Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series A Preferred Stock, in whole or in part, at our option, on any dividend payment date on or after April 1, 2024, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.
On August 19, 2019, the Company issued 5,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, without par value (the “Series B Preferred Stock”), and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share). The aggregate gross offering proceeds for the shares issued by the Company was $125.0 million, and after deducting underwriting discounts and commissions and offering expenses of approximately $4.2 million paid to third parties, the Company received total net proceeds of $120.8 million. The Series B Preferred Stock have no voting rights with respect to matters that generally require the approval of our common shareholders. Dividends on the Series B Preferred Stock, to the extent declared by the Company’s board, are payable quarterly. The Company may redeem the Series A Preferred Stock, in whole or in part, at our option, on any dividend payment date on or after October 1, 2024, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.
Private Placement Offerings of Preferred Stock
The Company previously issued a total of 41,625 shares of 8% Non-Cumulative, Perpetual Preferred Stock, without par value, with a liquidation preference of $1,000.00 per share (8% Preferred Stock”) in private placement offerings. The Company may redeem this Preferred Stock, in whole or in part, at our option, on any dividend payment date on or after December 31, 2020, subject to the approval of the appropriate federal banking agency, at the liquidation preference, plus any declared and unpaid dividends (without regard to any undeclared dividends) to, but excluding, the date of redemption.
On June 27, 2019 the Company issued an additional 874,000 shares of its 7.00% Series A Preferred Stock, without par value and with a liquidation preference of $25.00 per share, for aggregate proceeds of $21.85 million. No underwriter or placement agent was involved in this private placement and the Company did not pay any brokerage or underwriting fees or discounts in connection with the issuance of such shares. The shares were purchased primarily by related parties, including Michael Petrie, Chairman and Chief Executive Officer; Randall Rogers, Vice Chairman and a director and members of his family; Michael Dury, President of Merchants Capital; and other accredited investors.
Repurchase of Preferred Stock:
On September 23, 2019 the Company repurchased and subsequently retired 874,000 shares of its 7.00% Series A Preferred Stock, for its liquidation preference of $25 per share, at an aggregate cost of $21.85 million. There were no brokerage fees in connection with the transaction.
Note 12: Recent Accounting Pronouncements
The Company is an emerging growth company and as such will be subject to the effective dates noted for private companies if they differ from the effective dates noted for public companies.
FASB ASU 2016‑02, Leases
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016‑02, “Leases.” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short‑term leases) at the commencement date:
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A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of the financial condition at March 31, 2020, and results of operations for the three months ended March 31, 2020 and 2019, is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto, appearing in Part I, Item 1 of this Form 10-Q.
The words “the Company,” “we,” “our,” and “us” refer to Merchants Bancorp and its consolidated subsidiaries, unless we indicate otherwise.
Financial Highlights for the Three Months Ended March 31, 2020
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Total assets of $7.9 billion increased $1.5 billion, or 24%, compared to December 31, 2019, driven by record-setting loan growth. Return on average assets was 1.49% compared to 1.14% for the three months ended March 31, 2019.
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Net income per common share of $0.73 increased 115% compared to the three months ended March 31, 2019.
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The $14.0 million, or 133%, increase in net income compared to the three months ended March 31, 2019 was primarily driven by a 701% increase in gain on sale of loans from significantly higher growth in multi-family loans, and a 59% increase in net interest income that reflected significant growth in mortgage warehouse loans.
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Results reflected a $6.5 million negative fair market value adjustment to mortgage servicing rights compared to a $1.5 million negative adjustment in the three months ended March 31, 2019.
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Partially offsetting the increases in net income was a $9.3 million, or 71%, increase in noninterest expenses, primarily due to an increase in salaries and employee benefits associated with higher commissions from higher volume and to support the strong growth in our businesses. The efficiency ratio was 38.3% compared to 46.9% for the three months ended March 31, 2019.
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The net interest margin of 2.40% declined 37 basis points compared to 2.77% for the three months ended March 31, 2019. The decline reflected the flattening of the yield curve, and reflects the shift in business mix to a higher concentration of warehouse loans that typically are funded for a shorter duration and earn interest based on underlying mortgage rates or LIBOR. Furthermore, interest rate floors are used in the Mortgage Warehousing segment to support net interest margin. Profitability in this business, which also includes fees classified as noninterest income, made the most significant contribution to net income for the first quarter of 2020. Our diverse business model is designed to maximize overall profitability in both rising and falling interest rate environments, and unlike many other banks and holding companies, our future profitability relies less upon changes in net interest margin.
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A 210% increase in warehouse loan volume compared to the three months ended March 31, 2019 was well ahead of industry volume increases of 73%, according to the Mortgage Bankers Association. We have benefited from the increased loan origination and refinancing activity due to lower market interest rates.
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The volume of loans originated and acquired for sale in the secondary market through our multi-family business increased by $786.1 million, to $810.6 million, compared to $24.4 million for the three months ended March 31, 2019.
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Our asset quality remained strong, with nonperforming loans representing only 0.19% of total loans, and the allowance for loan losses as a percentage nonperforming loans was 288.0%. The number of delinquencies improved, with the total balance of loans over 30 days past due declining from $12.6 million at December 31,
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2019, to $9.5 million at March 31, 2020. Loans classified as special mention (watch) also declined from $60.3 million at December 31, 2019, to $48.3 million at March 31, 2020.
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Business Overview
We are a diversified bank holding company headquartered in Carmel, Indiana and registered under the Bank Holding Company Act of 1956, as amended. We currently operate in and service multiple lines of business, including multi-family housing, mortgage warehouse financing, retail and correspondent residential mortgage banking, agricultural lending, and traditional community banking.
