Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

mbin_Current_Folio_10Q

Table of Contents

 

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, 2018

 

 

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)

 

 

 

11555 North Meridian Street, Suite 400 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☐

 

 

(Do not check if a 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 7(a)(2)(B) of the Securities Act. ☐

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

As of May 11, 2018, the latest practicable date, 28,692,206 shares of the registrant’s common stock, without par value, were issued and outstanding.

 

 

 


 

Table of Contents

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,  2018 and December 31, 2017 

3

 

 

Condensed Consolidated Statements of Income for the Three Months Ended March  31,  2018 and 2017 

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 

5

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March  31,  2018 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 30, 2018 and 2017 

7

 

 

Notes to Condensed Consolidated Financial Statements 

8

 

 

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

38

 

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk 

47

 

 

Item 4 Controls and Procedures 

47

 

 

PART II – OTHER INFORMATION 

48

 

 

Item 1  Legal Proceedings 

48

 

 

Item 1A  Risk Factors 

48

 

 

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds 

48

 

 

Item 3  Defaults Upon Senior Securities 

48

 

 

Item 4  Mine Safety Disclosures 

48

 

 

Item 5  Other Information 

48

 

 

Item 6  Exhibits 

49

 

 

SIGNATURES 

50

 

 

2


 

Table of Contents

Part I – Financial Information

Item 1. Financial Statements

Merchants Bancorp

Condensed Consolidated Balance Sheets

March 31, 2018 (Unaudited) and December 31, 2017

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2018

    

2017

Assets

 

 

  

 

 

  

Cash and due from banks

 

$

21,592

 

$

18,905

Interest-earning demand accounts

 

 

266,141

 

 

340,614

Cash and cash equivalents

 

 

287,733

 

 

359,519

Securities purchased under agreements to resell

 

 

7,003

 

 

7,043

Trading securities

 

 

200,030

 

 

140,837

Available for sale securities

 

 

413,457

 

 

408,371

Federal Home Loan Bank (FHLB) stock

 

 

7,711

 

 

7,539

Loans held for sale (includes $6,618 at fair value for 2018)

 

 

1,081,376

 

 

995,319

Loans receivable, net of allowance for loan losses of $9,705 and $8,311, respectively

 

 

1,563,485

 

 

1,366,349

Premises and equipment, net

 

 

6,705

 

 

5,354

Mortgage servicing rights

 

 

67,268

 

 

66,079

Interest receivable

 

 

9,627

 

 

8,326

Goodwill

 

 

5,139

 

 

3,902

Intangible assets, net

 

 

1,915

 

 

1,512

Other assets and receivables

 

 

24,400

 

 

22,983

Total assets

 

$

3,675,849

 

$

3,393,133

Liabilities and Shareholders' Equity

 

 

  

 

 

  

Liabilities

 

 

  

 

 

  

Deposits

 

 

  

 

 

  

Noninterest bearing

 

$

653,124

 

$

620,700

Interest bearing

 

 

2,409,476

 

 

2,322,861

Total deposits

 

 

3,062,600

 

 

2,943,561

Borrowings

 

 

199,378

 

 

56,612

Deferred and current tax liabilities, net

 

 

15,555

 

 

12,422

Other liabilities

 

 

18,603

 

 

13,064

Total liabilities

 

 

3,296,136

 

 

3,025,659

Commitments and Contingencies

 

 

  

 

 

  

Shareholders' Equity

 

 

  

 

 

  

Common stock, without par value

 

 

  

 

 

  

Authorized - 50,000,000 shares

 

 

  

 

 

  

Issued and outstanding - 28,692,206 shares at March 31, 2018 and 28,685,167 shares at December 31, 2017

 

 

134,941

 

 

134,891

Preferred stock - $1,000 per share, without par value

 

 

 

 

 

  

Authorized - 5,000,000 shares

 

 

 

 

 

  

Issued and outstanding - 41,625 shares

 

 

41,581

 

 

41,581

Retained earnings

 

 

204,758

 

 

192,008

Accumulated other comprehensive loss

 

 

(1,567)

 

 

(1,006)

Total shareholders' equity

 

 

379,713

 

 

367,474

Total liabilities and shareholders' equity

 

$

3,675,849

 

$

3,393,133

 

See notes to condensed consolidated financial statements.

