MERCHANTS(MBINM) - 2024 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1 Interim Financial Statements (Unaudited) Merchants Bancorp's unaudited condensed consolidated financial statements for Q2 and H1 2024 are presented, including detailed notes Condensed Consolidated Balance Sheets | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Total assets | $18,212,422 | $16,952,516 | | Total liabilities | $16,324,275 | $15,251,432 | | Total shareholders' equity | $1,888,147 | $1,701,084 | - Total assets increased by $1.26 billion (7.4%) from December 31, 2023, to June 30, 2024[10] - Total shareholders' equity increased by $187.1 million (11.0%) from December 31, 2023, to June 30, 2024[10] Condensed Consolidated Statements of Income | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------------------- | :------------------------------------------ | :------------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Total interest income | $328,273 | $258,069 | $642,446 | $469,363 | | Total interest expense | $200,154 | $152,452 | $387,271 | $263,053 | | Net Interest Income | $128,119 | $105,617 | $255,175 | $206,310 | | Provision for credit losses | $9,965 | $22,603 | $14,691 | $29,470 | | Net Income | $76,393 | $65,302 | $163,447 | $120,257 | | Basic Earnings Per Share | $1.50 | $1.31 | $3.30 | $2.38 | | Diluted Earnings Per Share | $1.49 | $1.31 | $3.29 | $2.38 | - Net income for the three months ended June 30, 2024, increased by $11.1 million (17.0%) year-over-year[12] - Net income for the six months ended June 30, 2024, increased by $43.2 million (35.9%) year-over-year[12] Condensed Consolidated Statements of Comprehensive Income | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :----------------------------------------- | :----------------------------------------- | | Net Income | $76,393 | $65,302 | $163,447 | $120,257 | | Other Comprehensive Income | $663 | $693 | $1,978 | $3,485 | | Comprehensive Income | $77,056 | $65,995 | $165,425 | $123,742 | - Other comprehensive income for the six months ended June 30, 2024, decreased by $1.5 million (43.3%) year-over-year[14] Condensed Consolidated Statements of Shareholders' Equity | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Common Stock | $238,492 | $140,365 | | 7% Series A Preferred Stock | $0 | $50,221 | | 6% Series B Preferred Stock | $120,844 | $120,844 | | 6% Series C Preferred Stock | $191,084 | $191,084 | | 8.25% Series D Preferred Stock | $137,459 | $137,459 | | Retained earnings | $1,200,778 | $1,063,599 | | Accumulated other comprehensive loss | $(510) | $(2,488) | | Total shareholders' equity | $1,888,147 | $1,701,084 | - The Company redeemed all outstanding shares of 7% Series A Preferred Stock on April 1, 2024, for $50.2 million[16] - Common stock increased significantly due to the issuance of 2,400,000 shares, generating $97.7 million in net proceeds during the six months ended June 30, 2024[16] Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net cash used in operating activities | $(332,653) | $(543,020) | | Net cash used in investing activities | $(1,012,173) | $(2,356,545) | | Net cash provided by financing activities | $1,301,286 | $3,050,711 | | Net Change in Cash and Cash Equivalents | $(43,540) | $151,146 | | Cash and Cash Equivalents, End of Period | $540,882 | $377,310 | - Net cash used in operating activities decreased by $210.4 million (38.7%) year-over-year[19] - Net cash provided by financing activities decreased by $1.75 billion (57.3%) year-over-year[19] Notes to Condensed Consolidated Financial Statements Note 1: Basis of Presentation This note outlines the basis for the unaudited condensed consolidated financial statements, including consolidated entities and the FMBI branch sale - The Company completed the sale of Farmers-Merchants Bank of Illinois (FMBI) branches on January 26, 2024, to focus on core single and multi-family mortgage lending[23][24] FMBI Branch Sale Impact (January 26, 2024): | Metric | Amount (in thousands) | | :-------------------------------- | :-------------------- | | Deposits acquired by Bank of Pontiac | $164,800 | | Loans acquired by Bank of Pontiac | $19,200 | | Deposits acquired by CBI Bank & Trust | $65,100 | | Loans acquired by CBI Bank & Trust | $28,600 | | Total assets sold | $60,800 | | Total liabilities sold | $230,600 | | Net gain recognized | $715 | | Goodwill extinguished | $7,800 | | Intangibles extinguished | $500 | Note 2: Investment Securities This note details the Company's investment securities portfolio, including AFS and HTM securities, and the evaluation of unrealized losses Investment Securities Summary (June 30, 2024 vs. December 