40.9 million, driven by a $21.6 million, or 997%, rise in loan servicing fees[31] - Total noninterest expense decreased by 7% to $48,912,000 compared to Q4 2023, while increasing by 41% from Q1 2023[40] - Noninterest Expense decreased by $3.7 million, or 7%, to $48.9 million, primarily due to lower salaries and employee benefits[32] Efficiency and Ratios - The efficiency ratio improved to 29.1% in the first quarter of 2024, down from 30.3% in the first quarter of 2023[25] - The efficiency ratio improved to 29.1%, a decrease of 398 basis points from 33.1%[32] - Efficiency ratio improved to 29.13%, down from 33.11% in Q4 2023 and 30.25% in Q1 2023[42] - Return on average tangible common shareholders' equity rose to 25.34%, up 174 basis points from Q4 2023 and 645 basis points from Q1 2023[44] Deposits and Cash Management - Total deposits reached $14.0 billion, an increase of $2.6 billion compared to March 31, 2023[14] - Brokered deposits rose to $5.8 billion, a 54% increase from $3.8 billion as of March 31, 2023[15] - Cash balances stood at $508.8 million, an increase of $139.2 million compared to March 31, 2023[17] - Total deposits decreased to $13.98 billion from $14.06 billion, with noninterest-bearing deposits dropping significantly[37] Credit Losses and Risk Management - The allowance for credit losses on loans was $75.7 million, a 46% increase compared to $51.8 million as of March 31, 2023[9] - Provision for credit losses was $4,726,000, a 30% decrease from Q4 2023 and a 31% decrease from Q1 2023[40] - The company reported an allowance for credit losses on loans of $75,712 million as of March 31, 2024, compared to $71,752 million in the previous quarter and $51,838 million a year ago, indicating a proactive approach to risk management[49] Segment Performance - Merchants Bancorp operates multiple segments, including Multi-family Mortgage Banking and Mortgage Warehousing, contributing to its diversified business model[33] - Multi-family mortgage banking segment net income rose to $16,609 million for the three months ended March 31, 2024, compared to $8,580 million in the previous quarter and $1,966 million a year ago, indicating significant growth[49] - Mortgage warehousing segment net income decreased to $20,190 million for the three months ended March 31, 2024, down from $26,362 million in the previous quarter but up from $8,641 million a year ago[49] - The banking segment reported net income of $56,425 million for the three months ended March 31, 2024, an increase from $49,996 million in the previous quarter and $49,307 million a year ago[49]

PART I [Business](index=5&type=section&id=Item%201.%20Business) Merchants Bancorp is a diversified bank holding company with **$17.0 billion** in assets, operating through Multi-family Mortgage Banking, Mortgage Warehousing, and Banking segments, focusing on an originate-to-sell model Company Snapshot (as of December 31, 2023) | Metric | Value | | :--- | :--- | | Total Assets | $17.0 billion | | Total Deposits | $14.1 billion | | Shareholders' Equity | $1.7 billion | - The company's business model is designed to balance net interest income from its loan portfolio with noninterest income generated from the sale of government-backed loans, aiming for lower charge-offs and a reduced expense base[16](index=16&type=chunk)[255](index=255&type=chunk) - The company operates under a comprehensive regulatory framework, with oversight from agencies including the IDFI, Federal Reserve, FDIC, and CFPB. It became subject to heightened scrutiny after crossing the **$10 billion in assets** threshold[51](index=51&type=chunk)[52](index=52&type=chunk)[199](index=199&type=chunk) [Business Segments](index=5&type=section&id=Our%20Business%20Segments) The company's operations are divided into Multi-Family Mortgage Banking, Mortgage Warehousing, and Banking segments, each focusing on distinct lending and financial services - Multi-Family Mortgage Banking: Specializes in originating and servicing loans for affordable multi-family housing and healthcare facilities, primarily through FHA, Fannie Mae, and Freddie Mac programs. It also has a tax credit equity syndication platform for affordable housing projects[19](index=19&type=chunk)[20](index=20&type=chunk)[22](index=22&type=chunk) - Mortgage Warehousing: Provides warehouse financing facilities to non-depository financial institutions. This segment funded **$33.0 billion** in loan principal in 2023, a slight decrease from **$33.2 billion** in 2022[29](index=29&type=chunk)[30](index=30&type=chunk) - Banking: Includes a diverse range of lending and deposit services such as commercial and retail banking, agricultural lending, single-family mortgage lending (retail and correspondent), and SBA lending[31](index=31&type=chunk)[32](index=32&type=chunk)[34](index=34&type=chunk) - The business segments are designed to be complementary, creating synergies such as the Banking segment funding loans for the Multi-Family segment and Mortgage Warehousing providing leads for correspondent lending[37](index=37&type=chunk)[328](index=328&type=chunk) [Human Capital](index=11&type=section&id=Human%20Capital) As of December 31, 2023, Merchants Bancorp had **618 employees** with a **10% turnover** rate, emphasizing a positive work environment and employee ownership - The company had approximately **618 employees** as of year-end 2023, with 364 located in Central Indiana[40](index=40&type=chunk) - Employee turnover was **10% turnover** in 2023. The company was named a "Top Workplace" by The Indianapolis Star in 2023[41](index=41&type=chunk) - An Employee Stock Ownership Plan (ESOP) was established in 2020 to reward employees and align their interests with shareholders. The company also makes a discretionary **3% company contribution** to employee 401(k) plans[43](index=43&type=chunk) [Supervision and Regulation](index=14&type=section&id=SUPERVISION%20AND%20REGULATION) The company and its subsidiaries are subject to extensive federal and state banking regulations, with heightened scrutiny as an institution exceeding **$10 billion in assets** - As a Bank Holding Company (BHC), Merchants Bancorp is supervised by the Federal Reserve under the BHC Act, which governs acquisitions, permitted nonbanking activities, and requires the BHC to act as a source of strength for its subsidiary banks[55](index=55&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) - Merchants Bank is an Indiana-chartered bank supervised by the FDIC and IDFI. It must comply with numerous laws including the Bank Secrecy Act (BSA), USA Patriot Act, and Community Reinvestment Act (CRA)[65](index=65&type=chunk)[66](index=66&type=chunk)[93](index=93&type=chunk) - The company is subject to Basel III capital requirements. As of December 31, 2023, both the company and Merchants Bank were categorized as **well-capitalized** under the regulatory framework[77](index=77&type=chunk)[84](index=84&type=chunk) - Having exceeded **$10 billion in assets**, Merchants Bank is subject to direct examination by the Consumer Financial Protection Bureau (CFPB) for compliance with consumer protection laws[99](index=99&type=chunk)[200](index=200&type=chunk) [Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including interest rate sensitivity in mortgage banking, credit risks, operational vulnerabilities, market and liquidity risks, and extensive regulatory compliance burdens - **Mortgage Banking and Community Banking Risks**: Profitability is highly dependent on mortgage origination volume, which is sensitive to interest rate changes and competitive pricing pressures[118](index=118&type=chunk)[121](index=121&type=chunk) - **Credit and Financial Risks**: The business is sensitive to general economic conditions. An economic decline could increase nonperforming loans and charge-offs, and the **Allowance for Credit Losses (ACL)** may prove insufficient[131](index=131&type=chunk)[134](index=134&type=chunk)[136](index=136&type=chunk) - **Operational Risks**: The company is exposed to system failures, cybersecurity breaches, reliance on third-party vendors, and is highly dependent on its senior executive team[155](index=155&type=chunk)[160](index=160&type=chunk)[164](index=164&type=chunk) - **Market, Interest Rate, and Liquidity Risks**: Fluctuations in interest rates can reduce net interest income and affect asset values. Liquidity depends on the ability to raise funds through deposits and borrowings, with a significant portion of deposits concentrated in large mortgage institutions[175](index=175&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk) - **Legal, Regulatory, and Compliance Risks**: The company is subject to heightened regulatory requirements and scrutiny for exceeding **$10 billion in assets**, which increases compliance costs and operational complexity[199](index=199&type=chunk)[200](index=200&type=chunk) [Unresolved Staff Comments](index=60&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - **None**[215](index=215&type=chunk) [Cybersecurity](index=60&type=section&id=Item%201C.%20Cybersecurity) The company manages cybersecurity risk through a comprehensive Information Security Program, overseen by the Board's IT Committee, with annual risk assessments and an Incident Response Plan - The company maintains a comprehensive Information Security Program (ISP) that includes annual risk assessments, an Incident Response Plan, and a layered control environment[218](index=218&type=chunk)[219](index=219&type=chunk) - Governance is provided by the Board's IT Committee, which includes senior management and risk experts. The committee reviews security policies, risk assessments, and incident reports, reporting quarterly to the full Board[223](index=223&type=chunk) - The Information Security Officer, who has over a decade of experience and multiple industry certifications, is responsible for implementing and monitoring the security program[224](index=224&type=chunk) [Properties](index=64&type=section&id=Item%202.%20Properties) The company owns its headquarters building in Carmel, Indiana, which is undergoing expansion, and believes its facilities are adequate for foreseeable operational needs - The Company owns its headquarters building in Carmel, Indiana, which is in the process of being expanded[227](index=227&type=chunk) [Legal Proceedings](index=64&type=section&id=Item%203.%20Legal%20Proceedings) The company is not involved in any material pending legal proceedings outside of ordinary routine litigation incidental to its business - There are no material pending legal proceedings other than ordinary routine litigation incidental to the business[228](index=228&type=chunk) [Mine Safety Disclosures](index=64&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - **None**[229](index=229&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=64&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Merchants Bancorp's common stock trades on Nasdaq under "MBIN," with the company intending to pay quarterly dividends subject to board discretion and regulatory limitations - The company's common stock trades on the Nasdaq Capital Market under the symbol "MBIN"[231](index=231&type=chunk) - The company intends to continue paying quarterly dividends, but this is subject to board discretion and various restrictions, including the requirement to pay dividends on preferred stock first[232](index=232&type=chunk)[233](index=233&type=chunk) - As a holding company, its ability to pay dividends is dependent on receiving dividends from its subsidiary, Merchants Bank, which is subject to regulatory limitations[234](index=234&type=chunk) [Selected Financial Data](index=67&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of key financial data, highlighting significant growth in assets, loans, and deposits, and includes reconciliations for non-GAAP financial measures Selected Financial Data (2023 vs. 2022) | (Dollars in thousands, except per share data) | 2023 | 2022 | | :--- | :--- | :--- | | **Balance Sheet Data:** | | | | Total Assets | $16,952,516 | $12,615,227 | | Loans held for investment | $10,199,553 | $7,470,872 | | Deposits | $14,061,460 | $10,071,345 | | Total shareholders' equity | $1,701,084 | $1,459,739 | | **Income Statement Data:** | | | | Net interest income | $448,071 | $318,551 | | Net income | $279,234 | $219,721 | | **Per Share Data (Common Stock):** | | | | Diluted earnings per share | $5.64 | $4.47 | | Tangible book value (non-GAAP) | $27.40 | $21.88 | - The company provides reconciliations for non-GAAP financial measures, including tangible common shareholders' equity, tangible book value per share, and efficiency ratio, to their nearest GAAP equivalents[240](index=240&type=chunk)[246](index=246&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=71&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2023, net income increased **27%** to **$279.2 million**, and diluted EPS rose **26%** to **$5.64**, driven by a **41%** increase in net interest income and significant asset and loan growth, while maintaining strong liquidity Financial Highlights (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | **$279.2 million** | **$219.7 million** | **+27%** | | Diluted EPS | **$5.64** | **$4.47** | **+26%** | | Net Interest Income | **$448.1 million** | **$318.6 million** | **+41%** | | Total Assets | **$17.0 billion** | **$12.6 billion** | **+34%** | | Loans Receivable, Net | **$10.1 billion** | **$7.4 billion** | **+36%** | - The increase in net income was primarily driven by a **$129.5 million (41%)** increase in net interest income, partially offset by higher noninterest expense and a larger provision for credit losses[251](index=251&type=chunk)[288](index=288&type=chunk) - The company completed a **$303.6 million securitization** of multi-family mortgage loans and raised **$483.7 million in equity** for its LIHTC syndication business in 2023[257](index=257&type=chunk) - In **January 2024**, the company completed the sale of its Farmers-Merchants Bank of Illinois branches to focus on its core mortgage lending businesses[257](index=257&type=chunk)[482](index=482&type=chunk) [Comparison of Operating Results (2023 vs. 2022)](index=81&type=section&id=Comparison%20of%20Operating%20Results%20for%20the%20Years%20Ended%20December%2031%2C%202023%20and%202022) Net income for 2023 rose **27%** to **$279.2 million**, primarily due to a **41%** increase in net interest income, despite higher provision for credit losses and noninterest expenses - Net interest income increased by **$129.5 million (41%)**, driven by a $597.0 million increase in interest income from higher loan yields and balances, which was partially offset by a $467.4 million increase in interest expense on deposits and borrowings[289](index=289&type=chunk) - Net interest margin improved by **9 basis points to 3.06%** in 2023 from 2.97% in 2022[290](index=290&type=chunk) - The provision for credit losses increased by **$22.9 million to $40.2 million**, reflecting loan