 

3


 

Table of Contents

Merchants Bancorp

Condensed Consolidated Statements of Income (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

    

Interest Income

 

 

  

 

 

 

 

Loans

 

$

24,612

 

$

15,783

 

Investment securities:

 

 

 

 

 

  

 

Trading

 

 

989

 

 

1,376

 

Available for sale

 

 

1,542

 

 

894

 

Federal Home Loan Bank stock

 

 

129

 

 

81

 

Other

 

 

1,766

 

 

873

 

Total interest income

 

 

29,038

 

 

19,007

 

Interest Expense

 

 

  

 

 

  

 

Deposits

 

 

7,016

 

 

3,771

 

Borrowed funds

 

 

1,914

 

 

1,705

 

Total interest expense

 

 

8,930

 

 

5,476

 

Net interest income

 

 

20,108

 

 

13,531

 

Provision for loan losses

 

 

1,406

 

 

240

 

Net Interest Income After Provision for Loan Losses

 

 

18,702

 

 

13,291

 

Noninterest Income

 

 

  

 

 

  

 

Gain on sale of loans

 

 

10,892

 

 

5,442

 

Loan servicing fees (costs), net

 

 

(322)

 

 

1,989

 

Mortgage warehouse fees

 

 

486

 

 

596

 

Other income

 

 

257

 

 

64

 

Total noninterest income

 

 

11,313

 

 

8,091

 

Noninterest Expense

 

 

  

 

 

  

 

Salaries and employee benefits

 

 

6,487

 

 

3,892

 

Loan expenses

 

 

956

 

 

884

 

Occupancy and equipment

 

 

565

 

 

356

 

Professional fees

 

 

488

 

 

215

 

Deposit insurance expense

 

 

246

 

 

264

 

Technology expense

 

 

291

 

 

245

 

Other expense

 

 

1,237

 

 

785

 

Total noninterest expense

 

 

10,270

 

 

6,641

 

Income Before Income Taxes

 

 

19,745

 

 

14,741

 

Provision for Income Taxes

 

 

4,684

 

 

5,611

 

Net Income

 

$

15,061

 

$

9,130

 

  Dividends on Preferred Stock

 

 

(833)

 

 

(832)

 

Net Income allocated to Common Shareholders

 

 

14,228

 

 

8,298

 

Basic earnings per share

 

$

0.50

 

$

0.39

 

Diluted earnings per share

 

$

0.50

 

$

0.39

 

Weighted-average shares outstanding

 

 

  

 

 

  

 

Basic

 

 

28,690,876

 

 

21,114,400

 

Diluted

 

 

28,710,480

 

 

21,123,257

 

Dividends per share

 

$

0.06

 

$

0.05

 

 

See notes to condensed consolidated financial statements.

 

 

 

4


 

Table of Contents

Merchants Bancorp

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended March 31, 2018 and 2017

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

    

Net Income

 

$

15,061

 

$

9,130

 

Other Comprehensive Income (Loss):

 

 

  

 

 

  

 

Net change in unrealized losses on investment securities available for sale, net of (taxes) benefits of $97 and $(96), respectively

 

 

(318)

 

 

138

 

Comprehensive Income

 

$

14,743

 

$

9,268

 

 

See notes to condensed consolidated financial statements.

 

 

5


 

Table of Contents

Merchants Bancorp

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2018

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Preferred Stock

 

Retained

 

Comprehensive

 

 

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Earnings

    

Income (Loss)

    

Total

Balance, January 1, 2018

 

28,685,167

 

$

134,891

 

41,625

 

$

41,581

 

$

192,008

 

$

(1,006)

 

$

367,474

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

15,061

 

 

 —

 

 

15,061

Shares issued for stock compensation plan

 

7,039

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Compensation expense for stock compensation plan

 

 —

 

 

50

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

50

Dividends on preferred stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(833)

 

 

 —

 

 

(833)

Dividends on common stock, $0.06 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,721)

 

 

 —

 

 

(1,721)

Reclassification of deferred tax asset due to tax reform

 

 —

 

 

 —

 

 —

 

 

 —

 

 

243

 

 

(243)

 

 

 —

Other comprehensive loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(318)

 

 

(318)

Balance, March 31, 2018

 

28,692,206

 

$

134,941

 

41,625

 

$

41,581

 

$

204,758

 

$

(1,567)

 

$

379,713

 

See notes to condensed consolidated financial statements.

