MERCHANTS(MBINM) - 2025 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for Q1 2025, including balance sheets, income, comprehensive income, equity, and cash flows Condensed Consolidated Balance Sheets Total assets remained stable at $18.8 billion, with increased loans held for sale and deposits, offset by reduced borrowings and preferred stock redemption Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 | December 31, 2024 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $18,797,800 | $18,805,732 | -0.04% | | Loans receivable, net | $10,343,724 | $10,354,002 | -0.10% | | Loans held for sale | $3,983,452 | $3,771,510 | +5.62% | | Total Liabilities | $16,637,065 | $16,562,422 | +0.45% | | Total deposits | $12,406,165 | $11,919,976 | +4.08% | | Borrowings | $4,001,744 | $4,386,122 | -8.76% | | Total Shareholders' Equity | $2,160,735 | $2,243,310 | -3.68% | - The company redeemed all outstanding shares of its 6% Series B Preferred Stock in Q1 2025, which reduced total shareholders' equity[12] Condensed Consolidated Statements of Income Q1 2025 net income significantly decreased to $58.2 million, driven by lower net interest and noninterest income, and higher expenses Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | Q1 2025 | Q1 2024 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $122,196 | $127,056 | -3.8% | | Provision for credit losses | $7,727 | $4,726 | +63.5% | | Total noninterest income | $23,693 | $40,874 | -42.0% | | Total noninterest expense | $61,664 | $48,912 | +26.1% | | Net Income | $58,239 | $87,054 | -33.1% | | Diluted EPS | $0.93 | $1.80 | -48.3% | - A significant factor in the noninterest income decline was a sharp drop in loan servicing fees, which fell from $19.4 million in Q1 2024 to $4.0 million in Q1 2025[15] - The company incurred a $5.4 million impact from preferred stock redemption in Q1 2025, which reduced net income allocated to common shareholders[15] Condensed Consolidated Statements of Cash Flows Q1 2025 operating activities generated $148.0 million cash, reversing a prior-year outflow, leading to a $44.7 million increase in cash Consolidated Cash Flow Summary (in thousands) | Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $148,038 | $(383,772) | | Net cash used in investing activities | $(903) | $(695,019) | | Net cash (used in) provided by financing activities | $(102,449) | $1,003,124 | | Net Change in Cash and Cash Equivalents | $44,686 | $(75,667) | Notes to Condensed Consolidated Financial Statements Provides detailed disclosures on financial statements, including asset sales, loan composition, credit losses, and regulatory capital - On January 26, 2024, the company completed the sale of its Farmers-Merchants Bank of Illinois (FMBI) branches, resulting in a net gain of $715,000[28][29][30] - The company holds restricted cash of $33.4 million as of March 31, 2025, as collateral for senior credit linked notes[40] Loan Portfolio Composition (in thousands) | Loan Type | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Mortgage warehouse repurchase agreements | $1,408,239 | $1,446,068 | | Residential real estate | $1,332,601 | $1,322,853 | | Multi-family financing | $4,600,117 | $4,624,299 | | Healthcare financing | $1,583,290 | $1,484,483 | | Commercial and commercial real estate | $1,418,741 | $1,476,211 | | Total Loans Receivable | $10,427,137 | $10,438,388 | Allowance for Credit Losses (ACL) Activity - Q1 2025 (in thousands) | Activity | Amount | | :--- | :--- | | Beginning Balance (Jan 1, 2025) | $84,386 | | Provision for credit losses | $9,506 | | Charge-offs | $(10,507) | | Recoveries | $28 | | Ending Balance (Mar 31, 2025) | $83,413 | - Nonaccrual loans increased to $284.0 million at March 31, 2025, from $279.7 million at December 31, 2024, primarily within the Multi-family financing portfolio[106] - The company redeemed all outstanding shares of its 6.00% Series B Preferred Stock on January 2, 2025, for $125.0 million[197] Segment Net Income (in thousands) | Segment | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Multi-family Mortgage Banking | $3,413 | $16,609 | | Mortgage Warehousing | $15,398 | $20,190 | | Banking | $47,107 | $56,425 | | Other | $(7,679) | $(6,170) | | Total Net Income | $58,239 | $87,054 | - As of March 31, 2025, both the Company and Merchants Bank were categorized as well capitalized under regulatory frameworks[223][225] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 2025 net income declined due to market uncertainty, lower noninterest income, higher expenses, and increased credit losses, despite strong liquidity - Net income for Q1 2025 was $58.2 million, a decrease of $28.8 million from Q1 2024, with diluted EPS falling 48% to $0.93[237] - Of the $28.8 million decrease in net income, management attributes $19.3 million (or $0.34 per diluted share) to changes in valuation adjustments[237] - Core deposits grew 30% year-over-year to $10.7 billion, representing 86% of total deposits, while brokered deposits decreased by 70% to $1.7 billion[237] Key Performance Metrics | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net Interest Margin | 2.89% | 3.14% | | Efficiency Ratio | 42.27% | 29.13% | | Tangible Book Value per Share | $34.90 | $29.26 | Financial Condition Total assets stable at $18.8 billion, with increased loans held for sale and core deposits, reduced brokered deposits and borrowings, and lower shareholders' equity - Loans held for sale increased by $211.9 million (6%) to $4.0 billion, mainly due to higher volume in warehouse participations[254] - Core deposits increased by $1.3 billion (14%) to $10.7 billion, now comprising 86% of total deposits, up from 79% at year-end 2024[271] - Brokered deposits were reduced