Merchants Bancorp(MBINL) - 2024 Q2 - Quarterly Report

Form 10-Q Filing Information This section provides the basic filing information for Merchants Bancorp's Quarterly Report on Form 10-Q for the period ended June 30, 2024, including the registrant's identification, filer status, and a list of its registered securities Filing Details This section provides the basic filing information for Merchants Bancorp's Quarterly Report on Form 10-Q for the period ended June 30, 2024, including the registrant's identification, filer status, and a list of its registered securities - The registrant is MERCHANTS BANCORP, incorporated in Indiana, filing for the quarterly period ended June 30, 2024[2] - The Company is classified as an Accelerated filer[4] - As of August 1, 2024, 45,757,567 shares of common stock were issued and outstanding[5] Registered Securities on NASDAQ | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---------------- | :---------------------------------------- | | Common Stock, without par value | MBIN | NASDAQ | | Depositary Shares, each representing a 1/40th interest in a share of Series B Preferred Stock, without par value | MBINO | NASDAQ | | Depositary Shares, each representing a 1/40th interest in a share of Series C Preferred Stock, without par value | MBINN | NASDAQ | | Depositary Shares, each representing a 1/40th interest in a share of Series D Preferred Stock, without par value | MBINM | NASDAQ | PART I – FINANCIAL INFORMATION This part presents the unaudited interim financial statements, management's discussion and analysis of financial condition and results of operations, and disclosures on market risk and internal controls Item 1 Interim Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Merchants Bancorp, including the balance sheets, statements of income, comprehensive income, shareholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items - The accompanying unaudited condensed consolidated financial statements were prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X[21] - Management believes all necessary normal recurring adjustments have been included for a fair presentation of the financial position, results of operations, and cash flows[22] Condensed Consolidated Balance Sheets As of June 30, 2024, total assets increased by 7.4% to $18.21 billion from $16.95 billion at December 31, 2023, driven by growth in loans receivable and loans held for sale Condensed Consolidated Balance Sheet Highlights (In thousands) | Metric | June 30, 2024 | December 31, 2023 | Change (%) | | :----------------------------------- | :-------------- | :---------------- | :--------- | | Total assets | $18,212,422 | $16,952,516 | 7.43% | | Cash and cash equivalents | $540,882 | $584,422 | -7.45% | | Loans held for sale | $3,483,076 | $3,144,756 | 10.76% | | Loans receivable, net | $10,933,189 | $10,127,801 | 7.95% | | Total deposits | $14,917,067 | $14,061,460 | 6.09% | | Total borrowings | $1,159,206 | $964,127 | 20.24% | | Total liabilities | $16,324,275 | $15,251,432 | 7.03% | | Total shareholders' equity | $1,888,147 | $1,701,084 | 10.99% | - Goodwill decreased by 49% from $15.845 million at December 31, 2023, to $8.014 million at June 30, 2024[10] - Servicing rights increased by 12.8% from $158.457 million at December 31, 2023, to $178.776 million at June 30, 2024[10] Condensed Consolidated Statements of Income For the three months ended June 30, 2024, net income increased by 17.0% to $76.39 million, driven by a 21.3% increase in net interest income and a 55.9% decrease in provision for credit losses Condensed Consolidated Statements of Income Highlights (In thousands, except EPS) | Metric | 3 Months Ended Jun 30, 2024 | 3 Months Ended Jun 30, 2023 | Change (%) | 6 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2023 | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Total interest income | $328,273 | $258,069 | 27.20% | $642,446 | $469,363 | 36.88% | | Total interest expense | $200,154 | $152,452 | 31.30% | $387,271 | $263,053 | 47.22% | | Net Interest Income | $128,119 | $105,617 | 21.31% | $255,175 | $206,310 | 23.69% | | Provision for credit losses | $9,965 | $22,603 | -55.91% | $14,691 | $29,470 | -50.15% | | Total noninterest income | $31,351 | $29,882 | 4.92% | $72,225 | $44,146 | 63.59% | | Total noninterest expense | $50,380 | $44,320 | 13.68% | $99,292 | $79,092 | 