 

 

 

6


 

Table of Contents

Merchants Bancorp

Condensed Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31, 2018 and 2017

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2018

    

2017

    

Operating activities:

 

 

  

 

 

  

 

Net income

 

$

15,061

 

$

9,130

 

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

 

 

  

 

 

  

 

Depreciation

 

 

103

 

 

67

 

Provision for loan losses

 

 

1,406

 

 

240

 

Gain on sale of loans

 

 

(10,892)

 

 

(5,442)

 

Proceeds from sales of loans

 

 

4,020,784

 

 

4,456,947

 

Loans and participations originated and purchased for sale

 

 

(4,098,115)

 

 

(4,508,232)

 

Change in mortgage servicing rights for paydowns and fair value adjustments

 

 

2,263

 

 

199

 

Net change in:

 

 

 

 

 

  

 

Trading securities

 

 

(59,193)

 

 

(44,159)

 

Other assets and receivables

 

 

(3,407)

 

 

(1,127)

 

Other liabilities

 

 

7,918

 

 

4,289

 

Other

 

 

309

 

 

 3

 

Net cash used in operating activities

 

 

(123,763)

 

 

(88,085)

 

Investing activities:

 

 

  

 

 

  

 

Net change in securities purchased under agreements to resell

 

 

41

 

 

30

 

Purchases of available-for-sale securities

 

 

(28,224)

 

 

(15,000)

 

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

 

 

25,360

 

 

98

 

Purchases of loans

 

 

(34,273)

 

 

(36,942)

 

Net change in loans receivable

 

 

(137,092)

 

 

69,773

 

Purchase of Federal Home Loan Bank stock

 

 

(118)

 

 

 —

 

Purchases of premises and equipment

 

 

(1,055)

 

 

(22)

 

Purchases of mortgage servicing rights

 

 

(327)

 

 

(480)

 

Purchase of limited partnership interests

 

 

(13)

 

 

(29)

 

Cash received in acquisition of subsidiary

 

 

6,505

 

 

 —

 

Net cash provided by (used in) investing activities

 

 

(169,196)

 

 

17,428

 

Financing activities:

 

 

  

 

 

 

 

Net change in deposits

 

 

82,106

 

 

70,415

 

Proceeds from Federal Home Loan Bank advances

 

 

284,189

 

 

239,250

 

Repayment of Federal Home Loan Bank advances

 

 

(142,568)

 

 

(239,262)

 

Dividends

 

 

(2,554)

 

 

(1,887)

 

Net cash provided by financing activities

 

 

221,173

 

 

68,516

 

Net Change in Cash and Cash Equivalents

 

 

(71,786)

 

 

(2,141)

 

Cash and Cash Equivalents, Beginning of Period

 

 

359,519

 

 

445,701

 

Cash and Cash Equivalents, End of Period

 

$

287,733

 

$

443,560

 

Additional Cash Flows Information:

 

 

 

 

 

  

 

Interest paid

 

$

7,751

 

$

5,636

 

Income taxes paid

 

 

 —

 

 

106

 

The Company purchased all of the capital stock of Joy State Bank for $5,472 on January 2, 2018.  In conjunction with the acquisition, liabilities were assumed as follows:

 

 

 

 

 

 

 

Fair value of assets acquired

 

$

44,217

 

$

 —

 

Cash paid for the capital stock

 

 

5,472

 

 

 —

 

Liabilities assumed

 

 

38,745

 

 

 —

 

 

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 condensed consolidated financial statements include the accounts of Merchants Bancorp, a registered bank holding company (the “Company”) and its wholly owned subsidiary, Merchants Bank of Indiana (the “Bank”) and the Bank’s subsidiaries, P/R Mortgage and Investment Corp. (“P/RMIC”), Ash Realty Holdings, LLC (“Ash Realty”), Natty Mac Funding, Inc. (“NMF”), and MBI Midtown West, LLC (“MMW”), and P/RMIC’s subsidiary RICHMAC Funding LLC (“RICHMAC”), and Joy State Bank (“JSB”), (collectively referred to as the “Company”).

