Merchants Bancorp(MBIN) - 2022 Q4 - Annual Report

PART I Item 1. Business Merchants Bancorp is a diversified bank holding company with $12.6 billion in assets, focusing on low-risk, government-program-compliant loans through an originate-to-sell model - Merchants Bancorp is a diversified bank holding company with operations in Multi-family Mortgage Banking, Mortgage Warehousing, and Banking segments[13] - The company's business model primarily involves funding low-risk loans meeting government program underwriting standards, utilizing an originate-to-sell model[16] - Noninterest income is significantly contributed by gain on sale of loans and servicing fees from multi-family rental real estate loans[16] Merchants Bancorp Key Financials (as of December 31, 2022) | Metric | Amount (Billions) | | :------------------- | :------------------ | | Total Assets | $12.6 | | Deposits | $10.1 | | Shareholders' Equity | $1.5 | Company Overview Merchants Bancorp, founded in 2006, operates nationally in mortgage banking and locally through community banks, aiming for economic resilience and business synergies - Merchants Bancorp, founded in 2006, is a diversified bank holding company with a strategy to operate nationally through mortgage banking and locally through community banks, aiming for resilience against economic and credit swings[13][14] - Key subsidiaries include Merchants Bank of Indiana (Indiana charter, 6 branches) and Farmers-Merchants Bank of Illinois (Illinois charter, 4 branches), providing traditional community banking and specialized lending services[15] Our Business Segments Merchants Bancorp operates three segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking, providing specialized financial and traditional community banking services - The company's business is structured into three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking[17] Multi-Family Mortgage Banking This segment specializes in originating and servicing loans for affordable multi-family and healthcare facilities, acting as a top-ranked agency lender and tax credit equity syndicator - The Multi-Family Mortgage Banking segment, through MCC and MCS, specializes in originating and servicing loans for affordable multi-family rental housing and healthcare facilities[18] - The segment is a top-ranked agency lender with licenses from Fannie Mae, Freddie Mac, FHA, and USDA, providing comprehensive financing solutions[21] - MCC is also a fully integrated tax credit equity syndicator, specializing in Section 42 Low-Income Housing Tax Credits (LIHTC), Historic Rehabilitation Tax Credits, and State tax credits, with institutional investors[24] Mortgage Warehousing This segment provides asset-based warehouse financing to non-depository institutions for residential and multi-family mortgage loans, with funding volume significantly decreasing in 2022 - The Mortgage Warehousing segment provides asset-based financing (warehouse facilities) to non-depository financial institutions and mortgage bankers[29] - These facilities are secured by residential and multi-family mortgage loans underwritten to standards comparable to Fannie Mae, Freddie Mac, FHA, and VA[31] Mortgage Warehousing Loan Principal Funded | Year | Loan Principal Funded (Billions) | | :--- | :------------------------------- | | 2020 | $111 | | 2021 | $78 | | 2022 | $33.2 | Banking The Banking segment offers retail, commercial, agricultural, residential mortgage, and SBA lending, operating in specific Indiana and Illinois markets with national correspondent reach - The Banking segment offers retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending[32] - It operates in the Indianapolis metropolitan and Randolph County, Indiana markets, and Ford County in Central Illinois, with a national correspondent mortgage banking business[32] Commercial Lending and Retail Banking Merchants Bank's portfolio includes diverse commercial and residential loans, with deposits sourced from Indiana, Illinois, and escrow activities - Merchants Bank's portfolio includes multi-family construction and bridge loans, commercial real estate, commercial and industrial loans, agricultural loans, residential mortgages, and consumer loans[33] - Deposits are primarily from customers in Hamilton, Marion, Randolph, and surrounding counties in Indiana, and from escrows generated by MCC and MCS servicing activities[33] Agricultural Lending Merchants Bank and FMBI offer agricultural loans, utilizing Farmer Mac for interest rate risk management and Farm Service Agency certification for credit risk mitigation - Merchants Bank and FMBI offer agricultural loans, including operating lines of credit for crop and livestock production, intermediate-term equipment financing, and long-term agricultural real estate financing[34] - Merchants Bank sells agricultural loans through Farmer Mac to manage interest rate risk and both banks are Certified/Standard Eligible Lenders with the Farm Service Agency for credit risk mitigation[34] Single-Family Mortgage Lending, Correspondent Lending and Servicing Merchants Mortgage provides full-service single-family mortgage origination and servicing, offering diverse products and generating revenue from fees, interest, gain on sale, and servicing - Merchants Mortgage is a full-service single-family mortgage origination and servicing platform, operating as both a retail and correspondent lender[35] - It offers a variety of mortgage products, including agency-eligible, jumbo fixed, and hybrid adjustable-rate mortgages, as well as construction, bridge, lot financing, and first-lien HELOCs[35] - Revenues are derived from borrower fees, interest income during the warehouse period, gain on sale of loans to investors, and servicing fee income, with multiple investor outlets for best execution[35] SBA Lending Merchants Bank participates in SBA programs, holding Preferred Lender status for faster approvals, expanding its origination team, and diversifying revenue - Merchants Bank participates in SBA's 7(a), 504, and Express programs to support small businesses and diversify revenue[36] - Achieved Preferred Lender Program status in January 2018, granting delegated loan approval, closing, and servicing authority for faster loan decisions[36] - Expanded SBA origination team in 2019 to Illinois, Indiana, Ohio, and Texas, and participated in the government-sponsored Paycheck Protection Program (PPP) in 2020 and 2021[37][38] Strategy for Complementary Segments The company's segments are strategically designed to diversify net income and create synergies, such as inter-segment funding, tax credit syndication, and lead generation - Segments are designed