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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _______________

Commission File No. 001-38258

MERCHANTS BANCORP

(Exact name of registrant as specified in its charter)

Indiana

    

20-5747400

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

410 Monon Blvd. Carmel, Indiana

46032

(Address of principal

(Zip Code)

executive office)

(317) 569-7420

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes     No 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, without par value

MBIN

NASDAQ

Series A Preferred Stock, without par value

Depositary Shares, each representing a 1/40th interest in a share of Series B Preferred Stock, without par value

MBINP

MBINO

NASDAQ

NASDAQ

Depositary Shares, each representing a 1/40th interest in a share of Series C Preferred Stock, without par value

MBINN

NASDAQ

As of May 2, 2022, the latest practicable date, 43,267,776 shares of the registrant’s common stock, without par value, were issued and outstanding.

Merchants Bancorp

Index to Quarterly Report on Form 10-Q

PART I – FINANCIAL INFORMATION

Item 1 Interim Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021

3

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021

4

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021

5

Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2022 and 2021

6

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021

7

Notes to Condensed Consolidated Financial Statements

8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

43

Item 3 Quantitative and Qualitative Disclosures About Market Risk

58

Item 4 Controls and Procedures

58

PART II – OTHER INFORMATION

59

Item 1 Legal Proceedings

59

Item 1A Risk Factors

59

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3 Defaults Upon Senior Securities

59

Item 4 Mine Safety Disclosures

59

Item 5 Other Information

59

Item 6 Exhibits

60

SIGNATURES

61

2

Part I – Financial Information

Item 1. Financial Statements

Merchants Bancorp

Condensed Consolidated Balance Sheets

March 31, 2022 (Unaudited) and December 31, 2021

(In thousands, except share data)

March 31, 

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Cash and due from banks

$

9,853

$

14,030

Interest-earning demand accounts

 

401,668

 

1,018,584

Cash and cash equivalents

 

411,521

 

1,032,614

Securities purchased under agreements to resell

 

4,798

 

5,888

Mortgage loans in process of securitization

 

324,280

 

569,239

Available for sale securities

 

314,266

 

310,629

Federal Home Loan Bank (FHLB) stock

 

28,804

 

29,588

Loans held for sale (includes $14,567 and $48,583, respectively at fair value)

 

2,289,094

 

3,303,199

Loans receivable, net of allowance for credit losses on loans of $32,102 and $31,344, respectively

 

5,976,960

 

5,751,319

Premises and equipment, net

 

34,559

 

31,212

Servicing rights

 

121,036

 

110,348

Interest receivable

 

23,499

 

24,103

Goodwill

 

15,845

 

15,845

Intangible assets, net

 

1,574

 

1,707

Other assets and receivables

 

104,356

 

92,947

Total assets

$

9,650,592

$

11,278,638

Liabilities and Shareholders' Equity

 

 

Liabilities

 

  

 

  

Deposits

 

  

 

  

Noninterest-bearing

$

461,193

$

641,442

Interest-bearing

 

7,014,628

 

8,341,171

Total deposits

 

7,475,821

 

8,982,613

Borrowings

 

879,929

 

1,033,954

Deferred and current tax liabilities, net

 

30,695

 

19,170

Other liabilities

 

75,644

 

87,492

Total liabilities

 

8,462,089

 

10,123,229

Commitments and Contingencies

 

  

 

  

Shareholders' Equity

 

  

 

  

Common stock, without par value(1)

 

  

 

  

Authorized - 50,000,000 shares

 

  

 

  

Issued and outstanding - 43,267,776 shares at March 31, 2022 and 43,180,079 shares at December 31, 2021

 

137,882

 

137,565

Preferred stock, without par value - 5,000,000 total shares authorized

7% Series A Preferred stock - $25 per share liquidation preference

 

 

Authorized - 3,500,000 shares

 

 

Issued and outstanding - 2,081,800 shares

 

50,221

 