25.54% | | Net Income | $76,393 | $65,302 | 17.00% | $163,447 | $120,257 | 35.91% | | Diluted Earnings Per Share | $1.49 | $1.31 | 13.74% | $3.29 | $2.38 | 38.24% | Condensed Consolidated Statements of Comprehensive Income Comprehensive income for the three months ended June 30, 2024, increased to $77.06 million from $65.99 million in the prior year, primarily due to higher net income Condensed Consolidated Statements of Comprehensive Income Highlights (In thousands) | Metric | 3 Months Ended Jun 30, 2024 | 3 Months Ended Jun 30, 2023 | Change (%) | 6 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2023 | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :--------- | :-------------------------- | :-------------------------- | :--------- | | Net Income | $76,393 | $65,302 | 17.00% | $163,447 | $120,257 | 35.91% | | Other Comprehensive Income | $663 | $693 | -4.33% | $1,978 | $3,485 | -43.24% | | Comprehensive Income | $77,056 | $65,995 | 16.76% | $165,425 | $123,742 | 33.68% | Condensed Consolidated Statements of Shareholders' Equity Total shareholders' equity increased by 11.0% to $1.89 billion at June 30, 2024, from $1.70 billion at December 31, 2023, driven by net income and common stock offering proceeds - Common stock increased by $98.1 million, primarily due to the issuance of 2,400,000 shares in a public offering, generating $97.655 million in net proceeds[16][172] - The 7% Series A Preferred Stock was fully redeemed for $50.221 million during the period[16][175] - Retained earnings increased by $137.179 million, reflecting net income less dividends paid[16] - Dividends on common stock were $0.36 per share annually in 2024, up from $0.32 per share in 2023[16] Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2024, net cash used in operating activities was $(332.65) million, net cash used in investing activities was $(1.01) billion, and net cash provided by financing activities was $1.30 billion Condensed Consolidated Statements of Cash Flows Highlights (In thousands) | Metric | 6 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2023 | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Net cash used in operating activities | $(332,653) | $(543,020) | -38.60% | | Net cash used in investing activities | $(1,012,173) | $(2,356,545) | -57.05% | | Net cash provided by financing activities | $1,301,286 | $3,050,711 | -57.35% | | Net Change in Cash and Cash Equivalents | $(43,540) | $151,146 | -128.81% | | Cash and Cash Equivalents, End of Period | $540,882 | $377,310 | 43.35% | - Proceeds from issuance of common stock totaled $97.655 million for the six months ended June 30, 2024[19] - Repurchase of preferred stock amounted to $(52.045) million for the six months ended June 30, 2024[19] Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures and explanations for the condensed consolidated financial statements, covering the basis of presentation, significant accounting policies, investment securities, loans and allowance for credit losses, variable interest entities, regulatory matters, derivative financial instruments, fair value measurements, leases, deposits, borrowings, earnings per share, common and preferred stock, share-based payment plans, segment information, and recent accounting pronouncements Note 1: Basis of Presentation The financial statements are unaudited and consolidate Merchants Bancorp and its subsidiaries, with significant estimates involved in credit losses and fair values - The Company's consolidated entities include Merchants Bancorp, Merchants Bank of Indiana, Farmers-Merchants Bank of Illinois (until its merger on January 26, 2024), and Merchants Asset Management, LLC, along with their primary operating subsidiaries[20][28] - The sale of Farmers-Merchants Bank of Illinois branches was completed on January 26, 2024, resulting in a net gain of $715,000 and the extinguishment of $7.8 million in goodwill[24][26] - The transaction enhanced the Company's ability to focus on its core business of single and multi-family mortgage lending[24] - As of June 30, 2024, $37.0 million in restricted cash was held as collateral for potential risk of loss on senior credit linked notes[36] Note 2: Investment Securities The Company's investment portfolio includes securities available for sale (AFS) and held to maturity (HTM), with unrealized losses on AFS primarily due to interest