to diversify net income and create synergies, such as the Banking segment funding MCC/MCS loans and providing Ginnie Mae custodial services[39] - Low-income tax credit syndication and debt fund offerings complement multi-family mortgage lending activities[39] - Mortgage Warehousing provides leads to correspondent residential lending, and Merchants Mortgage acts as a risk mitigant by providing a platform to sell underlying collateral[39] Competition The company faces intense competition across all banking and mortgage sectors, differentiating itself through product range, expertise, relationships, and a diversified business model - The company operates in highly competitive industries, facing strong direct competition for deposits, loans, and financial services from non-depository institutions, community banks, thrifts, credit unions, large banks, and online businesses[41] - Differentiation is achieved through the range and quality of products, knowledgeable personnel, emphasis on long-lasting relationships, and a diversified business model[41] Human Capital With 556 employees, the company prioritizes employee feedback, maintains low turnover, and fosters shareholder alignment through an ESOP and 401(k) contributions - As of December 31, 2022, the company had approximately 556 full-time employees, none represented by collective bargaining units[42] - The company actively solicits employee feedback, has been named a 'Best Place to Work in Indiana' since 2016, and achieved an 11% turnover rate in 2022[43] - An Employee Stock Ownership Plan (ESOP) was established in 2020, fully funded by the company, and a discretionary 3% 401(k) contribution was initiated in 2022 to align employees with shareholders[43] Environment, Social, and Governance ("ESG") Activities Merchants Bancorp is committed to ESG, supporting affordable housing and healthcare financing, investing in tax credit equity funds, and promoting Diversity, Equity, and Inclusion - The company is committed to ESG, with a strong focus on sustainable, long-term growth and value creation[46] - A significant portion of its business supports affordable housing projects and need-based skilled nursing/healthcare facilities, with MCC acquiring private equity interests in affordable housing through tax credit equity funds[47][48] - The company embraces Diversity, Equity, and Inclusion (DEI), with an employee-level committee and a dedicated DEI leader hired in 2022, and its Board meets all Nasdaq diversity requirements[49] Corporate Information Merchants Bancorp's principal offices are in Carmel, Indiana, and SEC filings are publicly available on its investor relations website and the SEC's website - Principal executive offices are at 410 Monon Blvd., Carmel, Indiana 46032[50] - Annual reports (10-K), quarterly reports (10-Q), current reports (8-K), and proxy statements are available free of charge on the company's website (www.merchantsbancorp.com) under 'Investors' and on the SEC's website (www.sec.gov)[50](index=50&type=chunk) SUPERVISION AND REGULATION Merchants Bancorp and its subsidiaries are extensively regulated by federal and state laws, impacting operations and earnings, primarily to protect FDIC-insured deposits - Insured banks, their holding companies, and affiliates are extensively regulated under federal and state law, affecting growth and earnings[52] - The supervisory and regulatory framework subjects entities to regular examinations by agencies like IDFI, IDFPR, Federal Reserve, FDIC, and CFPB, with broad discretion to impose restrictions[52][56] General The company's operations are significantly influenced by federal and state regulations from various agencies, tax laws, and accounting rules, primarily for FDIC-insured deposit protection - The company's business is significantly impacted by federal and state statutes, regulations, and policies from various bank regulatory agencies (IDFI, IDFPR, Federal Reserve, FDIC, CFPB), tax laws, and FASB accounting rules[52][54] - The regulatory framework is primarily intended for the protection of FDIC-insured deposits and depositors, rather than shareholders[55] Merchants Bancorp As a bank holding company, Merchants Bancorp is supervised by the Federal Reserve, subject to reporting, acquisition regulations, and requirements to support subsidiary banks - Merchants Bancorp is a bank holding company (BHC) subject to Federal Reserve supervision, examination, and reporting requirements under the BHC Act[58] - Acquisition of 5% or more of voting shares in other banks or BHCs, or nonbanking companies (unless closely related to banking), generally requires prior Federal Reserve approval[59][61] - A BHC is required to serve as a source of financial and managerial strength to its subsidiary banks, providing adequate capital during financial stress[66] Bank Holding Company Act of 1956, as amended Merchants Bancorp is a bank holding company under the BHC Act, subject to Federal Reserve supervision, examination, and annual reporting requirements - Merchants Bancorp is a BHC under the Bank Holding Company Act of 1956, subject to Federal Reserve supervision, examination, and annual reporting[58] Acquisition of Banks The BHC Act requires prior Federal Reserve approval for significant bank or BHC acquisitions, and restricts nonbanking company acquisitions unless closely related to banking - Acquisition of 5% or more of voting shares of any other bank or BHC generally requires prior Federal Reserve approval, considering competitive, supervisory, financial, managerial, and community needs[60] - The BHC Act also restricts acquiring more than 5% of voting shares in 'nonbanking' companies unless the Federal Reserve deems the activities 'closely related to banking'[61] Permitted Activities Merchants Bancorp and its nonbank subsidiaries can engage in Federal Reserve-approved nonbanking activities closely related to banking, but the Federal Reserve can order termination of risky activities - Permitted nonbanking activities include factoring accounts receivable, making/servicing loans, leasing property, operating non-bank depositories, trust functions, financial/investment advisory, discount securities brokerage, underwriting government obligations, management consulting, insurance agency/brokerage, and selected insurance underwriting[65] - The Federal Reserve can order a BHC or its subsidiaries to terminate activities or ownership if they pose a serious risk to financial safety, soundness, or stability[65] - Merchants Bancorp has not elected to be treated as a financial holding company[65] Support of Subsidiary Institutions Federal Reserve regulations mandate Merchants Bancorp, as a