growth, changes in qualitative factors, and specific reserves[310](index=310&type=chunk)[312](index=312&type=chunk) - Noninterest income decreased by **$11.3 million (9%)**, primarily due to a **$16.0 million (25%)** decrease in gain on sale of loans as the business mix shifted towards holding more multi-family loans on the balance sheet[313](index=313&type=chunk)[314](index=314&type=chunk) - Noninterest expense increased by **$38.6 million (28%)**, mainly from a **$19.1 million** rise in salaries and benefits and a **$10.1 million** increase in FDIC deposit insurance expenses[319](index=319&type=chunk) [Operating Segment Analysis](index=91&type=section&id=Operating%20Segment%20Analysis%20for%20the%20Years%20Ended%20December%2031%2C%202023%20and%202022) In 2023, Mortgage Warehousing and Banking segments drove profitability with strong net income growth, while Multi-family Mortgage Banking saw a decline due to lower gain on sale of loans Net Income by Segment (2023 vs. 2022) | (Dollars in thousands) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $36,473 | $54,642 | -33% | | Mortgage Warehousing | $73,525 | $48,604 | +51% | | Banking | $194,398 | $134,221 | +45% | - Multi-family Mortgage Banking net income decreased due to a **$31.9 million** decline in noninterest income, reflecting lower gain on sale of loans as origination volume for sale decreased[332](index=332&type=chunk)[333](index=333&type=chunk) - Mortgage Warehousing net income increased significantly despite a mere **1% decrease** in funded loan volume, outperforming the **29% industry-wide decline**[337](index=337&type=chunk)[338](index=338&type=chunk) - Banking segment net income growth was driven by a **$100.2 million** increase in net interest income from higher balances in multi-family and healthcare bridge loans[340](index=340&type=chunk) [Comparison of Financial Condition (as of Dec 31, 2023 vs. Dec 31, 2022)](index=96&type=section&id=Comparison%20of%20Financial%20Condition%20at%20December%2031%2C%202023%20and%202022) Total assets grew **34%** to **$17.0 billion**, driven by a **36%** increase in net loans, funded by a **40%** rise in deposits, including a significant increase in brokered deposits Key Balance Sheet Items | (Dollars in billions) | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | **$17.0** | **$12.6** | **+34%** | | Loans Receivable, Net | **$10.1** | **$7.4** | **+36%** | | Deposits | **$14.1** | **$10.1** | **+40%** | | Shareholders' Equity | **$1.7** | **$1.5** | **+17%** | - The loan portfolio growth was led by increases of **$870.6 million** in multi-family financing, **$752.3 million** in healthcare financing, and **$664.4 million** in commercial loans[357](index=357&type=chunk) - The ACL-Loans increased to **$71.8 million (0.70% of loans)** from **$44.0 million (0.59% of loans)**, primarily due to loan growth and specific reserves in the healthcare and multi-family portfolios[361](index=361&type=chunk)[365](index=365&type=chunk) - The company significantly increased its use of brokered deposits, which grew by **$3.2 billion** to **$6.0 billion**, making up **42% of total deposits** compared to 27% in the prior year[375](index=375&type=chunk) [Liquidity and Capital Resources](index=109&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintained strong liquidity with **$10.6 billion** in liquid assets and unused borrowing capacity, and all regulatory capital ratios remained **well-capitalized** - The company has **$6.0 billion** in unused borrowing capacity with the FHLB and Federal Reserve, and total liquid assets plus this capacity amounted to **$10.6 billion**, or **62% of total assets**[385](index=385&type=chunk)[386](index=386&type=chunk) - Uninsured deposits totaled approximately **$2.7 billion**, representing **less than 20% of total deposits**. The company offers an insured cash sweep program to provide additional FDIC coverage[387](index=387&type=chunk) - The company announced it will redeem all outstanding shares of its **7% Series A Preferred Stock** on April 1, 2024, using cash on hand[401](index=401&type=chunk)[728](index=728&type=chunk) Merchants Bancorp Capital Ratios (December 31, 2023) | Ratio | Actual | Minimum to be Well Capitalized w/ Buffer | | :--- | :--- | :--- | | Total capital to risk-weighted assets | 11.6% | 10.5% | | Tier 1 capital to risk-weighted assets | 11.1% | 8.5% | | Common Equity Tier 1 capital | 7.8% | 7.0% | | Tier 1 capital to average assets | 10.1% | 5.0% | [Quantitative and Qualitative Disclosures About Market Risk](index=121&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate risk through its Asset-Liability Committee, using NII at Risk and EVE models, with results remaining within established policy limits - The company's main market risk is interest rate risk, which it manages by balancing its portfolio between fixed-rate loans held for sale and adjustable-rate loans held for investment[432](index=432&type=chunk)[434](index=434&type=chunk) Net Interest Income (NII) Sensitivity (as of Dec 31, 2023) | Rate Shock | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 bps | $57,294 | +11.7% | | **+100 bps** | $29,601 | **+6.0%** | | **-100 bps** | $(36,576) | **-7.5%** | | -200 bps | $(73,311) | -15.0% | Economic Value of Equity (EVE) Sensitivity (as of Dec 31, 2023) | Rate Shock | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 bps | $(79,455) | -4.7% | | **+100 bps** | $(34,800) | **-2.1% decrease** | | -100 bps | $92,793 | +5.5% | | -200 bps | $180,864 | +10.8% | [Financial Statements and Supplementary Data](index=126&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for 2023, with an **unqualified auditor's opinion** on both financial statements and internal control over financial reporting - The independent registered public accounting firm, FORVIS, LLP, issued an **unqualified opinion** on the consolidated financial statements as of December 31, 2023 and 2022[449](index=449&type=chunk) - The auditor's report identified the **Allowance for Credit Losses (ACL)** as a **critical audit matter** due to the high degree of subjectivity and complexity involved in management's estimates, particularly regarding qualitative factor adjustments[457](index=457&type=chunk)[460](index=460&type=chunk) - The company adopted ASU 2016-13 (CECL) for measuring credit losses effective January 1, 2022[451](index=451&type=chunk)[519](index=519&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=226&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - **None**[835](index=835&type=chunk) [Controls and Procedures](index=226&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were **effective as of December 31, 2023**, with the independent auditor issuing an **unqualified opinion** - The Chairman/CEO and CFO concluded that the company's disclosure controls and procedures were **effective as of December 31, 2023**[836](index=836&type=chunk) - Management concluded that the company's internal control over financial reporting was **effective as of December 31, 2023**, based on the COSO framework[841](index=841&type=chunk) - The independent auditor, FORVIS, LLP, issued an **unqualified opinion** on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[844](index=844&type=chunk)[845](index=845&type=chunk) [Other Information](index=230&type=section&id=Item%209B.%20Other%20Information) The company reports no other information under this item - **None**[852](index=852&type=chunk) [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=230&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable to the company - **Not Applicable**[853](index=853&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=231&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - Information required by this item is incorporated by reference from the Registrant's proxy statement for its 2024 annual meeting of shareholders[856](index=856&type=chunk) [Executive Compensation](index=231&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the 2024 Proxy Statement[858](index=858&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=231&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership by beneficial owners and management is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the 2024 Proxy Statement[859](index=859&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=231&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the 2024 Proxy Statement[860](index=860&type=chunk) [Principal Accounting Fees and Services](index=231&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information on principal accounting fees and services is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the 2024 Proxy Statement[861](index=861&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=232&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, including corporate governance documents and required certifications - This item lists the financial statements and exhibits filed with the Form 10-K, including governance documents, incentive plans, and required certifications[864](index=864&type=chunk)[865](index=865&type=chunk) [Form 10-K Summary](index=234&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company has not provided a summary under this optional item - **None**[868](index=868&type=chunk)

PART I [Item 1. Interim Financial Statements (Unaudited)](index=4&type=section&id=Item%201%20Interim%20Financial%20Statements%20(Unaudited)) This section presents Merchants Bancorp's unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, for the period ending September 30, 2023 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased by 31% to $16.5 billion as of September 30, 2023, primarily driven by a significant rise in loans receivable and deposits Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | **Total Assets** | **$16,495,236** | **$12,615,227** | **30.8%** | | Cash and cash equivalents | $407,238 | $226,164 | 80.1% | | Loans held for sale | $3,477,036 | $2,910,576 | 19.5% | | Loans receivable, net | $9,910,681 | $7,426,858 | 33.4% | | **Total Liabilities** | **$14,862,521** | **$11,155,488** | **33.2%** | | Total deposits | $13,007,338 | $10,071,345 | 29.2% | | Borrowings | $1,654,075 | $930,392 | 77.8% | | **Total Shareholders' Equity** | **$1,632,715** | **$1,459,739** | **11.8%** | [Condensed Consolidated Statements of Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Net income for Q3 2023 increased 39% to $81.5 million, driven by a 38% rise in net interest income, with nine-month net income growing 24% to $201.8 million Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $117,436 | $85,385 | 37.5% | | Provision for credit losses | $4,014 | $2,225 | 80.4% | | Noninterest Income | $36,068 | $29,186 | 23.6% | | **Net Income** | **$81,504** | **$58,488** | **39.4%** | | **Diluted EPS** | **$1.68** | **$1.22** | **37.7%** | | **Metric** | **9M 2023** | **9M 2022** | **YoY Change (%)** | | Net Interest Income | $323,746 | $223,141 | 45.1% | | Provision for credit losses | $33,484 | $10,888 | 207.5% | | Noninterest Income | $80,214 | $102,954 | -22.1% | | **Net Income** | **$201,761** | **$162,565** | **24.1%** | | **Diluted EPS** | **$4.06** | **$3.36** | **20.8%** | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2023, operating activities resulted in a $1.1 billion net cash outflow, while financing activities provided $3.6 billion, leading to a net increase in cash of $181.1 million Net Cash Flow for Nine Months Ended Sep 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(1,070,774) | $1,833,916 | | Net cash used in investing activities | $(2,371,045) | $(3,049,944) | | Net cash provided by financing activities | $3,622,893 | $507,375 | | **Net Change in Cash and Cash Equivalents** | **$181,074** | **$(708,653)** | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section details accounting policies and financial data, covering topics such as the planned sale of bank branches, loan portfolio, allowance for credit losses, and regulatory capital adequacy - On September 7, 2023, the Company entered into agreements to sell its Farmers-Merchants Bank of Illinois branch locations, including approximately **$219 million in deposits** and **$49 million in loans**, pending regulatory approval[25](index=25&type=chunk)[26](index=26&type=chunk) - The Allowance for Credit Losses on Loans (ACL-Loans) increased to **$66.9 million** as of September 30, 2023, from **$44.0 million** at year-end 2022, with a provision for credit losses of **$32.4 million** for the first nine months of 2023[85](index=85&type=chunk) - The company's total loan servicing portfolio had an unpaid principal balance of **$24.5 billion** as of September 30, 2023, serving as a significant source of noninterest income and deposits[298](index=298&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=66&type=section&id=Item%202%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q3 2023 financial performance, highlighting a 39% net income increase, significant asset growth driven by loan expansion, and a review of financial condition, asset quality, and segment results [Financial Highlights and Business Overview](index=66&type=section&id=Financial%20Highlights%20and%20Business%20Overview) Q3 2023 saw net income increase 39% to $81.5 million, with total assets reaching $16.5 billion, supported by strong liquidity and a balanced business model - Net income for Q3 2023 increased **39% to $81.5 million**, and diluted EPS increased **38% to $1.68** compared to Q3 2022[185](index=185&type=chunk) - Total assets reached **$16.5 billion**, a **31% increase** from December 31, 2022[185](index=185&type=chunk) - The company had **$5.4 billion** in unused borrowing capacity and total liquid assets (including unused capacity) of **$10.7 billion**, representing **65% of total assets**[185](index=185&type=chunk) [Financial Condition](index=67&type=section&id=Financial%20Condition) Total assets increased 31% to $16.5 billion, driven by a $2.5 billion rise in loans receivable and a $2.9 billion increase in deposits, while shareholders' equity grew 12% to $1.6 billion - Loans receivable increased by **$2.5 billion (33%) to $9.9 billion**, with significant growth in healthcare financing (+$614.2M), commercial & CRE (+$581.4M), multi-family financing (+$573.8M), and mortgage warehouse lines (+$557.9M)[203](index=203&type=chunk)[212](index=212&type=chunk) - Deposits grew by **$2.9 billion (29%) to $13.0 billion**, with brokered deposits increasing by **$1.6 billion to $4.4 billion**, representing **34% of total deposits**[216](index=216&type=chunk)[218](index=218&type=chunk) - Uninsured deposits were approximately **$2 billion**, representing less than **20% of total deposits**, with the company's insured cash sweep program holding **$1.8 billion**[217](index=217&type=chunk) - Shareholders' equity increased by **$173.0 million (12%) to $1.6 billion**, mainly from net income of **$201.8 million**, partially offset by **$36.4 million** in dividends[225](index=225&type=chunk) [Asset