rate changes Investment Securities Fair Values (In thousands) | Category | June 30, 2024 Fair Value | December 31, 2023 Fair Value | Change (%) | | :----------------------------------- | :------------------------- | :------------------------- | :--------- | | Securities available for sale | $1,017,019 | $1,113,687 | -8.68% | | Securities held to maturity | $1,291,960 | $1,203,535 | 7.35% | - Unrealized losses on available-for-sale securities are attributed to changes in the prevailing interest rate environment, not credit-related factors, and no allowance for credit losses has been recorded[49] - For the six months ended June 30, 2024, the Company received $10.0 million from sales of securities available for sale, recognizing a net loss of $108,000[44] Note 3: Mortgage Loans in Process of Securitization Mortgage loans in process of securitization are recorded at fair value, with changes recognized in earnings, and are primarily multi-family rental real estate pending settlement - Mortgage loans in process of securitization totaled $209.2 million at June 30, 2024, an 89% increase from $110.6 million at December 31, 2023[10][219] - The aggregate fair value adjustment recorded on these loans was $0.5 million as of June 30, 2024, down from $0.8 million at December 31, 2023[51] Note 4: Loans and Allowance for Credit Losses on Loans Loans receivable, net, increased by 7.95% to $10.93 billion at June 30, 2024, primarily driven by growth in mortgage warehouse repurchase agreements, multi-family, and healthcare financing Loans Receivable Summary (In thousands) | Loan Type | June 30, 2024 | December 31, 2023 | Change (%) | | :----------------------------------- | :-------------- | :---------------- | :--------- | | Mortgage warehouse repurchase agreements | $1,369,965 | $752,468 | 82.07% | | Residential real estate | $1,345,656 | $1,324,305 | 1.61% | | Multi-family financing | $4,160,420 | $4,006,160 | 3.85% | | Healthcare financing | $2,495,910 | $2,356,689 | 5.91% | | Commercial and commercial real estate | $1,566,809 | $1,643,081 | -4.64% | | Agricultural production and real estate | $70,244 | $103,150 | -31.89% | | Consumer and margin loans | $5,213 | $13,700 | -61.95% | | Total loans | $11,014,217 | $10,199,553 | 7.99% | | ACL-Loans | $81,028 | $71,752 | 12.93% | | Loans Receivable, Net | $10,933,189 | $10,127,801 | 7.95% | - The ACL-Loans increased by $9.3 million, or 13%, to $81.0 million at June 30, 2024, primarily due to loan growth in multi-family and healthcare portfolios and changes to qualitative loss factors[228] - Nonperforming loans (nonaccrual and 90+ days late but still accruing) increased to $143.5 million (1.30% of total loans) at June 30, 2024, from $82.0 million (0.80%) at December 31, 2023, driven by delinquent payments on variable rate multi-family and healthcare loans[244] - Loans classified as Special Mention totaled $244.0 million at June 30, 2024, and Substandard loans totaled $246.8 million, both showing increases compared to December 31, 2023, primarily due to rising interest rates impacting borrower cash flows[249][250] Note 5: Variable Interest Entities (VIEs) The Company has investments in various Variable Interest Entities (VIEs), including debt financing entities and low-income housing syndicated funds, with a maximum exposure to loss of $1.63 billion from unconsolidated VIEs - The Company invests in single-family, multi-family, and healthcare debt financing entities, as well as low-income housing syndicated funds that are deemed VIEs[108] - At June 30, 2024, the Company was not deemed the primary beneficiary for most of its VIEs, thus not consolidating their results[109] Maximum Exposure to Loss from Unconsolidated VIEs (In thousands) | Category | June 30, 2024 | December 31, 2023 | Change (%) | | :----------------------------------- | :-------------- | :---------------- | :--------- | | Low-income housing tax credit investments | $259,292 | $351,148 | -26.16% | | Debt funds | $67,035 | $119,637 | -43.99% | | Off-balance-sheet REMIC trusts | $1,298,964 | $1,192,201 | 8.95% | | Total Maximum Exposure to Loss | $1,625,291 | $1,662,986 | -2.39% | Note 6: Regulatory Matters Merchants Bancorp and Merchants Bank of Indiana continue to meet all capital adequacy requirements and are categorized as 'well capitalized' by federal banking agencies as of June 30, 2024 - As of June 