BHC, to provide financial and managerial strength to its subsidiary banks, ensuring adequate capital during stress - Federal Reserve regulations require a BHC to serve as a source of financial and managerial strength to its subsidiary banks, ready to provide adequate capital during financial stress[66] Repurchase or Redemption of Shares Share repurchases exceeding 10% of net worth require prior Federal Reserve notice, subject to disapproval, and are now subject to a 1% excise tax under the Inflation Reduction Act - Prior written notice to the Federal Reserve is generally required for share repurchases/redemptions if gross consideration exceeds 10% of consolidated net worth over 12 months[67] - The Federal Reserve can disapprove such actions if they are deemed unsafe, unsound, or violate regulations[68] - Beginning after December 31, 2022, the Inflation Reduction Act of 2022 imposes a 1% excise tax on the fair market value of repurchased stock[70] Merchants Bank and FMBI Merchants Bank and FMBI are state-chartered, non-Federal Reserve member banks regulated by the FDIC and state departments, subject to various banking and consumer protection laws - Merchants Bank (Indiana-chartered) and FMBI (Illinois-chartered) are non-Federal Reserve member banks, regulated by the FDIC and their respective state financial institutions departments (IDFI and IDFPR)[71] Bank Secrecy Act and USA Patriot Act Merchants Bank and FMBI must comply with BSA and Patriot Act anti-money laundering and customer identification requirements, with non-compliance risking significant penalties - The BSA requires financial institutions to maintain records of certain customers and currency transactions, and report domestic and foreign currency transactions for criminal, tax, or regulatory investigations[72] - The Patriot Act mandates financial institutions to prevent and detect international money laundering and terrorism financing, including communicating suspected terrorist names to law enforcement and verifying customer identities[73][74] - Merchants Bank and FMBI have established anti-money laundering and customer identification programs and implemented policies to comply with these requirements[75] FDIC Improvement Act of 1991 FDICIA mandates prompt corrective action for undercapitalized banks, establishing capital tiers, with Merchants Bank and FMBI categorized as 'well capitalized' as of December 31, 2022 - FDICIA requires federal bank regulatory authorities to take 'prompt corrective action' for banks not meeting minimum capital requirements, establishing five capital tiers[76] - 'Undercapitalized' banks face growth limitations and must submit capital restoration plans, with BHCs guaranteeing compliance. 'Critically undercapitalized' institutions may face receivership[77][79] - As of December 31, 2022, Merchants Bank and FMBI were categorized as 'well capitalized' under applicable regulations[80] Capital Requirements and Basel III Federal regulators impose Basel III capital requirements, with the Simplification Rule adjusting servicing rights deductions, and the company transitioned to Basel III risk-based ratios after exceeding $10 billion in assets - Federal regulators impose minimum capital requirements on insured depository institutions and holding companies, based on the international Basel III capital framework[81] - The Simplification Rule (effective Jan 1, 2020) raised the common equity deduction threshold for servicing rights to 25% of common equity (from 10%/15%), with non-deducted portions risk-weighted at 250%[84] - The company transitioned from using the Community Bank Leverage Ratio (CBLR) to reporting fully phased-in Basel III risk-based capital ratios as of September 30, 2022, after its total assets exceeded $10 billion[87] Deposit Insurance Fund and Financing Corporation Assessments The FDIC insures deposits up to $250,000, funded by risk-based premiums, which increased by 2 basis points in 2023, leading to higher premiums for the company as a large bank - The FDIC insures deposits of Merchants Bank and FMBI up to $250,000 per depositor, funded by risk-based insurance premiums[89] - In 2022, the FDIC adopted a rule to increase initial base deposit insurance assessment rates uniformly by 2 basis points, effective Q1 2023, to help the DIF reach its statutory minimum[90] - As a large bank (over $10 billion in assets), the company's individual assessment rate will be based on a scorecard combining CAMELS ratings, financial measures, and loss severity, leading to expected higher premiums[91] Dividends Merchants Bancorp's dividends rely on subsidiary bank payouts, which are restricted by state and federal laws based on earnings, capital, and regulatory status, subject to regulator prohibition - Merchants Bancorp's principal source of funds for dividends consists of dividends from Merchants Bank[92] - State and federal laws restrict the amount of dividends banks may pay, based on charter type, recent earnings, capital levels, and regulatory status[92] - Regulators can prohibit dividend payments if they determine it would be an unsafe or unsound practice or cause the bank to become undercapitalized[92][95] Community Reinvestment Act The CRA requires evaluation of financial institutions' community credit needs, with non-compliance leading to limitations, and the company operates under an approved CRA strategic plan - The CRA requires federal banking regulators to evaluate financial institutions' records in meeting local community credit needs, including low and moderate-income neighborhoods[98] - Failure to adequately meet CRA criteria could result in additional requirements and limitations on Merchants Bank and FMBI[98] - The Company is currently operating under an approved CRA strategic plan[98] The Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Act significantly reformed financial regulation, imposing new capital requirements, altering FDIC assessments, creating the CFPB, and increasing operating and compliance costs - The Dodd-Frank Act imposed new capital requirements on bank holding companies and changed the base for FDIC insurance assessments[99] - It created the CFPB, which has broad rulemaking, supervisory, and enforcement authority over consumer financial products and services, including mortgages[99] - Compliance with the Dodd-Frank Act and its regulations has resulted in additional operating and compliance costs, impacting the company's business[100] Privacy and Cybersecurity Merchants Bank and FMBI must comply with federal and state laws protecting customer confidential information, requiring privacy disclosures, sharing restrictions, and robust information security programs - Merchants Bank and FMBI must comply with federal and state laws governing the protection of customer non-public confidential information[100] - These laws require periodic disclosure of privacy policies, restrictions on sharing information with third parties, and implementation of comprehensive information security programs[100][101][102] Consumer Financial Services The CFPB enforces consumer protection laws, examining institutions over $10 billion in assets, with new mortgage rules emphasizing ability-to-repay, though the company expects minimal direct impact beyond compliance costs - The CFPB oversees and enforces consumer protection laws, with broad rulemaking authority and examination power over institutions with more than $10 billion in assets[103] - New CFPB rules, driven by the Dodd-Frank Act, address mortgage and mortgage-related products, emphasizing underwriting requirements like ability-to-repay standards and risk retention[103] - Merchants Bank does not expect the CFPB's rules to have a significant impact on its operations, except for higher compliance costs[103] S.A.F.E. Act The S.A.F.E. Act mandates residential mortgage loan originators at regulated financial institutions to register and maintain annual registration with the Nationwide Mortgage Licensing System - The S.A.F.E. Act requires residential mortgage loan originators employed by regulated financial institutions to register with the Nationwide Mortgage Licensing System and Registry and maintain annual registration[104] Mortgage Origination The CFPB's 'ability to repay' rule requires lenders to verify borrower repayment capacity for mortgage loans, with qualified mortgages receiving protection, and recent revisions have not significantly impacted production - The CFPB's 'ability to repay' rule requires lenders to consider a consumer's ability to repay a mortgage loan before extending credit[105] - The rule establishes protections for 'qualified mortgages,' which include loans eligible for purchase by Fannie Mae/Freddie Mac or insurance/guarantee by FHA, VA, or USDA[105] - A revised definition of 'qualified mortgage' became effective June 30, 2021, removing the 43% debt-to-income ratio and GSE Patch, but has not significantly impacted Merchants Bank's mortgage production[105] Mortgage Servicing CFPB rules have increased mortgage servicing requirements, raising industry costs, and Merchants has voluntarily adopted many of these standards due to competitive pressures - CFPB rules have increased requirements for mortgage servicing, covering borrower communications, account record maintenance, complaint responses, and handling delinquent loans/foreclosures[107] - These rules, effective since 2014, have increased the costs to service loans across the mortgage industry[107] - Merchants Bancorp has voluntarily adopted many of these servicing and foreclosure standards due to competitive pressures, despite not being a party to related settlements or consent orders[108] Consumer Laws Merchants Bank and FMBI must comply with numerous federal consumer protection laws covering privacy, financial confidentiality, debt collection, lending, credit reporting, and fair housing - Merchants Bank and FMBI must comply with various federal consumer protection laws, including those related to privacy, financial record confidentiality, debt collection, lending disclosures, credit reporting, equal credit opportunity, mortgage insurance, mortgage data reporting, fair housing, settlement procedures, savings disclosures, and electronic funds transfers[109][110][111] Future Legislation and Executive Orders Future legislation and executive orders, especially GSE reform, could significantly impact the banking industry by altering business costs, permissible activities, and competitive balance - Future legislation and executive orders, including potential GSE reform, could directly impact banking industry regulation[112] - These changes may increase or decrease business costs, limit or expand permissible activities, or affect the competitive balance among financial institutions in unpredictable ways[112] SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements subject to uncertainties and risks from economic conditions, regulatory compliance, and market factors, with no obligation to update - The report contains forward-looking statements, reflecting current views on future events and financial performance, subject to inherent uncertainties and risks[113] - Key factors that could cause actual results to differ include business and economic conditions, credit risk management, regulatory compliance, cybersecurity risks, strategic execution, changes in senior management, and governmental monetary/fiscal policies[114][115][122] - The company does not undertake any obligation to update or review any forward-looking statement[117] Item 1A. Risk Factors The company faces diverse risks, including those related to mortgage banking, credit, operations, market, liquidity, and legal/regulatory compliance, which could materially impact its financial performance - The company faces risks related to its business, including mortgage banking and community banking, credit and financial conditions, operational aspects, market and liquidity, and legal, regulatory, and compliance[118] Risks Related to Our Business Business risks include decreased mortgage origination, pricing competition, interest rate changes, reliance on secondary markets, HUD violations, inaccurate estimates, intense competition, and potential government shutdowns - Decreased residential and multi-family mortgage origination, competitive pricing, and interest rate changes can adversely affect profitability[119] - Profitability in mortgage banking depends on high loan volume and successful sales in the secondary market, which relies on GSE programs[120][121][124] - Risks include violations of HUD lending requirements for multi-family FHA business, potential losses from inaccurate estimates on real estate construction loans, and strong competition from various financial institutions[125][126][127] - Government shutdowns could adversely affect the multi-family FHA origination business, and maintaining a positive reputation is critical for business success[130][131] Credit and Financial Risks Credit and financial risks include economic downturns, increased loan losses, LIBOR transition costs, nonperforming assets, potential ACL-Loans insufficiency, higher risk in small business lending, and goodwill impairment - A decline in general business and economic conditions, including high inflation, could lead to increased delinquencies, nonperforming loans, and