MERCHANTS BANCOR(US:MBINN)2025-02-28 21:06Part I Item 1. Business Merchants Bancorp is a diversified bank holding company with $18.8 billion in assets, operating in mortgage banking, warehousing, and traditional banking, subject to extensive regulation Company Overview - Founded in 1990, Merchants Bancorp has grown into a diversified financial services company operating nationally through mortgage banking and locally through its community bank, Merchants Bank of Indiana21 Our Business Segments - The company operates through three main business segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking24253335 - 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 the Banking segment's correspondent lending business42 Mortgage Warehousing Funding Volume | Year | Funding Volume (billions) | | :--- | :--- | | 2024 | $45.6 | | 2023 | $33.0 | | 2022 | $33.2 | Competition - The company faces intense competition across all its business lines from a wide range of financial institutions, including community banks, large regional and national banks, non-depository institutions, and increasingly, online financial technology companies44126 Human Capital - As of December 31, 2024, the company had approximately 663 employees, maintained a low turnover rate of 9% in 2024, and established an Employee Stock Ownership Plan (ESOP) in 20204546 ESG Activities - The company's ESG efforts focus on financing affordable housing and skilled nursing facilities through low-income housing tax credits (LIHTC) and promoting inclusion and opportunity (IO) initiatives for employees505152 Supervision and Regulation - As a bank holding company with over $10 billion in assets, Merchants and its subsidiaries are subject to extensive federal and state regulation by agencies including the Federal Reserve, FDIC, and IDFI5557 - Merchants Bank is classified as "well capitalized" under the regulatory framework for prompt corrective action as of December 31, 20248589 - The company is subject to the Dodd-Frank Act, which imposes stringent capital requirements and subjects Merchants Bank to direct examination by the Consumer Financial Protection Bureau (CFPB) due to its asset size99104195 Company Snapshot (as of December 31, 2024) | Metric | Value (in billions) | | :--- | :--- | | Total Assets | $18.8 | | Total Deposits | $11.9 | | Shareholders' Equity | $2.2 | - The company's business model primarily involves funding fixed-rate, low-risk loans for sale, while retaining adjustable-rate loans to mitigate interest rate risk, generating both net interest and noninterest income23 Item 1A. Risk Factors The company faces risks from interest rate sensitivity, competition, market reliance, credit, operations, and regulatory compliance Mortgage Banking and Community Banking Risks - Profitability is highly dependent on mortgage origination volume, which is adversely affected by rising interest rates and competitive pricing118119 - The business relies on an active secondary market and eligibility for government-sponsored entity programs, with changes to these programs potentially affecting operations120123 - The company faces strong competition from a wide array of financial institutions, including online banks and fintech companies, which could reduce loan volume, deposits, and profitability126129 Credit and Financial Risks - A decline in general economic conditions could negatively impact borrowers' ability to repay loans, leading to increased delinquencies, nonperforming loans, and charge-offs132133 - The allowance for credit losses (ACL) is based on management estimates and may prove insufficient to absorb future loan losses, potentially reducing net income135136 - Lending to small and mid-sized businesses carries inherent risks, as these entities may have fewer resources to withstand economic downturns, potentially impairing their ability to repay loans137 Operational Risks - The company is highly dependent on its senior executive team, particularly the Chairman/CEO and President/COO, and the loss of key personnel could harm strategic plan implementation153154 - System failures or cybersecurity breaches could lead to increased operating costs, litigation, reputational damage, and other liabilities156159 - The adoption of Artificial Intelligence (AI) presents potential risks related to compliance, credit, reputation, and operations, including concerns about accountability, data bias, and privacy160161 Market, Interest Rate, and Liquidity Risks - Fluctuations in interest rates can reduce net interest income, with rising rates increasing borrower defaults and decreasing the value of fixed-rate securities172173176 - Liquidity risk is significant, as an inability to raise funds could negatively affect operations, with