31, 2023): | Metric | June 30, 2024 (Fair Value, in thousands) | December 31, 2023 (Fair Value, in thousands) | | :------------------------------------- | :--------------------------------------- | :----------------------------------------- | | Securities available for sale | $1,017,019 | $1,113,687 | | Securities held to maturity | $1,291,960 | $1,203,535 | | Gross unrealized losses (AFS) | $683 | $3,317 | | Gross unrealized losses (HTM) | $1,547 | $1,655 | - Securities available for sale decreased by $96.7 million (8.7%) from December 31, 2023, to June 30, 2024[38][40] - Gross unrealized losses on available-for-sale securities decreased by $2.6 million (79.4%) from December 31, 2023, to June 30, 2024, primarily due to non-credit related factors[38][40][49] Note 3: Mortgage Loans in Process of Securitization This note describes mortgage loans in process of securitization, recorded at fair value, primarily multi-family rental real estate Mortgage Loans in Process of Securitization (in thousands): | Metric | June 30, 2024 | December 31, 2023 | | :------------------------------------- | :------------ | :---------------- | | Aggregate fair value | $209,244 | $110,599 | | Aggregate fair value adjustment recorded | $500 | $800 | - The aggregate fair value of mortgage loans in process of securitization increased by $98.6 million (89.2%) from December 31, 2023, to June 30, 2024, indicating higher origination volume[51] Note 4: Loans and Allowance for Credit Losses on Loans This note details the Company's loan portfolio, ACL-Loans methodology, and credit risk profile, noting increased nonperforming loans Loans Receivable Summary (in thousands): | Loan Type | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :------------ | :---------------- | | Mortgage warehouse repurchase agreements | $1,369,965 | $752,468 | | Residential real estate | $1,345,656 | $1,324,305 | | Multi-family financing | $4,160,420 | $4,006,160 | | Healthcare financing | $2,495,910 | $2,356,689 | | Commercial and commercial real estate | $1,566,809 | $1,643,081 | | Agricultural production and real estate | $70,244 | $103,150 | | Consumer and margin loans | $5,213 | $13,700 | | Total Loans Receivable | $11,014,217 | $10,199,553 | | Less: ACL-Loans | $81,028 | $71,752 | | Loans Receivable, Net | $10,933,189 | $10,127,801 | ACL-Loans Activity (Six Months Ended June 30, 2024 vs. 2023, in thousands): | Metric | 2024 | 2023 | | :-------------------------------- | :--- | :--- | | Balance, beginning of period | $71,752 | $44,014 | | Provision for credit losses | $14,230 | $28,495 | | Loans charged to the allowance | $(4,377) | $(9,532) | | Recoveries of loans previously charged-off | $16 | $9 | | Balance, end of period | $81,028 | $62,986 | Nonperforming Loans (in thousands): | Loan Type | June 30, 2024 (Nonaccrual) | December 31, 2023 (Nonaccrual) | | :-------------------------------- | :------------------------- | :----------------------------- | | RES RE | $5,244 | $1,486 | | MF FIN | $86,284 | $39,608 | | HC FIN | $47,809 | $28,783 | | CML & CRE | $3,835 | $3,820 | | AG & AGRE | $147 | $147 | | CON & MAR | $0 | $3 | | Total Nonaccrual Loans | $143,319 | $73,847 | | Total Loans > 90 Days & Accruing | $133 | $8,168 | | Total Nonperforming Loans | $143,452 | $82,015 | Note 5: Variable Interest Entities (VIEs) This note defines VIEs and details the Company's involvement in various financing and housing funds, generally without consolidation Maximum Exposure to Loss from Unconsolidated VIEs (in thousands): | VIE Type | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :------------ | :---------------- | | Low-income housing tax credit investments | $259,292 | $351,148 | | Debt funds | $67,035 | $119,637 | | Off-balance-sheet REMIC trusts | $1,298,964 | $1,192,201 | | Total Unconsolidated VIEs | $1,625,291 | $1,662,986 | - The Company's maximum exposure to loss from unconsolidated VIEs decreased by $37.7 million (2.3%) from December 31, 2023, to June 30, 2024[111] Note 6: Regulatory Matters This note confirms Merchants Bancorp and Merchants Bank met all regulatory capital adequacy requirements and were 'well capitalized' Company Capital Ratios (June 30, 2024): | Capital Ratio | Actual Ratio | Minimum to be Well Capitalized with Basel III Buffer | Minimum to be Well Capitalized | | :------------------------------------- | :----------- | :----------------------------------- | :----------------------------- | | Total capital (to risk-weighted assets) | 12.0% | 10.5% | N/A | | Tier I capital (to risk-weighted assets) | 11.4% | 8.5% | N/A | | Common Equity Tier I capital (to risk-weighted assets) | 8.7% | 7.0% | N/A | | Tier I capital (to average assets) | 10.6% | 5.0% | N/A | - Both Merchants Bancorp and Merchants Bank were categorized as 'well capitalized' by regulatory agencies as of June 30, 2024[116] Note 7: Derivative Financial Instruments This note details the Company's use of non-hedging derivative financial instruments to manage interest rate and credit risk Derivative Financial Instruments (June 30, 2024, in thousands): | Instrument | Notional Amount | Fair Value Asset | Fair Value Liability | | :------------------------------------- | :-------------- | :--------------- | :----------------- | | Interest rate lock commitments | $50,471 | $170 | $127 | | Forward contracts | $60,524 | $149 | $88 | | Interest rate swaps | $57,513 | $4,232 | $0 | | Put options | $719,731 | $36,957 | $0 | | Interest rate floors | $1,224,171 | $9,124 | $0 | | Credit derivatives | $76,081 | $0 | $0 | | Total | | $50,632 | $215 | Derivative Gain (Loss) in Income Statement (Six Months Ended June 30, 2024, in thousands): | Category | Amount | | :------------------------------------- | :----- | | Net gain in gain on sale of loans | $1,908 | | Net gain in other income | $13,628 | - In March 2024, the Company purchased a credit default swap with a notional amount of $76.1 million to manage credit risk on specific multifamily mortgage loans[126][129] Note 8: Disclosures about Fair Value of Assets and Liabilities This note provides fair value measurements for assets and liabilities, categorized into Level 1, 2, and 3 based on input observability Fair Value Measurements (June 30, 2024, in thousands): | Asset/Liability | Fair Value | Level 1 | Level 2 | Level 3 | | :------------------------------------- | :--------- | :------ | :------ | :------ | | Mortgage loans in process of securitization | $209,244 | $0 | $209,244 | $0 | | Securities available for sale | $1,017,019 | $109,079 | $445,313 | $462,627 | | Loans held for sale | $102,873 | $0 | $102,873 | $0 | | Servicing rights | $178,776 | $0 | $0 | $178,776 | | Derivative assets | $50,632 | $0 | $14,419 | $36,291 | | Derivative liabilities | $215 | $0 | $9,976 | $127 | | Collateral dependent loans (nonrecurring) | $29,732 | $0 | $0 | $29,732 | - Servicing rights and a significant portion of mortgage-backed securities are classified as Level 3, indicating reliance on unobservable inputs for valuation[136][140] Key Level 3 Unobservable Inputs (June 30, 2024): | Asset/Liability | Unobservable Input | Range | Weighted Average | | :------------------------------------- | :----------------- | :---- | :--------------- | | Securities available for sale (Non-Agency residential) | Market credit spread | 3% | 3% | | Collateral dependent loans | Marketability discount | 0%-56% | 4% | | Servicing rights - Multi-family | Discount rate | 8%-13% | 9% | | Servicing rights - Multi-family | Constant prepayment rate | 0%-62% | 7% | | Interest rate lock commitments (assets/liabilities) | Loan closing rates | 57%-99% | 83% | Note 9: Leases This note details the Company's operating leases, with right-of-use assets at $8.0 million and liabilities at $9.1 million Operating Lease Information (in thousands): | Metric | June 30, 2024 | December 31, 2023 | | :------------------------------------- | :------------ | :---------------- | | Operating lease right-of-use asset | $7,992 | $10,060 | | Operating lease liability | $9,098 | $11,251 | | Weighted average remaining lease term (years) | 4.7 | 6.0 | | Weighted average discount rate | 3.25% | 2.89% | | Operating lease cost (Six Months Ended) | $1,369 | $1,249 | | Operating cash flows from operating leases (Six Months Ended) | $1,220 | $886 | - Operating lease right-of-use assets decreased by $2.1 million (20.6%) from December 31, 2023, to June 30, 2024[167] Note 10: Deposits This note details the Company's deposit composition, showing total deposits increased to $14.9 billion, driven by certificates of deposit Deposit Composition (in thousands): | Deposit Type | June 30, 2024 | December 31, 2023 | | :------------------------------------- | :------------ | :---------------- | | Noninterest-bearing deposits | $383,260 | $520,070 | | Interest-bearing deposits | $14,533,807 | $13,541,390 | | Total deposits | $14,917,067 | $14,061,460 | | Brokered certificates of deposit | $6,119,391 | $4,465,825 | | Brokered savings deposits | $948 | $589 | | Brokered deposit on demand accounts | $0 | $1,504,230 | | Total brokered deposits | $6,120,339 | $5,970,644 | - Total deposits increased by $855.6 million (6.1%) from December 31, 2023, to June 30, 2024[168] - Brokered certificates of deposit increased by $1.65 billion (37.0%) while brokered demand