charge-offs, requiring higher provisions for credit losses[132][133] - The transition from LIBOR as a reference rate to alternatives like SOFR could create considerable costs and risks due to changes in market risk profiles, pricing models, and hedging strategies[135][138] - Nonperforming assets adversely affect net income by reducing interest income, increasing administration costs, and requiring significant management time[139] - The Allowance for Credit Losses on Loans (ACL-Loans) is inherently subjective and may prove insufficient to absorb potential losses, potentially requiring additional provisions[140][142] - Lending to small to midsized businesses carries higher risk due to their fewer resources and greater vulnerability to economic downturns[144] - Reliance on the accuracy and completeness of information provided by customers and counterparties, and potential impairment of goodwill from acquisitions, also pose financial risks[145][146][149] Operational Risks Operational risks include ineffective risk management, dependence on key management, faulty data, system failures, cybersecurity breaches, third-party reliance, technology implementation challenges, and acquisition integration risks - The company's risk management framework, including modeling methodologies, may not be effective in mitigating all risks or losses[157] - Success is highly dependent on the continued service and skills of the executive management team, particularly Michael Petrie (Chairman/CEO) and Michael Dunlap (President/COO), with loss of key personnel posing an adverse impact[158][159] - Reliance on data and modeling for decision-making creates risk from faulty data or flawed approaches, potentially leading to suboptimal decisions or regulatory scrutiny[160][161][162] - System failures, cybersecurity breaches, and reliance on third-party service providers could interrupt operations, jeopardize data security, and lead to significant liabilities and reputational damage[163][164] - The company has a continuing need for technological change but may lack resources or face operational challenges in implementing new technology, potentially leading to a competitive disadvantage[165][166] - Acquisitions, while pursued for growth, involve risks such as intense competition, inaccurate valuation estimates, exposure to unknown liabilities, integration challenges, and loss of key employees/customers[170][171] Market, Interest Rate, and Liquidity Risks Market, interest rate, and liquidity risks include reduced net interest income from rate fluctuations, impaired collateral from real estate declines, vulnerable liquidity, repurchase liabilities from warranty breaches, and counterparty soundness issues - Fluctuations in interest rates can reduce net interest income, increase borrower payment requirements and defaults, and decrease the fair market value of servicing rights and fixed-rate debt securities[174][175][176][177][178][179] - Negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing real estate loans, leading to losses and potential liability for remediation costs on foreclosed properties[180][181][182] - Liquidity is essential but vulnerable to fluctuations in customer and brokered deposits, competitive pressures, and disruptions in financial markets, potentially increasing funding costs or impairing growth[183][184][185][187] - Breaching representations or warranties made to mortgage loan purchasers can result in liability for costs and damages, including loan repurchases[188] - The company's ability to engage in routine funding transactions can be adversely affected by the actions and commercial soundness of other financial institutions[190] Legal, Regulatory, and Compliance Risks Legal, regulatory, and compliance risks include capital requirements, increased costs from legislation like Dodd-Frank, heightened scrutiny for large banks, noncompliance penalties, and potential Federal Reserve-mandated capital injections - The company may need to raise additional capital to meet significant capital and regulatory requirements, and failure to do so could adversely affect its financial condition and regulatory compliance[191][192] - Legislative and regulatory actions, such as the Dodd-Frank Act, increase operating and compliance costs, potentially impacting profitability and requiring significant resources[193][194][195][197] - Exceeding $10 billion in assets subjects the company to heightened regulatory scrutiny, direct CFPB examination, and new requirements like the Volcker Rule[199][200] - Failure to meet stringent capital requirements (Basel III) could result in regulatory limitations on activities, affecting growth, dividends, and acquisitions[201][202] - Monetary policies of the Federal Reserve can adversely affect earnings and growth, and regulatory examinations can lead to remedial actions if financial condition or compliance is unsatisfactory[203][205][206] - Noncompliance with consumer protection laws (CRA, fair lending) and anti-money laundering statutes (BSA, Patriot Act) can result in sanctions, fines, restrictions, and reputational damage[207][208][209][210] - The Federal Reserve may require the company to commit capital resources to support its subsidiary banks under the 'source of strength' doctrine[211] Item 1B. Unresolved Staff Comments. There are no unresolved staff comments - There are no unresolved staff comments[212] Item 2. Properties. The company owns its Carmel, Indiana headquarters and other branches, all deemed adequate for current operating needs across its business segments - The company owns its headquarters building in Carmel, Indiana, which includes a Merchants Bank branch and houses operations for all three segments[213] - Additional branches and small offices are located in Indiana and other states, and facilities are considered adequate for foreseeable operating needs[213] Item 3. Legal Proceedings. There are no material pending legal proceedings beyond routine litigation incidental to the business - There are no material pending legal proceedings other than ordinary routine litigation incidental to the business[214] Item 4. Mine Safety Disclosures. There are no mine safety disclosures to report - There are no mine safety disclosures[215] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Merchants Bancorp's common stock trades on Nasdaq, with 43.2 million shares outstanding, a quarterly dividend policy, and $3.9 million in share repurchases in 2022 - Common stock (MBIN) began trading on Nasdaq on October 27, 2017. As of March 8, 2023, there were 43,233,618 shares outstanding and 38 shareholders of record[217] - The company's policy is to pay quarterly