Our business consists primarily of funding low risk loans that sell within 90 days of origination. The sale of loans and servicing fees generated primarily from the multi-family rental real estate loans servicing portfolio contribute to noninterest income. The funding source is primarily from mortgage custodial, municipal, retail, commercial, and brokered deposits. We believe that the combination of net interest income and noninterest income from the sale of low risk profile assets results in lower than industry charge offs and a lower expense base serving to maximize net income and shareholder return.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the current circumstances. These estimates form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We are taking advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The estimates and judgments that management believes have the most effect on its reported financial position and results of operations are set forth within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since those reported for the year ended December 31, 2019.
Financial Condition
As of March 31, 2020, we had approximately $7.9 billion in total assets, $6.7 billion in deposits, and $673.0 million in total shareholders’ equity. Total assets as of March 31, 2020 included approximately $568.1 million of cash and cash equivalents, $2.8 billion of loans held for sale and $3.5 billion of loans held for investment. It also includes $465.2 million of trading securities that represent pre-sold multi-family rental real estate loan originations in primarily Government National Mortgage Association (“GNMA”) mortgage backed securities pending settlements that typically occur within 30 days. There are $339.1 million of available for sale securities that are match funded with related custodial deposits. There are restrictions on the types of securities, as these are funded by certain custodial deposits where we set the cost of deposits based on the yield of the related securities. Mortgage servicing rights were $70.0 million at March 31, 2020 based on the fair value of the loan servicing, which are primarily GNMA servicing rights with 10-year call protection.
Comparison of Financial Condition at March 31, 2020 and December 31, 2019
Total Assets. Total assets increased $1.5 billion, or 24%, to $7.9 billion at March 31, 2020 from $6.4 billion at December 31, 2019. The increase was due primarily to increases in loans held for sale of $702.2 million, net loans receivable of $489.3 million, trading securities of $195.3, and cash and cash equivalents of $61.4 million.
Cash and Cash Equivalents. Cash and cash equivalents increased $61.4 million, or 12%, to $568.1 million at March 31, 2020 from $506.7 million at December 31, 2019. The 12% increase reflected cash levels consistent with balance sheet growth and increased funding activities.
Trading Securities. Trading securities increased $195.3 million, or 72%, to $465.2 million at March 31, 2020, from $269.9 million at December 31, 2019. These represent loans that our banking subsidiary, Merchants Bank, has funded and are held pending settlement, primarily as GNMA mortgage-backed securities with a firm investor commitment to purchase the securities. The 72% increase was primarily due to a significant increase in the volume of loans that had not yet settled with government agencies.
Securities Available-for-Sale. Investment securities available-for-sale increased $48.8 million, or 17%, to $339.1 million at March 31, 2020 from $290.2 million at December 31, 2019. The increase in securities available-for-sale was primarily due to purchases of $156.7 million, partially offset by calls, maturities, sales, and repayments of securities totaling $108.0 million during the period. We invest in available for sale securities primarily using funds from escrow deposits held at Merchants Bank, received in connection with our multi-family mortgage servicing activities. The available for sale securities are funded by, and paired with as to interest rates, escrow custodial deposits held at the Company on loans serviced by us. This portfolio of securities is structured to achieve a favorable interest rate spread.
Federal Home Loan Bank (“FHLB”) stock. FHLB stock increased $25.8 million, or 127%, to $46.2 million at March 31, 2020 from $20.4 million at December 31, 2019. The increase in FHLB stock was due primarily to additional borrowing from the FHLB that allows us to manage our liquidity and funding costs more effectively. Additional stock purchases are required by the FHLB in order to facilitate increased borrowing capacity.
Loans Held for Sale. Loans held for sale, comprised primarily of government agency eligible, single-family residential real estate loan participations, increased $702.2 million, or 34%, to $2.8 billion at March 31, 2020 from $2.1 billion at December 31, 2019. The increase in loans held for sale was due primarily to higher warehouse volumes at the end of the quarter ended March 31, 2020.
Loans Receivable, Net. Loans receivable, net, which are comprised of loans held for investment, increased $489.3 million, or 16%, to $3.5 billion at March 31, 2020 compared to December 31, 2019. The increase in net loans was comprised primarily of:
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an increase of $318.6 million, or 42%, in mortgage warehouse lines of credit, to $1.1 billion at March 31, 2020,
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an increase of $88.1 million, or 7%, in multi-family and healthcare financing loans, to $1.4 billion at March 31, 2020, and
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an increase of $70.1 million, or 18%, in commercial and commercial real estate, to $468.7 million at March 31, 2020.
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The increase in mortgage warehouse lines of credit was primarily due to an increase in single-family refinancing activity associated with lower market interest rates. Our growth in this business was higher than the industry overall. We reported a 3% increase in mortgage warehouse volumes for the three months ended March 31, 2020 compared to the three months ended December 31, 2019, while the forecast is for a 19% industry decline in single-family residential loan volumes for the same period, according to the Mortgage Bankers Association.
The increase in multi-family and healthcare financing was due to higher origination volume for construction, bridge and other loans generated through our Multi-family segment that will remain on our balance sheet until they convert to permanent financing or are otherwise paid off over an average of one to three years.
The increase in commercial loans was primarily due to higher origination volume for low income housing construction projects and SBA loan growth since December 31, 2019.
As of March 31, 2020, approximately 94% of the total net loans at Merchants Bank reprice within three months.
Allowance for Loan Losses. The allowance for loan losses of $18.9 million at March 31, 2020 increased $3.0 million compared to December 31, 2019, primarily reflecting increases associated with loan growth and uncertainties surrounding the COVID-19 pandemic. Loan growth drove approximately $2.5 million, or 82%, of the $3.0 million increase, while additional provision associated with the COVID-19 pandemic represented approximately $547,000, or 18% of the increase.
The $2.5 million increase in the allowance for loan losses associated with loan growth was largely driven by the 42% growth in mortgage warehouse loans, 18% growth in commercial and commercial real estate loans, and the 9% growth in agricultural loans. Loss factors applied to mortgage warehouse loans have traditionally represented the lowest loss factors of all loan categories utilized to compute allowances for loan losses. At March 31, 2020, the higher concentration of warehouse loans with lower loss factors in the allowance, has contributed to the overall percentage of the allowance for loan losses to total loans to increase by only 2 basis points, from .52% at December 31, 2019, to .54% at March 31, 2020.