30, 2024, both Merchants Bancorp and Merchants Bank met all capital adequacy requirements and were categorized as 'well capitalized' by their respective federal regulators[115][116] Company Capital Ratios (June 30, 2024) | Ratio | Actual Ratio | Minimum to be Well Capitalized with Basel III Buffer | | :----------------------------------- | :----------- | :------------------------------------------- | | 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% | Note 7: Derivative Financial Instruments The Company uses non-hedging designated derivative financial instruments to manage interest rate risk, including a credit default swap purchased in March 2024 to manage credit risk on specific multi-family mortgage loans - The Company utilizes forward contracts, interest rate swaps, put options, and interest rate floors to manage interest rate risk[122][123][124] - In March 2024, a credit default swap was purchased to manage credit risk associated with specific multi-family mortgage loans[126] - All derivative instruments are not designated as accounting hedges and are recorded at fair value, with changes reflected in noninterest income[127] Derivative Fair Values (In thousands, June 30, 2024) | Instrument | Notional Amount | Asset Fair Value | Liability Fair Value | | :----------------------------------- | :-------------- | :--------------- | :----------------- | | 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 | Note 8: Disclosures about Fair Value of Assets and Liabilities The Company measures certain assets and liabilities at fair value using a three-level hierarchy, with Level 3 assets including servicing rights, certain mortgage-backed securities, and specific derivative instruments - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[135] - Level 3 assets at June 30, 2024, include servicing rights ($178.8 million), certain mortgage-backed securities with fair value option ($462.6 million), and specific derivative assets and liabilities[136] - Collateral dependent loans measured at fair value on a nonrecurring basis are classified within Level 3, totaling $29.7 million at June 30, 2024[152] - Valuation methodologies for Level 3 assets include discounted cash flow models and market comparable properties, with sensitivity analysis performed on unobservable inputs like discount rates, prepayment rates, and market credit spreads[157][159][162] Note 9: Leases The Company has operating leases for various locations, with right-of-use assets of $8.0 million and liabilities of $9.1 million as of June 30, 2024 - Operating lease right-of-use assets were $7.992 million at June 30, 2024, a decrease from $10.060 million at December 31, 2023[167] - Operating lease liabilities were $9.098 million at June 30, 2024, down from $11.251 million at December 31, 2023[167] - The weighted average remaining lease term was 4.7 years at June 30, 2024, with a weighted average discount rate of 3.25%[167] Note 10: Deposits Total deposits increased by 6.1% to $14.92 billion at June 30, 2024, primarily due to a $1.7 billion increase in certificates of deposit, with brokered deposits representing 41% of the total Deposits Composition (In thousands) | Deposit Type | June 30, 2024 | December 31, 2023 | Change (%) | | :----------------------------------- | :-------------- | :---------------- | :--------- | | Noninterest-bearing deposits | $383,260 | $520,070 | -26.29% | | Interest-bearing deposits | $14,533,807 | $13,541,390 | 7.33% | | Total deposits | $14,917,067 | $14,061,460 | 6.09% | - Certificates of deposit increased by $1.7 billion (32.8%) to $6.87 billion at June 30, 2024, with $6.76 billion (98%) due within one year[168] - Brokered deposits increased by $149.7 million (2.5%) to $6.12 billion at June 30, 2024, representing 41% of total deposits[168][238] - Approximately 79% of total deposits reprice within three months, and uninsured deposits represent about 15% of total deposits[234][240] Note 11: Borrowings Total borrowings increased by 20.2% to $1.16 billion at June 30, 2024, primarily due to additional FHLB advances, with the Company maintaining significant unused borrowing capacity of $7.0 billion Borrowings Composition (In thousands) | Borrowing Type | June 30, 2024 | December 31, 2023 | Change (%) | | :----------------------------------- | :-------------- | :---------------- | :--------- | | Short-term