deposit accounts decreased by $1.50 billion (100%) over the same period[168] Note 11: Borrowings This note details the Company's borrowings, which increased to $1.16 billion at June 30, 2024, primarily due to FHLB advances Borrowings Composition (in thousands): | Borrowing Type | June 30, 2024 | December 31, 2023 | | :------------------------------------- | :------------ | :---------------- | | Short-term subordinated debt | $68,514 | $64,922 | | FHLB advances | $974,008 | $771,392 | | Credit linked notes, net | $108,750 | $119,879 | | Other borrowings | $7,934 | $7,934 | | Total borrowings | $1,159,206 | $964,127 | - Total borrowings increased by $195.1 million (20.2%) from December 31, 2023, to June 30, 2024[169] - A new $500 million variable rate FHLB advance was initiated on May 21, 2024, maturing August 19, 2024, at 5.48% interest rate as of June 30, 2024[170] Note 12: Earnings Per Share This note provides the calculation of basic and diluted earnings per share (EPS) for Q2 and H1 2024, showing significant year-over-year increases Earnings Per Share (EPS): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income available to common shareholders (in thousands) | $66,813 | $56,634 | $145,200 | $102,922 | | Basic Earnings Per Share | $1.50 | $1.31 | $3.30 | $2.38 | | Diluted Earnings Per Share | $1.49 | $1.31 | $3.29 | $2.38 | | Weighted-Average Shares Outstanding (Basic) | 44,569,345 | 43,235,398 | 43,937,665 | 43,207,655 | | Weighted-Average Shares Outstanding (Diluted) | 44,698,324 | 43,309,393 | 44,082,485 | 43,300,240 | - Basic EPS increased by $0.19 (14.5%) for Q2 2024 and by $0.92 (38.7%) for H1 2024, compared to the prior year periods[171] Note 13: Common Stock This note reports on the Company's common stock activities, highlighting a May 2024 public offering that raised $97.7 million in net proceeds - On May 13, 2024, the Company issued 2,400,000 shares of common stock at $43.00 per share in a public offering, generating $97.7 million in net proceeds after expenses[172] Note 14: Preferred Stock This note details the Company's preferred stock series, including Series A redemption, dividend payments, and the LIBOR to SOFR transition for Series B - The Company redeemed all outstanding shares of 7% Series A Preferred Stock on April 1, 2024, for $52 million using cash on hand[175][349] - For the 6% Series B Preferred Stock, the floating rate benchmark will transition from three-month LIBOR to three-month SOFR plus a spread of 483.1 basis points, effective October 1, 2024[177][351] - The 6% Series C Preferred Stock is redeemable on or after April 1, 2026, and the 8.25% Series D Preferred Stock is redeemable on or after October 1, 2027[179][182][354][358] Note 15: Share-Based Payment Plans This note describes the Company's share-based payment plans, including the 2017 Equity Incentive Plan, director restricted stock, and ESOP - Non-executive directors receive a portion of their annual fees in restricted common stock, with 2,849 shares issued in Q2 2024 and 6,013 shares issued in H1 2024[185] - The ESOP recognized expenses of $573 thousand for the six months ended June 30, 2024, and received 23,414 shares[186] Note 16: Segment Information This note provides financial information for the Company's three primary business segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking Net Income by Segment (in thousands): | Segment | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Multi-family Mortgage Banking | $9,037 | $11,242 | $25,646 | $13,208 | | Mortgage Warehousing | $22,270 | $18,596 | $42,460 | $27,237 | | Banking | $52,378 | $42,650 | $108,803 | $91,957 | | Other | $(7,292) | $(7,186) | $(13,462) | $(12,145) | | Total | $76,393 | $65,302 | $163,447 | $120,257 | - Multi-family Mortgage Banking net income decreased by 20% in Q2 2024 YoY but increased by 94% in H1 2024 YoY[189][190] - Mortgage Warehousing net income increased by 20% in Q2 2024 YoY and 56% in H1 2024 YoY, driven by higher volumes[189][190] Note 17: Recent Accounting Pronouncements This note discusses recent FASB ASUs on Segment Reporting and Income Taxes, which the Company is evaluating for potential impact - FASB ASU 2023-07 (Segment Reporting) requires additional disclosures on reportable segment expenses and profit/loss, effective for annual periods beginning after December 15, 2023[191][192] - FASB ASU 2023-09 (Income Taxes) mandates tabular tax rate reconciliations and disaggregated income tax expense by jurisdiction, effective for annual periods beginning after December 15, 2024[195][196] Note 18: Subsequent Events No material subsequent events were noted by the Company - No material events