Merchants Bancorp(MBIN) - 2023 Q3 - Quarterly Report

PART I Item 1. Interim Financial Statements (Unaudited) This section presents Merchants Bancorp's unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, for the period ending September 30, 2023 Condensed Consolidated Balance Sheets Total assets increased by 31% to $16.5 billion as of September 30, 2023, primarily driven by a significant rise in loans receivable and deposits Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $16,495,236 | $12,615,227 | 30.8% | | Cash and cash equivalents | $407,238 | $226,164 | 80.1% | | Loans held for sale | $3,477,036 | $2,910,576 | 19.5% | | Loans receivable, net | $9,910,681 | $7,426,858 | 33.4% | | Total Liabilities | $14,862,521 | $11,155,488 | 33.2% | | Total deposits | $13,007,338 | $10,071,345 | 29.2% | | Borrowings | $1,654,075 | $930,392 | 77.8% | | Total Shareholders' Equity | $1,632,715 | $1,459,739 | 11.8% | Condensed Consolidated Statements of Income Net income for Q3 2023 increased 39% to $81.5 million, driven by a 38% rise in net interest income, with nine-month net income growing 24% to $201.8 million Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $117,436 | $85,385 | 37.5% | | Provision for credit losses | $4,014 | $2,225 | 80.4% | | Noninterest Income | $36,068 | $29,186 | 23.6% | | Net Income | $81,504 | $58,488 | 39.4% | | Diluted EPS | $1.68 | $1.22 | 37.7% | | Metric | 9M 2023 | 9M 2022 | YoY Change (%) | | Net Interest Income | $323,746 | $223,141 | 45.1% | | Provision for credit losses | $33,484 | $10,888 | 207.5% | | Noninterest Income | $80,214 | $102,954 | -22.1% | | Net Income | $201,761 | $162,565 | 24.1% | | Diluted EPS | $4.06 | $3.36 | 20.8% | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, operating activities resulted in a $1.1 billion net cash outflow, while financing activities provided $3.6 billion, leading to a net increase in cash of $181.1 million Net Cash Flow for Nine Months Ended Sep 30 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(1,070,774) | $1,833,916 | | Net cash used in investing activities | $(2,371,045) | $(3,049,944) | | Net cash provided by financing activities | $3,622,893 | $507,375 | | Net Change in Cash and Cash Equivalents | $181,074 | $(708,653) | Notes to Condensed Consolidated Financial Statements This section details accounting policies and financial data, covering topics such as the planned sale of bank branches, loan portfolio, allowance for credit losses, and regulatory capital adequacy - On September 7, 2023, the Company entered into agreements to sell its Farmers-Merchants Bank of Illinois branch locations, including approximately $219 million in deposits and $49 million in loans, pending regulatory approval[25][26] - The Allowance for Credit Losses on Loans (ACL-Loans) increased to $66.9 million as of September 30, 2023, from $44.0 million at year-end 2022, with a provision for credit losses of $32.4 million for the first nine months of 2023[85] - The company's total loan servicing portfolio had an unpaid principal balance of $24.5 billion as of September 30, 2023, serving as a significant source of noninterest income and deposits[298] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2023 financial performance, highlighting a 39% net income increase, significant asset growth driven by loan expansion, and a review of financial condition, asset quality, and segment results Financial Highlights and Business Overview Q3 2023 saw net income increase 39% to $81.5 million, with total assets reaching $16.5 billion, supported by strong liquidity and a balanced business model - Net income for Q3 2023 increased 39% to $81.5 million, and diluted EPS increased 38% to $1.68 compared to Q3 2022[185] - Total assets reached $16.5 billion, a 31% increase from December 31, 2022[185] - The company had $5.4 billion in unused borrowing capacity and total liquid assets (including unused capacity) of $10.7 billion, representing 65% of total assets[185] Financial Condition Total assets increased 31% to $16.5 billion, driven by a $2.5 billion rise in loans receivable and a $2.9 billion increase in deposits, while shareholders' equity grew 12% to $1.6 billion - Loans receivable increased by $2.5 billion (33%) to $9.9 billion, with significant growth in healthcare financing (+$614.2M), commercial & CRE (+$581.4M), multi-family financing (+$573.8M), and mortgage warehouse lines (+$557.9M)[203][212] - Deposits grew by $2.9 billion (29%) to $13.0 billion, with brokered deposits increasing by $1.6 billion to $4.4 billion, representing 34% of total deposits[216][218] - Uninsured deposits were approximately $2 billion, representing less than 20% of total deposits, with the company's insured cash sweep program holding $1.8 billion[217] - Shareholders' equity increased by $173.0 million (12%) to $1.6 billion, mainly from net income of $201.8 million, partially offset by $36.4 million in dividends[225] Asset Quality Asset quality deteriorated with nonperforming loans increasing to $60.2 million (0.60% of total loans), though the allowance for credit losses covered 111% of these loans Asset Quality Indicators | Metric | Sep 30, 2023 | Dec 31, 2022 | Sep 30, 2022 | | :--- | :--- | :--- | :--- | | Nonperforming Loans | $60.2M | $26.7M | $26.6M | | Nonperforming Loans / Total Loans | 0.60% | 0.36% | 0.38% | | ACL-Loans / Nonperforming Loans | 111% | 165% | 147% | | Loans > 30 Days Past Due | $125.4M | $39.8M | $26.6M | - For the nine months ended Sep 30, 2023, net charge-offs were $9.56 million, primarily related to one customer, compared to net recoveries of $0.5 million in the prior-year period[230] Results of Operations Q3 2023 net income grew 39% driven by a 38% increase in net interest income to $117.4 million, while nine-month net income rose 24% to $323.7 million, despite a decrease in noninterest income Q3 2023 vs Q3 2022 Performance | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $117.4M | $85.4M | +38% | | Net Interest Margin | 2.99% | 3.05% | -6 bps | | Provision for Credit Losses | $4.0M | $2.2M | +$1.8M | | Noninterest Income | $36.1M | $29.2M | +24% | | Noninterest Expense | $42.9M | $35.0M | +23% | 9M 2023 vs 9M 2022 Performance | Metric | 9M 2023 | 9M 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $323.7M | $223.1M | +45% | | Net Interest Margin | 3.07% | 2.90% | +17 bps | | Provision for Credit Losses | $33.5M | $10.9M | +$22.6M | | Noninterest Income | $80.2M | $103.0M | -22% | | Noninterest Expense | $122.0M | $98.9M | +23% | - The decrease in noninterest income for the nine-month period was primarily due to a $24.0 million (45%) decrease in gain on sale of loans, reflecting a business mix shift in the multi-family portfolio[291][293] Segment Analysis In Q3 2023, all segments reported increased net income, with Banking leading at $52.4 million, while for the nine-month period, Multi-family Mortgage Banking's net income decreased due to lower gain on sale of loans Segment Net Income (in thousands) | Segment | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $14,685 | $13,366 | $27,893 | $44,414 | | Mortgage Warehousing | $19,926 | $11,801 | $47,163 | $36,828 | | Banking | $52,445 | $39,344 | $144,402 | $94,040 | | Other | $(5,552) | $(6,023) | $(17,697) | $(12,717) | | Total | $81,504 | $58,488 | $201,761 | $162,565 | - Multi-family Mortgage Banking's 9-month net income fell 37% due to a $36.8 million decrease in noninterest income, primarily from lower gain on sale of loans[311] - Mortgage Warehousing's Q3 net income grew 69% driven by a $11.5 million increase in net interest income from higher yields and loan volumes, outperforming the industry[315][317] - Banking's 9-month net income rose 54% due to an $84.8 million increase in net interest income, despite higher provisions and expenses[322] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk, its primary market risk, through an asset-sensitive position, with NII and EVE sensitivity analyses showing results within policy limits - The company's primary market risk is interest rate risk, arising from timing differences in asset and liability repricing, embedded options, and yield curve changes[363][364] Net Interest Income (NII) Sensitivity (Twelve Months Forward) | Rate Change (bps) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 | $51,728 | 10.5% | | +100 | $26,931 | 5.5% | | -100 | $(40,859) | -8.3% | | -200 | $(82,126) | -16.7% | Economic Value of Equity (EVE) Sensitivity (Immediate Shock) | Rate Change (bps) | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 | $(65,764) | -4.2% | | +100 | $(25,408) | -1.6% | | -100 | $19,426 | 1.2% | | -200 | $34,279 | 2.2% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2023, the Company's disclosure controls and procedures were effective[381] - No changes in the Company's internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[382] PART II – OTHER INFORMATION Other Information (Items 1-5) This section confirms no legal proceedings, no material changes to risk factors, no unregistered equity sales, no defaults on senior securities, and no other reportable information - Item 1: The company reports no legal proceedings[385] - Item 1A: There have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[386] - Items 2, 3, 5: The company reports 'None' for Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, and Other Information[387][388][390] Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including corporate governance documents and CEO/CFO certifications required by the Sarbanes-Oxley Act - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[392]