PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents Merchants Bancorp's unaudited condensed consolidated financial statements for Q3 and YTD September 30, 2024, along with detailed notes Condensed Consolidated Financial Statements Q3 2024 net income decreased to $61.3 million, while YTD net income increased to $224.7 million, with total assets growing to $18.7 billion and deposits decreasing, offset by higher borrowings Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2024 | December 31, 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $18,652,976 | $16,952,516 | +10.0% | | Loans receivable, net | $10,261,890 | $10,127,801 | +1.3% | | Loans held for sale | $3,808,234 | $3,144,756 | +21.1% | | 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 Income Statement Highlights (in thousands, except EPS) | Metric | Q3 2024 | Q3 2023 | Change (%) | YTD 2024 | YTD 2023 | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $132,821 | $117,436 | +13.1% | $387,996 | $323,746 | +19.8% | | Provision for credit losses | $6,898 | $4,014 | +71.9% | $21,589 | $33,484 | -35.5% | | Noninterest Income | $16,742 | $36,068 | -53.6% | $88,967 | $80,214 | +10.9% | | Net Income | $61,273 | $81,504 | -24.8% | $224,720 | $201,761 | +11.4% | | Diluted EPS | $1.17 | $1.68 | -30.4% | $4.45 | $4.06 | +9.6% | - For the nine months ended September 30, 2024, net cash used in operating activities was $825.3 million and in investing activities was $830.8 million, while financing activities provided $1.67 billion in cash, primarily from a significant increase in borrowings18 Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, loan portfolio composition, increased credit loss allowance, investment changes, a strategic shift to borrowings, regulatory capital, and derivative use - On January 26, 2024, the Company completed the sale of its Farmers-Merchants Bank of Illinois branches, selling approximately $60.8 million in assets and $230.6 million in liabilities, recognizing a net gain of $715,000232425 Loan Portfolio Composition (in thousands) | Loan Category | September 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Mortgage warehouse repurchase agreements | $1,213,429 | $752,468 | | Residential real estate | $1,317,234 | $1,324,305 | | Multi-family financing | $4,456,129 | $4,006,160 | | Healthcare financing | $1,733,674 | $2,356,689 | | Commercial and commercial real estate | $1,548,689 | $1,643,081 | | Total Loans Receivable (Gross) | $10,346,439 | $10,199,553 | - Nonaccrual loans increased significantly to $210.8 million as of September 30, 2024, from $73.8 million at December 31, 2023, primarily driven by multi-family and healthcare loans101 - The Company completed a $628.9 million private securitization of healthcare bridge loans on September 26, 2024, selling them into a REMIC and repurchasing the $534.5 million senior security, which was classified as held-to-maturity111 - In May 2024, the Company issued 2.4 million shares of common stock in a public offering, receiving net proceeds of $97.7 million. In April 2024, all outstanding shares of the 7% Series A Preferred Stock were redeemed for $52 million195199 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2024 net income decline to $61.3 million due to higher provisions and fair value adjustments, offset by YTD growth to $224.7 million, alongside a strategic funding shift, rising nonperforming loans, and strong capital Financial Condition Total assets grew 10% to $18.7 billion, driven by loans held for sale and securities, while deposits decreased 8% and borrowings increased 270% to $3.6 billion, bolstering shareholders' equity to $1.9 billion - Total assets increased by $1.7 billion (10%) to $18.7 billion at September 30, 2024, from December 31, 2023, primarily due to growth in loans held for sale and securities held to maturity246 - The company strategically shifted its funding mix, decreasing total deposits by $1.2 billion (8%) while increasing borrowings by $2.6 billion (270%), mainly through additional FHLB advances, which were a more cost-effective option263270 - Brokered deposits were reduced by 53% to $2.8 billion, representing 22% of total deposits, down from 42% at year-end 2023267 Asset Quality Asset quality deteriorated with nonperforming loans rising to $210.9 million (2.04% of total loans) due to interest rate pressures on variable-rate multi-family and healthcare loans, leading to increased substandard loans and specific reserves - Total nonperforming loans rose to $210.9 million (2.04% of total loans) at Q3 2024, a significant increase from $82.0 million (0.80%) at year-end 2023, attributed to interest rate pressure on variable-rate multi-family and healthcare loans274 - Loans classified as Substandard increased to $287.8 million from $128.6 million at year-end 2023, with specific reserves of $19.2 million established for these impaired loans280 - The company is actively managing credit risk through credit protection arrangements (credit linked notes and a credit default swap) covering a $1.3 billion loan portfolio as of September 30, 2024283 Results of Operations Q3 2024 net income decreased 25% to $61.3 million due to lower servicing fees, higher expenses, and increased credit loss provisions, while YTD