MERCHANTS BANCOR(US:MBINN)2024-11-08 21:06markdown PART I – FINANCIAL INFORMATION [Item 1. Interim Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Interim%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for Merchants Bancorp as of September 30, 2024, and for the three and nine-month periods then ended, including balance sheets, statements of income, comprehensive income, shareholders' equity, and cash flows, along with detailed notes on accounting policies and financial instruments [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of September 30, 2024, total assets grew to **$18.65 billion** from **$16.95 billion** at year-end 2023, driven by increases in loans held for sale and securities held to maturity, while total liabilities increased to **$16.71 billion**, primarily due to a significant rise in borrowings from **$0.96 billion** to **$3.57 billion**, and total shareholders' equity rose to **$1.94 billion** from **$1.70 billion**, supported by retained earnings growth and a common stock issuance Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2024 | Dec 31, 2023 | Change (%) | | :--- | :--- | :--- | :--- | | **Total Assets** | **$18,652,976** | **$16,952,516** | **+10.0%** | | Loans held for sale | $3,808,234 | $3,144,756 | +21.1% | | Loans receivable, net | $10,261,890 | $10,127,801 | +1.3% | | Securities held to maturity | $1,755,047 | $1,204,217 | +45.7% | | **Total Liabilities** | **$16,713,869** | **$15,251,432** | **+9.6%** | | Total deposits | $12,891,887 | $14,061,460 | -8.3% | | Borrowings | $3,568,721 | $964,127 | +270.1% | | **Total Shareholders' Equity** | **$1,939,107** | **$1,701,084** | **+14.0%** | [Condensed Consolidated Statements of Income](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) For Q3 2024, net income was **$61.3 million**, a 25% decrease from **$81.5 million** in Q3 2023, with diluted EPS of $1.17 versus $1.68, primarily due to a significant drop in noninterest income and higher noninterest expenses, while for the nine months ended September 30, 2024, net income increased 11% to **$224.7 million** from **$201.8 million** year-over-year, with diluted EPS rising to $4.45 from $4.06 Q3 2024 vs Q3 2023 Performance (in thousands, except EPS) | Metric | Q3 2024 | Q3 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $132,821 | $117,436 | +13.1% | | Provision for credit losses | $6,898 | $4,014 | +71.9% | | Total noninterest income | $16,742 | $36,068 | -53.6% | | Total noninterest expense | $61,318 | $42,930 | +42.8% | | **Net Income** | **$61,273** | **$81,504** | **-24.8%** | | **Diluted EPS** | **$1.17** | **$1.68** | **-30.4%** | Nine Months 2024 vs 2023 Performance (in thousands, except EPS) | Metric | Nine Months 2024 | Nine Months 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $387,996 | $323,746 | +19.8% | | Provision for credit losses | $21,589 | $33,484 | -35.5% | | Total noninterest income | $88,967 | $80,214 | +10.9% | | Total noninterest expense | $160,610 | $122,022 | +31.6% | | **Net Income** | **$224,720** | **$201,761** | **+11.4%** | | **Diluted EPS** | **$4.45** | **$4.06** | **+9.6%** | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2024, net cash used in operating activities was **$825.3 million**, and net cash used in investing activities was **$830.8 million**, with these outflows funded by net cash provided by financing activities of **$1.67 billion**, primarily driven by a net increase in borrowings, resulting in a net increase in cash and cash equivalents of **$17.5 million** for the period Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(825,301) | $(1,092,734) | | Net cash used in investing activities | $(830,763) | $(2,349,085) | | Net cash provided by financing activities | $1,673,548 | $3,622,893 | | **Net Change in Cash and Cash Equivalents** | **$17,484** | **$181,074** | - Financing activities were the primary source of cash, with proceeds from borrowings of **$109.0 billion** largely offset by repayments of **$106.4 billion**; a common stock issuance also provided **$97.7 million** in cash[18](index=18&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed explanations of the financial statements, including the sale of Farmers-Merchants Bank of Illinois (FMBI) branches in January 2024, resulting in a net gain of $715,000, and details on investment securities, loan portfolio credit quality, allowance for credit losses, fair value measurements, derivative instruments, segment performance, and capital adequacy - On January 26, 2024, the Company completed the sale of its Farmers-Merchants Bank of Illinois (FMBI) branch locations, selling approximately **$60.8 million** in assets and **$230.6 million** in liabilities, which resulted in a net gain of **$715,000**, including a **$10.1 million** deposit premium and the extinguishment of **$7.8 million** in goodwill[22](index=22&type=chunk)[23](index=23&type=chunk)[25](index=25&type=chunk) - The company redeemed all outstanding shares of its 7.00% Series A Preferred Stock on April 1, 2024, for **$52 million**[199](index=199&type=chunk) - On May 13, 2024, the Company issued 2,400,000 shares of common stock in a public offering, receiving net proceeds of **$97.7 million** after expenses[195](index=195&type=chunk) - In September 2024, the Company completed a private