subordinated debt | $68,514 | $64,922 | 5.53% | | FHLB advances | $974,008 | $771,392 | 26.26% | | Credit linked notes, net | $108,750 | $119,879 | -9.30% | | Other borrowings | $7,934 | $7,934 | 0.00% | | Total borrowings | $1,159,206 | $964,127 | 20.24% | - Unused borrowing capacity with the FHLB and Federal Reserve discount window totaled $7.0 billion at June 30, 2024, up from $6.0 billion at December 31, 2023[242] - A new $500.0 million variable rate debt agreement with the FHLB was entered into on May 21, 2024, maturing August 19, 2024, with an interest rate of Federal Funds effective rate + 15 bps (5.48% at June 30, 2024)[170] Note 12: Earnings Per Share Basic EPS for common shareholders was $1.50 for Q2 2024 and $3.30 for H1 2024, while diluted EPS was $1.49 and $3.29, respectively, representing significant increases compared to prior year periods Earnings Per Share (Q2 & H1, except share data) | Metric | 3 Months Ended Jun 30, 2024 | 3 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2023 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income available to common shareholders | $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 | Note 13: Common Stock On May 13, 2024, the Company completed a public offering of 2.4 million common shares at $43.00 per share, generating $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 an underwritten public offering[172] - The offering generated total net proceeds of $97.7 million after deducting $5.5 million in underwriting discounts, commissions, and offering expenses[172] Note 14: Preferred Stock The Company redeemed all outstanding Series A Preferred Stock on April 1, 2024, for $52 million and continues to have Series B, C, and D Preferred Stock outstanding, with the Series B's floating rate benchmark transitioning to SOFR - All outstanding shares of the 7% Series A Preferred Stock were redeemed on April 1, 2024, for $52 million[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[351] - The 6% Series C Preferred Stock is redeemable at the Company's option on or after April 1, 2026[179][354] - The 8.25% Series D Preferred Stock is redeemable at the Company's option on or after October 1, 2027, with its dividend rate resetting to the 5-year Treasury rate plus 4.34% if outstanding after that date[182][358] Note 15: Share-Based Payment Plans The Company issues equity-based incentive awards under the 2017 Equity Incentive Plan, provides restricted common stock to non-executive directors, and maintains an Employee Stock Ownership Plan (ESOP) - Equity-based incentive awards for Company officers are issued pursuant to the 2017 Equity Incentive Plan[184] - Non-executive directors receive a portion of their annual fees in restricted common stock, equal to $70,000 per member quarterly, effective January 1, 2024[185] - The Employee Stock Ownership Plan (ESOP) received 23,414 shares for the six months ended June 30, 2024, with recognized expenses of $573,000[186] Note 16: Segment Information The Company operates in three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking, along with an 'Other' segment for corporate overhead and investments - The Company's reportable business segments are Multi-family Mortgage Banking, Mortgage Warehousing, and Banking, consistent with internal reporting[187] - The Multi-family Mortgage Banking segment originates and services government-sponsored mortgages and syndicates low-income housing tax credit and debt funds, managing a total servicing portfolio of $27.1 billion at June 30, 2024[187][309] - The Mortgage Warehousing segment funds agency-eligible residential and commercial loans, funding $18.8 billion for the six months ended June 30, 2024[187][310] - The Banking segment provides retail banking, commercial lending, agricultural lending, and residential mortgage banking, primarily in Indiana[187][312] Net Income by Segment (In thousands) | Segment | 3 Months Ended Jun 30, 2024 | 3 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2024 | 6 Months Ended Jun 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 | Note 17: Recent Accounting Pronouncements The Company is evaluating the impact of two new FASB ASUs on Segment Reporting and Income Taxes, neither of which is expected to have a material impact on its financial position or results of operations - FASB ASU 2023-07 (Segment Reporting) requires additional