Merchants Bancorp(MBIN) - 2020 Q4 - Annual Report

Employee and Workplace Culture - As of December 31, 2020, the company had approximately 404 full-time employees with a turnover rate of 9.49% in 2020[37] - The company has been recognized as one of the "Best Places to Work in Indiana" every year since 2016[38] - The company established an Employee Stock Ownership Plan (ESOP) in 2020, funded entirely by the company, to align employee interests with shareholders[38] Regulatory Environment - The company is subject to extensive regulation under federal and state laws, which can impact growth and earnings performance[44] - The Federal Reserve requires bank holding companies to serve as a source of financial and managerial strength to their subsidiary banks[59] - The company maintains an anti-money laundering program in compliance with the Bank Secrecy Act and the USA Patriot Act[65] - The company is regulated by various agencies, including the FDIC and the Federal Reserve, which evaluate its operations and compliance with applicable laws[46] - The Company, Merchants Bank, and FMBI met all regulatory capital requirements with the Community Bank Leverage Ratio (CBLR) to be classified as well capitalized as of December 31, 2020[80] - The minimum capital requirements under Basel III, effective since 2015, apply to all covered banking organizations, including the Company[72] - The Dodd-Frank Act imposed more stringent capital requirements on bank holding companies, affecting the Company's operations[90] - The company is subject to legal limitations on the extent to which Merchants Bank or FMBI can supply funds, primarily through dividends[86] - The company is required to comply with SEC rules regarding internal controls over financial reporting, and failure to maintain effective controls could adversely affect business and stock price[145] - The company is required to maintain effective anti-money laundering programs, with potential penalties for noncompliance that could restrict its business operations[206][207] Financial Performance and Risks - The company’s allowance for loan losses may prove insufficient to absorb potential losses, requiring additional provisions in the future[139] - The company’s goodwill totaled $15.8 million as of December 31, 2020, and future evaluations may result in impairment charges that could adversely affect financial results[143] - Economic downturns may impair the ability of small to midsized business borrowers to repay loans, adversely affecting the company’s financial condition[140] - Increased competition from non-bank competitors, which are not subject to the same regulations, may further challenge the company’s market position[121] - Nonperforming assets adversely affect net income and increase loan administration costs, impacting overall financial performance[135] - The company is exposed to risks from large mortgage non-depository financial institutions, which could impact funding and revenue[178] - An increase in nonperforming assets could adversely impact net interest income, affecting overall financial performance[173] - Liquidity risks could adversely affect operations, with potential negative impacts from fluctuations in customer deposits and competitive pressures[177] - The company raised $171.1 million through preferred stock offerings in 2019, indicating a need for additional capital to meet business commitments[186] - Regulatory capital requirements could increase, necessitating additional capital raises or operational contractions[186] Market Competition - The company faces strong competition in various sectors, including commercial and retail banking, residential mortgages, and multi-family loan originations[36] - The company faces strong competition from various financial institutions, including national, regional, and community banks, as well as online businesses, which may adversely affect its ability to attract and retain customers[120] - Changes in interest rates and competitor pricing decisions may adversely affect the profitability of the mortgage banking business[112] - The profitability of mortgage banking is highly dependent on the ability to aggregate and sell a high volume of loans in the secondary market[113] - The company has voluntarily adopted many servicing and foreclosure standards due to competitive pressures, despite not being a party to certain state settlements[100] Interest Rate and Economic Sensitivity - Fluctuations in interest rates may reduce net interest income, negatively impacting the company's financial condition and results of operations[168] - Interest rate increases may lead to larger payment requirements for borrowers, increasing the potential for defaults[169] - The company’s operations are sensitive to general economic conditions, particularly in Indiana, which could constrain growth and profitability[124] - Interest rate risk management is crucial, with the company aiming to limit changes in net interest income to 20% for a +/- 100 basis point move in interest rates[410] - As of December 31, 2020, the company's net interest income sensitivity showed a dollar change of $50,305 (19.1% increase) for a +200 basis point shift in rates[410] - The Economic Value of Equity (EVE) analysis indicated a dollar change of $100,236 (12.8% increase) for a -200 basis point shift in rates as of December 31, 2020[412] Compliance and Legal Risks - Future legislation and executive orders may significantly impact the banking industry, potentially altering operational costs and permissible activities[104] - The company must comply with various federal consumer protection laws, including the Fair Debt Collection Practices Act and the Truth in Lending Act[106] - The company faces risks related to noncompliance with consumer protection laws, which could result in sanctions and adversely affect its operations and growth prospects[202][204] - The company operates under an approved Community Reinvestment Act (CRA) strategic plan, which evaluates its record in meeting local credit needs[89] - Regulatory actions against the company could include restrictions on growth initiatives and acquisitions, impacting overall business strategy[198][201] Management and Strategic Initiatives - The company is highly dependent on its management team, and the loss of key executives could harm its strategic implementation and growth prospects[152] - The company plans to pursue acquisitions to enhance profitability, but faces risks including competition for merger candidates and potential integration challenges[164] Audit and Financial Reporting - Merchants Bancorp's consolidated financial statements present a fair view of the company's financial position as of December 31, 2020, and 2019[419] - The audit was conducted in accordance with PCAOB standards to ensure reasonable assurance of the financial statements' accuracy[422] - The company is not required to have an audit of its internal control over financial reporting, and no opinion on its effectiveness is expressed[422]