The accompanying unaudited condensed consolidated balance sheet of the Company as of December 31, 2017, which has been derived from audited financial statements, and unaudited condensed consolidated financial statements of the Company as of March 31, 2018 and for the three months ended March 31, 2018 and 2017, 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, 2017 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, 2018 and the results of operations for the three months ended March 31, 2018 and 2017, and cash flows for the three months ended March 31, 2018 and 2017. All interim amounts have not been audited and the results of operations for the three months ended March 31, 2018, herein are not necessarily indicative of the results of operations to be expected for the entire year.

Principles of Consolidation

The consolidated financial statements as of and for the period ended March 31, 2017, include the Company and its wholly owned subsidiary, the Bank, and its wholly owned subsidiaries, P/RMIC, Ash Realty, NMF, and MMW.  The consolidated financial statements as of and for the period ended March 31, 2018 also includes the Company’s wholly owned subsidiaries RICHMAC and JSB.  All significant intercompany accounts and transactions have been eliminated in consolidation.

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 loan losses, loan servicing rights and fair values of financial instruments.

Stock Split

On July 5, 2017, the Company’s shareholders approved an increase of authorized common shares to 50.0 million shares, and the Company declared a 2.5-for-1 stock split effective July 6, 2017.  The presentation of authorized common shares has been retrospectively adjusted to give effect to the increase, and all share and per share amounts have been retrospectively adjusted to give effect to the stock split. 

8


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Acquisitions

Effective August 15, 2017, the Bank acquired 100% of the equity interests of RICHMAC Funding, LLC, which is a national multifamily housing mortgage lender and servicer. The purchase price was paid in shares of Company common stock with a value of $8.1 million. The Company recorded goodwill and intangible assets totaling $3.9 million and $1.6 million, respectively, in connection with the acquisition.  Certain fair value measurements and the purchase price allocation are still being evaluated by management and are subject to change during the measurement period.  The acquisition did not materially impact the Company’s financial position, results of operations or cash flows. 

On May 8, 2017, the Company entered into a Stock Purchase Agreement to acquire Joy State Bank.  The acquisition closed on January 2, 2018 at a total cost of approximately $5.5 million.  At December 31, 2017 Joy State Bank had $43 million in assets.  The Company recorded goodwill and intangible assets totaling $737,000 and $478,000, respectively, in connection with the acquisition.  The intangibles consisted of core deposit intangibles that are being amortized over 10 years on an accelerated basis.    The acquired time deposits of $16.7 million were recorded at a fair value of $16.9 million.  The fair value premium of $185,000 is being accreted against interest expense over 20 months. The acquired loan portfolio of $27.9 million was recorded at a fair value of $27.5 million.  The fair value discount of $458,000 is being accreted to interest income on a straight-line basis over an average of 39 months in accordance with ASC 310-20.  While there were some loans identified for potential classification under ASC 310-30, they were not material to the transaction.  Certain fair value measurements and the purchase price allocation are still being evaluated by management and are subject to change during the measurement period.  The acquisition did not materially impact the Company’s financial position, results of operations or cash flows.

Reclassifications

 

Certain reclassifications have been made to the 2017 financial statements to conform to the financial statement presentation as of and for the three months ended March 31, 2018.  These reclassifications had no effect on net income.

Note 2:   Securities

Trading Securities

 

Securities that are held principally for resale in the near term are recorded as trading securities at fair value with changes in fair value recorded in earnings.  Trading securities include FHA and conventional participation certificates.  The fair value changes recorded in earnings totaled $1.5 million and $1.7 million for the three-month periods ended March 31, 2018 and 2017, respectively.

