Merchants Bancorp(MBIN) - 2023 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Interim Financial Statements (Unaudited) Presents the unaudited condensed consolidated financial statements for Q1 2023, including key statements and notes Condensed Consolidated Balance Sheets Total assets grew 13% to $14.2 billion in Q1 2023, driven by loan growth and funded by increased deposits and borrowings Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $14,240,966 | $12,615,227 | +12.9% | | Cash and cash equivalents | $369,586 | $226,164 | +63.4% | | Loans held for sale | $2,855,250 | $2,910,576 | -1.9% | | Loans receivable, net | $8,575,210 | $7,426,858 | +15.5% | | Total Liabilities | $12,735,282 | $11,155,488 | +14.2% | | Total deposits | $11,345,231 | $10,071,345 | +12.6% | | Borrowings | $1,233,762 | $930,392 | +32.6% | | Total Shareholders' Equity | $1,505,684 | $1,459,739 | +3.1% | Condensed Consolidated Statements of Income Net income for Q1 2023 rose to $55.0 million, as a 53% surge in net interest income offset lower noninterest income Condensed Consolidated Income Statement Highlights (in thousands, except EPS) | Account | Q1 2023 | Q1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $100,693 | $65,725 | +53.2% | | Provision for credit losses | $6,867 | $2,451 | +180.2% | | Noninterest Income | $14,264 | $34,597 | -58.8% | | Noninterest Expense | $34,772 | $31,033 | +12.0% | | Net Income | $54,955 | $50,142 | +9.6% | | Diluted EPS | $1.07 | $1.02 | +4.9% | Condensed Consolidated Statements of Cash Flows Q1 2023 saw a net cash outflow from operations and increased investing use, offset by cash from financing activities Net Cash Flow Summary (in thousands) | Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(301,533) | $1,295,630 | | Net cash used in investing activities | $(1,120,176) | $(247,149) | | Net cash provided by (used in) financing activities | $1,565,131 | $(1,669,574) | | Net Change in Cash and Cash Equivalents | $143,422 | $(621,093) | Notes to Condensed Consolidated Financial Statements Details the company's accounting policies, including CECL adoption, portfolio composition, and segment reporting - The company adopted CECL on January 1, 2022, which replaced the incurred loss model with an expected loss model for measuring credit losses, resulting in a net decrease to retained earnings of $3.6 million[28][30] - The loan portfolio is segmented into Mortgage warehouse, Residential real estate, Multi-family financing, Healthcare financing, Commercial, Agricultural, and Consumer loans, with the Allowance for Credit Losses (ACL) determined using various methodologies[80] - The company's business is divided into three reportable segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking, with the Banking segment being the largest contributor to net income for Q1 2023[161][162] Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes Q1 2023 financial performance, highlighting net income growth, improved margins, and strong liquidity - Net income for Q1 2023 increased by 10% to $55.0 million compared to Q1 2022, primarily due to a $35.0 million (53%) increase in net interest income[178][218] - Total assets grew 13% to $14.2 billion from year-end 2022, driven by a $1.1 billion (15%) increase in loans receivable, particularly in multi-family and healthcare financing[178][187][195] - The company maintains strong liquidity, with $7.8 billion in liquid assets and unused borrowing capacity, which is significantly greater than its $2.0 billion in uninsured deposits[178][253][254] - In March 2023, the company issued $158.1 million in senior credit linked notes to reduce risk-weighted assets and benefit regulatory capital ratios, supporting future loan growth[154][184] Financial Condition Total assets grew 13% to $14.2 billion in Q1 2023, driven by a $1.1 billion increase in net loans receivable Key Balance Sheet Changes (Q1 2023 vs YE 2022) | Account | Change ($M) | Change (%) | Key Driver | | :--- | :--- | :--- | :--- | | Total Assets | +$1,600 | +13% | Loan growth | | Loans Receivable, Net | +$1,100 | +15% | Growth in multi-family and healthcare loans | | Total Deposits | +$1,300 | +13% | $1.0B increase in brokered CDs | | Borrowings | +$303.4 | +33% | Increased Fed