were noted subsequent to the reporting period[197] Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Merchants Bancorp's financial condition and operating results for Q2 and H1 2024, highlighting key financial metrics, asset quality, and segment performance Financial Highlights for the Three Months Ended June 30, 2024 Key Financial Highlights (Three Months Ended June 30, 2024 vs. 2023): | Metric | June 30, 2024 | June 30, 2023 | Change (%) | | :------------------------------------- | :------------ | :------------ | :--------- | | Net income | $76.4 million | $65.3 million | 17% | | Diluted earnings per share | $1.49 | $1.31 | 14% | | Tangible book value per common share | $31.27 | $24.14 | 30% | | Total assets (vs. Dec 31, 2023) | $18.2 billion | $17.0 billion | 7% | | Loans receivable, net (vs. Dec 31, 2023) | $10.9 billion | $10.1 billion | 8% | | Net interest margin | 2.99% | 2.97% | +2 bps | | Efficiency ratio | 31.59% | 32.71% | -1.12% | | Unused borrowing capacity | $7.0 billion | N/A | N/A | | Warehouse loans funded volume | $10.9 billion | $8.4 billion | 30% | - Net income increased by $11.1 million (17%) year-over-year, driven by a $22.5 million (21%) increase in net interest income and a $12.6 million (56%) decrease in provision for credit losses[207] - The Company's most liquid assets, combined with unused borrowing capacity, totaled $12.6 billion, representing 69% of total assets, as of June 30, 2024[207] Business Overview Merchants Bancorp is a diversified bank holding company with three main segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking - The Company operates in Multi-family Mortgage Banking, Mortgage Warehousing, and Banking segments[209] - The core business strategy involves funding fixed-rate, low-risk loans for sale and retaining adjustable-rate loans for investment to manage interest rate risk[210] Critical Accounting Policies and Estimates Management's financial statement preparation involves significant estimates for credit losses and fair values, with no material policy changes since December 31, 2023 - Material estimates are susceptible to significant change, particularly for the allowance for credit losses on loans and fair values of servicing rights and financial instruments[34][211] - No significant changes in critical accounting policies or assumptions have been reported since December 31, 2023[212] Financial Condition As of June 30, 2024, Merchants Bancorp reported $18.2 billion in total assets, $14.9 billion in deposits, and $1.9 billion in total shareholders' equity Financial Position (June 30, 2024, in billions): | Metric | Amount | | :------------------------------------- | :----- | | Total assets | $18.2 | | Deposits | $14.9 | | Total shareholders' equity | $1.9 | | Cash and cash equivalents | $0.54 | | Loans held for sale | $3.5 | | Loans receivable, net | $10.9 | | Mortgage loans in process of securitization | $0.21 | | Securities held to maturity | $1.3 | | Securities available for sale | $1.0 | | Servicing rights | $0.18 | - The Company completed a common stock offering of 2.4 million shares on May 13, 2024, yielding $97.7 million in net proceeds, increasing the common equity tier I capital ratio to 8.7%[214] - A $324.6 million securitization of 13 multi-family mortgage loans was completed on April 30, 2024, through a Freddie Mac-sponsored Q-Series transaction[214] Comparison of Financial Condition at June 30, 2024 and December 31, 2023 Total assets increased by 7% to $18.2 billion, deposits by 6% to $14.9 billion, and shareholders' equity by 11% to $1.9 billion Financial Condition Changes (June 30, 2024 vs. December 31, 2023, in thousands): | Metric | June 30, 2024 | December 31, 2023 | Change ($) | Change (%) | | :------------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Total Assets | $18,212,422 | $16,952,516 | $1,259,906 | 7% | | Cash and Cash Equivalents | $540,882 | $584,422 | $(43,540) | (7%) | | Mortgage Loans in Process of Securitization | $209,244 | $110,599 | $98,645 | 89% | | Securities Available for Sale | $1,017,019 | $1,113,687 | $(96,668) | (9%) | | Securities Held to Maturity | $1,291,110 | $1,204,217 | $86,893 | 7% | | Loans Held for Sale | $3,483,076 | $3,144,756 | $338,320 | 11% | | Loans Receivable, Net | $10,933,189 | $10,127,801 | $805,388 | 8% | | ACL-Loans | $81,028 | $71,752 | $9,276 | 13% | | Goodwill | $8,014 | $15,845 | $(7,831) | (49%) | | Servicing Rights | $178,776 | $158,457 | $20,319 | 13% | | Deposits | $14,917,067 | $14,061,460 | $855,607 | 6% | | Borrowings | $1,159,206 | $964,127 | $195,079 | 20% | | Total Shareholders' Equity | $1,888,147 | $1,701,084 | $187,063 | 11% | - Loans