Quality](index=75&type=section&id=Asset%20Quality) Asset quality deteriorated with nonperforming loans increasing to $60.2 million (0.60% of total loans), though the allowance for credit losses covered 111% of these loans Asset Quality Indicators | Metric | Sep 30, 2023 | Dec 31, 2022 | Sep 30, 2022 | | :--- | :--- | :--- | :--- | | Nonperforming Loans | $60.2M | $26.7M | $26.6M | | Nonperforming Loans / Total Loans | 0.60% | 0.36% | 0.38% | | ACL-Loans / Nonperforming Loans | 111% | 165% | 147% | | Loans > 30 Days Past Due | $125.4M | $39.8M | $26.6M | - For the nine months ended Sep 30, 2023, net charge-offs were **$9.56 million**, primarily related to one customer, compared to net recoveries of **$0.5 million** in the prior-year period[230](index=230&type=chunk) [Results of Operations](index=75&type=section&id=Results%20of%20Operations) Q3 2023 net income grew 39% driven by a 38% increase in net interest income to $117.4 million, while nine-month net income rose 24% to $323.7 million, despite a decrease in noninterest income Q3 2023 vs Q3 2022 Performance | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $117.4M | $85.4M | +38% | | Net Interest Margin | 2.99% | 3.05% | -6 bps | | Provision for Credit Losses | $4.0M | $2.2M | +$1.8M | | Noninterest Income | $36.1M | $29.2M | +24% | | Noninterest Expense | $42.9M | $35.0M | +23% | 9M 2023 vs 9M 2022 Performance | Metric | 9M 2023 | 9M 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $323.7M | $223.1M | +45% | | Net Interest Margin | 3.07% | 2.90% | +17 bps | | Provision for Credit Losses | $33.5M | $10.9M | +$22.6M | | Noninterest Income | $80.2M | $103.0M | -22% | | Noninterest Expense | $122.0M | $98.9M | +23% | - The decrease in noninterest income for the nine-month period was primarily due to a **$24.0 million (45%) decrease** in gain on sale of loans, reflecting a business mix shift in the multi-family portfolio[291](index=291&type=chunk)[293](index=293&type=chunk) [Segment Analysis](index=91&type=section&id=Segment%20Analysis) In Q3 2023, all segments reported increased net income, with Banking leading at $52.4 million, while for the nine-month period, Multi-family Mortgage Banking's net income decreased due to lower gain on sale of loans Segment Net Income (in thousands) | Segment | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $14,685 | $13,366 | $27,893 | $44,414 | | Mortgage Warehousing | $19,926 | $11,801 | $47,163 | $36,828 | | Banking | $52,445 | $39,344 | $144,402 | $94,040 | | Other | $(5,552) | $(6,023) | $(17,697) | $(12,717) | | **Total** | **$81,504** | **$58,488** | **$201,761** | **$162,565** | - Multi-family Mortgage Banking's 9-month net income fell **37%** due to a **$36.8 million decrease** in noninterest income, primarily from lower gain on sale of loans[311](index=311&type=chunk) - Mortgage Warehousing's Q3 net income grew **69%** driven by a **$11.5 million increase** in net interest income from higher yields and loan volumes, outperforming the industry[315](index=315&type=chunk)[317](index=317&type=chunk) - Banking's 9-month net income rose **54%** due to an **$84.8 million increase** in net interest income, despite higher provisions and expenses[322](index=322&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=107&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate risk, its primary market risk, through an asset-sensitive position, with NII and EVE sensitivity analyses showing results within policy limits - The company's primary market risk is **interest rate risk**, arising from timing differences in asset and liability repricing, embedded options, and yield curve changes[363](index=363&type=chunk)[364](index=364&type=chunk) Net Interest Income (NII) Sensitivity (Twelve Months Forward) | Rate Change (bps) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 | $51,728 | 10.5% | | +100 | $26,931 | 5.5% | | -100 | $(40,859) | -8.3% | | -200 | $(82,126) | -16.7% | Economic Value of Equity (EVE) Sensitivity (Immediate Shock) | Rate Change (bps) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 | $(65,764) | -4.2% | | +100 | $(25,408) | -1.6% | | -100 | $19,426 | 1.2% | | -200 | $34,279 | 2.2% | [Item 4. Controls and Procedures](index=112&type=section&id=Item%204%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2023, the Company's disclosure controls and procedures were effective[381](index=381&type=chunk) - No changes in the Company's internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[382](index=382&type=chunk) PART II – OTHER INFORMATION [Other Information (Items 1-5)](index=113&type=section&id=Items%201-5) This section confirms no legal proceedings, no material changes to risk factors, no unregistered equity sales, no defaults on senior securities, and no other reportable information - Item 1: The company reports no legal proceedings[385](index=385&type=chunk) - Item 1A: There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[386](index=386&type=chunk) - Items 2, 3, 5: The company reports 'None' for Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, and Other Information[387](index=387&type=chunk)[388](index=388&type=chunk)[390](index=390&type=chunk) [Item 6. Exhibits](index=114&type=section&id=Item%206%20Exhibits) This section lists exhibits filed with Form 10-Q, including corporate governance documents and CEO/CFO certifications required by the Sarbanes-Oxley Act - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[392](index=392&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission File No. 001-38258 (317) 569-7420 (Registrant's telephone number, including area code) N/A (Forme ...

PART I – FINANCIAL INFORMATION [Item 1. Interim Financial Statements (Unaudited)](index=4&type=section&id=Item%201%20Interim%20Financial%20Statements%20(Unaudited)) Presents the unaudited condensed consolidated financial statements for Q1 2023, including key statements and notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets grew 13% to $14.2 billion in Q1 2023, driven by loan growth and funded by increased deposits and borrowings Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | **Total Assets** | **$14,240,966** | **$12,615,227** | **+12.9%** | | Cash and cash equivalents | $369,586 | $226,164 | +63.4% | | Loans held for sale | $2,855,250 | $2,910,576 | -1.9% | | Loans receivable, net | $8,575,210 | $7,426,858 | +15.5% | | **Total Liabilities** | **$12,735,282** | **$11,155,488** | **+14.2%** | | Total deposits | $11,345,231 | $10,071,345 | +12.6% | | Borrowings | $1,233,762 | $930,392 | +32.6% | | **Total Shareholders' Equity** | **$1,505,684** | **$1,459,739** | **+3.1%** | [Condensed Consolidated Statements of Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Net income for Q1 2023 rose to $55.0 million, as a 53% surge in net interest income offset lower noninterest income Condensed Consolidated Income Statement Highlights (in thousands, except EPS) | Account | Q1 2023 | Q1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $100,693 | $65,725 | +53.2% | | Provision for credit losses | $6,867 | $2,451 | +180.2% | | Noninterest Income | $14,264 | $34,597 | -58.8% | | Noninterest Expense | $34,772 | $31,033 | +12.0% | | **Net Income** | **$54,955** | **$50,142** | **+9.6%** | | **Diluted EPS** | **$1.07** | **$1.02** | **+4.9%** | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Q1 2023 saw a net cash outflow from operations and increased investing use, offset by cash from financing activities Net Cash Flow Summary (in thousands) | Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(301,533) | $1,295,630 | | Net cash used in investing activities | $(1,120,176) | $(247,149) | | Net cash provided by (used in) financing activities | $1,565,131 | $(1,669,574) | | **Net Change in Cash and Cash Equivalents** | **$143,422** | **$(621,093)** | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Details the company's accounting policies, including CECL adoption, portfolio composition, and segment reporting - The company adopted CECL on January 1, 2022, which replaced the incurred loss model with an expected loss model for measuring credit losses, resulting in a net decrease to retained earnings of **$3.6 million**[28](index=28&type=chunk)[30](index=30&type=chunk) - The loan portfolio is segmented into Mortgage warehouse, Residential real estate, Multi-family financing, Healthcare financing, Commercial, Agricultural, and Consumer loans, with the **Allowance for Credit Losses (ACL)** determined using various methodologies[80](index=80&type=chunk) - The company's business is divided into three reportable segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking, with the **Banking segment being the largest contributor to net income** for Q1 2023[161](index=161&type=chunk)[162](index=162&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=65&type=section&id=Item%202%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Analyzes Q1 2023 financial performance, highlighting net income growth, improved margins, and strong liquidity - **Net income for Q1 2023 increased by 10% to $55.0 million** compared to Q1 2022, primarily due to a **$35.0 million (53%) increase in net interest income**[178](index=178&type=chunk)[218](index=218&type=chunk) - **Total assets grew 13% to $14.2 billion** from year-end 2022, driven by a **$1.1 billion (15%) increase in loans receivable**, particularly in multi-family and healthcare financing[178](index=178&type=chunk)[187](index=187&type=chunk)[195](index=195&type=chunk) - The company maintains **strong liquidity, with $7.8 billion in liquid assets** and unused borrowing capacity, which is significantly greater than its **$2.0 billion in uninsured deposits**[178](index=178&type=chunk)[253](index=253&type=chunk)[254](index=254&type=chunk) - In March 2023, the company issued **$158.1 million in senior credit linked notes** to reduce risk-weighted assets and benefit regulatory capital ratios, supporting future loan growth[154](index=154&type=chunk)[184](index=184&type=chunk) [Financial Condition](index=68&type=section&id=Financial%20Condition) Total assets grew 13% to $14.2 billion in Q1 2023, driven by a $1.1 billion increase in net loans receivable Key Balance Sheet Changes (Q1 2023 vs YE 2022) | Account | Change ($M) | Change (%) | Key Driver | | :--- | :--- | :--- | :--- | | Total Assets | +$1,600 | +13% | Loan growth | | Loans Receivable, Net | +$1,100 | +15% | Growth in multi-family and healthcare loans | | Total Deposits | +$1,300 | +13% | $1.0B increase in brokered CDs | | Borrowings | +$303.4 | +33% | Increased Fed discount window usage and new credit linked notes | - **Uninsured deposits totaled approximately $2.0 billion**, representing less than 25% of total deposits, with the company offering an Insured Cash Sweep program holding $1.6 billion[205](index=205&type=chunk) - **Nonperforming loans increased to $65.3 million (0.76% of total loans)** from $26.7 million (0.36%) at year-end 2022, mainly due to delinquencies from two customers[212](index=212&type=chunk)[215](index=215&type=chunk) [Results of Operations](index=74&type=section&id=Results%20of%20Operations) Q1 2023 net income grew 10% to $55.0 million, as a 53% surge in net interest income offset a 59% drop in noninterest income Net Interest Income Analysis (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $100.7M | $65.7M | +$35.0M | | Net Interest Margin | 3.27% | 2.62% | +65 bps | | Interest Rate Spread | 2.76% | 2.55% | +21 bps | - **Noninterest income decreased by $20.3 million (59%)**, primarily due to an **$11.2 million decrease in gain on sale of loans** and a $7.4 million decrease in loan servicing fees[234](index=234&type=chunk) - The **provision for credit losses increased by $4.4 million (180%) to $6.9 million**, reflecting loan growth and changes in portfolio mix[233](index=233&type=chunk) [Segment Analysis](index=82&type=section&id=Segment%20Analysis) The Banking segment's net income surged 71%, while Multi-family Mortgage Banking and Mortgage Warehousing income declined Net Income by Segment (in thousands) | Segment | Q1 2023 | Q1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $1,966 | $11,492 | -82.9% | | Mortgage Warehousing | $8,641 | $13,159 | -34.3% | | Banking | $49,307 | $28,764 | +71.4% | | **Total Net Income** | **$54,955** | **$50,142** | **+9.6%** | - The decrease in Multi-family Mortgage Banking income was primarily due to a **$12.9 million drop in gain on sale of loans**[245](index=245&type=chunk) - Mortgage Warehousing experienced a **42% decrease in loan funding volume to $5.4 billion**, which was better than the 52% industry-wide decrease[248](index=248&type=chunk) [Liquidity and Capital Resources](index=85&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains a strong liquidity position and robust capital resources, with all ratios exceeding 'well-capitalized' minimums - As of March 31, 2023, the company had **$4.0 billion in available unused borrowing capacity** with the FHLB and the Federal Reserve discount window[263](index=263&type=chunk) - The company's investment portfolio has **minimal unrealized losses**, with AOCI at $(7.7) million, representing less than 1% of total equity[255](index=255&type=chunk) Company Capital Ratios (as of March 31, 2023) | Ratio | Actual | Minimum for Adequately Capitalized | | :--- | :--- | :--- | | Total capital (to risk weighted assets) | 12.4% | 8.0% | | Tier I capital (to risk weighted assets) | 11.9% | 6.0% | | Common Equity Tier I capital | 7.9% | 4.5% | | Tier I capital (to average assets) | 11.6% | 4.0% | [Quantitative and Qualitative Disclosures About Market Risk](index=92&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, which is managed within policy limits for NII and EVE sensitivity Net Interest Income (NII) Sensitivity (Twelve Months Forward) | Rate Change (bps) | NII Change (%) | Status | | :--- | :--- | :--- | | +200 | +17.0% | Within Policy Limit (30%) | | +100 | +8.7% | Within Policy Limit (20%) | | -100 | -11.1% | Within Policy Limit (20%) | | -200 | -22.2% | Within Policy Limit (30%) | Economic Value of Equity (EVE) Sensitivity (Immediate Shock) | Rate Change (bps) | EVE Change (%) | Status | | :--- | :--- | :--- | | +200 | -1.2% | Within Policy Limit (20%) | | +100 | -0.4% | Within Policy Limit (15%) | | -100 | +0.1% | Within Policy Limit (15%) | | -200 | +0.3% | Within Policy Limit (20%) | [Controls and Procedures](index=96&type=section&id=Item%204%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The CEO and CFO concluded that as of March 31, 2023, the **Company's disclosure controls and procedures were effective**[302](index=302&type=chunk) - **No changes in internal control over financial reporting occurred** during the quarter that materially affected, or are reasonably likely to materially affect, these controls[303](index=303&type=chunk) PART II – OTHER INFORMATION [Legal Proceedings](index=97&type=section&id=Item%201%20Legal%20Proceedings) The company reported no legal proceedings for the period - There are **no legal proceedings to report**[305](index=305&type=chunk) [Risk Factors](index=97&type=section&id=Item%201A%20Risk%20Factors) No material changes were reported for risk factors disclosed in the 2022 Annual Report on Form 10-K - **No material changes have been made** to the risk factors disclosed in the 2022 Annual Report on Form 10-K[306](index=306&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=97&type=section&id=Item%202%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds - There were **no unregistered sales of equity securities or use of proceeds to report**[307](index=307&type=chunk) [Exhibits](index=98&type=section&id=Item%206%20Exhibits) Lists exhibits filed with the Form 10-Q, including required CEO and CFO certifications - Key exhibits filed include **CEO and CFO certifications** pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[312](index=312&type=chunk)