a substantial portion of deposits concentrated in large non-depository financial institutions179180 Legal, Regulatory, and Compliance Risks - Failure to maintain sufficient capital to meet regulatory requirements could adversely affect the company's financial condition, liquidity, and ability to grow187 - As an institution with over $10 billion in assets, the company is subject to heightened regulatory requirements and scrutiny under the Dodd-Frank Act, including direct examination by the CFPB, increasing compliance costs194195 - Non-compliance with consumer protection laws, such as the Community Reinvestment Act (CRA) and fair lending laws, could lead to sanctions, fines, and restrictions on business activities202 Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None209 Item 1C. Cybersecurity The company maintains a comprehensive Information Security Program, overseen by its Board's IT Committee and managed by a certified Information Security Officer - The company's cybersecurity strategy is built on a defense-in-depth posture, with controls across numerous domains including data protection, vulnerability management, network monitoring, and security awareness training215 - Governance is managed by the Board's IT Committee, which includes senior management and risk experts, reviewing security policies, risk assessments, and incident reports quarterly218 - The Information Security Officer, with over a decade of experience and multiple industry certifications (including CISSP), is responsible for implementing and monitoring the ISP219 Item 2. Properties The company owns its headquarters building in Carmel, Indiana, which is currently being expanded, and operates several other branches and offices, with facilities deemed adequate for foreseeable operational needs - The main corporate headquarters, located at 410 Monon Blvd. in Carmel, Indiana, is owned by the company and is undergoing expansion221 Item 3. Legal Proceedings The company reports no material pending legal proceedings outside of ordinary routine litigation incidental to its business - There are no material pending legal proceedings other than ordinary routine litigation222 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable223 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq under the symbol "MBIN", with a policy of paying quarterly dividends subject to board discretion and regulatory restrictions - As of February 24, 2025, there were 45,850,904 shares of common stock outstanding held by 32 shareholders of record, with a closing price of $41.21 per share225 - The company intends to continue paying quarterly dividends, but this is subject to board discretion, financial condition, and regulatory limits, contingent on paying dividends on all classes of preferred stock226227 Item 6. Selected Financial Data This section presents five years of selected financial data, highlighting asset and net income growth, with non-GAAP reconciliations Selected Financial Data (2020-2024) | (In thousands, except per share data) | 2024 | 2023 | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $18,805,732 | $16,952,516 | $12,615,227 | $11,278,638 | $9,645,375 | | Total Deposits | $11,919,976 | $14,061,460 | $10,071,345 | $8,982,613 | $7,408,066 | | Net Interest Income | $522,620 | $448,071 | $318,551 | $277,994 | $224,146 | | Net Income | $320,386 | $279,234 | $219,721 | $227,104 | $180,533 | | Diluted EPS | $6.30 | $5.64 | $4.47 | $4.76 | $3.85 | | Tangible Book Value (non-GAAP) | $34.15 | $27.40 | $21.88 | $17.96 | $13.45 | Reconciliation of GAAP to Non-GAAP Tangible Common Shareholders' Equity | (In thousands) | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Shareholders' equity per GAAP | $2,243,310 | $1,701,084 | $1,459,739 | | Less: goodwill & intangibles | (8,073) | (16,587) | (17,031) | | Less: preferred stock | (672,135) | (499,608) | (499,608) | | Tangible common shareholders' equity | $1,563,102 | $1,184,889 | $943,100 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased 15% to $320.4 million in 2024, driven by revenue growth, asset expansion, and strategic capital management Financial Highlights for Year Ended Dec 31, 2024 | Metric | 2024 | Change vs 2023 | | :--- | :--- | :--- | | Net Income | $320.4 million | +15% | | Diluted EPS | $6.30 | +12% | | Total Assets | $18.8 billion | +11% | | Tangible Book Value per Share | $34.15 | +25% | - Key strategic activities in 2024 included redemption of Series A Preferred Stock, issuance of Series E Preferred Stock, a $97.7 million common stock offering, and execution of multiple securitizations and credit default swaps to manage capital and risk246 - Warehouse loan funding volume increased significantly by 38% to $45.6 billion in 