The Company has minimal direct exposure to consumer, commercial, and other small businesses that may be negatively impacted by COVID-19, but management has analyzed and increased the qualitative factors in these and other loan categories for potential future loan losses attributable to COVID-19. Accordingly, the Company has increased the allowance by approximately $547,000. As of March 31, 2020, management did not see significant disruption with existing customers related to COVID-19. However, Merchants did grant customer requests to defer payments on 24 loans with unpaid balances of $23.6 million. While it is too early to know the full extent of potential future losses associated with the impact of COVID-19, the Company continues to monitor the situation and may need to adjust future expectations with additional increases to its provision for loan losses as developments occur throughout the remainder of 2020.
Also influencing the overall level of the allowance for loan losses is our differentiated strategy to typically hold loans with shorter durations and to maintain strict underwriting standards that enable us to sell the majority of our loans to government agencies.
Goodwill. Goodwill of $15.8 million at March 31, 2020 remained unchanged compared to December 31, 2019. As of March 31, 2020, the Company’s market capitalization declined in response to news related to the COVID-19 pandemic, to a level that was below its book value, prompting an assessment of potential impairment to goodwill. At this time, we do not believe there exists any impairment to goodwill or intangible assets.
Mortgage Servicing Rights. Mortgage servicing rights decreased $4.4 million, or 6%, to $70.0 million at March 31, 2020 compared to December 31, 2019. During the three months ended March 31, 2020, originated and purchased servicing of $3.9 million was offset by paydowns of $1.9 million and a fair value decrease of $6.5 million. Mortgage servicing rights are recognized in connection with sales of loans when we retain servicing of the sold loans, as well as upon purchases of loan servicing portfolios. The mortgage servicing rights are recorded and carried at fair value. The fair value decrease recorded during the three months ended March 31, 2020 was driven primarily by the decline in short term interest rates that drive the valuation of escrow deposits held in conjunction with the servicing, and the decline in multi-family mortgage rates that increased borrower prepayment assumptions. Further decreases in interest rates could result in additional reductions to fair market values. The opposite could occur if interest rates increase.
Deposits. Deposits increased 23%, to $6.7 billion at March 31, 2020 from $5.5 billion at December 31, 2019. The increase was primarily due to our higher use of brokered certificates of deposits to support the significant growth in warehouse loans and to match the expected duration.
Certificates of deposit accounts increased $581.1 million, or 27%, to $2.8 billion at March 31, 2020, primarily driven by the increase in brokered deposits outstanding period to period. Demand deposits increased $466.4 million, or 22%, to $2.6 billion at March 31, 2020, while savings deposits increased $197.1 million, or 16%, to $1.4 billion at March 31, 2020.
To fund the significant growth in loans that have relatively short durations, we have increased our use of brokered deposits by $671.2 million, or 31%, to $2.8 billion at March 31, 2020 from $2.2 billion at December 31, 2019.
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Brokered certificates of deposit accounts increased $503.4 million, or 26%, to $2.5 billion at March 31, 2020 from $2.0 billion at December 31, 2019.
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Brokered savings deposits increased $158.8 million, or 86%, to $343.4 million at March 31, 2020 from $184.6 million at December 31, 2019.
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Brokered demand deposit accounts increased by $9.0 million, or 90%, to $19.0 million at March 31, 2020 from $10.0 million at December 31, 2019.
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Although our brokered deposits are short-term in nature, they may be more rate sensitive compared to other sources of funding. In the future, those depositors may not replace their brokered deposits with us as they mature, or we may have to pay a higher rate of interest to keep those deposits or to replace them with other deposits or other sources of funds. Not being able to maintain or replace those deposits as they mature would adversely affect our liquidity. Additionally, if Merchants Bank does not maintain its well‑capitalized position, it may not accept or renew any brokered deposits without a waiver granted by the FDIC.
Interest-bearing deposits increased $1.2 billion, or 23%, to $6.4 billion at March 31, 2020, and noninterest-bearing deposits increased $55.8 million, to $327.8 million at March 31, 2020.
Borrowings. Borrowings totaled $444.6 million at March 31, 2020, an increase of $263.1 million, or 145%, from December 31, 2019, in order to maintain an appropriate level of cash to fund our businesses. Depending on rates and timing, borrowing can be a more effective liquidity management alternative than utilizing brokered deposits. The Company has also applied to utilize the Federal Reserve’s discount window, should the need arise.
Total Shareholders’ Equity. Total shareholders’ equity increased $19.2 million, or 3%, to $673.0 million at March 31, 2020 compared to December 31, 2019. The increase resulted primarily from an increase in net income of $24.6 million, which was partially offset by dividends paid on common and preferred shares of $2.3 million and $3.6 million, respectively, during the period.
Comparison of Operating Results for the Three Months Ended March 31, 2020 and 2019
General. Net income for the three months ended March 31, 2020 was $24.6 million, an increase of $14.0 million, or 133%, from net income of $10.6 million for the three months ended March 31, 2019. The increase was due to an $18.5 million increase in gain on sale of loans and a $14.2 million increase in net interest income. Partially offsetting the increases was a $9.3 million increase in noninterest expenses, a $5.5 million decrease in loan servicing fees related primarily to negative fair market value adjustments to mortgage servicing rights, a $4.8 million increase in the provision for income taxes, and a $2.3 million increase in the provision for loan losses.
Net Interest Income. Net interest income increased $14.2 million, or 59%, to $38.4 million for the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The increase was due to a $2.9
billion increase in our average interest earning assets that offset a 31 basis point decrease in our interest rate spread, to 2.19%, for the three months ended March 31, 2020 from 2.50% for the three months ended March 31, 2019.
Our net interest margin decreased 37 basis points, to 2.40%, for the three months ended March 31, 2020 from 2.77% for the three months ended March 31, 2019. The decline in net interest margin reflected the flattening of the yield curve compared to the prior year, and reflects the shift in business mix to a higher concentration of warehouse loans that typically are funded for a shorter duration and earn interest based on longer term rates. Profitability in this business, which also includes fees classified as noninterest income, had the most significant growth in net income of all our businesses during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Interest Income. Interest income increased $20.7 million, or 52%, to $60.4 million for the three months ended March 31, 2020, compared with the three months ended March 31, 2019. This increase was primarily attributable to a $19.1 million increase in interest on loans and loans held for sale and a $1.8 million increase in interest on trading securities.
The average balance of loans, including loans held for sale, during the three months ended March 31, 2020 increased $2.3 billion, or 82%, to $5.0 billion from $2.7 billion for the three months ended March 31, 2019, while the average yield on loans decreased 79 basis points, to 4.3%, for the three months ended March 31, 2020, compared to 5.09% for the three months ended March 31, 2019. The increase in average balances of loans and loans held for sale was primarily due to significant increases in warehouse funding and multi-family volume. The decrease in the average yield on loans was due to the overall decrease in interest rates in the economy period to period.
The average balance of trading securities increased $240.3 million, or 220%, to $349.7 million for the three months ended March 31, 2020, compared to $109.4 million for the three months ended March 31, 2019, while the average yield decreased 65 basis points to 3.22% for the three months ended March 31, 2020.
The average balance of interest-earning deposits and other increased $408.1 million, or 110%, to $777.8 million for the three months ended March 31, 2020 from $369.7 million for the three months ended March 31, 2019, while the average yield decreased 137 basis points, to 1.40%, for the three months ended March 31, 2020.
Interest Expense. Total interest expense increased $6.5 million, or 42%, to $22.1 million for the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Interest expense on deposits increased $6.4 million, or 45%, to $20.6 million for the three months ended March 31, 2020 from the three months ended March 31, 2019. The increase was attributable to an increase in the average balance of interest-bearing deposits of $2.4 billion, or 79%, to $5.3 billion for the three months ended March 31, 2020. The higher average balances were offset by a 39 basis point decrease in the average cost of interest-bearing deposits, to 1.55% for the three months ended March 31, 2020 from 1.94% for the same period in 2019. The increase in the average balance of interest-bearing deposits was primarily due to growth in certificates of deposit and interest-bearing checking accounts, while the decrease in the cost of deposits was primarily due to the overall decrease in interest rates in the economy period to period.
Interest expense on borrowings increased $118,000, or 9%, to $1.4 million for the three months ended March 31, 2020 from $1.3 million for the three months ended March 31, 2019. The increase was due primarily to a $200.9 million, or 227%, increase in the average balance of borrowings outstanding for the three months ended March 31, 2019 that was partially offset by a 405 basis point decrease in the average cost of borrowings of 1.99%, compared to 6.04% for the three months ended March 31, 2019. The higher average balances for the three months ended March 31, 2020 reflected an increase in borrowing from the FHLB at much lower rates. Partially offsetting the lower FHLB borrowing rates, were short-term subordinated debt instruments that have carried a higher cost than our other categories of borrowing, as they include a variable interest rate equal to the one-month LIBOR rate plus an applicable margin. Additionally, our warehouse structured financing agreements provide for an additional interest payment for a portion of the earnings
generated. As a result, the cost of borrowings increased from a base rate of 0.96% and 3.68%, to an effective rate of 1.99% and 6.04% for the three months ended March 31, 2020 and 2019, respectively.
The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. Nonaccrual loans are included in loans and loans held for sale.
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Three Months Ended March 31,
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2020
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2019
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Interest
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Interest
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Average
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Income/
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Yield/
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Average
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Income/
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Yield/
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Balance
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Expense
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Rate
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Balance
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Expense
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Rate
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(Dollars in thousands)
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Assets:
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Interest-bearing deposits, and other
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$
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777,820
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$
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2,698
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1.40
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%
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$
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369,736
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$
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2,527
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2.77
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%
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Securities available for sale - taxable
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293,964
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1,322
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1.81
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%
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292,500
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1,551
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2.15
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%
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Securities available for sale - tax exempt
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5,305
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37
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2.81
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%
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12,460
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96
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3.12
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%
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Trading securities
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349,746
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2,796
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3.22
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%
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109,423
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1,045
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3.87
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%
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Loans and loans held for sale
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5,012,324
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53,564
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4.30
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%
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2,746,562
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34,455
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5.09
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%
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Total interest-earning assets
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6,439,159
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60,417
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3.77
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%
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3,530,681
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39,674
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4.56
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%
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Allowance for loan losses
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(15,841)
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(12,704)
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Noninterest-earning assets
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181,076
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179,968
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Total assets
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$
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6,604,394
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$
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3,697,945
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Liabilities/Equity:
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Interest-bearing checking
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$
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2,064,967
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6,891
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1.34
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%
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$
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1,314,733
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6,434
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1.98
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%
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Savings deposits
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163,154
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|
|
58
|
|
0.14
|
%
|
|
147,534
|
|
|
80
|
|
0.22
|
%
|
|
Money market
|
|
|
1,143,249
|
|
|
4,575
|
|
1.61
|
%
|
|
892,806
|
|
|
4,208
|
|
1.91
|
%
|
|
Certificates of deposit
|
|
|
1,964,622
|
|
|
9,106
|
|
1.86
|
%
|
|
618,646
|
|
|
3,505
|
|
2.30
|
%
|
|
Total deposits
|
|
|
5,335,992
|
|
|
20,630
|
|
1.55
|
%
|
|
2,973,719
|
|
|
14,227
|
|
1.94
|
%
|
|
Borrowings
|
|
|
289,263
|
|
|
1,434
|
|
1.99
|
%
|
|
88,353
|
|
|
1,316
|
|
6.04
|
%
|
|
Total interest-bearing liabilities
|
|
|
5,625,255
|
|
|
22,064
|
|
1.58
|
%
|
|
3,062,072
|
|
|
15,543
|
|
2.06
|
%
|
|
Noninterest-bearing deposits
|
|
|
235,020
|
|
|
|
|
|
|
|
155,218
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities
|
|
|
74,950
|
|
|
|
|
|
|
|
51,425
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,935,225
|
|
|
|
|
|
|
|
3,268,715
|
|
|
|
|
|
|
|
Equity
|
|
|
669,169
|
|
|
|
|
|
|
|
429,230
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
6,604,394
|
|
|
|
|
|
|
$
|
3,697,945
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
38,353
|
|
|
|
|
|
|
$
|
24,131
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
2.19
|
%
|
|
|
|
|
|
|
2.50
|
%
|
|
Net interest-earning assets
|
|
$
|
813,904
|
|
|
|
|
|
|
$
|
468,609
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
2.40
|
%
|
|
|
|
|
|
|
2.77
|
%
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
114.47
|
%
|
|
|
|
|
|
|
115.30
|
%
|
Provision for Loan Losses. We recorded a provision for loan losses of $3.0 million for the three months ended March 31, 2020, an increase of $2.3 million, over the three months ended March 31, 2019. The allowance for loan losses was $18.9 million, or 0.54% of total loans, at March 31, 2020, compared to $15.8 million, or 0.52% of total loans, at December 31, 2019, and $13.4 million, or 0.61%, at March 31, 2019. The increases in the allowance for loan losses compared to both prior periods reflected increases associated with loan growth and uncertainties surrounding COVID-19. Additional details are provided in the Allowance for Loan Losses portion of the Comparison of Financial Condition
at March 31, 2020 and December 31, 2019. While it is too early to know the full extent of potential future losses associated with the impact of COVID-19, the Company continues to monitor the situation and may need to adjust future expectations as developments occur throughout the remainder of 2020.
Noninterest Income. Noninterest income increased $16.2 million, or 443%, to $19.9 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase was primarily due to an $18.5 million, or 701%, increase in gain on sale of loans, to $21.2 million, for the three months ended March 31, 2020 compared to $2.6 million in the year earlier period, primarily from an increase in the volume of multi-family rental real estate loan sales.
Also contributing to the increase in noninterest income was a $2.0 million increase in mortgage warehouse fees that reached $2.7 million for the three months ended March 31, 2020, related to the significant increase in volume compared to the year earlier period.
These increases were partially offset by a $5.5 million decrease in loan servicing fees that included a $6.5 million negative adjustment to the fair value of mortgage servicing rights for the three months ended March 31, 2020, compared to a negative adjustment of $1.5 million for the three months ended March 31, 2019.
Noninterest Expense. Noninterest expense increased $9.3 million, or 71%, to $22.3 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase was due primarily to a $5.7 million, or 66% increase in salaries and employee benefits. The increase in salaries and employee benefits was due primarily to an increase in commission expense associated with higher volume and additional employees to support business growth. Also contributing to the increase was a $1.5 million increase in deposit insurance expense related to the growth in deposits and assets. The efficiency ratio was at 38.3% in the three months ended March 31, 2020, compared with 46.9% in the three months ended March 31, 2019.
Income Taxes. Income tax expense increased $4.8 million, or 137%, to $8.4 million for the three months ended March 31, 2020 from the three months ended March 31, 2019. The increase was due primarily to a 134% increase in pretax income period to period. The effective tax rate was 25.4% for the three months ended March 31, 2020 and 25.1% for the three months ended March 31, 2019.
Asset Quality
In response to the COVID-19 pandemic, we migrated employees to work-from-home arrangements in mid-March 2020 and expect to continue operating without disruption to our customers. We have also assessed our internal control environment and believe we have the necessary precautions in place to ensure business continuity.
The Company believes it has minimal direct exposure to consumer, commercial and other small businesses that may be negatively impacted by COVID-19. As of March 31, 2020, Merchants granted customer requests to defer payments on 24 loans with unpaid balances of $23.6 million, representing less than 1% of total loans receivable. Management has also assisted small businesses that could benefit from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, particularly in the SBA’s Paycheck Protection Program (“PPP”). As of March 31, 2020, the Company was taking applications, but had not funded any loans to small businesses under this program until it launched on April 3, 2020.
Total nonperforming loans (nonaccrual and greater than 90 days late but still accruing) were $6.6 million, or 0.19%, of total loans at March 31, 2020, compared to $4.7 million, or 0.15%, of total loans at December 31, 2019 and $2.6 million, or 0.12%, at March 31, 2019. The increase compared to December 31, 2019 was primarily related to one collateralized agricultural loan that was delinquent greater than 90 days, with repayment still anticipated. Also contributing to the increase compared to March 31, 2019 were higher delinquencies greater than 90 days late for residential real estate and commercial loans, for which repayment is still anticipated.
As a percentage of nonperforming loans, the allowance for loan losses was 288.0% at March 31, 2020 compared to 338.6% at December 31, 2019 and 523.1% at March 31, 2019. The decreases compared to both periods were primarily due to the increase in the nonperforming loans.
Total loans greater than 30 days past due were $9.5 million at March 31, 2020, $12.6 million at December 31, 2019, and $6.3 million at March 31, 2019.
Special Mention (Watch) loans were $48.3 million at March 31, 2020, compared to $60.3 million at December 31, 2019 and $73.2 million at March 31, 2019. The decreases primarily reflected the completion of certain construction projects with cost over-runs that had been funded by the borrowers. Classified (substandard, doubtful and loss) loans were $14.1 million at March 31, 2020, $12.5 million at December 31, 2019 and $13.4 million at March 31, 2019. Although we currently do not anticipate COVID-19 to have a material increase to Special Mention or Classified loans, given the industries in which we provide funding, we continue to monitor the situation.
We had $1,000 of charge-offs and $44,000 in recoveries during the three months ended March 31, 2020. For the three months ended March 31, 2019, there were no charge-offs and $3,000 in recoveries.
Our Segments
We operate in three primary segments: Multi-family Mortgage Banking, Mortgage Warehousing, and Banking. We believe that Merchants Bank’s subsidiary, Merchants Capital Corp. (“MCC”), which operates in our Multi-Family Mortgage Banking segment, is one of the largest FHA lenders and GNMA servicers in the country based on aggregate loan principal value. MCC originated and acquired $1.2 billion in loans during the three months ended March 31, 2020. As of March 31, 2020, MCC also had a $13.3 billion servicing portfolio for banks and investors, including $1.9 billion serviced for Merchants Bank. The servicing portfolio is primarily GNMA and is a significant source of our noninterest income and deposits.
Our Mortgage Warehousing segment funds agency eligible loans for non-depository financial institutions from the date of origination or purchase until the date of sale to an investor, which typically takes less than 30 days and is a significant source of our net interest income, loans, and deposits. Mortgage Warehousing has grown to fund over $20 billion of loan principal annually since 2015 and exceeded $46 billion in 2019. Mortgage Warehousing also provides commercial loans and collects deposits related to the mortgage escrow accounts of its customers.
The Banking segment includes retail banking, commercial lending, agricultural lending, retail and correspondent residential mortgage banking, and SBA lending. Banking operates primarily in Indiana and Illinois, except for correspondent mortgage banking which, like Multi-family Mortgage Banking and Mortgage Warehousing, is a national business. The Banking segment has a well-diversified customer and borrower base and has experienced significant growth over the past three years. These segments diversify the net income of Merchants Bank and provide synergies across the segments. The strategic opportunities include that MCC loans are funded by the Banking segment and the Banking segment provides GNMA custodial services to MCC. The securities available for sale funded by MCC custodial deposits, as well as loans generated by Merchants Bank, are pledged to the FHLB to provide advance capacity during periods of high residential loan volume for mortgage warehousing. Mortgage Warehousing provides leads to correspondent residential lending in the banking segment. Retail, SBA and commercial customers provide cross selling opportunities within the banking segment. These and other synergies form a part of our strategic plan.
For the three months ended March 31, 2020 and 2019, we had total net income of $24.6 million and $10.6 million, respectively. Net income for our three segments for the respective periods was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
(In thousands)
|
|
Multi-family Mortgage Banking
|
|
$
|
5,399
|
|
$
|
(712)
|
|
|
Mortgage Warehousing
|
|
|
12,437
|
|
|
3,832
|
|
|
Banking
|
|
|
7,950
|
|
|
8,769
|
|
|
Other
|
|
|
(1,203)
|
|
|
(1,319)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,583
|
|
$
|
10,570
|
|
Multi-family Mortgage Banking. The Multi-family Mortgage Banking segment reported net income of $5.4 million for the three months ended March 31, 2020, an increase of $6.1 million, or 858%, from the $712,000 net loss reported for the three months ended March 31, 2019. The growth was due to a $14.7 million increase in noninterest income, primarily associated with a $19.0 million increase in gain on sale of loans. The volume of loans originated and acquired for sale in the secondary market increased by $786.1 million, to $810.6 million, for the three months ended March 31, 2020 compared to $24.4 million for the three months ended March 31, 2019.
Partially offsetting the increase in gain on sale of loans compared to the prior year period were negative fair market value adjustments to mortgage servicing rights. The three months ended March 31, 2020 included a $6.5 million negative fair value adjustment to mortgage servicing rights, compared with a $1.5 million negative adjustment for the three months ended March 31, 2019.
Also partially offsetting the increase in noninterest income was a $6.4 million increase in noninterest expenses, primarily due to an increase in salaries and employee benefits associated with higher commissions and additional employees to support future growth in volume, in addition to a $2.3 million increase in the provision for income taxes associated with significantly higher pre-tax income compared to the three months ended March 31, 2019.
Mortgage Warehousing. The Mortgage Warehousing segment reported net income for the three months ended March 31, 2020 of $12.4 million, an increase of $8.6 million, or 225%, over the $3.8 million reported for the three months ended March 31, 2019. The higher net income was primarily due to a $10.1 million, or 151%, increase in net interest income after provision for loan losses, associated with significantly higher volume. The volume of loans funded during the three months ended March 31, 2020 amounted to $16.8 billion, an increase of $11.4 billion, or 210%, compared to the same period in 2019. This compared favorably to the 73% industry increase in single-family residential loan volumes from the three months ended March 31, 2019 to the three months ended March 31, 2020, according to the Mortgage Bankers Association. Also contributing to the increase in net income for the three months ended March 2020 compared to the prior year period was a $2.0 million, or 269%, increase in noninterest income that was offset by a $2.9 million increase in the provision for income taxes associated with a 223% higher pre-tax income.
Banking. The Banking segment reported net income of $8.0 million for the three months ended March 31, 2020, a decrease of $819,000 million, or 9%, over the three months ended March 31, 2019. The decrease in net income was primarily due to a $1.6 million increase in noninterest expenses that reflected higher deposit insurance related to the growth in deposits and assets compared to the prior year period. Also impacting the lower net income compared to March 31, 2019 was a $1.3 million increase in the provision for loan losses reflecting loan growth and uncertainties associated with COVID-19 that was offset by a $1.9 million increase in net interest income.
Liquidity and Capital Resources
Liquidity.
Our primary sources of funds are business and consumer deposits, escrow and custodial deposits, principal and interest payments on loans, and proceeds from sale of loans. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition. Our most liquid assets are cash, short-term investments, including interest-bearing demand deposits, trading securities, and loans held for sale. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by (used in) operating activities was $(871.6) million and $2.7 million for the three months ended March 31, 2020 and 2019, respectively. Net cash provided by (used in) investing activities, which consists primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $(568.4) million and $(103.6) million for the three months ended March 31, 2020 and 2019, respectively. Net cash provided by financing activities, which is comprised primarily of net change in deposits and borrowings, was $1.5 billion and $77.7 million for the three months ended March 31, 2020 and 2019, respectively.
At March 31, 2020, we had $786.0 million in outstanding commitments to extend credit that are subject to credit risk and $1.9 billion outstanding commitments subject to certain performance criteria and cancellation by the Company, including loans pending closing, unfunded construction draws, and unfunded lines of warehouse credit. We anticipate that we will have sufficient funds available to meet our current loan origination commitments.
Within our role as a multi-family mortgage servicer for other banks and investors, we may be obligated to remit principal and interest payments to investors on certain loans regardless of the borrower’s ability to make payments, which could become more likely as a result of the COVID-19 pandemic. If there are situations where a borrower is granted a forbearance, the Company believes it has sufficient liquidity to cover these required advances. We have not approved any requests for forbearance in our multi-family servicing portfolio as of March 31, 2020 but remain confident in our ability to fund potential advances we may be required to make as a result of the COVID-19 pandemic.
Certificates of deposit that are scheduled to mature in less than one year from March 31, 2019 totaled $2.6 billion. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may decide to utilize FHLB advances, the Federal Reserve’s discount window, or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
At March 31, 2020, based on available collateral, we had access to additional FHLB advances of up to $1.2 billion.
Capital Resources.
The access to and cost of funding for new business initiatives, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs and the level and nature of regulatory oversight depend, in part, on our capital position. The Company filed a registration statement on Form S-3 with the SEC on December 30, 2019, which was declared effective on January 9, 2020, and which provides a means to allow us to issue registered securities to finance our growth objectives.
The assessment of capital adequacy depends on a number of factors, including asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to our current operations and to promote public confidence in our Company.
Shareholders’ Equity. Shareholders’ equity was $673.0 million as of March 31, 2020, compared to $653.7 million as of December 31, 2019. The $19.2 million increase resulted primarily from the net income of $24.6 million, which was partially offset by dividends paid on common and preferred shares of $2.3 million and $3.6 million, respectively, during the period.
7% Preferred Stock. In March 2019 the Company issued 2,000,000 shares of 7.00% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $25.00 per share (“Series A Preferred Stock”). The Company received net proceeds of $48.3 million after underwriting discounts, commissions and direct offering expenses. In April 2019, the Company issued an additional 81,800 shares of Series A Preferred Stock to the underwriters related to their exercise of an option to purchase additional shares under the associated underwriting agreement, resulting in an addition $2.0 million in net proceeds, after underwriting discounts.
In June 2019 the Company issued an additional 874,000 shares of Series A Preferred Stock for net proceeds of $21.85 million.
In September 2019 the Company repurchased and subsequently retired 874,000 shares of Series A Preferred Stock at an aggregate cost of $21.85 million. There were no brokerage fees in connection with the transaction.
Dividends on the Series A Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $1.75 per share through March 31, 2024. After such date, quarterly dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 460.5 basis points per year. In the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero. The Company may redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on March 22, 2019.
6% Preferred Stock. In August 2019 the Company issued 5,000,000 depositary shares, each representing a 1/40th interest in a share of its 6.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, without par value, and with a liquidation preference of $1,000.00 per share (equivalent to $25.00 per depositary share)(“Series B Preferred Stock”). After deducting underwriting discounts, commissions, and direct offering expenses, the Company received total net proceeds of $120.8 million.
Dividends on the Series B Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $60.00 per depositary share (equivalent to $1.50 per depositary share) through December 31, 2024. After such date, quarterly dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 456.9 basis points per year. In the event that three-month LIBOR is less than zero, three-month LIBOR shall be deemed to be zero. The Company may redeem the Series B Preferred Stock at its option, subject to regulatory approval, on or after October 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on August 13, 2019.
8% Preferred Stock. The Company previously issued a total of 41,625 shares of 8% Non-Cumulative, Perpetual Preferred Stock, without par value, with a liquidation preference of $1,000.00 per share (“8% Preferred Stock”) in private placement offerings.
Dividends on the 8% Preferred Stock, to the extent declared by the Company’s board, are payable quarterly at an annual rate of $80.00 per share. The Company may redeem the 8% Preferred Stock at its option, subject to regulatory approval, on or after December 31, 2020.
Common Shares/Dividends. As of March 31, 2020, the Company had 28,742,484 common shares issued and outstanding. In February 2020, the board of directors declared quarterly dividends at an annual rate of $0.32 per share.
Capital Adequacy.
On November 13, 2019, the federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio (“CBLR”), which became effective on January 1, 2020. The intent of CBLR is to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions and depository institution holding companies, as directed under the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under CBLR, if a qualifying depository institution or depository institution holding company elects to use such measure, such institution or holding company will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds 9%, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold, and will not be required to calculate and report risk-based capital ratios. In April 2020, under the CARES Act, the 9% leverage ratio threshold was temporarily reduced to 8% in response to the COVID-19 pandemic. The threshold will increase to 8.5% in 2021 and return to 9% in 2022. The Company, Merchants Bank, and FMBI elected to begin using CBLR in the first quarter of 2020.
At March 31, 2020, the Company, Merchants Bank, and FMBI exceeded all of its regulatory capital requirements with Tier 1 leverage capital levels exceeding 9% and management is not aware of any conditions or events since the most recent regulatory notification that would change the Company’s, Merchants Bank’s, or FMBI’s category.
At March 31, 2020, the Company reported a Tier 1 leverage capital level of $652.8 million, or 9.9% of adjusted total assets, which is above the required level of $592.7 million, or 9.0%; Merchants Bank reported a Tier 1 leverage capital level of $642.9 million, or 10.1% of adjusted total assets, which is above the required level of $574.3 million, or 9.0%; FMBI reported a Tier 1 leverage capital level of $22.0 million, or 10.7% of adjusted total assets, which is above the required level of $18.4 million, or 9.0%.