PART I [Item 1. Business](index=5&type=section&id=Item%201.%20Business) Merchants Bancorp is a diversified bank holding company with $12.6 billion in assets, focusing on low-risk, government-program-compliant loans through an originate-to-sell model - Merchants Bancorp is a diversified bank holding company with operations in Multi-family Mortgage Banking, Mortgage Warehousing, and Banking segments[13](index=13&type=chunk) - The company's business model primarily involves funding low-risk loans meeting government program underwriting standards, utilizing an originate-to-sell model[16](index=16&type=chunk) - Noninterest income is significantly contributed by gain on sale of loans and servicing fees from multi-family rental real estate loans[16](index=16&type=chunk) Merchants Bancorp Key Financials (as of December 31, 2022) | Metric | Amount (Billions) | | :------------------- | :------------------ | | Total Assets | $12.6 | | Deposits | $10.1 | | Shareholders' Equity | $1.5 | [Company Overview](index=5&type=section&id=Company%20Overview) Merchants Bancorp, founded in 2006, operates nationally in mortgage banking and locally through community banks, aiming for economic resilience and business synergies - Merchants Bancorp, founded in 2006, is a diversified bank holding company with a strategy to operate nationally through mortgage banking and locally through community banks, aiming for resilience against economic and credit swings[13](index=13&type=chunk)[14](index=14&type=chunk) - Key subsidiaries include Merchants Bank of Indiana (Indiana charter, 6 branches) and Farmers-Merchants Bank of Illinois (Illinois charter, 4 branches), providing traditional community banking and specialized lending services[15](index=15&type=chunk) [Our Business Segments](index=5&type=section&id=Our%20Business%20Segments) Merchants Bancorp operates three segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking, providing specialized financial and traditional community banking services - The company's business is structured into three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking[17](index=17&type=chunk) [Multi-Family Mortgage Banking](index=5&type=section&id=Multi-Family%20Mortgage%20Banking) This segment specializes in originating and servicing loans for affordable multi-family and healthcare facilities, acting as a top-ranked agency lender and tax credit equity syndicator - The Multi-Family Mortgage Banking segment, through MCC and MCS, specializes in originating and servicing loans for affordable multi-family rental housing and healthcare facilities[18](index=18&type=chunk) - The segment is a **top-ranked agency lender** with licenses from Fannie Mae, Freddie Mac, FHA, and USDA, providing comprehensive financing solutions[21](index=21&type=chunk) - MCC is also a fully integrated tax credit equity syndicator, specializing in Section 42 Low-Income Housing Tax Credits (LIHTC), Historic Rehabilitation Tax Credits, and State tax credits, with institutional investors[24](index=24&type=chunk) [Mortgage Warehousing](index=7&type=section&id=Mortgage%20Warehousing) This segment provides asset-based warehouse financing to non-depository institutions for residential and multi-family mortgage loans, with funding volume significantly decreasing in 2022 - The Mortgage Warehousing segment provides asset-based financing (warehouse facilities) to non-depository financial institutions and mortgage bankers[29](index=29&type=chunk) - These facilities are secured by residential and multi-family mortgage loans underwritten to standards comparable to Fannie Mae, Freddie Mac, FHA, and VA[31](index=31&type=chunk) Mortgage Warehousing Loan Principal Funded | Year | Loan Principal Funded (Billions) | | :--- | :------------------------------- | | 2020 | $111 | | 2021 | $78 | | 2022 | $33.2 | [Banking](index=9&type=section&id=Banking) The Banking segment offers retail, commercial, agricultural, residential mortgage, and SBA lending, operating in specific Indiana and Illinois markets with national correspondent reach - The Banking segment offers retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending[32](index=32&type=chunk) - It operates in the Indianapolis metropolitan and Randolph County, Indiana markets, and Ford County in Central Illinois, with a national correspondent mortgage banking business[32](index=32&type=chunk) [Commercial Lending and Retail Banking](index=9&type=section&id=Commercial%20Lending%20and%20Retail%20Banking) Merchants Bank's portfolio includes diverse commercial and residential loans, with deposits sourced from Indiana, Illinois, and escrow activities - Merchants Bank's portfolio includes multi-family construction and bridge loans, commercial real estate, commercial and industrial loans, agricultural loans, residential mortgages, and consumer loans[33](index=33&type=chunk) - Deposits are primarily from customers in Hamilton, Marion, Randolph, and surrounding counties in Indiana, and from escrows generated by MCC and MCS servicing activities[33](index=33&type=chunk) [Agricultural Lending](index=9&type=section&id=Agricultural%20Lending) Merchants Bank and FMBI offer agricultural loans, utilizing Farmer Mac for interest rate risk management and Farm Service Agency certification for credit risk mitigation - Merchants Bank and FMBI offer agricultural loans, including operating lines of credit for crop and livestock production, intermediate-term equipment financing, and long-term agricultural real estate financing[34](index=34&type=chunk) - Merchants Bank sells agricultural loans through Farmer Mac to manage interest rate risk and both banks are Certified/Standard Eligible Lenders with the Farm Service Agency for credit risk mitigation[34](index=34&type=chunk) [Single-Family Mortgage Lending, Correspondent Lending and Servicing](index=9&type=section&id=Single-Family%20Mortgage%20Lending,%20Correspondent%20Lending%20and%20Servicing) Merchants Mortgage provides full-service single-family mortgage origination and servicing, offering diverse products and generating revenue from fees, interest, gain on sale, and servicing - Merchants Mortgage is a full-service single-family mortgage origination and servicing platform, operating as both a retail and correspondent lender[35](index=35&type=chunk) - It offers a variety of mortgage products, including agency-eligible, jumbo fixed, and hybrid adjustable-rate mortgages, as well as construction, bridge, lot financing, and first-lien HELOCs[35](index=35&type=chunk) - Revenues are derived from borrower fees, interest income during the warehouse period, gain on sale of loans to investors, and servicing fee income, with multiple investor outlets for best execution[35](index=35&type=chunk) [SBA Lending](index=9&type=section&id=SBA%20Lending) Merchants Bank participates in SBA programs, holding Preferred Lender status for faster approvals, expanding its origination team, and diversifying revenue - Merchants Bank participates in SBA's 7(a), 504, and Express programs to support small businesses and diversify revenue[36](index=36&type=chunk) - Achieved **Preferred Lender Program status** in January 2018, granting delegated loan approval, closing, and servicing authority for faster loan decisions[36](index=36&type=chunk) - Expanded SBA origination team in 2019 to Illinois, Indiana, Ohio, and Texas, and participated in the government-sponsored Paycheck Protection Program (PPP) in 2020 and 2021[37](index=37&type=chunk)[38](index=38&type=chunk) [Strategy for Complementary Segments](index=11&type=section&id=Strategy%20for%20Complementary%20Segments) The company's segments are strategically designed to diversify net income and create synergies, such as inter-segment funding, tax credit syndication, and lead generation - Segments are designed to diversify net income and create synergies, such as the Banking segment funding MCC/MCS loans and providing Ginnie Mae custodial services[39](index=39&type=chunk) - Low-income tax credit syndication and debt fund offerings complement multi-family mortgage lending activities[39](index=39&type=chunk) - Mortgage Warehousing provides leads to correspondent residential lending, and Merchants Mortgage acts as a risk mitigant by providing a platform to sell underlying collateral[39](index=39&type=chunk) [Competition](index=11&type=section&id=Competition) The company faces intense competition across all banking and mortgage sectors, differentiating itself through product range, expertise, relationships, and a diversified business model - The company operates in highly competitive industries, facing strong direct competition for deposits, loans, and financial services from non-depository institutions, community banks, thrifts, credit unions, large banks, and online businesses[41](index=41&type=chunk) - Differentiation is achieved through the range and quality of products, knowledgeable personnel, emphasis on long-lasting relationships, and a diversified business model[41](index=41&type=chunk) [Human Capital](index=11&type=section&id=Human%20Capital) With 556 employees, the company prioritizes employee feedback, maintains low turnover, and fosters shareholder alignment through an ESOP and 401(k) contributions - As of December 31, 2022, the company had approximately **556 full-time employees**, none represented by collective bargaining units[42](index=42&type=chunk) - The company actively solicits employee feedback, has been named a 'Best Place to Work in Indiana' since 2016, and achieved an **11% turnover rate in 2022**[43](index=43&type=chunk) - An Employee Stock Ownership Plan (ESOP) was established in 2020, fully funded by the company, and a discretionary 3% 401(k) contribution was initiated in 2022 to align employees with shareholders[43](index=43&type=chunk) [Environment, Social, and Governance ("ESG") Activities](index=13&type=section&id=Environment,%20Social,%20and%20Governance%20(%22ESG%22)%20Activities) Merchants Bancorp is committed to ESG, supporting affordable housing and healthcare financing, investing in tax credit equity funds, and promoting Diversity, Equity, and Inclusion - The company is committed to ESG, with a strong focus on sustainable, long-term growth and value creation[46](index=46&type=chunk) - A significant portion of its business supports affordable housing projects and need-based skilled nursing/healthcare facilities, with MCC acquiring private equity interests in affordable housing through tax credit equity funds[47](index=47&type=chunk)[48](index=48&type=chunk) - The company embraces Diversity, Equity, and Inclusion (DEI), with an employee-level committee and a dedicated DEI leader hired in 2022, and its Board meets all Nasdaq diversity requirements[49](index=49&type=chunk) [Corporate Information](index=13&type=section&id=Corporate%20Information) Merchants Bancorp's principal offices are in Carmel, Indiana, and SEC filings are publicly available on its investor relations website and the SEC's website - Principal executive offices are at 410 Monon Blvd., Carmel, Indiana 46032[50](index=50&type=chunk) - Annual reports (10-K), quarterly reports (10-Q), current reports (8-K), and proxy statements are available free of charge on the company's website (www.merchantsbancorp.com) under 'Investors' and on the SEC's website (www.sec.gov)[50](index=50&type=chunk) [SUPERVISION AND REGULATION](index=13&type=section&id=SUPERVISION%20AND%20REGULATION) Merchants Bancorp and its subsidiaries are extensively regulated by federal and state laws, impacting operations and earnings, primarily to protect FDIC-insured deposits - Insured banks, their holding companies, and affiliates are extensively regulated under federal and state law, affecting growth and earnings[52](index=52&type=chunk) - The supervisory and regulatory framework subjects entities to regular examinations by agencies like IDFI, IDFPR, Federal Reserve, FDIC, and CFPB, with broad discretion to impose restrictions[52](index=52&type=chunk)[56](index=56&type=chunk) [General](index=13&type=section&id=General) The company's operations are significantly influenced by federal and state regulations from various agencies, tax laws, and accounting rules, primarily for FDIC-insured deposit protection - The company's business is significantly impacted by federal and state statutes, regulations, and policies from various bank regulatory agencies (IDFI, IDFPR, Federal Reserve, FDIC, CFPB), tax laws, and FASB accounting rules[52](index=52&type=chunk)[54](index=54&type=chunk) - The regulatory framework is primarily intended for the protection of FDIC-insured deposits and depositors, rather than shareholders[55](index=55&type=chunk) [Merchants Bancorp](index=15&type=section&id=Merchants%20Bancorp) As a bank holding company, Merchants Bancorp is supervised by the Federal Reserve, subject to reporting, acquisition regulations, and requirements to support subsidiary banks - Merchants Bancorp is a bank holding company (BHC) subject to Federal Reserve supervision, examination, and reporting requirements under the BHC Act[58](index=58&type=chunk) - Acquisition of 5% or more of voting shares in other banks or BHCs, or nonbanking companies (unless closely related to banking), generally requires prior Federal Reserve approval[59](index=59&type=chunk)[61](index=61&type=chunk) - A BHC is required to serve as a source of financial and managerial strength to its subsidiary banks, providing adequate capital during financial stress[66](index=66&type=chunk) [Bank Holding Company Act of 1956, as amended](index=15&type=section&id=Bank%20Holding%20Company%20Act%20of%201956,%20as%20amended) Merchants Bancorp is a bank holding company under the BHC Act, subject to Federal Reserve supervision, examination, and annual reporting requirements - Merchants Bancorp is a BHC under the Bank Holding Company Act of 1956, subject to Federal Reserve supervision, examination, and annual reporting[58](index=58&type=chunk) [Acquisition of Banks](index=15&type=section&id=Acquisition%20of%20Banks) The BHC Act requires prior Federal Reserve approval for