2024, substantially outpacing the 9% industry growth246 Comparison of Operating Results for the Years Ended December 31, 2024 and 2023 - Net income for 2024 increased by $41.2 million (15%) to $320.4 million, driven by a $74.5 million increase in net interest income and a $33.4 million increase in noninterest income, partially offset by a $49.2 million increase in noninterest expense281 - Net interest income grew 17% to $522.6 million, reflecting higher average balances and yields on loans and securities, with the net interest margin decreasing by only 3 basis points to 3.03%282283 - Noninterest income increased 29% to $148.1 million, primarily due to a $14.1 million increase in gain on sale of loans and a $17.5 million increase in loan servicing fees306307309 - Noninterest expense rose 28% to $223.8 million, largely due to higher salaries and commissions from increased production, and a 93% increase in FDIC deposit insurance expenses as the company transitioned to a large bank classification312 Asset Quality Nonperforming Loans | Metric | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Nonperforming Loans | $279.7 million | $82.0 million | | % of Total Loans Receivable | 2.68% | 0.80% | - The increase in nonperforming loans was primarily driven by multi-family and healthcare customers with variable rate loans facing higher payments due to elevated interest rates316 - To mitigate credit risk, the company executed credit protection arrangements (credit default swaps and credit linked notes) covering a total of $2.3 billion in loans as of year-end 2024318 Operating Segment Analysis for the Years Ended December 31, 2024 and 2023 Segment Net Income (Loss) | (In thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Multi-family Mortgage Banking | $55,897 | $36,473 | | Mortgage Warehousing | $82,802 | $73,525 | | Banking | $210,073 | $194,398 | | Other | $(28,386) | $(25,162) | | Total Net Income | $320,386 | $279,234 | - Multi-family Mortgage Banking net income increased 53%, driven by higher noninterest income from loan servicing fees and gain on sale of loans330331 - Mortgage Warehousing net income grew 13% due to a $37.7 million increase in net interest income, reflecting a 38% increase in loan funding volume to $45.6 billion336337 - Banking net income rose 8%, primarily from a $33.0 million increase in net interest income from higher balances of multi-family bridge loans340 Comparison of Financial Condition at December 31, 2024 and 2023 - Total assets increased by 11% to $18.8 billion, driven by growth in loans held for sale (+$626.8 million) and securities held to maturity (+$460.5 million)343350352 - Loans receivable, net, increased 2% to $10.4 billion, composed of a $693.6 million increase in mortgage warehouse repurchase agreements and a $618.1 million increase in multi-family loans, offset by an $872.2 million decrease in healthcare financing loans due to a securitization356357 - Total deposits decreased 15% to $11.9 billion as the company shifted its funding mix, reducing brokered deposits by 58% to $2.5 billion while core deposits grew 16% to $9.4 billion377378379 - Borrowings increased 355% to $4.4 billion, primarily due to a $3.4 billion increase in FHLB advances, utilized as a more cost-effective funding source than brokered deposits384 - Total shareholders' equity increased 32% to $2.2 billion, driven by $320.4 million in net income, $222.7 million from a preferred stock offering, and $97.7 million from a common stock offering388 Liquidity and Capital Resources - The company maintained a strong liquidity position with $4.3 billion in available unused borrowing capacity from the FHLB and Federal Reserve as of December 31, 2024390 - Uninsured deposits represented 24% of total deposits, and the company's available credit lines could fund 111% of these uninsured deposits, complemented by an insured cash sweep program392383 Regulatory Capital Ratios (Company) | Ratio | Dec 31, 2024 | Dec 31, 2023 | Minimum to be Well Capitalized w/ Buffer | | :--- | :--- | :--- | :--- | | Total Capital | 13.9% | 11.6% | 10.5% | | Tier 1 Capital | 13.3% | 11.1% | 8.5% | | Common Equity Tier 1 | 9.3% | 7.8% | 7.0% | | Tier 1 Leverage | 12.1% | 10.1% | 5.0% | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk through ALCO, using NII at Risk and EVE analyses, remaining asset sensitive and within policy limits Net Interest Income (NII) Sensitivity (Twelve Months Forward) | Rate Shock | % Change in NII (as of Dec 31, 2024) | | :--- | :--- | | +200 bps | +13.1% | | +100 bps | +6.5% | | -100 bps | -6.5% | | -200 bps | -12.2% | Economic Value of Equity (EVE) Sensitivity (Immediate Shock) | Rate Shock | % Change in EVE (as of Dec 31, 2024) | | :--- | :--- | | +200 bps | -0.1% | | +100 