9


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Securities Available-For-Sale

 

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

Gross

 

Gross

 

Approximate

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

3,494

 

$

 —

 

$

21

 

$

3,473

Federal agencies

 

 

379,719

 

 

 —

 

 

2,103

 

 

377,616

Equities

 

 

69

 

 

18

 

 

 —

 

 

87

Municipals

 

 

6,430

 

 

 —

 

 

 —

 

 

6,430

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

25,851

 

 

 —

 

 

 —

 

 

25,851

Total available-for-sale securities

 

$

415,563

 

$

18

 

$

2,124

 

$

413,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

Gross

 

Gross

 

Approximate

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

1,000

 

$

 —

 

$

 8

 

$

992

Federal agencies

 

 

376,414

 

 

 —

 

 

1,683

 

 

374,731

Municipals

 

 

6,688

 

 

 —

 

 

 —

 

 

6,688

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

25,960

 

 

 —

 

 

 —

 

 

25,960

Total available-for-sale securities

 

$

410,062

 

$

 —

 

$

1,691

 

$

408,371

 

The amortized cost and fair value of available-for-sale securities at March 31, 2018 and December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

    

Cost

    

Value

    

Cost

    

Value

Contractual Maturity

 

(In thousands)

Within one year

 

$

184,928

 

$

184,268

 

$

164,997

 

$

164,321

After one through five years

 

 

198,515

 

 

197,051

 

 

212,905

 

 

211,890

After five through ten years

 

 

 —

 

 

 —

 

 

 —

 

 

 —

After ten years

 

 

6,200

 

 

6,200

 

 

6,200

 

 

6,200

 

 

 

389,643

 

 

387,519

 

 

384,102

 

 

382,411

Mortgage-backed - Government-sponsored entity (GSE) - residential

 

 

25,851

 

 

25,851

 

 

25,960

 

 

25,960

Equities

 

 

69

 

 

87

 

 

 —

 

 

 —

 

 

$

415,563

 

$

413,457

 

$

410,062

 

$

408,371

 

No securities available-for-sale were sold during the three months ended March 31, 2018.

The following tables show the Company’s investments’ gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment

10


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

class and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

 

 

 

12 Months or

 

 

 

 

 

 

 

 

Less than 12 Months

 

 Longer

 

Total

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

 —

 

$

 —

 

$

3,473

 

$

21

 

$

3,473

 

$

21

Federal agencies

 

 

173,816

 

 

633

 

 

203,800

 

 

1,470

 

 

377,616

 

 

2,103

 

 

$

173,816

 

$

633

 

$

207,273

 

$

1,491

 

$

381,089

 

$

2,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

12 Months or

 

 

 

 

 

 

 

 

Less than 12 Months

 

Longer

 

Total

 

    

 

 

    

Gross

    

 

 

    

Gross

    

 

 

    

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

992

 

$

 8

 

$

 —

 

$

 —

 

$

992

 

$

 8

Federal agencies

 

 

191,064

 

 

903

 

 

183,667

 

 

780

 

 

374,731

 

 

1,683

 

 

$

192,056

 

$

911

 

$

183,667

 

$

780

 

$

375,723

 

$

1,691

 

 

Other-than-temporary Impairment

Unrealized losses on securities have not been recognized to income because the Company has the intent and ability to hold the securities for the foreseeable future, and the decline in fair value is primarily due to increased market interest rates. The fair value is expected to recover as the bonds approach the maturity date.

 

Note 3:   Loans and Allowance for Loan Losses

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. 

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past-due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income.  The interest on these loans is applied to the principal balance until the loan can be returned to an accrual status.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

11


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

For all loan portfolio segments, the Company promptly charges off loans, or portions thereof, when available information confirms that specific loans are uncollectable based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations.  For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan.  Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms. 

The Company uses warehouse loans or credit to fund mortgage loans held for sale from closing until sale to an investor. Under a warehousing arrangement the Company funds a mortgage loan as secured financing.  The warehousing arrangement is secured by the underlying mortgages and a combination of deposits, personal guarantees and advance rates.

The Company holds the collateral until it is sent under a bailee arrangement instructing the investor to send proceeds to the Company.  Typical investors are large financial institutions or government agencies.

Interest earned from the time of funding to the time of sale is recognized as interest income as accrued. Fees earned agreements are recognized when collected as noninterest income.