significant bank or BHC acquisitions, and restricts nonbanking company acquisitions unless closely related to banking - Acquisition of **5% or more of voting shares** of any other bank or BHC generally requires prior Federal Reserve approval, considering competitive, supervisory, financial, managerial, and community needs[60](index=60&type=chunk) - The BHC Act also restricts acquiring more than 5% of voting shares in 'nonbanking' companies unless the Federal Reserve deems the activities 'closely related to banking'[61](index=61&type=chunk) [Permitted Activities](index=17&type=section&id=Permitted%20Activities) Merchants Bancorp and its nonbank subsidiaries can engage in Federal Reserve-approved nonbanking activities closely related to banking, but the Federal Reserve can order termination of risky activities - Permitted nonbanking activities include factoring accounts receivable, making/servicing loans, leasing property, operating non-bank depositories, trust functions, financial/investment advisory, discount securities brokerage, underwriting government obligations, management consulting, insurance agency/brokerage, and selected insurance underwriting[65](index=65&type=chunk) - The Federal Reserve can order a BHC or its subsidiaries to terminate activities or ownership if they pose a serious risk to financial safety, soundness, or stability[65](index=65&type=chunk) - Merchants Bancorp has not elected to be treated as a financial holding company[65](index=65&type=chunk) [Support of Subsidiary Institutions](index=17&type=section&id=Support%20of%20Subsidiary%20Institutions) Federal Reserve regulations mandate Merchants Bancorp, as a BHC, to provide financial and managerial strength to its subsidiary banks, ensuring adequate capital during stress - Federal Reserve regulations require a BHC to serve as a source of financial and managerial strength to its subsidiary banks, ready to provide adequate capital during financial stress[66](index=66&type=chunk) [Repurchase or Redemption of Shares](index=17&type=section&id=Repurchase%20or%20Redemption%20of%20Shares) Share repurchases exceeding 10% of net worth require prior Federal Reserve notice, subject to disapproval, and are now subject to a 1% excise tax under the Inflation Reduction Act - Prior written notice to the Federal Reserve is generally required for share repurchases/redemptions if gross consideration exceeds **10% of consolidated net worth** over 12 months[67](index=67&type=chunk) - The Federal Reserve can disapprove such actions if they are deemed unsafe, unsound, or violate regulations[68](index=68&type=chunk) - Beginning after December 31, 2022, the Inflation Reduction Act of 2022 imposes a **1% excise tax** on the fair market value of repurchased stock[70](index=70&type=chunk) [Merchants Bank and FMBI](index=19&type=section&id=Merchants%20Bank%20and%20FMBI) Merchants Bank and FMBI are state-chartered, non-Federal Reserve member banks regulated by the FDIC and state departments, subject to various banking and consumer protection laws - Merchants Bank (Indiana-chartered) and FMBI (Illinois-chartered) are non-Federal Reserve member banks, regulated by the FDIC and their respective state financial institutions departments (IDFI and IDFPR)[71](index=71&type=chunk) [Bank Secrecy Act and USA Patriot Act](index=19&type=section&id=Bank%20Secrecy%20Act%20and%20USA%20Patriot%20Act) Merchants Bank and FMBI must comply with BSA and Patriot Act anti-money laundering and customer identification requirements, with non-compliance risking significant penalties - The BSA requires financial institutions to maintain records of certain customers and currency transactions, and report domestic and foreign currency transactions for criminal, tax, or regulatory investigations[72](index=72&type=chunk) - The Patriot Act mandates financial institutions to prevent and detect international money laundering and terrorism financing, including communicating suspected terrorist names to law enforcement and verifying customer identities[73](index=73&type=chunk)[74](index=74&type=chunk) - Merchants Bank and FMBI have established anti-money laundering and customer identification programs and implemented policies to comply with these requirements[75](index=75&type=chunk) [FDIC Improvement Act of 1991](index=19&type=section&id=FDIC%20Improvement%20Act%20of%201991) FDICIA mandates prompt corrective action for undercapitalized banks, establishing capital tiers, with Merchants Bank and FMBI categorized as 'well capitalized' as of December 31, 2022 - FDICIA requires federal bank regulatory authorities to take 'prompt corrective action' for banks not meeting minimum capital requirements, establishing five capital tiers[76](index=76&type=chunk) - 'Undercapitalized' banks face growth limitations and must submit capital restoration plans, with BHCs guaranteeing compliance. 'Critically undercapitalized' institutions may face receivership[77](index=77&type=chunk)[79](index=79&type=chunk) - As of December 31, 2022, Merchants Bank and FMBI were categorized as **'well capitalized'** under applicable regulations[80](index=80&type=chunk) [Capital Requirements and Basel III](index=21&type=section&id=Capital%20Requirements%20and%20Basel%20III) Federal regulators impose Basel III capital requirements, with the Simplification Rule adjusting servicing rights deductions, and the company transitioned to Basel III risk-based ratios after exceeding $10 billion in assets - Federal regulators impose minimum capital requirements on insured depository institutions and holding companies, based on the international Basel III capital framework[81](index=81&type=chunk) - The Simplification Rule (effective Jan 1, 2020) raised the common equity deduction threshold for servicing rights to **25% of common equity** (from 10%/15%), with non-deducted portions risk-weighted at 250%[84](index=84&type=chunk) - The company transitioned from using the Community Bank Leverage Ratio (CBLR) to reporting fully phased-in Basel III risk-based capital ratios as of September 30, 2022, after its total assets exceeded **$10 billion**[87](index=87&type=chunk) [Deposit Insurance Fund and Financing Corporation Assessments](index=23&type=section&id=Deposit%20Insurance%20Fund%20and%20Financing%20Corporation%20Assessments) The FDIC insures deposits up to $250,000, funded by risk-based premiums, which increased by 2 basis points in 2023, leading to higher premiums for the company as a large bank - The FDIC insures deposits of Merchants Bank and FMBI up to **$250,000 per depositor**, funded by risk-based insurance premiums[89](index=89&type=chunk) - In 2022, the FDIC adopted a rule to increase initial base deposit insurance assessment rates uniformly by **2 basis points**, effective Q1 2023, to help the DIF reach its statutory minimum[90](index=90&type=chunk) - As a large bank (over **$10 billion in assets**), the company's individual assessment rate will be based on a scorecard combining CAMELS ratings, financial measures, and loss severity, leading to expected higher premiums[91](index=91&type=chunk) [Dividends](index=23&type=section&id=Dividends) Merchants Bancorp's dividends rely on subsidiary bank payouts, which are restricted by state and federal laws based on earnings, capital, and regulatory status, subject to regulator prohibition - Merchants Bancorp's principal source of funds for dividends consists of dividends from Merchants Bank[92](index=92&type=chunk) - State and federal laws restrict the amount of dividends banks may pay, based on charter type, recent earnings, capital levels, and regulatory status[92](index=92&type=chunk) - Regulators can prohibit dividend payments if they determine it would be an unsafe or unsound practice or cause the bank to become undercapitalized[92](index=92&type=chunk)[95](index=95&type=chunk) [Community Reinvestment Act](index=25&type=section&id=Community%20Reinvestment%20Act) The CRA requires evaluation of financial institutions' community credit needs, with non-compliance leading to limitations, and the company operates under an approved CRA strategic plan - The CRA requires federal banking regulators to evaluate financial institutions' records in meeting local community credit needs, including low and moderate-income neighborhoods[98](index=98&type=chunk) - Failure to adequately meet CRA criteria could result in additional requirements and limitations on Merchants Bank and FMBI[98](index=98&type=chunk) - The Company is currently operating under an approved CRA strategic plan[98](index=98&type=chunk) [The Dodd-Frank Wall Street Reform and Consumer Protection Act](index=25&type=section&id=The%20Dodd-Frank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act) The Dodd-Frank Act significantly reformed financial regulation, imposing new capital requirements, altering FDIC assessments, creating the CFPB, and increasing operating and compliance costs - The Dodd-Frank Act imposed new capital requirements on bank holding companies and changed the base for FDIC insurance assessments[99](index=99&type=chunk) - It created the CFPB, which has broad rulemaking, supervisory, and enforcement authority over consumer financial products and services, including mortgages[99](index=99&type=chunk) - Compliance with the Dodd-Frank Act and its regulations has resulted in additional operating and compliance costs, impacting the company's business[100](index=100&type=chunk) [Privacy and Cybersecurity](index=25&type=section&id=Privacy%20and%20Cybersecurity) Merchants Bank and FMBI must comply with federal and state laws protecting customer confidential information, requiring privacy disclosures, sharing restrictions, and robust information security programs - Merchants Bank and FMBI must comply with federal and state laws governing the protection of customer non-public confidential information[100](index=100&type=chunk) - These laws require periodic disclosure of privacy policies, restrictions on sharing information with third parties, and implementation of comprehensive information security programs[100](index=100&type=chunk)[101](index=101&type=chunk)[102](index=102&type=chunk) [Consumer Financial Services](index=27&type=section&id=Consumer%20Financial%20Services) The CFPB enforces consumer protection laws, examining institutions over $10 billion in assets, with new mortgage rules emphasizing ability-to-repay, though the company expects minimal direct impact beyond compliance costs - The CFPB oversees and enforces consumer protection laws, with broad rulemaking authority and examination power over institutions with more than **$10 billion in assets**[103](index=103&type=chunk) - New CFPB rules, driven by the Dodd-Frank Act, address mortgage and mortgage-related products, emphasizing underwriting requirements like ability-to-repay standards and risk retention[103](index=103&type=chunk) - Merchants Bank does not expect the CFPB's rules to have a significant impact on its operations, except for higher compliance costs[103](index=103&type=chunk) [S.A.F.E. Act](index=27&type=section&id=S.A.F.E.%20Act) The S.A.F.E. Act mandates residential mortgage loan originators at regulated financial institutions to register and maintain annual registration with the Nationwide Mortgage Licensing System - The S.A.F.E. Act requires residential mortgage loan originators employed by regulated financial institutions to register with the Nationwide Mortgage Licensing System and Registry and maintain annual registration[104](index=104&type=chunk) [Mortgage Origination](index=27&type=section&id=Mortgage%20Origination) The CFPB's 'ability to repay' rule requires lenders to verify borrower repayment capacity for mortgage loans, with qualified mortgages receiving protection, and recent revisions have not significantly impacted production - The CFPB's 'ability to repay' rule requires lenders to consider a consumer's ability to repay a mortgage loan before extending credit[105](index=105&type=chunk) - The rule establishes protections for 'qualified mortgages,' which include loans eligible for purchase by Fannie Mae/Freddie Mac or insurance/guarantee by FHA, VA, or USDA[105](index=105&type=chunk) - A revised definition of 'qualified mortgage' became effective June 30, 2021, removing the 43% debt-to-income ratio and GSE Patch, but has not significantly impacted Merchants Bank's mortgage production[105](index=105&type=chunk) [Mortgage Servicing](index=29&type=section&id=Mortgage%20Servicing) CFPB rules have increased mortgage servicing requirements, raising industry costs, and Merchants has voluntarily adopted many of these standards due to competitive pressures - CFPB rules have increased requirements for mortgage servicing, covering borrower communications, account record maintenance, complaint responses, and handling delinquent loans/foreclosures[107](index=107&type=chunk) - These rules, effective since 2014, have increased the costs to service loans across the mortgage industry[107](index=107&type=chunk) - Merchants Bancorp has voluntarily adopted many of these servicing and foreclosure standards due to competitive pressures, despite not being a party to related settlements or consent orders[108](index=108&type=chunk) [Consumer Laws](index=29&type=section&id=Consumer%20Laws) Merchants Bank and FMBI must comply with numerous federal consumer protection laws covering privacy, financial confidentiality, debt collection, lending, credit reporting, and fair housing - Merchants Bank and FMBI must comply with various federal consumer protection laws, including those related to privacy, financial record confidentiality, debt collection, lending disclosures, credit reporting, equal credit opportunity, mortgage insurance, mortgage data reporting, fair housing, settlement procedures, savings disclosures, and electronic funds transfers[109](index=109&type=chunk)[110](index=110&type=chunk)[111](index=111&type=chunk) [Future Legislation and Executive Orders](index=31&type=section&id=Future%20Legislation%20and%20Executive%20Orders) Future legislation and executive orders, especially GSE reform, could significantly impact the banking industry by altering business costs, permissible activities, and competitive balance - Future legislation and executive orders, including potential GSE reform, could directly impact banking industry regulation[112](index=112&type=chunk) - These changes may increase or decrease business costs, limit or expand permissible activities, or affect the competitive balance among financial institutions in unpredictable ways[112](index=112&type=chunk) [SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS](index=31&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This report contains forward-looking statements subject to uncertainties and risks from economic conditions, regulatory compliance, and market factors, with no obligation to update - The report contains forward-looking statements, reflecting current views on future events and financial performance, subject to inherent uncertainties and risks[113](index=113&type=chunk) - Key factors that could cause actual results to differ include business and economic conditions, credit risk management, regulatory compliance, cybersecurity risks, strategic execution, changes in senior management, and governmental monetary/fiscal policies[114](index=114&type=chunk)[115](index=115&type=chunk)[122](index=122&type=chunk) - The company does not undertake any obligation to update or review any forward-looking statement[117](index=117&type=chunk) [Item 1A. Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) The company faces diverse risks, including those related to mortgage banking, credit, operations, market, liquidity, and legal/regulatory compliance, which could materially impact its financial performance - The company faces risks related to its business, including mortgage banking and community banking, credit and financial conditions, operational aspects, market and liquidity, and legal, regulatory, and compliance[118](index=118&type=chunk) [Risks Related to Our Business](index=33&type=section&id=Risks%20Related%20to%20Our%20Business) Business risks include decreased mortgage origination, pricing competition, interest rate changes, reliance on secondary markets, HUD violations, inaccurate estimates, intense competition, and potential government shutdowns - Decreased residential and multi-family mortgage origination, competitive pricing, and interest rate changes can adversely affect profitability[119](index=119&type=chunk) - Profitability in mortgage banking depends on high loan volume and successful sales in the secondary market, which relies on GSE programs[120](index=120&type=chunk)[121](index=121&type=chunk)[124](index=124&type=chunk) - Risks include violations of HUD lending requirements for multi-family FHA business, potential losses from inaccurate estimates on real estate construction loans, and strong competition from various financial institutions[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk) - Government shutdowns could adversely affect the multi-family FHA origination business, and maintaining a positive reputation is critical for business success[130](index=130&type=chunk)[131](index=131&type=chunk) [Credit and Financial Risks](index=37&type=section&id=Credit%20and%20Financial%20Risks) Credit and financial risks include economic downturns, increased loan losses, LIBOR transition costs, nonperforming assets, potential ACL-Loans insufficiency, higher risk in small business lending, and goodwill impairment - A decline in general business and economic conditions, including high inflation, could lead to increased delinquencies, nonperforming loans, and charge-offs, requiring higher provisions for credit losses[132](index=132&type=chunk)[133](index=133&type=chunk) - The transition from LIBOR as a reference rate to alternatives like SOFR could create considerable costs and risks due to changes in market risk profiles, pricing models, and hedging strategies[135](index=135&type=chunk)[138](index=138&type=chunk) - Nonperforming assets adversely affect net income by reducing interest income, increasing administration costs, and requiring significant management time[139](index=139&type=chunk) - The Allowance for Credit Losses on Loans (ACL-Loans) is inherently subjective and may prove insufficient to absorb potential losses, potentially requiring additional provisions[140](index=140&type=chunk)[142](index=142&type=chunk) - Lending to small to midsized businesses carries higher risk due to their fewer resources and greater vulnerability to economic downturns[144](index=144&type=chunk) - Reliance on the accuracy and completeness of information provided by customers and counterparties, and potential impairment of goodwill from acquisitions, also pose financial risks[145](index=145&type=chunk)[146](index=146&type=chunk)[149](index=149&type=chunk) [Operational Risks](index=45&type=section&id=Operational%20Risks) Operational risks include ineffective risk management, dependence on key management, faulty data, system failures, cybersecurity breaches, third-party reliance, technology implementation challenges, and acquisition integration risks - The company's risk management framework, including modeling methodologies, may not be effective in mitigating all risks or losses[157](index=157&type=chunk) - Success is highly dependent on the continued service and skills of the executive management team, particularly **Michael Petrie** (Chairman/CEO) and **Michael Dunlap** (President/COO), with loss of key personnel posing an adverse impact[158](index=158&type=chunk)[159](index=159&type=chunk) - Reliance on data and modeling for decision-making creates risk from faulty data or flawed approaches, potentially leading to suboptimal decisions or regulatory scrutiny[160](index=160&type=chunk)[161](index=161&type=chunk)[162](index=162&type=chunk) - System failures, cybersecurity breaches, and reliance on third-party service providers could interrupt operations, jeopardize data security, and lead to significant liabilities and reputational damage[163](index=163&type=chunk)[164](index=164&type=chunk) - The company has a continuing need for technological change but may lack resources or face operational challenges in implementing new technology, potentially leading to a competitive disadvantage[165](index=165&type=chunk)[166](index=166&type=chunk) - Acquisitions, while pursued for growth, involve risks such as intense competition, inaccurate valuation estimates, exposure to unknown liabilities, integration challenges, and loss of key employees/customers[170](index=170&type=chunk)[171](index=171&type=chunk) [Market, Interest Rate, and Liquidity Risks](index=51&type=section&id=Market,%20Interest%20Rate,%20and%20Liquidity%20Risks) Market, interest rate, and liquidity risks include reduced net interest income from rate fluctuations, impaired collateral from real estate declines, vulnerable liquidity, repurchase liabilities from warranty breaches, and counterparty soundness issues - Fluctuations in interest rates can reduce net interest income, increase borrower payment requirements and defaults, and decrease the fair market value of servicing rights and fixed-rate debt securities[174](index=174&type=chunk)[175](index=175&type=chunk)[176](index=176&type=chunk)[177](index=177&type=chunk)[178](index=178&type=chunk)[179](index=179&type=chunk) - Negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing real estate loans, leading to losses and potential liability for remediation costs on foreclosed properties[180](index=180&type=chunk)[181](index=181&type=chunk)[182](index=182&type=chunk) - Liquidity is essential but vulnerable to fluctuations in customer and brokered deposits, competitive pressures, and disruptions in financial markets, potentially increasing funding costs or impairing growth[183](index=183&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk)[187](index=187&type=chunk) - Breaching representations or warranties made to mortgage loan purchasers can result in liability for costs and damages, including loan repurchases[188](index=188&type=chunk) - The company's ability to engage in routine funding transactions can be adversely affected by the actions and commercial soundness of other financial institutions[190](index=190&type=chunk) [Legal, Regulatory, and Compliance Risks](index=55&type=section&id=Legal,%20Regulatory,%20and%20Compliance%20Risks) Legal, regulatory, and compliance risks include capital requirements, increased costs from legislation like Dodd-Frank, heightened scrutiny for large banks, noncompliance penalties, and potential Federal Reserve-mandated capital injections - The company may need to raise additional capital to meet significant capital and regulatory requirements, and failure to do so could adversely affect its financial condition and regulatory compliance[191](index=191&type=chunk)[192](index=192&type=chunk) - Legislative and regulatory actions, such as the Dodd-Frank Act, increase operating and compliance costs, potentially impacting profitability and requiring significant resources[193](index=193&type=chunk)[194](index=194&type=chunk)[195](index=195&type=chunk)[197](index=197&type=chunk) - Exceeding **$10 billion in assets** subjects the company to heightened regulatory scrutiny, direct CFPB examination, and new requirements like the Volcker Rule[199](index=199&type=chunk)[200](index=200&type=chunk) - Failure to meet stringent capital requirements (Basel III) could result in regulatory limitations on activities, affecting growth, dividends, and acquisitions[201](index=201&type=chunk)[202](index=202&type=chunk) - Monetary policies of the Federal Reserve can adversely affect earnings and growth, and regulatory examinations can lead to remedial actions if financial condition or compliance is unsatisfactory[203](index=203&type=chunk)[205](index=205&type=chunk)[206](index=206&type=chunk) - Noncompliance with consumer protection laws (CRA, fair lending) and anti-money laundering statutes (BSA, Patriot Act) can result in sanctions, fines, restrictions, and reputational damage[207](index=207&type=chunk)[208](index=208&type=chunk)[209](index=209&type=chunk)[210](index=210&type=chunk) - The Federal Reserve may require the company to commit capital resources to support its subsidiary banks under the 'source of strength' doctrine[211](index=211&type=chunk) [Item 1B. Unresolved Staff Comments.](index=61&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments.) There are no unresolved staff comments - There are no unresolved staff comments[212](index=212&type=chunk) [Item 2. Properties.](index=61&type=section&id=Item%202.%20Properties.) The company owns its Carmel, Indiana headquarters and other branches, all deemed adequate for current operating needs across its business segments - The company owns its headquarters building in Carmel, Indiana, which includes a Merchants Bank branch and houses operations for all three segments[213](index=213&type=chunk) - Additional branches and small offices are located in Indiana and other states, and facilities are considered adequate for foreseeable operating needs[213](index=213&type=chunk) [Item 3. Legal Proceedings.](index=61&type=section&id=Item%203.%20Legal%20Proceedings.) There are no material pending legal proceedings beyond routine litigation incidental to the business - There are no material pending legal proceedings other than ordinary routine litigation incidental to the business[214](index=214&type=chunk) [Item 4. Mine Safety Disclosures.](index=61&type=section&id=Item%204.%20Mine%20Safety%20Disclosures.) There are no mine safety disclosures to report - There are no mine safety disclosures[215](index=215&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.](index=61&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities.) Merchants Bancorp's common stock trades on Nasdaq, with 43.2 million shares outstanding, a quarterly dividend policy, and $3.9 million in share repurchases in 2022 - Common stock (MBIN) began trading on Nasdaq on October 27, 2017. As of March 8, 2023, there were **43,233,618 shares outstanding** and **38 shareholders of record**[217](index=217&type=chunk) - The company's policy is to pay quarterly dividends, subject to results, financial condition, capital requirements, banking regulations, and preferred stock dividends[218](index=218&type=chunk) - In 2022, the company repurchased **165,037 common shares** for **$3.9 million** at an average price of **$23.85 per share**, under a $75 million authorization expiring December 31, 2023[225](index=225&type=chunk)[386](index=386&type=chunk)[699](index=699&type=chunk) [Dividend Policy](index=61&type=section&id=Dividend%20Policy) The company's policy is to pay quarterly common stock dividends, subject to board discretion and dependent on financial performance, capital, and regulatory factors - The company's policy is to pay quarterly dividends to common stockholders, but this policy may change at the board's discretion without notice[218](index=218&type=chunk) - Future dividend payments depend on results of operations, financial condition, capital requirements, banking regulations, preferred stock dividends, and other relevant factors[218](index=218&type=chunk) [Dividend Restrictions](index=63&type=section&id=Dividend%20Restrictions) Common stock dividends are restricted by preferred stock payments, Federal Reserve policies, and subsidiary bank dividend limitations - The company cannot declare or pay common stock dividends unless dividends have been declared and paid on all classes of preferred stock[220](index=220&type=chunk) - As a BHC, dividend payments are affected by Federal Reserve policies and reliance on dividends from subsidiary banks, which face legal and regulatory restrictions[221](index=221&type=chunk) [Stock Performance Graph](index=63&type=section&id=Stock%20Performance%20Graph) The report includes a graph comparing the company's common stock cumulative total shareholder return against Nasdaq indices from 2017 to 2022, assuming dividend reinvestment - A graph compares the cumulative total shareholder return of the company's common stock against the Nasdaq Composite Index and the Nasdaq Bank Index from December 31, 2017, through December 31, 2022[222](index=222&type=chunk) - The comparison assumes an initial investment of **$100.00** and reinvestment of all quarterly dividends[222](index=222&type=chunk) [Securities Authorized for Issuance Under Equity Compensation Plans](index=64&type=section&id=Securities%20Authorized%20for%20Issuance%20Under%20Equity%20Compensation%20Plans) Disclosure on securities authorized for issuance under equity compensation plans is provided in Item 12, as required by Regulation S-K - Disclosure regarding securities authorized for issuance and equity compensation plans is provided in Item 12 of this report, as required by Item 201(d) of Regulation S-K[224](index=224&type=chunk) [Unregistered Sales and Repurchases of Equity Securities](index=64&type=section&id=Unregistered%20Sales%20and%20Repurchases%20of%20Equity%20Securities) No unregistered sales or repurchases occurred in Q4 2022, with $71.1 million remaining authorized for repurchase under a program expiring December 31, 2023 - The company had no repurchases during October 1 - December 31, 2022. A Rule 10b5-1 plan for repurchases commenced on May 3, 2022[225](index=225&type=chunk) Equity Repurchase Program Status (as of December 31, 2022) | Metric | Amount | | :------------------------------------------------ | :------------- | | Remaining authorization at December 31, 2021 | $75,000,000 | | Dollar value of shares repurchased (2022) | $3,935,333 | | Shares repurchased (2022) | 165,037 | | Average price paid per share (2022) | $23.85 | | Remaining authorization at December 31, 2022 | $71,064,667 | [Item 6. Selected Financial Data.](index=65&type=section&id=Item%206.