bps | -0.1% | | -100 bps | +0.7% | | -200 bps | +0.6% | Item 8. Financial Statements and Supplementary Data This section presents the company's consolidated financial statements for 2022-2024, with notes and an unqualified audit opinion on financial statements and internal controls - The independent auditor, Forvis Mazars, LLP, issued an unqualified opinion on the consolidated financial statements, stating they present fairly the financial position and results of operations in conformity with GAAP447 - The auditor identified the Allowance for Credit Losses (ACL) on Loans as a Critical Audit Matter due to the subjectivity and high degree of judgment required in estimating qualitative adjustments451452456 Notes to Consolidated Financial Statements - Note 1 (Nature of Operations and Significant Accounting Policies): Details the company's business, consolidation principles, critical accounting policies including CECL adoption for ACL on January 1, 2022, and the sale of FMBI branches in January 2024471475506 - Note 5 (Loans and ACL): Provides a detailed breakdown of the $10.4 billion loan portfolio by segment, with ACL on loans at $84.4 million (0.81% of loans) at year-end 2024, up from $71.8 million (0.70%) in 2023, and nonperforming loans increasing to $279.7 million from $82.0 million577365368 - Note 13 (Deposits): Details the composition of the $11.9 billion in deposits, with core deposits constituting 79% of total deposits at year-end 2024 (up from 58% in 2023), while brokered deposits decreased to 21% from 42%666378 - Note 18 (Preferred Stock): Describes various series of preferred stock, noting the redemption of Series A shares for $52.0 million and issuance of $230.0 million of new Series E shares in 2024, with Series B shares redeemed in January 2025739751816 - Note 23 (Segment Information): Provides a detailed financial breakdown for the three reportable segments, showing net income, assets, and significant non-cash items for each766772 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None817 Item 9A. Controls and Procedures Management concluded the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2024, a conclusion affirmed by the independent auditor - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2024, based on the COSO framework823 - The independent registered public accounting firm issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting826827 Item 9B. Other Information A director and officer of the company adopted a Rule 10b5-1 trading plan on August 7, 2024, under which 25,000 shares of common stock were sold on January 29, 2025 - Scott A. Evans, a director and officer, adopted a Rule 10b5-1 trading plan in August 2024 and subsequently sold 25,000 shares in January 2025835 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable836 Part III Item 10. Directors, Executive Officers and Corporate Governance Information concerning directors, executive officers, and corporate governance will be provided in the company's 2025 Proxy Statement and is incorporated by reference - The required information is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of shareholders839 Item 11. Executive Compensation Information concerning executive compensation will be provided in the company's 2025 Proxy Statement and is incorporated by reference - The required information is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of shareholders842 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership will be provided in the company's 2025 Proxy Statement and is incorporated by reference - The required information is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of shareholders843 Item 13. Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence will be provided in the company's 2025 Proxy Statement and is incorporated by reference - The required information is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of shareholders844 Item 14. Principal Accounting Fees and Services Information concerning principal accounting fees and services will be provided in the company's 2025 Proxy Statement and is incorporated by reference - The required information is incorporated by reference from the registrant's definitive proxy statement for its 2025 annual meeting of shareholders845 Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements included in Item 8 and the exhibits filed with the Form 10-K, including articles of incorporation, bylaws, descriptions of securities, material contracts, and certifications required by the Sarbanes-Oxley Act - This item lists all financial statements, schedules, and exhibits filed as part of the annual report847 Item 16. Form 10-K Summary The company indicates that there is no Form 10-K summary - None850