securitization of a **$628.9 million** portfolio of healthcare bridge loans, selling them into a REMIC, and purchased the **$534.5 million** senior security from this transaction, which is now classified as held-to-maturity[111](index=111&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=76&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, highlighting a 10% increase in total assets to **$18.7 billion** since year-end 2023, a Q3 2024 net income decrease of 25% YoY to **$61.3 million** primarily due to higher credit loss provisions and unfavorable fair value adjustments on derivatives, and a nine-month net income rise of 11% to **$224.7 million**, covering detailed analysis of financial condition, asset quality, results of operations by segment, liquidity, and capital resources, noting strong loan growth and a strategic shift from brokered deposits to FHLB borrowings for funding Q3 2024 Financial Highlights | Metric | Q3 2024 | Change vs Q3 2023 | | :--- | :--- | :--- | | Net Income | $61.3 million | -25% | | Diluted EPS | $1.17 | -30% | | Total Assets | $18.7 billion | +10% (vs Dec 2023) | | Tangible Book Value/Share | $32.38 | +25% | | Net Interest Margin | 2.99% | Unchanged | | Efficiency Ratio | 41.00% | vs 27.97% | - The company's business model focuses on originating and selling fixed-rate, low-risk government-sponsored loans while retaining adjustable-rate loans, aiming to generate noninterest income from gains on sale and servicing fees, funded primarily by deposits and short-term borrowings[239](index=239&type=chunk) - Asset quality showed some stress, with nonperforming loans increasing to **2.04%** of total loans at Sept 30, 2024, up from **0.80%** at year-end 2023, driven by delinquent payments on variable-rate multi-family and healthcare loans amid higher interest rates[274](index=274&type=chunk) - The company has strategically reduced its reliance on brokered deposits by **53%** since year-end 2023, replacing them with more cost-effective FHLB borrowings, which increased by **$2.6 billion**[267](index=267&type=chunk)[270](index=270&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=75&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, managed by the Asset-Liability Committee (ALCO), with a strategy involving originating fixed-rate loans for sale and retaining adjustable-rate loans to mitigate risk, and as of September 30, 2024, the company is asset-sensitive, meaning net interest income is expected to rise with increasing interest rates, with both Net Interest Income (NII) at Risk and Economic Value of Equity (EVE) models showing the company is within its board-approved policy limits for various interest rate shock scenarios - The company's business model is designed to reduce interest rate risk by originating fixed-rate loans for sale while holding adjustable-rate loans for investment[415](index=415&type=chunk) Net Interest Income (NII) Sensitivity (Twelve Months Forward) | Rate Change (bps) | % Change in NII (as of Sep 30, 2024) | Policy Limit | | :--- | :--- | :--- | | +200 | +14.2% | < 30% | | +100 | +7.1% | < 20% | | -100 | -9.9% | < 20% | | -200 | -19.6% | < 30% | Economic Value of Equity (EVE) Sensitivity (Immediate Shock) | Rate Change (bps) | % Change in EVE (as of Sep 30, 2024) | Policy Limit | | :--- | :--- | :--- | | +200 | -0.1% | < 20% | | +100 | -0.0% | < 15% | | -100 | +0.2% | < 15% | | -200 | -0.5% | < 20% | [Item 4. Controls and Procedures](index=76&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were **effective** as of September 30, 2024, with **No material changes** made to the internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2024, the Company's disclosure controls and procedures were **effective**[429](index=429&type=chunk) - **No material changes** were made to the internal control over financial reporting during the third quarter of 2024[430](index=430&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings](index=77&type=section&id=Item%201.%20Legal%20Proceedings) The company reported no legal proceedings during the period - None[433](index=433&type=chunk) [Item 1A. Risk Factors](index=77&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 - No material changes from the risk factors disclosed in the 2023 Annual Report on Form 10-K[434](index=434&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=77&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - None[435](index=435&type=chunk) [Item 5. Other Information](index=77&type=section&id=Item%205.%20Other%20Information) During the third quarter of 2024, Scott A. Evans, a director and executive officer, adopted a Rule 10b5-1 stock trading plan on August 7, 2024, allowing for the potential sale of up to **25,000 shares** of common stock before March 13, 2025 - On August 7, 2024, Director and COO of Merchants Bank, Scott A. Evans, adopted a Rule 10b5-1 trading plan to potentially sell up to **25,000 shares** of common stock[438](index=438&type=chunk) [Item 6. Exhibits](index=78&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including **CEO/CFO certifications** pursuant to the Sarbanes-Oxley Act of 2002 and XBRL data files - Lists various corporate governance documents, **CEO/CFO certifications** (31.1, 31.2, 32), and XBRL interactive data files as exhibits[440](index=440&type=chunk)