%20Selected%20Financial%20Data.) This section presents a five-year summary of selected financial data, highlighting 2022 performance with $12.6 billion in assets and $219.7 million net income, and the adoption of CECL - The company adopted FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL") on January 1, 2022, replacing the incurred loss impairment methodology[227](index=227&type=chunk) Selected Financial Data (2018-2022) | Metric | 2022 | 2021 | 2020 | 2019 | 2018 | | :------------------------------------------ | :----------- | :----------- | :----------- | :----------- | :----------- | | **Balance Sheet Data (in thousands):** | | | | | | | Total Assets | $12,615,227 | $11,278,638 | $9,645,375 | $6,371,928 | $3,884,163 | | Loans held for investment | 7,470,872 | 5,782,663 | 5,535,426 | 3,028,310 | 2,058,127 | | Deposits | 10,071,345 | 8,982,613 | 7,408,066 | 5,478,075 | 3,231,086 | | Total shareholders' equity | 1,459,739 | 1,155,409 | 810,621 | 653,728 | 421,237 | | **Income Statement Data (in thousands):** | | | | | | | Net interest income | 318,551 | 277,994 | 224,146 | 122,298 | 89,971 | | Noninterest income | 125,936 | 157,333 | 127,473 | 47,089 | 49,585 | | Net income | 219,721 | 227,104 | 180,533 | 77,329 | 62,874 | | Net income available to common shareholders | $193,738 | $206,231 | $166,060 | $68,113 | $59,544 | | **Per Share Data (Common Stock):** | | | | | | | Diluted earnings per share | $4.47 | $4.76 | $3.85 | $1.58 | $1.38 | | Dividends declared | $0.28 | $0.24 | $0.21 | $0.19 | $0.16 | | Tangible book value (non-GAAP) | $21.88 | $17.96 | $13.45 | $9.79 | $8.33 | | **Performance Metrics:** | | | | | | | Return on average assets | 1.99% | 2.23% | 2.12% | 1.47% | 1.71% | | Return on average equity | 17.21% | 22.07% | 25.09% | 14.37% | 15.86% | | Net interest margin | 2.97% | 2.79% | 2.69% | 2.40% | 2.54% | | Efficiency ratio (non-GAAP) | 30.61% | 28.80% | 27.42% | 37.38% | 36.47% | | **Capital Ratios—Merchants Bancorp:** | | | | | | | Tangible common equity to tangible assets (non-GAAP) | 7.5% | 6.9% | 6.0% | 6.6% | 9.3% | | Tier 1 leverage ratio/CBLR | 11.7% | 10.4% | 8.6% | 9.4% | 10.0% | [NON-GAAP FINANCIAL MEASURES](index=65&type=section&id=NON-GAAP%20FINANCIAL%20MEASURES) This section reconciles non-GAAP financial measures like tangible common equity and efficiency ratio, used by management as supplementary performance indicators - Non-GAAP financial measures used by management include tangible common shareholders' equity, tangible book value per share, tangible common shareholders' equity to tangible assets, return on average tangible common equity, and efficiency ratio[230](index=230&type=chunk) - These measures provide useful supplementary information but are not substitutes for GAAP results and may not be comparable to other companies' non-GAAP measures[234](index=234&type=chunk) Reconciliation of GAAP to Non-GAAP Financial Measures (as of December 31, 2022) | Metric | 2022 (in thousands) | | :------------------------------------ | :------------------ | | Shareholders' equity per GAAP | $1,459,739 | | Less: goodwill & intangibles | (17,031) | | Less: preferred stock | (499,608) | | **Tangible common shareholders' equity** | **$943,100** | | Assets per GAAP | $12,615,227 | | Less: goodwill & intangibles | (17,031) | | **Tangible assets** | **$12,598,196** | | Tangible book value per common share | $21.88 | | Return on average tangible common equity | 22.50% | | Tangible common equity to tangible assets | 7.5% | | Efficiency ratio | 30.61% | [Item 7. Management's Discussion and Analysis of Financial Condition and the Results of Operations.](index=69&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20the%20Results%20of%20Operations.) This section analyzes Merchants Bancorp's 2022 financial condition and operating results, detailing net income, asset growth, net interest margin, asset quality, segment performance, liquidity, and capital - Net income for the year ended December 31, 2022, was **$219.7 million**, a **3% decrease** from $227.1 million in 2021[241](index=241&type=chunk) - Total assets increased by **$1.3 billion (12%)** to **$12.6 billion**, and loans receivable (net of ACL) increased by **$1.7 billion (29%)** to **$7.4 billion**[241](index=241&type=chunk) - Net interest margin increased by **18 basis points** to **2.97%** in 2022 from 2.79% in 2021[241](index=241&type=chunk) [Financial Highlights for the Year Ended December 31, 2022](index=69&type=section&id=Financial%20Highlights%20for%20the%20Year%20Ended%20December%2031,%202022) In 2022, net income decreased 3% to $219.7 million, while total assets grew 12% to $12.6 billion, net interest margin improved, and the company raised $137.5 million in new capital - The decrease in net income was primarily driven by a **$31.4 million (20%) decrease** in noninterest income, a **$12.3 million increase** in provision for credit losses, and a **$10.7 million (9%) increase** in noninterest expense, partially offset by a **$40.6 million (15%) increase** in net interest income[241](index=241&type=chunk) - Completed a **$214 million CMBS securitization** in May 2022 and a **$284.2 million securitization** in November 2022, both Freddie Mac-sponsored Q-Series transactions[241](index=241&type=chunk)[248](index=248&type=chunk) - Sold **$1.2 billion of multi-family bridge loans** into a private securitization in September 2022, purchasing a $1.0 billion senior investment security[248](index=248&type=chunk) - Raised **$137.5 million in new capital** through an 8.25% Series D preferred stock offering in September 2022[248](index=248&type=chunk) - LIHTC syndications business raised **$290.9 million in equity** for 5 funds launched in 2022[248](index=248&type=chunk) - Warehouse loans funded decreased by **58% to $33.2 billion** in 2022, reflecting a broader industry decline in single-family residential loan volumes[248](index=248&type=chunk) Financial Highlights (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 | 2021 | Change ($M) | Change (%) | | :------------------------------------ | :----------- | :----------- | :---------- | :--------- | | Net income | $219.7M | $227.1M | $(7.4) | (3%) | | Diluted earnings per share | $4.47 | $4.76 | - | (6%) | | Total assets | $12.6B | $11.3B | $1.3B | 12% | | Loans receivable (net of ACL) | $7.4B | $5.7B | $1.7B | 29% | | Net interest margin | 2.97% | 2.79% | +0.18% | - | | Efficiency ratio | 30.61% | 28.80% | +1.81% | - | | Tangible book value per common share | $21.88 | $17.96 | - | 22% | [Company and Business Segment Overview](index=71&type=section&id=Company%20and%20Business%20Segment%20Overview) Merchants Bancorp operates three segments, focusing on funding low-risk, government-program-compliant loans via an originate-to-sell model to generate noninterest income and enhance shareholder returns - Merchants Bancorp operates in Multi-family Mortgage Banking, Mortgage Warehousing, and Banking segments[244](index=244&type=chunk) - The business model focuses on funding low-risk loans meeting government program underwriting standards, primarily through an originate-to-sell model[245](index=245&type=chunk) - Gain on sale of loans and servicing fees from multi-family rental real estate loans are significant contributors to noninterest income, aiming for lower charge-offs and higher shareholder returns[245](index=245&type=chunk) [Primary Factors We Use to Evaluate Our Business](index=71&type=section&id=Primary%20Factors%20We%20Use%20to%20Evaluate%20Our%20Business) The company evaluates its business based on operating results and financial condition, monitoring key metrics like net interest income, asset levels, liquidity, capital, and asset quality - Primary factors for evaluating results of operations include net interest income, noninterest income, and noninterest expense[250](index=250&type=chunk) - Key metrics for net interest income evaluation are yields on assets, duration of loans/deposits/borrowings, funding costs, net interest margin, and regulatory risk weighting[251](index=251&type=chunk) - Primary factors for evaluating financial condition are asset levels, liquidity, capital, and asset quality[259](index=259&type=chunk) - Asset quality is managed based on the level, distribution, severity, and trend of problem assets, adequacy of ACL-Loans, diversification of portfolios, counterparty risks, and credit concentrations[263](index=263&type=chunk) [Recent Developments and Material Trends](index=75&type=section&id=Recent%20Developments%20and%20Material%20Trends) Recent developments include rapid interest rate increases, a 58% decrease in warehouse loan funding, minimal COVID-19 credit impact, heightened regulatory capital requirements, and the company's transition to Basel III ratios - The Federal Reserve rapidly increased interest rates in 2022 due to inflation, pushing 30-year mortgage rates above **7%** for the first time since 2002[264](index=264&type=chunk) - Warehouse loan funding volume decreased by **58%** in 2022, reflecting a **49% industry decrease** in single-family residential loan volumes[248](index=248&type=chunk)[265](index=265&type=chunk) - The COVID-19 pandemic had minimal direct credit exposure impact on the company's loan portfolio[268](index=268&type=chunk) - Regulatory trends include heightened capital requirements and burdens from the Dodd-Frank Act, favoring community banks with sufficient capital and diversified business models[269](index=269&type=chunk) - The company transitioned to reporting fully phased-in Basel III risk-based capital ratios as of September 30, 2022, after exceeding **$10 billion in total assets**[270](index=270&type=chunk) - Issued **8.25% Series D Preferred Stock** in September 2022, raising **$137.5 million in new capital**, and completed several loan sale and securitization transactions to manage regulatory capital and reduce credit risk[272](index=272&type=chunk)[276](index=276&type=chunk) [Comparison of Operating Results for the Years Ended December 31, 2022 and 2021](index=79&type=section&id=Comparison%20of%20Operating%20Results%20for%20the%20Years%20Ended%20December%2031,%202022%20and%202021) In 2022, net income decreased 3% to $219.7 million, driven by lower noninterest income and higher provisions/expenses, partially offset by a 15% increase in net interest income and an improved net interest margin Operating Results (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :------------------------------------ | :------------------ | :------------------ | :---------- | :--------- | | Net income | $219,721 | $227,104 | $(7,383) | (3%) | | Noninterest income | $125,936 | $157,333 | $(31,397) | (20%) | | Provision for credit losses | $17,295 | $5,012 | $12,283 | 245% | | Noninterest expense | $136,050 | $125,385 | $10,665 | 9% | | Net interest income | $318,551 | $277,994 | $40,557 | 15% | | Net interest margin | 2.97% | 2.79% | +0.18% | - | [Net Interest Income](index=79&type=section&id=Net%20Interest%20Income) Net interest income increased 15% to $318.6 million in 2022, driven by higher interest income from yields and loan balances, partially offset by increased interest expense, improving net interest margin to 2.97% - Average loan balances (including held for sale) increased by **$806.2 million (9%)** to **$9.3 billion**, and the average yield on loans increased by **140 basis points** to **4.85%**[282](index=282&type=chunk) - Interest expense on deposits increased by **$121.4 million (430%)** to **$149.6 million**, primarily due to higher interest rates on interest-bearing checking, money market, and CD accounts, as well as higher average balances for CDs and money market accounts[289](index=289&type=chunk)[291](index=291&type=chunk)[292](index=292&type=chunk) - Interest expense on borrowings increased by **$7.0 million (124%)** to **$12.6 million**, driven by a **127 basis point increase** in the average cost of borrowings to **2.13%**[293](index=293&type=chunk) Net Interest Income Components (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :------------------ | :------------------ | :------------------ | :---------- | :--------- | | Net interest income | $318,551 | $277,994 | $40,557 | 15% | | Interest Income | $480,833 | $311,886 | $168,947 | 54% | | Interest Expense | $162,282 | $33,892 | $128,390 | 379% | | Net interest margin | 2.97% | 2.79% | +0.18% | - | [Provision for Credit Losses](index=85&type=section&id=Provision%20for%20Credit%20Losses) Provision for credit losses increased by $12.3 million to $17.3 million in 2022, driven by loan growth, portfolio mix, and CECL adoption, increasing ACL-Loans to $44.0 million - The ACL-Loans increased to **$44.0 million (0.59% of loans receivable)** at December 31, 2022, from $31.3 million (0.54%) at December 31, 2021, driven by loan growth and portfolio mix, partially offset by a **$4.0 million release** from loan sales and securitizations[300](index=300&type=chunk) - The adoption of FASB ASU No. 2016-13 (CECL) on January 1, 2022, also contributed to the increase in provision for credit losses[301](index=301&type=chunk) Provision for Credit Losses (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | | :-------------------------- | :------------------ | :------------------ | :---------- | | Provision for credit losses | $17,295 | $5,012 | $12,283 | | ACL-Loans | $13,473 | - | - | | ACL-OBCEs | $2,600 | - | - | | ACL-Guarantees | $1,200 | - | - | [Noninterest Income](index=85&type=section&id=Noninterest%20Income) Noninterest income decreased 20% to $125.9 million in 2022, primarily due to a $47.0 million decrease in gain on sale of loans, partially offset by an $13.8 million increase in loan servicing fees - The decrease in gain on sale of loans was due to a shift in business mix to programs with lower average trade pricing in the multi-family loan portfolio, and lower single-family and multi-family secondary market volumes[302](index=302&type=chunk) - Loan servicing fees included a **$19.8 million positive adjustment** to the fair value of servicing rights in 2022, compared to $12.4 million in 2021[305](index=305&type=chunk) Noninterest Income (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :-------------------- | :------------------ | :------------------ | :---------- | :--------- | | Total noninterest income | $125,936 | $157,333 | $(31,397) | (20%) | | Gain on sale of loans | $64,150 | $111,185 | $(47,035) | (42%) | | Loan servicing fees, net | $30,198 | $16,373 | $13,825 | 84% | | Mortgage warehouse fees | $5,394 | $12,396 | $(7,002) | (56%) | | Syndication and asset management fees | $9,493 | $6,507 | $2,986 | 46% | | Other income | $16,701 | $10,681 | $6,020 | 56% | [Noninterest Expense](index=87&type=section&id=Noninterest%20Expense) Noninterest expense increased 9% to $136.1 million in 2022, driven by higher salaries and professional fees, resulting in an efficiency ratio increase to 30.6% - The increase in salaries and employee benefits was to support higher multi-family loan production volumes[305](index=305&type=chunk) Noninterest