receivable, net, increased by $805.4 million (8%), primarily driven by mortgage warehouse repurchase agreements (82% increase), multi-family financing (4% increase), and healthcare financing (6% increase)[225][235] - Goodwill decreased by $7.8 million (49%) due to the elimination of goodwill associated with FMBI upon the sale of its branches[230] Asset Quality Asset quality saw nonperforming loans increase to $143.5 million (1.30%) at June 30, 2024, primarily due to delinquent multi-family and healthcare loans Nonperforming Loans (in thousands): | Metric | June 30, 2024 | December 31, 2023 | June 30, 2023 | | :------------------------------------- | :------------ | :---------------- | :------------ | | Total nonperforming loans | $143,452 | $82,015 | $68,400 | | % of total loans | 1.30% | 0.80% | 0.69% | | ACL-Loans as % of nonperforming loans | 56% | 87% | 92% | | Loans > 30 days past due | $234,848 | $183,529 | $92,900 | | Special Mention loans | $244,000 | $191,267 | N/A | | Substandard loans | $246,839 | $128,577 | N/A | Charge-offs and Recoveries (in thousands): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Charge-offs | $3,452 | $9,532 | $4,377 | $9,532 | | Recoveries | $15 | $2 | $16 | $9 | - The increase in nonperforming loans was primarily driven by multi-family and healthcare customers with delinquent payments on variable rate loans due to elevated interest rates[244][248] Comparison of Operating Results for the Three Months Ended June 30, 2024 and 2023 Net income increased by 17% to $76.4 million for Q2 2024, driven by higher net interest income and lower credit loss provision Operating Results (Three Months Ended June 30, 2024 vs. 2023, in thousands): | Metric | 2024 | 2023 | Change ($) | Change (%) | | :------------------------------------- | :----- | :----- | :--------- | :--------- | | Net income | $76,393 | $65,302 | $11,091 | 17% | | Net Interest Income | $128,119 | $105,617 | $22,502 | 21% | | Provision for Credit Losses | $9,965 | $22,603 | $(12,638) | (56%) | | Noninterest Income | $31,351 | $29,882 | $1,469 | 5% | | Noninterest Expense | $50,380 | $44,320 | $6,060 | 14% | | Income Tax Expense | $22,732 | $3,274 | $19,458 | 594% | | Net Interest Margin | 2.99% | 2.97% | +2 bps | N/A | | Efficiency Ratio | 31.59% | 32.71% | -1.12% | N/A | Interest Income & Expense Changes (Three Months Ended June 30, 2024 vs. 2023, in thousands): | Category | Interest Income | Interest Expense | | :------------------------------------- | :-------------- | :--------------- | | Total Interest Income | $328,273 (27% increase) | N/A | | Loans and loans held for sale | $284,421 (24% increase) | N/A | | Securities available for sale | $14,784 (166% increase) | N/A | | Securities held to maturity | $19,799 (14% increase) | N/A | | Total Interest Expense | N/A | $200,154 (31% increase) | | Deposits | N/A | $179,651 (30% increase) | | Borrowings | N/A | $20,503 (40% increase) | - The effective tax rate increased to 22.9% from 4.8% due to a $13.0 million tax benefit recorded in Q2 2023 related to tax refunds and state tax apportionment changes[280] Comparison of Operating Results for the Six Months Ended June 30, 2024 and 2023 Net income for H1 2024 increased by 36% to $163.4 million, driven by higher net interest and noninterest income, and lower credit loss provision Operating Results (Six Months Ended June 30, 2024 vs. 2023, in thousands): | Metric | 2024 | 2023 | Change ($) | Change (%) | | :------------------------------------- | :----- | :----- | :--------- | :--------- | | Net income | $163,447 | $120,257 | $43,190 | 36% | | Net Interest Income | $255,175 | $206,310 | $48,865 | 24% | | Provision for Credit Losses | $14,691 | $29,470 | $(14,779) | (50%) | | Noninterest Income | $72,225 | $44,146 | $28,079 | 64% | | Noninterest Expense | $99,292 | $79,092 | $20,200 | 26% | | Income Tax Provision | $49,970 | $21,637 | $28,333 | 131% | | Net Interest Margin | 3.07% | 3.11% | -4 bps | N/A | | Efficiency Ratio | 30.33% | 31.58% | -1.25% | N/A | Interest Income & Expense Changes (Six Months Ended June 30, 2024 vs. 2023, in thousands): | Category | Interest Income | Interest Expense | | :------------------------------------- | :-------------- | :--------------- | | Total Interest Income | $642,446 (37% increase) | N/A | | Loans and loans held for sale | $556,419 (33% increase) | N/A | | Securities available for sale | $29,172 (273% increase) | N/A | | Securities held to maturity | $40,321 (22% increase) | N/A | | Total Interest Expense | N/A | $387,271 (47% increase) | | Deposits | N/A | $350,673 (45% increase) | | Borrowings | N/A | $36,598 (76% increase) | - Noninterest