disclosures on reportable segments and is effective for annual periods beginning after December 15, 2023[191] - FASB ASU 2023-09 (Income Taxes) requires a tabular tax rate reconciliation and disaggregation of income tax expense/paid by jurisdiction, effective for annual periods beginning after December 15, 2024[195] - The Company does not expect either ASU to have a material impact on its financial position or results of operations[194][196] Note 18: Subsequent Events No material subsequent events were noted after the reporting period - No material events were noted subsequent to June 30, 2024[197] Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition at June 30, 2024, and operating results for the three and six months ended June 30, 2024 and 2023 - Net income for the three months ended June 30, 2024, increased 17% to $76.4 million, with diluted earnings per share rising 14% to $1.49[207] - Total assets increased 7% to $18.2 billion at June 30, 2024, compared to December 31, 2023, driven by growth in warehouse, multi-family, and healthcare loan portfolios[207][217] - Approximately 94% of total net loans reprice within three months, which reduces the risk of market rate increases[207][227] - The Company had $7.0 billion in unused borrowing capacity and $12.6 billion in highly liquid assets (69% of total assets) as of June 30, 2024[207][333] Business Overview Merchants Bancorp is a diversified bank holding company operating in Multi-family Mortgage Banking, Mortgage Warehousing, and Banking segments, focusing on originating and selling fixed-rate, low-risk government-backed loans - The Company operates in multiple business segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking[209] - The business strategy involves funding fixed-rate, low-risk multi-family, residential, and SBA loans for sale, and retaining adjustable-rate loans as held for investment to reduce interest rate risk[210] - Funding sources primarily include mortgage custodial, municipal, retail, commercial, and brokered deposits, and short-term borrowing[210] Critical Accounting Policies and Estimates The preparation of financial statements requires management to make significant estimates and judgments, particularly concerning the allowance for credit losses on loans and the fair values of servicing rights and financial instruments - Material estimates susceptible to significant change relate to the determination of the allowance for credit losses on loans and fair values of servicing rights and financial instruments[34] - There have been no significant changes in critical accounting policies or the assumptions and judgments utilized since the year ended December 31, 2023[212] Financial Condition Total assets grew 7.4% to $18.2 billion at June 30, 2024, primarily due to increases in loans receivable and loans held for sale, with deposits increasing 6.1% to $14.9 billion Financial Condition Highlights (In thousands) | Metric | June 30, 2024 | December 31, 2023 | Change (%) | | :----------------------------------- | :-------------- | :---------------- | :--------- | | Total assets | $18,212,422 | $16,952,516 | 7.43% | | Loans receivable, net | $10,933,189 | $10,127,801 | 7.95% | | Loans held for sale | $3,483,076 | $3,144,756 | 10.76% | | Total deposits | $14,917,067 | $14,061,460 | 6.09% | | Total borrowings | $1,159,206 | $964,127 | 20.24% | | Total shareholders' equity | $1,888,147 | $1,701,084 | 10.99% | - Loans receivable, net, increased by $805.4 million, or 8%, driven primarily by increases in mortgage warehouse repurchase agreements (up 82%), multi-family financing (up 4%), and healthcare financing loans (up 6%)[225][235] - Deposits increased by $855.6 million, or 6%, primarily due to a $1.7 billion increase in certificates of deposit, partially offset by decreases in demand and savings deposits[234] - Goodwill decreased by $7.8 million, or 49%, due to the elimination of goodwill associated with FMBI upon the sale of its branches[230] Asset Quality Asset quality deteriorated with nonperforming loans increasing to $143.5 million (1.30% of total loans) at June 30, 2024, primarily due to delinquent payments on variable rate multi-family and healthcare loans - Total nonperforming loans increased to $143.5 million (1.30% of total loans) at June 30, 2024, from $82.0 million (0.80%) at December 31, 2023, driven by delinquent