by $815.7 million (32%) to $1.7 billion, representing 14% of total deposits compared to 21% at year-end 2024[272] - Shareholders' equity decreased by $82.6 million, largely due to the $125.0 million redemption of Series B Preferred Stock, partially offset by $58.2 million in net income[277] Asset Quality Asset quality deteriorated with nonperforming loans rising to 2.73% of total loans, primarily in multi-family and healthcare portfolios, leading to higher net charge-offs - Nonperforming loans were $284.6 million (2.73% of total loans) at Q1 2025, compared to $279.7 million (2.68%) at Q4 2024 and $131.8 million (1.22%) at Q1 2024[279] - The increase in nonperforming loans is attributed to multi-family and healthcare customers with variable-rate loans facing higher payments due to elevated interest rates[279][281] - The company executed credit protection arrangements (credit linked notes and credit default swaps) covering a loan balance of $2.2 billion as of March 31, 2025, to mitigate credit risk[283] - Net charge-offs for Q1 2025 were $10.5 million, primarily from five customers in the multi-family portfolio[287] Results of Operations Q1 2025 net income fell 33% due to decreased net interest income, a 42% drop in noninterest income, and a 26% rise in noninterest expense - Net interest margin decreased to 2.89% from 3.14% in Q1 2024, negatively impacted by a business mix shift towards lower-margin loans held for sale[293] - Noninterest income decreased by $17.2 million (42%), primarily due to a $15.4 million drop in loan servicing fees, including a negative fair value adjustment of $0.8 million on servicing rights in Q1 2025[316][317] - Noninterest expense increased by $12.8 million (26%), driven by a $6.8 million increase in salaries and a new $3.9 million expense for credit risk transfer premiums[321] - The provision for credit losses increased 63% to $7.7 million, with $9.5 million allocated for loans, primarily in the multi-family portfolio[313][314][315] Our Segments All primary segments experienced year-over-year net income declines in Q1 2025, impacted by lower servicing fees, negative derivative adjustments, and reduced net interest income Segment Net Income (in thousands) | Segment | Q1 2025 | Q1 2024 | Change | | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $3,413 | $16,609 | -79% | | Mortgage Warehousing | $15,398 | $20,190 | -24% | | Banking | $47,107 | $56,425 | -17% | - The Multi-family Mortgage Banking segment's decline was primarily due to a $12.5 million decrease in loan servicing fees and a $5.0 million increase in noninterest expense[336] - Despite a 49% increase in loan funding volume to $11.9 billion, the Mortgage Warehousing segment's net income fell due to a negative swing in derivative fair value adjustments[340][341] Liquidity and Capital Resources The company maintained strong liquidity with $4.7 billion in unused borrowing capacity and capital ratios well above regulatory minimums, despite preferred stock redemption - The company had $4.7 billion in available unused borrowing capacity with the FHLB and Federal Reserve discount window as of March 31, 2025[346] - Uninsured deposits totaled approximately $3.0 billion, representing 24% of total Bank deposits, with an insured cash sweep program holding $1.5 billion[273][348] - The company redeemed all outstanding shares of its 6% Series B Preferred Stock on January 2, 2025, for $125.0 million[361] Company Capital Ratios | Ratio | March 31, 2025 | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Total capital (to risk-weighted assets) | 13.0% | 10.5% (with buffer) | | Tier I capital (to risk-weighted assets) | 12.4% | 8.5% (with buffer) | | Common Equity Tier I capital | 9.2% | 7.0% (with buffer) | | Tier I capital (to average assets) | 12.1% | 5.0% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is asset-sensitive, with NII and EVE within policy limits under various interest rate shock scenarios as of March 31, 2025 Net Interest Income (NII) Sensitivity (Twelve Months Forward) | Rate Change (bps) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 | $73,001 | 13.9% | | +100 | $36,422 | 6.9% | | -100 | $(35,378) | -6.7% | | -200 | $(66,284) | -12.6% | Economic Value of Equity (EVE) Sensitivity (Immediate Shock) | Rate Change (bps) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 | $(10,228) | -0.5% | | +100 | $(5,088) | -0.2% | | -100 | $8,370 | 0.4% | | -200 | $(1,762) | -0.1% | - The company's interest rate risk management policy limits the change in NII to 20% for a +/-100 bps move and 30% for a +/-200 bps move, remaining within these limits as of March 31, 2025[388] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2025, with no material changes to internal controls - The CEO and CFO concluded that as of March 31, 2025, the Company's disclosure controls and procedures were effective[396] - No material changes to the Company's internal control over financial reporting occurred during the first quarter of 2025[397] PART II – OTHER INFORMATION Item 1. Legal Proceedings No legal proceedings were reported during the period - There are no legal proceedings to report[399] Item 1A. Risk Factors No material changes to previously disclosed risk factors occurred - No material changes from the risk factors disclosed in the 2024 Annual Report on Form 10-K have occurred[400] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported - There were no unregistered sales of equity securities to report[401] Item 6. Exhibits Lists exhibits including corporate governance documents and CEO/CFO certifications - Exhibits filed include corporate governance documents and CEO/CFO certifications as required by Sections 302 and 906 of the Sarbanes-Oxley Act[406]