Loans receivable at March 31, 2018 and December 31, 2017 include:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2018

    

2017

    

 

 

(In thousands)

 

 

 

 

 

 

 

 

Mortgage warehouse lines of credit

 

$

245,724

 

$

224,937

 

Residential real estate

 

 

356,885

 

 

330,410

 

Multi-family and healthcare financing

 

 

645,432

 

 

529,259

 

Commercial and commercial real estate

 

 

249,372

 

 

228,668

 

Agricultural production and real estate

 

 

64,548

 

 

51,966

 

Consumer and margin loans

 

 

11,229

 

 

9,420

 

 

 

 

1,573,190

 

 

1,374,660

 

Less

 

 

  

 

 

  

 

Allowance for loan losses

 

 

9,705

 

 

8,311

 

 

 

 

 

 

 

 

 

Loans Receivable

 

$

1,563,485

 

$

1,366,349

 

 

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Mortgage Warehouse Lines of Credit (MTG WHLOC):  Under its warehouse program, the Company provides warehouse financing arrangements to approved mortgage companies for the origination and sale of residential mortgage loans and to a lesser extent multi-family loans. Agency eligible, governmental and jumbo residential mortgage loans that are secured by mortgages placed on existing one to four family dwellings may be originated or purchased and placed on each mortgage warehouse line.

As a secured line of credit, collateral pledged to the Company secures each individual mortgage until the lender sells the loan in the secondary market. A traditional secured warehouse line of credit typically carries a base interest rate of 30 day LIBOR or the Wall Street Journal Prime Rate plus a margin.

12


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Risk is evident if there is a change in the fair value of mortgage loans originated by mortgage bankers during the time in warehouse, the sale of which is the expected source of repayment of the borrowings under a warehouse line of credit.

Residential Real Estate Loans (RES RE):  The real estate loans are secured by owner-occupied 1‑4 family residences. Repayment of residential real estate loans is primarily dependent on the personal income and credit rating of the borrowers.

Multi-Family and Healthcare Financing (MF RE):  The Company engages in multi-family and healthcare financing, including construction loans, specializing in originating and servicing loans for multi-family rental and senior living properties. In addition, the Company originates loans secured by an assignment of federal income tax credits by partnerships invested in multi-family real estate projects. Construction and land loans are generally based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economy in the Company’s market area. Repayment of these loans depends on the successful operation of a business or property and the borrower’s cash flows.

Commercial Lending and Commercial Real Estate Loans (CML & CRE):  The commercial lending and commercial real estate portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions, as well as loans to commercial customers to finance land and improvements. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Agricultural Production and Real Estate Loans (AG & AGRE):  Agricultural production loans are generally comprised of seasonal operating lines of credit to grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. The Company also offers long term financing to purchase agricultural real estate. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry-developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary. The Company is approved to sell agricultural loans in the secondary market through the Federal Agricultural Mortgage Corporation and uses this relationship to manage interest rate risk within the portfolio.

Consumer and Margin Loans (CON & MAR):  Consumer loans are those loans secured by household goods. Margin loans are those loans secured by marketable securities. The term and maximum amount for these loans are determined by considering the purpose of the loan, the margin (advance percentage against value) in all collateral, the primary source of repayment, and the borrower’s other related cash flow.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income.  Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance. 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 

13


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The allowance consists of allocated and general components.  The allocated component relates to loans that are classified as impaired.  For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process.  Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.  For impaired loans where the Company utilizes discounted cash flows to determine the level of impairment, the Company includes the entire change in the present value of cash flows as bad debt expense. 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. 

In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In restructuring the loan, the Company attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the loan.  A troubled debt restructuring (TDR) occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

Nonaccrual loans, including TDRs that have not met the six month minimum performance criterion, are reported as non-performing loans. For all loan classes, it is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. A loan is generally classified as nonaccrual when the Company believes that receipt of principal and interest is questionable under the terms of the loan agreement. Most generally, this is at 90 or more days past due. 

With regard to determination of the amount of the allowance for credit losses, restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed previously above. 

14


 

Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements