Merchants Bancorp(MBIN) - 2023 Q4 - Annual Report

PART I Business Merchants Bancorp is a diversified bank holding company with $17.0 billion in assets, operating through Multi-family Mortgage Banking, Mortgage Warehousing, and Banking segments, focusing on an originate-to-sell model Company Snapshot (as of December 31, 2023) | Metric | Value | | :--- | :--- | | Total Assets | $17.0 billion | | Total Deposits | $14.1 billion | | Shareholders' Equity | $1.7 billion | - The company's business model is designed to balance net interest income from its loan portfolio with noninterest income generated from the sale of government-backed loans, aiming for lower charge-offs and a reduced expense base[16][255] - The company operates under a comprehensive regulatory framework, with oversight from agencies including the IDFI, Federal Reserve, FDIC, and CFPB. It became subject to heightened scrutiny after crossing the $10 billion in assets threshold[51][52][199] Business Segments The company's operations are divided into Multi-Family Mortgage Banking, Mortgage Warehousing, and Banking segments, each focusing on distinct lending and financial services - Multi-Family Mortgage Banking: Specializes in originating and servicing loans for affordable multi-family housing and healthcare facilities, primarily through FHA, Fannie Mae, and Freddie Mac programs. It also has a tax credit equity syndication platform for affordable housing projects[19][20][22] - Mortgage Warehousing: Provides warehouse financing facilities to non-depository financial institutions. This segment funded $33.0 billion in loan principal in 2023, a slight decrease from $33.2 billion in 2022[29][30] - Banking: Includes a diverse range of lending and deposit services such as commercial and retail banking, agricultural lending, single-family mortgage lending (retail and correspondent), and SBA lending[31][32][34] - The business segments are designed to be complementary, creating synergies such as the Banking segment funding loans for the Multi-Family segment and Mortgage Warehousing providing leads for correspondent lending[37][328] Human Capital As of December 31, 2023, Merchants Bancorp had 618 employees with a 10% turnover rate, emphasizing a positive work environment and employee ownership - The company had approximately 618 employees as of year-end 2023, with 364 located in Central Indiana[40] - Employee turnover was 10% turnover in 2023. The company was named a "Top Workplace" by The Indianapolis Star in 2023[41] - An Employee Stock Ownership Plan (ESOP) was established in 2020 to reward employees and align their interests with shareholders. The company also makes a discretionary 3% company contribution to employee 401(k) plans[43] Supervision and Regulation The company and its subsidiaries are subject to extensive federal and state banking regulations, with heightened scrutiny as an institution exceeding $10 billion in assets - As a Bank Holding Company (BHC), Merchants Bancorp is supervised by the Federal Reserve under the BHC Act, which governs acquisitions, permitted nonbanking activities, and requires the BHC to act as a source of strength for its subsidiary banks[55][61][62] - Merchants Bank is an Indiana-chartered bank supervised by the FDIC and IDFI. It must comply with numerous laws including the Bank Secrecy Act (BSA), USA Patriot Act, and Community Reinvestment Act (CRA)[65][66][93] - The company is subject to Basel III capital requirements. As of December 31, 2023, both the company and Merchants Bank were categorized as well-capitalized under the regulatory framework[77][84] - Having exceeded $10 billion in assets, Merchants Bank is subject to direct examination by the Consumer Financial Protection Bureau (CFPB) for compliance with consumer protection laws[99][200] Risk Factors The company faces significant risks including interest rate sensitivity in mortgage banking, credit risks, operational vulnerabilities, market and liquidity risks, and extensive regulatory compliance burdens - Mortgage Banking and Community Banking Risks: Profitability is highly dependent on mortgage origination volume, which is sensitive to interest rate changes and competitive pricing pressures[118][121] - Credit and Financial Risks: The business is sensitive to general economic conditions. An economic decline could increase nonperforming loans and charge-offs, and the Allowance for Credit Losses (ACL) may prove insufficient[131][134][136] - Operational Risks: The company is exposed to system failures, cybersecurity breaches, reliance on third-party vendors, and is highly dependent on its senior executive team[155][160][164] - Market, Interest Rate, and Liquidity Risks: Fluctuations in interest rates can reduce net interest income and affect asset values. Liquidity depends on the ability to raise funds through deposits and borrowings, with a significant portion of deposits concentrated in large mortgage institutions[175][184][185] - Legal, Regulatory, and Compliance Risks: The company is subject to heightened regulatory requirements and scrutiny for exceeding $10 billion in assets, which increases compliance costs and operational complexity[199][200] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[215] Cybersecurity The company manages cybersecurity risk through a comprehensive Information Security Program, overseen by the Board's IT Committee, with annual risk assessments and an Incident Response Plan - The company maintains a comprehensive Information Security Program (ISP) that includes annual risk assessments, an Incident Response Plan, and a layered control environment[218][219] - Governance is provided by the Board's IT Committee, which includes senior management and risk experts. The committee reviews security policies, risk assessments, and incident reports, reporting quarterly to the full Board[223] - The Information Security Officer, who has over a decade of experience and multiple industry certifications, is responsible for implementing and monitoring the security program[224] Properties The company owns its headquarters building in Carmel, Indiana, which is undergoing expansion, and believes its facilities are adequate for foreseeable operational needs - The Company owns its headquarters building in Carmel, Indiana, which is in the process of being expanded[227] Legal Proceedings The company is not involved in any material pending legal proceedings outside of ordinary routine litigation incidental to its business - There are no material pending legal proceedings other than ordinary routine litigation incidental to the business[228] Mine Safety Disclosures This item is not applicable to the company - None[229] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Merchants Bancorp's common stock trades on Nasdaq under "MBIN," with the company intending to pay quarterly dividends subject to board discretion and regulatory limitations - The company's common stock trades on the Nasdaq Capital Market under the symbol "MBIN"[231] - The company intends to continue paying quarterly dividends, but this is subject to board discretion and various restrictions, including the requirement to pay dividends on preferred stock first[232][233] - As a holding company, its ability to pay dividends is dependent on receiving dividends from its subsidiary, Merchants Bank, which is subject to regulatory limitations[234] Selected Financial Data This section provides a five-year summary of key financial data, highlighting significant growth in assets, loans, and deposits, and includes reconciliations for non-GAAP financial measures Selected Financial Data (2023 vs. 2022) | (Dollars in thousands, except per share data) | 2023 | 2022 | | :--- | :--- | :--- | | Balance Sheet Data: | | | | Total Assets | $16,952,516 | $12,615,227 | | Loans held for investment | $10,199,553 | $7,470,872 | | Deposits | $14,061,460 | $10,071,345 | | Total shareholders' equity | $1,701,084 | $1,459,739 | | Income Statement Data: | | | | Net interest income | $448,071 | $318,551 | | Net income | $279,234 | $219,721 | | Per Share Data (Common Stock): | | | | Diluted earnings per share | $5.64 | $4.47 | | Tangible book value (non-GAAP) | $27.40 | $21.88 | - The company provides reconciliations for non-GAAP financial measures, including tangible common shareholders' equity, tangible book value per share, and efficiency ratio, to their nearest GAAP equivalents[240][246] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net income increased 27% to $279.2 million, and diluted EPS rose 26% to $5.64, driven by a 41% increase in net interest income and significant asset and loan growth, while maintaining strong liquidity Financial Highlights (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | $279.2 million | $219.7 million | +27% | | Diluted EPS | $5.64 | $4.47 | +26% | | Net Interest Income | $448.1 million | $318.6 million | +41% | | Total Assets | $17.0 billion | $12.6 billion | +34% | | Loans Receivable, Net | $10.1 billion | $7.4 billion | +36% | - The increase in net income was primarily driven by a $129.5 million (41%) increase in net interest income, partially offset by higher noninterest expense and a larger provision for credit losses[251][288] - The company completed a $303.6 million securitization of multi-family mortgage loans and raised $483.7 million in equity for its LIHTC syndication business in 2023[257] - In January 2024, the company completed the sale of its Farmers-Merchants Bank of Illinois branches to focus on its core mortgage lending businesses[257][482] Comparison of Operating Results (2023 vs. 2022) Net income for 2023 rose 27% to $279.2 million, primarily due to a 41% increase in net interest income, despite higher provision for credit losses and noninterest expenses - Net interest income increased by $129.5 million (41%), driven by a $597.0 million increase in interest income from higher loan yields and balances, which was partially offset by a $467.4 million increase in interest expense on deposits and borrowings[289] - Net interest margin improved by 9 basis points to 3.06% in 2023 from 2.97% in 2022[290] - The provision for credit losses increased by $22.9 million to $40.2 million, reflecting loan growth, changes in qualitative factors, and specific reserves[310][312] - Noninterest income decreased by $11.3 million (9%), primarily due to a $16.0 million (25%) decrease in gain on sale of loans as the business mix shifted towards holding more multi-family loans on the balance sheet[313][314] - Noninterest expense increased by $38.6 million (28%), mainly from a $19.1 million rise in salaries and benefits and a $10.1 million increase in FDIC deposit insurance expenses[319] Operating Segment Analysis In 2023, Mortgage Warehousing and Banking segments drove profitability with strong net income growth, while Multi-family Mortgage Banking saw a decline due to lower gain on sale of loans Net Income by Segment (2023 vs. 2022) | (Dollars in thousands) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Multi-family Mortgage Banking | $36,473 | $54,642 | -33% | | Mortgage Warehousing | $73,525 | $48,604 | +51% | | Banking | $194,398 | $134,221 | +45% | - Multi-family Mortgage Banking net income decreased due to a $31.9 million decline in noninterest income, reflecting lower gain on sale of loans as origination volume for sale decreased[332][333] - Mortgage Warehousing net income increased significantly despite a mere 1% decrease in funded loan volume, outperforming the 29% industry-wide decline[337][338] - Banking segment net income growth was driven by a $100.2 million increase in net interest income from higher balances in multi-family and healthcare bridge loans[340] Comparison of Financial Condition (as of Dec 31, 2023 vs. Dec 31, 2022) Total assets grew 34% to $17.0 billion, driven by a 36% increase in net loans, funded by a 40% rise in deposits, including a significant increase in brokered deposits Key Balance Sheet Items | (Dollars in billions) | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $17.0 | $12.6 | +34% | | Loans Receivable, Net | $10.1 | $7.4 | +36% | | Deposits | $14.1 | $10.1 | +40% | | Shareholders' Equity | $1.7 | $1.5 | +17% | - The loan portfolio growth was led by increases of $870.6 million in multi-family financing, $752.3 million in healthcare financing, and $664.4 million in commercial loans[357] - The ACL-Loans increased to $71.8 million (0.70% of loans) from $44.0 million (0.59% of loans), primarily due to loan growth and specific reserves in the healthcare and multi-family portfolios[361][365] - The company significantly increased its use of brokered deposits, which grew by $3.2 billion to $6.0 billion, making up 42% of total deposits compared to 27% in the prior year[375] Liquidity and Capital Resources The company maintained strong liquidity with $10.6 billion in liquid assets and unused borrowing capacity, and all regulatory capital ratios remained well-capitalized - The company has $6.0 billion in unused borrowing capacity with the FHLB and Federal Reserve, and total liquid assets plus this capacity amounted to $10.6 billion, or 62% of total assets[385][386] - Uninsured deposits totaled approximately $2.7 billion, representing less than 20% of total deposits. The company offers an insured cash sweep program to provide additional FDIC coverage[387] - The company announced it will redeem all outstanding shares of its 7% Series A Preferred Stock on April 1, 2024, using cash on hand[401][728] Merchants Bancorp Capital Ratios (December 31, 2023) | Ratio | Actual | Minimum to be Well Capitalized w/ Buffer | | :--- | :--- | :--- | | Total capital to risk-weighted assets | 11.6% | 10.5% | | Tier 1 capital to risk-weighted assets | 11.1% | 8.5% | | Common Equity Tier 1 capital | 7.8% | 7.0% | | Tier 1 capital to average assets | 10.1% | 5.0% | Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk through its Asset-Liability Committee, using NII at Risk and EVE models, with results remaining within established policy limits - The company's main market risk is interest rate risk, which it manages by balancing its portfolio between fixed-rate loans held for sale and adjustable-rate loans held for investment[432][434] Net Interest Income (NII) Sensitivity (as of Dec 31, 2023) | Rate Shock | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 bps | $57,294 | +11.7% | | +100 bps | $29,601 | +6.0% | | -100 bps | $(36,576) | -7.5% | | -200 bps | $(73,311) | -15.0% | Economic Value of Equity (EVE) Sensitivity (as of Dec 31, 2023) | Rate Shock | Dollar Change (in thousands) | Percent Change | | :--- | :--- | :--- | | +200 bps | $(79,455) | -4.7% | | +100 bps | $(34,800) | -2.1% decrease | | -100 bps | $92,793 | +5.5% | | -200 bps | $180,864 | +10.8% | Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2023, with an unqualified auditor's opinion on both financial statements and internal control over financial reporting - The independent registered public accounting firm, FORVIS, LLP, issued an unqualified opinion on the consolidated financial statements as of December 31, 2023 and 2022[449] - The auditor's report identified the Allowance for Credit Losses (ACL) as a critical audit matter due to the high degree of subjectivity and complexity involved in management's estimates, particularly regarding qualitative factor adjustments[457][460] - The company adopted ASU 2016-13 (CECL) for measuring credit losses effective January 1, 2022[451][519] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[835] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with the independent auditor issuing an unqualified opinion - The Chairman/CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[836] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[841] - The independent auditor, FORVIS, LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[844][845] Other Information The company reports no other information under this item - None[852] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable[853] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for its 2024 annual meeting of shareholders - Information required by this item is incorporated by reference from the Registrant's proxy statement for its 2024 annual meeting of shareholders[856] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the 2024 Proxy Statement[858] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the 2024 Proxy Statement[859] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the 2024 Proxy Statement[860] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the company's 2024 Proxy Statement - Information required by this item is incorporated by reference from the 2024 Proxy Statement[861] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K, including corporate governance documents and required certifications - This item lists the financial statements and exhibits filed with the Form 10-K, including governance documents, incentive plans, and required certifications[864][865] Form 10-K Summary The company has not provided a summary under this optional item - None[868]