Failure to exceed the leverage ratio threshold required under CBLR in the future, subject to any applicable grace period, would require the Company, Merchants Bank, and/or FMBI to return to the risk-based capital ratio thresholds previously utilized under the fully phased-in Basel III Capital Rules to determine capital adequacy.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified two primary sources of market risk: interest rate risk and price risk related to market demand.
Interest Rate Risk
Our Asset-Liability Committee, or ALCO, is a management committee that manages our interest rate risk within broad policy limits established by our board of directors. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.
Income Simulation and Economic Value Analysis. Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
We use two approaches to model interest rate risk: Net Interest Income at Risk (NII at Risk) and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.
We report NII at Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The NII at Risk results reflect the analysis used quarterly by management. It models gradual -200, -100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one-year period. The following table presents NII at Risk for Merchants Bank as of March 31, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income Sensitivity
|
|
|
|
Twelve Months Forward
|
|
|
|
- 200
|
|
- 100
|
|
+ 100
|
|
+ 200
|
|
|
|
(Dollars in thousands)
|
|
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar change
|
$
|
(1,512)
|
|
$
|
(138)
|
|
$
|
27,522
|
|
$
|
53,517
|
|
|
Percent change
|
|
(0.8)
|
%
|
|
(0.1)
|
%
|
|
13.7
|
%
|
|
26.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar change
|
$
|
(10,311)
|
|
$
|
(16,293)
|
|
$
|
17,501
|
|
$
|
34,703
|
|
|
Percent change
|
|
(7.8)
|
%
|
|
(12.3)
|
%
|
|
13.2
|
%
|
|
26.2
|
%
|
Our interest rate risk management policy limits the change in our net interest income to 20% for a +/-100 basis point move in interest rates, and 30% for a +/-200 basis point move in rates. At March 31, 2020 we estimated that we are within policy limits set by our board of directors for the -200, -100, +100, and +200 basis point scenarios.
The EVE results for Merchants Bank included in the following table reflect the analysis used quarterly by management. It models immediate -200, -100, +100 and +200 basis point parallel shifts in market interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Value of Equity
|
|
|
|
Sensitivity (Shock)
|
|
|
|
Immediate Change in Rates
|
|
|
|
- 200
|
|
- 100
|
|
+ 100
|
|
+ 200
|
|
|
|
(Dollars in thousands)
|
|
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar change
|
$
|
(7,945)
|
|
$
|
25,180
|
|
$
|
7,952
|
|
$
|
11,518
|
|
|
Percent change
|
|
(1.3)
|
%
|
|
4.0
|
%
|
|
1.3
|
%
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar change
|
$
|
(3)
|
|
$
|
(1,154)
|
|
$
|
(3,130)
|
|
$
|
(7,615)
|
|
|
Percent change
|
|
—
|
%
|
|
(0.2)
|
%
|
|
(0.5)
|
%
|
|
(1.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our interest rate risk management policy limits the change in our EVE to 15% for a +/-100 basis point move in interest rates, and 20% for a +/-200 basis point move in rates. We are within policy limits set by our board of directors for the -200, -100, +100 and +200 basis point scenarios. The EVE reported at March 31, 2020 projects that as interest rates increase (decrease) immediately, the economic value of equity position will be expected to decrease (increase). When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
The information required under this item is included as part of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q under the headings “Liquidity and Capital Resources” and “Interest Rate Risk.”
ITEM 4 Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2019, the Company’s disclosure controls and procedures were effective.
(b) Changes in internal control.
There have been no changes in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Merchants Bancorp
Part II
Other Information
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
In addition to the risk factors previously disclosed in the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, the Company has made the following updates:
The current COVID-19 pandemic could adversely affect our business operations, asset valuations, financial condition, and results of operations.
We are unable to estimate the near-term and ultimate impacts of the COVID-19 pandemic on our business and operations at this time. It is unknown how long the COVID-19 pandemic will last, or when restrictions on individuals and businesses will be lifted and businesses and their employees will be able to resume normal activities. Additional information may emerge regarding the severity of COVID-19 and additional actions may be taken by federal, state, and local governments to contain COVID-19 or treat its impact.
While the COVID-19 pandemic has minimally impacted our business and as of March 31, 2020 we had deferred payments on only 24 loans with unpaid balances of $23.6 million and we believe deferrals may better position customers to resume their regular payments to us in the future, these deferrals, and any additional deferrals may negatively impact our revenue and other results of operations at least in the near term, may produce additional requests for deferrals and/or for extensions and modifications beyond what we anticipate, and we may not be as successful as we expect in managing our credit risk, resulting in higher credit losses in our lending portfolio.
Additionally, the COVID-19 pandemic could cause further increases to our allowance for credit losses, impairment of our goodwill and other financial assets, diminished access to capital markets and other funding sources, and reduced demand for our products and services. Further, although the Federal Reserve’s monetary policies to date have been accommodative and may benefit us to some degree by supporting economic activity of our customers, sudden shifts in the Federal Reserve’s policies may impact our ability to grow and/or effectively manage interest-rate risk. While we continue to anticipate that our capital and liquidity positions will be sufficient, sustained adverse effects may impair these positions or prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
Merchants Bancorp
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Merchants Bancorp
|
|
|
|
|
|
|
|
Date:
|
May 4, 2020
|
|
By:
|
/s/ Michael F. Petrie
|
|
|
|
|
|
Michael F. Petrie
|
|
|
|
|
|
Chairman & Chief Executive Officer
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|
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Date:
|
May 4, 2020
|
|
By:
|
/s/ John F. Macke
|
|
|
|
|
|
John F. Macke
Chief Financial & Accounting Officer
|
|
|
|
|
|
(Principal Financial Officer)
|
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