net income grew 11% to $224.7 million driven by net interest income and lower provisions Q3 2024 vs Q3 2023 Performance Drivers | Metric | Change | Reason | | :--- | :--- | :--- | | Net Interest Income | +$15.4M (+13%) | Higher average loan balances | | Provision for Credit Losses | +$2.9M (+72%) | Increased specific reserves on certain borrowers | | Loan Servicing Fees | -$18.9M (-109%) | Negative fair market value adjustments on servicing rights and derivatives | | Noninterest Expense | +$18.4M (+43%) | Higher commissions, deposit insurance, and credit default swap premiums | Nine Months 2024 vs 2023 Performance Drivers | Metric | Change | Reason | | :--- | :--- | :--- | | Net Interest Income | +$64.3M (+20%) | Higher average balances and yields on earning assets | | Provision for Credit Losses | -$11.9M (-36%) | Lower loan charge-offs and fewer changes to qualitative factors | | Noninterest Income | +$8.8M (+11%) | Higher gain on sale of loans and syndication fees | | Noninterest Expense | +$38.6M (+32%) | Higher salaries/commissions and deposit insurance | - Net interest margin for Q3 2024 was 2.99%, unchanged from Q3 2023. The nine-month NIM was 3.04%, a slight decrease from 3.07% in the prior year, negatively impacted by interest reversals on new nonaccrual loans288319 Segment Performance In Q3 2024, all three segments experienced net income declines, with Multi-family Mortgage Banking down 45% to $8.1 million, Mortgage Warehousing down 20% to $15.9 million, and Banking down 14% to $45.0 million Segment Net Income (in thousands) | Segment | Q3 2024 | Q3 2023 | Change (%) | YTD 2024 | YTD 2023 | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $8,068 | $14,685 | -45.1% | $33,714 | $27,893 | +20.9% | | Mortgage Warehousing | $15,940 | $19,926 | -20.0% | $58,400 | $47,163 | +23.8% | | Banking | $44,983 | $52,445 | -14.2% | $153,786 | $144,402 | +6.5% | - The Multi-family Mortgage Banking segment's Q3 income was heavily impacted by a $5.1 million negative fair value adjustment to servicing rights, compared to a $10.4 million positive adjustment in Q3 2023358359 - The Mortgage Warehousing segment funded $13.1 billion in loans in Q3 2024, a 22% increase YoY, outperforming the industry's 21% growth367 Liquidity and Capital Resources The company maintains strong liquidity with $5.1 billion in unused borrowing capacity and $11.1 billion in total liquid assets, while capital resources remain robust with all regulatory ratios exceeding 'well capitalized' thresholds - The company has $5.1 billion in available unused borrowing capacity with the FHLB and Federal Reserve discount window as of September 30, 2024376 - Total liquid assets plus unused borrowing capacity equaled $11.1 billion (59% of total assets), providing substantial coverage for uninsured deposits (approximately 20% of total deposits)377378 Company Capital Ratios | Ratio | September 30, 2024 | Minimum to be Well Capitalized w/ Buffer | | :--- | :--- | :--- | | Total capital (to risk-weighted assets) | 12.2% | 10.5% | | Tier I capital (to risk-weighted assets) | 11.6% | 8.5% | | Common Equity Tier I capital | 8.9% | 7.0% | | Tier I capital (to average assets) | 10.5% | 5.0% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed by ALCO, showing asset sensitivity where a +100 basis point rate increase is projected to raise Net Interest Income by 7.1% over 12 months, with all risk metrics within policy limits - The company is positioned to be asset sensitive, where an increase in short-term interest rates is expected to generate higher net interest income418 Net Interest Income (NII) Sensitivity Analysis (Twelve Months Forward) | Rate Change (basis points) | % Change in NII (as of Sep 30, 2024) | % Change in NII (as of Dec 31, 2023) | | :--- | :--- | :--- | | +200 | +14.2% | +11.7% | | +100 | +7.1% | +6.0% | | -100 | -9.9% | -7.5% | | -200 | -19.6% | -15.0% | Economic Value of Equity (EVE) Sensitivity Analysis (Immediate Shock) | Rate Change (basis points) | % Change in EVE (as of Sep 30, 2024) | % Change in EVE (as of Dec 31, 2023) | | :--- | :--- | :--- | | +200 | -0.1% | -4.7% | | +100 | -0.0% | -2.1% | | -100 | +0.2% | +5.5% | | -200 | -0.5% | +10.8% | Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2024, with no material changes to 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 effective429 - No material changes were made to the Company's internal control over financial reporting during the third quarter of 2024430 PART II – OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings during the period - There are no legal proceedings to report433 Item 1A. Risk Factors No material changes occurred to the risk factors previously disclosed in the 2023 Annual Report on Form 10-K - No material changes from the risk factors disclosed in the 2023 Form 10-K have occurred434 Item 5. Other Information This section discloses a director and officer adopted a Rule 10b5-1 stock trading plan on August 7, 2024 - On August 7, 2024, Scott A. Evans, a director and officer, adopted a Rule 10b5-1 trading plan to potentially sell up to 25,000 shares of common stock before March 13, 2025438 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents and certifications
Merchants Bancorp(MBINL) - 2024 Q3 - Quarterly Report