payments on variable rate multi-family and healthcare loans[244] - The Allowance for Credit Losses on Loans (ACL-Loans) as a percentage of nonperforming loans decreased to 56% at June 30, 2024, from 87% at December 31, 2023[245] - Loans classified as Special Mention totaled $244.0 million at June 30, 2024, and Substandard loans totaled $246.8 million, both showing significant increases compared to December 31, 2023, primarily due to increased interest rates impacting net operating income on certain properties[249][250] - For the six months ended June 30, 2024, there were $4.4 million of charge-offs and $16,000 of recoveries, compared to $9.5 million of charge-offs and $9,000 of recoveries for the same period in 2023[251] Comparison of Operating Results for the Three Months Ended June 30, 2024 and 2023 Net income increased 17.0% to $76.4 million, driven by a 21.3% rise in net interest income and a 55.9% decrease in provision for credit losses, partially offset by increased interest and noninterest expenses - Net interest income increased by $22.5 million, or 21%, to $128.1 million, with the net interest margin increasing 2 basis points to 2.99%[253][254] - Interest income from loans and loans held for sale increased by $55.7 million, or 24%, driven by a 20% increase in average balances and a 30 basis point increase in average yield[256] - Interest expense on deposits increased by $41.9 million, or 30%, primarily due to higher average balances and rates on certificates of deposit and interest-bearing checking accounts[263] - Provision for credit losses decreased by $12.6 million, or 56%, to $10.0 million, primarily due to lower loan charge-offs and relative changes to qualitative factors[272] - Noninterest income increased by $1.5 million, or 5%, driven by a 26% increase in net loan servicing fees and a 46% increase in other income[275] - Noninterest expense increased by $6.1 million, or 14%, primarily due to a 10% increase in salaries and employee benefits and a 47% increase in FDIC deposit insurance expenses[278] Comparison of Operating Results for the Six Months Ended June 30, 2024 and 2023 Net income increased 35.9% to $163.4 million, primarily due to a 23.7% increase in net interest income, a 63.6% increase in noninterest income, and a 50.2% decrease in provision for credit losses - Net interest income increased by $48.9 million, or 24%, to $255.2 million, though the net interest margin decreased 4 basis points to 3.07%[282][283] - Interest income increased by $173.1 million, or 37%, driven by a 23% increase in average loan balances and a 57 basis point increase in average loan yield[284][286] - Interest expense increased by $124.2 million, or 47%, primarily due to higher average balances and rates for certificates of deposit (up 52% volume, 74 bps rate) and interest-bearing checking accounts (up 20% volume, 49 bps rate)[290][291][292][293] - Provision for credit losses decreased by $14.8 million, or 50%, to $14.7 million, primarily due to lower loan charge-offs and relative changes to qualitative factors[302] - Noninterest income increased by $28.1 million, or 64%, driven by a 175% increase in loan servicing fees (including a $19.0 million positive fair value adjustment) and a 73% increase in other income (including $3.5 million in derivative fee income)[303][304] - Noninterest expense increased by $20.2 million, or 26%, primarily due to a 21% increase in salaries and employee benefits and a 79% increase in deposit insurance[306] Our Segments The Company's three main segments—Multi-family Mortgage Banking, Mortgage Warehousing, and Banking—demonstrated varied performance, with all showing increased net income for H1 2024 Net Income by Segment (H1 2024 vs H1 2023, In thousands) | Segment | H1 2024 Net Income | H1 2023 Net Income | Change (%) | | :----------------------------------- | :----------------- | :----------------- | :--------- | | Multi-family Mortgage Banking | $25,646 | $13,208 | 94.18% | | Mortgage Warehousing | $42,460 | $27,237 | 55.90% | | Banking | $108,803 | $91,957 | 18.32% | | Other | $(13,462) | $(12,145) | 10.84% | - Multi-family Mortgage Banking's net income increase for H1 2024 was primarily due to a $19.9 million increase in servicing fees and a $3.3 million increase in syndication and asset management fees[320] - Mortgage Warehousing's net income increase for H1 2024 was driven by a 36% increase in warehouse loan volume to $18.8 billion[325] - Banking segment's net income increase for H1 2024 was primarily due to higher net interest income from higher average balances and yields on loans[329] Liquidity and Capital Resources The Company maintains strong liquidity with $7.0 billion in unused borrowing capacity and $12.6 billion in highly liquid assets, with all capital ratios remaining above regulatory 'well capitalized' thresholds - The Company had $7.0 billion in available unused borrowing capacity with the FHLB and Federal Reserve discount window at June 30, 2024[332] - Highly liquid assets (cash, short-term investments, mortgage loans in process of securitization, loans held for sale, and warehouse lines of credit) totaled $12.6 billion, or 69% of total assets, at June 30, 2024[333] - Uninsured deposits represent approximately 15% of total deposits, with the Federal Reserve Board line of credit alone capable of funding 118% of uninsured deposits[334] - Total shareholders' equity increased by $187.1 million, or 11%, to $1.9 billion at June 30, 2024, primarily from net income and $97.7 million from a common stock offering, partially offset by the $52.0 million redemption of Series A Preferred Stock[345] - The Company and Merchants Bank met all capital adequacy requirements and were categorized as 'well capitalized' by federal banking agencies as of June 30, 2024[365][366] Item 3 Quantitative and Qualitative Disclosures About Market Risk The Company actively manages market risk, primarily interest rate risk, through its Asset-Liability Committee (ALCO), using NII at Risk and EVE models to assess sensitivity to interest rate changes - The Company's primary sources of market risk are interest rate risk and price risk related to market demand[369] - The Asset-Liability Committee (ALCO) manages interest rate risk within board-established policy limits, monitoring reprice risk, option risk, yield curve risk, and spread risk[373] - Interest rate risk is measured using Net Interest Income at Risk (NII at Risk) and Economic Value of Equity (EVE) models[377] Net Interest Income Sensitivity (Merchants Bank, 12 Months Forward, June 30, 2024) | Scenario | Dollar Change (in thousands) | 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 (Merchants Bank, Immediate Change in Rates, June 30, 2024) | Scenario | Dollar Change (in thousands) | 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)% | - All NII at Risk and EVE sensitivities are within the board-approved policy limits[381][383] Item 4 Controls and Procedures As of June 30, 2024, the Company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2024[387] - There have been no material changes in the Company's internal control over financial reporting during the period covered by this report[388] PART II – OTHER INFORMATION This part addresses legal proceedings, risk factors, equity sales, senior security defaults, mine safety, other disclosures, and a list of exhibits and signatures Item 1 Legal Proceedings No legal proceedings were reported for the period - No legal proceedings were reported[390] Item 1A Risk Factors There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023 - No material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[391] Item 2 Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - No unregistered sales of equity securities and use of proceeds were reported[392] Item 3 Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - 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[394] Item 5 Other Information No other information was reported for the period - No other information was reported[395] Item 6 Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, certifications from the CEO and CFO, and XBRL-related documents - Exhibits include the Second Amended and Restated Articles of Incorporation, Articles of Amendment, and Second Amended and Restated By-Laws[396] - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[396] - XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are provided[396] SIGNATURES The report was duly signed on August 9, 2024, by Michael F. Petrie, Chairman & Chief Executive Officer, and John F. Macke, Chief Financial Officer - The report was signed by Michael F. Petrie, Chairman & Chief Executive Officer, and John F. Macke, Chief Financial Officer, on August 9, 2024[400]