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Section 1: 10-Q (10-Q)

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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

September 30, 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 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 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 November 9, 2018, the latest practicable date,  28,694,036 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 September 30, 2018 and December 31, 2017 

3

 

 

Condensed Consolidated Statements of Income for the Three and Nine months Ended September 30, 2018 and 2017 

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine months Ended September 30, 2018 and 2017 

5

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Nine months Ended September 30, 2018 and 2017 

6

 

 

Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 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 

40

 

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk 

53

 

 

Item 4 Controls and Procedures 

53

 

 

PART II – OTHER INFORMATION 

54

 

 

Item 1  Legal Proceedings 

54

 

 

Item 1A  Risk Factors 

54

 

 

Item 2  Unregistered Sales of Equity Securities and Use of Proceeds 

54

 

 

Item 3  Defaults Upon Senior Securities 

54

 

 

Item 4  Mine Safety Disclosures 

54

 

 

Item 5  Other Information 

54

 

 

Item 6  Exhibits 

55

 

 

SIGNATURES 

56

 

 

2


 

Table of Contents

Part I – Financial Information

Item 1. Financial Statements

Merchants Bancorp

Condensed Consolidated Balance Sheets

September 30, 2018 (Unaudited) and December 31, 2017

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

Assets

 

 

  

 

 

  

Cash and due from banks

 

$

20,069

 

$

18,905

Interest-earning demand accounts

 

 

390,687

 

 

340,614

Cash and cash equivalents

 

 

410,756

 

 

359,519

Securities purchased under agreements to resell

 

 

6,913

 

 

7,043

Trading securities

 

 

74,116

 

 

140,837

Available for sale securities

 

 

269,709

 

 

408,371

Federal Home Loan Bank (FHLB) stock

 

 

7,608

 

 

7,539

Loans held for sale (includes $5,888 at fair value for 2018)

 

 

1,004,402

 

 

995,319

Loans receivable, net of allowance for loan losses of $11,243 and $8,311, respectively

 

 

1,905,859

 

 

1,366,349

Premises and equipment, net

 

 

10,846

 

 

5,354

Mortgage servicing rights

 

 

71,490

 

 

66,079

Interest receivable

 

 

12,289

 

 

8,326

Goodwill

 

 

5,302

 

 

3,902

Intangible assets, net

 

 

1,763

 

 

1,512

Other assets and receivables

 

 

25,896

 

 

22,983

Total assets

 

$

3,806,949

 

$

3,393,133

Liabilities and Shareholders' Equity

 

 

  

 

 

  

Liabilities

 

 

  

 

 

  

Deposits

 

 

  

 

 

  

Noninterest bearing

 

$

336,940

 

$

620,700

Interest bearing

 

 

2,965,429

 

 

2,322,861

Total deposits

 

 

3,302,369

 

 

2,943,561

Borrowings

 

 

67,279

 

 

56,612

Deferred and current tax liabilities, net

 

 

12,859

 

 

12,422

Other liabilities

 

 

17,096

 

 

13,064

Total liabilities

 

 

3,399,603

 

 

3,025,659

Commitments and Contingencies

 

 

  

 

 

  

Shareholders' Equity

 

 

  

 

 

  

Common stock, without par value

 

 

  

 

 

  

Authorized - 50,000,000 shares

 

 

  

 

 

  

Issued and outstanding - 28,694,036 shares at September 30, 2018 and 28,685,167 shares at December 31, 2017

 

 

135,021

 

 

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

 

 

232,041

 

 

192,008

Accumulated other comprehensive loss

 

 

(1,297)

 

 

(1,006)

Total shareholders' equity

 

 

407,346

 

 

367,474

Total liabilities and shareholders' equity

 

$

3,806,949

 

$

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 and Nine Months Ended September 30, 2018 and 2017

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Interest Income

 

 

  

 

 

  

 

 

  

 

 

 

 

Loans

 

$

32,056

 

$

22,016

 

$

85,458

 

$

56,821

 

Investment securities:

 

 

  

 

 

  

 

 

 

 

 

  

 

Trading

 

 

1,299

 

 

1,300

 

 

3,777

 

 

4,124

 

Available for sale

 

 

1,541

 

 

1,259

 

 

4,708

 

 

3,175

 

Federal Home Loan Bank stock

 

 

87

 

 

80

 

 

297

 

 

240

 

Other

 

 

2,594

 

 

1,351

 

 

6,498

 

 

3,117

 

Total interest income

 

 

37,577

 

 

26,006

 

 

100,738

 

 

67,477

 

Interest Expense

 

 

  

 

 

  

 

 

  

 

 

  

 

Deposits

 

 

11,670

 

 

5,659

 

 

28,427

 

 

14,170

 

Borrowed funds

 

 

2,425

 

 

1,957

 

 

6,515

 

 

5,662

 