50,221

6% Series B Preferred stock - $1,000 per share liquidation preference

 

 

Authorized - 125,000 shares

 

 

Issued and outstanding - 125,000 shares (equivalent to 5,000,000 depositary shares)

 

120,844

 

120,844

6% Series C Preferred stock - $1,000 per share liquidation preference

Authorized - 250,000 shares

Issued and outstanding - 196,181 shares (equivalent to 7,847,233 depositary shares)

191,084

191,084

Retained earnings

 

694,776

 

657,149

Accumulated other comprehensive loss

 

(6,304)

 

(1,454)

Total shareholders' equity

 

1,188,503

 

1,155,409

Total liabilities and shareholders' equity

$

9,650,592

$

11,278,638

(1)The number of shares have been restated to reflect the 3-for-2 common stock split, effective on January 17, 2022.

See notes to condensed consolidated financial statements.

3

Merchants Bancorp

Condensed Consolidated Statements of Income (Unaudited)

For the Three Months Ended March 31, 2022 and 2021

(In thousands, except share data)

Three Months Ended

March 31, 

    

2022

    

2021

Interest Income

 

  

 

  

Loans

$

72,196

$

75,517

Mortgage loans in process of securitization

 

2,245

 

3,136

Investment securities:

 

 

Available for sale - taxable

 

701

 

354

Available for sale - tax exempt

11

Federal Home Loan Bank stock

 

269

 

384

Other

 

601

 

147

Total interest income

 

76,012

 

79,549

Interest Expense

 

  

 

  

Deposits

 

8,813

 

6,100

Borrowed funds

 

1,474

 

1,486

Total interest expense

 

10,287

 

7,586

Net Interest Income

 

65,725

 

71,963

Provision for credit losses

 

2,451

 

1,663

Net Interest Income After Provision for Credit Losses

 

63,274

 

70,300

Noninterest Income

 

  

 

  

Gain on sale of loans

 

17,965

 

28,620

Loan servicing fees, net

 

9,731

 

7,951

Mortgage warehouse fees

 

1,858

 

4,116

Low-income housing tax credit syndication fees

519

55

Other income

 

4,524

 

3,194

Total noninterest income

 

34,597

 

43,936

Noninterest Expense

 

  

 

  

Salaries and employee benefits

 

21,293

 

21,274

Loan expenses

 

1,211

 

2,523

Occupancy and equipment

 

1,814

 

1,627

Professional fees

 

1,303

 

422

Deposit insurance expense

 

759

 

671

Technology expense

 

1,236

 

937

Other expense

 

3,417

 

2,630

Total noninterest expense

 

31,033

 

30,084

Income Before Income Taxes

 

66,838

 

84,152

Provision for income taxes

 

16,696

 

22,169

Net Income

$

50,142

$

61,983

Dividends on preferred stock

(5,728)

(3,757)

Net Income Allocated to Common Shareholders

44,414

58,226

Basic Earnings Per Share(1)

$

1.03

$

1.35

Diluted Earnings Per Share(1)

$

1.02

$

1.35

Weighted-Average Shares Outstanding(1)

 

  

 

  

Basic

 

43,190,066

 

43,158,138

Diluted

 

43,360,034

 

43,275,621

(1)The number of shares and per share amounts have been restated to reflect the 3-for-2 common stock split, effective on January 17, 2022.

See notes to condensed consolidated financial statements.

4

Merchants Bancorp

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended March 31, 2022 and 2021

(In thousands)

Three Months Ended

March 31, 

    

2022

    

2021

Net Income

$

50,142

$

61,983

Other Comprehensive Loss:

 

  

 

Net change in unrealized losses on investment securities available for sale, net of tax benefits of $1,650 and $43, respectively

 

(4,850)

 

(125)

Other comprehensive loss for the period

 

(4,850)

 

(125)

Comprehensive Income

$

45,292

$

61,858

See notes to condensed consolidated financial statements.

5

Merchants Bancorp

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2022 and 2021

(In thousands, except share data)

Three Months Ended

March 31, 

    

2022

    

2021

Shares

Amount

Shares

Amount

Common Stock

 

  

 

  

Balance beginning of period(1)

43,180,079

$

137,565

43,120,625

$

135,857

Cash paid in lieu of fractional shares for stock split

(29)

(1)

Distribution to employee stock ownership plan

20,709

653

29,150

537

Shares issued for stock compensation plans, net of taxes withheld to satisfy employee tax obligations

67,017

(335)

23,434

80

Balance end of period

43,267,776

137,882

43,173,209

136,474

8% Preferred Stock

Balance beginning of period

-

-

41,625

41,581

Redemption of 8% preferred stock

-

-

-

-

Balance end of period

-

-

41,625

41,581

7% Series A Preferred Stock

Balance at beginning and end of period

2,081,800

50,221

2,081,800

50,221

6% Series B Preferred Stock

Balance at beginning and end of period

125,000

120,844

125,000

120,844

6% Series C Preferred Stock

Balance beginning of period

196,181

191,084

-

-

Issuance of 6% Series C preferred stock, net of $5.1 million in offering expenses

-

-

150,000

144,925

Private issuance of 6% Series C preferred stock, net of $23 in offering expenses

-

-

-

-

Balance end of period

196,181

191,084

150,000

144,925

Retained Earnings

Balance beginning of period

657,149

461,744

Net income

50,142

61,983

Impact from adoption of ASU 2016-13 (Credit Losses)

(3,648)

-

Impact from adoption of ASU 2016-02 (Leases)

(110)

-

Dividends on 8% preferred stock, $80.00 per share, annually

-

(833)

Final dividend for redemption of 8% preferred stock, $3.33 per share

-

(139)

Dividends on 7% Series A preferred stock, $1.75 per share, annually

(910)

(910)

Dividends on 6% Series B preferred stock, $60.00 per share, annually

(1,875)

(1,875)

Dividends on 6% Series C preferred stock, $60.00 per share, annually

(2,943)

-

Dividends on common stock, $0.28 per share, annually in 2022 and $0.24 per share, annually in 2021

(3,029)

(2,590)

Deconsolidation of entities

-

(419)

Balance end of period

694,776

516,961

Accumulated Other Comprehensive Income (Loss)

Balance beginning of period

(1,454)

374

Other comprehensive loss

(4,850)

(125)

Balance end of period

(6,304)

249

Total shareholders' equity

$

1,188,503

$

1,011,255

(1)The number of shares have been restated to reflect the 3-for-2 common stock split, effective on January 17, 2022.

See notes to condensed consolidated financial statements.

6

Merchants Bancorp

Condensed Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31, 2022 and 2021

(In thousands)

Three Months Ended

March 31, 

    

2022

    

2021

Operating activities:

 

  

 

  

Net income

$

50,142

$

61,983

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation

 

591

 

504

Provision for credit losses

 

2,451

 

1,663

Gain on sale of loans

 

(17,965)

 

(28,620)

Proceeds from sales of loans

 

8,214,273

 

16,974,055

Loans and participations originated and purchased for sale

 

(7,178,991)

 

(16,636,332)

Purchases of low-income housing tax credits for sale

(6,651)

Change in servicing rights for paydowns and fair value adjustments

 

(4,896)

 

(3,430)

Net change in:

 

 

Mortgage loans in process of securitization

 

244,959

 

(93,330)

Other assets and receivables

 

(15,325)

 

4,065

Other liabilities

 

8,030

 

15,644

Other

 

(988)

 

(409)

Net cash provided by operating activities

 

1,295,630

 

295,793

Investing activities:

 

 

  

Net change in securities purchased under agreements to resell

 

1,090

 

36

Purchases of available for sale securities

 

(20,002)

 

(3)

Proceeds from calls, maturities and paydowns of available for sale securities

 

9,302

 

27,917

Purchases of loans

 

(40,672)

 

(137,548)

Net change in loans receivable

 

(187,323)

 

(79,162)

Proceeds from sale of FHLB stock

 

784

 

Purchases of premises and equipment

 

(3,939)

 

(2,004)

Purchase of servicing rights

(2,057)

Purchase of limited partnership interests

(6,577)

(3,486)

Other investing activities

 

2,245

(464)

Net cash (used in) investing activities

 

(247,149)

 

(194,714)

Financing activities:

 

  

 

Net change in deposits

 

(1,506,792)

 

653,011

Proceeds from borrowings

 

626,000

 

17,754,346

Repayment of borrowings

 

(780,025)

 

(18,557,442)

Proceeds from issuance of preferred stock

 

 

144,925

Dividends

(8,757)

(6,208)

Net cash (used in) financing activities

 

(1,669,574)

 

(11,368)

Net Change in Cash and Cash Equivalents

 

(621,093)

 

89,711

Cash and Cash Equivalents, Beginning of Period

 

1,032,614

 

179,728

Cash and Cash Equivalents, End of Period

$

411,521

$

269,439

Supplemental Cash Flows Information:

 

 

  

Interest paid

$

10,228

$

6,972

Income taxes paid, net of refunds

 

(497)

 

563

Dividends payable

139

Deconsolidation of debt fund entities

See Note 1

Cash paid for operating lease liabilities

283

See notes to condensed consolidated financial statements.

7

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1:   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Merchants Bancorp, a registered bank holding company (the “Company”) and its wholly owned subsidiaries, Merchants Bank of Indiana (“Merchants Bank”), Farmers-Merchants Bank of Illinois (“FMBI”) and Merchants Asset Management, LLC (“MAM”). Merchants Bank’s primary operating subsidiaries include Merchants Capital Corp. (“MCC”), Merchants Capital Servicing, LLC (“MCS”) and Merchants Capital Investments, LLC (“MCI”). All direct and indirectly owned subsidiaries owned by Merchants Bancorp are collectively referred to as the “Company”.

The accompanying unaudited condensed consolidated balance sheet of the Company as of December 31, 2021, which has been derived from audited financial statements, and unaudited condensed consolidated financial statements of the Company as of March 31, 2022 and for the three months ended March 31, 2022 and 2021, were prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed financial statements should be read in conjunction with the audited financial statements and notes thereto of the Company as of and for the year ended December 31, 2021 in its Annual Report on Form 10-K. Reference is made to the accounting policies of the Company described in the Notes to the Financial Statements contained in the Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included to present fairly the financial position as of March 31, 2022 and the results of operations for the three months ended March 31, 2022 and 2021, and cash flows for the three months ended March 31, 2022 and 2021. All interim amounts have not been audited and the results of operations for the three months ended March 31, 2022, herein are not necessarily indicative of the results of operations to be expected for the entire year.

Principles of Consolidation

The unaudited condensed consolidated financial statements as of and for the period ended March 31, 2022 and 2021 include results from the Company, and its wholly owned subsidiaries, Merchants Bank, FMBI and MAM. Also included are Merchants Bank’s primary operating subsidiaries, MCC, MCS and MCI, as well as all direct and indirectly owned subsidiaries owned by Merchants Bancorp.