dividends, subject to results, financial condition, capital requirements, banking regulations, and preferred stock dividends[218] - In 2022, the company repurchased 165,037 common shares for $3.9 million at an average price of $23.85 per share, under a $75 million authorization expiring December 31, 2023[225][386][699] Dividend Policy The company's policy is to pay quarterly common stock dividends, subject to board discretion and dependent on financial performance, capital, and regulatory factors - The company's policy is to pay quarterly dividends to common stockholders, but this policy may change at the board's discretion without notice[218] - Future dividend payments depend on results of operations, financial condition, capital requirements, banking regulations, preferred stock dividends, and other relevant factors[218] Dividend Restrictions Common stock dividends are restricted by preferred stock payments, Federal Reserve policies, and subsidiary bank dividend limitations - The company cannot declare or pay common stock dividends unless dividends have been declared and paid on all classes of preferred stock[220] - As a BHC, dividend payments are affected by Federal Reserve policies and reliance on dividends from subsidiary banks, which face legal and regulatory restrictions[221] Stock Performance Graph The report includes a graph comparing the company's common stock cumulative total shareholder return against Nasdaq indices from 2017 to 2022, assuming dividend reinvestment - A graph compares the cumulative total shareholder return of the company's common stock against the Nasdaq Composite Index and the Nasdaq Bank Index from December 31, 2017, through December 31, 2022[222] - The comparison assumes an initial investment of $100.00 and reinvestment of all quarterly dividends[222] Securities Authorized for Issuance Under Equity Compensation Plans Disclosure on securities authorized for issuance under equity compensation plans is provided in Item 12, as required by Regulation S-K - Disclosure regarding securities authorized for issuance and equity compensation plans is provided in Item 12 of this report, as required by Item 201(d) of Regulation S-K[224] Unregistered Sales and Repurchases of Equity Securities No unregistered sales or repurchases occurred in Q4 2022, with $71.1 million remaining authorized for repurchase under a program expiring December 31, 2023 - The company had no repurchases during October 1 - December 31, 2022. A Rule 10b5-1 plan for repurchases commenced on May 3, 2022[225] Equity Repurchase Program Status (as of December 31, 2022) | Metric | Amount | | :------------------------------------------------ | :------------- | | Remaining authorization at December 31, 2021 | $75,000,000 | | Dollar value of shares repurchased (2022) | $3,935,333 | | Shares repurchased (2022) | 165,037 | | Average price paid per share (2022) | $23.85 | | Remaining authorization at December 31, 2022 | $71,064,667 | Item 6. Selected Financial Data. This section presents a five-year summary of selected financial data, highlighting 2022 performance with $12.6 billion in assets and $219.7 million net income, and the adoption of CECL - The company adopted FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL") on January 1, 2022, replacing the incurred loss impairment methodology[227] Selected Financial Data (2018-2022) | Metric | 2022 | 2021 | 2020 | 2019 | 2018 | | :------------------------------------------ | :----------- | :----------- | :----------- | :----------- | :----------- | | Balance Sheet Data (in thousands): | | | | | | | Total Assets | $12,615,227 | $11,278,638 | $9,645,375 | $6,371,928 | $3,884,163 | | Loans held for investment | 7,470,872 | 5,782,663 | 5,535,426 | 3,028,310 | 2,058,127 | | Deposits | 10,071,345 | 8,982,613 | 7,408,066 | 5,478,075 | 3,231,086 | | Total shareholders' equity | 1,459,739 | 1,155,409 | 810,621 | 653,728 | 421,237 | | Income Statement Data (in thousands): | | | | | | | Net interest income | 318,551 | 277,994 | 224,146 | 122,298 | 89,971 | | Noninterest income | 125,936 | 157,333 | 127,473 | 47,089 | 49,585 | | Net income | 219,721 | 227,104 | 180,533 | 77,329 | 62,874 | | Net income available to common shareholders | $193,738 | $206,231 | $166,060 | $68,113 | $59,544 | | Per Share Data (Common Stock): | | | | | | | Diluted earnings per share | $4.47 | $4.76 | $3.85 | $1.58 | $1.38 | | Dividends declared | $0.28 | $0.24 | $0.21 | $0.19 | $0.16 | | Tangible book value (non-GAAP) | $21.88 | $17.96 | $13.45 | $9.79 | $8.33 | | Performance Metrics: | | | | | | | Return on average assets | 1.99% | 2.23% | 2.12% | 1.47% | 1.71% | | Return on average equity | 17.21% | 22.07% | 25.09% | 14.37% | 15.86% | | Net interest margin | 2.97% | 2.79% | 2.69% | 2.40% | 2.54% | | Efficiency ratio (non-GAAP) | 30.61% | 28.80% | 27.42% | 37.38% | 36.47% | | Capital Ratios—Merchants Bancorp: | | | | | | | Tangible common equity to tangible assets (non-GAAP) | 7.5% | 6.9% | 6.0% | 6.6% | 9.3% | | Tier 1 leverage ratio/CBLR | 11.7% | 10.4% | 8.6% | 9.4% | 10.0% | NON-GAAP FINANCIAL MEASURES This section reconciles non-GAAP financial measures like tangible common equity and efficiency ratio, used by management as supplementary performance indicators - Non-GAAP financial measures used by management include tangible common shareholders' equity, tangible book value per share, tangible common shareholders' equity to tangible assets, return on average tangible common equity, and efficiency ratio[230] - These measures provide useful supplementary information but are not substitutes for GAAP results and may not be comparable to other companies' non-GAAP measures[234] Reconciliation of GAAP to Non-GAAP Financial Measures (as of December 31, 2022) | Metric | 2022 (in thousands) | | :------------------------------------ | :------------------ | | Shareholders' equity per GAAP | $1,459,739 | | Less: goodwill & intangibles | (17,031) | | Less: preferred stock | (499,608) | | Tangible common shareholders' equity | $943,100 | | Assets per GAAP | $12,615,227 | | Less: goodwill & intangibles | (17,031) | | Tangible assets | $12,598,196 | | Tangible book value per common share | $21.88 | | Return on average tangible common equity | 22.50% | | Tangible common equity to tangible assets | 7.5% | | Efficiency ratio | 30.61% | Item 7. Management's Discussion and Analysis of Financial Condition and the Results of Operations. This section analyzes Merchants Bancorp's 2022 financial condition and operating results, detailing net income, asset growth, net interest margin, asset quality, segment performance, liquidity, and capital - Net income for the year ended December 31, 2022, was $219.7 million, a 3% decrease from $227.1 million in 2021[241] - Total assets increased by $1.3 billion (12%) to $12.6 billion, and loans receivable (net of ACL) increased by $1.7 billion (29%) to $7.4 billion[241] - Net interest margin increased by 18 basis points to 2.97% in 2022 from 2.79% in 2021[241] Financial Highlights for the Year Ended December 31, 2022 In 2022, net income decreased 3% to $219.7 million, while total assets grew 12% to $12.6 billion, net interest margin improved, and the company raised $137.5 million in new capital - The decrease in net income was primarily driven by a $31.4 million (20%) decrease in noninterest income, a $12.3 million increase in provision for credit losses, and a $10.7 million (9%) increase in noninterest expense, partially offset by a $40.6 million (15%) increase in net interest income[241] - Completed a $214 million CMBS securitization in May 2022 and a $284.2 million securitization in November 2022, both Freddie Mac-sponsored Q-Series transactions[241][248] - Sold $1.2 billion of multi-family bridge loans into a private securitization in September 2022, purchasing a $1.0 billion senior investment security[248] - Raised $137.5 million in new capital through an 8.25% Series D preferred stock offering in September 2022[248] - LIHTC syndications business raised $290.9 million in equity for 5 funds launched in 2022[248] - Warehouse loans funded decreased by 58% to $33.2 billion in 2022, reflecting a broader industry decline in single-family residential loan volumes[248] Financial Highlights (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 | 2021 | Change ($M) | Change (%) | | :------------------------------------ | :----------- | :----------- | :---------- | :--------- | | Net income | $219.7M | $227.1M | $(7.4) | (3%) | | Diluted earnings per share | $4.47 | $4.76 | - | (6%) | | Total assets | $12.6B | $11.3B | $1.3B | 12% | | Loans receivable (net of ACL) | $7.4B | $5.7B | $1.7B | 29% | | Net interest margin | 2.97% | 2.79% | +0.18% | - | | Efficiency ratio | 30.61% | 28.80% | +1.81% | - | | Tangible book value per common share | $21.88 | $17.96 | - | 22% | Company and Business Segment Overview Merchants Bancorp operates three segments, focusing on funding low-risk, government-program-compliant loans via an originate-to-sell model to generate noninterest income and enhance shareholder returns - Merchants Bancorp operates in Multi-family Mortgage Banking, Mortgage Warehousing, and Banking segments[244] - The business model focuses on funding low-risk loans meeting government program underwriting standards, primarily through an originate-to-sell model[245] - Gain on sale of loans and servicing fees from multi-family rental real estate loans are significant contributors to noninterest income, aiming for lower charge-offs and higher shareholder returns[245] Primary Factors We Use to Evaluate Our Business The company evaluates its business based on operating results and financial condition, monitoring key metrics like net interest income, asset levels, liquidity, capital, and asset quality - Primary factors for evaluating results of operations include net interest income, noninterest income, and noninterest expense[250] - Key metrics for net interest income evaluation are yields on assets, duration of loans/deposits/borrowings, funding costs, net interest margin, and regulatory risk weighting[251] - Primary factors for evaluating financial condition are asset levels, liquidity, capital, and asset quality[259] - Asset quality is managed based on the level, distribution, severity, and trend of problem assets, adequacy of ACL-Loans, diversification of portfolios, counterparty risks, and credit concentrations[263] Recent Developments and Material Trends Recent developments include rapid interest rate increases, a 58% decrease in warehouse loan funding, minimal COVID-19 credit impact, heightened regulatory capital requirements, and the company's transition to Basel III ratios - The Federal Reserve rapidly increased interest rates in 2022 due to inflation, pushing 30-year mortgage rates above 7% for the first time since 2002[264] - Warehouse loan funding volume decreased by 58% in 2022, reflecting a 49% industry decrease in single-family residential loan volumes[248][265] - The COVID-19 pandemic had minimal direct credit exposure impact on the company's loan portfolio[268] - Regulatory trends include heightened capital requirements and burdens from the Dodd-Frank Act, favoring community banks with sufficient capital and diversified business models[269] - The company transitioned to reporting fully phased-in Basel III risk-based capital ratios as of September 30, 2022, after exceeding $10 billion in total assets[270] - Issued 8.25% Series D Preferred Stock in September 2022, raising $137.5 million in new capital, and completed several loan sale and securitization transactions to manage regulatory capital and reduce credit risk[272][276] Comparison of Operating Results for the Years Ended December 31, 2022 and 2021 In 2022, net income decreased 3% to $219.7 million, driven by lower noninterest income and higher provisions/expenses, partially offset by a 15% increase in net interest income and an improved net interest margin Operating Results (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :------------------------------------ | :------------------ | :------------------ | :---------- | :--------- | | Net income | $219,721 | $227,104 | $(7,383) | (3%) | | Noninterest income | $125,936 | $157,333 | $(31,397) | (20%) | | Provision for credit losses | $17,295 | $5,012 | $12,283 | 245% | | Noninterest expense | $136,050 | $125,385 | $10,665 | 9% | | Net interest income | $318,551 | $277,994 | $40,557 | 15% | | Net interest margin | 2.97% | 2.79% | +0.18% | - | Net Interest Income Net interest income increased 15% to $318.6 million in 2022, driven by higher interest income from yields and loan balances, partially offset by increased interest expense, improving net interest margin to 2.97% - Average loan balances (including held for sale) increased by $806.2 million (9%) to $9.3 billion, and the average yield on loans increased by 140 basis points to 4.85%[282] - Interest expense on deposits increased by $121.4 million (430%) to $149.6 million, primarily due to higher interest rates on interest-bearing checking, money market, and CD accounts, as well as higher average balances for CDs and money market accounts[289][291][292] - Interest expense on borrowings increased by $7.0 million (124%) to $12.6 million, driven by a 127 basis point increase in the average cost of borrowings to 2.13%[293] Net Interest Income Components (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :------------------ | :------------------ | :------------------ | :---------- | :--------- | | Net interest income | $318,551 | $277,994 | $40,557 | 15% | | Interest Income | $480,833 | $311,886 | $168,947 | 54% | | Interest Expense | $162,282 | $33,892 | $128,390 | 379% | | Net interest margin | 2.97% | 2.79% | +0.18% | - | Provision for Credit Losses Provision for credit losses increased by $12.3 million to $17.3 million in 2022, driven by loan growth, portfolio mix, and CECL adoption, increasing ACL-Loans to $44.0 million - The ACL-Loans increased to $44.0 million (0.59% of loans receivable) at December 31, 2022, from $31.3 million (0.54%) at December 31, 2021, driven by loan growth and portfolio mix, partially offset by a $4.0 million release from loan sales and securitizations[300] - The adoption of FASB ASU No. 2016-13 (CECL) on January 1, 2022, also contributed to the increase in provision for credit losses[301] Provision for Credit Losses (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | | :-------------------------- | :------------------ | :------------------ | :---------- | | Provision for credit losses | $17,295 | $5,012 | $12,283 | | ACL-Loans | $13,473 | - | - | | ACL-OBCEs | $2,600 | - | - | | ACL-Guarantees | $1,200 | - | - | Noninterest Income Noninterest income decreased 20% to $125.9 million in 2022, primarily due to a $47.0 million decrease in gain on sale of loans, partially offset by an $13.8 million increase in loan servicing fees - The decrease in gain on sale of loans was due to a shift in business mix to programs with lower average trade pricing in the multi-family loan portfolio, and lower single-family and multi-family secondary market volumes[302] - Loan servicing fees included a $19.8 million positive adjustment to the fair value of servicing rights in 2022, compared to $12.4 million in 2021[305] Noninterest Income (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :-------------------- | :------------------ | :------------------ | :---------- | :--------- | | Total noninterest income | $125,936 | $157,333 | $(31,397) | (20%) | | Gain on sale of loans | $64,150 | $111,185 | $(47,035) | (42%) | | Loan servicing fees, net | $30,198 | $16,373 | $13,825 | 84% | | Mortgage warehouse fees | $5,394 | $12,396 | $(7,002) | (56%) | | Syndication and asset management fees | $9,493 | $6,507 | $2,986 | 46% | | Other income | $16,701 | $10,681 | $6,020 | 56% | Noninterest Expense Noninterest expense increased 9% to $136.1 million in 2022, driven by higher salaries and professional fees, resulting in an efficiency ratio increase to 30.6% - The increase in salaries and employee benefits was to support higher multi-family loan production volumes[305] Noninterest Expense (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :---------- | :--------- | | Total noninterest expense | $136,050 | $125,385 | $10,665 | 9% | | Salaries and employee benefits | $89,085 | $85,727 | $3,358 | 4% | | Professional fees | $9,065 | $5,427 | $3,638 | 67% | | Loan expenses | $4,703 | $7,657 | $(2,954) | (39%) | | Efficiency ratio | 30.6% | 28.8% | +1.8% | - | Income Taxes Income tax expense decreased 8% to $71.4 million in 2022, primarily due to a 5% decrease in pre-tax income, with the effective tax rate falling to 24.5% - The decrease in income tax expense was primarily due to a 5% decrease in pre-tax income[306] Income Taxes (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($M) | Change (%) | | :-------------------- | :------------------ | :------------------ | :---------- | :--------- | | Income tax expense | $71,421 | $77,826 | $(6,405) | (8%) | | Effective tax rate | 24.5% | 25.5% | - | - | Asset Quality Total nonperforming loans significantly increased to $26.7 million (0.36% of total loans) in 2022, primarily due to one healthcare loan, reducing the ACL-Loans to nonperforming loans ratio - The increase in nonperforming loans was primarily due to the delinquency of one fully collateralized healthcare loan, for which full repayment is expected[307] - Net charge-offs were $0.5 million in 2022 ($1.3 million charge-offs, $0.8 million recoveries), compared to $1.2 million in 2021 ($1.2 million charge-offs, $0.02 million recoveries)[309] Asset Quality Metrics (as of December 31, 2022 vs. 2021) | Metric | 2022 | 2021 | Change | | :------------------------------------ | :--------- | :--------- | :------- | | Total nonperforming loans | $26.7M | $0.8M | +$25.9M | | Nonperforming loans to total loans | 0.36% | 0.01% | +0.35% | | ACL-Loans to nonperforming loans | 165.0% | 4,118.8% | -3,953.8% | | Total loans greater than 30 days past due | $39.8M | $2.6M | +$37.2M | | Special Mention (Watch) loans | $137.8M | $100.8M | +$37.0M | Operating Segment Analysis for the Years Ended December 31, 2022 and 2021 In 2022, Multi-family Mortgage Banking net income rose 6%, Mortgage Warehousing net income fell 49%, and Banking segment net income increased 48%, reflecting diverse segment performance - The company's reportable segments are Multi-family Mortgage Banking, Mortgage Warehousing, and Banking[310] Net Income by Operating Segment (Year Ended December 31, 2022 vs. 2021, in thousands) | Segment | 2022 Net Income | 2021 Net Income | Change ($M) | Change (%) | | :------------------------ | :-------------- | :-------------- | :---------- | :--------- | | Multi-family Mortgage Banking | $54,642 | $51,504 | $3,138 | 6% | | Mortgage Warehousing | $48,604 | $95,159 | $(46,555) | (49%) | | Banking | $134,221 | $90,858 | $43,363 | 48% | | Other | $(17,746) | $(10,417) | $(7,329) | (70%) | | Total | $219,721 | $227,104 | $(7,383) | (3%) | Multi-family Mortgage Banking Multi-family Mortgage Banking net income increased 6% to $54.6 million in 2022, driven by higher loan servicing fees, despite decreased gain on sale of loans and increased noninterest expenses - Net income for Multi-family Mortgage Banking increased by $3.1 million (6%) to $54.6 million in 2022[315] - Growth was driven by a $14.3 million increase in noninterest income, including a $20.1 million increase in loan servicing fees and a $14.0 million positive fair market value adjustment on servicing rights[315][316] - Gain on sale of loans decreased by $16.1 million, and noninterest expenses increased by $10.7 million, primarily due to salaries and employee benefits[316] - The volume of loans originated and acquired for sale decreased by $1.1 billion (39%) to $1.8 billion in 2022[318] Mortgage Warehousing Mortgage Warehousing net income decreased 49% to $48.6 million in 2022, primarily due to lower net interest income and fees, reflecting a 58% decline in funded loa