Total interest expense

 

 

14,095

 

 

7,616

 

 

34,942

 

 

19,832

 

Net interest income

 

 

23,482

 

 

18,390

 

 

65,796

 

 

47,645

 

Provision for loan losses

 

 

617

 

 

592

 

 

3,021

 

 

1,072

 

Net Interest Income After Provision for Loan Losses

 

 

22,865

 

 

17,798

 

 

62,775

 

 

46,573

 

Noninterest Income

 

 

  

 

 

  

 

 

  

 

 

  

 

Gain on sale of loans

 

 

8,825

 

 

7,204

 

 

27,548

 

 

27,813

 

Loan servicing fees, net

 

 

1,851

 

 

(83)

 

 

4,084

 

 

2,301

 

Mortgage warehouse fees

 

 

778

 

 

749

 

 

1,948

 

 

2,007

 

Other income

 

 

453

 

 

186

 

 

1,270

 

 

652

 

Total noninterest income

 

 

11,907

 

 

8,056

 

 

34,850

 

 

32,773

 

Noninterest Expense

 

 

  

 

 

  

 

 

  

 

 

  

 

Salaries and employee benefits

 

 

7,842

 

 

5,350

 

 

21,597

 

 

14,417

 

Loan expenses

 

 

1,254

 

 

1,119

 

 

3,512

 

 

3,072

 

Occupancy and equipment

 

 

736

 

 

326

 

 

2,062

 

 

1,080

 

Professional fees

 

 

590

 

 

561

 

 

1,755

 

 

1,091

 

Deposit insurance expense

 

 

269

 

 

230

 

 

751

 

 

704

 

Technology expense

 

 

412

 

 

325

 

 

996

 

 

831

 

Other expense

 

 

1,346

 

 

1,031

 

 

4,046

 

 

2,649

 

Total noninterest expense

 

 

12,449

 

 

8,942

 

 

34,719

 

 

23,844

 

Income Before Income Taxes

 

 

22,323

 

 

16,912

 

 

62,906

 

 

55,502

 

Provision for income taxes

 

 

5,584

 

 

6,445

 

 

15,454

 

 

21,147

 

Net Income

 

$

16,739

 

$

10,467

 

$

47,452

 

$

34,355

 

  Dividends on preferred stock

 

 

(833)

 

 

(833)

 

 

(2,498)

 

 

(2,497)

 

Net Income Allocated to Common Shareholders

 

 

15,906

 

 

9,634

 

 

44,954

 

 

31,858

 

Basic Earnings Per Share

 

$

0.55

 

$

0.45

 

$

1.57

 

$

1.50

 

Diluted Earnings Per Share

 

$

0.55

 

$

0.45

 

$

1.57

 

$

1.50

 

Weighted-Average Shares Outstanding

 

 

  

 

 

  

 

 

  

 

 

  

 

Basic

 

 

28,694,036

 

 

21,310,199

 

 

28,692,591

 

 

21,180,384

 

Diluted

 

 

28,727,822

 

 

21,328,237

 

 

28,719,740

 

 

21,193,857

 

Dividends Per Share

 

$

0.06

 

$

0.05

 

$

0.18

 

$

0.15

 

 

See notes to condensed consolidated financial statements.

 

4


 

Table of Contents

 

 

Merchants Bancorp

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three and Nine Months Ended September 30, 2018 and 2017

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

    

2018

    

2017

Net Income

 

$

16,739

 

$

10,467

 

$

47,452

 

$

34,355

Other Comprehensive Income (Loss):

 

 

  

 

 

 

 

 

  

 

 

  

Net change in unrealized losses on investment securities available for sale, net of (taxes) benefits of $(58),  $(57),  $(15), and $(105) respectively

 

 

173

 

 

86

 

 

(48)

 

 

157

Comprehensive Income

 

$

16,912

 

$

10,553

 

$

47,404

 

$

34,512

 

See notes to condensed consolidated financial statements.

 

 

5


 

Table of Contents

Merchants Bancorp

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 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

 

 —

 

 

 —

 

 —

 

 

 —

 

 

47,452

 

 

 —

 

 

47,452

Shares issued for stock compensation plans

 

8,869

 

 

130

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

130

Dividends on preferred stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,498)

 

 

 —

 

 

(2,498)

Dividends on common stock, $0.18 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(5,164)

 

 

 —

 

 

(5,164)

Reclassification of deferred tax asset due to tax reform

 

 —

 

 

 —

 

 —

 

 

 —

 

 

243

 

 

(243)

 

 

 —

Other comprehensive loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(48)

 

 

(48)

Balance, September 30, 2018

 

28,694,036

 

$

135,021

 

41,625

 

$

41,581

 

$

232,041

 

$

(1,297)

 

$

407,346

 

 

For the Nine Months Ended September 30, 2017

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Preferred Stock

 

Retained

 

Comprehensive

 

 

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Earnings

    

Income (Loss)

    

Total

Balance, January 1, 2017

 

21,111,200

 

$

20,061

 

41,625

 

$

41,581

 

$

145,274

 

$

(628)

 

$

206,288

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

34,355

 

 

 —

 

 

34,355

Shares issued for stock compensation plans

 

3,200

 

 

42

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

42

Cash paid in lieu of fractional shares in stock split

 

(4)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Shares issued for RICHMAC acquisition

 

383,271

 

 

8,127

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,127

Dividends on preferred stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,498)

 

 

 —

 

 

(2,498)

Dividends on common stock, $0.15 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(3,186)

 

 

 —

 

 

(3,186)

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

157

 

 

157

Balance, September 30, 2017

 

21,497,667

 

$

28,230

 

41,625

 

$

41,581

 

$

173,945

 

$

(471)

 

$

243,285

 

See notes to condensed consolidated financial statements.

 

 

 

6


 

Table of Contents

Merchants Bancorp

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2018 and 2017

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2018

    

2017

Operating activities:

 

 

  

 

 

  

Net income

 

$

47,452

 

$

34,355

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

 

 

  

 

 

  

Depreciation

 

 

336

 

 

201

Provision for loan losses

 

 

3,021

 

 

1,072

Gain on sale of loans

 

 

(27,548)

 

 

(27,813)

Proceeds from sales of loans

 

 

13,387,330

 

 

14,380,078

Loans and participations originated and purchased for sale

 

 

(13,374,161)

 

 

(14,394,235)

Change in mortgage servicing rights for paydowns and fair value adjustments

 

 

1,854

 

 

4,602

Net change in:

 

 

 

 

 

  

Trading securities

 

 

66,721

 

 

16,315

Other assets and receivables

 

 

(4,718)

 

 

11,504

Other liabilities

 

 

3,441

 

 

4,869

Other

 

 

1,050

 

 

721

Net cash provided by operating activities

 

 

104,778

 

 

31,669

Investing activities:

 

 

 

 

 

  

Net change in securities purchased under agreements to resell

 

 

130

 

 

(1,688)

Purchases of available-for-sale securities

 

 

(36,284)

 

 

(148,233)

Proceeds from the sale of available-for-sale securities

 

 

6,431

 

 

 —

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

 

 

171,319

 

 

43,779

Purchases of loans

 

 

(112,219)

 

 

(101,227)

Net change in loans receivable

 

 

(403,900)

 

 

(166,634)

Purchase of Federal Home Loan Bank stock

 

 

(233)

 

 

 —

Proceeds from sale of Federal Home Loan Bank stock

 

 

218

 

 

 —

Proceeds from sale of assets

 

 

10

 

 

 —

Purchases of premises and equipment

 

 

(5,440)

 

 

(754)

Purchases of mortgage servicing rights

 

 

(790)

 

 

(1,209)

Purchase of limited partnership interests

 

 

(3,005)

 

 

(1,845)

Cash received in acquisition of subsidiary

 

 

6,505

 

 

363

Other investing activities

 

 

(74)

 

 

111

Net cash used in investing activities

 

 

(377,332)

 

 

(377,337)

Financing activities:

 

 

  

 

 

 

Net change in deposits

 

 

321,931

 

 

472,843

Proceeds from Federal Home Loan Bank advances

 

 

536,367

 

 

464,250

Repayment of Federal Home Loan Bank advances

 

 

(536,379)

 

 

(464,632)

Proceeds from notes payable

 

 

9,534

 

 

 —

Dividends

 

 

(7,662)

 

 

(5,684)

Net cash provided by financing activities

 

 

323,791

 

 

466,777

Net Change in Cash and Cash Equivalents

 

 

51,237

 

 

121,109

Cash and Cash Equivalents, Beginning of Period

 

 

359,519

 

 

445,701

Cash and Cash Equivalents, End of Period

 

$

410,756

 

$

566,810

Additional Cash Flows Information:

 

 

 

 

 

  

Interest paid

 

$

31,694

 

$

19,258

Income taxes paid

 

 

13,023

 

 

17,225

The Company purchased all of the capital stock of Joy State Bank on January 2, 2018 and purchased all of the capital stock for RICHMAC on August 15, 2017.  In conjunction with the acquisitions, liabilities were assumed as follows:

 

 

 

 

 

 

Fair value of assets acquired

 

$

44,217

 

$

12,666

Cash paid for the capital stock/fair value common stock issued

 

 

5,472

 

 

8,127

  Fair value of liabilities assumed

 

 

38,745

 

 

4,539

 

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 subsidiaries, Joy State Bank (which was renamed Farmers-Merchants Bank of Illinois on October 22, 2018), Merchants Bank of Indiana (the “Bank”), and the Bank’s subsidiaries, Merchants Capital Corp. (“MCC,” formerly known as P/R Mortgage and Investment Corp. prior to October 1, 2018), Ash Realty Holdings, LLC (“Ash Realty”), Natty Mac Funding, Inc. (“NMF”), MBI Midtown West, LLC (“MMW”), and MCC’s subsidiary RICHMAC Funding LLC (“RICHMAC”), (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 September 30, 2018 and for the three and nine months ended September 30, 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 September 30, 2018 and the results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. All interim amounts have not been audited and the results of operations for the three and nine months ended September 30, 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 September 30, 2018 include the Company, and its wholly owned subsidiaries, the Bank, and Joy State Bank (prior to it being renamed Farmers-Merchants Bank of Illinois, effective October 22, 2018).   Also included are the Bank’s wholly owned subsidiaries, MCC, MCC’s wholly owned subsidiary, RICHMAC, Ash Realty, NMF, and MMW.  The consolidated financial statements as of and for the period ended September 30, 2017, include the Company and its wholly owned subsidiary, the Bank, and the Bank’s wholly owned subsidiaries, MCC,  MCC’s wholly owned subsidiary, RICHMAC as of August 15, 2017, Ash Realty, NMF, and MMW.  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

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Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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. 

Acquisitions

Effective August 15, 2017, the Bank acquired 100% of the equity interests of RICHMAC Funding, LLC, which is a national multi-family 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 $3.8 million and $1.6 million, respectively, in connection with the acquisition.  As a result of the acquisition, the Company expanded its product offerings and benefited from economies of scale. 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 $989,000 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.  On October 22, 2018, the Company changed the name of Joy State Bank to Farmers-Merchants Bank of Illinois.  Certain fair value measurements and the purchase price allocation are still being evaluated by management and are subject to change during the measurement period.  As a result of the acquisition, the Company increased its deposit base and benefited from economies of scale.  The acquisition did not materially impact the Company’s financial position, results of operations or cash flows.

On October 1, 2018, the Company acquired FM Bancorp, Inc., a bank holding company, and its wholly owned subsidiary, Farmers-Merchants National Bank of Paxton.  On that date, FM Bancorp, Inc. ultimately merged with and into the Company, with the Company as the surviving entity, and Farmers-Merchants National Bank of Paxton merged with and into Joy State Bank, with Joy State Bank as the surviving bank.  Effective October 22, 2018, Joy State Bank’s name changed to Farmers-Merchants Bank of Illinois.  Under the terms of the merger agreement, shareholders of the 27,537 outstanding shares of FM Bancorp, Inc. were to be compensated $795.29 per share, for a total purchase price of $21.9 million.  As of September 30, 2018, FM Bancorp, Inc. and Farmers-Merchants National Bank of Paxton had total assets of approximately $109.6 million, deposits of approximately $95.7 million, and net loan receivables of approximately $35.0 million.   As a result of the acquisition, the Company expects to increase its deposit base and to benefit from economies of scale. The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided.    

Reclassifications

 

Certain reclassifications have been made to the 2017 financial statements to conform to the financial statement presentation as of and for the three and nine months ended September 30, 2018.  These reclassifications had no effect net income.

 

 

 

 

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Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 Fannie Mae and Freddie Mac participation certificates.  The unrealized gains included in trading securities totaled $661,000 and $1.4 million at September 30, 2018 and 2017, respectively.

Securities Available-For-Sale

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

Gross

 

Gross

 

Approximate

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

 

 

(In thousands)

Available-for-sale securities:

 

 

  

 

 

  

 

 

  

 

 

  

Treasury notes

 

$

3,489

 

$

 —

 

$

24

 

$

3,465

Federal agencies

 

 

242,247

 

 

 —

 

 

1,703

 

 

240,544

Equities

 

 

69

 

 

 3

 

 

 —

 

 

72

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

 

 

25,628

 

 

 —

 

 

 —

 

 

25,628

Total available-for-sale securities

 

$

271,433

 

$

 3

 

$

1,727

 

$

269,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2018 and December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may

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Table of Contents

Merchants Bancorp

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

    

Cost

    

Value

    

Cost

    

Value

Contractual Maturity

 

(In thousands)

Within one year

 

$

166,208

 

$

165,217

 

$

164,997

 

$

164,321

After one through five years

 

 

79,528

 

 

78,792

 

 

212,905

 

 

211,890

After five through ten years

 

 

 —

 

 

 —

 

 

 —

 

 

 —

After ten years

 

 

 —

 

 

 —

 

 

6,200

 

 

6,200

 

 

 

245,736

 

 

244,009

 

 

384,102

 

 

382,411

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

 

 

25,628

 

 

25,628

 

 

25,960

 

 

25,960

Equities

 

 

69

 

 

72

 

 

 —

 

 

 —

 

 

$

271,433

 

$

269,709