Merchants Bancorp(MBIN) - 2022 Q3 - Quarterly Report

PART I Item 1. Financial Statements This section presents Merchants Bancorp's unaudited condensed consolidated financial statements for Q3 and 9M 2022 and 2021, including balance sheets, income statements, and cash flows with accompanying notes Condensed Consolidated Balance Sheets Total assets increased to $12.0 billion by September 30, 2022, driven by loan growth and a new held-to-maturity security, while liabilities rose due to deposits and shareholders' equity grew to $1.4 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | December 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $11,978,722 | $11,278,638 | +6.2% | | Cash and cash equivalents | $323,961 | $1,032,614 | -68.6% | | Loans held for sale | $2,844,750 | $3,303,199 | -13.9% | | Loans receivable, net | $6,919,128 | $5,751,319 | +20.3% | | Held to maturity securities | $1,005,487 | $0 | N/A | | Total Liabilities | $10,566,132 | $10,123,229 | +4.4% | | Total deposits | $10,319,479 | $8,982,613 | +14.9% | | Borrowings | $97,279 | $1,033,954 | -90.6% | | Total Shareholders' Equity | $1,412,590 | $1,155,409 | +22.3% | Condensed Consolidated Statements of Income Q3 2022 net income remained flat at $58.5 million due to increased net interest income offset by lower noninterest income, while 9M 2022 net income decreased 5% to $162.6 million Q3 Financial Performance (in thousands, except EPS) | Metric | Q3 2022 | Q3 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $85,385 | $68,881 | +24.0% | | Provision for credit losses | $2,225 | $1,079 | +106.2% | | Noninterest Income | $29,186 | $40,271 | -27.5% | | Net Income | $58,488 | $58,503 | -0.03% | | Diluted EPS | $1.22 | $1.22 | 0.0% | Nine-Month Financial Performance (in thousands, except EPS) | Metric | 9M 2022 | 9M 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $223,141 | $205,251 | +8.7% | | Provision for credit losses | $10,888 | $2,427 | +348.6% | | Noninterest Income | $102,954 | $117,062 | -12.1% | | Net Income | $162,565 | $171,903 | -5.4% | | Diluted EPS | $3.36 | $3.62 | -7.2% | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, including CECL adoption, and provide breakdowns of loan and investment portfolios, asset quality, securitization, capital, and segment performance - The Company adopted the Current Expected Credit Losses (CECL) standard on January 1, 2022, resulting in a $3.6 million decrease to retained earnings, net of tax. This adjustment primarily reflects the establishment of an allowance for off-balance sheet credit exposures (ACL-OBCEs)[31][34][35] - In September 2022, the Company completed a private securitization, selling a $1.2 billion portfolio of multi-family bridge loans. As part of the transaction, the Company purchased a $1.0 billion security from the deal, which is classified as held-to-maturity[105] - In September 2022, the Company issued 5.7 million depositary shares of 8.25% Series D Preferred Stock, raising approximately $137.4 million in net proceeds to support capital levels and growth[182] - As of September 30, 2022, the Company's total loan servicing portfolio had an unpaid principal balance of $20.6 billion, which is a significant source of noninterest income and deposits[318] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and 9M 2022 financial performance, highlighting strong net interest income growth offset by declining noninterest income, and covers financial condition, asset quality, segment performance, and capital Financial Condition Analysis Total assets grew 6% to $12.0 billion by Q3 2022, fueled by a 20% increase in net loans and a 15% rise in deposits, while shareholders' equity increased 22% to $1.4 billion - Net loans receivable increased by $1.2 billion (20%) since year-end 2021, with significant growth in healthcare financing (+$603.5 million), commercial and commercial real estate (+$290.5 million), and residential real estate (+$187.0 million)[235] - Servicing rights increased 31% to $145.0 million, benefiting from $22.7 million in new originations and a $19.9 million positive fair value adjustment due to higher interest rates[244] - Borrowings decreased 91% to $97.3 million as the company shifted its funding mix towards deposits, which grew by $1.3 billion[250][254] Asset Quality Asset quality remains strong despite nonperforming loans increasing to 0.38% of total loans, primarily due to