discount window usage and new credit linked notes | - Uninsured deposits totaled approximately $2.0 billion, representing less than 25% of total deposits, with the company offering an Insured Cash Sweep program holding $1.6 billion[205] - Nonperforming loans increased to $65.3 million (0.76% of total loans) from $26.7 million (0.36%) at year-end 2022, mainly due to delinquencies from two customers[212][215] Results of Operations Q1 2023 net income grew 10% to $55.0 million, as a 53% surge in net interest income offset a 59% drop in noninterest income Net Interest Income Analysis (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $100.7M | $65.7M | +$35.0M | | Net Interest Margin | 3.27% | 2.62% | +65 bps | | Interest Rate Spread | 2.76% | 2.55% | +21 bps | - Noninterest income decreased by $20.3 million (59%), primarily due to an $11.2 million decrease in gain on sale of loans and a $7.4 million decrease in loan servicing fees[234] - The provision for credit losses increased by $4.4 million (180%) to $6.9 million, reflecting loan growth and changes in portfolio mix[233] Segment Analysis The Banking segment's net income surged 71%, while Multi-family Mortgage Banking and Mortgage Warehousing income declined Net Income by Segment (in thousands) | Segment | Q1 2023 | Q1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $1,966 | $11,492 | -82.9% | | Mortgage Warehousing | $8,641 | $13,159 | -34.3% | | Banking | $49,307 | $28,764 | +71.4% | | Total Net Income | $54,955 | $50,142 | +9.6% | - The decrease in Multi-family Mortgage Banking income was primarily due to a $12.9 million drop in gain on sale of loans[245] - Mortgage Warehousing experienced a 42% decrease in loan funding volume to $5.4 billion, which was better than the 52% industry-wide decrease[248] Liquidity and Capital Resources The company maintains a strong liquidity position and robust capital resources, with all ratios exceeding 'well-capitalized' minimums - As of March 31, 2023, the company had $4.0 billion in available unused borrowing capacity with the FHLB and the Federal Reserve discount window[263] - The company's investment portfolio has minimal unrealized losses, with AOCI at $(7.7) million, representing less than 1% of total equity[255] Company Capital Ratios (as of March 31, 2023) | Ratio | Actual | Minimum for Adequately Capitalized | | :--- | :--- | :--- | | Total capital (to risk weighted assets) | 12.4% | 8.0% | | Tier I capital (to risk weighted assets) | 11.9% | 6.0% | | Common Equity Tier I capital | 7.9% | 4.5% | | Tier I capital (to average assets) | 11.6% | 4.0% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, which is managed within policy limits for NII and EVE sensitivity Net Interest Income (NII) Sensitivity (Twelve Months Forward) | Rate Change (bps) | NII Change (%) | Status | | :--- | :--- | :--- | | +200 | +17.0% | Within Policy Limit (30%) | | +100 | +8.7% | Within Policy Limit (20%) | | -100 | -11.1% | Within Policy Limit (20%) | | -200 | -22.2% | Within Policy Limit (30%) | Economic Value of Equity (EVE) Sensitivity (Immediate Shock) | Rate Change (bps) | EVE Change (%) | Status | | :--- | :--- | :--- | | +200 | -1.2% | Within Policy Limit (20%) | | +100 | -0.4% | Within Policy Limit (15%) | | -100 | +0.1% | Within Policy Limit (15%) | | -200 | +0.3% | Within Policy Limit (20%) | Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The CEO and CFO concluded that as of March 31, 2023, the Company's disclosure controls and procedures were effective[302] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[303] PART II – OTHER INFORMATION Legal Proceedings The company reported no legal proceedings for the period - There are no legal proceedings to report[305] Risk Factors No material changes were reported for risk factors disclosed in the 2022 Annual Report on Form 10-K - No material changes have been made to the risk factors disclosed in the 2022 Annual Report on Form 10-K[306] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds - There were no unregistered sales of equity securities or use of proceeds to report[307] Exhibits Lists exhibits filed with the Form 10-Q, including required CEO and CFO certifications - Key exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[312]