income increased by $28.1 million (64%), primarily due to a $19.3 million (175%) increase in loan servicing fees and a $4.5 million (73%) increase in other income[303][304] Our Segments The Company operates through three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking, each contributing to diversified net income - The Multi-family Mortgage Banking segment originates and services government-sponsored mortgages for multi-family and healthcare facilities, and syndicates low-income housing tax credit and debt funds[309] - The Mortgage Warehousing segment funds agency-eligible residential loans for non-depository financial institutions, with volumes of $18.8 billion for the six months ended June 30, 2024[310] - The Banking segment offers retail banking, commercial lending, agricultural lending, and residential mortgage banking, primarily in Indiana[312] Multi-family Mortgage Banking The Multi-family Mortgage Banking segment reported a 20% decrease in Q2 2024 net income YoY but a 94% increase in H1 2024 YoY, driven by servicing fees Multi-family Mortgage Banking Net Income (in thousands): | Period | 2024 | 2023 | Change ($) | Change (%) | | :------------------------------------- | :----- | :----- | :--------- | :--------- | | Three Months Ended June 30 | $9,037 | $11,242 | $(2,205) | (20%) | | Six Months Ended June 30 | $25,646 | $13,208 | $12,438 | 94% | - Loan servicing fees for H1 2024 included a positive fair market value adjustment of $17.7 million on servicing rights, compared to a negative adjustment of $0.1 million in H1 2023[321] - The volume of loans originated and acquired for sale decreased by 49% in Q2 2024 YoY and 24% in H1 2024 YoY[319][321] Mortgage Warehousing The Mortgage Warehousing segment reported a 20% increase in Q2 2024 net income YoY and a 56% increase in H1 2024 YoY, driven by higher loan volumes Mortgage Warehousing Net Income (in thousands): | Period | 2024 | 2023 | Change ($) | Change (%) | | :------------------------------------- | :----- | :----- | :--------- | :--------- | | Three Months Ended June 30 | $22,270 | $18,596 | $3,674 | 20% | | Six Months Ended June 30 | $42,460 | $27,237 | $15,223 | 56% | - Warehouse loan volume increased by 30% in Q2 2024 YoY ($10.9 billion vs. $8.4 billion) and 36% in H1 2024 YoY ($18.8 billion vs. $13.8 billion), outperforming industry trends[323][325] Banking The Banking segment's net income increased by 23% for Q2 2024 YoY and 18% for H1 2024 YoY, driven by higher net interest income Banking Segment Net Income (in thousands): | Period | 2024 | 2023 | Change ($) | Change (%) | | :------------------------------------- | :----- | :----- | :--------- | :--------- | | Three Months Ended June 30 | $52,378 | $42,650 | $9,728 | 23% | | Six Months Ended June 30 | $108,803 | $91,957 | $16,846 | 18% | - Noninterest income for H1 2024 included a positive fair market value adjustment of $1.3 million on single-family servicing rights, compared to $0.6 million in H1 2023[330] Liquidity and Capital Resources The Company maintains strong liquidity and capital resources, with $7.0 billion in unused borrowing capacity and $12.6 billion in liquid assets - The Company had $7.0 billion in unused borrowing capacity with the FHLB and Federal Reserve discount window as of June 30, 2024[332] - Liquid assets combined with unused borrowing capacity totaled $12.6 billion, or 69% of total assets, at June 30, 2024[333] - Uninsured deposits represented approximately 15% of total deposits, with the Federal Reserve Board line of credit capable of funding 118% of uninsured deposits[334] Liquidity The Company's liquidity is robust, supported by diverse funding, $7.0 billion in unused borrowing capacity, and $12.6 billion in highly liquid assets Cash Flow Summary (Six Months Ended June 30, in thousands): | Activity | 2024 | 2023 | | :------------------------------------- | :----- | :----- | | Net cash used in operating activities | $(332,653) | $(543,020) | | Net cash used in investing activities | $(1,012,173) | $(2,356,545) | | Net cash provided by financing activities | $1,301,286 | $3,050,711 | - Certificates of deposit maturing within one year totaled $6.8 billion (98% of total CDs) at June 30, 2024, with management anticipating substantial renewals[340] Off-Balance Sheet Arrangements The Company engages in off-balance sheet arrangements, including loan commitments and letters of credit, totaling $3.9 billion subject to credit risk Off-Balance Sheet Commitments (June 30, 2024, in billions): | Commitment Type | Amount | | :------------------------------------- | :----- | | Outstanding commitments to extend credit (subject to credit