In addition, when the Company makes an equity investment in an entity for which it holds a variable interest, it is evaluated for consolidation requirements under Accounting Standards Update of Topic 810. Accordingly, the entity is assessed for potential consolidation under the variable interest entity (“VIE”) model and would only consolidate those entities for which it is a primary beneficiary. A primary beneficiary is defined as the party that has both the power to direct the activities that most significantly impact the entity, and an interest that could be significant to the entity. To determine if an interest could be significant to the entity, both qualitative and quantitative factors regarding the nature, size and form of our involvement with the entity are evaluated. Alternatively, under the voting interest model, it would only consolidate those entities for which it has a controlling interest. Because the variable interest investments held by the Company as of March 31, 2022 are not deemed to be primary beneficiaries or controlling interests, the entities are not consolidated and the equity method or proportional method of accounting has been applied. The Company will analyze whether its entities are the primary beneficiary on an ongoing basis. Changes in facts and circumstances occurring since the previous primary beneficiary determination will be considered as part of this ongoing assessment. See Note 5: Variable Interest Entities (VIEs) for additional information about VIEs.

All significant intercompany accounts and transactions have been eliminated in consolidation.

8

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Deconsolidation

The unaudited condensed consolidated financial statements included consolidated results from certain entities primarily involved in single-family debt financing until January 30, 2021, while the Company was deemed to be a primary beneficiary. On February 1, 2021, the Company’s debt fund entities were restructured in such a way that its ownership and participation was significantly reduced with the inclusion of additional, unrelated investors and the Company was no longer classified as a primary beneficiary. Accordingly, results from these entities were no longer consolidated after this date, in accordance with the consolidation guidelines of the Accounting Standards Update of Topic 810.

Following the deconsolidation, the carrying value of assets and liabilities of these entities were removed from the consolidated balance sheet, and the continuing investments were recorded at fair value at the date of deconsolidation. The total amount deconsolidated from the balance sheet included net assets of approximately $10 million, consisting primarily of $66.6 million in loans receivable, and $52.7 million in borrowings with Merchants Bank that was previously eliminated in consolidation. The fair value of its continuing investments was approximately $10 million on the deconsolidation date and has been reported in Other Assets after deconsolidation. The estimated fair value was determined based on third-party evaluations of similar assets in the underlying business. The difference between the fair value of these deconsolidated entities and their carrying value was deemed to be immaterial, resulting in no gain or loss on deconsolidation. These continuing investments after deconsolidation are classified as variable interest entities, have not been consolidated, and are accounted for under the equity method of accounting. See Note 5: Variable Interest Entities (VIEs) for additional information about VIEs.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses on loans, servicing rights and fair values of financial instruments.

Significant Accounting Policies

The significant accounting policies followed by the Company for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. However, on January 1, 2022, 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"). The Company revised certain accounting policies and implemented certain accounting policy elections, related to the adoption of CECL, which are described below. All adjustments, which are of a normal recurring nature and are, in the opinion of management, necessary for a fair statement of the results for the periods reported, have been included in the accompanying Condensed Consolidated Financial Statements.

CECL replaces the previous "allowance for loan and lease losses" model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an "expected loss" model for measuring credit losses, which encompasses allowances for losses expected to be incurred over the life of the included assets. The new CECL model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures (“OBCEs”) based on historical experiences, current conditions, and reasonable and supportable forecasts. CECL also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as credit quality and underwriting standards of an organization's portfolio. In addition, CECL includes certain changes to the accounting for investment securities available

9

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

for sale depending on whether management intends to sell the securities or believes that it is more likely than not they will be required to sell.

As of the adoption date on January 1, 2022, the Company recorded a $3.6 million decrease, net of taxes, to retained earnings for the cumulative effect of adopting CECL. The transition adjustment included a $0.3 million increase to retained earnings related to allowance for credit losses on loans (“ACL-Loans”) and a $5.2 million decrease to retained earnings related to allowance for OBCEs (“ACL-OBCEs”). The following table summarizes the impact of the adoption of CECL on the Company’s balance sheet as of January 1, 2022.

Impact of

January 1, 2022

CECL

Post-CECL

    

December 31, 2021

    

Adoption

    

Adoption

Assets:

(In thousands)

MTG WHLOC

$

1,955

$

41

$

1,996

RES RE

 

4,170

275

 

4,445

MF FIN

14,084

520

14,604

HC FIN

4,461

139

4,600

CML & CRE