Expense (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :---------- | :--------- | | Total noninterest expense | $136,050 | $125,385 | $10,665 | 9% | | Salaries and employee benefits | $89,085 | $85,727 | $3,358 | 4% | | Professional fees | $9,065 | $5,427 | $3,638 | 67% | | Loan expenses | $4,703 | $7,657 | $(2,954) | (39%) | | Efficiency ratio | 30.6% | 28.8% | +1.8% | - | [Income Taxes](index=87&type=section&id=Income%20Taxes) Income tax expense decreased 8% to $71.4 million in 2022, primarily due to a 5% decrease in pre-tax income, with the effective tax rate falling to 24.5% - The decrease in income tax expense was primarily due to a **5% decrease** in pre-tax income[306](index=306&type=chunk) Income Taxes (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :-------------------- | :------------------ | :------------------ | :---------- | :--------- | | Income tax expense | $71,421 | $77,826 | $(6,405) | (8%) | | Effective tax rate | 24.5% | 25.5% | - | - | [Asset Quality](index=87&type=section&id=Asset%20Quality) Total nonperforming loans significantly increased to $26.7 million (0.36% of total loans) in 2022, primarily due to one healthcare loan, reducing the ACL-Loans to nonperforming loans ratio - The increase in nonperforming loans was primarily due to the delinquency of one fully collateralized healthcare loan, for which full repayment is expected[307](index=307&type=chunk) - Net charge-offs were **$0.5 million** in 2022 ($1.3 million charge-offs, $0.8 million recoveries), compared to $1.2 million in 2021 ($1.2 million charge-offs, $0.02 million recoveries)[309](index=309&type=chunk) Asset Quality Metrics (as of December 31, 2022 vs. 2021) | Metric | 2022 | 2021 | Change | | :------------------------------------ | :--------- | :--------- | :------- | | Total nonperforming loans | $26.7M | $0.8M | +$25.9M | | Nonperforming loans to total loans | 0.36% | 0.01% | +0.35% | | ACL-Loans to nonperforming loans | 165.0% | 4,118.8% | -3,953.8% | | Total loans greater than 30 days past due | $39.8M | $2.6M | +$37.2M | | Special Mention (Watch) loans | $137.8M | $100.8M | +$37.0M | [Operating Segment Analysis for the Years Ended December 31, 2022 and 2021](index=87&type=section&id=Operating%20Segment%20Analysis%20for%20the%20Years%20Ended%20December%2031,%202022%20and%202021) In 2022, Multi-family Mortgage Banking net income rose 6%, Mortgage Warehousing net income fell 49%, and Banking segment net income increased 48%, reflecting diverse segment performance - The company's reportable segments are Multi-family Mortgage Banking, Mortgage Warehousing, and Banking[310](index=310&type=chunk) Net Income by Operating Segment (Year Ended December 31, 2022 vs. 2021, in thousands) | Segment | 2022 Net Income | 2021 Net Income | Change ($M) | Change (%) | | :------------------------ | :-------------- | :-------------- | :---------- | :--------- | | Multi-family Mortgage Banking | $54,642 | $51,504 | $3,138 | 6% | | Mortgage Warehousing | $48,604 | $95,159 | $(46,555) | (49%) | | Banking | $134,221 | $90,858 | $43,363 | 48% | | Other | $(17,746) | $(10,417) | $(7,329) | (70%) | | **Total** | **$219,721** | **$227,104** | **$(7,383)** | **(3%)** | [Multi-family Mortgage Banking](index=89&type=section&id=Multi-family%20Mortgage%20Banking) Multi-family Mortgage Banking net income increased 6% to $54.6 million in 2022, driven by higher loan servicing fees, despite decreased gain on sale of loans and increased noninterest expenses - Net income for Multi-family Mortgage Banking increased by **$3.1 million (6%)** to **$54.6 million** in 2022[315](index=315&type=chunk) - Growth was driven by a **$14.3 million increase** in noninterest income, including a **$20.1 million increase** in loan servicing fees and a **$14.0 million positive fair market value adjustment** on servicing rights[315](index=315&type=chunk)[316](index=316&type=chunk) - Gain on sale of loans decreased by **$16.1 million**, and noninterest expenses increased by **$10.7 million**, primarily due to salaries and employee benefits[316](index=316&type=chunk) - The volume of loans originated and acquired for sale decreased by **$1.1 billion (39%)** to **$1.8 billion** in 2022[318](index=318&type=chunk) [Mortgage Warehousing](index=91&type=section&id=Mortgage%20Warehousing) Mortgage Warehousing net income decreased 49% to $48.6 million in 2022, primarily due to lower net interest income and fees, reflecting a 58% decline in funded loa

PART I [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Merchants Bancorp's unaudited condensed consolidated financial statements for Q3 and 9M 2022 and 2021, including balance sheets, income statements, and cash flows with accompanying notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to **$12.0 billion** by September 30, 2022, driven by loan growth and a new held-to-maturity security, while liabilities rose due to deposits and shareholders' equity grew to **$1.4 billion** Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | December 31, 2021 | Change | | :--- | :--- | :--- | :--- | | **Total Assets** | **$11,978,722** | **$11,278,638** | **+6.2%** | | Cash and cash equivalents | $323,961 | $1,032,614 | -68.6% | | Loans held for sale | $2,844,750 | $3,303,199 | -13.9% | | Loans receivable, net | $6,919,128 | $5,751,319 | +20.3% | | Held to maturity securities | $1,005,487 | $0 | N/A | | **Total Liabilities** | **$10,566,132** | **$10,123,229** | **+4.4%** | | Total deposits | $10,319,479 | $8,982,613 | +14.9% | | Borrowings | $97,279 | $1,033,954 | -90.6% | | **Total Shareholders' Equity** | **$1,412,590** | **$1,155,409** | **+22.3%** | [Condensed Consolidated Statements of Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Q3 2022 net income remained flat at **$58.5 million** due to increased net interest income offset by lower noninterest income, while 9M 2022 net income decreased **5%** to **$162.6 million** Q3 Financial Performance (in thousands, except EPS) | Metric | Q3 2022 | Q3 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $85,385 | $68,881 | +24.0% | | Provision for credit losses | $2,225 | $1,079 | +106.2% | | Noninterest Income | $29,186 | $40,271 | -27.5% | | Net Income | $58,488 | $58,503 | -0.03% | | Diluted EPS | $1.22 | $1.22 | 0.0% | Nine-Month Financial Performance (in thousands, except EPS) | Metric | 9M 2022 | 9M 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $223,141 | $205,251 | +8.7% | | Provision for credit losses | $10,888 | $2,427 | +348.6% | | Noninterest Income | $102,954 | $117,062 | -12.1% | | Net Income | $162,565 | $171,903 | -5.4% | | Diluted EPS | $3.36 | $3.62 | -7.2% | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, including CECL adoption, and provide breakdowns of loan and investment portfolios, asset quality, securitization, capital, and segment performance - The Company adopted the Current Expected Credit Losses (CECL) standard on January 1, 2022, resulting in a **$3.6 million** decrease to retained earnings, net of tax. This adjustment primarily reflects the establishment of an allowance for off-balance sheet credit exposures (ACL-OBCEs)[31](index=31&type=chunk)[34](index=34&type=chunk)[35](index=35&type=chunk) - In September 2022, the Company completed a private securitization, selling a **$1.2 billion** portfolio of multi-family bridge loans. As part of the transaction, the Company purchased a **$1.0 billion** security from the deal, which is classified as held-to-maturity[105](index=105&type=chunk) - In September 2022, the Company issued **5.7 million** depositary shares of **8.25% Series D Preferred Stock**, raising approximately **$137.4 million** in net proceeds to support capital levels and growth[182](index=182&type=chunk) - As of September 30, 2022, the Company's total loan servicing portfolio had an unpaid principal balance of **$20.6 billion**, which is a significant source of noninterest income and deposits[318](index=318&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=48&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q3 and 9M 2022 financial performance, highlighting strong net interest income growth offset by declining noninterest income, and covers financial condition, asset quality, segment performance, and capital [Financial Condition Analysis](index=49&type=section&id=Financial%20Condition%20Analysis) Total assets grew **6%** to **$12.0 billion** by Q3 2022, fueled by a **20%** increase in net loans and a **15%** rise in deposits, while shareholders' equity increased **22%** to **$1.4 billion** - Net loans receivable increased by **$1.2 billion (20%)** since year-end 2021, with significant growth in healthcare financing (**+$603.5 million**), commercial and commercial real estate (**+$290.5 million**), and residential real estate (**+$187.0 million**)[235](index=235&type=chunk) - Servicing rights increased **31%** to **$145.0 million**, benefiting from **$22.7 million** in new originations and a **$19.9 million** positive fair value adjustment due to higher interest rates[244](index=244&type=chunk) - Borrowings decreased **91%** to **$97.3 million** as the company shifted its funding mix towards deposits, which grew by **$1.3 billion**[250](index=250&type=chunk)[254](index=254&type=chunk) [Asset Quality](index=53&type=section&id=Asset%20Quality) Asset quality remains strong despite nonperforming loans increasing to **0.38%** of total loans, primarily due to one fully collateralized healthcare loan, with ACL at **147%** of nonperforming loans - Total nonperforming loans were **$26.6 million (0.38% of total loans)** at Q3 2022, a significant increase from **$0.8 million (0.01% of total loans)** at year-end 2021, mainly due to one healthcare loan[258](index=258&type=chunk) - For the nine months ended September 30, 2022, net charge-offs were **$550,000** (**$1.3 million** in charge-offs and **$750,000** in recoveries), compared to net charge-offs of **$793,000** in the same period of 2021[261](index=261&type=chunk) [Results of Operations](index=53&type=section&id=Results%20of%20Operations) Q3 2022 net interest income grew **24%** to **$85.4 million**, offset by a **28%** drop in noninterest income due to lower mortgage volumes, while 9M 2022 net interest income rose **9%** to **$223.1 million** - Q3 2022 net interest margin increased **32 basis points** year-over-year to **3.05%**, benefiting from higher average loan balances at higher yields[264](index=264&type=chunk) - Q3 2022 noninterest income fell by **$11.1 million**, primarily due to a **$15.7 million** decrease in gain on sale of loans, reflecting lower volumes in multi-family, single-family, and SBA lending[284](index=284&type=chunk)[286](index=286&type=chunk) - Noninterest expense for Q3 2022 increased **19%** to **$35.0 million**, driven by higher salaries and professional fees, leading to an efficiency ratio of **30.51%** compared to **27.00%** in Q3 2021[287](index=287&type=chunk) [Segment Performance](index=61&type=section&id=Segment%20Performance) Q3 2022 saw Banking segment net income grow **68%** to **$39.3 million**, while Mortgage Warehousing net income fell **49%** to **$11.8 million** due to lower volumes, and Multi-family Mortgage Banking net income decreased **7%** to **$13.4 million** Net Income by Segment - Q3 (in thousands) | Segment | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $13,366 | $14,448 | -7.5% | | Mortgage Warehousing | $11,801 | $23,217 | -49.2% | | Banking | $39,344 | $23,463 | +67.7% | Net Income by Segment - 9 Months (in thousands) | Segment | 9M 2022 | 9M 2021 | Change | | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $44,414 | $37,380 | +18.8% | | Mortgage Warehousing | $36,828 | $73,848 | -50.1% | | Banking | $94,040 | $68,229 | +37.8% | [Liquidity and Capital Resources](index=64&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$2.8 billion** in unused borrowing capacity and capital ratios well above minimums, transitioning to Basel III reporting after exceeding **$10 billion** in assets - The company had **$2.8 billion** in available unused borrowing capacity with the FHLB and Federal Reserve discount window as of September 30, 2022[345](index=345&type=chunk) - The company switched from the Community Bank Leverage Ratio (CBLR) framework to fully phased-in Basel III risk-based capital ratios at September 30, 2022, as total assets surpassed the **$10 billion** threshold[374](index=374&type=chunk) Key Capital Ratios (Company) - September 30, 2022 | Ratio | Actual | Minimum for Adequacy | | :--- | :--- | :--- | | Total capital to risk-weighted assets | 12.5% | 8.0% | | Tier I capital to risk-weighted assets | 12.1% | 6.0% | | Common Equity Tier I to risk-weighted assets | 7.8% | 4.5% | | Tier I capital to average assets | 12.3% | 4.0% | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=71&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate risk using NII at Risk and EVE models, showing asset sensitivity with NII projected to increase **7.4%** in a **+100 bps** rate shock, while EVE remains within policy limits Net Interest Income (NII) Sensitivity Analysis (12 Months Forward) | Rate Change (bps) | % Change in NII (Sep 30, 2022) | | :--- | :--- | | +200 | +18.6% | | +100 | +7.4% | | -100 | -15.6% | | -200 | -26.0% | Economic Value of Equity (EVE) Sensitivity Analysis | Rate Change (bps) | % Change in EVE (Sep 30, 2022) | | :--- | :--- | | +200 | -5.8% | | +100 | -5.4% | | -100 | -4.8% | | -200 | -3.6% | [Item 4. Controls and Procedures](index=71&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2022, the Company's disclosure controls and procedures were effective[394](index=394&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[395](index=395&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings](index=72&type=section&id=Item%201.%20Legal%20Proceedings) The company reported no material legal proceedings - There are no legal proceedings to report[398](index=398&type=chunk) [Item 1A. Risk Factors](index=72&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors previously disclosed in the 2021 Form 10-K were reported - No material changes from the risk factors disclosed in the 2021 Form 10-K were reported[399](index=399&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=72&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities - There were no unregistered sales of equity securities during the period[400](index=400&type=chunk) [Item 6. Exhibits](index=73&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including articles, bylaws, and CEO/CFO certifications required by Sarbanes-Oxley Act - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL data files[405](index=405&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission File No. 001-38258 MERCHANTS BANCORP (Exact name of registrant as specified in its charter) Indiana 20-57474 ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission File No. 001-38258 MERCHANTS BANCORP (Exact name of registrant as specified in its charter) Indi ...