risk) | $3.9 | | Outstanding commitments (subject to performance criteria/cancellation) | $3.7 | Capital Resources The Company maintains a strong capital base, with shareholders' equity increasing by 11% to $1.9 billion, exceeding 'well capitalized' thresholds Shareholders' Equity Changes (June 30, 2024 vs. December 31, 2023, in millions): | Metric | June 30, 2024 | December 31, 2023 | Change ($) | Change (%) | | :------------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Total Shareholders' Equity | $1,888.1 | $1,701.1 | $187.0 | 11% | | Net income contribution | $163.4 | N/A | N/A | N/A | | Common stock offering net proceeds | $97.7 | N/A | N/A | N/A | | Series A Preferred Stock redemption | $(52.0) | N/A | N/A | N/A | | Dividends paid | $(24.4) | N/A | N/A | N/A | Company Capital Ratios (June 30, 2024): | Capital Ratio | Actual Ratio | Minimum to be Well Capitalized | | :------------------------------------- | :----------- | :----------------------------- | | Total capital (to risk-weighted assets) | 12.0% | 10.5% | | Tier I capital (to risk-weighted assets) | 11.4% | 8.5% | | Common Equity Tier I capital (to risk-weighted assets) | 8.7% | 7.0% | | Tier I capital (to average assets) | 10.6% | 5.0% | - The Company and Merchants Bank were both categorized as 'well capitalized' by federal regulators as of June 30, 2024[116][366] Quantitative and Qualitative Disclosures About Market Risk The Company actively manages market risk, primarily interest rate risk, through its ALCO, using NII at Risk and EVE models to assess sensitivity - The Company's primary market risks are interest rate risk and price risk related to market demand[369] - The Asset-Liability Committee (ALCO) manages interest rate risk, aiming to minimize the impact of changing rates on net interest income and economic values[373][374] Net Interest Income Sensitivity (Twelve Months Forward, June 30, 2024, in thousands): | Rate Shift | Dollar Change | Percent Change | | :------------------------------------- | :------------ | :------------- | | -200 bps | $(89,293) | (16.8)% | | -100 bps | $(44,404) | (8.4)% | | +100 bps | $36,099 | 6.8% | | +200 bps | $70,343 | 13.3% | Economic Value of Equity Sensitivity (Immediate Shock, June 30, 2024, in thousands): | Rate Shift | Dollar Change | Percent Change | | :------------------------------------- | :------------ | :------------- | | -200 bps | $148,524 | 8.1% | | -100 bps | $77,540 | 4.2% | | +100 bps | $(25,446) | (1.4)% | | +200 bps | $(65,403) | (3.6)% | Item 3 Quantitative and Qualitative Disclosures About Market Risk This item refers to market risk disclosures provided in Item 2 under 'Liquidity and Capital Resources' and 'Interest Rate Risk' - The required information for market risk disclosures is included in Item 2, specifically under "Liquidity and Capital Resources" and "Interest Rate Risk"[384] Item 4 Controls and Procedures Management concluded the Company's disclosure controls and procedures were effective as of June 30, 2024, with no material changes in internal control - The Company's disclosure controls and procedures were deemed effective as of June 30, 2024[387] - No material changes in internal control over financial reporting occurred during the reporting period[388] PART II – OTHER INFORMATION Item 1 Legal Proceedings The Company reported no legal proceedings - No legal proceedings were reported[390] Item 1A Risk Factors No material changes to risk factors were reported since the Annual Report on Form 10-K for December 31, 2023 - No material changes to risk factors were reported since the Annual Report on Form 10-K for December 31, 2023[391] Item 2 Unregistered Sales of Equity Securities and Use of Proceeds The Company reported no unregistered sales of equity securities or use of proceeds - No unregistered sales of equity securities or use of proceeds were reported[392] Item 3 Defaults Upon Senior Securities The Company reported no defaults upon senior securities - No defaults upon senior securities were reported[393] Item 4 Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the registrant[394] Item 5 Other Information The Company reported no other information - No other information was reported[395] Item 6 Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL data files - Exhibits include organizational documents, CEO and CFO certifications (Sarbanes-Oxley Act Sections 302 and 906), and XBRL interactive data files[396] SIGNATURES The report was signed by Michael F. Petrie, Chairman & CEO, and John F. Macke, CFO, on August 9, 2024 - The report was signed by Michael F. Petrie, Chairman & CEO, and John F. Macke, CFO, on August 9, 2024[400]