one fully collateralized healthcare loan, with ACL at 147% of nonperforming loans - Total nonperforming loans were $26.6 million (0.38% of total loans) at Q3 2022, a significant increase from $0.8 million (0.01% of total loans) at year-end 2021, mainly due to one healthcare loan[258] - For the nine months ended September 30, 2022, net charge-offs were $550,000 ($1.3 million in charge-offs and $750,000 in recoveries), compared to net charge-offs of $793,000 in the same period of 2021[261] Results of Operations Q3 2022 net interest income grew 24% to $85.4 million, offset by a 28% drop in noninterest income due to lower mortgage volumes, while 9M 2022 net interest income rose 9% to $223.1 million - Q3 2022 net interest margin increased 32 basis points year-over-year to 3.05%, benefiting from higher average loan balances at higher yields[264] - Q3 2022 noninterest income fell by $11.1 million, primarily due to a $15.7 million decrease in gain on sale of loans, reflecting lower volumes in multi-family, single-family, and SBA lending[284][286] - Noninterest expense for Q3 2022 increased 19% to $35.0 million, driven by higher salaries and professional fees, leading to an efficiency ratio of 30.51% compared to 27.00% in Q3 2021[287] Segment Performance Q3 2022 saw Banking segment net income grow 68% to $39.3 million, while Mortgage Warehousing net income fell 49% to $11.8 million due to lower volumes, and Multi-family Mortgage Banking net income decreased 7% to $13.4 million Net Income by Segment - Q3 (in thousands) | Segment | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $13,366 | $14,448 | -7.5% | | Mortgage Warehousing | $11,801 | $23,217 | -49.2% | | Banking | $39,344 | $23,463 | +67.7% | Net Income by Segment - 9 Months (in thousands) | Segment | 9M 2022 | 9M 2021 | Change | | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $44,414 | $37,380 | +18.8% | | Mortgage Warehousing | $36,828 | $73,848 | -50.1% | | Banking | $94,040 | $68,229 | +37.8% | Liquidity and Capital Resources The company maintains strong liquidity with $2.8 billion in unused borrowing capacity and capital ratios well above minimums, transitioning to Basel III reporting after exceeding $10 billion in assets - The company had $2.8 billion in available unused borrowing capacity with the FHLB and Federal Reserve discount window as of September 30, 2022[345] - The company switched from the Community Bank Leverage Ratio (CBLR) framework to fully phased-in Basel III risk-based capital ratios at September 30, 2022, as total assets surpassed the $10 billion threshold[374] Key Capital Ratios (Company) - September 30, 2022 | Ratio | Actual | Minimum for Adequacy | | :--- | :--- | :--- | | Total capital to risk-weighted assets | 12.5% | 8.0% | | Tier I capital to risk-weighted assets | 12.1% | 6.0% | | Common Equity Tier I to risk-weighted assets | 7.8% | 4.5% | | Tier I capital to average assets | 12.3% | 4.0% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk using NII at Risk and EVE models, showing asset sensitivity with NII projected to increase 7.4% in a +100 bps rate shock, while EVE remains within policy limits Net Interest Income (NII) Sensitivity Analysis (12 Months Forward) | Rate Change (bps) | % Change in NII (Sep 30, 2022) | | :--- | :--- | | +200 | +18.6% | | +100 | +7.4% | | -100 | -15.6% | | -200 | -26.0% | Economic Value of Equity (EVE) Sensitivity Analysis | Rate Change (bps) | % Change in EVE (Sep 30, 2022) | | :--- | :--- | | +200 | -5.8% | | +100 | -5.4% | | -100 | -4.8% | | -200 | -3.6% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2022, the Company's disclosure controls and procedures were effective[394] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[395] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company reported no material legal proceedings - There are no legal proceedings to report[398] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the 2021 Form 10-K were reported - No material changes from the risk factors disclosed in the 2021 Form 10-K were reported[399] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities - There were no unregistered sales of equity securities during the period[400] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including articles, bylaws, and CEO/CFO certifications required by Sarbanes-Oxley Act - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and XBRL data files[405]